Lesson 2: Buy Assets, Not Liabilities

So how do you put your money to work for you? The key is to buy things that generate income (assets). You do NOT want to buy things that lose money over time or incur large expenses (liabilities).

This is obvious enough. But the most deceptive investments look like assets, but are actually liabilities.

Liability: Buying a House as a Primary Residence

In Robert Kiyosaki’s view, the most common mistake is buying a house as a primary residence, and considering it an asset and their primary investment.

His reasoning:

• You don’t get rental income on your house. Meanwhile, you’re paying large expenses - mortgage, property taxes, upkeep. In steady state, this represents monthly negative cashflow that requires income to compensate. (Shortform note: Kiyosaki basically considers things assets only if they generate cash.)
  • This is why many are stuck in the rat race - someone buys an expensive house. Now she has high monthly expenses, so she has to keep working to sustain it. Yes, the house may be appreciating, but that doesn’t help her high month to month expenses.
• The money tied up as a down payment, building up home equity, and paying expenses has a large opportunity cost. That money could be better spent on higher returning assets.
• While real estate can appreciate over the long term, there’s no guarantee of this.
• Even if real estate appreciates, you get the gain only on liquidation. (Kiyosaki seems to prefer investments with clearer short-term outcomes.)
• Considering your house as your primary investment causes a few subtle problems:
  • People tend to overspend on housing, depleting money that could be spent on other investments.
  • Because your cash is spent on the house, you never have enough money to think about what to do with it. This prevents building up the financial education to become a sophisticated investor.
  • (Shortform note: also, loading too heavily on your house concentrates risk on your local real estate market. And if you’re subject to groupthink, you’re more likely to think buying a house is a great deal precisely when it’s actually not.)
• Many people buy a new house every number of years, each time incurring a new 30-year loan without really truly owning the house.

Shortform Explanation

Kiyosaki doesn’t address that people obviously have to live somewhere, and paying rent would also be an expense. And, typically, the monthly mortgage payment is lower than the monthly rent of the home, which is where people often get tripped up.

A proper analysis would compare the long-term outcome of these two options:

1. the cost of buying a home, including the down payment, annual expenses, and likely appreciation of home value

2. renting an identical property, increases in rental costs in proportion with home value appreciation, and investment returns of the extra cash from not buying a home (e.g. down payment) over time

But Rich Dad, Poor Dad isn’t great about these tactical details - one of its major failings. Going through the exercise, neither option is a clear home run, depending on your assumptions of how the housing market and stock market change.

So to bring it all together, here’s the best advice we imagine Kiyosaki would give:

• As a mindset, don’t consider your home as your natural biggest investment. There are better places to put your money with better returns and more robust diversification.

• Buy only the house that you need.

  • Do not overspend under the delusion that it’s going to be a great investment, or your major investment.

  • Do not buy to keep up with the Joneses - the money you save can be better employed elsewhere.

• If you get a pay raise, don’t upgrade your house if you don’t need to. This is the cause of the vicious cycle putting you in the rat race.

Liability: Buying Expensive Stuff

Don’t buy physical goods whenever you get more money, with the expectation they’ll be good investments. This includes bigger houses, fancier cars, house renovations, handbags, jewelry, and golf clubs.

Not only do consumption goods not generate income, they also depreciate incredibly quickly.

• Common advice: A new car loses 25% of the price once you drive it off the lot.
• Corollary: buy used goods instead of obsessing about it being new.

Be especially careful when buying the thing just causes you to go further into debt. This is a major way to increase expenses without increasing income, thus digging you into a deeper hole.

• People have a tendency to spend money when they get it. But it’s not about how much money you make, it’s how much money you keep.
• More money only accentuates the cashflow pattern running in people’s heads. This is why giving people more money without financial education rarely improves their situation.

Kiyosaki isn’t saying don’t enjoy yourself. You can still buy nice things and live life well. But ideally, afford your luxuries using extra cash flow from your assets. This way you’ll feel like you’ve really earned it. Rich people buy luxuries last.

Assets

So what are real assets?

• Businesses that don’t require your presence. You own them, but they’re managed by other people. If you have to work there for it to generate money, it becomes your job.
  • Only start a business if you have a desire for it. The odds are against you and the stress is high. You don’t have to make money this way.
• Stock, bonds, funds, and other securities.
  • Kiyosaki once liked tax liens, which he claims returned 16%, but says since then more attention has made this less profitable.
• Income-generating real estate. In particular:
  • Using debt to lever up on more houses. In other words, with $500k, you could buy one $500k house and use it to make income. Or, you could pay $100k down payments for 5 houses and get rental income from 5 houses.
    • (Shortform caveat: note that with more leverage, if the houses lose value, you also magnify your losses, as in the 2008 recession.]
  • Buying under-market properties, like from foreclosures, and reselling them quickly.
    • Kiyosaki notes that today foreclosures are competitive and he’s looking elsewhere.
  • Using steady cash flow from rental income to make riskier bets, like in the stock market.
  • Consider buying property that’s larger than what you need. Then sell off a piece to someone else. This will let you broaden the opportunities you find.
  • When selling a property, trade it for a larger one to avoid immediate taxes on the gain. (Section 1031)
• Notes (IOUs).
• Royalties from intellectual property such as music, scripts, patents.
• Anything that has value, produces income, appreciates, and has a ready market.

(Shortform note: Rich Dad, Poor Dad contains lots of (possibly embellished) examples of super-profitable real estate deals. Unfortunately the book doesn’t cover how to find or generate valuable assets, which is a much more complicated topic and specific to the industry.)

Think about each dollar as your employee that works 24 hours a day tirelessly to make you more money.

The tradeoff between today’s expenses and future income should be clear. Every dollar you spend today is a dollar that does not work for you again, in perpetuity.

Further, avoid situations where you have to dip into savings or investments. Find creative ways to come up with the money, and protect your assets.

Pay Yourself First

Most people have the habit of paying their bills first, then saving whatever money is left.

Rich Dad inverted this - he bought assets first, then paid his bills as late as possible. His reasoning - the threat of having bill collectors was supremely strong motivation to creatively find ways to make more money.

In contrast, paying yourself last gives little pressure to generate more money.