Robert Kiyosaki The Real Book Of Real Estate

The REAL Book

Real Estate

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page i

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page ii

This page intentionally left blank

The REAL Book

REAL EXPERTS. REAL STORIES. REAL LIFE.

Robert Kiyosaki

Real Estate

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page iii

Published by Vanguard Press

system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,

recording, or otherwise, without the prior written permission of the publisher. Printed in

the United States of America. For information and inquiries, address Vanguard Books,

387 Park Avenue South, 12th Floor, New York, NY 10016, or call (800) 343-4499.

Set in 10.5 point Mercury

Library of Congress Cataloging-in-Publication Data

The real book of real estate : real experts, real advice, real success stories/Robert Kiyosaki.

p. cm.

Includes index.

ISBN 978-1-59315-532-2

1. Real estate investment. 2. Real estate business. I. Kiyosaki, Robert T., 1947-

HD1382.5.R33 2009

333.33—dc22

2009008346

ISBN 13: 978-1-59315-532-2

Vanguard Press books are available at special discounts for bulk purchases in the United

States by corporations, institutions, and other organizations. For more information, please

contact the Special Markets Department at the Perseus Books Group, 2300 Chestnut Street,

Suite 200, Philadelphia, PA 19103, or call (800) 810-4145, extension 5000, or e-mail

special.markets@perseusbooks.com.

10 9 8 7 6 5 4 3 2 1

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page iv

"I'm not a genius. I'm just a tremendous bundle of experience."

—Dr. R. Buckminster “Bucky” Fuller

From left to right: Dr. R. Buckminster

“Bucky” Fuller at eighty-six years old with

Robert Kiyosaki in 1981. Buckminster Fuller

was an American architect, author,

designer, futurist, inventor, and visionary.

Recognized as one of the most

accomplished Americans in history, he

dedicated his life to a world that worked

for all things and all people.

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page v

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page vi

This page intentionally left blank

Contents

Acknowledgments ix

Introduction, Robert Kiyosaki 1

PART 1:

The Business of Real Estate

1 The Business of Real Estate, Tom Wheelwright 5

2 A Real Estate Attorney’s View of Assembling and Managing Your

Team, Charles W. Lotzar 29

3 The Way to Exotic Wealth, Wayne Palmer 53

4 Proﬁts from the Ground Up, Ross McCallister 71

5 Master Your Universe, Craig Coppola 89

6 10 Rules for Real Estate Asset Protection, Garrett Sutton 108

7 Of Marbles and Capital, Wayne Palmer 133

8 How to Avoid and Handle Real Estate Disputes, Bernie Bays 152

PART 2:

Your Real Estate Project

9 Buy by the Acre, Sell by the Foot: Understanding Real Needs,

Financial Logic, and Asking Questions, Mel Shultz 173

10 It’s All About Adding Value, Curtis Oakes 184

11 Analyzing the Deal, or Adventures in Real Estate, John Finney 200

12 Real Estate Due Diligence, Scott McPherson 222

13 Creating Value from the Inside Out, Kim Dalton 233

14 Financing for Real Estate Investors, Scott McPherson 251

15 Lease It and Keep It Leased, Craig Coppola 262

16 The Perils of Careless Property Management, Ken McElroy 276

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page vii

PART 3: Creative Ways to Make Money in Real Estate

17 Getting from A to B Without Paying Taxes, Gary Gorman 293

18 No Down Payment, Carleton Sheets 306

19 Marketing: Your Ticket to Finding and Proﬁting from Foreclosures,

Dean Graziosi 326

20 Entitlements: The Sleeping Giant of Real Estate Proﬁtability,

W. Scott Schirmer 341

21 The Tax Lien Investment Strategy, Tom Wheelwright 371

22 Horse Trading: The Original Way to Wealth on the Great American

Frontier, Wayne Palmer 390

23 How to Create Retail Magic: A Tale of Two Centers,

Marty De Rito 409

PART 4:

Lessons Learned

24 What One Property Can Teach You, Kim Kiyosaki 433

25 In the Beginning... , Donald Trump 451

26 What Is the Most Important Thing You’ve Learned From Your

Father About Real Estate?, Donald Trump Jr. and Eric Trump 458

27 Overcoming the Fear of Failing, Robert Kiyosaki 466

Index 481

Credits 501

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page viii

or years I have been an advocate for ﬁnancial education.While many other

ﬁnancial advisors are telling people what they should invest in, I have been

telling people to invest in themselves—to invest in their own knowledge. That

is what I have done, and it has made me rich. I have also been telling people to

surround themselves with great teachers who are actively practicing what they

preach. The creation of this book was made possible because of the people I

consider my teachers. Each one has a lifetime of experience and a lifetime of

knowledge. And each one knows the importance of continual learning.

The contributors to this book generously gave of their time and their talent

so that you could see the possibilities, avoid the pitfalls, and understand the

methods of building wealth through real estate. They have recollected their

great achievements, and they have revealed their painful failures. I thank them

for their openness. The lessons we learn from our own mistakes and the mis-

takes of others are the most powerful.

These people are not only my advisors, but they are also my friends. Together

we have been through the ups and downs of the real estate cycle, ridden each

wave, and made money doing it. These are the friends I run my ideas and my

deals by. And because they are friends, I know that they will give me their

honest opinions. I thank them for that, too.

Acknowledgments

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page ix

I’d also like to thank Jan Ayres and Kathy Heasley of Heasley & Partners,

Inc., who took this book from ideas on a ﬂip chart to a ﬁnished manuscript.

Special thanks to Rhonda Shenkiryk of The Rich Dad Company and Charles

McStravick of Artichoke Design for their work on the book’s cover. Finally,

thank you to my wife, Kim, who more than twenty years ago said yes to a guy

with no money and a lot of ideas.

x ACKNOWLEDGMENTS

9781593155322_FM:real estate_new 3/25/09 3:52 PM Page x

here are four reasons why I think a real book of real estate is important at

this time.

First, there will always be a real estate market. In a civilized world, a roof

over your head is as essential as food, clothing, energy, and water. Real estate

investors are essential to keeping this vital human need available at a reasonable

price. In countries where investing in real estate is limited or excessively con-

trolled by the government, such as it was in former Communist Bloc countries,

people suffer, and real estate deteriorates.

Second, there are many different ways a person can participate and prosper

with real estate. For most people, their only real estate investment is where they

live. Their home is their biggest investment. During the real estate boom from

2000 to 2007, many amateurs got involved with ﬂipping houses—buying low

and hoping to sell higher. As you know, many ﬂippers ﬂopped and lost every-

thing. In true investor vocabulary, ﬂipping is known as speculating or trading.

Some people call it gambling. While ﬂipping is one method of investing, there

are many, more sophisticated, less risky ways to do well with real estate. This

book is ﬁlled with the knowledge and experiences of real, real estate investors—

real estate professionals who invest rather than ﬂip, speculate, trade, or gamble.

Third, real estate gives you control over your investments, that is, if you

have the skills. In the volatile times of early 2009, millions of people were losing

Introduction: A Note from

Robert Kiyosaki

Why a Real Book of Real Estate

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 1

trillions of dollars simply because they handed over control of their wealth to

other people. Even since the middle of 2008, the great Warren Buffett’s fund,

Berkshire Hathaway, has lost 40 percent of its value! Millions of people have

lost their jobs, which means they had no control over their own employment

either. The real, real estate professionals in this book have control over both

their businesses and investments. They will share their good times and the bad

times with you. They will share what they have learned while learning to control

their investments and their ﬁnancial destiny. The learning process is continual.

And, ﬁnally, here’s my real reason for this book. I am sick and tired of ﬁnan-

cial experts giving advice on real estate, especially when they do not actually

invest in real estate. After my book Rich Dad Poor Dad came out, I was on a tel-

evision program with a ﬁnancial author and television personality. At the time,

in 1999, the stock market was red hot with the dot-com boom. This ﬁnancial

expert, who was a former stockbroker and ﬁnancial planner, was singing the

praises of stocks and mutual funds. After the stock market crashed in 2001, this

man suddenly resurfaced with a new book on real estate, portraying himself as

a real estate expert. His real estate advice was beyond bad. It was dangerous.

Then the real estate market crashed and he dropped out of sight again. The last

time I saw him, he had written a book on investing in solar energy and was

claiming to be a green entrepreneur. If he were to write a book about what he

really does, his new book would be about raising bulls... and selling BS.

There are other ﬁnancial “experts” who know nothing about real estate, yet

they speak badly about real estate and say it is risky. The only reason real estate

is risky for them is because they know nothing about investing in it. Instead,

they recommend saving money and investing in a well-diversiﬁed portfolio of

mutual funds—investments which I believe are the riskiest investments in the

world, especially in this market. Why do they recommend investing in savings

and mutual funds? The answer is obvious: Many of these professionals are en-

dorsed by banks, mutual fund companies, and the media. It’s good business to

plug your sponsors’ businesses and products.

Commissioning this book gives the public its ﬁrst chance to learn from real,

real estate investors, friends, and advisors—people who have been through the

ups and the downs and who walk their talk. This book gives them the opportu-

nity to share the spotlight with the many media ﬁnancial “experts” and speak

the truth. These real estate experts are true pros, and you’re about to move be-

yond the media hype. I hope you are ready. The Real Book of Real Estate is the

real deal.

2 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 2

PART 1

The Business

of Real Estate

•

TOM WHEELWRIGHT

•

CHARLES LOTZAR

•

WAYNE PALMER

•

ROSS MCCALLISTER

•

CRAIG COPPOLA

•

GARRETT SUTTON

•

BERNIE BAYS

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 3

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 4

This page intentionally left blank

om Wheelwright is a rare combination of CPA, real estate investor, and

teacher. He has the ability to take the complex and often boring subject of

tax and tax law and make it into something that’s simple enough for a person like

me to understand.

Tom understands the tax code. He actually enjoys reading the tax code, and be-

cause he is such a student of it, he understands this lengthy document better than

anyone I know. Most CPAs focus on a very small part of the tax code. They focus

on the part that lets you and most Americans defer taxes until retirement—the

code relating to IRAs, 401(k)s, and other so-called retirement plans. Tom also pays

close attention to the other, much lengthier part of the code that shows you how to

reduce or eliminate your taxes permanently. The difference between Tom and

other CPAs is that Tom understands the purpose of the tax code. It’s not just a set

of rules. It’s a document that when followed is designed to reward certain behaviors

through lowering or eliminating taxes. Does your CPA see the tax code this way?

I consider Tom to be a very moral and ethical man. He is very religious, raised

in the Mormon faith. While I am not Mormon, I do share many of the values of

the Mormon religion—values such as tithing, giving at least 10 percent to spiritual

matters, and dedicating a number of years as a missionary. While I have never

1Tom WHEELWRIGHT

The Business of Real Estate

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 5

been a religious missionary, I have spent nearly ten years as a military missionary:

a Marine Corps pilot in Vietnam, serving my country.

One important lesson I have learned from Tom and others of the Mormon faith

is the saying, “God does not need to receive, but humans need to give.” This reminds

me of the importance of being generous. It is my opinion that greed rather than

generosity has taken over the world. Every time I meet someone who is short of

money, or if I am short of money, I am reminded to be generous and to give what I

would like to get. For example, if I want money, I need to give money. Having

been out of money a number of times in my life, I have had to remind myself to

give money at times when I needed money the most. Today I make a point of do-

nating regularly to charities and causes that are dear to my heart. My opinion is,

if I cannot personally work at a cause near to my heart, then my money needs to

work there for me. Going further, if I want kindness, then I need to give more

kindness. If I want a smile, then I need to ﬁrst give a smile. And if I want a punch

in the mouth, then all I have to do is throw the ﬁrst one.

I asked my friend Tom Wheelwright to be a part of this book not only because

he is a smart accountant—a team player that anyone who wants to be rich needs

to add to his his team—but also because he comes from a generous and sound

philosophical background.

Tom is a smart CPA who is an advocate of investing in real estate. Why? Be-

cause he knows that tax laws reward real estate investors more than they reward

stock investors. He is a great teacher, a generous man, and, most importantly, a

friend I respect.

—Robert Kiyosaki

was one of the fortunate few growing up. Unlike much of the rest of the

world—people who have been told to save their pennies and invest in mutual

funds—my parents taught me to invest in real estate and business. My father

had a printing business, and my mother handled their real estate portfolio.

So, it was natural that once I had received my education, both formal and

work related, I opened my own business. (I had a lot of education before I

ﬁnally opened my own business—a master’s degree in professional accounting,

thirteen years of experience with international accounting ﬁrms, as well as ex-

perience as the in-house tax advisor to a Fortune 1000 company. I was a little

slow to realize the power of business.) When I started my accounting ﬁrm, I

did it like most people: I worked all hours of the day and rarely took a vacation.

6 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 6

When I did take a vacation, I still took calls from clients and colleagues. After

all, business never rests, so why should I?

Several years into my business, we had experienced signiﬁcant growth, but I

was still working day and night and never taking a real vacation. And outside of

my business, I had no substantial assets. That’s when I read Rich Dad Poor Dad

and ﬁrst met Robert Kiyosaki. He helped me realize that I was thinking about

business all wrong. It was not about how hard I worked, but rather about how

smart I worked.

Like many of you, my ﬁrst real experience with Robert was at a Rich Dad

seminar. There I was, sitting next to my business partner, Ann Mathis, and her

husband, Joe. Robert was talking about a subject near and dear to my heart—

the tax beneﬁts of real estate. Out of the blue, Robert asked me to come up to

the front of the room to explain the tax beneﬁts of depreciation, introducing

me as his “other accountant.”

I had come to learn about Robert Kiyosaki and Rich Dad only a few months

earlier. One of my good friends, George Duck, had become the chief ﬁnancial

ofﬁcer at Rich Dad and had introduced us. I’m not sure who was more nervous

that ﬁrst time I went on stage, Robert or me. Can you imagine putting an ac-

countant on stage? Robert had no idea that I had spent my life teaching in one

capacity or another, but he took the chance and put me up there anyway. This

began a long and inspiring relationship between us, and it really launched my

journey toward ﬁnancial freedom.

I remember one of the ﬁrst times Robert and I worked together. He used me

as “muscle.” That’s right, he used his accountant as his muscle. Robert had been

asked by a reporter to give an interview for the business section of the Arizona

Republic. The primary topic was how Robert could claim that he routinely re-

ceived 40 percent returns on his investments.

I went as the authoritative backup to Robert’s ideas. After all, someone might

not believe a marketing genius (i.e., Robert) when he says he gets these levels

of returns, but who wouldn’t believe an accountant? When it comes to investing,

numbers are everything, and who better to support the numbers than someone

who spends his life documenting, reviewing, and analyzing them?

That was one of the ﬁrst opportunities I had to explain the beneﬁts of lever-

age that comes from real estate. Not long before, I had started my own real

estate investing. You would think that with parents who were real estate in-

vestors, that I, too, would become a real estate investor. I had even spent my ca-

reer helping real estate investors and developers reduce their tax burdens.

ROBERT KIYOSAKI 7

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 7

Not so. I didn’t actually begin investing in real estate until after the ﬁrst time

I played Robert’s game, CASHFLOW 101®. This game had a powerful impact

on me. I saw, with my own eyes, the power of leverage in real estate. The game

was so powerful that the next day after playing the game, I called one of my

clients who had been investing in real estate for several years and asked him to

meet with me to show me how I could begin my own real estate investing.

And then I began making serious changes to my business. My partner, Ann, a

systems genius, created the systems, policies, and procedures in our ﬁrm so we

could focus on running the business and not working in the business. It took a

few years, but eventually we were able to step away from working for hourly

professional fees and instead supervise and grow a business that worked without

us.

Now, I can take three weeks off each year with no e-mail or phone access, as

I did just recently when I took my oldest son on a trip to the châteaux region of

northern France. I didn’t have to worry about my accounting ﬁrm or my real

estate investments while I was gone because they were both running without

my daily attention.

Real estate investing is a business and should be run like a business.

Robert talks a lot about the CASHFLOW Quadrant, with each labeled as E,

S, B, and I. He emphasizes that we need to move out of the E (employee) and S

(self employed) quadrants and into the B (business) and I (investor) quadrants.

I have learned to take this one step further. That is, to move all I-quadrant in-

vesting into the B quadrant.

Think about what you could do with the time you would have if you didn’t

have to worry about tenants, repairs, and cash ﬂow. How would it feel to elimi-

nate the frustration that comes from constantly watching your real estate in-

vestments and worrying about if a tenant might call you in the middle of the

night with a problem? You can eliminate all of this stress and free up hundreds

of hours of your time simply by running your real estate investments as a B-

quadrant business.

TIP

8 THE REAL BOOK OF REAL ESTATE

FIGURE 1.1 I’ve learned to take the quadrant a step further and

free up hundreds of hours of my time simply by running my real

estate investments like a B-quadrant business.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 8

It’s really not that difﬁcult. You simply have to start acting like a business

and apply fundamental business principles to your real estate investing.

Business Principle No. 1: Strategy

Every business has to have a plan. Your real estate investing business is no dif-

ferent. A strategy is simply a systematic plan of action designed to accomplish

speciﬁc goals. There are seven simple steps to creating a successful strategy.

Step 1: Imagine

Begin your strategy with goals. Imagine where you would like your real estate

investing to take you. It may be a white sand beach in the Caribbean, unlimited

time with your family, or working for your favorite charity. My favorite places

in the world are Hawai’i, France, Arizona, and Park City, Utah. So my dream is

to own a house in each of these locations.

Don’t be afraid of being too aggressive. These are your dreams, after all, not

some number that is artiﬁcially imposed by a ﬁnancial advisor. Our clients fre-

quently have dreams of ﬁnancial freedom in as few as ﬁve to ten years. And

with a good strategy in place, anyone can be ﬁnancially free in less than ten

years if they just start by applying these few basic business principles to their

real estate investing. So far, after six years of investing, I now have houses in

Hawai’i, Arizona, and Park City. France is on the agenda for next year. Pretty

aggressive goals, but I have been able to reach them in six short years by apply-

ing basic business principles to my real estate and business.

Step 2: Financial Goals

Determine what it will take to realize these dreams in terms of wealth and cash

ﬂow. And commit to a date for accomplishing this goal. Then write down what

you currently have available in terms of investable assets less the liabilities.

This is your current wealth (also called net worth).

Step 3: Cash Flow Target

Of course, you will need to ﬁgure out the amount of wealth that it will take in

order to create your desired cash ﬂow. A simple rule of thumb for calculating

this number is to multiply your desired cash ﬂow by twenty. For me, I needed

$5 million in order to create an after-tax cash ﬂow of $250,000 each year.

ROBERT KIYOSAKI 9

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 9

Step 4: Current Wealth

Once you have your dream ﬁrmly in mind, the next step is to identify where

you are today. When considering where you are today, list only your real assets,

that is, those that are available to invest. Don’t list your car or your jewelry. But

do list the amount of equity in your home if it can be made available for investing

through a home equity loan. Here is an example of what I mean:

These ﬁrst four steps are the essence of a process referred to as “dreamlin-

ing,” and I will use a simple illustration to show you what I mean. Here is what

my dreamline looked like when I ﬁrst met Robert and started down my road to

ﬁnancial freedom.

Step 5: Vision, Mission, and Values

After you have your dreamline in place, you can make a plan to reach those

dreams. This plan should include your vision, mission and values, the type of

real estate you will specialize in buying, and the criteria you use for choosing

your real estate investments.

10 THE REAL BOOK OF REAL ESTATE

July 1, this year July 1, 5 years

1 million investable

Net Worth

$250,000 Cash Flow

$5,000,000 Net Worth

Wealth Strategy

TABLE 1.1

Liquid: Long-Term:

Savings Loans

Stocks & Bonds Real Estate

Mutual Funds Oil & Gas

CDs Business

Other Intellectual

Other Other

Sub-Total: Sub-Total:

FIGURE 1.2 Tom’s “Dreamline” When He First Met Robert Kiyosaki

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 10

At this point, you may be wondering if I have truly lost my mind. After all,

aren’t vision, mission, and value statements only for true businesses? Exactly!

And your real estate investments are a true business. At least they should be if

you are going to reach your dreams in the shortest amount of time possible and

with the least amount of work.

When creating your vision, remember that this represents your focus for the

future, that is, what you want your life to look like when everything is in place.

Your mission is simply a statement of how you are going to go about your in-

vesting business. And your values are the values that you insist everyone you

work with in real estate share with you.

Tom’s Personal

Vision, Mission, and Values

Vision. My vision for financial freedom means having the time and resources to do

what I want, when I want. I know I have reached financial freedom when I can travel

anytime I desire, spend quality time with family and friends, and go on missions for

my church.

Mission. My mission to reach financial freedom is to invest in highly appreciating sin-

gle-family homes by researching foreclosures, borrowing from banks and sellers, hold-

ing properties for five to ten years, and obtaining tax leverage through depreciation.

Values. My values are these: abundance—recognizing that there are plenty of re-

sources and real estate deals to go around; caring—being kind and expressing grat-

itude; learning—taking the time to grow and improve my real estate knowledge;

and respect—treating others the way I want to be treated.

Step 6: Investment Niche

Once you have your vision, mission, and values in place, you can begin looking

at what type of real estate makes sense for you. Every successful business owner

knows that you are always most successful when you focus your attention on

something you enjoy doing and for which you have a natural ability. At my com-

pany, ProVision, we have a variety of tools we use to help people ﬁgure out

which type of real estate they will enjoy the most—multifamily, commercial,

industrial, raw land or single-family homes. My personal investment niche re-

mains highly appreciating single-family homes.

ROBERT KIYOSAKI 11

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 11

Step 7: Criteria

The ﬁnal step in your strategy—determining your investment criteria—is some-

thing that few people take time to do. And yet, if you can determine your in-

vestment criteria as part of your strategy, you can avoid a lot of headaches,

stress, and wasted time. You can also avoid making costly mistakes. And you

will save a considerable amount of time and energy, enabling you to focus on

only those investments that meet your criteria. As an example, here are my per-

sonal investment criteria:

You may be asking why you need to spend so much time and effort developing

a strategy. We teach our ProVision clients about the importance of strategy by

playing CASHFLOW 101® with them in a very speciﬁc way. If you have played

the game, you realize that, on average, it will take two and a half hours. We in-

struct our clients that their team (the players at their table) must spend the

ﬁrst thirty minutes developing a strategy to win the game. This strategy includes

the type of assets they will invest in and their criteria for investing. All members

of their team, though playing as individuals, must follow the strategy precisely.

The result is astonishing. Each player gets out of the Rat Race and wins the

game in less than two hours. So even though they have spent an enormous per-

centage of their allotted time developing their strategy (roughly 20 percent),

they ﬁnish substantially earlier than they would have without their strategy.

This happens every time, so long as each team member adheres to the strategy.

Business Principle No. 2: Team

Just as every good business has a strategy, every successful business owner has

a very carefully chosen team of individuals and companies to help him/her

12 THE REAL BOOK OF REAL ESTATE

TABLE 1.2 Tom’s Personal Investment Criteria

Criteria Decision

Minimum appreciation 10%

Minimum rate of return 50%

Cash flow or cash on cash return -0-

Price range $200,000-$600,000

Maximum amount of investment/deal $80,000

Maximum time commitment 5 hours per month

Location of investment Western U.S.

Price as a % of value 85%

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 12

succeed. Your team will add considerable leverage to your investing. You can

take advantage of your team members’ time, talents, contacts, knowledge, and

resources.

Tips for Building a Team

Plan. Think carefully about what skills you need on your team. For example,

you are going to need an attorney, an accountant, a banker, at least one property

manager, and others. Decide on the skill sets you need before you decide on

which people will ﬁll those roles.

Referrals. The best team members almost always come as a referral from some-

one you trust. But make sure the person referring is also a real estate investor

and is knowledgeable about your situation and needs. A trusted advisor, such

as an attorney, accountant, mentor or wealth coach, can be a good source of

referrals.

Agreements. Make sure you have good, clear agreements in place with each of

your team members so they know what is expected of them and what they can

expect from you.

Before we leave the concept of a team, let me give you my personal experi-

ence with developing a real estate team. Anyone who knows me realizes that I

spend most of my day growing my business. This doesn’t leave me much time

for real estate investing. But I love real estate investing and understand com-

pletely the importance of it in my wealth strategy.

I estimate the time I spend each week on real estate to be no more than one

hour. Yet, I make in excess of $100,000 per month through my real estate in-

vesting, all because I have developed a great team and applied the other business

principles we are talking about in this chapter. This brings me to our next prin-

ciple: accounting.

Business Principle No. 3: Accounting

You may wonder if I include accounting as a basic principle of business because

of my accounting background. While I have to admit to a natural bias in favor

of good accounting, I believe that if you were to ask one hundred successful

business owners if good accounting (including good reporting) were critical to

their business, at least ninety-ﬁve of them would agree.

Why? Because good accounting leads to good reporting, and good reporting

leads to good decisions. If you don’t have the information you need, how are

you going to make good decisions, such as when you should sell a piece of real

estate or how to know if your portfolio is producing the desired results?

ROBERT KIYOSAKI 13

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 13

Great entrepreneurs understand the purpose of accounting. Here are a few

of my personal keys to great accounting.

Key No. 1: Purposeful Accounting

Accounting should never be done solely (or even mainly) to satisfy the IRS or

other regulators. Accounting’s primary purpose should be to provide accurate

and useful information so that you can make the best decisions. Poor investors

think that the only reason to keep records is so their accountant can prepare

their tax return at the end of the year.

This is a huge mistake. Good accounting is critical to good decision making.

Without current, accurate numbers, how are you going to make the decision to

buy, sell, or reﬁnance your property? And how will you know which property is

doing well and which is doing poorly? You won’t even know if your property

manager is doing a good job or not.

Several years ago, Ann and I purchased a group of fourplexes in Mesa, Ari-

zona. The price was good based on the information we had at the time. We kept

14 THE REAL BOOK OF REAL ESTATE

Real Life Story: My Team Took Care of It All

o how do I make time for real estate? You guessed it—I have a terrific team.

They are so good, in fact, that the only time I have to spend is to quickly review

reports, make decisions (which are pretty easy, since I have very well-defined in-

vestment criteria), and sign documents. I remember one time recently when I was

speaking to my team leader and he informed me that a tenant had vacated a house

unexpectedly and not turned off the water. My team leader, who is not the property

manager, drops by all of my houses on a regular basis and noticed that the tenant

had left. He rushed into the house only to discover that the pipes had broken (this

was in Utah in the dead of winter), and the house was flooded. The cost of repair

was in the neighborhood of $50,000.

My team leader immediately took action. After turning the water off, he called

the property manager and the insurance agent. He arranged for the repair company

to renovate the property, made sure the insurance accepted the claim (before

spending any money), and went after the property manager and tenant for any

damages not paid for by the insurance company. I did not have to worry about a

thing. And I probably spent only thirty minutes total dealing with this mess (signing

authorizations and talking to my team leader).

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 14

ROBERT KIYOSAKI 15

very close track of the cash ﬂow and the income from these properties. But

after a year or so, it became clear to us that these properties were not going to

generate positive cash ﬂow in the near future. At the same time, we noticed

that cap rates (see Principle No. 4, p. 17) were going down. So, based on our

numbers, we sold the fourplexes. Because of the decrease in cap rates, we were

able to make a signiﬁcant proﬁt, and we stopped losing money each month.

Key No. 2: Accurate Bookkeeping

While good accounting should go far beyond mere bookkeeping, it begins with

accurate and appropriate bookkeeping entries. Accurate bookkeeping is the ba-

sis for creating useful reports and analysis.

Bookkeeping is merely the process of entering the results of transactions

into a record that can be used for reporting and analysis. I suggest to most of

my clients that they outsource their bookkeeping to their accountant or some

other professional bookkeeping service. For those who want to do it themselves,

I recommend using a very simple accounting software program, such as Quick-

books.

Key No. 2a: Chart of Accounts

Begin by setting up a chart of accounts (this is just a list of the accounts you are

going to use to classify your receipts and expenditures). The accounts you use

should be those that make the most sense to you. For example, one person may

list printer paper as an ofﬁce supply while another may list it in the more general

category of ofﬁce expense. It’s simply a matter of how detailed you want your

reporting to be. Just remember that if you did not create an account for it, you

cannot create a report for it.

Here’s a little trick for you: You don’t have to create a separate chart

of accounts for every property. Instead, you can create a “class” for each

property. This allows you to do all of the bookkeeping for your real estate

business in one Quickbooks “company” while creating the detail and report

options that you need in order to understand what is happening with each

property.

If you need help setting up your chart of accounts, ask your accountant/

CPA—a critical member of your team—to lend you a hand. This person should

be happy to help, and can do this fairly quickly for you.

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 15

Key No. 2b: Detailed Data Entry

Once you have your chart of accounts set up, you are ready to begin entering

your data. Remember that you need to enter the details of every transaction.

Most transactions will have some cash involved, so if you enter the details every

time you receive or spend money, you probably will catch 98 percent of your

transactions. Some transactions don’t have cash involved, such as recording de-

preciation expense. These are done through journal entries. Since you will likely

have some journal entries to do, I will give you a brief explanation of how to do

these.

Understand that every transaction has two sides to it for accounting pur-

poses; a debit side and a credit side (think left and right so the total of the left

side always equals the total of the right side). Expenditures are always a debit

to the expense, income, or asset account (left side), and a credit to cash (right

side). Receipts are always a credit to an income, expense, or liability account

(left side), and a debit to cash (right side). To increase an expense or an asset,

you debit that account, and to increase income or a liability, you credit that

account.

Key No. 2c: Journal Entries

When you enter a receipt or an expenditure into Quickbooks, the software au-

tomatically creates both the debit and the credit. But sometimes you will need

to make a correction or adjustment to your books when there has not been a

cash transaction. You do this with a journal entry. When you make a journal

entry, you simply enter both a credit and a debit. Let’s use our depreciation

journal entry as an example, since everyone has to make this journal entry at

least once a year:

Debit to Depreciation Expense in the amount of depreciation calculated for

the period (usually based on tables provided by the Internal Revenue Service or

your accountant). See page 26 for more details about the Magic of Depreciation.

Credit to Accumulated Depreciation in the same amount (this account is an

offset to the asset account for the asset you are depreciating, such as a building).

See? It’s simple.

Key No. 3: Consistency

Learn to use the correct accounts, and use the same accounts for all similar re-

ceipts and expenditures. If you decide to put paper costs into ofﬁce supplies,

always put purchases of paper into ofﬁce supplies. Don’t put them into the

ofﬁce supply account one month and the ofﬁce expense account the next month.

16 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 16

Key No. 4: Frequency

Do your bookkeeping no less than once a week. Two problems happen when

you get behind. First, it becomes overwhelming, and you will tend to continue

putting it off until the end of the year when it becomes urgent for your tax re-

turns. This creates the second problem: Not having up-to-date bookkeeping

means you cannot get good reports to make good decisions.

Key No. 5: Online Banking

Personally, I do my bookkeeping every Friday morning. It takes me less than

one hour because I use the systems that are available to me, such as online

banking and automatic bill pay. Quickbooks will automatically classify all of my

online banking to the right accounts with a few clicks of the mouse. I actually

ﬁnd it quicker to do the bookkeeping myself using these systems than if I were

to use an outside bookkeeper (I tried that once and found it took me more time

to correct the bookkeeping than if I just did it myself using online banking).

The next principle I’m going to share with you is how to get good reports

from your bookkeeping software. If you review these reports each month, you

will be able to make good decisions about your real estate business quickly and

effectively.

Business Principle No. 4: Reporting

All successful entrepreneurs understand the importance of managing their busi-

ness by metrics. Metrics is simply a measurement of the day-to-day results of the

business. Sometimes these measurements are raw numbers, such as cash ﬂow.

Other times they take the form of ratios. And still other times these measurements

are comparisons, either to a previous period, to targets, or industry averages.

If you don’t know your numbers, you don’t know your business.

Report No. 1: Statement of Cash Flows

Let’s start with the king of all raw numbers: cash ﬂow. Unfortunately, it’s rare

that a real estate investor has a clear picture of his/her true cash ﬂow. You should

know the cash ﬂow from each property as well as the overall cash ﬂow for your

real estate business.

There is a tendency among real estate investors to believe that all they need to

know about cash ﬂow is the difference in their bank account from the beginning

of the month to the end of the month. But the real key to using cash ﬂow as a tool

TIP

ROBERT KIYOSAKI 17

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 17

is to understand where the cash came from and where it went. A standard ac-

counting report that you can use to ﬁgure this out is the Statement of Cash Flows.

This report, though rarely used among real estate investors, is the most important

report of all.

It begins with operating income. Operating income includes rents minus nor-

mal cash expenses, including repairs, maintenance, and management fees. It

then details nonoperating items such as ﬁnancing transactions and investing

transactions. Financing transactions include any money that ﬂows to or from

your business because of loans. These include your mortgage payments as well

as any loans you take out or money you put it. Investing transactions include any

money that ﬂows to or from your business because of investing activities. These

include down payments on properties and cash from the sale of a property.

The end result is the increase or decrease in the amount of cash you have at

the end of the period (month, quarter, or year) compared to what you had at

the beginning of the period. This report makes it clear how much of your posi-

tive or negative cash ﬂow is coming from operations versus other activities,

such as ﬁnancing or investing. Wouldn’t it be great to know this and be able to

18 THE REAL BOOK OF REAL ESTATE

TABLE 1.3 Tom’s Statement of Cash Flow

Property A Oct - Dec

OPERATING ACTIVITIES

Net Income -6,706.40

Adjustments to reconcile Net Income

to net cash provided by operations:

Escrow Accounts -174.40

Security Deposits 800.00

Net cash provided by Operating Activities -6,080.80

INVESTING ACTIVITIES

Accumulated depreciation 6,790.00

Accumulated amortization 18.00

Net cash provided by Investing Activities 6,808.00

FINANCING ACTIVITIES

Mortgage Payable -258.34

Net cash provided by Financing Activities -258.34

Net cash increase for period 468.86

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 18

ROBERT KIYOSAKI 19

TABLE 1.4 Most Common Ratios Used to Analyze Property Results

Ratio Numerator Denominator Tells You

Cap rate

Net Operating

Income

Property

Value

How much the

property is earning

ROI

Annual increase in value

plus income

Cash invested Total return

Cash on Cash

return

Net cash from

investment after taxes

Cash invested Cash return

Current ratio Current assets

Current

liabilities

Ability to pay

liabilities

Debt/equity ratio Total de b t Net Equity Leverage

Return on

assets

Net operating

income

Total assets Profitability

Debt coverage

Net operating

income

Annual debt

service

Ability to service debt

from cash flow

Loan to value (LTV) Debt Value of Property Leverage

Internal Rate

of Return (IRR)

Complex formula

Average annual

return on investment

ﬁnd out this information at any time? Table 1.3 is an example of a statement of

cash ﬂows for one of my properties. I pulled this report directly from my Quick-

books.

This report tells me several things about this property. First, it tells me there

was positive cash ﬂow. Second, it tells me that there was a loss for tax purposes

(net income was negative), producing additional cash ﬂow for me through de-

preciation. Third, it tells me that I paid down my mortgage by $258, which is

an additional beneﬁt to me. If all I knew was that my cash had increased by

$468 for the period, I would never have learned these other important beneﬁts

from this property and may have thought the property wasn’t doing too well.

Report No. 2: Ratio Analysis

While raw numbers are helpful to know, serious analysis of your real estate

business comes from ratios and comparisons. A list of the most common ratios

used to analyze your results is found in Table 1.4.

Two of the most important ratios are the cap rate on your properties

and your return on investment (ROI).

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 19

Ratio No. 1: Cap Rate

Your cap rate (or capitalization rate) is simply your net operating income di-

vided by the value of your property. Remember that this ﬁgure represents the

value of the property, not the cost of the property. Let’s look at an example.

Suppose your property produces $10,000 per month in rent, or $120,000 for

the year. And suppose your operating expenses (remember, this doesn’t include

mortgage interest or principal payments, or depreciation) are $70,000. This

means that your net operating income (NOI) is $50,000. If your property is

worth $500,000, then your cap rate is 10 percent.

You can use this information to make decisions. Let’s suppose

that you have a loan on the property with a 7 percent interest rate. If your

cap rate goes below 7 percent, then you need to think about selling the

property. Why? Because now you have what is called “negative leverage.”

Negative leverage occurs when your return is less than you are paying

on your loan. At this point, it is actually costing you money to borrow

because the cap rate is lower than your borrowing rate.

When Ann and I sold our fourplexes in Mesa, the cap rate had dipped down

around 5 percent. The interest rate on our mortgage was 6.5 percent. So we

were now into negative leverage. On top of that, we had negative cash ﬂow. So

it was time to sell the properties. And we did so at a substantial proﬁt because

we watched the cap rate. When we purchased the properties, the cap rate was

around 10 percent. Though our net operating income never increased, our prop-

erty value doubled simply because of the cap rate decreasing from 10 percent

to 5 percent.

Ratio No. 2: ROI

Another ratio we review is Return on Investment, or ROI. This ratio tells us

how a property is doing overall. It’s critical to review this ratio on a regular

basis. I know several investors who calculate expected ROI when buying a prop-

erty but never again. Like the cap rate, your ROI can tell you if you should be

holding on to the property or if you need to do something different with the

property.

For example, one of my criteria for investing is an after-tax return of at least

30 percent. This includes cash ﬂow from the property and the appreciation on

the property plus my tax beneﬁts from the property and principal reduction

TIP

20 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 20

on my mortgage. A few years ago, I bought a property in Utah that looked like

it would have an ROI of 35 percent over a ﬁve-year period. But it turned out

that the property was very difﬁcult to rent, so the ROI was less than expected.

Once it was clear the ROI was going to fall below my 30 percent requirement, I

sold the property and found another property that better ﬁt my investment cri-

teria. It should be obvious to you by now that a lot depends on coming up with

the appropriate investment criteria. Many of your decisions will be based on

these.

Working through your numbers and applying them to your criteria is where

another member of your team—your wealth coach—will be critical. Everyone

should have a coach for his/her business. Your coach should be someone well

versed in real estate and in overall wealth strategies. Go to www.ProVision

Wealth.com/wealthstrategies.asp for more information on wealth coaching.

Report No. 3: Comparison Reports

The third type of reporting is comparison reporting. Comparison reports take

the actual data from your real estate business and compare it to some other

data, such as industry standards, past performance, or expected/budgeted per-

formance. Let’s suppose that when you bought your property, you expected

that it would appreciate 10 percent per year. Suppose the actual appreciation is

15 percent.

Your appreciation report should show you not only your current apprecia-

tion, but also your expected appreciation and perhaps the average appreciation

in the market. This gives you a good idea of how you are doing compared to the

market and to your own expectations and whether you might want to consider

buying more property in that market or selling what you have so you can buy

other property that better meets your criteria.

Can you see how important it is to have good reports? It’s not just the raw

data you want; it’s also the ratios and the comparisons. One of my biggest com-

plaints about many property managers is that they produce terrible reports. Typ-

ically, they give you only the raw data, and frequently even that is impossible to

understand. Let me show you the type of report my property manager gives me.

While it doesn’t give me any analysis, at least it gives me the data in a way I

can create my own analysis. I can see immediately that I have positive cash

ﬂow, which meets my criteria. I now need to take this information and put it

into my reporting system (Quickbooks or something similar), and from that

system I can create reports that give me cap rates, ROI, and other analyses.

ROBERT KIYOSAKI 21

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 21

Business Principle No. 5: Taxes

If you want to make an immediate impact on the return on your real estate, you

need to pay close attention to tax laws.

The fastest way to increase your ROI on a property is to take advantage

of the tax laws in place to encourage real estate investment.

The single biggest expense for most people is taxes. In the United States,

which is routinely considered to be a low-tax country, the average business

owner earning $100,000 pays more than 50 percent of his earnings to the gov-

ernment in some form of taxes. These include income taxes, property taxes,

transfer taxes, sales taxes, employment taxes, and excise taxes, not to mention

estate taxes.

Some ancient civilizations equated a 50 percent tax to being in bondage. Yet

here we are in the twenty-ﬁrst century paying more than 50 percent of our in-

come in taxes and accepting this as okay. The good news is that if you are in

business, and particularly if that business is real estate investment, you can eas-

ily lower this rate from 50 percent to 20 or 30 percent. In fact, many of our

clients at ProVision who are serious real estate investors legally pay no income

tax at all.

Think about what you could do with the extra money you would have if you

reduced your income taxes by even 20 or 30 percent. How much more real es-

tate could you buy? How much faster would your portfolio grow? I once calcu-

lated that someone in the 30 percent tax bracket could double his investment

portfolio over seven years if he simply maximized his tax beneﬁts from real es-

tate and reinvested these savings into his portfolio.

TIP

22 THE REAL BOOK OF REAL ESTATE

TABLE 1.5 Real Life Example of

a Good Property Report

Property Address Lease Rate: $1200/mo

Rent Collected: $1200.00

Less 8% Management Fee: $96.00

Expenses-HOA Fee: $105.00

Amount to Owner $999.00

Mortgage Payment: $987.90

March 2009 Cashflow: $11.10 +

April 2009 Projection: $999.00

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 22

When I tell people that they can legally reduce their income tax by 30 percent

or more, they are immediately skeptical. They think I must be getting my clients

into some tax shelter. They are correct. That tax shelter is real estate investing.

And it doesn’t matter whether it is residential, commercial, or industrial prop-

erty. In the United States and many other countries, real estate is a highly fa-

vored investment under the tax laws.

In the United States and many other countries, real estate is a highly

favored investment under the tax laws.

So let’s talk about what you can do to receive the maximum tax beneﬁt from

your real estate. We will focus on the laws of the United States, but keep in

mind that many other countries have similar laws. So even if you don’t invest in

the United States, these tax reduction principles may apply to your real estate

investments in Canada, Europe, or other areas of the world. Here are ﬁve ways

to reduce your income tax by 30 percent or more.

Tip No. 1: Tax Strategy

What? A tax strategy? Didn’t we just talk about creating a business strategy for

our real estate earlier in this chapter? And now we are going to create a tax

strategy? That’s right. A tax strategy: a systematic plan of action for permanently

reducing or eliminating income taxes.

A good tax strategy is like a good business strategy in many ways. You have

to look at the big picture, including not only your real estate but also any other

businesses and investments you own. And you have to look at it from a long-

term perspective. My personal tax strategy includes aspects relating to my two

sons. One of my sons, Sam, works in both of my businesses and wants to be in-

volved for many years to come. My other son, Max, has no interest in business

and wants to write children’s books. So my tax strategy keeps my sons’ interests

in mind. They both own parts of my business, but I have to structure their own-

ership differently, since one is actively involved and the other is not.

Many of our clients work together as a couple on their business. My wife, on

the other hand, has no interest in business per se and is interested in helping

me only with the speaking part of my business (she is a wonderful speaker and

entertainer). So my tax strategy cannot, for example, include my wife as a real

estate professional.

A good tax strategist could really help here. So, another team member

for you is a tax advisor who specializes in tax strategies.

TIP

ROBERT KIYOSAKI 23

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 23

Your tax strategy needs to be a plan that you can readily accomplish without

making life too complicated. Of course, a good tax strategist could really help

here. So, another team member for you is a tax advisor who specializes in tax

strategies.

Tip No. 2: Entity Structure

Which type of entity should you use? Should you use a limited liability company

(LLC), a corporation, or a partnership? Or should you avoid using an entity at

all? In some countries, where there is not a lot of litigation, you may not need a

separate entity for your real estate. But in the United States, where 95 percent

of lawsuits worldwide are ﬁled, the proper entity is essential. Let’s look at a

quick overview of the tax entities available in the United States.

While every person’s situation is different, let me give you a few pointers

about which entity you may want to consider for holding your real estate in-

vestments. From an asset protection standpoint (discussed in detail in another

chapter of this book), LLCs are frequently the best entity to use. One of the

great things about LLCs is that they don’t have any tax consequence. You can

elect to tax an LLC anyway you want. An LLC can be treated as a sole propri-

etorship, a partnership, an S corporation, or a C corporation.

For most real estate rental properties, you will want to be taxed either as a

part nership or a sole proprietorship. Don’t make the mistake of putting your real

estate rentals into an S corporation or a C corporation. This could spell disaster

if you ever have to take the property out of the corporation to reﬁnance it; you

will be taxed as if the corporation sold the property to you at its fair market

value. I had someone in my ofﬁce recently who owned his investment property

in an S corporation. We estimated the tax cost of reﬁnancing to be in the neigh-

borhood of $250,000 simply because of the entity structure.

24 THE REAL BOOK OF REAL ESTATE

Business Structures

Partnership

General Limited

Sole

Proprietorship

Corporation

FIGURE 1.3 Overview of Entities

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 24

Don’t make the mistake of putting your real estate rentals into an

S corporation or a C corporation. This could spell disaster if you ever have to

take the property out of the corporation to refinance it; you will be taxed as

if the corporation sold the property to you at its fair market value.

If you are a real estate dealer or developer, you may want to consider S cor-

poration taxation. This includes those of you who want to ﬁx and ﬂip properties.

The reason? You can signiﬁcantly lower your social security taxes by owning

your property in an S corporation. And since you probably won’t need to dis-

tribute the property out of the company except when you sell it, you won’t have

the bad income tax consequences I spoke of earlier.

Tip No. 3: Travel, Meals, and Entertainment

Remember that the United States and most other countries tax only the net in-

come from a business. So any expenses that you can treat as deductible expenses

lower your income tax. The most overlooked deductions in the real estate busi-

ness are travel, meals, and entertainment expenses. The rule in the United States

for meals and entertainment is that if you discuss business before, during, or

after the meal or entertainment and the discussion is necessary and ordinary

for your business, then you get to deduct the cost of the meal or entertainment.

I’m not talking about going to dinner with your real estate agent or your ac-

countant (though I’m sure they would appreciate it). I’m talking about going to

dinner or a sporting event with your partner. For most of you, your business

partner in real estate is your spouse. My experience with business owners is

that when they go to dinner with their spouses they almost always talk about

business. And if you and your spouse are working on the real estate business

together, I can virtually guarantee that you are talking about your real estate

every time you go out to eat.

My wife and I eat out once or twice a week on average. I cannot even re-

member the last time we had dinner out and did not discuss business. These

discussions are essential to our success as business owners, even though she

does not maintain a very active role in any of our businesses. She has a perspec-

tive, though, that I ﬁnd extremely useful as I make business decisions.

So stop paying for your meals out of your personal bank account, and start

paying for them from your real estate business bank account.

Travel is a little more difﬁcult to deduct, but not much. If you are traveling

within the United States, you simply have to prove that your primary reason

for the trip was business. You prove this by showing that you spent more than

TIP

ROBERT KIYOSAKI 25

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 25

50 percent of each eight-hour workday discussing or working on your real estate

investment business. This could include your annual meeting or you could sim-

ply be investigating real estate opportunities in that location.

We had one client who applied these principles and ended up with a $1 mil-

lion deal. He really liked to travel to New Mexico. Knowing that he had to look

at real estate to deduct his travel expense, he set up a meeting with a local real

estate agent to review land development opportunities in his vacation spot. He

ended up ﬁnding a deal that netted him $1 million. And, of course, he got to

deduct his travel expenses.

Tip No. 4: Depreciation

After Robert and I met with the Arizona Republic journalist to discuss 40 per-

cent returns, we walked across the street to have lunch at a local restaurant.

Robert asked me what I thought about depreciation. I told him I thought it was

like magic. Where else can you get a tax deduction for something you didn’t

pay for and that is appreciating in value? Yet that is exactly what happens with

depreciation in the United States, Canada, and many other countries. Here’s

how it works:

Say you pay $500,000 for a house that you are going to rent. You put $100,000

of your own money into the house, and the bank loans you $400,000. You get a

deduction for a portion of the cost of the house each year—not just a portion of

your $100,000, but of the entire purchase price. Let me show you the calculation

for U.S. tax purposes.

Let’s estimate that 20 percent (or $100,000) of the cost of the house was for

the land. Even the IRS recognizes that land does not wear out, so we don’t get

to depreciate the land. But we do get to depreciate the remaining $400,000. At

a minimum for residential property, we should get a deduction of 3.636 percent

or $14,545 each year. And that’s assuming that the entire $400,000 is allocated

to the building. You can increase this deduction by doing what’s called a cost

segregation or chattel appraisal.

Brieﬂy, here is what happens in a cost segregation. Your accountant or his

engineer goes through your property and segregates (on paper) everything that

could easily be removed from the building and is not necessary for its basic op-

eration from the building itself. Those items that can be removed are called

personal property or chattels. Personal property can be depreciated at 20 per-

cent or more per year.

In our case, let’s suppose that $100,000 of costs is segregated from the build-

ing. This would increase our annual depreciation deduction from $14,545 to

26 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 26

$30,900—more than double. So while our property appreciates, we still get a

tax deduction for depreciation of more than $30,000. This is the best of all de-

ductions, since there is no cash outlay involved other than the down payment

on the property.

So if our cash ﬂow is $30,900 or less, we will not pay any income tax on our

monthly cash ﬂow. And if our cash ﬂow is less than our depreciation, then we

create a tax loss from the property that we can use (with proper planning) to

offset income from other sources. This is the primary reason many real estate

investors are able to reduce their income tax by 30 percent or more and why

some real estate investors pay no income tax at all. See how this can increase

your return on investment?

Tip No. 5: Documentation

Last but not least, let’s talk brieﬂy about the importance of properly document-

ing our real estate transactions and expenses. Without good documentation,

the IRS has the right to disallow your deductions. What a waste of good deduc-

tions! We have already discussed the most important form of documentation—

good accounting.

In addition, there are other forms of documentation you must keep. For travel,

meals, and entertainment, you must keep receipts, and you must note who you

were with, where you went, what you discussed, the date of the event, and why

you incurred the expense. For automobile deductions, you need to maintain a

log of business versus personal miles driven. And for your entities, you need to

write down minutes that detail all of your meetings and major transactions.

Documentation is not the most fun part of real estate, but it’s not too difﬁcult

if you just take a few minutes a week to take care of it. Stay on top of it. If you

don’t know exactly what you need to document, consult with your tax preparer.

Remember that if it isn’t documented, then you probably cannot prove to the

IRS that it was a legitimate deduction.

So there you have it—ﬁve easy opportunities to reduce your income taxes

while making tons of money in your real estate business. Now you can see why

smart business owners include tax planning as one of their keys to success. Ap-

plying these basic principles to your real estate business will enable you to build

enormous wealth in a very short time. Remember to begin with a strategy, add

a team, maintain good accounting, regularly review your reports, and minimize

your taxes by creating a long-term tax strategy. The sooner you begin treating

your real estate investing as a real business, the sooner you can stop working so

hard and start reaping the proﬁts that are there for all good real estate investors.

ROBERT KIYOSAKI 27

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 27

Ways to Learn More

ProVision Wealth Strategy U—a free resource at www.ProVisionWealth.com/

WealthStrategyU

ProVision Business Start-up Kit—a series of ﬁve training modules on starting

up your real estate business. Includes courses on bookkeeping, year-round tax

planning, entity structuring, and setting up a business.

ProVision School of Wealth Strategy—a monthly subscription to compre-

hensive training materials on building wealth. Includes courses on creating

your wealth vision, building your wealth team, and designing your personal

wealth strategy.

ProVision School of Tax Strategy—a monthly subscription to comprehensive

training materials on permanently reducing taxes. Includes courses on design-

ing your family tax strategy, involving your children in your real estate business,

and getting the greatest tax beneﬁts out of your real estate.

For more than twenty-ﬁve years, Tom Wheelwright has strategically de-

veloped innovative tax, business, and wealth strategies for sophisticated

investors and business owners across the United States and around the

world, resulting in millions of dollars in proﬁts. His goal is to teach people

how to create a strategic and proactive approach to wealth that creates

lasting success. As the founder of ProVision, Tom is the innovator of

proactive consulting services for ProVision’s premium clientele, who on average, pay much

less in taxes and earn much more on their investments. He coaches select clients on their

wealth, business, and tax strategies; lectures on wealth and tax strategies around the world;

and is an adjunct professor at Arizona State University.

28 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 28

ﬁrst met Chuck Lotzar in 2001 or so when he was a senior partner in a national

law ﬁrm. At Chuck’s former law ﬁrm, I delivered a presentation to approxi-

mately ten attorneys that covered my rich dad’s philosophy on money, wealth cre-

ation, and wealth management. Chuck seemed to be the only one out of the ten

who understood or was interested in what I was saying.

In 2003, Kim and I used Chuck to ﬁnalize one of our biggest real estate invest-

ments. It was a zero-down deal that would put more than $30,000 a month net

income in our pockets. If not for Chuck, this deal could have been our biggest

nightmare. He found irregularities that most people, including most lawyers,

would have missed. On top of that, after the deal was closed, Chuck offered to give

us a discount on some of his ﬁrm’s legal fees since he felt his ﬁrm did not work as

effectively as it could have. Needless to say, we told him to bill us in full and keep

the money. He had more than earned it.

In 2007, Chuck again came to our rescue, this time as our personal attorney

against our former business partner. The lawsuit was the worst, most vile event in

Kim’s and my life. If not for Chuck, I do not know where Kim and I would be today.

The good news is that Chuck Lotzar has turned out to be far more than our real

estate attorney. Through Chuck’s guidance, the Rich Dad Company has emerged

stronger, better staffed, and much more proﬁtable. Personally, I have emerged more

2Charles W. LOTZAR

A Real Estate Attorney’s View

of Assembling and Managing

Your Team

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 29

mature, wiser, and less of a hothead, which is a miracle. Chuck has not only made

Kim and me vastly richer; we have become better entrepreneurs and investors.

The lesson again is this: It is often through our worst deals with the worst

people that the best people emerge.

—Robert Kiyosaki

know attorneys see the world differently than most people. A working rela-

tionship isn’t just a working relationship; it ideally should be a contract be-

tween two parties with built-in protections, limitations, and provisions, just in

case the relationship goes south. A piece of real estate isn’t just a piece of prop-

erty; it’s an asset that brings with it the need for appropriate entity structure,

identiﬁcation of risk, allocation of risk, mitigation of risk and liabilities, and a

host of other legal protections and caveats associated with its development,

management, and eventual sale.

I know you’re thinking life is easier when you are not an attorney. You’re

probably right! But for me life as an attorney and particularly a real estate at-

torney is full of the excitement, the challenges, and the accomplishments that

can come only from working with people so that they sleep well at night, have

their family fortunes protected, and bring their dreams to life. It’s a profession

that keeps me continually learning, which I love. Real estate is a dynamic ﬁeld

that keeps every day at the ofﬁce new and fresh.

The likelihood that you are reading the chapter written by an attorney ﬁrst

is slim, so I’ll assume you’ve read at least a few chapters before mine. If you

have, you’ve probably noticed that there are a number of references in them to

team members: the professionals it takes to make a real estate deal actually

happen. Many of the contributors list the types of team members that they need

in the type of real estate work that they do and how they have helped.

Well, I will echo their beliefs. Team members are the deciding factors in

spelling success or disaster for a real estate project. In my practice, I have seen

teams that operate seemingly effortlessly and others that are clumsy and doomed

to failure. So how do you assemble one that works effortlessly, and avoid the

kinds that are disasters waiting to happen? The answer is, you can’t. You can

only try to do your best and know that the reality of your team—particularly as

you are just starting out—will fall somewhere in the middle of those two ex-

tremes. Your job will be to assemble and manage a group of pros that makes its

way progressively more efﬁcient to close every deal you do.

My perspective on teams and team members is different from the views of

many in this book because I am one of those team members. Many of the others

30 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 30

in this book are the investors who drive the team. They delegate to team mem-

bers who advise them. I’m the one they delegate to and who advises them on

how to lead the team. That gives me a slightly different perspective. Combine

that with my attorney’s perspective and you have a chapter with three primary

purposes:

1.To tell you who you need on your team and how to know you have a winner.

2.To identify known risks and make sure that they are properly allocated

among other writing parties, including the members of your team.

3.To establish performance measures and deadlines, and to follow up to make

sure that each of those performance measures and deadlines are met in a

timely manner.

See, this is where my lawyer’s mentality comes into play. I know your team

will not be perfect, no matter how perfectly you follow this book’s directions,

how well you interview potential team members, or how ironclad their refer-

ences were. Life and real estate deals are not that cut and dried. So what do you

do? Well, quite simply, you do your best on the front end, and you attempt to

protect yourself on the back end.

Three Rules of the Game

Before you say to yourself, “This team thing seems like more trouble than it is

worth. For my project, I’ll keep it simple and do most of the work I need alone.

I’ll keep the team small—as small as possible—and that will minimize my prob-

lems,” understand that it is very hard to do anything in real estate alone. It is a

team sport and as such, I have assembled my Three Rules of the Game.

Nowhere else will your team come into play more than when it is time to

perform your due diligence. It’s a necessary part of every real estate deal, and

with the right team it can be your best friend and actually a lot of fun because

you often ﬁnd the hidden gems that can signal great opportunity. On the other

hand, it can be the beginnings of a vivid nightmare you are living because you

are the proud owner of a “problem-property,” thanks to a team that missed

something big during due diligence. Again, the ﬁrst camp is the place to be.

You’ll recall that the due diligence period is usually not less than sixty days

in length. Its purpose is to discover any problems and opportunities with a

property to determine whether you want to go through with the transaction,

and if so with what speciﬁc stipulations. It’s also designed to allocate and alle-

viate risk among various parties: the buyer, the seller, the lender, and the various

third-party professionals on your team.

ROBERT KIYOSAKI 31

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 31

As I mention in rule number two, when it comes to due diligence, you want a

team that will be willing to learn the truth about the property and tell you the

brutal facts. If your baby is ugly, you need professionals and advisors who aren’t

going to be afraid to tell you the truth to your face—before the acquisition takes

place. So let’s delve into the team members and their roles from a fellow team

member and a lawyer’s perspective.

Consider these your core team members, the ones you’ll need for virtually

every real estate deal you do. I believe that people generally fall into two cate-

gories: those who are relationship oriented and those who are transaction ori-

ented. Although I have a law practice based on the ability to successfully

complete transactions, I am a relationship-oriented person who generally seeks

out other teammates who are also relationship oriented. I am willing to work

with other teammates who are transaction oriented, but I do so recognizing

that their ability and willingness to step up to solve a problem is limited, espe-

cially after the transaction closes.

Real Estate Attorney

Notice how I wrote real estate attorney, not just attorney. That’s the ﬁrst tip I

will give you right up front. Real estate transactions are signiﬁcantly different

from other transactions, so it is critical to hire an attorney who understands

32 THE REAL BOOK OF REAL ESTATE

Chuck’s Three Rules of the Game

Rule No. 1: Talent pays for itself. Accept that hiring a capable and talented real estate

team to complete your transaction is in your best interest. Although there will be

costs up front, your investment should more than pay for itself over time.

Rule No. 2: You are hiring folks’ brains; let them use their brains to solve your prob-

lems. Allow teammates to give you their honest and complete assessment of any

transaction given the circumstances presented—you want to know all of the prob-

lems so that you can craft solutions and quantify the costs of obtaining those solu-

tions. Unfortunately, in some instances you will learn that the cost of continuing with

the transaction outweighs the opportunity to be achieved, and you are forced to

stop so as to prevent yourself from throwing good money after bad.

Rule No. 3: It is better to hire someone with outstanding judgment and wisdom

than a person who has merely completed similar types of transactions.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 32

and is experienced in real estate. Contract attorneys without real estate experi-

ence are not good enough.

The reason I am so emphatic here is because a good real estate attorney can

take a lot of the pressure off you by acting as the quarterback and taking re-

sponsibility for coordinating the entire team. A good attorney is strong, experi-

enced, and at the same time self-conﬁdent enough to know when he or she

needs your input or help from a third party. There are times when a real estate

transaction will have nuances that your lead real estate attorney—no matter

how experienced—may not have ever encountered before. You don’t want your

attorney learning on your transaction; you want an attorney with a network of

people, inside or outside the ﬁrm, that he or she can call on to bridge any gaps.

Often a good real estate attorney can be the master of the due diligence

budget and calendar and keep all the other team members on track and on time

with their deliverables. That means you’ll want your attorney on board early,

right at the very start, to handle the early documents, such as the term sheet or

the letter of intent, to make sure that the allocation and assignment of risks are

thoughtfully documented for closing.

ROBERT KIYOSAKI 33

Real Life Story

very real estate opportunity is different, and it’s the truly unique ones that

sometimes cause your teams to expand beyond your expectations, even into

the realm of the unbelievable.

Too often real estate investors become successful based on their ability to over-

come numerous problems, and they become insensitive to the weight of certain

problems that would otherwise thwart a transaction. I recall one group of clients who

were prolific real estate investors. Although they were astute business people who

accomplished a number of successful transactions in sequence, their history of suc-

cess impeded their ability to walk away from a bad deal, even when they knew that

there would be insufficient equity in a transaction and visible and indivisible deferred

maintenance issues with the heating and cooling system for the apartment complex,

which needed replacement and caused the buildings to settle in the ground by more

than one foot! No matter how successful you have been in the past, you need to

replicate good habits for the diligence and closing with each new transaction.

Most often, however, your team will be highly predictable and consist of several

core members. You will find that the more you work with them, the better you will

all work together, which will increase your efficiency.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 33

A good real estate attorney can be your greatest ally. I frequently ﬁnd myself

providing ideas and advice that will enhance my clients’ transactions and their

businesses as a whole. At our ﬁrm, we approach projects from a business-

owner’s perspective. Business owners want us to tell them the things that are

standing in their way, of course. But they also want us to come up with innova-

tive ways to transcend the problems and get the deal done. If you have an attor-

ney who seems to be pointing out all the problems without posing solutions,

that’s a sign that you may need another attorney. If you have an attorney who

conducts himself or herself in a manner that makes you uncomfortable, e.g.,

rudeness, or overly passive or overly aggressive under the circumstances, then

that’s another sign that you may need another attorney.

Speciﬁcally, it’s our job to read and analyze all documentation, including

third-party reports, title and survey, purchase and sale agreements, and loan

documents. Sometimes, we may be requested to draft these documents along

with corporate entity documents when dealing with equity investments and

partnerships.

Hiring a Real Estate Attorney?

What to Look For, and What to Watch Out For

What to Look For

• Portability of past knowledge, wisdom, and judgment

• Availability of time to do the work

• An understanding of professional limitations

• Openness to engaging the assistance of other lawyers or law firms

• A willingness and ability to work as a team player

• Experience in various forms of real estate transactions

• Experience with complex finance structure of real estate transactions

• Demeanor and approach to the practice of law, e. g., that’s part gentleman,

part pit bull

• The support of the law firm—how deep is the bench?

What to Watch Out For

• Any past malpractice claims

• Any past Bar complaints

• Experience with contracts, business, and litigation, but not in relation to real estate

• A personality and/or demeanor incompatible with the client’s personality

and/or demeanor

34 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 34

Your attorney can either bill you hourly for his or her work or provide a soft

estimate for the scope of work. Should the scope of work exceed the estimate,

the additional work is billed at the hourly rate. Another payment method is

hourly against a hard estimate. These agreements generally have a large con-

tingency built in for unforeseen events that is payable at closing. This type of

contract can put the attorney and the client at odds. You want your attorney to

ﬁnd the unexpected—that can save you in a real estate transaction—but if you

are worried that the work of searching for the unexpected will cost you more

money, you may be thwarting your own success. In the best instances, the fruits

of the deal, or the savings in terms of money and/or risk, a contingent fee that

changes which party is in control will more than pay for any attorney fees.

Many of our clients feel we have more than earned our fees, and that’s ideally

what both sides want.

Over the years I have focused a good portion of my law practice working on

contingent-fee matters related to large revenue bond ﬁnancings and tax credit

projects. Whenever I have a contingent fee, I want to be the person with the

most control over the ability to advance and close the transaction. However, a

lawyer’s compass needs to be completely aligned with the interest of his client,

regardless of his fee arrangement.

How to Construct an Effective

Engagement Letter

ost members of your team will require an engagement letter before beginning

work. They may provide one, or you can. To protect yourself, make sure the fol -

lowing points are included:

• Spell out scope of work, particularly the roles of each party.

•Specify the nature and timing of payment, including timing of service and

due date.

• Define the particulars of termination for both the contractor and you.

• Be specific on needs (software) and deliverables (eight copies of plans, etc.)

due to cost and which party will bear the cost.

• Disclose conflicting relationships.

• Identify and allocate known risks.

• Dispute resolution.

• Limit liability.

ROBERT KIYOSAKI 35

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 35

36 THE REAL BOOK OF REAL ESTATE

Real Estate Brokers

Real estate brokers are important team members because they are the genera-

tors of opportunities. They can decide who sees a property that is coming on-

line ﬁrst and can be the bearer of great opportunities. What it takes is a broker

who understands the importance of relationships and working as part of a team.

On the other hand, many brokers are transactional, living and dying by their

fees, which naturally results in an eat-what-you-kill mentality. They will indis-

criminately pose opportunities that are nothing more than distractions because

they do not ﬁt your business goals. What you really want is a real estate broker

who looks out for your best interest, understands your needs, and seeks out op-

portunities that match them. That adds value.

Beyond this, the true role of a real estate broker is to bring a willing buyer

and willing seller together, not necessarily to ensure his or her client gets the

best deal. But the good ones do both. They work to execute the best possible

transaction for their client from start to ﬁnish.

Sometimes a real estate broker will perform what is known as dual repre-

sentation, which means the same broker will represent both the buyer and the

seller. On the surface, this may seem like an opportunity to save some money in

commissions; after all, typical transactions have two brokers who must share

Real Life Story: How to Know Your Real Estate

Broker Is Looking Out for You

he dual brokerage relationship does not trouble me when I see sophisticated

parties on both sides of a transaction. The broker frequently has problems

when there is a mismatch of sophistication among the parties. I have had many

conversations with brokers who had dual agency relationships that they regretted

once problems arose.

I have found that the best real estate brokers have the client’s interests at heart.

The best example I can give relates to my good friend and client, Craig Coppola,

who was acting as my real estate broker in my attempt to buy an office building for

my law firm. Although I had my heart set on buying a particular building, Craig was

a good friend and professional broker who looked me in the eye and told me that it

was not in my best interest to act and that I needed to be patient as the market was

trending downward. Clearly, Craig’s advice was in my best interest and not in his

short-term interest since no commission would be paid.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 36

the commissions. But dual representation can be tricky, and in the very least it

requires full disclosure of all known facts and circumstances to avoid conﬂicts

of interests.

While most people in business recognize the need to adjust to market

changes, real estate brokers really need to moderate their styles as market con-

ditions ﬂuctuate. During the boom times of the mid 2000s, many real estate

brokers, based on the volume of work, became more transactional as they tried

to close as many deals as they could. But the best ones knew that booms also

create busts, and it’s the real pros who maintain relationships during the booms

that have business during the down times. The best brokers also know that the

height of the market is not the time to buy and provide that level of counsel to

investor clients. They are market advisors as well as salespeople who are in it

for the long term and know that no deal today is worth the loss of many deals

tomorrow. That’s the kind of broker you want.

Accountant

I have found that almost all business is based on some form of mathematics,

and it is important to have accountants who are well versed in the intricacies of

real estate. In fact, much of the advice that I gave you with respect to establish-

ing a relationship with a real estate attorney has equal weight to establishing a

relationship with an accountant.

I have also found that one of the ﬁrst folks hired internally by real estate in-

vestors is an accountant who will be charged with working cooperatively with

an outside accounting ﬁrm. Frequently, the internal accountant is charged with

a substantial amount of responsibility beyond accounting and feels pressure to

limit the involvement of the outside accounting ﬁrm. If the internal accountant

is strong enough, then there will not be problems. Unfortunately, problems fre-

quently do arise based on lack of communication and sophistication.

A strong real estate accountant will understand the effect of changes in deal

structure on the various tax attributes such as amortization, depreciation, and

losses (which are inevitable during a construction phase since no money is

being generated during the development and construction of the project). Ad-

ditionally, a real estate accountant will know when it is in your best interest to

obtain a cost segregation study to identify the component parts of the

building(s) so as to allow for an accurate and possibly accelerated application

of amortization and depreciation.

ROBERT KIYOSAKI 37

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 37

Architect

First of all, special thanks to Greg Zimmerman and Chris Ilg for sharing their

knowledge on this subject. Architects are critical members of any real estate

team because they have the ability like no one else to provide creativity, innova-

tion, and magic that can transform an ordinary property into a showpiece. They

also have the ability to create a lot of expense that sometimes isn’t needed at all.

Good architect partners understand that while they may have the ability to

turn a property into a project that provides accolades and acclaim, the project

objectives may dictate otherwise. The project may require the architect make

minor modiﬁcations that deliver big results. They are not exciting modiﬁcations,

and they are often not very dramatic. They may not even be all that rewarding

to do, but sometimes that’s the nature of the project, and although the design

work might be mundane, it can deliver a big payoff for the investors. And that

is anything but mundane. While it’s more fun to redesign an apartment building

to create exciting loft living environments, a proﬁtable, cash-ﬂow-positive proj-

ect may require only that the architect ﬁgure out how to ﬁt a washer and dryer

in each existing unit. This is actually one of the biggest challenges faced in the

apartment industry. The trend is away from common area laundry rooms, and

architects are challenged to make washers and dryers work in small spaces.

Design professionals are a lot like physicians or attorneys. They specialize.

While there are excellent neurosurgeons out there, you don’t want the neuro-

surgeon performing your heart surgery. And the attorney who makes a living in

divorce court isn’t the one you want handling the ﬁnancial complexities of a

real estate transaction. Just the same, you don’t want the architect who designs

million-dollar homes designing your mini-storage investment property. You

want the architect who can design those structures in his or her sleep.

But the biggest reason why you want to work with experienced, specialized

architects is because they know the ins and outs. National and local codes

change almost daily. Only architects and their ﬁrms can keep up with it all.

Even the slightest revision to any of the several codes could have a serious im-

pact on a design. As an attorney, I have seen too many investors’ projects get

caught up in the complicated codes and laws of building, remodeling, and restor-

ing a property. It wastes a lot of time and can get messy. It’s never easy to ﬁght

city hall, and with the right architect who knows the laws and the regulations,

you should not have to.

Let me elaborate on the word experience. Architecture is a lifelong endeavor,

and it is not unusual for an architect to require years of experience before truly

38 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 38

gaining the amount of competence required to guide the client through a highly

specialized project. It’s not necessarily just the design aspects that I am talking

about. It’s the peripheral know-how that cannot be learned in school but can

come only from doing things like working through the political process. Work-

ing positively and effectively with federal, state, and city employees is a honed

skill that only comes over time. And let’s not forget the value of a keen sense for

anticipating market trends. After all, the work you are hiring from an architect

may be happening today, but it needs to be valued by customers for years to

come.

Once you interview and select your architectural ﬁrm from these perspectives,

you can also look at other important requirements like working relationship and

costs. I won’t elaborate too much on the fact that regardless of how skilled the

architect, if that person can’t work with the team or with you, you need to keep

looking. Relationships are everything, particularly when it comes to the architect.

Too often the design side of the project can put off the trades side of the project

by being overly demanding about aesthetics and not being open to ﬁnding rea-

sonable solutions that don’t compromise the look and function of the project.

It’s extremely important to have a strong and collaborative working relationship

between an architect and the general contractor. Forcing the architect or the

general contractor to work with an architect or general contractor that they

don’t work well with leads only to trouble for the property owner.

When it comes to money, be prepared to fully spell out exactly what you are

hoping to achieve—your objectives—and how you would like to achieve them.

Share your budget both for the design aspects of the project and for how much

you plan to put into the building process. You must be concerned at this point

with the architect’s fees, yes, but also the cost to build out the architect’s design.

ROBERT KIYOSAKI 39

Experience Is Everything

When you work with an experienced, specialized architect partner, you reap the

advantages:

• Design moves along quicker.

• There is not a steep learning curve.

• You get a completed design that works with fewer surprises.

• Plans, although custom, are somewhat field-tested.

• Building is smoother because the plans have commonalities with past projects.

• He knows the ins and outs of building codes.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 39

Again, having been involved in many real estate projects, I have seen architects

create designs that are simply too costly to build under the predeﬁned budget

and proﬁtability constraints. Those are severe mistakes that can cost time and

money. Architects and contractors must communicate to avoid these kinds of

problems.

The better the information that you give the architect up front, the more ac-

curate his fee proposal should be. Understandably, it is difﬁcult to have a handle

on every issue surrounding a project; things do come up that are unexpected.

But there are ways to protect yourself a bit from costs getting out of control.

First of all, you may want to begin your working relationship with an architect

by putting together an agreement for the due diligence and preliminary

design/consulting work. There is nothing wrong with doing this, and as long as

both you and the architect understand that further work is contingent on the

success and outcomes of the preliminary work, you may ﬁnd this is the best

arrangement.

You can implement this kind of arrangement with either a phased contract

or better yet, a time and materials contract with provisions for a subsequent

contract using the American Institute of Architects (AIA) form B181, which is a

standard agreement between an owner and an architect. You can ﬁnd this form

on the Internet when you search AIA B181. It may serve as a good reference for

you.

The beneﬁt of this arrangement is that you can move forward without a huge

commitment and no real idea of what can be done. That’s handy because most

likely at this point, you won’t have much idea of what can be done. That’s why

you need the architect. The beneﬁt to the architect is job security. It’s nice to

know that if the due diligence is favorable, all further work, including time, de-

signs, and working drawings will be developed in his or her ofﬁce. That also is

excellent incentive for the architect to work harder to ﬁnd feasible design solu-

tions that ﬁt into the budget for the project. If he or she wants more work, then

make the project work.

I’ve seen this approach work well quite often. One minor, but important,

point is that the services you contract with the architect may require the services

of other consultants. I recommend contracting with them directly to maintain

knowledge and control over the outside service provider’s work and progress.

Assuming the project moves forward, and you and the architect have exe-

cuted the contracts, the next phase is all about communication. The best, most

efﬁcient projects I’ve been associated with have been ones where the design

team holds weekly meetings and provides progress plans and updates for re-

view. With so many moving parts to any design project, keeping everyone in-

40 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 40

formed is always a top priority. When well executed, it speeds up the process

and delivers far better outcomes.

Once the design and development phase is complete, the construction docu-

ments get under way. At this point, it is the architect who should control the

consultants and keep the attorneys and lender informed of all progress. As a

ring leader for the design and construction side of the project, all information

needs to funnel through the architect to maintain control and ensure that no

deviation to the schedule, scope, and of course, fees are made without his or

her knowledge.

Civil Engineer

Civil engineers are frequently hired by your architect. They are responsible for

locating existing utilities and developing the plans to connect to them or deter-

mine if and how to upsize the capacity. ALTA surveys are part of this process, as

is obtaining a “will serve” letter from the utility provider, which legally obliges

it to serve the particular project with utility service.

Civil engineers are also responsible for such things as drainage, grading re-

quirements, and in cases where canal irrigation is involved, that too. Your ar-

chitect will inform you when and why a civil engineer is needed for a project.

Your architect will review all contracts for service from not only civil engi-

neers but all related design consultants. And I recommend you allow your real

estate attorney to review these documents as well, solely from a legal perspec-

tive. By contrast, the architect will review them to make sure the intent of the

design is being met and to look for gaps and overlaps with the goal of a seamless

scope of service.

You will want to execute the contracts once your real estate attorney and ar-

chitect have reviewed them and given them the go ahead. Often these contracts

contain contingencies or line items in them that are part of the contract, but

which could be separately executed or deleted as needed. Your attorney and

architect can point these out, but be aware that if these contingencies are exe-

cuted in the course of work because of requirements in the ﬁeld, they can and

often will cost you more money.

In my experience, civil engineers are not known for adding on unneeded

services, but rather omitting services. And it is very difﬁcult as a property owner,

particularly if you have not been doing this work for twenty years, to know what

the civil engineer should have done until there’s a torrential rain and you ﬁnd

half your parking lot is submerged in a murky brown puddle. Then you know

more work should have been done regarding drainage. These things happen.

ROBERT KIYOSAKI 41

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 41

42 THE REAL BOOK OF REAL ESTATE

The challenges a civil engineer can solve go beyond the concrete world of

grading, utilities, and drainage. I always recommend to my clients that they

ﬁnd civil engineering ﬁrms with a lead engineer or representative who is not

only knowledgeable of civil engineering but knows how to walk the corridors

of city hall. Political savvy is a huge value-added advantage. Knowing the people

who matter and then presenting your case before city ofﬁcials and a crowd of

interested citizens without acting and sounding like a civil engineer is a real

ace card to hold.

Three Most Common Pitfalls with Civil Engineers

1. Delivering in a timely manner.

2. Plans that do not have sufficient detail to match the existing utilities.

3. Plans that fail to adequately take into consideration the property’s topography

as it relates to water retention and drainage.

Overcome these problems by holding your civil engineers to incentivized timeta-

bles and have your engineer, architect, and your contractor review the drawings

with all those involved in advance.

Professional Surveyor

We’ve all seen surveyors standing in the middle of the street, gazing through

their transits and taking measurements of the ground. This information is pre-

cisely what makes property owners and lenders sleep well at night, knowing

that the properties they are considering during the due diligence phase are all

that they have been stated to be. And best of all, they report this information

with a very ofﬁcial document that bears all the appropriate seals and certiﬁca-

tions. It’s the real deal, and it becomes a matter of public record.

So what exactly are surveyors looking for, and looking at, through those tiny

site scopes? When it comes to most projects, they are conﬁrming or establishing

the following:

• Easements. The surveyor is designating or verifying the access into and out

of the property.

• Dimension and Location of Property. The surveyor is looking at and marking

the property lines to determine the property’s exact size and location in re-

spect to other properties.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 42

• Encroachments. The surveyor is looking at the property lines and determin-

ing if any structures belonging to another party are within your property

line... or yours within theirs. This can affect the appraised value of a prop-

erty and cost money to remediate.

• Location of All Buildings and Improvements. The surveyor is determining

the exact placement of all buildings and improvements within the land parcel

to assert that they are placed as specified and that they are within the con-

straints of local building codes.

• Nonvehicular Access. The surveyor is determining the exact placement of

any nonvehicular access easements like pedestrian walkways that may exist

on the property. These can impact building improvement and building place-

ment plans.

• Trafﬁc Calming Measures. The surveyor is looking at and indicating or plan-

ning the location of trafﬁc-calming improvements such as speed humps, me-

dian plantings, etc., that slow trafﬁc and improve the environment for

residents, pedestrians, and bicyclists.

Of course, every project dictates what your surveyor will need to do, and ev -

ery piece of land brings its own unique needs, too. In the mountainous, boulder-

ridden terrain of Arizona—a state with strict laws related to indigenous plants

and natural formations—surveyors indicate the location of every giant saguaro

cactus, every palo verde tree, and any rock outcroppings that are to be preserved

as natural space.

Ultimately, your title company and the surveyors themselves do not want

there to be any gaps between adjacent properties. There are a lot of reasons for

this when you think about it. One is ownership. Who is responsible to care and

maintain the gap area? A second is liability. Are both owners, one or neither, re-

sponsible for a mishap that may take place in between property lines?

Another is property value. It can be really expensive to buy a small piece of

land that your project may need in order to be compliant with development re-

quirements related to setbacks, ingress, and egress, etc. Remember, just because

you may need additional land to complete your project does not mean that your

neighbor has to sell it to you.

Hazardous Substance Site Assessment Engineer

This is a professional you want to bring on very early in the due diligence process

because if he or she ﬁnds there are hazardous substances on the property, you

ROBERT KIYOSAKI 43

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 43

may want to rethink everything. Your lenders will strongly advise and may even

insist upon it. You simply must know the status of the property in terms of haz-

ardous substances. There have been too many cases where—and these are the

worst kind—entire housing developments have been built in areas that were

later found to be toxic. Love Canal in New York is one of them. Cases that are far

less dramatic, but still incredibly expensive, are those where a hazard exists but

can be remediated. You never want to ﬁnd yourself responsible for the ﬁrst sce-

nario; it is actually quite difﬁcult, given the law and requirements for develop-

ment and redevelopment today. But in the event of the second case, which is

more likely to occur, at least know what kind of remediation costs you are in for.

When selecting an environmental engineer, begin by ﬁnding one who is fully

accredited in the ﬁeld. Having a trustworthy relationship with your mortgage

banking professional is also key. The mortgage banker will know which envi-

ronmental engineers are responsive and familiar with the reporting require-

ments of a broad spectrum of lenders. The lender may have a list of preferred

providers that may at times take selection out of the borrower’s hands. It is also

important that while your environmental engineer is thorough so as to identify

actual existing recognized environmental conditions, he does not create un-

necessary work by requiring more expensive Phase II reports.

During due diligence, you must contract what is called a Phase I hazardous

substance site contamination study. Among the many things the inspector looks

at, he or she will perform a visual assessment of the site and surrounding prop-

erties; interview the owner, neighbors, occupants; and take a look at the site’s

history. The goal is to determine if any hazardous materials were ever manu-

factured, stored, or dumped there. At this stage the inspector doesn’t take any

samples.

Ideally, you will receive a clean Phase I report and not need any additional

testing or a Phase II study in which the inspector takes samples of the discov-

ered hazardous materials. This process can be costly and time-consuming be-

cause sometimes just getting the “samples” requires excavation and core

drillings.

Interestingly, certain entities in the chain of title may have remediation re-

sponsibility should hazardous materials be found. In addition, they have a dis-

closure responsibility should they know of these hazards during the due

diligence period. Lenders obviously are looking for a clean Phase I report so

that there is no drag on their ability to seize collateral and liquidate, should the

need arise. This action usually requires stepping into the chain of title, and it’s

best if there are no obstacles due to a history of hazardous materials liability.

44 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 44

Recently, engineers to prepare Phase I and II reports have sought to limit

the amount of their liability to property owners by having their engagement

letter or contract specify that damages are limited to the amount of fees paid to

the engineer. Obviously, limitations of this nature do not afford the property

owner the beneﬁt intended when a professional engineer was hired to conduct

the Phase I or II investigation and report.

Escrow Officer/Title Agent

The more real estate deals you do, the more you will get to know your escrow

ofﬁcer/title agent. This person acts as a neutral party who is attempting to carry

out the express written instructions of the buyer, the seller, the lender(s), and

in some cases the real estate brokers. They review and verify all documents

and pass the documents along with the funds between the appropriate parties

in the transaction. They are there at closing.

Again, my approach to this chapter is from a legal perspective. Where I have

seen issues relating to this area is in title insurance. It is the title agent who is-

sues the title insurance policy. Title insurance is insurance covering the past

because it protects only against losses arising from events that occurred prior

to the date of the policy. Coverage ends on the day the policy is issued and ex-

tends backward in time for an indeﬁnite period. This is in marked contrast to

property or life insurance, which protect against losses resulting from events

that occur after the policy is issued, for a speciﬁed period into the future. A

Title policy protects property owners and lenders from monetary losses that

could result from ownership of a property’s title, which may include fraud, liens

against the property, or errors missed during the title search. Title insurance

does not prevent loss of marketability due to a title claim, and that is important

to know if you are going to assume ownership of a property.

In other words, a title insurance policy does not obligate the title insurance

company to make corrections to your property’s title if a problem is discovered;

rather it simply provides a basis to receive monetary compensation for your

loss at a maximum level speciﬁed by the title policy limits.

I am frequently surprised by a real estate investor’s willingness to accept a

title company’s offer to “insure over” a known risk because the title insurance

does not cure the apparent defect in the title; which may come back to haunt

the property owner in the future.

The policy covers only the amount of the loan, so the policy’s cost is based on

this amount. It is best to obtain both a lender and owner’s policy. The coverage

ROBERT KIYOSAKI 45

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 45

extended to the owner is usually referred to as the ALTA policy, which must be

based in part on a survey.

The talent associated with escrow and title ofﬁcers varies widely. For that

reason it is important to know who we are dealing with and their approach to

solving problems. An effective escrow agent anticipates the demand of the

transaction for all parties and is proactive. I am very loyal to escrow and title

ofﬁcers who I know have the capacity to close complex transactions in a timely

manner. Unfortunately, I had to kiss a few toads in order to ﬁnd folks who are

keepers!

Mortgage Broker

Selecting your mortgage broker is one of the most important decisions you will

make. You want to ﬁnd a mortgage broker, who like the architect you choose,

specializes in your area of investment. You may not know this, but the brokerage

industry is a specialty business, and few brokers possess the expertise needed

to service all areas of the lending arena. I want a broker who is well versed in

not only the execution of the loan but also very in touch with the local trends.

If your proposed project is not well suited to the market, your mortgage broker

should tell you outright or will facilitate the market telling you. Either way,

you’ll know because the process will be arduous and most likely not well re-

ceived by lenders.

Almost anything can trigger lending difﬁculties. Perhaps the proposed proj-

ect isn’t right for the location. Or maybe the location is right, but the timing

isn’t right for the project. Sometimes the lender will raise ﬂags because the

plan and proposed product didn’t go through enough feasibility studies or a

satisfactory amount of market research to ensure the project is on target. Any

investor who comes to a mortgage broker without having done his or her home-

work and as a result made the proper adjustments to the plan and design will

ﬁnd the underwriting will stall, and a loan will be next to impossible to attain.

That’s a failure by the investor.

A failure on the mortgage broker’s side can happen, too. A good mortgage

broker should guide you to the most appropriate lending vehicle and steer you

clear of the ones that are not in your best interest. Too often I have seen or

heard of mismatches between a product and the type of loan terms, even when

the product has qualiﬁed for that kind of loan. A mismatch can impact a lot of

things, not the least of which is the pro forma of the property. It can also con-

tribute to reduced proﬁtability. And loan vehicles such as city, local, and federal

46 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 46

funding have stringent requirements so their cost-beneﬁt is questionable, unless

the ﬁt is just right. Your mortgage broker should be very clear about every loan

term so you can take full advantage of them and avoid the pitfalls. If there is

something you don’t understand, do whatever it takes to clarify it.

You also should ask your mortgage broker what they know about tax credit,

HUD ﬁnancing, and related agencies, and ask them to relate to you the advan-

tages and disadvantages of these ﬁnancing vehicles. Experience with them in

addition to knowledge about them is a real advantage. The last thing you want

is a mortgage broker who is learning on the job with your project. Look for a

seasoned veteran.

In the absence of a good mortgage broker partner, some real estate attorneys—

I am one of them—also specialize in obtaining the most favorable ﬁnancing ve-

hicles available. It is a service we provide, and I am sure we are not alone. Given

that your attorney is looking out for your best interest, he or she will analyze the

loan for more than just interest rates and amortization schedules. He or she will

read the ﬁne print and the ﬁner points to discover any possible ways a loan, be-

cause of its terms, could come back to bite you years later.

Insurance Agent

I won’t go into big detail on this one except to make a few points. Have an in-

surance agent who specializes in real estate and development early on in the

process to avoid easily avoidable pitfalls. The lender generally has the speciﬁc

coverage required for your transaction. You should be able to rely on your in-

surance broker to easily interpret the requirements and deliver an insurance

certiﬁcate covering the same within twenty-four hours.

Over the years, as lending has become more oriented to packaging loans for

sale in the secondary market, lenders have dictated the types of insurance that

must be obtained, as well as the limits that they believe to be appropriate. Your

insurance agent should be able to provide you additional insight with respect

to the suitability of the proposed forms of coverage applicability of the proposed

limits.

There are probably entire agencies in your city or town that offer mostly real

estate, construction, and development insurance. There are a number of things,

based on your project, that will require insurance of one sort or another. Insur-

ance is all about risk management and the question becomes how much risk

you want to assume versus if you should pay a premium to have someone else

assume it. If you know in advance the type of insurance you will need, you can

ROBERT KIYOSAKI 47

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 47

factor it into your project budget and determine if the project is feasible and

will deliver a solid return with these added costs. If it won’t, then you may want

to reconsider the project entirely.

1031 Exchange Intermediary

Every time a client presents me with an opportunity to participate in an IRC

Section 1031 transaction, I insist that he or she had his or her accountants run

the numbers to determine the effect of paying the taxes versus deferring the

tax with an exchange. From my vantage point, the tax savings do not replace

the need for a strong real estate transaction for the replacement property. I be-

lieve you make money buying real estate; which is best demonstrated when you

sell real estate.

Many times, investors are working on a project that will be part of a 1031 Ex-

change. There’s an entire chapter in this book about exchanges, but in a nutshell,

a 1031 Exchange occurs when you sell one property and purchase another prop-

erty under the tax code 1031 and minimize or avoid paying taxes on the gain.

Anytime a 1031 Exchange is involved, you should have a qualiﬁed intermediary

execute it. The reason is simple. If there is any misstep with the procedures of

the exchange, you will not qualify and you will end up paying the taxes you

were trying to avoid.

You want to know exactly how much the tax is and weigh the pros and cons

of the exchange. A good test in my opinion, is asking yourself whether or not

you would go forward with the transaction if an exchange was not involved. In

other words, would you still consider this opportunity a good investment? Even

if you answer yes to this question, I always make sure my client has discussed

the exchange with me and his or her tax advisor so the entire plan can be viewed

in light of the investor’s bigger ﬁnancial picture.

There are also nontax reasons for exchanges. Here are a few that you may

not have considered:

• Exchange from fully depreciated property to a higher value property that

can be depreciated.

• Exchange from non-income-producing raw land to improved property to

create cash flow.

• Exchange to meet location requirements.

• Exchange from a larger property to several smaller properties, used to divide

an estate among several heirs or for retirement reasons.

48 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 48

• Exchange from a tenants-in-common interest in one property to a fee interest

in another property.

So what do you look for in a qualiﬁed intermediary? Exchangors must feel

conﬁdent that exchange funds will be safe and available for the successful con-

clusion of their exchange. It is best to hire a qualiﬁed intermediary that, ﬁrst,

comes highly recommended by other real estate investors. You should also do

your own due diligence to determine how the intermediary is investing funds

it has on hand. Recently, a large intermediary was unable to fulﬁll its funding

obligations because it had invested the bulk of its funds in auction rate securi-

ties, which became illiquid overnight! If you cannot understand the nature of

the intermediary’s underlying investments, then you should not let the inter-

mediary hold your money!

Second, be sure to obtain a written guarantee for the exchange of funds. And,

ﬁnally, verify that the qualiﬁed intermediary has ﬁdelity bond coverage, prefer-

ably in the amount of $100 million professional liability insurance and employee

theft and dishonesty coverage.

General Contractors

Nearly all real estate projects involve some construction or renovation. And for

that reason, having a general contractor run the show is a good idea. Unless

you are a general contractor yourself, you should never attempt to manage your

own construction, no matter how well you think you can do it. If you are an in-

vestor, remain an investor.

It should almost go without saying that you want to be very careful which

contractor you choose. Your decision will greatly impact the quality of your

project. You can get excellent referrals from your architect who may even rec-

ommend one particular contractor. And if you have selected the right insurance

agency in your city or town, the one that specializes in construction and does

the bond work for all the contractors in town, you will be able to get some solid

referrals from them as well. Other than that, you can ask your attorney, mortgage

brokers, lender, and look around town at the projects that are currently under-

way. That will give you a good idea of which companies are the most reputable.

No matter how tempting it is to go cheap and hire a small-time player for

your “small job,” it is never a good idea to hire any contractor who isn’t licensed

and insured. As an attorney, I will never allow my clients to assume the astro-

nomical risks that they are assuming when working with a contractor or any

trades person who is not licensed and insured.

ROBERT KIYOSAKI 49

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 49

I think it is always a good idea to determine whether or not the general con-

tractor can obtain a performance and payment bond. If you learn that the gen-

eral contractor is unable to obtain a performance and payment bond, you should

ﬁnd out exactly why that is the case. If the general contractor is involved in its

own development activities, bonding companies will frequently shy away from

the risk. However, if the general contractor is not involved in development,

then bonding companies should be more inclined to underwrite the risk asso-

ciated with the general contractor’s affairs. If a performance and payment bond

is obtained, the general contractor will pass the cost on to the developer, which

may be signiﬁcant.

Your general contractor is responsible for carrying out the design plans to

the letter, and for managing the trade contractors (subcontractors) who will

actually do the work. General contractors seldom actually perform any of the

trades themselves; they are simply very experienced project managers who

know the process of construction and know the people and the companies that

will get the work done. Pick a good contractor and you elevate your chances of

having good trades people working on your project. You should look for general

contractors who pay their subcontractors and material men in a timely manner

and have a systematized manner of obtaining all of the required lien releases.

Too often, general contractors who are struggling look to use subcontractors

and material men as a form of working capital ﬁnancing, as a result of the gen-

eral contractor’s failure to pay them in a timely manner. Ask for a list of refer-

ences who are subcontractors from various trades and material men from

various product lines.

How do you know you have a good contractor? First of all, look at their pre-

vious projects. Walk through them. Is the quality up to your standards of excel-

lence? You can tell by looking at ﬁnishes and details. If the details are shoddy,

one can only assume what lies behind the walls hidden from view isn’t much

better. Second, and perhaps even more important, is ask the tradespeople. Does

the contractor pay them on time, or is the company always running way behind

on payment? This could be a sign of cash ﬂow problems. Stay as far clear of that

as you can. What you don’t want is to have construction loan draws that are

meant to be buying your building materials going to pay off an old debt on an-

other project.

And speaking of money, building costs—like anything else—can start out in

one solar system and end up in a completely differently galaxy if not closely

managed right from the time of the initial estimate. To set a price, you’ll need a

50 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 50

clearly deﬁned budget, a clearly deﬁned scope of work, and a clearly deﬁned

schedule.

From my vantage point, I believe that folks starting out in development

should look to work with established general contractors who have obtained a

performance or payment bond for the project. The additional costs associated

with the performance and payment bond are substantially less than the poten-

tial downside.

Construction Risks That Can

Cost You Money

s an attorney, I’m always concerned about risks, so here are a few that I have

encountered, which you’ll want to keep within your field of view. It will save you

money.

• Poorly defined separation of functions between architect, engineer, and contractor.

• Scope creep that causes a small project to become a big one based on change

orders.

• Project acceleration. This may be done as a way to provide an incentive for your

contractor to complete your project prior to the original date for purposes of in-

terest savings, favorable material pricing, or changes and deadlines for laws or

regulations.

• Poor working relationships between parties that cause a lack of collaboration and

inefficiencies.

Keeping your contractors happy is pretty easy. Mostly what they want is to

be paid on time. They, in turn, have subcontractors to pay and paying them on

time keeps their tradespeople happy. Pay on time and you have a happy worksite.

Contractors also tend to take great pride in the work that they do and feel a

great sense of accomplishment bringing a building out of the ground. And, ﬁ-

nally, they value their relationships with owners, designers, and subcontractors.

Work as a team, keeping all these things in good standing, and you’ll have a

general contractor who will become a valued asset to your real estate investment

business.

You can learn more about contractors in Chapter 4, in which Ross McCallis-

ter talks about proﬁts from the ground up.

ROBERT KIYOSAKI 51

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 51

52 THE REAL BOOK OF REAL ESTATE

A Few Final Words

Any real estate project is all about minimizing ﬁnancial risk, time risk, design

risk, and quality risk. It’s about choosing the right people to help you achieve

this and working collaboratively all along the way. If you are the type of person

who seems to foster adversarial relationships, this will be difﬁcult. That’s not

to say that there won’t be times when being tough will be required. There most

deﬁnitely will be.

You’ll ﬁnd as you go from simple projects to the more complex that your team

will have to function at a higher level with greater cooperation and problem-

solving abilities. In all instances, and with every project—big or small—that you

do, have a good attorney looking out for your interests. Find the best one you

can, and let him or her do the job you deserve.

Charles W. Lotzar is founder of the Lotzar Law Firm, P.C., a diversiﬁed

practice with representation of clients in commercial and real estate

transactions, low-income housing, tax credit ﬁnancings, administrative

proceedings, and various forms of tax-exempt and taxable bond ﬁnanc-

ings. A former senior partner in the national law ﬁrm, Kutak Rock LLP,

Lotzar is involved in all phases of real estate development, including debt

and equity ﬁnancing. He has extensive experience in dealing with public contracts and issues

related to public ofﬁcials, and he has been involved in bond ﬁnancings that have an aggregate

value in excess of $5 billion.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 52

ayne Palmer is an artist and a creative genius. However, his creativity is

not seen in a painting or heard in the harmony of a song. Wayne’s creative

genius comes from seeing what cannot be seen: putting a deal together out of the

invisible and creating a ﬁnancial masterpiece.

Wayne is really an alchemist, taking different disciplines such law, taxes, mar-

keting, and design and transforming them into exceptional real estate investments.

In other words, it is not the building or the raw land that is the investment. It is

the ability to create value out of the elements and forces that surround real estate

that gives Wayne his advantage.

Wayne’s mastery of creative ﬁnancing can’t be fully described; it must be expe-

rienced. As you study Wayne’s three chapters in this book, you’ll begin to see what

I mean by that. You’ll begin to understand the difference between Wayne and the

rest of the world. Wayne can see a way to make a deal work in less time than it

takes most people to pick up a pen and sign their name. And his often simple solu-

tions to ﬁnancing problems will leave you asking, “Why didn’t I think of that?” He

has a rare gift that maybe he was born with, and that his lifetime of experience as

a real estate developer, certiﬁed real estate note appraiser, certiﬁed cash ﬂow mas-

ter broker, and licensed continuing education provider has certainly honed. Wayne

is one of kind, and he presents to anyone reading this book an opportunity to see

the world of ﬁnance in a way that you’ve never seen it before.

3Wayne PALMER

The Way to Exotic Wealth

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 53

54 THE REAL BOOK OF REAL ESTATE

Wayne is a man I trust. If a person is going to be creative, it is imperative that

he or she holds him or herself to the highest of legal, ethical, and moral standards,

which is Wayne’s true strong suit. While he is always pleasant, enthusiastic, and

speaks with a smile, his graciousness does not interfere with his straightforward

candor. He will tell you what he thinks, even if it means saying that he thinks the

deal stinks or that the person representing it is either incompetent or of shady

character.

The beauty and power of real estate investing is found in the scope of creativity

each property affords the investor. Whenever I am at a dead end, brain dead, and

in need of a shot of creativity, Wayne is the person I call.

—Robert Kiyosaki

sat staring at the envelope with the anticipation of a youngster on Christmas

morning. Seeing the title company logo, I had a pretty good idea of what

was inside. After months of patient teamwork, the escrow had ﬁnally closed. It

had required our best collective skills to complete the transaction. I felt a vi-

bration that I knew was part steel on paper and part the tingle of adrenaline as

the letter opener glided through the cotton bond. I carefully reached in and re-

moved a single document and unfolded it. It was a proceeds check made payable

to my company for $1,175,206.16.

As I paused to savor the victory, my mind wandered back over my thirty

years in real estate. How had we come so far? I remembered days in the distant

past when lunch money was hard to come by. What was so different about then

compared to now? Why was it so relatively easy today to make a million dollars

on a single transaction while it had sometimes seemed so difﬁcult to make a

living years ago? As I breathed in the magnitude of the moment, one word came

to mind, and it wasn’t the economy or boom times or anything about having

more money. It was simple: formulas.

The word “formula” is rarely used in the real estate industry. We hear about

formulas in math and chemistry, but not in real estate. What could a cluster of

numerals and digits, strung together with mathematical operatives, possibly

have to do with making money? I smiled at the thought, realizing how few peo-

ple in real estate understand the power of one good formula. I noticed a wave

of gratitude ﬂood over me. I felt so lucky to know the formula that had proven

to be worth a million dollars.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 54

What could a cluster of numerals and digits, strung together with math-

ematical operatives, possibly have to do with making money?

A Harvard friend once explained to me that certain truths are too big and

too powerful to express, except in the language of mathematics. Even Einstein

and his fellow physicist couldn’t explain the nature of our universe with mere

words, only with equations. Formulas allow us to identify, condense, and use

chunks of information that would otherwise be too big to manage.

As I held a $1 million check in my hand, I thought about all that had led up

to receiving it. If I were to write a formula to express how that had happened,

what would it be? I put the check down on my desk where I could glance at it,

and just for fun, I picked up a pad and pen to see if I could create a formula that

captured the key elements. Since I didn’t major in math, I didn’t intend to come

up with anything of cosmic signiﬁcance. I just wanted to know if there was a

way to boil it down to one simple and concise expression. After a few failed at-

tempts, scratch-outs, and rearrangements, I looked at what I had scrawled on

the paper with a strange sense of satisfaction.

W = ( XO (T+E) ) / K

Yes! That was it! My entire career summarized in one inch or less. All of the

study, all of the acquired skills, all of the systems I had learned to operate within

the “big system” we call real estate were included. I knew I was on to something.

I could see that if I could put the essence of my formula in writing, others could

save years of struggle by applying the same principles to build their own wealth.

That is what I set out to do!

So what exactly does the formula mean?

[W] WEALTH equals [X] EXCHANGE multiplied by [O] OPPORTUNITY

multiplied by the sum of [T] TALENT plus [E] EQUITY divided by [K]

SPEED/TIME.

Let’s look at what each of these variables mean.

W “Wealth”

What is it? The word clearly has different meanings for different people.

Tabloids provide ample examples of the fabulously rich and famous who often

appear to live miserable lives in spite of their money. On the other end of the

TIP

ROBERT KIYOSAKI 55

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 55

spectrum, I have seen those who barely survive economically but who seem

blissfully happy. True wealth, it would seem, is not only about cash in the bank,

although most deﬁnitions of wealth do include a certain amount of money. I

know my own deﬁnition of wealth has evolved over time to include freedom,

good health, peace of mind, happy relationships, education, recreation, and the

ability to serve others. However, for purposes of this chapter and this book, my

formula—W = (XO (T+E)) / K—focuses primarily on monetary wealth.

I deﬁne monetary wealth as assets that generate enough cash ﬂow to sustain

my chosen lifestyle indeﬁnitely, with minimal time and effort required on my part

to manage them. In Rich Dad terms, it is getting out of the rat race. Wealth is an

end result, just like the million-dollar check was the end result of one transac-

tion. Becoming wealthy is an overarching goal of the game of business.

I have concluded that one of the great gifts of living in a free society is that

everyone has the right to choose what works best for them and how much

wealth is enough.

X “EXchange”

Whenever an economic transaction occurs, there is an eXchange of value that

takes place. In ancient barter- or commodity-based economies, a cow may have

been traded for several bushels of wheat. Milk was traded for eggs. Chickens

were traded for hogs, etc. In each of these transactions, it is easy to see the sym-

metry of the exchange. In currency-based economies, we trade money for goods

and services. Regardless, if we look past the symbols of value, such as the ani-

mals or the coins, we can see that something else is actually being exchanged.

What is the “something else”?

It has been said that energy is everything and everything is energy. With

modern scientiﬁc tools, such as electron microscopes, we have learned that

things are not what they appear to be. What appears to be solid is actually a

mass of atoms that each has electrons swirling around the nucleus at astonishing

speeds. Each atom that makes up any substance on earth is pure energy. There

is relatively as much space between the nucleus and the electrons of the average

atom as there is between the earth and the sun. What we see as solid isn’t solid

at all. We only perceive it as such.

Our perceptions about money are much the same. We have come to think of

it as real wealth, but is it real, or is it only the symbol of the energy that consti-

tutes real wealth? I would suggest that the real wealth, or value, that is ex-

changed in any economic transaction—the “something else”—is not the money

56 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 56

but the energy that the exchange of the money causes to move from one place

to another. If I use my money to buy oil, it is not the oil that I want but the

energy contained in the oil that has value to me. If I exchange my money for

food, the value isn’t in the food itself but in its ability to provide me with physical

energy and perhaps some pleasure in the eating.

The X in our formula represents the eXchange of energy that takes place in

a transaction. There are elements of both quantity and quality to each of these

exchanges. The element of quantity is easy to see. I pay $2 for a loaf of bread,

$3 for a gallon of milk, $4 for a gallon of gas, or $6 for a pound of ﬁsh. The

aspect of quality is a bit trickier.

Left to its own devices, nature always returns to balance. In the deserts of

the Western United States, we have lots of rabbits. From time to time, the pop-

ulation of rabbits may increase to the point that they overrun their habitat. In

response, nature produces only enough food in the habitat for so many rabbits,

and so the weakest starve and die. Or, the coyotes in surrounding areas discover

that rabbits are plentiful and come to dine on the bounteous bunnies. As human

beings, we have the opportunity to rise above the random and seemingly violent

balancing that’s found in nature, by committing ourselves to balancing the en-

ergy of our transactions right up front. This is where the quality of the exchange

comes into play. If I make sure that I give full value, or in other words, a full

measure of energy, in each transaction to which I am a party, I harness the

power of nature in providing perpetual abundance. Nature is inherently abun-

dant when balance is maintained.

So, for purposes of our formula, a fair exchange of energy is simply to con-

sciously give something equal to or greater in value than what one receives. It

is a living commitment to the principle of win/win. It is taking pride in the

quality of one’s contribution. If I give at least as much as I want to receive, na-

ture will balance the scales by seeing that I get full measure in return. If I give

extra, I create a vacuum and nature rushes to ﬁll a vacuum, so I set myself up to

receive a greater portion. Once this principle of energy eXhange is understood

and followed, there can no longer be any lack of any kind. Natural law will see

to that.

O “Opportunity”

Oh, say, can you see? “America is [still] the land of opportunity.” In my opinion,

this statement is actually truer today than it has ever been. If anyone doubts its

validity, I invite them to observe the accomplishments of people immigrating

ROBERT KIYOSAKI 57

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 57

to the United States. They typically come to America with little money, lacking

in language skills, and having no background about how Americans do things.

Yet, many immigrants build successful businesses, buy nice homes, and end up

sending their children to the best schools available, all within a ﬁfteen-to

twenty-year period. They seize opportunities and acquire wealth that forever

changes their economic standing.

“America is [still] the land of opportunity.” In my opinion, this

statement is actually truer today than it has ever been. . . . However,

I don’t believe America is the

only

land of opportunity.

However, I don’t believe America is the only land of opportunity. Through

my travels, studies, and friends, I see tremendous entrepreneurial possibilities

in every capitalist country in the world. It is a matter of clear vision and of train-

ing ourselves to see things as they are, not as they once were, or as we hope they

might be.

I would ask this of anyone doubting the quality of today’s opportunities: Are

you willing to work as hard, study as long, and sacriﬁce as much as the immi-

grants that come to this country do? I think it is an important question because

those newcomers are today’s competitors, just as the ancestors of most Ameri-

cans were the newcomers competing for opportunities when they passed

through Boston Harbor or Ellis Island. I have no patience for those who stand

around whining about things, instead of harvesting the opportunities that are

everywhere to be found. Some may cite economic downturns as evidence that

the good days are gone. To the contrary, times of economic turbulence may ar-

guably provide greater opportunities to build wealth even faster.

I trust in Buckminster Fuller’s concept of “ephemeralization,” which para-

phrased is to progressively do more with less, faster. The technological revolu-

tion we are part of gives us incredible competitive capability and leaves us

without excuse. Yes, many things are different now than they were generations

ago and may be even more difﬁcult in some ways. However, given all of the ad-

vantages we have that our ancestors lacked, I believe we still have the edge. I

know I wouldn’t want to trade places with them.

Think about the leverage inherent in just a few of our modern conveniences:

Air travel. More than once, I have left Europe in the morning and arrived home

in the Rocky Mountains by nightfall, traveling in the comfort of kings. It took my

ancestors months of sacriﬁce and peril to make the same journey by ship.

TIP

58 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 58

Cell phones. I am able to talk to anyone from almost anywhere, at minimal ex-

pense. I remember the days when I had to get back to my ofﬁce before I could re-

turn calls, act on a thought, or solve a critical problem. Now I can make use of

drive time, down time, and spare time as it occurs, with the greatest convenience.

Word-processing software. Decades ago, what constituted a workforce of

several secretaries in an ofﬁce of several hundred square feet is now the size of

a book and sits comfortably on my lap. My PC gives me word processing ca-

pacity with instant correction, printing, graphics, and even video and sound, if

desired. It even surpasses the capacity of entire publishing companies of an-

other era.

Electronic document transfer. When I ﬁrst started in real estate (1976) there

were no fax machines. I put ﬁfty thousand miles a year on my car, just chasing

down signatures on documents and delivering them to mortgage companies,

title companies, clients, etc. Now I can send a fully executed copy to everyone

simultaneously, without ever leaving my desk and without using a single sheet

of paper or a thimbleful of gasoline.

The Internet. It is difﬁcult to begin to estimate the value of so much infor-

mation at one’s ﬁngertips. The physical equivalent of the electronic information

available on the Internet today would obviously ﬁll the world’s libraries and

require a staff of several thousand to retrieve when needed. Even then, it would

be impossible to match the speeds at which such information is delivered to

my computer screen. It is as though all of the knowledge in the world is just a

click away. How could our forbearers compete with that?

Consider how only these few tools multiply a person’s time, especially when

you consider the time, effort, and knowledge it would take to physically repro-

duce the results one can achieve by using these spectacular tools. We truly live

in a time of marvelous opportunities.

As I see it, the biggest challenge in real estate today is to sort through the

hundreds of opportunities that are constantly available to determine which

ones are the best and which ones truly warrant the allocation of precious time,

talent, and capital. My only frustration with “opportunity” is that I cannot pos-

sibly invest in all of the good deals I see.

Since opportunity is all around us and the challenge is to sort through the

many to ﬁnd the fabulous few, I believe the most important aspect of the “O” is

to become skilled at analyzing opportunity. While this book is full of powerful

ideas on how to do just that, here are my basic guidelines in the form of ten ques-

tions. (Yes, we literally put every deal through the “Ten Questions” routine!)

ROBERT KIYOSAKI 59

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 59

60 THE REAL BOOK OF REAL ESTATE

Wayne’s Opportunity Filter—Ten Questions

1. Is the project in harmony with our major goals and purposes?

2. Are the people involved of good character, and will we likely enjoy working with

them?

3. Does the project make sense as explained?

4. Does it promise returns equal to, or better than, our target rates?

5. Do we have, or can we hire, the skill required to successfully complete the project?

6. Do we have, or can we get, the capital needed?

7. Do we have the time to successfully oversee the project?

8. Does it provide at least three acceptable exit strategies?

9. Can we live with the worst case scenario, and is it within our risk profile?

10. Is it a win/win for everyone concerned?

We call this our Opportunity Filter. If we are satisﬁed with the answers to

these ten questions, we will go to the next step and do in-depth underwriting,

or “due diligence,” as it is called in our industry.

Let’s go back to the million-dollar check mentioned at the beginning of this

chapter and walk through the project that generated it. As background, the

project was a sixty-acre residential development that was only partway through

the entitlement process and was in foreclosure. The owners had twenty-four

hours to cure the default or they would lose the property, their down payment

of nearly $200,000 cash, and more than $3 million in equity.

1.Was the project in harmony with our major goals and purposes? Yes. We are

real estate lenders and developers, and it ﬁt well within our portfolio.

2.Were the people involved of good character, and would we likely enjoy work-

ing with them? Although we had just met them, their references were positive,

and we were willing to give it a go, knowing we could remain lenders only if we

chose to do so.

3.Did the project make sense as explained? Yes, the proposed lots were in high

demand, and the views from the property were exceptional.

4.Did it promise returns equal to, or better than, our target rates? Ye s. The

owners were willing to pay our standard hard-money rates.

5.Did we have, or could we hire, the skill to do the project? We saw the owners

to be a bit weak in their ability to complete the project, but they had plenty of

equity to insure their performance. We were content we had the skills on our

team, even if it turned out that they didn’t.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 60

6.Did we have the capital required? Yes. We had the money on deposit to make

the loan and knew we could borrow to complete the improvements, if necessary.

7.Did we have the time to successfully oversee the project? Yes. The project

was close to home and could be spread across our existing staff, without over-

loading anyone.

8.Did it provide at least three acceptable exit strategies? Yes: (a) get paid off as

agreed; (b) complete the project in partnership with the existing owners; or (c)

foreclose on the property and sell it or complete the development ourselves.

9.Could we live with the worst case scenario, and was it within our risk proﬁle?

The answer turned out to be “No,” because we discovered the property did not

yet have a deeded right of way for access. Although a contract was in place

with the neighbor to provide access, it contained no deadline for doing so. This

was a deal breaker for us. It threw us outside of our risk proﬁle because we

couldn’t get title insurance without deeded access to the property.

10.Is it a win/win for everyone concerned? No. Because of the problem with the

access, it was not a win for us.

So, how did we solve the problems identiﬁed in numbers nine and ten (above)?

We renegotiated the terms of our proposed loan agreement with the owners. We

knew that we had legal grounds for getting the access from the neighbor. If it

took a year longer under the worst case scenario to acquire the access by litigation,

we simply needed a way to be compensated for our added exposure. Our so lution

was this: In addition to our loan fees, and as an offset for our additional risk, the

owners agreed to grant us a 35 percent ownership interest in the property.

It took us ten months to acquire the access, at which time we sold the prop-

erty for a $3.35 million gain. The check in the envelope was our 35 percent

share of the net proﬁt.

Sometimes opportunities must be massaged a bit to discover the real gems

lurking beneath the surface.

(T+E) “The Sum of Talent and Equity”

This is the mathematics of synergy. One plus one is greater than two. Talent is

wasted without equity, and equity tends to dissipate without talent. However,

properly combined, T+E equals pure power. While it may be true that it some-

times takes money to make money, my experience tells me that of the two, talent

or equity, talent is somewhat more important in building and maintaining

wealth. For example, who wouldn’t want to have the talent of Warren Buffett

managing one’s equities? Of course, Mr. Buffett is not for hire. I understand it is

ROBERT KIYOSAKI 61

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 61

often difﬁcult to acquire Berkshire Hathaway stock because Buffett’s talent has

proven so exceptional that the current owners rarely sell their shares. I see that

as an undeniable testament to talent. The stock market at large would throw

billions of dollars at Mr. Buffett to have him get the results his talent has

achieved for his investors.

There is an old adage that states, “When money meets experience, the expe-

rience gets the money, and the money gets the experience.” I have found that

money (or equity) will ﬂock to anyone who demonstrates an ability to protect

it and cause it to grow. So, let’s consider the value of talent.

T “Talent”

The New Oxford American Dictionary deﬁnes talent as aptitude, gift, knack,

technique, ability, expertise, capacity, and faculty; strength, forte, genius, skill,

and artistry.

It is easy to see that Mr. Buffett has all of these elements of talent on his

team. I refer to the Buffett team because in today’s business environment, things

move too fast and are too technical for any individual to successfully compete

against a talented team. I must admit it took me a while to realize this glaring

truth. As a self-employed “S,” within Rich Dad’s CASHFLOW Quadrant

, I took

pride in doing everything myself. I remember the day it ﬁnally dawned on me

that others could actually do some things better than I could. An employee, to

whom I had reluctantly delegated a task, not only completed it ahead of sched-

ule, but did it better than I would have done and in a way I would not have con-

sidered. I felt a huge weight lift off of my shoulders as I realized that it wasn’t

all up to me anymore.

Since that glorious day of independence, I have devoted much of my time to

building project teams that consist of the best players I can ﬁnd. Team building

became the key for my move from the “S” (self employed) to the “B” (business

owner) quadrant (see Robert Kiyosaki’s book, CASHFLOW Quadrant). The re-

sults have been astounding. With an in-house staff of less than ten people and

outsourced “partners” of perhaps another dozen, I am now able to manage ﬁf-

teen companies, nearly six hundred investor accounts, and as many as twenty

projects at a time. It sometimes takes my breath away to see how productive

our team has become. There are weeks when we close dozens of real estate

transactions of one kind or another. I am so proud of my people for the way

they produce and for the pride they take in the quality of their work.

62 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 62

Here is a snapshot of the team we assembled for the “million dollar” closing:

1.The previous owners, who became our partners.

2.My business partner, Reed, is our systems guy. I believe every team must

have Reed’s equivalent to truly excel. He takes care of all of the details re-

quired to run our businesses, such as communication systems, information

systems, and personnel systems. The genius of his systems organizes our

staff to handle every detail of every project and to respond to otherwise im-

possible deadlines.

3.My support staff, including our receptionist, Lindsey, my administrative as-

sistant, Johanne, Renee who runs our document department, Lincoln, who

operates our real estate company, Julie, Dan and Victor in accounting and

Lila, our ﬁle clerk.

4.Our private investor clients, who, in part, provide the capital we use to fund

our loans and acquisitions.

5.Civil engineers to design the proposed subdivision, roads, and utility systems.

6.Lawyers to advise, to draft documents, and to litigate if necessary to secure

the needed right of way.

7.Accountants to keep accurate records, establish budgets, and give tax guidance.

8.Title ofﬁcers to work through issues of boundary lines, easements, legal de-

scriptions, and in resolving the right-of-way issue.

9.City ofﬁcials, who worked with us to approve our proposed development

and who helped formalize the needed right of way.

Each potential investment requires unique talent. I encourage you to learn

what is needed for a given project and build a team made up of those who have

spent their lives honing exceptional, fundamental skills that qualify them to be

part of your team. I don’t know who plays on Mr. Buffett’s team, but I would

wager with conﬁdence that they are people of outrageous talent. After proving

the talent of your team, and with a few wins to your record, you, too, should

ﬁnd it relatively easy to attract all of the equity you need to become wealthy.

E “Equity”

Deﬁnition: value, worth; ownership, rights, and proprietorship (New Oxford

American Dictionary)

Having said that equity is perishable without talent, let me now say that eq-

uity is everything when ﬁnancing real estate—once one has the talent to activate

ROBERT KIYOSAKI 63

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 63

the equity. Equity leads to net worth on your balance sheet. Equity is the symbol

of entrepreneurial wealth. Equity is capital, and understanding the role of equity

is a key to raising capital.

I also view equity as paper wealth. Currency is paper. Stock shares are paper.

In real estate, the difference between the value of the property and the debt on

the property is paper equity. Mortgages are paper assets for those who own the

notes and have the rights to receive the payments made by borrowers.

There are two segments of the real estate business where I have learned to

use equity in unique ways to achieve outstanding results.

The ﬁrst is using equity as a tool in the “equity marketing” arena covered in

Chapter 22 and the second is real estate paper, or private mortgages. In each of

these realms, equity is applied in speciﬁc formulas to accelerate the accumula-

tion of personal wealth.

Let’s look at the second part of equity—the private paper portion. Private

mortgage paper is created by converting the seller’s equity into ﬁnancing for

the buyer. A private note comes into existence when a seller “carries back,” or

in other words, loans equity to a buyer in the form of seller ﬁnancing or when

an owner pledges equity as collateral for money loaned against the property.

Since all seller equity is capital, under our deﬁnition, seller equity provides one

of the most convenient and effective sources of ﬁnancing for the purchase of

the seller’s property. Think about it: all seller equity is part of a huge pool of

potential ﬁnancing for the building of your portfolio. Once you know how to

use seller ﬁnancing, it is like having a pre-approved credit line for millions of

dollars just waiting to be tapped.

When I purchase real estate, I have trained myself to look to the seller’s eq-

uity ﬁrst and foremost for ﬁnancing. In the overwhelming majority of the prop-

erties we have bought over the years, seller ﬁnancing played some role. Even in

the best of markets, when bank ﬁnancing is plentiful, I prefer to use private ﬁ-

nancing, for many reasons.

The Benefits of Private Financing—For the Buyer

1.Negotiable. Whereas banks and mortgage companies usually dictate the

terms of their loans, a private note can include any clause the buyer and

seller might agree to, such as lower interest rates, alternative collateral, ir-

regular payment schedules to match income ﬂuctuations, and payments tied

to the performance of the property or project, to name a few.

2.Always available. Lending goes in cycles, and supplies of mortgage money

sometimes dry up. Private ﬁnancing is always available because there is con-

stant equity in certain properties in the marketplace.

64 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 64

3.Not credit driven. Private ﬁnancing may be available, even if a credit score is

low, income is difﬁcult to verify, or debt ratios are high.

4.No aggregate limit. Once the average borrower has a few loans outstanding,

institutional lenders may restrict further borrowing. There is no set limit to

what a real estate investor can borrow privately.

5.Flexible loan-to-value ratios. Banks and mortgage companies have set limits

on loan-to-value ratios (LTVs), but it is possible to borrow 100 percent of

the purchase price of the property from the owner with private ﬁnancing.

6.A ship for rough seas. In tough times, institutions have historically been rigid

in their default and foreclosure procedures. When making payments to a pri-

vate party who doesn’t want the property back, it is possible to re-negotiate

terms, extend deadlines, and in general, work together to get through the

storm. Equity is preserved for both parties, and in the process, creates an-

other win/win.

These advantages of private ﬁnancing for the buyer are clear, but I am often

asked why sellers would carry back. What’s in it for the seller?

Benefits of Private Financing—For the Seller

1.Providing ﬁnancing for a buyer in a slow market might make the property

sell quicker.

2.By making it easier for the buyer to qualify for ﬁnancing, sellers often get a

higher price for the property.

3.A seller carry-back sale is usually considered an installment sale by the IRS,

and any gain on the sale is deferred until the principal portion of the loan is

received. Properly structured, an installment sale can push the tax conse-

quences of the sale many years into the future (See Internal Revenue Code

Section 453i).

4.The seller earns income from the interest portion of the payment. The rates

of interest paid by buyers on private mortgages are usually higher than the

rates paid by banks on certiﬁcates of deposit. This means that a seller can

earn more money on a carry-back loan than he or she could by selling the

property for cash and depositing the money in a CD at the bank. This is es-

pecially a boon to sellers who are of retirement age. It is as though they con-

vert their home equity into an annuity of sorts.

5.A private note, properly structured, is legal tender. The seller can borrow

against the note or use it for a down payment on his next property or even

sell it for cash if desired. Selling a note for cash may result in the seller re-

ceiving less than the full face amount of the note.

ROBERT KIYOSAKI 65

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 65

66 THE REAL BOOK OF REAL ESTATE

Real Life Story: How Private Financing

Can Work for You

s an example, I purchased a condo from a private party who owned the unit

free and clear. They agreed to accept a $20,000 down payment and to carry a

note of $78,000 at 7.5 percent for twenty years. The monthly principal and interest

payment was to be $628.36. I asked for a clause in the note that provided for all

payments made in the first year to be allocated to principal, such that the interest

rate for the first year of the note was effectively 0 percent. The seller would still re-

ceive the same monthly income, while I could prepay as much of the balance as I

desired, within twelve months, without interest. However, 7.5 percent interest would

begin accruing against the unpaid balance on the first anniversary of the loan. That

one simple clause, written into the private note, shortened the amortization of the

note from 240 months to 205.68 months, a savings of $21,565.76. You might note

that the savings exceeded my down payment. In other words, the zero interest

clause was, in essence, an agreement by the seller to rebate my down payment if I

paid on the note to maturity.

I trust that now you can see how equity in exchanges and equity in paper,

combined with talent, can turbocharge your investment results. I believe this

is one of the most important beneﬁts of understanding and using wealth for-

mulas. Unless you were born into money or win the lottery, learning how to

harness various forms of equity that currently belongs to someone else, will

likely be your fastest road to riches.

Now, before we get to the last part of the formula, let’s consider what we

have learned so far:

Wealth is our goal—to be wealthy is to get out of the rat race

X stands for the balanced exchange of value and for the context of the real

estate exchange marketplace

O is for opportunity that is all around us, all of the time, just waiting to be

multiplied by the synergy of

Talent plus

Equity

Looking once again at the million-dollar deal, let’s take an inventory of

what we had when the borrowers walked into our office with their problem.

The property owners were about to lose a chunk of Wealth in foreclosure. We

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 66

were prepared to provide an eXchange of value using our cash and Equity

Marketing formulas. We were presented with an Opportunity to help someone

else solve a problem and to profit by doing so. We had the Talent, and they

had the Equity to provide safety for our capital. It would seem the stars were

all aligned, right? Wrong! There is one more critical element to the formula

that I am convinced makes all the difference in today’s business environment.

I call it the “K” factor.

K “Speed/Time”

In mathematics, a factor is deﬁned as a number or algebraic expression by

which another is exactly divisible (New Oxford American Dictionary). You may

notice that in my wealth formula, the product of everything else is divided by

K. K is the last operation that deﬁnes the ultimate sum of the wealth. So what

could possibly be so important as to warrant this key spot? The K is critical to

the equation because to me it represents time multiplied and compressed, as

with the metric system K, which is the symbol for kilo, or one thousand. How

can I do one thousand times more, a thousand times faster? In other words,

SPEED! How much ground can be covered in the least amount of time?

We live in a world where transactional time frames are being condensed and

collapsed by the effects of technology. What once took months to accomplish

now takes seconds or no measurable time at all. When Benjamin Franklin lived

in Paris as the U.S. ambassador to France, he communicated with his family

and government through letters. Those letters took up to six months to arrive

in the United States by boat from Paris. Today telephone, e-mail, text messaging,

and facsimile technologies make such communications instant. We can some-

times do almost everything in almost no time at all. To compete and succeed

today, we must prepare to accomplish ever more in ever shorter time frames in

every way possible.

Even though all of the stars seemed to be aligned in our million dollar deal,

there was one glaring exception. If we couldn’t salvage the owner’s Wealth by

funding the transaction within twenty-four hours, the Opportunity for eX-

change of value would expire, and all of the owner’s Equity would be lost, re-

gardless of how much Talent we had as a team. The key was the need for speed.

Without speed, all else was of no value. Without the K factor, everything that

preceded it in the formula was meaningless. Anything divided by zero is zero.

What was the key to our speed?

ROBERT KIYOSAKI 67

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 67

68 THE REAL BOOK OF REAL ESTATE

The Keys to Speed

1.Private capital—the money system. Because we control private capital, there

was no need to make a loan application to a bank, order a lengthy appraisal,

wait for a meeting of the loan committee, or wade through the rivers of red

tape surrounding institutional transactions. In short, we were working in a

niche market where their bureaucratic structures knock the banks out of

the box. They simply could not compete with us on the basis of speed, and

our client was indeed in need of speed.

2.Technology—the mechanical system. Under Reed’s direction, our ofﬁce is

wired with high-speed Internet, and we maintain accounts that connect us

to all kinds of data sources. These allow us to rapidly download title infor-

mation, zoning maps, tax rolls, market information, property histories, satel-

lite photos, and demographic data pertinent to our decision-making

processes. We can access much of this information instantly or communicate

very quickly with others who may be in possession of electronic versions of

the data that can be instantly forwarded to us. We can build a loan ﬁle in a

matter of hours instead of weeks.

3.Talent—the training system. Our staff has a broad scope of talents and disci-

plines necessary to gather and process information, create documents, com-

municate with vested parties, and support all others involved in the process.

We work as a team. We function as a whole, slicing and dicing the workload

and delivering the intended results in dramatically condensed time frames.

4.Relationships—the people system. We consciously invest in people. We do

all we can on a day-to-day basis to treat others as we would like to be treated.

We make every effort to accommodate others when called upon. We have

an absolute rule in our businesses that requires telling the truth and keeping

our word to everyone at all times. By making this investment in others, we

ﬁnd that they are there for us when we have a need for speed and they readily

respond to our requests. We see these people as extensions of our team’s tal-

ent and resources. Our network of connected people is one of our greatest

assets. We also have an unbreakable rule: No matter what else is right with a

transaction, if the people piece is wrong, we walk away. As Robert Kiyosaki

so aptly teaches, “You can’t do a good deal with a bad partner.” The guidelines

we have set and hold to in our companies protect the integrity of our teams.

Our people abide by such high standards that we rarely need to ﬁre anyone.

If the bad guys slip under the radar to ﬁnd a way onto our team, they soon

leave because they are made so uncomfortable by the culture that everyone

else upholds. We have zero tolerance for lying, cheating, stealing, gossiping,

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 68

petty politics, and sexual harassment. We intend for our business relation-

ships to last for a lifetime and create an environment that is mutually re-

spectful, safe, clean, fun, and productive.

Time is the investor’s friend in an appreciating market. As we say,

“Appreciation will cover a multitude of investor sins.” However in a down

market, time is the enemy, and the need for speed, for precision, and for

bullet proof decision making becomes even more critical. Speed is often

the difference between success and failure, especially in a contracting

real estate market.

Many modern tools allow us to cover more ground in less time. I encourage

you to use cell phones, computers, e-mail, text messaging, a paperless ofﬁce,

video conferencing, and anything else that gets more out of the time allotted.

To illustrate how valuable this can be, one of my favorite tech tools is a digital

voice recorder. I keep it in my pocket most of the time. When I have a creative

idea or think of something I need to do, I make a quick note of it on the micro

recorder. Because I can talk faster than I write, this high tech tool consolidates

what would be a scattered pile of sticky notes into one location. I use the

recorded notes to compile my daily to-do list. This habit keeps important ideas

and tasks from slipping through the cracks. It also reduces my stress levels

considerably because my mind is free of all of those details. In addition, I keep

an audio journal of important thoughts, events, and new things I learn. It is

amazing how valuable some of that information is at a later date, especially

when imbued with the emotion of the moment, as captured in my voice. It ac-

celerates the learning process and the implementation of new ideas. Perhaps

the most important beneﬁt of all is that it saves so much of my time, which is

irreplaceable.

So, there you have it! W = ( XO ( T+E ) ) / K. Wealth is XOTEK. To make it

easy to remember, say it phonetically. It sounds like “Wealth is exotic.” Now

you have your ﬁrst formula for achieving exotic personal wealth.

On a bright spring morning in May, a few days after receiving the million

dollar check, I walked down the hall to my ofﬁce. It was my birthday. I noticed

a document taped to the door at eye level. It was a copy of a deposit slip with a

printout of my discretionary business account balance. It had been posted there

by my accounting staff as a birthday surprise. It showed available funds of

$1,217,674.44. All of the bills were paid. There were no strings attached to that

money.

TIP

ROBERT KIYOSAKI 69

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 69

70 THE REAL BOOK OF REAL ESTATE

It struck me that I had more than a million dollars in cash with which I could

do whatever I wanted. I sat down at my desk and again let the full impact of the

moment settle in on me. My thoughts were strangely drawn once more to those

times in the past when I struggled to learn the secrets of abundance. Of course,

I felt joy, peace, gratitude, and a sense of well being, but most of all, I felt vindi-

cated for every effort I had made through years of hard work, tireless study, and

the gathering of experiences that collectively prepared me to close million-

dollar transactions. A sense of excitement welled up inside of me. I knew it was

only the beginning because, now, I had the formula for replicating the same

success over and over again.

I glanced at the equation I had scratched on the pad of paper a few days ear-

lier. I felt so utterly blessed. I thought of thousands of other people who are out

there in the world, going through the same process I had been through; strug-

gling to ﬁnd the right combination, the right recipe, the right formula for their

own success. I picked up the piece of paper and with a smile, folded it and care-

fully tucked it in my pocket. I knew it would come in handy soon, when I would

have a chance to share it with someone else who was diligently searching for

the way to XOTEK Wealth.

Ways to Learn More

www.waynelpalmer.com

www.nce1031.com

A soon-to-be-published book on real estate formulas, by Wayne Palmer

Wayne Palmer is widely regarded as a master of the creative structuring

of real estate acquisition and ﬁnancing, using notes and other forms of

real estate paper, together with 1031 Equity Marketing formulas. As the

owner and manager of National Note of Utah, LC, and several other com-

panies, Wayne is a Certiﬁed Real Estate Note Appraiser, Certiﬁed Cash

Flow Master Broker, a Licensed Continuing Education Provider, and holds

the Equity Marketing Specialist (EMS) designation with the National Council of Exchangors.

He has been involved in real estate development since 1978 in Utah, Idaho, Arizona, Hawai’i,

and Minnesota.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 70

oss is Ken McElroy’s partner in their business MC Properties. Kim and I are

often ﬁnancial partners with Ken and Ross in a number of their projects and

have done very well ﬁnancially, even in tough economic times.

There are three primary reasons why our investments with Ross do so well.

The ﬁrst reason is that he is a builder. He understands the ins and outs of the con-

struction industry. Second, he is a property manager. This is important because

the key to long-term investing in real estate is professional property management.

And third, Ross is exceptional at ﬁnance by managing the ratios between debt, eq-

uity, and expenses. When it comes to real estate investing, he is the complete pack-

age. On top of that, he is a great guy. He is fair and honest.

In 2002, when the Tucson apartment market was hot, Ross’s background al-

lowed us not only to do well buying existing apartment houses but also building

new apartment houses. One of our ﬁrst investments together was the purchase of

an existing apartment complex his company was managing. This gave us an ad-

vantage because we knew the numbers were honest—which is important since

most pro forma numbers provided by realtors are lies. Second, the property had

an additional ten acres of vacant land. Once we bought the existing apartment

house, our next step was to begin construction on an additional one hundred units

on the vacant land. Then with the increased rents a few years later, Ross reﬁnanced

the property, and Kim and I got all of our initial investment money back. This

4Ross MCCALLISTER

Profits from the Ground Up

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 71

means each month we receive a check from the positive cash ﬂow, and Kim and I

have zero invested in the project. If you do the math, this means Kim and I have

an inﬁnite return on our money. In layman’s terms, an inﬁnite return is truly

money for nothing... every month.

This is why Kim and I love being partners with Ross McCallister and Ken

McElroy.

—Robert Kiyosaki

erhaps you’ve already read and maybe even re-read Rich Dad Poor Dad by

Robert Kiyosaki, as well as my partner Ken McElroy’s book, The Advanced

Guide to Real Estate Investing, and now you are ready to take the plunge and in-

vest in real estate on your own. That’s probably why you bought this book writ-

ten by real estate professionals, each of whom have been earning their livings

in real estate for decades.

There are pages in this book that are full of tremendous opportunities and

innovative ways to make money in real estate. But one avenue of investment

you may not have thought of and may want to consider is to develop your own

project from the ground up.

The proﬁts you have heard about from real estate development are mind

boggling, and if you are like most people, the numbers leave you frothing at the

mouth for a piece of the development pie. Yes, there is tremendous proﬁt to be

made from real estate development, but as with any high reward venture there

is also the possibility of tremendous ﬁnancial losses if you let your emotions

override good judgment, or if you don’t know what you are doing.

In this chapter I will outline some of the steps you need to take to evaluate a

development opportunity, steps I’ve gleaned from my expertise in developing

apartment communities during the past three decades and from some twenty-

plus projects of about four thousand units. And because my experience is pri-

marily in apartment development, that is what we will talk about. However,

these fundamentals apply to any commercial development, such as ofﬁce or re-

tail, and to any size apartment community, be it four or four hundred units.

For me, development from the ground up is the most exciting way to invest

in real estate. There are few professional accomplishments more rewarding

than to see a project go from conception to reality. And it’s even better when

that project produces positive ﬁnancial results. Yet, with that said, nothing can

be more frustrating than working for years (yes, years!) to start your project

and battling through environmental and governmental regulations, market con-

72 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 72

ROBERT KIYOSAKI 73

ditions, ﬁnancial institutions, and your own continuous questioning about

whether all this frustration and risk is worth it. That side of the business is a re-

ality, too, even for those of us who have many projects already under our belts.

I know you can see yourself as the owner of that “perfect” corner lot at Main

and Better Main, graced with a structure and a monument sign bearing the

name you have been dreaming about for years. Maybe it’s (insert your dream

name here!) in large letters on the monument sign in the front. You can see all

the happy families living there, and you can hear the ka-ching of the cash regis-

ter as the rents roll in every month. But before you build that sign or take that

cash to the bank, let’s talk about some of the decisions you must make ﬁrst be-

fore you consider embarking upon this adventure.

The main lesson I have learned in thirty years of apartment

development is that each project is unique and different. Each will

bring its own set of opportunities and challenges.

Before you call me when you are in the middle of your next development

and say, “But Ross, you didn’t tell me I would need an environmental impact

study on the duck-billed humpback pygmy ﬁeld mouse!” remember, I did tell

you that something always comes up to make your project harder than you

thought it would be.

A Clear Vision

From the beginning, for any project to be truly successful, you need to have a

clear vision of what you want to build and how developing this property meets

your own objectives. That means you also need to actually have objectives—or

better said, you need a solid understanding what you want this project to

achieve. One of the reasons MC Companies—the company Ken and I own—has

been successful in development is that we have an infrastructure in place within

our ﬁrm to develop, construct, manage, and proﬁtably operate multifamily com-

munities. We are careful to select communities large enough to support an on-

site staff, earn economies of scale, and that ﬁt within our investment model.

We are careful to keep our egos in check and build for the market rather than

for our own self esteem.

When we take on a new development, we draw upon each and every one of

those disciplines—development, construction, and management—from inception

to ensure that we make good decisions in the present because we know they

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 73

will impact the future. This inclusive team approach is crucial to the successful

development and operation of our multifamily communities. If you do not have

expertise in all these areas, then it’s in your best interest to create a team whose

members do have the expertise in each of these ﬁelds before you venture into

multifamily investments, whether you are building a duplex or four hundred

units.

Develop for the Long Term

Without exception we build communities with the full intent of operating them

once they are done. If the market is strong and the right buyer knocks on our

door after the development is complete, we have an alternate option to make

money on the investment, but we don’t enter a project with this end in mind. It

takes many months, or years, from the time we create the vision of our ﬁnished

community to the time when we collect even a dollar in rent from the ﬁrst ten-

ant. To predict what the market will be like at the ﬁnish line is not always pos-

sible. But if you plan to own and operate the project after it is built and use

those numbers in your pro forma, you begin with a more solid platform—a

better business premise—from which to launch your development, lease it up,

and operate the community proﬁtably.

Let’s look at the other scenario—from the point of view of building and selling

rather than building and operating. What if the market changes from the time

that you planned your development to the time it is built and ready for you to

operate? If you have not planned on operating it from the beginning, the likeli-

hood of you recognizing the changes, knowing how they affect your project,

and then making the necessary adjustments are slim. In the end, you may ﬁnd

yourself holding an obsolete project or one that would require some serious

adjustments to ﬁt the new market conditions.

My examples are not entirely hypothetical. In the spring of 2006 the apart-

ment market was hot, and any project completed could be sold for a big proﬁt.

Many developers began projects with the idea that they could cash in upon

completion with an immediate sale. So, thousands of units were developed and

built over the next two years. In 2008, banks had changed their qualiﬁcation

and ratios for loans, and their credit criteria changed dramatically, too. Investor

money was not readily available, either. Economic conditions had deteriorated,

resulting in higher unemployment and a tight economy. The market for new

apartments was, at best, weak. Investors were demanding lower purchase prices

to compensate for the slower economy.

74 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 74

ROBERT KIYOSAKI 75

Consequently, many developers found themselves sitting on their shiny new

properties in a down economy, with cautious investors, reluctant banks, and a

weak market for their product. All the assumptions they had made two years

prior were based on factors that no longer applied. Because they didn’t develop

their projects with the idea that they were going to operate them, they created

a scenario dependent on a sale and ripe for ﬁnancial disaster!

Ken and I have avoided this situation because we plan from the start to op-

erate the communities once they are completed, and we make sure all our ac-

tions are consistent with our investment objectives. Consequently, we have

been able to adjust to market changes and ride out the difﬁcult times, all the

while building long-term value.

I don’t believe that it is possible to hit a real estate cycle perfectly.

If you do, it’s luck. Building value from real estate development over the long

term takes skill and expertise. It also takes an operator’s eye to recognize

market shifts and a mind-set that is open to change.

Your Market Niche Focus

Just as you simply must have your objectives for a development in place, you

must decide which market niche your apartment project, or other project, will

ﬁll. Here are the basics I consider when looking for a market niche:

• What are the demographics of the area you are considering?

• What is the salary level of the area?

• Is there a college population looking for more off-campus housing, and is

that the type of community I want to run?

• Where are the major employment centers?

• Are new businesses and employment being generated in the area?

• What other communities are in the area that a prospective tenant will con-

sider, and are they the same class as the community you are developing, that

is, luxury, blue-collar, or subsidized housing?

• What can I build, and how much rent can I charge?

• Will I enjoy owning and managing the community?

In 1999, we took over the development of an eighty-unit townhome commu-

nity in a town with lots of retirees. Twenty-four units had been built, and only

two had sold in more than one year. When we inspected the project, it was ob-

vious why the sales weren’t happening. Each unit had two bedrooms with a

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 75

detached garage. When homeowners came home, they would park in the garage

and would have to walk sometimes hundreds of feet through the property to

enter their front doors. A review of other competing townhomes for sale in the

area revealed they all had attached garages. Homeowners park, get out of their

cars, and take a few steps right into their homes. Is it any surprise why an

elderly buyer would prefer the competition?

When we took the project over, we bought the two sold units back and con-

verted the entire community to an apartment project, offering it for rent, not to

retirees, but to the people who worked in the town. We completed construction

of the eighty units, leased the property to full occupancy within six months,

and operated the project at a proﬁt until we sold it four years later. That’s un-

derstanding the niche and developing for it. The original developer of the town-

homes clearly did not understand the market niche, which meant he did not

understand the buyer.

The most beautiful project imaginable will not rent if it’s built in the wrong

place. A luxury apartment community may be your dream, but if you build it in

a blue collar area, you won’t be able to lease the community or be able to charge

enough rent to make the economics work. Matching the needs of the commu-

nity with the project you develop is crucial to your success. Research and know

your demographics before you proceed. Only research will give you the per-

spective that you need before you take another step forward.

Where to Build Your Community

You’ve most likely heard it before in this book and likely everywhere else: loca-

tion, location, location. As you are standing on that dusty lot, ﬁlled with years of

accumulated trash, a couple of homeless camps, and overgrown weeds, envision

where the main entrance to your community will be located. Pretend you are

driving in and driving out. Look around you. What do you see? If the view is of

an industrial complex across the street, a junkyard, or poorly maintained build-

ings, don’t just brush it off. Signs like that generally mean the area isn’t going to

entice many people to choose your community no matter how beautiful you make

it. On the other hand, sometimes negative factors like these can be minimized.

We developed an apartment project on a site where our due diligence revealed

that a processing plant was located just half a mile away. The plant took used

grease from restaurants and processed it to be reused. When the plant was op-

erating, it stunk to high heaven. But the site was an excellent inﬁll location in a

76 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 76

ROBERT KIYOSAKI 77

good school district. The clincher was when we discovered that the processing

plant was in the midst of implementing rigid pollution-control measures. We

were able to pull off a really nice, affordable apartment community in an under-

served area with conﬁdence. Research paid off.

While a panoramic view of the mountains or ocean may not be possible, or

even relevant to your community plans, don’t forget to envision what residents

will see and feel coming home. Is it welcoming? Does it feel safe? Would you

want to call that home after a long day at work?

Before Beginning a Multifamily Development Project,

Ask Yourself These Questions

Lifestyle and Convenience

• Will your community have good exposure to drive-by traffic? Heavy drive-by traffic

is a plus when you are trying to attract potential tenants, but possibly a negative

for residents concerned about traffic noise. On the other hand, the cutest, most

affordable community in town could suffer high vacancy rates if it is located on a

street no one can find, even with a blitz of advertising.

• How far from the major thoroughfares will your community be, and how easy is

the access to them? Is that important for the type of community you are planning

to build?

• How easy will it be for residents to get to work, school, shopping, the movies, etc.?

• Where are the schools in relation to your community? What is the reputation and

rating of those schools? What are the transportation options to and from those

schools?

• What are the employment opportunities in the area? What mass transit is available

to help your residents get to work?

• Is the major downtown area easily accessible?

Social Amenities

• Are parks, movie complexes, theaters, arcades, and sports facilities an acceptable

distance from your proposed community?

• What is the “flavor” of the part of town you are considering?

• How does your apartment community plan fit in with the area?

Neighborhood Amenities

• Is shopping in close proximity?

• Is a major grocery store nearby? It matters for those 10 p.m. milk runs.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 77

Development of Your Site

By this point, you understand that you must choose a site based on your demo-

graphic research. Now consider your site from the development perspective.

How easy will bringing the project, literally, out of the ground actually be? This

is perhaps the most critical analysis you will need to do, and it is the one that

will have the biggest effect on your development costs. Is the site fairly ﬂat,

with a minimum of site prep work required? Or does the site have some geo-

graphical features that are interesting but challenging?

Flat sites are wonderful, and they typically will allow for the highest density.

That is, they allow you to construct the most units per acre. Drainage becomes

your biggest concern with ﬂat sites because water will not ﬂow off them without

effort. On the other hand, a lovely, hilly piece of land can make for an interesting

project. But on the downside, density will be a challenge, and the geography it-

self can run up the site development and infrastructure costs very quickly. Foun-

dational structures like retaining walls can take a huge chunk of your

development budget in the blink of an eye. The point is, each site provides its

own set of challenges and opportunities. You need to understand how they af-

fect the number of units you can build and at what costs.

When considering the location of your community, consult with your local

governing bodies regarding zoning and other development requirements as

soon as you can. Your local government development department can help you

determine the required process for gaining permission to develop your project.

Be wary, though. I’ve found cities and counties are notorious for seeing new

development as a signiﬁcant revenue source, and they look for opportunities to

solve their problems and budget overruns at your expense. For example, some

will make approval of your project contingent upon the city or the town getting

concessions from you. You need to understand the law and the regulations, so

you know what a government jurisdiction can and cannot legitimately require.

Do not take their word as gospel without checking. And most of all, be prepared

to do battle on every issue.

Can you tell that I speak from experience? During the approval process for

one project we developed, the city initially required us to build a trafﬁc median

in the middle of a six lane street—the major highway through town—with the

excuse that the median was required to provide safe access to the proposed

apartment community. Medians are not cheap! We were going to incur several

hundred thousand dollars in off-site expenses that threatened to jeopardize

the entire deal. However, after many sleepless nights, a great deal of contem-

78 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 78

plation, and consultation with our development team, we were able to deter-

mine that, although we were required to augment the street improvements to

provide safe access, we could do it by slightly redesigning the entrance to the

project and re-striping the street, at a cost of only $3,000.

Just as important as knowing how to work with the city or town is knowing

how to work with the utility companies. On your to-do list should be checking

with the utility companies that will serve your community for availability of

their services, hook-up fees, development fees, and monthly service rates. I’ve

seen too many novices get surprised by utility access and hook-up issues. An-

other often overlooked detail is checking on the possible future infrastructure

requirements of your site. For example, if your site is on a heavily traveled two-

lane street, and the city decides to widen it to four or six lanes, you will be as-

sessed for your portion of the cost, and you will lose part of your site for the

right-of-way. Be prepared for these issues by knowing they can happen up front,

then plan your development accordingly.

Oh, and let’s not forget the remote possibility, which in some parts of the

country isn’t that remote, that your site could have archeological or environ-

mental signiﬁcance. Find out what rules are governing those discoveries in ad-

vance of even buying the land. Remember, ﬁnding out that your site is the home

of those endangered duck-billed humpback pygmy ﬁeld mice, or the next Machu

Picchu, could either kill your development entirely or put it on hold for an in-

deﬁnite period of time while experts complete expensive studies and develop

mitigation plans.

Another tip that every developer must know is the value of checking for any

riparian or wetland conditions on the property, as well as drainage, ﬂooding

potential, and soil conditions. You don’t want your beautiful new community

to be in a lake when the summer rains come. And you don’t want to ﬁnd your

buildings slowly—or not so slowly—sinking into the ground because of poor

soil conditions. When evaluating a site, you must consider all these factors. I

know there are quite a number of them, and I can’t stress enough that each site

has its own nuances. As a developer you must be prepared to spend the money

to do a proper evaluation. It’s pretty easy to see the cost implications if you

don’t.

Your Development Team

In our company, Ken and I have worked out clear guidelines regarding who will

handle which areas of development and management, based on our respective

ROBERT KIYOSAKI 79

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 79

professional backgrounds. At the same time, we constantly consult with each

other and make joint decisions.

You do not have the expertise to handle all the development, manage-

ment, and construction phases for the community you want to build. You need

to start by putting together a development team with the strongest expertise

in each area you can find.

We’re always certain to clarify up front and in writing who will be the team

leader and who will make the ﬁnal decisions. That holds people accountable and

gives them ownership. It’s ﬁne to use people you know, but this is not the time to

give your sister-in-law’s cousin his ﬁrst break in the development business!

Your Architectural Team

The next person on your team will be your architect. Ideally, this will be some-

one you have worked with in the past and have traveled a lot of rocky roads to-

gether. This person will have the experience and relationships with the

governing jurisdiction to guide you through all the government requirements.

He or she will also coordinate all the other design professions that you need,

and will provide the site plan, design, and building elevations, unit plans, project

amenities, and construction drawings with speciﬁcations.

Other members of your development team that your architect will coordinate

include:

• Mechanical engineer who will design the plumbing and HVAC systems.

• Structural engineer who will design the foundations, the framing require-

ments, and the roofing system.

• Electrical engineer who will design both the underground electrical systems

and the building electrical requirements.

• Civil engineer who will design the grading requirements for your site, in-

cluding drainage, parking lot, and zoning compliances.

Your Contractor

The contractor will be the guy or gal who is going to take all these drawings,

plans, and speciﬁcations and construct your community. Think of him/her as

TIP

80 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 80

ROBERT KIYOSAKI 81

translating the two-dimensional plans into three-dimensional buildings, from

overseeing the grading of the site all the way through handing over the keys of

the ﬁnished units. You will want a general contractor licensed in the state in

which you are building and who hires only licensed subcontractors in each trade

qualiﬁed to do the work. Reputation and past performance of the general con-

tractor will be your main guideline for this professional. Once chosen, you will

want to have a signed contract between you as the developer/owner and the

general contractor that will delineate the terms of the relationships including

compensation.

Common Construction Contracts

• Lump Sum or Fixed Price Contract—In this type of contract, the contractor

agrees to provide specified services for a specific price and receives this sum

upon completion of the project or according to a negotiated payment schedule. If

the actual costs of labor and materials are higher than the contractor’s estimate,

his profit will be reduced. If the actual costs are lower, the contractor will get more

profit. Either way, the cost to the developer/owner is the same.

• Cost Plus a Fixed Fee Contract—In this contract, you as the owner/developer

will pay the contractor the actual costs of construction plus a fee to the general

contractor. If the actual costs are higher than the estimate, the owner must pay the

additional amount. If the actual costs are lower, then the owner gets the savings.

• Guaranteed Maximum Price Contract—This contract states the owner/devel-

oper will pay for the costs like a Cost Plus contract, but the contractor will guar-

antee that the costs will not exceed a maximum amount. In the event that actual

costs are lower than the estimates, the owner keeps the savings. As costs rise,

the owner must pay for the additional costs up to the guaranteed maximum.

Thereafter the contractor pays.

The Construction Team

For as important as the general contractor is to the success of any project, un-

derstand that the success or failure of your construction relies heavily on the

expertise of the entire construction team. I cannot stress enough the importance

of hiring a qualiﬁed, ﬁnancially stable contractor who employs a bright project

manager, assigns experienced superintendents, and hires excellent tradespeople.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 81

Carefully scrutinize each person who will be involved with the construction of

your project; not only is that your prerogative, it’s your job. In addition to your

general contractor being licensed in the state of your project, he or she must

also be fully insured and be bondable. Another tip, and I know, everyone needs

to get their start somewhere, but give careful consideration before you agree to

allow your general contractor to break in a new superintendent or project man-

ager on your job. His limited experience in the ﬁeld may cost you money and

may even jeopardize the quality of your ﬁnished product.

So just who constitutes a construction team? Your team should include a

strong project manager. It is this person’s responsibility, among other things, to

decide which subcontractors will be awarded the contract for the project and

to set the construction budget. The project manager studies the plans and spec-

iﬁcations submitted by the architectural team and based on his or her experi-

ence will often suggest adjustments or changes in the plans. A few choice

suggestions made by a perceptive and conﬁdent project manager can save you

thousands of dollars in the construction budget without affecting the quality

or the appearance of the ﬁnished product.

Each project has at least one on-site superintendent, based on the size and

scope of the project. The superintendent is responsible for the day-to-day op-

erations of all the subcontracting trades who will be working on the project at

any given time. Superintendents set the schedule for the trades to ensure the

proper ﬂow of work. There is a sequential order to construction; for example,

you don’t want the painters arriving before the drywallers have ﬁnished putting

up the walls. And you certainly want to make sure all the necessary site work—

such as grading, compacting, etc.—is done before the concrete folks come to

pour the building pads. This right-on-time kind of scheduling takes a person

who has been around the block and knows how long things take to complete. It

takes a person who knows what the demand is for the various trades and knows

the appropriate lead times. It also takes someone who can forcefully, yet pro-

fessionally, get you the best treatment from the subs.

Between the subcontractors, superintendents, and the project manager, this

construction team is responsible for continued communication with the archi-

tect and engineers and for attending to construction methods and details that

don’t always show up on the drawings, yet become obvious as construction is in

progress. They should also be in continual communication with the testing tech-

nicians, building inspectors, ﬁnancial institution inspectors, and, of course, you

the owner/developer! Remember, this is your baby, and you cannot deny the

fact that you are ultimately responsible for the design and construction pros.

82 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 82

The project manager also has another very vital role, one you will come to

appreciate. He or she is the person responsible for keeping a close eye on the

construction budget. That involves closely monitoring if or when a particular

trade is out of sync with the budget, and making adjustments before the close

of the project. This is the person who looks out for your ﬁnancial interests and

communicates with you to discuss any overages. In construction, things often

take longer and cost more than originally planned, so having a good project

manager with good communication skills is a real plus.

Where does the general contractor make his money? When you get your ﬁrst

glimpse of a construction budget, you’ll notice a line item built in for a speciﬁed

percentage of the overall construction budget for the contractor’s overhead and

proﬁt. Remember, construction costs are negotiated between you and the con-

tractor, so you need to understand all the components of the construction

budget, including direct costs for labor and materials, subcontractors, and gen-

eral conditions, as well as proﬁt and overhead.

Finally, you are part of the construction team, too. It is up to you to use every

means available to make sure that the contractor builds the project correctly

and pays his bills.

This includes hiring third party quality-control inspectors; requiring proof

of payment for the materials and labor, such as lien waivers; and possibly re-

quiring a payment and performance bond.

Your Title Company

Title companies have been mentioned several times in this book, and here they

are again. Just as they play a role in acquiring existing property, they play a role

in new development, too. Here it is their job to hold all monies involved in the

transaction of the land transfer in escrow. They also provide a title report and

title insurance. The title company can help you by periodically checking to

make sure that the contractor is paying his bills and that no liens have been

ﬁled against the project by a subcontractor. You don’t want to have your build-

ings almost completed only to ﬁnd out that there is a lien on the property from

an unpaid sub. It happens!

Your Property Management Company

Contrary to what you might think, you’ll need a property management company,

even before your project breaks ground. It is the property management company

ROBERT KIYOSAKI 83

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 83

that will prepare the market analysis and determine the rents your community

can reasonably charge. From there they help you prepare a realistic operating

budget. The way management companies make their money is usually based

on a percentage of anticipated gross annual rents. Having an experienced prop-

erty management company has been a true key to our success. The market

knowledge and expertise it provides is something we would never dream of

doing without.

Your Financing Partner

Unless you are related to Daddy Warbucks or recently won the lottery (if that

describes you, let’s talk!), you will need to obtain ﬁnancing for your project.

You may qualify for various forms of ﬁnancing from governmentally controlled

ﬁnancing, to commercial banks, to private money. All are viable and all come

with certain requirements.

It is possible to qualify for governmental or commercial bank loans that offer

development and construction ﬁnancing. These lenders historically will lend

from 65 percent to 85 percent of the total cost of the project. The credit crunch

of 2008 has changed those lending percentages, and developers are required to

have more of their own cash in their deal, but regardless of the amount, those

capital sources are options. However, governmental or commercial bank lenders

will have a ﬁrst mortgage priority, meaning that in the event of a default, they

get paid ﬁrst. Their interest rates are based on the current market.

Another ﬁnance option is securing money from private lenders, meaning in-

dividuals wanting to invest in a real estate project as opposed to stocks or bonds.

If you have a successful track record and a convincing business plan/sales pack-

age for your proposed community, they will lend you the money with the con-

dition that they receive an interest payment as well as a percentage of the proﬁts

from the operations of the completed project and any sales proceeds. Although

private lenders are typically more expensive than traditional lenders, they are

more ﬂexible and may lend you a higher percentage of the project costs.

Given the scope of your project and your ﬁnancial contacts, your funding

may possibly come from a combination of these sources, depending on how

you structure the ﬁnancing. Most of the projects Ken and I work on are struc-

tured to obtain a commercial bank loan for approximately 67 percent of the

total amount needed for the project, with the remaining 33 percent contributed

as the equity, which may come from investors, our own funds, or both.

84 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 84

Your Business Plan

Obtaining ﬁnancing isn’t as easy as strolling into a bank with a good idea. It

takes much more than that. In reality, to obtain ﬁnancing, you will need a busi-

ness plan. Business plans come in many shapes and sizes, and you can ﬁnd nu-

merous templates for them all over the Internet. But let me cut to the chase

and tell you exactly what banks want to see. This eliminates all the unnecessary

ﬂuff that they don’t read anyway. Here’s what you need to include in your busi-

ness plan:

• Executive Summary, which explains the purpose of the project and gives a

ﬁnancial summary. You actually can write this ﬁrst or last, but it’s always the

ﬁrst few pages of your plan.

• Property Overview, which includes a description of the site, unit mix, floor

plans, site plan, elevations, and pictures of the site.

• Market Overview, which presents neighborhood features, city economics,

and the local apartment market.

• Financial Pro Forma, which includes development costs, construction costs,

and projected operations income and expenses.

• Developer résumé which highlights your credentials.

• Development team résumés, which highlight the credentials of your archi-

tect, engineers, and property managers.

Those are the components lenders care about and are the sections they read.

No amount of ﬂuff or page volume will make up for a poor job assembling the

details in these sections of the plan. Complete analysis and a realistic business

case surrounding that analysis have a better chance of receiving funding. A

sketchy plan based on incomplete research and analysis with blue sky projec-

tions won’t. Not only is this document obviously important in your getting the

ﬁnancing for your project, the exercise of doing it helps articulate and establish

your goals and objectives. It is the exercise that helps you determine if your

project can ultimately be proﬁtable, and let’s face it, you should want to know

that as much as the lender does.

Will You Qualify for a Loan?

Ken and I have spent our entire careers building our credit and ﬁnancial stand-

ing, as well as building our network of contacts within banking and investing

ROBERT KIYOSAKI 85

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 85

circles. These bankers and investors know our reputation and qualiﬁcations

and are willing to entertain a development proposal that we present to them.

Our track record and ﬁnancial strength give banks and investors conﬁdence

that we can complete and operate a ﬁnancially viable project. When searching

for ﬁnancing for your project, whatever your sources, you can count on them

scrutinizing your background particularly in these areas:

• What is your ﬁnancial strength? If you are building the community under the

umbrella of a company, what is the ﬁnancial strength of the entire company?

• What is your development experience? Have you successfully built numerous

projects before, or is this your first time at bat? If this is your first develop-

ment, what attributes and strengths do you have that will put to rest concerns

about your experience?

• Have you had one or more previous projects fall through in some way?

• What are the backgrounds, experiences, and strengths of your development

team? Are they all solid and strong, or are there any weak links that could

potentially cause hesitation from the source of your loan?

• What is the source of the equity you will be bringing to the table for this proj-

ect? How much of your own money are you willing to invest in the project?

The stronger your answers to each of these questions, the better the terms

and rate of loan you will be able to qualify for. A lender will ask these questions

regardless of the type of loan you are seeking—a construction loan or a perma-

nent loan. And that leads us to our next subject.

Short-Term Loan vs.

Long-Term Loan

A construction loan is a short-term loan with a term length from six to thirty-

six months, depending on the size of your project and construction budget.

Construction loans usually have variable interest rates and are interest-only

loans. The lending institution holds your project as collateral during the course

of the loan. In the event of default, you will lose your property. Construction

loans are also typically personally guaranteed by the developer, meaning the

bank has recourse to your personal assets in the event of default.

Unlike with other loans, with a short-term construction loan the lender will

not hand over to you the full amount of the loan all at once. Rather, you’ll receive

it in monthly payments based on the percent of completion of your project.

This process is called a draw, and each month your construction team will sub-

86 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 86

mit an application to the lending institution. The lending institution will send

out an inspector to verify the work is completed as stated in a workmanlike

fashion and that all local government inspections are complete and approved.

Only with the inspector’s approval will the lender issue that month’s draw.

After construction is completed, then you, the developer, will need to obtain

a permanent loan. The permanent loan is long-term ﬁnancing that will require

a monthly payment for principal and interest. The proceeds of the permanent

loan are used to pay off the short-term construction loan, and possibly repay a

portion of your equity. Sometimes, a lender will provide a construction loan

that will convert to a permanent loan upon construction completion. This has

the advantage of reducing your ﬁnancing risk. There’s always the outside

chance that you may have trouble getting long-term ﬁnancing once the project

is done. With a loan of this type, that ﬁnancing is already in place.

Financing terms can be very complicated. Our company never takes on a

loan without thoroughly reviewing the loan documents ourselves, as well as

having the documents reviewed by an attorney who specializes in real estate ﬁ-

nancing. Be sure you understand what you are obligating yourself to.

A Few Final Words

You, the developer, will put yourself on the line for the money to fulﬁll your

dream, but you won’t see your proﬁt until the project is completed and opera-

tional. While the rewards of a well-thought-out and well-constructed project

are fantastic in the end, it is a long journey, and there is a lot of risk along the

way. The processes I used for building my ﬁrst home in 1976 for $29,000, and

the communities we have built for more than $30 million are basically the same:

lots of time, research, due diligence, expenses, and sleepless nights.

By the time we identify a site, analyze the market, hire the professionals, ob-

tain ﬁnancing, and start construction, we have invested huge amounts of time

and money. Every day during the development process a new challenge presents

itself. It is a major commitment and ﬁnancial risk to take on an apartment de-

velopment, with the prospect of ﬁnancial reward in the distant future. The de-

velopment process is complicated and frustrating but also exciting and fun. You

cannot anticipate everything, but you can succeed if you approach your project

methodically, get the best advice and help, don’t cut corners, and never give up!

The personal and ﬁnancial rewards are unsurpassed.

Hang on for a challenging adventure. Watch out for the duck-billed hump-

back pygmy ﬁeld mice and all the other bumps in this ride. You are either going

ROBERT KIYOSAKI 87

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 87

to enjoy developing and building a new community as much as I do, or you will

ﬁnd that it isn’t your cup of tea. Either way, I wish you much success!

Ross McCallister is a thirty-year industry expert in real estate/develop-

ment and ﬁnance. He is a co-partner of MC Companies and oversees in-

vestment analysis, development, construction, ﬁnancing, business

development, and client relations. He is a licensed real estate broker and

a licensed general contractor. Ross has developed and constructed more

than four thousand apartment units in Arizona and managed condo-

minium conversions in Oregon, Las Vegas, and Arizona valued in excess of $300 million.

Prior to founding MC Companies with Ken McElroy, Ross was president of The McCallister

Company, a real estate syndication ﬁrm and property management company. Ross believes

in “giving back” and has served the real estate industry on various boards throughout his

career, including the Ofﬁce of the Governor’s Arizona Housing Finance Authority Board.

88 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 88

ommercial real estate is very different from residential real estate. Craig Cop-

pola is recognized as one of the best commercial real estate brokers in the

United States. That is why he is my partner in commercial real estate investments,

and we have done extremely well ﬁnancially.

When Kim and I began our transition from residential to commercial real estate,

the ﬁrst thing we had to do was let go of a residential real estate investor’s mind-

set. We had to see real estate investing through a different set of eyes. If not for

Craig’s experience, Kim and I might have lost a lot of money paying for our com-

mercial real estate education. Craig is great because he is a tremendous teacher

and takes the time to explain what we fail to see.

As an example, Craig’s education of Kim and me began with our interest in a

beautiful ofﬁce building in a great location. It was a cute structure, built in the

1980s. The ﬁrst thing Craig said was that there was not enough parking. He did

not even look at the building. Since the 1980s, zoning laws had been passed requir-

ing more parking spaces. If we wanted to improve the building, we would have to

tear it down completely and rebuild from the ground up to comply with the new

zoning law. The second lesson from Craig on the same building was that “Cute

buildings attract cute businesses.” He went on to say, “Rent to well-run businesses,

not cute people running cute businesses. You’ll have fewer headaches and earn

more money.”

5Craig COPPOLA, CCIM, CRE, SIOR

Master Your Universe:

Get the Lay of the Land

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 89

90 THE REAL BOOK OF REAL ESTATE

Craig is the most well-organized person I know. He has his days planned to the

minute. He is constantly studying and investing in his personal development—his

business—yet time with his family takes the highest priority. Craig is a great family

man and natural teacher, and he is priceless as a real estate partner.

—Robert Kiyosaki

eople who know me know that when I commit to doing something I gen-

erally jump in with both feet. And that is probably an understatement. It’s

not that I’m foolhardy about it; people would say I’m methodical and possibly

relentless. I don’t make rash decisions, and I don’t give up. That’s the way I ap-

proach my business goals, my personal goals, and my family goals. People would

also say I’m consistent.

One of my passions in life has been baseball. I was an all-state high school

and all-conference college player, and I was even drafted and played profes-

sionally with the Minnesota Twins organization. But after baseball, I knew I

needed something that I could throw myself into 100 percent, something that I

would love just as much and that would help me achieve my life goals.

Like so many people, my story of how I entered the real estate profession is a

classic friend-of-a-friend story. I won’t bore you with the details, but sufﬁce it

to say I did my share of dues paying. I didn’t mind. My mentality then was no

different than it is now and no different than it was playing baseball: Everything

I do makes me stronger, smarter, and faster and gives me the only thing I ever

ask for in life—an unfair advantage.

Yes, I want an unfair advantage and I do what it takes to get it—ethically.

Getting the unfair advantage ethically usually means no shortcuts, lots of home-

work, discipline, and sacriﬁce. At least that is how it has been for me. When it

pays off, those long days and longer nights of poring over real estate offering

Memorandums, market comparables, and property ﬁnancial data become dis-

tant memories that are replaced with cash, which ﬂows into my mailbox on a

monthly basis. It’s a beautiful thing.

My career in real estate has afforded me spare time to do other things that I

love; that was part of my plan when I got into this business. I wanted to be able

to spend more time with my family, participate in my kids’ lives, and pursue

other passions in life such as running, Tai Kwon Do, and of course, baseball.

Today my passion for baseball takes the form of coaching a youth club base-

ball team—the Arcadia Rat Pack—and I approached that in much the same way

I’ve approached everything else I’ve set out to do: with a startling amount of

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 90

research, analysis, planning, and detail all in preparation for intense action. I’m

not coaching a pro sports team, but regardless, I had batting lineups (based on

who from the opposing team was pitching), training schedules, practice sched-

ules, scouting reports, game strategies, substitution plans, even a plan for who

was going to coach ﬁrst base. Some of the parents, I’m sure, thought I was going

a little overboard.

But to me “going overboard” was simply preparing the team to face every

challenge in practice so that when those same situations came up in a game,

they weren’t new. I wanted to give those kids the unfair advantage, ethically. In

essence, my role was to put those kids in a position to win.

That included mastering our universe and knowing the lay of the land. What

teams were we going to be up against? What were their strengths and their

weaknesses? How could we exploit those weaknesses and overcome their

strengths? What do we do in a ﬁrst-and-third situation? What’s our bunt defense?

How do we handle a “run down”? We studied, strategized, and practiced all this

and more. We made it all the way to the state ﬁnals and were state runner-ups—

that was victory to us. Sixteen wins and three losses. The team played great

and came away with better and more conﬁdent kids. I want the same for you

when it comes to commercial real estate investing. I want you to win! I want

you to be the master of your universe before you even think about investing in

property.

In real estate, mastering your universe takes the form of knowing

intimately your chosen area of city or town, fully understanding and enjoying

your preferred type of real estate investment (also known as “asset class”),

and being tuned in to the real estate cycle.

In real estate, mastering your universe takes the form of knowing intimately

your chosen area of city or town, fully understanding and enjoying your pre-

ferred type of real estate investment (also known as “asset class”), and being

tuned in to the real estate cycle. Once you’ve achieved all this, you are in a great

position to begin considering properties. Here’s your ﬁrst pitch:

Let’s Take a Ride

Even if you have lived in the same city or town your whole life and feel you

know every road and every building, humor me, and still hop in your car and

take a ride. This won’t be a ride to simply look at buildings; it’s a ride to help you

TIP

ROBERT KIYOSAKI 91

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 91

look at your town or city with what I like to call “real estate eyes.” Actually look-

ing at the buildings is a minor thing at this point. This drive will help you to un-

derstand the lay of the land—the environment the buildings are sitting in—from

many different perspectives. The drive is about location, location, location.

Start your drive with the goal of trying to understand the overall city from a

real estate investment perspective. Be observant. What do you think is impact-

ing real estate values in one neighborhood or another? Even if you think you

know the area in which you want to invest, it’s still a good idea to understand

what’s going on in other areas of your city or town. Those things will play a

part in the value of the area you like best.

By now it is probably no surprise to you that I live by my schedule. My days,

weeks, months, and years are open to change, but they are highly planned.

Whether you are a heavy scheduler or not, if you really look at your life, you’ll

likely ﬁnd that we are all creatures of habit. We drive the same way to work and

the same way home, day in and day out. Not only do we miss the opportunities

on that drive, but we never see the changes that are taking place in the other 90

percent of our community. So the ﬁrst thing I recommend in order to get the

lay of the land and master your universe is to drive a different way to work. If

you normally take the highway, then take the residential streets. If you always

stop at the same Starbucks for coffee, then go to a different coffee shop. Take in

a variety of scenery and people.

Recommendation No. 1: Master your universe by driving a different way

at different times to work, and take in the world from a real estate perspective.

You’ll be surprised by what you see.

Once you think you know an area, travel there at different times of the day.

How about evenings, weekends, and at night? Really take the time to see how

people live in this area, how it is trafﬁcked. You may be surprised. There are

neighborhoods that not only have changed over time, but there are neighbor-

hoods that change with the time of day. I’ve seen parts of town that are “hap-

pening” spots during the week and during lunch, but they are absolute ghost

towns during the dinner hour and at night. If you’re looking for a great building

for a daytime business, this area of town could be the right place. But if you’re

looking for a building for an evening business, look elsewhere. Your goal here

is to look at an area and “get it.” That means you get what it’s about, and you

know what is a ﬁt. Once you “get an area,” you will begin to be able to see the

future. This is a gut response that may be helpful to write down. You’ll have an

TIP

92 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 92

opportunity later to test how right you are when you talk to the experts who

will eventually be on your team—appraisers, inspectors, attorneys, brokers, and

builders.

Look for “The Path of Growth”

When it comes to understanding the lay of the land, I look for what real estate

pros call “the path of growth” in the market. Even in cities that as a whole are

not growing, there usually are areas that are. How do you recognize the path of

growth when it comes to commercial real estate? Look for the areas where

home builders are buying land, where new homes are being constructed, and

where elementary schools are being planned and built. City governments are a

great resource for this information because they tell you where they are plan-

ning to build new facilities and where infrastructure is going in. You can also

get good insight from the economic development ofﬁcials in your city ofﬁces.

It’s always interesting to see which projects they are the most excited about

and what they see developing down the road.

Recommendation No. 2: Get to know your city officials and staff.

Find out the projects that are underway that they are the most excited about.

The more you talk with them, the more you’ll come to know where the path

of growth really is.

City ofﬁcials often can be very excited about urban revitalization projects

that are underway and often help fund projects that jump-start the process.

How exciting it is to think about being part of the solution to violence, crime,

and urban blight! But here’s my caution: These kinds of projects take time, lots

of time. Not only is there the obvious planning, zoning, designing, and entitle-

ment process that must happen; sometimes votes are involved. Then there is

the intangible consumer acceptance variable that can take years. In my home-

town of Phoenix, there were more than $800 million of revitalization projects

built before I considered this area for investment, and the elapsed time to re-

solve them took more than twelve years. So stay cautious for a very long time

because even neighborhoods marked for revitalization may remain in decline

for years.

I should point out that some real estate investors make it their entire business

to seek out declining neighborhoods. People who specialize in urban revital-

ization are just one example. That’s not my area of interest or expertise, so for

TIP

ROBERT KIYOSAKI 93

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 93

my specialty—commercial ofﬁce space—I stay clear when I see a lot of grafﬁti

or closed businesses. That seems obvious, but you’ll be surprised how a quaint

historic home that may have been recently rezoned commercial in a troubled

neighborhood can still be compelling to emotional investors. These buyers can

easily talk themselves into a bad decision by thinking that purchasing this build-

ing will be good for the neighborhood, or by telling themselves they will live

with the location because the building is so perfect. None of these arguments is

good enough. Remember, it’s location ﬁrst, no matter how difﬁcult the dwelling

is to pass up.

It’s Tough to Grow Your Way

out of a Downhill Slide

The reason I’m such a stickler on this point is that it’s really tough to grow your

way out of a downhill slide. There’s a difference between a declining area and

an area that is going to be revitalized. When you get the feel that a neighborhood

is going downhill, stay away. If it’s on the upswing and that historic building is

right in the center of it, don’t let your preconceived beliefs about the neighbor-

hood hold you back. There may be an opportunity. Understand they call it real

estate for a reason. You’re looking at the real estate ﬁrst. That’s the key under-

lying truth to all of this. The building is second.

To me an absolute must is to fully understand where the market is going, not

just where it is today. It’s all about feel and not getting in too early. What I mean

by that is unlike some businesses where speed is everything, there is no need to

be on the bleeding edge in real estate. You don’t have to be ﬁrst. You don’t want

to be ﬁrst; leave that to the biggest players who can afford the risk. There’s

plenty of opportunity and money to be made by being second, third, and even

twenty-third. Leave the bleeding edge to the big boys. In fact, if you’re a small

investor who is starting out, never be ﬁrst.

Recommendation No. 3: Do the homework it takes to fully understand

where the market is going, not just where it is at this moment in time. You’re

investing for the future, so see the future as best you can.

Even though time ﬂies, when it comes to real estate, I’ve been surprised by

how long it takes the future to actually arrive. And if you’re in a downhill slide,

the future can’t happen quick enough, believe me. You may ﬁnd out that your

grand vision for the property isn’t two years away; it’s actually twenty. This has

TIP

94 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 94

happened to many real estate investors. The town of Fountain Hills, Arizona,

was started by a real estate speculator in the 1970s. He built the world’s highest

fountain, which is powered by jet engines and shoots a huge plume of water

560 feet into the air. His goal was to attract curious people to the new commu-

nity that at the time was out in the middle of nowhere. People came and mar-

veled at the fountain, but not enough bought real estate. It took decades for the

real estate in Fountain Hills to really take off. Today it is a thriving community,

but it took almost thirty years for that to happen.

Is your view of the future too far ahead of the curve? My rule is to take my

time and be patient. There’s no need for excessive urgency at this point in the

process. If there’s room for one person to make money in an area, then there’s

room for more. In fact, I’ve found there are very few properties that are so spe-

cial that if you miss them, you miss the deal of the century or even the decade.

While those properties do exist, their owners know it and they typically over-

price the properties anyway, negating the value of the deal. A good example is

the Esplanade and Biltmore Fashion Park, both within the same city block in

the highly sought after Camelback Corridor in Phoenix. Those properties are

the types that are bought by huge institutions who want trophy properties

where the look and the location are more critical than the solidity of the real

estate and the return. For example, General Electric bought Hayden Ferry Lake-

side in a prestigious area of Tempe, Arizona. MetLife bought the Esplanade in

Phoenix. These are called core plus properties and are named such because

they create a portfolio of foundation projects that entice other investors who

are looking for glamorous investments.

Recommendation No. 4: Real estate investing is about patience. There

is no need to rush into an investment in any market.

Keep Your Real Estate Eyes Open

As you look at neighborhoods, don’t overlook the places that you think might

be too expensive, too cheap, or that used to be blighted. Neighborhoods change.

I know one investor who has made a ton of money improving the looks and

performance of less-than-stellar buildings and increasing the property values.

It takes a big commitment to do that, but she’s doing it. Understand, too, that

there are slum lords out there who have made big bucks owning very shabby

properties. That’s not something I encourage; part of what we can do as in-

vestors is create better spaces for all. But with that said, it’s a free country.

TIP

ROBERT KIYOSAKI 95

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 95

Everyone always asks this: What are the warning signs of a declining neigh-

borhood? That’s easy, and if you go with your feelings, you’ll know them in-

stinctively. True story, I was driving one morning, checking out a few

neighborhoods I hadn’t been through in a while and drove right by a car on

blocks with the tires missing. That’s the classic bad sign, and there it was in all

its glory. Other signs are multiple cars parked in the street at night and a tenant

mix in a building that looks ﬂy-by-night or that are in shady businesses. Finally,

take a look at the general upkeep. If the properties are unkempt, that’s not good

either. You may even want to take a look at the police reports to see how much

crime happens in the area.

The bottom line is you can modify your building, but you alone can’t modify

the neighborhood your building sits in. And about that quaint historic building

in a seedy part of town: Sure it would make great ofﬁces for a trendy design

studio, but if your employees are too afraid to work there or stay after hours,

how wise was your decision? Open your eyes and think through what you’re

seeing, and listen to your gut. Write down what you feel—yes, what you feel—

about every neighborhood. On the next page is a form that will not only help

you know important considerations, but also will give you a place to record your

impressions about the area.

Recommendation No. 5: Look for the signs of a declining neighborhood,

and don’t be in denial about them. Unless you want to specialize in renewal

projects, those signs matter.

Let’s Talk Buildings . . . Sort of

As I mentioned, the actual buildings themselves are practically the last things I

look at when I’m getting familiar with a city and its neighborhoods. And even

when it comes to a building, I don’t initially see the vertical structure; I see the

property it’s sitting on. Are there enough parking spaces? Is it easy to get into

and out of? In other words, does the property have good access? And looking at

the building and the site it is sitting on, does it feel right? And can visitors ﬁnd

the location without getting lost?

From there I take a closer look at who is occupying the building. What are

the tenants like? Are they quality, established companies or a little on the ﬂakey

side? A tenant doesn’t have to be The Home Depot or Taco Bell to be acceptable.

A local plumbing outﬁt that’s been in a building for ten years is actually a good

tenant—I have one like that—particularly when compared to let’s say a start-up

TIP

96 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 96

ROBERT KIYOSAKI 97

Drive Guide – The Neighborhood Environment

Below are the things you need to look for as you drive neighborhoods and look at environments.

(Rating scale: 1 is poor, 2 is fair, 3 is average, 4 is good, 5 is very good.) Add comments to right.

Neighborhood Environment: __________________________________________________ (list area)

Border: N__________________ / S__________________ / E__________________ / W________________

(comments)

Overall upkeep 1 2 3 4 5 _______________

General condition of buildings 1 2 3 4 5 _______________

Quality/condition of cars in area 1 2 3 4 5 _______________

Quality of businesses in area 1 2 3 4 5 _______________

Traffic patterns 1 2 3 4 5 ______________

Area landscape 1 2 3 4 5 _______________

Overall visual interest 1 2 3 4 5 _______________

Perceived prestige 1 2 3 4 5 _______________

Would I buy here? Yes No

If yes, what product type? _________________________________________________________________

On what street(s) would I own? ____________________________________________________________

Your Feelings and Impressions

High points? Morning Noon Night

____________________ ____________________ ____________________

Low points? Morning Noon Night

____________________ ____________________ ____________________

Future Outlook

In 5 years: _______________________________________________________________________________

________________________________________________________________________________________

In 10 years: ______________________________________________________________________________

________________________________________________________________________________________

Other impressions: ______________________________________________________________________

________________________________________________________________________________________

Questions I need answered: _______________________________________________________________

________________________________________________________________________________________

FIGURE 5.1

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 97

technology company that no one has ever heard of with millions in venture

capital money and a burn rate of a million dollars per month with one customer

and no proﬁts. I also consider the tenant’s position within their industry, the

level of competition, and where the industry is going.

Recommendation No. 6: Consider the building last and look at the

location and property it’s on first.

One afternoon, a friend called me from her car as she was traveling in a small

town some distance from her home. She said, “Hey Craig, I’m looking at a great

building here that’s all set up for a call center. What do you think?” For me the

answer was easy. Call centers are declining in the United States with most com-

panies shipping their operations overseas. I replied, “Unless you’re in India

right now, I’d pass.” Much of this is really common sense and having some

knowledge of where the trends are, not just in real estate, but also in the areas

of business and life that affect real estate.

The tracking form on the next page is a tool you can use to record your ﬁrst-

glance view and impressions of a property. It’s also a great idea to bring along a

digital camera so you can take photos of buildings and attach them to the Driv-

ing Guide records. Pay special attention to these items and be sure to record

your overall impressions as well.

Commercial Asset Class Options

One of the most important decisions you as a real estate investor will have to

make is in which area of the business you want to specialize. If reading this

book tells you anything, it should tell you that there are a lot of ways to make

and lose money in the world of real estate. Even within the commercial real es-

tate sector, there are a number of different asset class options. You’ll soon dis-

cover that they are each quite specialized with plenty of their own nuances and

requirements. I believe it’s important to see the commercial real estate sector

in its entirety so that you get an accurate picture of how it is all interconnected

because, even though the different asset classes are unique, they all do work to-

gether to create an environment within an area of a city or town. Here are the

asset classes complete with descriptions and the risks and the rewards.

Recommendation No. 7: No one can possibly be an expert in every

commercial asset class. Choose the one you think you’ll enjoy most and

specialize in it.

TIP

98 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 98

ROBERT KIYOSAKI 99

Drive Guide – The Building

Below are the things you need to look for as you drive and look at buildings. You’ll want one form

for each building you view. (Rating scale: 1 is poor, 2 is fair, 3 is average, 4 is good, 5 is very good.)

Building Name: __________________________________________________________________________

Building Address: ________________________________________________________________________

(comments)

Location within area 1 2 3 4 5 ____________________

Curb appeal 1 2 3 4 5 ____________________

General condition 1 2 3 4 5 ____________________

Parking 1 2 3 4 5 ____________________

Lighting 1 2 3 4 5 ____________________

Access/entrance and exit 1 2 3 4 5 ____________________

Tenants 1 2 3 4 5 ____________________

Ease of finding 1 2 3 4 5 ____________________

Landscaping 1 2 3 4 5 ____________________

Fits with your needs/wants 1 2 3 4 5 ____________________

Your Feelings and Impressions

High points? Morning Noon Night

____________________ ____________________ ____________________

Low points? Morning Noon Night

____________________ ____________________ ____________________

Future Outlook

In 5 years: ______________________________________________________________________________

________________________________________________________________________________________

In 10 years: _____________________________________________________________________________

________________________________________________________________________________________

Other impressions: ______________________________________________________________________

________________________________________________________________________________________

FIGURE 5.2

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 99

Multifamily

The multifamily asset class includes everything from small duplex apartment

buildings to entire apartment complexes with eight hundred units or more. The

biggest risk in this asset class is oversupply because when people have lots of

choices, rents can fall, affecting your property’s operating performance and

cash ﬂow. Another risk with multifamily is that when interest rates are low,

more people can afford to buy homes, so they don’t have to rent. That leaves

more apartment units vacant and competing for fewer residents. But on the

plus side, when lending gets tighter and it becomes harder to qualify for a home

mortgage, renting becomes the only option, and the demand for apartment

homes increases. Investors have made a lot of money in this area of commercial

real estate by buying right and managing efﬁciently. Like all commercial real

estate, the value of a multifamily property increases based on increased operat-

ing performance. In other words, buying a property and then managing it and

ﬁlling up the vacant space better than the previous owner can create an auto-

matic bump in value.

Retail

Retail commercial space is something you know probably quite well: shopping

centers, strip centers, malls, and stand-alone retailers. The beneﬁt with retail

property is that construction costs are high—often tens to hundreds of millions

of dollars—making for a high barrier to entry by competitors. This keeps de-

mand usually ahead of supply. As an investor, that’s generally a good position

to be in. But it’s not all blue sky. Economic factors such as reports of inﬂation,

recession, and declining consumer spending trends can trigger retailers to go

out of business, and as a building owner you could lose a retail tenant. Compe-

tition can also turn a favored retail center into one that is second class. That’s

what I mean about knowing the lay of the land and seeing the future. You want

to know what is coming, not just what is.

Commercial Office

Ofﬁce buildings and ofﬁce condos are one of the largest real estate asset classes.

Just look around. We all work somewhere, and ofﬁces house many of us daily

from eight-to-ﬁve. Ofﬁces come in many shapes and sizes, so there is diversity

and easy entry for new investors. Some ofﬁces are former residential buildings

converted to ofﬁce space. Others are conventional ofﬁce buildings of all shapes

and sizes. The beneﬁt of commercial ofﬁce space is that there is likely something

in your town that will ﬁt your budget whether you are a ﬁrst-time or a seasoned

100 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 100

investor and give you plenty of room to grow as you increase your wealth and

your level of investment.

Industrial

Just like commercial ofﬁce buildings, industrial spaces tend to have longer

leases and lots of options when it comes to investing. There are giant ware-

houses with upward of ﬁve hundred thousand square feet and smaller mixed-

use spaces in the neighborhood of three thousand square feet, along with

everything in between. Because of the many options available, industrial space

is a classic ﬁrst-time-investor property. One reason for industrial’s popularity

with ﬁrst-time investors is that many have their own businesses and need this

kind of space.

Health Care

This asset class in commercial real estate includes not just hospitals, but also

nursing homes, medical buildings, and assisted living facilities. The beneﬁt of

this class is that recessions and economic downturns don’t really affect it much.

But it is prone to the ups and downs of the tenant. Medical practices are small

businesses. Hospitals are big businesses. And business can ﬂuctuate. Plus, the

medical profession is one that is in a state of ﬂux, and it will be so for many

years to come. Through my experience in this area I know that not only is it

important to have the right tenants in your space, but it’s important to have the

right mix of tenants in your space—the right practices and the right practition-

ers. Assisted living facilities, on the other hand, rely heavily on good manage-

ment. Having a reputable management company that specializes in these kinds

of communities is a must.

Self Storage

Self storage spaces are those mini-warehouse consumer and commercial facil-

ities that you most likely have seen in your town. You may even have some of

your things stored in one of them. They are seemingly recession resistant, and

that is a big advantage for you as an investor. Generally, the management is rel-

atively easy. Believe it or not, corporations are actually the biggest users of stor-

age facilities, and every year they pay billions to store excess ﬁles, records, and

general stuff. The downside is that building self storage facilities is a low-cost

proposition. That means it’s easy for competitors to break into the market,

charge a lower price, and erode your margins. When it comes to self storage, I

always make sure there are lots of rooftops nearby as well.

ROBERT KIYOSAKI 101

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 101

Hospitality

This asset class includes hotels, motels, casinos, bed and breakfasts, resorts,

and vacation rentals. And like assisted care facilities, management is impor-

tant. In general, it is the asset class most closely connected with the health of

the economy. In periods of economic decline, travels for business or pleasure

are early casualties of cost-cutting and penny-pinching. That affects the num-

ber of room nights booked, which means per-night room rates can fall as prop-

erties vie for fewer customers. This, in turn, erodes income and profitability,

but in markets with a balanced supply-and-demand ratio, hospitality can be

very lucrative.

Within each of these asset classes are subcategories. All these options may

at ﬁrst seem overwhelming, but in reality it’s this diversity that makes com-

mercial real estate so lucrative and why smart investors specialize. It’s this spe-

cialization that enables us to have an advantage over other types of investments

and over other types of investors who are trying to do it all.

The ABCs of Commercial Space

Just as you need to know the various asset classes and some of the nuances of

each, it’s a good idea to know the four classes of commercial space that refer to

the quality of the property. Too often I have seen novice investors duped into

believing that an ofﬁce building is one class, when it is really a lesser class.

Class matters because the better the class of building, the higher the rent per

square foot. Here are the ofﬁcial class guidelines:

Class A+. Landmark quality, high-rise buildings with a central business dis-

trict location. These are the best of the Class A buildings.

Class A. Buildings that are one hundred square feet or larger with at least

ﬁve ﬂoors. The construction of these buildings is concrete and steel, and they

were built after 1980. Buildings include business/support amenities such as

cafés and banks, and they have strong identiﬁable locations and accesses.

Class B. Renovated buildings in good locations or newer buildings that are

smaller in size. These can be wood frame construction in nonprime locations.

Most ﬁrst-time investors invest here.

Class C. Older buildings that are not renovated. They can be of any size, and

are in average to fair condition.

Keep these qualiﬁcations in mind as you look at properties. They will help

you know what you are looking at, and they will also help you recognize false

advertising when you see it.

102 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 102

ROBERT KIYOSAKI 103

The Real Estate Cycle Revealed

Although you now know there are more kinds of commercial property than

you could have imagined, you may still be surprised to learn that their perform-

ance over time is cyclical in whole and in part. What I mean by that is that each

asset class runs through a cycle. And each asset class’s cycle either ﬂows before,

ﬂows with, or ﬂows after another asset class’s cycle.

For example, you’ll ﬁnd that growth in residential housing will fuel a similar

but slightly lagging rise in retail. This pattern makes sense when you consider

that new homeowners will want shopping centers, grocery stores, and other

conveniences near where they live. The surge in retail then drives growth in

the industrial and distribution sectors, so that means warehouse and mixed-

use property development grows. Home development also drives some growth

in commercial ofﬁce space, but again commercial lags behind. That’s why when

housing development slows, it takes a few years for commercial to slow down,

too. You’ve probably noticed that. When the news is reporting real estate de-

clines, new commercial projects are still getting underway. Now you know why.

Real estate is about cycles and the inevitability of them. Once you know that

and know how to pay attention to the cycles, you’ll know the lay of the land in

this regard, too, and you’ll be in a position to make the best of the cycle by mak-

ing the best decisions along the way.

Recommendation No. 8: Understand the real estate cycle and watch for

the indicators, and you will seldom be surprised.

Cycles are important, but in reality if you buy right, your real estate will do

well, regardless of where in the cycle you bought. But if you are just starting

out, buying right may not be as intuitive to you, so understanding the real estate

cycle becomes golden knowledge. The following diagram shows the typical

commercial real estate cycle and how it affects new construction and vacancy.

Let’s walk through each quadrant. In Phase 1, the lower left quadrant, the

market is in recovery phase. There is declining vacancy and no new construction.

You know the market is in this phase when there is some growth in the market

indicated by properties being rented and properties being sold. This uptrend

can, and often does, last a long time, years in many cases. That’s why I never

feel like I need to rush into an investment. I also don’t like surprises, so I gener-

ally let the bigger guys make the ﬁrst leaps during this phase. Then I make my

moves with solid knowledge that we are solidly in Phase one—the buying phase.

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 103

Recommendation No. 9: Phase 1 in the real estate cycle is the time to

buy, and Phase 2 and 3 is the time to sell.

As you’ll see in a minute when we talk about Phase 3 and Phase 4, declining

markets aren’t the time to take vacations. Doing lots of homework during those

times will make you smarter and at the ready during a Phase 1 market when it

is time to buy. When the other guys who bought poorly, or bought in the wrong

phase of the market, have thrown in the towel, that’s when I buy.

During Phase 2, you see the occupancy rates move below the Long Term Occu-

pancy (LT Occupancy line on the diagram) for your market. (Long Term Oc-

cupancy means that owners typically need at least a minimum of ﬁve years of

term remaining.) Every market is different, but in most cases, vacancy is very

healthy when it is below 10 percent. Understand that new construction tends

to start when vacancy rates drop below 10 and 15 percent, so during this phase

new properties begin to be developed. Again, this phase of the cycle does not

last days, weeks, or months. It tends to last a few years, so there is no hurry

here. If and when I buy during this phase, I really make sure the numbers work

and that the property meets my qualiﬁcations. There’s no way of knowing ex-

actly where the top of the market is or how long it will last, so caution is the

rule. If you’re going to sell, Phase 2 is when you do it.

Recommendation No. 10: Phase 3 and Phase 4 are not the times

to buy. They are the times to research and target properties to buy when

Phase 1 kicks in.

TIP

104 THE REAL BOOK OF REAL ESTATE

Market Cycle Quadrants

Phase II - Expansion Phase III - Hypersupply

Phase I - Recovery

Phase IV - Recession

Declining Vacancy

New Construction

Increasing Vacancy

New Construction

Declining Vacancy

No New Construction

Increasing Vacancy

More Completions

LT Occupancy

FIGURE 5.3 Market Cycle Quadrants

Used with permission by Glenn R. Mueller, Ph.D.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 104

In Phase 3, the market is in obvious decline. The guessing game, however, is

how far the market will fall and how long it will take. If you bought in Phase 1,

you may have bought yourself some strength. But when you are still seeing new

construction underway and occupancy rates increasing above the LT Occu-

pancy for your market, recognize the signs that you are in Phase 3. This is known

as “hyper supply.” Obviously, I never buy during this phase no matter how badly

I want a building. I am simply not willing to ride the wave to the bottom, not

knowing how far down bottom is. What’s the point when I know that there

will be plenty of time for deals that make sense in Phase 1? In fact, I’ll be buying

at bargain prices the properties others foolishly bought in Phase 3! You’ll hear

people say that there are buying opportunities in every phase. That is true. But

it just depends on how strong your constitution is and how deep your pockets

are.

Finally, Phase 4 signals market bottom. But there’s good news in Phase 4,

too. The darker it gets in Phase 4, the better the buying opportunities will be in

Phase 1. So if you’re on the buying side, relish Phase 4, and take the time to look

at properties. Look a lot, but don’t buy a thing. There’s no way of knowing the

bottom until it makes the turn upward. You’ll know you’re in Phase 4 when va-

cancy hits its high well above the LT Occupancy and buildings are no longer

under construction. The cranes and bulldozers will be replaced by completed

buildings sitting vacant. At this time, I do a lot of research so that when Phase 1

kicks in I have pinpointed some ripe buying opportunities. I have lined up in-

vestors and ﬁnancing and spoken to lots of people and told them that when the

turnaround happens, I’ll give them a call.

While it is helpful to know that real estate is cyclical and in all cases inter-

connected by asset class, knowing where you are in a market cycle and predict-

ing where it is going is key. Savvy investors can make money anywhere in the

cycle, but it takes great skill and experience to make money on the right side of

the line.

Further, understand that all real estate follows this pattern and that some

asset classes will follow the curve earlier or later than others. For instance, res-

idential real estate is always the ﬁrst to decline and the ﬁrst to rebound. Multi-

family follows a little later, and retail and commercial after that. Commercial/

industrial is usually the last asset class to emerge from a down market; however

it is usually the last to enter it. The more familiar you get with watching the

real estate cycles, the better you will get at knowing where you are in them.

Commercial real estate, for me, gives me plenty of warning to buy, sell, and

hold.

ROBERT KIYOSAKI 105

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 105

The Last Word on Mastery

Well, now you know how critical the lay of the land in terms of neighborhood,

asset class, and the real estate cycle is to the success of your real estate invest-

ment career. But just like in baseball, there’s a huge gap between knowing how

to hit a home run and hitting a home run. That gap, of course, is technique,

practice, and unfortunately, failure. Becoming master of your real estate uni-

verse will take all of those, too. It did for me. I’ve lived in Phoenix for more

than twenty years, and I still drive around the market with real estate eyes.

Things are always changing, and I need to keep up with those changes. I develop

new systems to make me more efﬁcient as I analyze properties and deals. And

I’m not ashamed to say on my ﬁrst deal I lost $15,000 and didn’t even end up

with the property! It never closed. These kinds of things happen to everyone,

and they are what separate the serious investors from the novices.

The same goes for baseball. Every time the Arcadia Rat Pack stepped out on

the diamond, they expected to win, but they also knew that losing was a possi-

bility. Of course we did everything in our power to increase the odds of winning,

but on those occasions when we didn’t come out on top, our team learned what

didn’t work, what we had to do better next time, and what subtleties we missed.

We didn’t make the same mistakes twice, and that’s the beneﬁt of losing: the

lessons.

Yes, knowledge is just part of the story. But action is the most critical part.

All the information in this chapter and within this book as a whole is only as

good as your willingness to take action on it. So make a pact with yourself to

become master of your real estate universe. Step up to the plate. That ﬁrst swing

is yours to take.

Ways to Learn More

CCIM Institute (Certiﬁed Commercial Investment Manager)

SIOR (Society of Industrial and Ofﬁce Realtors)

CRE (Councilors of Real Estate)

NAIOP (National Association of Industrial and Ofﬁce Properties)

ULI (Urban Land Institute)

LoopNet.com—a great place to learn about your market and research properties

InvestorWords.com—excellent online glossary of terms

106 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 106

ROBERT KIYOSAKI 107

A forthcoming Rich Dad Advisor book: How to Win in Commercial Real Estate:

Your Guide to Finding, Evaluating, and Purchasing Your First Commercial Prop-

erty in 9 Weeks or Less, by Craig Coppola

One of the premier commercial real estate brokers in the United States,

Craig Coppola has been awarded the Arizona Ofﬁce Broker of the Year

six times in the past thirteen years by the National Association of Indus-

trial and Ofﬁce Properties. He has completed more than twenty-ﬁve hun-

dred lease and sale transactions over the past twenty-three years, totaling

a value in excess of $2.5 billion. As founding principal of Lee & Associates

Arizona, Craig has earned the top three designations in the real estate industry: CCIM, CRE,

and SIOR. Only thirty-ﬁve people worldwide hold all three.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 107

arrett and I share a common love: the love of the game of rugby. Although we

do not remember each other, we played against each other years ago on op-

posing teams at the Monterrey Rugby Festival. He played for the Hastings Rugby

Club of San Francisco, and I played for the Navy/Marine Corps Flight School

team from Pensacola, Florida. Unfortunately, we were not the better team, but it

was a great game.

In 2003, Garrett and I traveled to Sydney, Australia, to watch the Rugby World

Cup. It is in our humble opinion that we witnessed the greatest game of rugby

ever played. It was the ﬁnal match between England and Australia. For as long as

I live, I will always remember that game and feel honored to have been a spectator

in the stands as we watched England beat Australia in overtime by a score of

twenty to seventeen.

Besides being a rugby player, Garrett is an attorney. He is a very important at-

torney. He specializes in asset protection, which is a vital area of law because in

today’s world there are more attorneys who want to steal your assets than there

are who want to protect them. One of the reasons why Kim and I can sleep soundly

at night is because Garrett is an expert at making sure our assets are protected.

This does not mean we are totally protected. This means Garrett has built legal

ﬁrewalls around different assets. It means we might lose one or two properties,

but we will not lose everything.

Garrett SUTTON

108

10 Rules for Real Estate

Asset Protection

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 108

In today’s litigious world, having a Garrett Sutton on your side is vital for any-

one who wants to grow rich and get a good night’s sleep, too.

—Robert Kiyosaki

s a Rich Dad’s Advisor, one of the questions I am most frequently asked is:

“How can I protect my real estate?”

In answering this key question, a pattern of repetitive follow-up queries al-

ways ensues such that after several years I have been able to distill all of the is-

sues and concerns into what I call the “10 Rules for Protecting Your Real Estate.”

By knowing, following, and implementing these ten rules, you will not only

properly protect your assets, but you will also avoid the many pitfalls placed in

your path by the overpriced asset protection “gurus” and service providers out

there who are more interested in your money than your situation. You will have

the conﬁdence to say “No” to these people because you will know more than

they do.

Your important and easily acquired education lies ahead. Let’s begin.

Rule No. 1: Insurance Is Never a Complete

Asset Protection Strategy

Or: Never let a commissioned salesperson tell you how to protect your assets.

At Rich Dad events around the country I am always confronted by the person

who asserts that his insurance agent has assured him that asset protection is a

hoax and that all that is needed is a good insurance policy. I have to laugh be-

cause there are so many instances of insurance companies failing to cover real

estate investors and others on their coverage policies, that there is a whole area

of law named after the situation. It is called “Bad Faith Litigation,” as in the

bad faith that occurs when insurance companies say they will cover you, collect

your premiums, and then, heaven forbid, a claim arises and they ﬁnd reasons

not to cover you.

Never forget that insurance companies have an economic incentive not to

cover you. As is clearly obvious, the less they pay out in claims, the more money

they make. Also never forget that insurance agents receive a commission on all

the policies they sell. So when an insurance agent says that all you need is insur-

ance instead of asset protection, please remember where his incentive lies. It is

also important to acknowledge that insurance agents are not licensed to give

legal advice. You would have to question the motives of one who would do so.

ROBERT KIYOSAKI 109

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 109

Given my healthy skepticism of the insurance industry, you would think that

I would advocate the exclusive use of asset protection entities without the use

of any insurance at all.

Insurance is the first line of defense when protecting assets. The proper

use of asset protection strategies is this second line of defense.

But to the contrary, I believe that insurance is the ﬁrst line of defense when

protecting assets. Many insurance companies are forthright in their dealings

and will honor their coverage commitments. Others, with the help of a legal

nudge, will do the right thing. So I always advocate the reasonable use of insur-

ance as a protection strategy. However, because we know that a certain per-

centage of insurance companies will use exclusions and ﬁnd reasons not to

cover you, you most certainly need another defense mechanism. The proper

use of asset protection strategies is this second line of defense. As we will learn

in this section, asset protection is not difﬁcult or expensive, but it is required if

you are to succeed at building real estate wealth.

TIP

110 THE REAL BOOK OF REAL ESTATE

Real Life Story: The Plight of “Paul”

client of mine, we’ll call Paul, initially believed in the strident assertions of his

“insurance professional.” Instead of combining insurance with entities for his

Aspen, Colorado, fourplex, he obtained only an insurance policy on the mountain

property. He held title to the fourplex in his individual name.

Despite the 100 percent insurance protection guarantees of his agent, the policy

was very clear that the company would not cover any claims related to an avalanche.

Sure enough, Paul’s fourplex was greatly damaged in a swift and freakish ava-

lanche. The insurance company quite correctly refused to cover the claim. Its policy

expressly excluded avalanche damage.

Paul was furious at his agent who, besides assuring that the pricey policy covered

everything and that no other protection was needed, had never pointed out the

very clear policy exclusions. By relying on his agent and not taking any other pro-

tective steps, all of Paul’s assets were exposed to the avalanche claim.

Paul’s problem was completely avoidable. If he had relied on a team of advisors,

including an asset protection attorney, the situation where a highly commissioned

salesperson got away with giving legal advice would never have occurred.

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 110

Now that we know that insurance alone will not completely protect us, let’s

review further ways to not protect your real estate before we get to the promised

land of beneﬁcial strategies in later rules.

Rule No. 2: The Two Most Common Ways of

Taking Title to Your Real Estate Do Not

Provide Asset Protection

Or: Why to avoid joint tenancies and tenants in common.

It is indeed ironic that the two most common and popular methods of taking ti-

tle to your real estate provide you with the least protection. Joint tenancy is

one of the most popular forms of holding title because it provides for a right of

survivorship. This works such that if one party dies the other joint tenant be-

comes the sole owner by operation of law, meaning it happens automatically.

Joint tenancy is popular with husband and wife couples. If the husband, for ex-

ample, passes away ﬁrst, then the wife has complete control of the property

without having to go to court or ﬁle new deeds.

The problem for real estate investors is twofold. First, joint tenancies offer

no asset protection. Suppose Peter, Paul, and Coco own a sixplex as joint tenants.

If Paul gets sued, his creditor can reach Paul’s joint tenancy interest. Peter and

Coco now have a new partner in the sixplex, most likely someone, who after

suing their friend and barging their way in, they don’t like right off the bat. As

well, this new partner can bring a partition lawsuit to force a sale of the property.

It can get expensive in legal fees and messy in court.

Secondly, the right of survivorship feature that makes joint tenancies easy

and attractive to married couples is the same feature that makes them so scary

and abhorrent to investors. Let’s take another look at the joint tenancy that

holds Peter, Paul, and Coco’s sixplex. Suppose Coco were to die in a fashion in-

dustry disaster. Her interest in the sixplex is automatically terminated. She

can’t pass her interest on to her heirs because Peter and Paul, by operation of

law, are now the two remaining joint tenants on title.

Savvy investors will not invest with you if you propose taking title as joint

tenants. The good ones know that you should never put yourself in a position

where someone will beneﬁt from your demise. That’s what you are doing with

joint tenancies. I will withhold comment on the state of marriage today and

why so many knowledgeable spouses continue to use joint tenancies. But for

investors it is not the right choice.

ROBERT KIYOSAKI 111

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 111

Savvy investors will not invest with you if you propose taking title

as joint tenants.

Similarly, but with one exception, taking title as tenants in common is not

the best course, either. Again, there is no asset protection. In our example, if

Peter gets sued, Paul and Coco can ﬁnd themselves with a new and unwanted

partner. Once again, the partner can bring a partition suit to force a sale of the

property. As well, if there is a lawsuit involving the property (i.e., a tenant sues

over a defective water heater) the individual tenants in common (or individual

joint tenants, for that matter) can be held personally responsible. All of their

personal assets can be exposed to such a claim. Holding title to any property as

individual tenants in common does not make good sense in our very litigious

world. In fact, it can make you more of a target.

The one exception for using tenants in common to hold title is when investors

take their interest not as exposed individuals but with protected entities. In a

TiC situation (“TiC” stands for tenants in common) investors come together

from 1031 exchanges or with investment money to buy a large property. The

large property is held as a tenancy in common with all the various investors

holding their speciﬁc TiC interest through a protective entity such as a LLC

(limited liability company).

A chart helps to illustrate:

While I may have let the cat out of the bag (that LLCs are good entities for

real estate), it is my belief that most of you may have already known this. Still,

there are a few more rules involving what not to use before we get to positive

asset protection territory.

TIP

112 THE REAL BOOK OF REAL ESTATE

The Difference Between Individual Tenants in Common

and Tenants in Common (TiC)

John,

as individual

Jane,

as individual

John’s

LLC

Jane’s

LLC

Tenants in Common

4 Plex

TiC

4 Plex

vs.

Outside assets protected from all claimsAll assets personally exposed to all claims

FIGURE 6.1

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 112

Rule No. 3: Never Hold Real Estate

in a C Corporation

Or: Fire the professional who even suggests such a thing.

One of the cardinal sins of real estate asset protection is to take title in the name

of a C corporation. While there are certainly advantages to using a C corporation

in business (which are discussed in my Rich Dad’s Advisor book Own Your Own

Corporation) there is a huge disadvantage to using a C corporation for real es-

tate, which can be expressed in one word: taxes.

As you probably know, C corporations face a double tax. You pay taxes once

at the company level and then again when dividends are distributed to share-

holders. With an S corporation, LLC, or LP you pay tax only once at the com-

pany level. A chart graphically illustrates the difference between double

taxation and ﬂow-through taxation.

So what happens when you have a capital gain on the sale of real estate held

by a C corporation? You pay a lot more in taxes.

Consider the situation in which a $500,000 long-term capital gain is realized

on the sale of real estate held for longer than one year.

As the chart on p. 114 indicates, you will pay $144,500 more in federal taxes

by using a C corporation instead of an LLC. Does Uncle Sam want you to use a

C corporation? Of course. Will any investors join your deal if you propose using

a C corporation? Of course not. They’ll know you don’t know what you are do-

ing. Avoid the professional who advises you to use a C corporation to hold any

interest in real estate. They just don’t know what they are doing—to your later

detriment.

ROBERT KIYOSAKI 113

No Entity Tax

Flow-Through Profits

After Tax Profits

Corporate Tax

Taxes Paid Once

Taxes Paid Twice

Taxes Paid Once

Dividends to

Shareholders

Dividends to

Members

Corporation

LLC, LP, or Sub S

Corporation

FIGURE 6.2

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 113

114 THE REAL BOOK OF REAL ESTATE

Avoid the professional who advises you to use a C corporation to hold

any interest in real estate.

We frequently have clients discuss how some asset protection “guru” or other

promoter advised them to set up their structure as follows:

The rationale is that the two pieces of rental property are owned by the LLCs

and each LLC is in turn owned by a C corporation. The gurus will state that all

kinds of deductions can be taken with a C corporation. The problem is that, as

ﬂow-through entities, the proﬁts ﬂow from the LLCs to a double tax C corpo-

ration. You are still in a bad tax position.

If you are intent on using a C corporation in your entity mix (and please be

cautious of promoters who overly tout the supposed glorious beneﬁts of the C

corporation) a better scenario is the following:

TIP

LLC

4 plex

LLC

Duplex

C Corporation

FIGURE 6.4

C Corporation

$500,000 Gain

−170,000 Less 34% corporate tax (35% for larger corporations)

$330,000

− 49,500 Less 15% tax to shareholder on distributions

$280,500 Amount after tax

LLC

$500,000 Gain

− 75,000 Less 15% capital gain tax

$425,000 Amount after tax

FIGURE 6.3

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 114

In the structure above, the title-holding LLCs are held by an asset protecting

Wyoming or Nevada LLC, thus providing ﬂow-through taxation throughout

the structure. For those desiring the write-offs of a C corporation, a manage-

ment C corporation is used. Each title-holding LLC pays a management fee to

the corporation so their beneﬁts are obtained. But there is no ownership of real

estate through the C corporation, thus avoiding the double taxation of proﬁts

we had in the ﬁrst instance.

Please also beware of promoters who would have you set up more entities

than you need. The management corporation may provide some beneﬁts in

later years when there is plenty of cash ﬂow. But at the start, do you really need

one? Probably not. So be very cautious of those promoters who want what is in

their best interest and not yours.

Rule No. 4: Offshore Strategies Do Not

Work for Onshore Real Estate

Or: What have you been smoking?

As you have probably noticed, throughout this chapter and in my other writings

I have found the need to warn against the slick and salesy gurus and promoters

with their incredible claims and come-ons. Certainly some of the most outra-

geous claims come from the offshore promoters who offer tax savings and ab-

solute privacy. Of course, they never mention the existing United States rules

and regulations that do, in fact, run contrary to their claims. In most cases,

these people actually live on small Caribbean Islands or in European principal-

ities beyond the reach of U.S. authorities. They can say what they want.

ROBERT KIYOSAKI 115

LLC

4 plex

LLC

Duplex

WY or NV LLC

Management

C Corporation

FIGURE 6.5

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 115

But as a U.S. citizen, can you afford to listen to those who intentionally mis-

represent U.S. laws? Or course not.

To further your caution, let’s review what can happen when offshore asset

protection is used in attempt to protect U.S. real estate.

Real Life Story: John’s Bad Day

ohn was a doctor in California. He had worked hard and paid his taxes. He owned

a twenty-unit Roseville apartment building free and clear and a significant bro-

kerage account. He felt as if he were doing well, but the combination of the mal-

practice and real estate litigation explosion and the ravenous demands of both the

IRS and California’s notorious state tax collector—the Franchise Tax Board—had

led John down the path of considering offshore options.

A promoter from the Caribbean Island of Nevis held a seminar for doctors and

dentists in John’s hometown. The self-styled asset protection man with glowing

testimonials and advanced degrees from schools John had not heard of, laid out a

comprehensive and seamless case for using Nevis structures to protect assets.

The promoter boldly claimed that by using offshore trusts John could obtain com-

plete privacy and incredible tax savings. His strategy was graphically represented

as follows:

The promoter indicated that John would not have to pay any taxes. Because the

apartment building LLC was owned by the Nevis APT (“asset protection trust”),

profits generated from rents could pass offshore without taxes. The domestic LLC

would simply file zero return. The promoter further stated that insurance was not

needed on the apartment building because it was now in a bulletproof structure. As

well, by moving John’s significant brokerage account into the second APT, profits

could be generated offshore without U.S. or California taxes. Better yet, the monies

could be accessed by John, tax free, into the United States by simply requesting

the Nevis trustee—who received $3,000 a year for the service—wire the money.

116 THE REAL BOOK OF REAL ESTATE

Roseville, LLC

20 unit apt. building

Nevis APT, I

Nevis APT II

Offshore brokerage

account

FIGURE 6.6

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 116

John followed the promoter’s advice, paid the $25,000 for setting it all up, and

in the first year his financial condition greatly improved. With his assets offshore

and no onshore taxes paid, he was doing really well. He wondered why everyone

didn’t do this. Then, in one day, two problems arose. He was sued for malpractice

by a patient and a tenant fell at the apartment building.

When the tenant’s claim was made, John informed the claimants that there was

no insurance. When the tenant’s lawyer indicated they would sue anyway, John calmly

replied that the building was owned by a bulletproof offshore asset protection trust.

The lawyer laughed and said John needed to get a local attorney to advise him.

When John did so he learned the bitter truth: You can’t protect U.S. real estate with

offshore entities. The apartment building was located in California and, as such, Cali-

fornia courts had jurisdiction. This was the law in all fifty states. The tenant could bring

a claim against the LLC, and with no insurance in place, the tenant could reach the en-

tire free-and-clear equity in the apartment building. The fact that the LLC was owned

by an offshore APT was of absolutely no consequence and offered zero protection.

John also spoke to his new lawyer about the malpractice claim. As a doctor, John

was sued individually. But he felt protected because his brokerage assets were pri-

vately all held offshore. This was when the second shoe dropped.

The lawyer explained that if John had followed all the tax reporting requirements

associated with offshore entities, a creditor could easily learn what John owned.

John was incredulous. The promoter had assured him that he had bulletproof

privacy and asset protection without the requirement of taxes or even tax reporting.

The lawyer had seen other professionals lured in before. He presented John with

the following chart detailing all the reporting requirements:

ROBERT KIYOSAKI 117

TABLE 6.1

IRS Requirement IRS Rule

U.S. persons must report all gratuitous and nongratuitous transfers

to a foreign trust.

Section 6048,

Section 1494

Foreign trusts owned by U.S. persons must file an annual tax return

on IRS Form 3520-A. U.S. persons are subject to a 5% penalty against

the value of offshore assets each year for failure to file.

Sections

671 to 679

U.S. persons receiving offshore distributions, whether taxable or

nontaxable, must report them or pay 35% penalty.

Section 6677(a)

Foreign trusts owned by U.S. persons must appoint a U.S. agent so

that the IRS may examine offshore records.

Sections

7602 to 7604

CONTINUED

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 117

John now realized that everything the promoter said was false. Given the IRS

rules, there was no privacy, no tax savings, and no bulletproof protection. With the

help of his new lawyer, John cleaned up the offshore mess by paying significant IRS

penalties and fees. A demand to the Nevis promoter for the $25,000 John was lured

into paying for worthless strategies and documents went unanswered.

Offshore strategies do not work for onshore real estate.

Rule No. 5: Living Trusts Offer

No Asset Protection

Or: Will you please stop listening to these guys?

Many of you have seen the ads touting the signiﬁcant beneﬁts of living trusts.

Invariably, one of the great features mentioned is the ability of these trusts to

protect your assets.

While living trusts do offer certain advantages it is very important to clearly

recognize the one beneﬁt they do not offer: asset protection.

Let’s take a closer look.

Primarily used for estate planning, the key beneﬁt of a living trust is to avoid

probate. If you have only a will, or pass without a will, the distribution of your

estate is supervised by a local probate court. The probate process is long and

time consuming and a matter of public record, meaning that anyone can view

the ﬁle to see what assets are involved, and perhaps challenge the distribution.

As well, the attorney’s fees awarded for probate proceedings can be quite lu-

crative for the lawyers involved. For example, with a $1 million primary resi-

dence passing through a California probate, the court awards a statutorily set

attorney’s fee of $23,000. An executor is entitled to the same amount. These

fees are due, even if the home is fully encumbered by loans, and thus without

equity to pay the fees.

The solution is to set up a living trust, which is a trust document allowing

you to use an appointed trustee, typically a surviving spouse or other family

member, to distribute your assets without the need for probate court assistance

or review. The several thousand dollars spent on a living trust can easily save

many more thousands of dollars in probate fees.

TIP

118 THE REAL BOOK OF REAL ESTATE

CONTINUED

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 118

The living trust also features a great deal

of ﬂexibility. It is a revocable trust, meaning

you can change its terms and/or beneﬁci-

aries at any time. But that also means it

does not offer any asset protection. Because

it can be easily altered, a judgment creditor

can get a court order forcing a transfer of

any property from the trust to the litigation

party.

Despite this factual lack of asset protec-

tion, living trust promoters continue to sell

their services as offering such protection.

When challenged, they will parse and nar-

row their overly broad claims to suggest

that their living trusts help protect against creditor claims because they avoid

the very public probate process. And this is true. But just as deciding not to

sunbathe completely in the nude is not the same as the judicious use of sun-

screen, avoiding a fully public probate is not the same as proper asset protection.

By relying only on the former examples, you are going to get burned.

Real Life Story: Mario’s Mistake

client of mine named Mario came to me after titling all of his assets—his house,

a rental fourplex, and a significant brokerage account—in the name of his living

trust. The formal name for the trust—The Mario T. and Carmen O. Sanchez Revoca-

ble Trust dated June 10, 2004—was given to the county recorder and assessor for

taking title to the two real estate properties. The Smith Barney broker took the

same name for the Sanchez’s brokerage account.

Mario indicated that the seminar promoter who set up his living trust assured

him that his assets were now fully protected. But now he was being sued by a tenant

who fell at the fourplex, and he wanted a second opinion.

It was not pleasant to inform Mario that his assets were not protected. By titling

everything in his living trust’s name, all of his assets were exposed to the tenant’s

claim.

When Mario asked if he could re-title everything into a more protective structure,

it was even more difficult to explain that it was now too late to do so. Once you’ve

been sued, or even threatened with suit, it is too late for asset protection.

ROBERT KIYOSAKI 119

Sanchez Living Trust

Owns LLC

XYZ, LLC

Owns 4plex

Asset Protection

Probate Avoidance

FIGURE 6.7

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 119

The next question clients always have is: How do they combine the beneﬁt of

a living trust’s probate avoidance with the necessity of asset protection? The an-

swer is simple, and it is graphically charted in Figure 6.7: The LLC is on title

with the county recorder as owning the fourplex. We have asset protection at

this level. The living trust owns the membership interests in XYZ, LLC. If both

Mario and Carmen die, the living trust document will dictate who owns the LLC

without the need for court supervision. At this level we have probate avoidance.

You can’t rely on the LLC for probate avoidance, and you can never

count on the living trust for asset protection, but in concert you can get both.

Properly structured LLCs and living trusts work well together and comple-

ment each other. You can’t rely on the LLC for probate avoidance, and you can

never count on the living trust for asset protection, but in concert you can get

both.

Rule No. 6: Land Trusts Offer Privacy

But Not Asset Protection

Or: Why privacy is not enough.

For many of the same reasons a living trust offers no asset protection, neither

does a land trust offer asset protection. In fact, a land trust is very similar to a

living trust. In both, you are transferring assets to a trust administered by a

trustee for your beneﬁt.

According to the seminar promoters, the big beneﬁt of a land trust is its pri-

vacy. By using a trustee other than yourself, your name can be kept off the chain

of title and public records. And while privacy is a good thing in this day and age,

it is not a perfect substitute for asset protection.

It is important to understand the structure of a

land trust in order to appreciate why asset pro-

tection is not inherent.

In our chart, Joe is identiﬁed on public records

as being the trustee, but Jane, as beneﬁciary, is not

anywhere identiﬁed. In this manner, privacy can

be achieved.

But the land trust, like the living trust, does not

protect Jane. If there is a lawsuit involving the

fourplex, a judgment rendered is against the ben-

TIP

120 THE REAL BOOK OF REAL ESTATE

ABC

Land Trust

owns 4 plex

Jane, an individual

Beneficiary

FIGURE 6.8

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 120

eﬁciary. If Jane, as an individual, is the beneﬁciary, then any judgment is against

her personally, and all of her personally held assets are exposed.

There are two better ways to handle it. In example A, we show the beneﬁciary

to be an LLC.

In this way, a judgment attained against the beneﬁciary is rendered against a

limited liability entity. James’s personal assets are not exposed.

Of course, this structure entails setting up two structures—the land trust and

the LLC—as well as paying the trustee to serve every year. The same asset pro-

tection is attained by just setting up one entity, the LLC, as in example B.

If privacy is important you can certainly have the manager of the

LLC be a nominee, a person other than yourself.

If privacy is important you can certainly have the manager of the LLC be a

nominee, a person other than yourself. Our ﬁrm charges $650 a year for this

service. Others may charge more or less. But in this way you can achieve asset

protection and privacy, without the need to set up a land trust.

Rule No. 7: LLCs and LPs Are Excellent Asset

Protection Entities

Or: Why you want the charging order.

So, ﬁnally at rule seven we are getting to the good stuff. But as I mentioned,

there is so much misinformation out there that I felt it was important to ﬁrst

dispel the myths and outright lies. With all that completed, I can now state that

LLCs and LPs offer excellent asset protection via the charging order.

Before reviewing the charging order, the difference between LLCs and LPs

must be explained. With an LP you must have at least one general partner and

TIP

ROBERT KIYOSAKI 121

ABC Land Trust

owns 4 plex

James’s LLC Beneficiary

Joe, Trustee

James’s LLC

owns 4 plex

Example A Example B

FIGURE 6.9

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 121

one limited partner. The general partner, if an individual, is personally respon-

sible for the LP’s activities. To encapsulate that unlimited liability you must

form a limited liability entity—a corporation or an LLC—to be the general part-

ner. While you are now fully protected, it is important to remember that you

have had to form two entities: ﬁrst, the LP, and then second, a corporation or

LLC to be the general partner of the LP. With the LLC you need to form only

one entity, the LLC. Everyone is protected within the LLC. While LPs certainly

have their place, due to the need for only one entity instead of two, we shall use

the LLC example from here on out.

When it comes to protecting your real estate, we must also distinguish be-

tween attacks. A chart helps to explain:

In Attack No. 1, a tenant sues the LLC over a broken stairway. If successful,

the tenant can get what is inside the LLC—the fourplex—subject to any deeds

of trusts against the property.

But if the tenant can get the equity in the property, you ask, why even bother

with an LLC? Because without the LLC, the tenant could get everything John

owns—his house and bank account and everything else. The LLC limits the ten-

ant to just what’s in the LLC and shields your outside assets from attack.

In Attack No. 2, John gets in a car wreck, his insurance company won’t cover

him, and a judgment creditor (the person who won in court; we’ll call him Nate)

is seeking to get paid. Because the car wreck had nothing to do with the real es-

tate, Nate, the judgment creditor, can’t sue John’s LLC directly. Instead, Nate

must go after John’s membership interest in the LLC.

This is where the charging order comes into play. The charging order rule

provides that Nate can’t take possession of John’s membership interest, his own-

ership in the LLC. If Nate could, he could then sell the fourplex and get paid.

(And please note, this is what can happen with a corporation. The judgment cred-

itor gets the shares and takes control and sells all the corporate assets. Nevada, to

date, is the only state that has extended charging order protections to corporate

shares in corporations with between two and seventy-ﬁve shareholders.)

122 THE REAL BOOK OF REAL ESTATE

John, Member

John’s LLC

4 plex

Attack #1

Tenant

Attack #2

Car Wreck

FIGURE 6.10

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 122

The charging order instead allows Nate to stand in John’s shoes as a member

and receive distributions.

But what if no distributions are made? Then Nate gets nothing. He has to

wait to be paid. But what if money is made, there are taxes due, but no money is

distributed to even pay the taxes? This is called phantom income, and is frus-

trating to creditors. Under the charging order, Nate is standing in John’s shoes.

So he must pay the taxes on money he did not receive.

Most people do not want to be put in this position, which is why the proper

use of LLCs and LPs is an excellent deterrent to frivolous litigation. Not many

people want to ﬁght it out in court to not receive any money and have to pay

taxes on the money they didn’t receive. Using LLCs and LPs can be an aid in

settlement discussions. They can even prevent a lawsuit from being ﬁled in the

ﬁrst place.

Using LLCs and LPs can be an aid in settlement discussions. They can

even prevent a lawsuit from being filed in the first place.

Charging order rules vary from state to state. Nevada and Wyoming have the

strongest laws. In those states, the exclusive creditor remedy is the charging

order. California has the weakest law. There are two California court cases al-

lowing creditors to pierce through and sell off LLC and LP assets to pay the

creditor.

So if you are going to buy property in California or one of the many other

states with weak asset protection laws (including Georgia), you have the choice

of setting up your LLC or LP in the state where the property is located or form-

ing in Nevada or Wyoming, and then qualifying in the state where the property

is located. The process of qualifying involves submitting, for example, the

Wyoming LLC papers and appropriate fees to the California secretary of state’s

ofﬁce. If properly done it is always granted and keeps you within the law.

But the beneﬁt is that if you get sued as in Attack No. 2, Wyoming or Nevada

law applies, not California law. A judgment creditor has to hire a Wyoming or

Nevada lawyer to ﬁght a very uphill battle. This is what you want: a very strong

reason for predators to leave you alone.

More information on this is found in my book, How to Use Limited Liability

Companies and Limited Partnerships (SuccessDNA, 2009).

TIP

ROBERT KIYOSAKI 123

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 123

Rule No. 8: Segregation of Assets Is Good

Or: Let’s not put all of our eggs in one basket.

Since we’ve learned that LLCs and LPs are good entities for holding and pro-

tecting our real estate, the question then becomes: How many properties do I

put in each entity?

This is a judgment call on your part. But consider these scenarios involving

Liz, who owns twelve properties:

In Scenario 1, if a tenant sues over a problem at one property, the other eleven

properties are exposed to the attack. In Scenario 2, with three properties in

each LLC, only two additional properties are exposed if Liz is sued. Of course,

in Scenario 3 with only one property in each LLC, only one property is exposed.

I would never suggest a client hold twelve properties in one LLC. With that

many properties, your LLC is a rich target. In my experience, most of my clients

124 THE REAL BOOK OF REAL ESTATE

LLC

12 properties

Scenario #1

LLC

3 properties

LLC

3 properties

LLC

3 properties

LLC

3 properties

Scenario #2

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

LLC

1 property

Scenario #3

FIGURE 6.11

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 124

choose somewhere between Scenario 2 and 3. As is evident, the best asset pro-

tection is obtained through Scenario 3. Only one property is exposed to any one

attack.

But some clients don’t want to pay the one time initial set-up fees and con-

tinuing annual fees for twelve entities. In a state like California, where the an-

nual fee is $800 per entity, $9,600 a year for twelve entities is rather daunting.

So the choice of using one LLC to hold three properties is an option. It is your

call. But once again, the fewer properties you hold in each entity, the better

protected you will be.

Due to these issues, a new type of LLC is being touted to help reduce the

number of LLCs you need to form, called the “Series LLC.” Unfortunately, I

cannot recommend this new creature. It attempts to place separate properties

into separate series under one LLC, as follows:

The supposed beneﬁt is that by setting up one LLC you can independently

protect two properties. The idea is that within the Series LLC there is an inter-

nal liabilities shield whereby a claim against the duplex in Series 1 does not

affect the fourplex in Series 2. The problem is there is no guidance whether or

not this supposed internal liability shield will be upheld. There are no court

cases in the subject, and conceptually the strategy may be difﬁcult for a court

to uphold. Can two properties in the same state-chartered entity be protected

from each other? As well, what if one series goes bankrupt? Will the other series

be protected? No one knows.

The California tax authorities (the very aggressive Franchise Tax Board)

have their opinion. If you are going to try and set up one series to hold two

properties, they are going to charge you $800 per series, the same as if you had

set up two separate LLCs to begin with.

Of course, by setting up two separate LLCs you have the certainty of sepa-

rateness, rather than hoping that someday a court will miraculously rule that

ROBERT KIYOSAKI 125

Series #1

Duplex

Series #2

4plex

Series LLC

FIGURE 6.12

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 125

the muddled and imperfect concept of an internal liability shield actually makes

sense.

Stay away from promoters who would put you into this untested entity

called the Series LLC.

Interestingly, the American Bar Association brought together the nation’s

brightest lawyers to review LLC developments. After looking at the Series LLC

they declined to endorse the whole concept. Stay away from promoters who

would put you into this untested entity called the Series LLC.

Rule No. 9: Transfer Title into Your Entity

Or: What’s the point if you don’t?

All right, so you have set up one or more LLCs to protect your real estate. You

have the articles properly ﬁled with the state. You have approved and signed

the operating agreement governing how the LLC will run. You have signed the

minutes of the ﬁrst meeting and issued the membership certiﬁcates. All the im-

portant documents are in one binder in a safe place.

And remember, if all these steps are not taken, you are not ready. Beware of

promoters who will sell you the articles for just $99 but will not provide you

with an operating agreement, meeting minutes, and membership certiﬁcates.

Our ﬁrm charges $695 (or less if you are with Rich Dad) plus state ﬁling fees

for the complete package—binder and all—with all your documents prepared

and ﬁnalized according to your speciﬁc needs, along with live phone support

through the whole process. You have the certainty of knowing that everything

is in order.

You’ve formed the asset protection entity. The next step is to transfer

title to the property into the LLC.

So assuming that everything is in order, now what?

Just because you have your asset protection entity in place, are your real es-

tate assets now protected? No, not yet. You must take the next step, which is to

transfer title to the property into the name of the LLC.

You must prepare a grant deed transferring ownership of your fourplex, for

example, from John Jones, as an individual, to the Jones Real Estate, LLC.

Several questions arise during this process.

TIP

126 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 126

First, is this a taxable event? Will the IRS or my state taxing authority assess

taxes when this happens? The answer is no. This is not a sale of the property—

you are not receiving any money in this transaction. Instead, it is a transfer. You

are transferring the property from yourself (as an individual) to yourself (your

new 100-percent-owned LLC).

The property goes into the LLC at its basis, which is the amount you paid for

the property originally. That basis, for tax purposes, remains the same once the

property is in the LLC. So, for example, if you paid $250,000 for your fourplex,

the basis of $250,000 remains once it is titled in the LLC’s name. There is no

gain in the transaction, and with no gain there are no capital gain or ordinary

income taxes.

If John Jones added new members (owners) into Jones Real Estate, LLC be-

fore or after the transfer, there could be a taxable event. Be sure to consult with

your advisors prior to any change in ownership.

The next question is: Are there any transfer taxes? The answer is: It depends.

Transfer taxes, a tax based upon the value of the property being transferred,

vary from state to state. Many states have an exception to their transfer taxes.

If you are transferring the property from yourself as an individual to yourself

as an LLC, there is no tax. Check with your local advisors to understand your

local rules.

Some states are very tricky, though. In Nevada, you are free to transfer title

into your LLC. But if you transfer it from the LLC back to yourself there is a

transfer tax. This situation occurs when you are reﬁnancing and the lender

wants title to be in your name when the new ﬁrst deed of trust attaches. Resist

the lender’s attempts to require this. He will argue that he doesn’t have security

if title is in the LLC. That is nonsense. With title in the LLC, he will have your

personal guarantee for the loan and a ﬁrst deed of trust against the property,

the same as if it was in your individual name. He is equally protected in either

situation. Seek out lenders who are enlightened as to asset protection. They do

exist.

One state is very costly when it comes to transfer taxes. Pennsylvania charges

a 2 percent tax on the value of the property. So if you have a million dollar property

ROBERT KIYOSAKI 127

Jones Real Estate, LLC

John Jones,

An individual

Grant

Deed

FIGURE 6.13

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 127

with a mortgage of $950,000, you will still pay $20,000 (2 percent of $1 million)

for the privilege of holding title in the name of your LLC. Ouch.

The best course in all of this is to take title in the name of your LLC when

you ﬁrst buy the property. With title in the proper entity at the start there is no

need for a later transfer, thus no issue of transfer taxes. There are lenders who

will let you take title at closing in the name of the LLC (or your LP). You can

view the LLCLoan.com Web site for more information.

Speaking of banks and lenders, the next questions is: Will they call the loan

if I transfer title? In dealing with clients, I have heard numerous times about

the attitude of lenders regarding transferring title into an LLC. In their reptilian

mind-set, they feel as if you are trying to hide assets from them and deny them

their due. Of course, as mentioned, if the lender has your personal guarantee

and a ﬁrst deed of trust on the property, he is protected whether it is in your

name or the LLC’s name.

But that logic is lost on the functionaries at most lenders. They will argue

that if you make the transfer they will enforce the due-on-sale clause, which

states that the loan is due when you sell the property. Of course you haven’t

sold the property; you transferred it to yourself.

So what do you do?

In my experience it comes down to: Is it better to ask for permission or for-

giveness? If you ask most lenders, as if by reﬂex, they will say no. But if you just

go ahead and make the transfer without asking you can always say you are sorry

later. The chances are good you will never have such a conversation. In my

dealings, the lenders have never called a note. Will you be the ﬁrst one? I don’t

know. But as long as you keep making the monthly payments, there is a very

good chance that they are not going to call the loan. Why would they want to

create such trouble for themselves, especially when they are being paid? If in

some bizarre case they do, reﬁnance with a lender comfortable with LLCs. It’s

not as if you are going to lose your property if they call the note.

But some of you may be overly cautious in this realm, which is ﬁne. If you

are willing to spend a little more money, there is another way to skin the cat.

Federal law holds that a lender can’t prevent you from transferring title from

your individual name to your living trust. Land trusts look like, and can be

named like, a living trust. So by forming a land trust and transferring title into

it, you may be able to accomplish your goals.

The extra money involved is the preparation of a land trust. Our ﬁrm charges

$395 for such a document; others may charge more or less. But remember, as

discussed in Rules 5 and 6, neither land trusts nor living trusts offer asset pro-

128 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 128

tection. So when utilizing this strategy you still need to form that LLC and

name the LLC as beneﬁciary of the land trust.

With the title transferred to the land trust and an LLC as beneﬁciary of the

land trust you may be able to get the protection you need without irrational

lender interference.

The only group you do need to notify when you transfer title is your insurance

company. It needs to know the policy is in your LLC name and not in your per-

sonal name. Otherwise, and this does happen, your friendly insurance company

may claim it was insuring you as an individual, not your LLC, and use that as an

excuse to deny any coverage in the event of a problem at the property. And

while the insurance company may notify the lender of the change in insureds,

that usually does not lead to due-on-sale threats.

A ﬁnal question always arises as to why to use a grant deed instead of a quit

claim deed to transfer the title. A quit claim deed merely transfers everything

you claim you may own to the next party. A grant deed is a much more afﬁrma-

tive grant of property rights. As such, in many cases, title insurance coverage

ﬂows to the next party with a grant deed. Since you are essentially transferring

property from yourself to yourself, it makes sense to give yourself the most

complete rights you can. Use a grant deed.

Rule No. 10: Don’t Set Up More

Entities Than Necessary

Or: Beware of promoters telling you otherwise.

Several years ago I was at a real estate event in San Francisco. A lady approached

me after hearing my speech, in which I argued that people should not go over-

board and set up more entities than are needed.

I was shocked by her story.

Jane was looking to invest in her ﬁrst duplex. She had previously attended a

seminar on asset protection given by a self-styled asset protection guru. The

seminar had been sponsored by a local real estate organization. She trusted that

the group would provide her only with competent service providers.

The asset protection guy indicated that she needed the following structure

for protection: (See Figure 6.14.)

Jane stated that the man convinced her that for the necessary protection she:

1.Needed the LP to hold her LLC. The LP was then, in turn, owned by the Ne-

vada Asset Protection Trust and the Offshore Asset Protection Trust. These

structures gave her extra layers of protection.

ROBERT KIYOSAKI 129

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 129

130 THE REAL BOOK OF REAL ESTATE

2.Needed an S corporation to manage the LP in order to achieve necessary as-

set protection.

3.Needed the C corporation to manage the LLC in order to achieve signiﬁcant

tax savings.

The cost of this structure was $20,000. The annual fees were more than $5,000

to maintain all the entities. Jane was in tears because after spending such a

large sum of money for asset protection, she no longer had enough money for

the down payment on her duplex.

I told her the truth. She had spent way too much money. The asset protection

man’s arguments were false. Extra layers of entities do not necessarily provide

extra layers of protection. If you aren’t making any money yet, you don’t really

need a C corporation to save on taxes. The structure they created was designed

for their proﬁt, not her needs. Jane asked me to give her a chart of what she

needed to protect her duplex. It took ﬁve seconds to chart her strategy:

LLC

Holds Duplex

FIGURE 6.15

C Corporation

Management

Co./Tax Savings

S Corporation

General Partner

of L.P.

LLC

Holds Duplex

Limited Partnership

Holds LLC interest

Nevada Asset

Protection Trust

Offshore Asset

Protection Trust

FIGURE 6.14

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 130

Jane was in shock. She asked how the local real estate group promoter, a

person she trusted, could let such a snake in the door to present to them. I told

her something that was an open secret in that business. The local promoter in

many cases receives 50 percent of what the service provider sells. As such, there

is a powerful economic incentive for local promoters to tout the value, integrity,

and importance of the service provider, as well as the urgent need for the serv-

ices offered. In Jane’s case, the local promoter may have made as much as

$10,000 for doing so.

Jane calculated that ﬁfteen people had signed up for all this and ﬁgured the

promoter must have cleared a total of $150,000 at the one asset protection event.

She was furious and sickened by what had happened. She vowed never to invest

in real estate. I tried to counsel her but could not. She had gone through a hor-

rible experience and was adamant that her decision was ﬁnal.

Do not let Jane’s experience be yours. Real estate is an excellent way to build

wealth, but at some points during your journey you will need to be able to nav-

igate through shark-infested waters.

Important Tips

• Engage in critical thinking.

• Ask yourself if the “expert” really is such an expert.

• Ask yourself if the services are for your legal benefit or the expert’s financial

benefit.

• Use healthy skepticism and old-fashioned due diligence.

• Check around, and don’t bite at the first supposedly “discounted” offer.

These tips will work out to your advantage.

That said, asset protection, as we have seen, is important. You want to take

the necessary steps to protect your real estate assets and your ﬁnancial future.

The correct use of entities will greatly assist you in achieving this goal.

Remember, asset protection is neither overly difﬁcult nor outrageously ex-

pensive. And with critical thinking, never allow someone to tell you it is.

Good luck in all your asset-protected real estate investing.

ROBERT KIYOSAKI 131

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 131

Where to Learn More

www.corporatedirect.com

www.sutlaw.com

www.successdna.com

Garrett Sutton is a Rich Dad’s Advisor and is the author of Own Your

Own Corporation, The ABC’s of Getting Out of Debt, The ABC’s of Writing

Winning Business Plans, and How to Buy and Sell a Business. He is also

the co-author of Real Estate Advantages. Garrett is an attorney with more

than twenty-ﬁve years experience in assisting individuals and businesses

to determine their appropriate corporate structure, limit their liability,

protect their assets, and advance their ﬁnancial, personal, and credit success goals. He has

been featured in the Wall Street Journal and the New York Times, among others. His ﬁrm,

Sutton Law Center, has ofﬁces in Reno, Nevada; Jackson Hole, Wyoming; and Rocklin, Cali-

fornia, and accepts new clients at (800) 700-1430.

132 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 132

his book is called The Real Book of Real Estate because the people I chose to

be a part of it are real-life real estate investors. They are not people who just

teach real estate and make their money teaching. Wayne like the others who I

asked to be part of this book, makes his money doing what he teaches. He is one of

the best real estate investors and one of the best ﬁnance guys I know. He is, like all

of the advisors in this book, doing his own deals while teaching others how to be

rich using the same methods and formulas he uses himself. I am always leery of

people who give advice and say, “Trust me.” Then they don’t do what they are

telling me to do. Those are not the kind of teachers I want around me. And they

are not the kind of teachers who are in this book. This book is real people and real-

life real estate strategies that they use to build wealth.

One of the things I like most about Wayne is how his brain goes into overdrive

whenever he sees a roadblock in the way of his or one of his client’s goals. When it

comes to ﬁnance, nothing stops Wayne’s creative mind. Obstacles become excuses

for Wayne to ﬁnd innovative ways to get around them.

Wayne is an excellent teacher, and he has taught me more through example

and through the deals we do together than even he probably knows. He can take

things that are very complex and make them simple so that I can understand

7Wayne PALMER

Of Marbles and Capital

133

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 133

them. When I ﬁrst met Wayne, I could tell from the way he talked and the way he

carried himself that he spoke from years of experience, successes, and failures.

Life is the best teacher, and that’s why Wayne’s chapters and the others in this

book are so powerful. They are full of stories and experiences that are entertaining

and educational. Education should be fun. If it isn’t, I’m not interested. Wayne is

a great communicator. He has a way of telling a story and teaching a lesson that

keeps you wanting more. Read this chapter, and you’ll see what I mean.

—Robert Kiyosaki

n the bookshelf opposite the desk in my ofﬁce sits an antique jar ﬁlled

with marbles. It is there to remind me of the importance of capital. As a

fourth grader, I didn’t call it capital, and I surely didn’t realize the role that

capital plays in business. I just knew I wanted to play marbles with the other

kids, and I couldn’t get in the game unless I owned some marbles, or at least

one marble.

Coming from a family of modest means, it was out of the question to ask for

money for marbles. I accepted that I should expect only a few new toys on my

birthday and on Christmas. If I didn’t take care of the toys I received twice a

year, I would go without or make my own. I made trucks out of scrap lumber,

bows and arrows out of whittled sticks, and forts out of haystacks, but I could

think of no way to make a marble. Every day I watched with envy as other boys,

and a few bold girls, played with those ﬂashing glass spheres on the playground.

I studied their techniques and strategies. I ached to get in the game. I had a

plan as to how I would approach the game if I could ﬁnd a way to play, but I

was locked out. I had no “taw.”

Where I come from, a taw is that one precious marble that each player selects

in order to play with the greatest skill. It is the perfect weight. It ﬁts the thumb

just so. It is the single marble out of the entire bag that the player feels will give

him or her the greatest advantage in a particular game. I knew if I could just

ﬁnd a taw, I could get in the game.

“FIND A TAW!” That was it! I suddenly remembered playing along the side

of our home as a ﬁve-year-old. While digging in the dirt to build roads for my

toy cars, I had unearthed a white marble. Having no value to me at the time, I

left it lying in my diggings where I had found it. I wondered if it was still there.

I rushed to the barn and grabbed a shovel. I turned up the dirt and carefully

134 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 134

chopped through the overturned earth to loosen it. I got down on my hands

and knees and sifted through the soil with a spoon. After a few minutes of min-

ing, I felt and heard a click on the end of the spoon. My heart jumped into my

throat. I felt a burst of excitement tingling in my temples. I brushed back the

soil, and there it was—a somewhat dirty, but perfectly formed, ivory-colored

marble.

Something shifted within me at that moment. I felt a rush of freedom and

opportunity. I was wild with excitement that I could ﬁnally get in the game on

the playground. It was as if I had come of age or had been declared worthy to

be a real boy. The doors to my future opened wide. I was prepared to be a marble

master, or so I thought. Owning my own taw became a right of passage for me.

Suddenly, my jubilation was cut short by a ﬂood of fears that crowded my

thoughts. In every game of marbles, like battles in a war, someone wins and

someone loses. What if I lose my only marble? Where will I ﬁnd another one?

Who am I to think I could win when the other kids have been playing for

months or years? What if I get totally embarrassed? What if I start crying right

there in front of the toughest guys and the bravest girls? What will they say

about me? What if they make fun of me? I was petriﬁed.

As I clutched the marble in my hand, I realized how critical it was to my

game and yet knew I couldn’t play without risking it. Finally, I decided that if I

must take the chance, I would take the smallest risk possible. I would challenge

someone of the lowest skill level. Because I had been watching others play mar-

bles for months, I knew who the champions were and who to avoid. Even if

they called me out and teased me for being too chicken to play them, I would

refuse to risk my taw on a game I couldn’t win. I would play to win by carefully

choosing the ﬁrst games I entered and the opponents I faced.

I took my chances and got in the game. By the end of fourth grade, my shoot-

ing skills had improved considerably. I dared to play anyone in the school under

the right conditions, and I had a gallon can full of marbles as proof of my

progress. They were treasure to me. Each one held a memory, and each had a

story of how it had been won. I kept my original white taw safely in a smaller

pouch to remind me of how far I had come. It was no longer my best marble for

play, but would always be my favorite, for sentimental reasons.

Sometimes when I teach seminars, I ask which of the attendees consider

themselves to be capitalists. Almost every hand in the room goes up. Then I ask

how many have capital. Most of the hands go down. To play in the game of cap-

ROBERT KIYOSAKI 135

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 135

italism, one must own or control some capital. Like marbles, capital is the “taw”

that allows us to play the game. Raising capital is a vital skill for anyone who

wants to get out of the rat race, as taught by the Rich Dad CASHFLOW game.

Louis Kelso, the father of the Employee Stock Option Plan in the

United States said, “The right to life implies the right to earn a good income.

When 90 percent of the goods and services are produced by capital workers—

people who own capital—as it is in an industrial society like ours, you can’t

earn a good income without owning capital.”

(BILL MOYERS, A WORLD OF IDEAS [NY: DOUBLEDAY, 1990])

Robert Kiyosaki expressed the same principle in one of the Rich Dad business

schools, showing the hierarchy of the economic food chain:

You may notice that those who work for money are on the bottom of the

food chain. They get only crumbs, after everyone else has taken the best returns.

Also notice that the capitalists are at the top of the food chain. Everyone works

for the capitalists. Capitalists fund all enterprises. The capitalists own and con-

trol the majority of the wealth. The biggest returns, the best leverage, and the

greatest tax advantages go to the capitalists. The capitalists are also those who

take the biggest risks. Still, given a choice, why would anyone want to remain

an employee, rather than becoming a capitalist?

Working for money is an arduous way to move up the economic food chain.

If you continue to work only for money you will never escape the trap of the rat

race. What is the key to economic freedom? It is the ownership or control of

TIP

136 THE REAL BOOK OF REAL ESTATE

Capitalists

Investment Bankers

Corporations

Mutual Funds

Stockholders

Employees/Laborers

FIGURE 7.1

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 136

capital. If you want to be a capitalist instead of an employee, capital is the key.

Capital is your taw. It empowers you to leverage and move ahead faster.

So how does someone who has no capital get started? Where do you go to

get your ﬁrst marble?

There are three basic ways:

1.Save it from your earnings

2.Borrow it from someone else

3.Trade ownership (equity) for capital

Let’s look at each of these methods in more detail.

Saving

Accumulating seed capital by saving money is the long, hard way to get your

taw, but it has been proven viable by ﬂedgling capitalists since ancient times. In

his classic book The Richest Man in Babylon, George S. Clason shares a fable

that clearly shows how one can go from the Rich Dad E quadrant (employee)

to the S quadrant (specialist/self-employed), and even to the I quadrant (in-

vestor), by frugality and sacriﬁce. In America and other capitalist countries,

immigrants prove over and over again that by working hard—sometimes even

for subsistence wages—and by saving part of what they earn, individuals or

families can rise quickly to capital ownership and wealth. Setting aside a portion

of one’s labor to accumulate an initial capital stake is within everyone’s reach,

just as I employed my own labor to dig in the dirt until I found my ﬁrst marble.

However, no matter how much capital you acquire by your own labor, your

earnings will always be limited by the hours you can spend at work. Using only

the capital you can save from your own earnings means that you will be severely

restricted in growth and income.

ROBERT KIYOSAKI 137

FIGURE 7.2 Rich Dad CASHFLOW® Quadrant

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 137

138 THE REAL BOOK OF REAL ESTATE

Borrowing

Back in fourth grade, I may have been able to get into a game of marbles sooner

if I had thought to borrow a taw from someone else. But how would I have re-

paid the debt if I had lost? These are the kinds of risks we must consider when

borrowing capital as well. As my grandpa Palmer used to say, “Any damn fool

can run into debt, but everyone will crawl out!” In other words, it is easy to go

into debt, but not usually so easy to get back out. Borrowing money has conse-

quences, and it is wise to fully consider those consequences before signing for

the debt. Under most market conditions, borrowing money is relatively easy

for strong investors with viable collateral. Paying it back as agreed will deter-

mine the true nature of your character and business skills. If you become good

at taking care of Other People’s Money (OPM), you will likely have plenty of

capital with which to pursue your investment opportunities.

Bad deals chase the money, while the money chases good ones.

The term OPM has become a popular acronym for the concept of raising

capital. OPM can refer to borrowed capital as well as equity capital. It is some-

times spoken of with reckless abandon, as though getting others to back your

idea is as easy as asking. As simple as some might make it appear, there are

proven guidelines and important legalities for qualifying yourself and your proj-

ect to attract the capital of others. I have often heard this said by lenders: “Bad

deals chase the money, while the money chases good ones.” In the end, how

successful you are at borrowing will be largely determined by the answers to

these two questions:

1.How viable is the opportunity?

2.How clear, concise, complete, compelling, and convincing is the communi-

cation contained in your loan package?

Let’s consider these questions one at a time.

Viable Opportunity

First and foremost, what you propose must be viable—it must make sense. How

do we deﬁne a viable opportunity? It is something that the average lender could

look at and say, “Wow, I believe that will work.” The projections of proﬁt are

based on reasonably probable outcomes, not on pie-in-the-sky dreams. The as-

sumptions that lead to the bottom line are in harmony with the way things

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 138

work in the real world. The outcome is not dependent upon anyone turning

back the tides or walking on water or otherwise doing things that mere humans

have never done before. More importantly, the lender must believe that you can

do it. Just because Donald Trump did it doesn’t mean the average Joe can pull

it off. The outcome must be highly likely, given the skills, experience, and re-

sources of your team. Above all, it must be economic, which means it must

make money. Why else would a lender risk capital on your idea?

Loan Package

Two of our companies do real estate lending. As lenders, we see and hear dozens

of loan requests each week. Not long ago I received an e-mail from a would-be

borrower that consisted of merely six line items, each with a large number at

the end of the line, all totaling $2.44 million. There was nothing else in the e-

mail. No borrower information, no outline of the ownership entity, no informa-

tion about the structure of the proposed loan, no indication of the value of the

properties that were to be pledged as collateral. Frankly, such a proposal is an

insult to a lender. Underwriters rarely have enough time to sort through the

mountains of paper and electronic packages that end up on their desks each

day. To have borrowers suppose that, as a lender, I am going to hold their hand,

do their work for them, beg for the documents that are needed to underwrite

the loan, or spend hours on the phone with them, educating them in the busi-

ness of borrowing, communicates to me only how naïve, or perhaps lazy, the

borrower must be. We do not risk our capital on naïve or lazy people. We prefer

hardworking, well-informed, and experienced borrowers. They have a better

track record of paying us back. To avoid making a complete fool of yourself,

wasting everyone’s time, and killing your chances of getting a loan, take the

time to compile a complete and easy-to-read loan package. In other words, be

prepared!

How to Prepare a Loan Package

At a minimum, a good commercial real estate loan package includes the follow-

ing twelve items:

1.A brief Executive Summary: This is a one-page concise summary of the

loan request in outline form. An executive summary typically includes:

a. Name and contact information of the borrower;

b. A description of the collateral property (address, type, age);

c. The requested loan amount; and

ROBERT KIYOSAKI 139

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 139

d. The proposed terms of the loan (loan to value, interest rate, maturity

date, and balloon or call date, if any).

2.A Table of Contents for the remainder of the package: This allows the

Lender to quickly and conveniently ﬁnd any information that may be of in-

terest without reading the entire binder. It is also in your best interest to in-

sert tabs at the front of each section to make the package easy to navigate.

The more convenient it is to access the information, the more likely it is that

your loan proposal will receive full consideration.

3.Maps: Include in the map section a state map, a city map, and a plat map of

the subject property/site.

4.Photos: Include a small group of pictures that give a good idea of the prop-

erty, its condition, and a sense of the neighborhood.

5.Appraisal: If you’ve had a professional appraisal done on the property, in-

clude the full document, or at a minimum, the summary pages. If there is no

appraisal, provide some estimation of value, based on cost, comparative mar-

ket analysis, or a list of comparable sales in the marketplace.

6.Environmental Study: Because environmental contamination is almost al-

ways an automatic deal killer, it is in your best interest to pay for a Phase One

Environmental Report and include it in the package. Such reports are com-

piled by environmental engineering ﬁrms. The only exception may be when

the property is known to have had zero exposure to contaminants, such as

might likely be the case with raw farm land or mountaintop property.

7.Operating Statement and/or Projections (“Pro forma”): The operating

statement sets forth the historic annual income and expenses on the prop-

erty, usually for the past two to three years. This is one of the most important

parts of the package so take extra care to make sure you compile and report

this information accurately. Perhaps nothing will destroy the credibility of

your proposal faster than a misstatement of the income or expenses on the

property. The Pro forma is a projection of future income and expenses related

to the property. An inaccurate or incomplete Pro forma is evidence that you,

the borrower, have not entirely thought through the ﬁnancial future of the

project. That will likely result in the loan being declined.

8.Borrower Financial Information and Credit: This section will typically in-

clude the balance sheets and income statements on you, the borrower, and

Guarantors, as well as tax returns for the prior two years. Each borrower

and Guarantor will likely be required to submit a credit report or allow the

lender to pull one.

140 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 140

9.Management Experience: Make sure that you have a person on your team

with the experience to manage the kind of project you are proposing. Include

in the loan package a copy of his or her résumé or professional qualiﬁcations

and experience.

10.Use of Funds Statement: The use of funds statement is a one-page (or less)

description of how you will use the borrowed funds. If the proposed loan is

intended to be a purchase money mortgage, which is a term used to describe

any mortgage that is taken out to pay for a property at the time of purchase,

also include a statement of the source of the down payment.

11.Title Report: Provide a title report on the property from a local title com-

pany. Such a report is generally called a PR (Preliminary Report) or a Title

Commitment.

12.Ask in advance about any submission guidelines your lender might have

and if he would prefer to have you submit your package electronically or in

hard copy.

Perhaps most importantly, once your loan is approved and closed, pay it back

on time. Nothing will enhance your status with lenders or do more to encourage

additional funding of your investments than precise performance on your part.

I relish the comment Lee Iacocca made when he was chairman of Chrysler

Corporation. He said, “We borrow money the old-fashioned way; we pay it

back.”

Equity

Raising equity capital is another matter altogether. First of all, there are very

stringent securities laws that govern the raising of capital. Do not start soliciting

funds for your business without consulting a good lawyer to make sure you are

within legal guidelines. The penalties for breaking securities laws can be severe.

Whereas lenders primarily look at collateral values, cash ﬂows, and the

strength of the borrower to repay his loans, venture capitalists who may con-

sider investing in your enterprise additionally look to management expertise

and a solid business plan. Raising capital for real estate can take on elements of

both borrowing and venture capital. When others approach me to be their po-

tential joint venture partner, I want to see all of the information contained in

the loan packaging above. Additionally, I must also be satisﬁed concerning the

following:

ROBERT KIYOSAKI 141

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 141

• Who is providing what to the venture? A real estate investment is made up

of two basic parts: money and management. Who will provide the money

and in what increments? And who will do the work of managing the project?

Some investments require more money than work, and some require more

work than money. Our companies generally negotiate to provide debt or eq-

uity. We may also sometimes choose to structure a combination of both. As

equity investors, or venture capitalists, we will require our potential partners

to answer these questions:

• How much capital are we being asked to risk?

• For how long will it be at risk?

• Will our rate of return be based on an interest rate paid periodically, with an

equity kicker in the end, or will it be based solely on the upside equity and

cash flow?

• What management skills are required to protect the capital and deliver the

projected returns?

• Does anyone on the team possess these skills or will they be contracted from

outside of the ownership group?

• How much of our time and expertise will be required?

• How will those who contribute their time to the project be compensated?

Will they receive money or additional equity in the property?

• What is the order of priority for each team member in the disbursement of

funds? Most of the time, a venture is structured to ﬁrst pay expenses, includ-

ing interest and personnel costs; second, the costs of sale; third, a payment

of the remaining principal balance on the debt; fourth, a return of the initial

joint venture (equity) capital; and ﬁnally, the disbursement of proﬁts to each

partner at the pre-agreed percentages. As sponsors of an opportunity, we

sometimes agree to disburse proﬁts to our money partners as a ﬁrst priority,

until they have achieved a predetermined rate of return, with remaining

proﬁts going to ourselves or to the group at large.

A Word About Legal Compliance

I have learned just enough about securities laws to know that they are compli-

cated, diverse, and generally unforgiving. Inasmuch as I am not qualiﬁed or

willing to give anyone legal advice, the only guidance I will venture to suggest

is this: Make sure you get competent legal counsel if you are going to ask anyone

else to participate in your projects with you. Do not underestimate the serious-

ness of even unintentional violations of securities regulations. The Securities

142 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 142

and Exchange Commission (SEC) is the regulator of securities issues on the

federal level in the United States. Each state also has wide-ranging, and some-

times peculiar regulations for the issuance and governance of securities within

its respective boundaries. You are well advised to stay in compliance with the

rules and regulations they administer, when your venture falls within the deﬁ-

nition of a securities transaction.

A Word About Entity Structure

It is critical to consider what legal structure will best serve the ownership group

and its purposes. Will it be a corporation, a general partnership, a limited part-

nership, or a limited liability company? The structure chosen is more important

than it may appear on the surface, especially when the tax position of each in-

vestor is taken into consideration. Once again, seek competent legal advice in

forming the entity that will own and manage the investment. Garrett Sutton’s

chapter in this book is a great source of information, as is Garrett himself.

If I had been more astute at age ten, perhaps I could have convinced another

player to spot me some marbles from his bag, with an agreement to share my

winnings with him. In the end, I may have had fewer marbles, or I may have

had more. My treasure would clearly have been reduced by the proﬁts I shared

with my partner, while on the other hand, getting in the game earlier may have

resulted in more winnings over a longer period of time. You will face similar

decisions as you decide how you will raise capital.

Regardless of which method you use to capitalize your investments—saving,

borrowing, or equity—please consider the following perspective on money. If

you use your own capital, it is probably painfully clear that it represents months,

perhaps years, of work, sacriﬁce, and discipline on your part. Until we have a

grubstake of our own we are stuck in the rat race. As employees, we trade our

time for money. Our time is largely someone else’s capital as long as we are

stuck in the E quadrant.

In the end, the time we spend on this planet equals life. Most people

would agree that a human life is sacred and carries a higher value than almost

anything else on earth. Since we trade our time—our very lives—for money or

capital, I conclude that capital equals life. If that is the case, then capital, like

life, is sacred and should be treated as such.

TIP

ROBERT KIYOSAKI 143

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 143

How much different would the annals of business history read if executives

regarded Other People’s Money as a sacred trust, akin to life itself? When an

investor has worked all of his or her life to accumulate capital, then invests in a

venture that is mismanaged or illegally operated and the capital is lost, a very

real part of that investor’s life is destroyed. For the elderly, in particular, the

hours, days, weeks, and years are irreplaceable. Risking your own marbles,

your own time, your own life capital, is one thing. Taking upon yourself the

moral responsibility of safeguarding someone else’s capital is another. I en-

courage you to approach the use of OPM with this kind of serious moral

grounding. There is nothing else you can do that will have a more positive in-

ﬂuence on your success. If you conduct yourself with integrity not only in

word, but in deed, and keep the capital entrusted to you secure and productive,

a time will soon come when you will likely have more capital than you can put

to use. As suggested earlier in this chapter, the money will begin to chase you,

which is perhaps a crude way of saying that as you respect capital, you will at-

tract capital.

Think of all the capital that exists in the world. Land, minerals, timber, plants,

animals, ﬁsh, and even some insects and reptiles have capital value. In addition,

tools, equipment, machinery, processes, intangibles (such as intellectual assets

like software and know-how), and all forms of money and securities represent

capital. Various forms of naturally occurring energy, such as solar, wind, tidal,

gravitational, geothermal, human labor, and animal labor (horsepower) consti-

tute capital as well.

The reason I ask you to consider this enormous supply of capital is to em-

power you to overcome any thoughts of scarcity. The more we need the money,

the less likely we are to believe that it exists in abundance. Under such circum-

stances, fear overpowers faith that money is available in ample supply.

Even in difficult economic times, capital is rarely destroyed. It only

changes hands or changes forms.

Consider how capital ﬂows around the world. It is mind-boggling to ponder

the number of individual transactions that take place every day. From the child

buying penny candy at the grocery store, to international banks moving moun-

tains of money, to balancing government currency accounts, there are billions

of individual capital ﬂows that take place every day. In its most basic deﬁnition,

capital is either energy or a symbol of energy. Capital is the energy that ﬂows

through each economic transaction, not the money itself. The money is only a

TIP

144 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 144

symbol of the energy, the value, the increment of human life (time) that is in-

herent in the underlying asset, process, or function.

When we start to see these countless transactions as ﬂows of economic en-

ergy, having real value, instead of as merely the exchange of money, the true

nature of capital is revealed. It is not in scarce supply. It is, in fact, inﬁnitely

abundant. It is not all locked up in vaults where you cannot get to it. You already

possess a great deal of it in your time, your talent, your knowledge, and in your

ability to start where you are to increase your stock of capital. One buried marble

properly played soon becomes a bag of marbles and perhaps even a barrel. You

need not wait for anyone else to begin growing your capital. You already have

the power to start where you are to increase your holdings.

What, then, is the trigger that causes capital to ﬂow in each of these individ-

ual transactions? I believe it is human emotion that drives each exchange. Com-

merce is driven by emotions such as need, greed, desire, trust, or conﬁdence.

Someone once told me that “emotion” is energy in motion. See if this is true by

considering the following: If a person needs an expensive operation to preserve

health and life, he will do all in his power to gather the money to pay for it. If

someone is hungry, he will move what capital he has to someone who has food

for sale. If I believe you can teach me something of value, I may direct some of

my personal resources to you for books or seminars or personal coaching. If

you decide to visit your grandma in a distant place, you will most likely pay for

transportation to get from where you are to where you want to go. Notice how

in each of these examples the inﬂuence of human desires causes the economic

energy (money) to move.

My family once took a chartered bus trip across the United States. As I sat

on the bus, gazing out the window, I came to a profound realization. Somewhere

in the middle of Nebraska, while seeing farm after farm and wondering about

the people who lived on each one, it struck me. I imagined a couple of people

living in each farmhouse who had fallen in love and married. Their love brought

children into the family. Every day they worked the farm to provide for their

loved ones. It was then that I suspected the lyrics to the old song that my dad

sang to my mother were true, “Love Makes the World Go ’Round.” I realized in

that moment that the economy was actually the energy of human love and other

human desires that spur us to creation and consumption of various kinds.

As we continued down Interstate 80 on the same bus, I noticed all the trucks

passing by me in both directions, carrying the freight produced in the factories

and foundries of America. It was then that I ﬁrst knew that all would be well

and that the economy would go on because people would keep falling in love,

ROBERT KIYOSAKI 145

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 145

keep having children, and keep working hard to give them a good life. The

trucks would keep running, and capital would continue to be exchanged in

countless daily transactions that support the needs and desires of human beings.

No force on earth, no government blunder, could bring the real economy to a

halt. It was energy in motion and would remain in motion as long as individual

human beings had any desires for a better life.

So, since capital exists in abundance all around you, how do you cause it to

move from wherever it is now to where you want it to be?

1.First, establish the mind-set of abundance. Ask yourself if you are operating

from fear or from trust, from doubt or from conﬁdence. Be constantly mind-

ful that there is no shortage of capital and that it is eager to ﬂow to you, if

you do what is necessary to attract it and safeguard it. A dear friend of mine

shared with me that her family loves blueberries. She had the feeling blue-

berries were scarce because they were quite expensive at the grocery store.

One day she had the chance to take her boys to the country and pick blue-

berries on a farm. For the same price she paid for a small box at the store,

she could buy two big ﬂats from the farmer, and he let them eat all they

wanted while they picked. She realized that blueberries were in abundant

supply once she had a change of perspective.

2.Qualify yourself to attract capital ﬂows. Make a conscious choice to adopt

an energy within and around yourself that is harmonious with the energy of

the capital you wish to attract. What kind of energy attracts capital? Read on!

3.Practice full accountability. Take the committed stand that Gene Kranz,

Apollo 13 mission control director (played by the actor Ed Harris in the

movie) took during that fated mission. If you saw the movie, you may re-

member that there was an explosion that damaged the command module

while on its journey to the moon, threatening its ability to return to earth.

The astronauts had to extend their supplies of oxygen and electricity to sur-

vive. On the ground in Houston, Kranz pulled his team together and declared,

“We never lost an American in space. We’re sure as hell not going to lose one

on my watch. Failure is not an option.” He demanded that his engineers ﬁnd

a way to bring the crew home safely, using only the resources the astronauts

had on board. Capital rushes toward that kind of commitment because com-

plete accountability inspires conﬁdence, creativity, and can-do attitudes. To

the total extent of your ability and capacity take personal responsibility to

make sure that no one ever loses a nickel on your watch.

4.Work with integrity. To me, the meaning of integrity is clear. It is simply to

do what you say you will do, when you say you will do it, and to tell the truth

146 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 146

in all things and under all conditions. Integrity is what integrity does. Being

reliable will set you apart from most of your competition. People want to do

business with those who are dependable.

5.Disclose. Provide your potential lenders or investors with all of the infor-

mation you would want to know if you were in their shoes and were consid-

ering placing capital with you.

6.Establish the habit of over-communicating. Keep your lenders and in-

vestors constantly informed of important details. This attention shows re-

spect and accountability.

7.Prepare yourself to attract capital ﬂows. You will notice I differentiate be-

tween qualiﬁcation and preparation. Qualiﬁcation is about energy, compe-

tency and your state of being. Preparation is the act of taking care of the

mechanics and the details, where the rubber meets the road. My experience

tells me these are the key areas of preparation.

8.Know your business. Know a good deal from a bad one. Drive yourself to

constantly study and stay abreast of the real estate industry. What are the

trends in ﬁnancing, demographics, product types, customer preferences,

building materials and methods, technology, municipal codes, taxation, reg-

ulations, and risk management, to name but a few.

9.Write a business plan. Create a comprehensive plan that fully explores the

risks and responses that will be required to generate a proﬁt.

10.Have multiple exit strategies. Do you have enough conﬁdence in your pro-

posed investment, based on solid economic principles and potentially chang-

ing conditions, to absolutely believe that you can achieve the projected

results? Have you run different scenarios? Do you have multiple exit strate-

gies? If the worst happens, how will you protect the capital that your in-

vestors have entrusted to you?

11.Deﬁne and staff up to provide core competencies. Do you, or does your

team, have the skills, the core competencies, needed to fully execute your

business plan? If something is lacking, are you realistically addressing it?

How will you compensate for the weakness? Will you hire someone with

that skill? Will you take on another partner who has the talent? Just imagine

trying to drive your car with one ﬂat tire! Your business won’t run smoothly

if there is a “ﬂat” on the team. An abundance of talent will overcome a mul-

titude of challenges.

12.Develop a stellar track record. Protect your reputation by over-performing.

If you are just starting out and have no track record, be honest about it, and

clearly communicate to potential lenders and investors that you are aware

of your lack of experience. Be prepared to show them how you will deal with

ROBERT KIYOSAKI 147

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 147

any shortfall in your experience. Remember, experience and expertise can

be hired, too. Robert Kiyosaki continually emphasizes that he isn’t the

smartest guy in every situation, so he surrounds himself with those who un-

derstand certain things better than he does. I can’t think of a time that I was

unable to ﬁnd the talent I needed. People of extreme capability love the game

and are usually eager to play with a quality team, even if it is their experience

the team must rely upon.

13.Take care of business. It has been my experience that my JOB ONE is to

fully focus on whatever business I am operating. Businesses don’t run them-

selves. Running a viable business requires the best energy and efforts of the

team. Rich rewards are in store for those who give their all to protect busi-

ness operations and to provide all it takes to prosper and turn a proﬁt.

Protect-Provide-Prosper-Profit

When a business does well, everyone wants to be a part of it. Wall Street clamors

to buy shares in any enterprise that is producing a healthy return on investment.

On the other hand, you have likely seen the statistics that suggest as many as 90

percent of small businesses fail within the ﬁrst ﬁve years. People and companies

squander billions of dollars in investment capital on poor business investments.

If you want to attract capital to your business, make your business work. Make

it proﬁtable. Infuse it with passion and the prospect of continued success. Peo-

ple invest in real estate ventures to make money. If you develop a proven talent

for generating solid returns and offer such an opportunity to others with proper

disclosures, they will naturally want to be a part of your enterprise.

As you attract the capital of others, no matter how small-scale at ﬁrst, and

take exquisite care of that capital, your investors will spread the word. Others

will be knocking on your door to become part of a good thing. It is almost as if

the only thing you need to do is to prove your ability to run your company hon-

orably and proﬁtably. If you do that in the face of the corporate corruption that

seems to be more and more prevalent, capital will seek a home in your enter-

prise. However, remember that even when potential investors come to you

through referrals, you still have the same responsibility to provide all of the

disclosures required by law.

I know these principles work because I applied them to build my own group

of companies from zero to millions in assets over a sixteen-year period. What I

am sharing with you I have learned from ﬁrsthand experience. Business school

baloney would have you believe that there is some magical formula, some sci-

148 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 148

entiﬁc certainty that makes success in business predictable and fail-safe. Non-

sense. There is much value in the average college curriculum, but it is mostly

theory. A college degree is the beginning of the journey, not the end. A diploma

is only a way of qualifying yourself for a position on a team in the real world

where you will work for money.

It is no mistake that the metaphor of war is so often chosen to describe the

dynamics of business. Once graduation is over, every student must meet the

competition on the corporate battleﬁeld. Out there, no one is taken prisoner.

Economically speaking, everyone lives or dies by his own ability to recognize

the opportunity, strategize the attack, and execute the plan under the ever-

changing conditions of battle. When I started the company National Note in

December of 1992, my vision for it was very different than it is today. I originally

intended to broker notes to institutional buyers for a commission. That put me

squarely in the “S” corner of the Rich Dad CASHFLOW Quadrant. I soon found

that many institutional note buyers were often too subjective and sometimes

even ﬁckle, I tired of seeing perfectly good proposals turned down for reasons

that seemed capricious to me.

With IRA funds of my own and limited money from family, friends, and

clients I had known for years, I started buying the notes myself with private

capital. I soon realized that I was building assets and equity in my company at a

rather rapid rate. My balance sheet was improving dramatically from year-to-

year. It wasn’t until I read Robert Kiyosaki’s book, The CASHFLOW Quadrant,

that I realized I had become an investor (“I” quadrant), instead of merely self-

employed (“S” quadrant).

Years later, while teaching a seminar with Robert, I was stunned to learn

that the rapid growth of my company was primarily because I had inadvertently

managed to structure it in harmony with the Rich Dad philosophy. Not being

sophisticated in any sense of the word, I simply kept my head down and focused

on managing my business as best I knew how. Others came to me with various

ideas and wanted to be part of National Note. Rather than share equity, I joint-

ventured new business opportunities with a few of the best people. These en-

terprises, funded by National Note, prospered because of my partners’ talents

and National Note’s capital. I split proﬁts with my partners at pre-agreed per-

centages, as the companies grow and prosper.

Somewhere along the way, something phenomenal started to happen. Those

to whom we had been faithfully sending checks each month, with never a delin-

quency, began to tell their family and friends about us. Our business has grown

every year for the past sixteen years and is ten times larger today than it was

ROBERT KIYOSAKI 149

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 149

four years ago. We simply “stuck to our knitting,” as the saying goes, and man-

aged the company in such a way as to make it stronger and stronger to assure

the safety of the capital entrusted to us.

What is the key to such growth? The very principles I am sharing with you

now. By focusing on acquiring quality assets, running our business, telling the

truth, making the required disclosures, under-promising, and over-performing,

capital continues to be available to our companies.

From among the people who do business with us today, there are dozens of

inspiring personal stories of how debts were liquidated, stock market losses re-

covered, retirements funded, tuition paid, and moms who quit work to stay at

home with their babies. These private victories were possible because of the

careful deployment of their capital in real estate and real estate paper. For me,

seeing our clients achieve such milestones is the most rewarding aspect of being

a capitalist.

There is no way I could have known when I was ten years old how important

that white marble would become to me. I trust you now understand why I keep

a jar of marbles in my ofﬁce. Growing a business does not need to be difﬁcult or

highly technical. By gaining some proﬁciency in the practice of capitalism, just

like learning to shoot marbles, you, too, can build a machine that will crank out

proﬁts for you and those who are fortunate enough to be in business with you.

There is no need to gamble or speculate, as so many do when investing. Find

a simple system that works, and work it! Attend to your game of marbles. Pick

your matches (investments) carefully, and celebrate as treasure ﬁlls ﬁrst a bag,

then a barrel, and perhaps even a bank vault. I am astonished at how far our

companies have come. What a fabulous experience it is to be a capitalist! What

a ride it has been! What a joy it is to look back and relish the journey and to

look ahead with eager anticipation of an exciting future!

Now, could it be your turn? Where will you ﬁnd your “taw”? When will you

enter your ﬁrst game? How long will it take you to acquire more marbles than

you ever dreamed possible? Those questions are yours to answer, and the jour-

ney ahead is yours to begin. Good luck!

Ways to Learn More

www.waynelpalmer.com

www.nce1031.com

A soon-to-be published book on real estate formulas, by Wayne Palmer

150 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 150

Wayne Palmer is widely regarded as a master in the creative structuring

of real estate acquisitions and ﬁnancing, using notes and other forms of

real estate paper, together with 1031 Equity Marketing formulas. His skills

come from thirty years of daily practice of his trade, as the owner and

manager of National Note of Utah, LC and several other companies. He

has been involved in real estate development since 1978, in Utah, Idaho,

Arizona, Hawai’i, and Minnesota. By way of industry credentials, Wayne is a Licensed Princi-

pal Real Estate Broker, a Certiﬁed Real Estate Note Appraiser, a Certiﬁed Cash Flow Master

Broker, a Licensed Continuing Education Provider, and holds the Equity Marketing Specialist

(EMS) designation with the National Council of Exchangors.

ROBERT KIYOSAKI 151

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 151

ernie Bays has been a friend of mine since the mid-1970s. He is also a fellow

marine and rugby team member. If you go over his record, you can tell he is

no ordinary marine, but a Force Recon Marine, the toughest of the tough. He is

also no ordinary rugby player, playing for USC and for Stanford University on a

national championship team. Small wonder he is such a smart and respected real

estate attorney.

When I ﬁrst started out in real estate, my deals were small, and I thought I did

not need an attorney. Being naïve, I thought a real estate broker and a good ap-

praiser were enough. On my ﬁrst investment property—a small one bedroom, one

bath condo on the island of Maui—my little dream bubble was popped. A few

months after acquiring the property and putting a tenant in it, netting me a whop-

ping $25 a month, the septic system in the condominium complex burst and ﬂooded

the apartment. The apartment went empty, I began to lose money, the homeowners

told me the septic damage to my unit was my problem, not theirs. My ﬁrst asset

became a liability, and I learned a priceless but expensive lesson about real estate.

Hire an attorney before you invest, not after.

Real estate is more than dirt, sticks, bricks, ﬁnancing, and tenants. Real estate

is also law, agreements, boundaries, and disputes. This is why Bernie Bays is not

only a friend; he is the real estate attorney I call before investing in Hawai’i.

—Robert Kiyosaki

8 Bernie BAYS

How to Avoid and Handle

Real Estate Disputes

152

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 152

ne unfortunate reality of real estate deals today is that there is always the

possibility that you can become involved in a dispute with other partici-

pants during the making of the deal. These participants can include sellers,

lenders, construction and planning professionals, construction contractors,

and buyers. Success in real estate means not only being great at picking prop-

erties, managing them well, and eventually selling at the right time, it also

means knowing how to minimize the risk of becoming involved in a protracted

dispute.

I have been representing clients involved in real estate–related disputes for

more than thirty-eight years. During that time, I have observed that some par-

ticipants in real estate deals are constantly involved in disputes. Others rarely

get into disputes and when they do, they usually manage to resolve them rela-

tively quickly. What’s the difference between these two groups of people: the

ones who seem to get into dispute after dispute and the ones who seldom do?

How can you minimize your chances of being involved in a dispute?

Make no mistake about it. Disputes in real estate deals can spoil your party

by diverting time, money, other resources, and, most importantly, emotional

energy from what you are trying to achieve: a successful real estate deal. There

are admittedly a few perverse individuals who occasionally come out ahead by

picking ﬁghts in a real estate deal. And there are a few people who thrive on

the negative emotional energy of disputes, even though they may not really

come out ahead. You want to avoid these people in your real estate deals. But

it’s not always about the people. Sometimes it’s the kind of real estate deals

that are prone to disputes and you want to avoid those as well.

Disputes in real estate deals can spoil your party by diverting time,

money, other resources, and, most importantly, emotional energy from what

you are trying to achieve: a successful real estate deal.

My objective here is to give you some simple guidelines so you can reduce

your chances of becoming involved in a real estate dispute. I also want to give

you some suggestions for how best to handle the disputes that you cannot avoid.

How to Avoid Disputes

The best defense against a dispute is to avoid the dispute altogether. Here’s my

list of how to keep yourself out of trouble.

TIP

ROBERT KIYOSAKI 153

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 153

Work With a Good, Experienced Broker

Always work with your own real estate broker on a real estate deal. Do not just

work with the seller’s real estate broker when you are buying a property. You

want to select a broker who has the experience and good sense to look out for

your interests rather than simply pushing you to close the deal at hand in order

to get a commission. You want a broker who is in it for the long term and knows

that there will be other deals to do with you if this one does not work out. You

want a trusted broker who will advise you to walk away from the deal if that is

the best thing for you to do under the circumstances.

I recently concluded a case for a client who had purchased a development

property through the listing broker without using his own broker. My client

initially told the broker that he could not buy the property because of the three-

unit affordable housing requirement. The broker told my client that if my client

would sell him three of the lots in the proposed subdivision at a reduced price,

he would construct the affordable housing on the three lots and satisfy the re-

quirement. My client allowed the broker’s lawyer to draft the agreement re-

garding the three lots and proceeded with the purchase of the property. He did

not have his own lawyer review the agreement, but instead just trusted the

seller’s broker. After my client purchased the property, he discovered that the

affordable housing requirement for the project was actually ﬁve units, not three.

Even more shocking, the broker said that he was not obligated to build any af-

fordable housing at the site. “That was just something we discussed that I might

do if it worked out,” the broker said.

The broker then demanded that my client convey the three lots to him at the

reduced price and threatened to sue. When my client came to me, we discovered

that the agreement drafted by the broker’s attorney provided for a sale of the

lots to the broker at a reduced price, but said nothing about building the afford-

able housing.

My client did not have a legal leg to stand on. We were ﬁnally able to settle

the case by conveying only two of the three lots to the broker. My client was

left to satisfy the ﬁve-unit affordable housing requirement on his other lots.

This case demonstrates how dangerous it is not to have your own broker repre-

senting you in a real estate transaction. It also demonstrates how dangerous it

is not to have your own lawyer representing you in documenting your agree-

ments, which is what the next section is about.

Do not just work with the seller’s real estate broker when you are buying

a property. You want a trusted broker who will advise you to walk away from the

deal if that is the best thing for you to do.

TIP

154 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 154

Consult with a Good, Experienced Lawyer Early and Often

I was giving a speech a few months ago to a group of real estate developers and

joked that in real estate deals you should get a lawyer involved “early and often.”

I was joking, but there is a good deal of truth in what I said. The truth here is

that an ounce of prevention in lawyer time spent drafting the deal contracts is

worth a pound of cure in the form of costly litigation. So spend a little money

on lawyers in the beginning to get clear contracts that protect your interests. It

may save you a fortune in litigation costs later on. These are my suggestions to

get the most value from your lawyer in a real estate deal:

• Find an experienced real estate attorney you trust and can afford.

• Keep him or her up to speed on pending transactions and request advice

early and often.

• Specifically, have your lawyer involved in the preparation of any term sheets

or letters of intent, even though they may be nonbinding. This is usually

when the buyer and the seller agree upon important deal points that are dif-

ficult to change later on.

• Have your lawyer prepare any binding contracts.

• Do not try to save money by allowing the lawyer on the other side to prepare

the first draft of the contracts. It is better to spend the money to have your

lawyer prepare the first draft. It is often difficult to change a contract drafted

by the other side. Once they have prepared and approved it, they tend to be-

come wedded to it.

• Involve your lawyer in your due diligence process for any property you are

buying. Skimping on legal due diligence to save money is a bad idea, a false

economy. If a property is worth putting under contract, then it is worth

spending the money on a thorough due diligence including legal.

The truth here is that an ounce of prevention in lawyer time spent draft-

ing the deal contracts is worth a pound of cure in the form of costly litigation.

Insist on Clear Contracts that Protect Your Interests

I handle real estate litigation that results when real estate deals go bad. Often

these cases result from poorly drafted contracts that do not do a good job of

protecting the legitimate interests of the parties. For example, I have had two

cases in the last year or so where, believe it or not, the contracts really did not

require one of the parties to follow through on his commitments to complete

the real estate projects that were the subject of those contracts. Clearly the in-

tent of the parties was to execute contracts that were binding, but the contracts

TIP

ROBERT KIYOSAKI 155

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 155

156 THE REAL BOOK OF REAL ESTATE

they signed did not effectively do the job. In one case, the party ﬁnancing the

development just refused to proceed with the project, even though the market

was good and the project would have been proﬁtable. Unfortunately, the con-

tracts did not explicitly require the investor to proceed. The developers had al-

lowed the investor’s lawyer to prepare the agreements without hiring their own

lawyer, which turned out to be a very costly mistake.

In the other case, the investors gave the developer the money he said he

needed to complete the development. Unfortunately the contracts did not really

obligate him to ﬁnish the project, and the contracts also prevented the investors

from replacing the developer, even if he completely failed to ﬁnish the project.

The lesson here is to insist on clear contracts that obligate the parties to do

what they have agreed to do and to have a lawyer represent you who is looking

out for your interests and protecting your rights.

You are entitled to contracts that spell out precisely what you expect to hap-

pen in the real estate deal; contracts that reduce the uncertainty and keep am-

biguity to a minimum. You also want to make absolutely sure the other parties

are required to do exactly what you expect them to do when you expect them

to do it. Spell out the consequences if the other parties do not do what you ex-

pect them to do. By the same token, you also want to know what the conse-

quences will be if you do not or cannot uphold your side of the agreement. A

good lawyer can help you deﬁne and limit your downside as much as possible

in those situations. Later we’ll talk about limiting remedies in more detail, but

here’s some legal advice: If you are not sure you can perform under the terms

of the contract, then you should not sign it.

Beyond these words of wisdom, take the time to read and understand the

contracts you are going to sign. In doing so, your real estate broker and your

lawyer can give you all the help you need. Let them help you identify any risks

that others will not perform or that you cannot perform, and make the necessary

changes to ﬁx the problems. Don’t hesitate to have things explained again if

you do not understand. And don’t worry about looking stupid. The more you

understand, the smarter you will get. The stupid thing is to sign a contract you

really do not understand.

You are entitled to contracts that spell out precisely what you expect

to happen in the real estate deal; contracts that reduce the uncertainty and

keep ambiguity to a minimum. You also want to make absolutely sure the

other parties are required to do exactly what you expect them to do when

you expect them to do it.

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 156

Carefully Specify and Limit Remedies in the Contract

Much of the uncertainty regarding real estate contracts can be eliminated by

clearly specifying remedies. For example, real estate contracts often provide

that the seller’s only remedy if the buyer defaults is to keep the buyer’s deposit.

On the other hand, if you are a seller, you want to limit the buyer’s remedy to

just getting the deposit back and you want to speciﬁcally preclude the buyer

from getting what is called “speciﬁc performance.”

“Speciﬁc performance” is an equitable remedy that gives the buyer the right

to legally compel the seller to sell the property to the buyer upon the terms in

the contract. If the buyer is arguably entitled to speciﬁc performance, the buyer

may have the ability to tie up the seller’s property in court for years while the

parties litigate their respective obligations under the contract and who did

what. This could effectively give the buyer an option on the seller’s property

for years with only the deposit at risk. This is not where you want to be if you

are a seller. If you cannot completely negotiate out speciﬁc performance, you

want to limit the situations where the buyer is entitled to seek speciﬁc per-

formance as much as possible.

“Specific performance” is an equitable remedy that gives the buyer

the right to legally compel the seller to sell the property to the buyer upon

the terms in the contract. As a seller, if you cannot completely negotiate out

specific performance, you want to limit it as much as possible.

Let me share with you a story of how powerful speciﬁc performance can be.

I represented a large hotel chain in litigation that resulted from the failed sale

of a trophy resort hotel in Honolulu. The buyer had failed to perform according

to the exact terms of the contract, so my client ﬁnally canceled the deal and

kept the buyer’s $1 million deposit. The buyer had also spent more than

$200,000 on a lengthy due diligence before my client canceled the contract.

Had I been involved earlier, I would have recommended that my client give the

buyer more time to perform and would have carefully positioned the buyer be-

fore canceling. But by the time the case got to me, the contract had been can-

celed, and the buyer had sued. We asked the court for summary judgment

without a trial based upon the fact that the buyer had not met the time deadlines

provided for in the contract. We got lucky and the federal court gave us sum-

mary judgment against the buyer.

After the hearing, I advised the top management of the hotel chain that we

had been very lucky to get summary judgment, and that the court’s decision

TIP

ROBERT KIYOSAKI 157

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 157

might be reversed on appeal. I told them that they did not want a premier hotel

tied up for years by the buyer’s potential right to speciﬁc performance while

the appeal got resolved. I recommended that they use this opportunity to settle

with the buyer by returning some of the deposit. But warmed by the glow of

victory, they refused to offer the buyer anything, and I was reprimanded by a

senior partner for spoiling our victory with my dismal predictions about an

appeal.

To make a long story short, I left the ﬁrm with some of my colleagues to

form our own ﬁrm, and someone else handled the appeal. Years later, after the

hotel had increased 50 percent in value, the appeals court ruled that the buyer

should be allowed to proceed with the purchase of the hotel at the original

price with full credit for the deposit the seller had retained.

Here are some words of experience:

• Limit the buyer’s right to speciﬁc performance whenever possible

• Always try to resolve the dispute instead of rolling the dice in litigation

In that case, the seller’s failure to limit speciﬁc performance and insistence

on keeping the buyer’s $1 million tied up a premier hotel for years and resulted

in the sale of an $80 million hotel for $55 million. Not a good outcome!

Avoid Problem People

Do not do real estate deals with people who are likely to be trouble down the

road. Some people get into disputes with everyone. You want to do online liti-

gation checks on people you are considering doing business with. If they have

been involved in a lot of litigation you want to avoid them. This is also another

good reason for you to avoid litigation; so that other people will not avoid doing

business with you! Conversely, you want to do business with people who have

a history and reputation for working things out when a real estate deal hits a

rough spot. You want to have a mutual trust and respect for the other people

involved in a real estate deal whenever possible, especially a real estate devel-

opment project that will go on for several years.

Do online litigation checks on people you are considering doing

business with. Avoid litigation so people will do business with you!

Rough spots are sure to come up, and potential disagreements are certain to

arise. You want to be involved with people who will work them out with you,

TIP

158 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 158

not make a mountain out of every molehill. The last thing you want is someone

who will blow up your deal in litigation to prove they are right.

Avoid Problem Deals

Some deals are just more trouble than they are worth. Some deals get more

complicated, involved, and difﬁcult as they progress. And the more complicated

and difﬁcult the deal becomes, the more likely there are to be disputes later on

that will be difﬁcult to resolve. So when the deal gets more and more difﬁcult

and the brain damage mounts, you need to ask: Is it worth it? Is this deal so

good and so beneﬁcial for you that it is worth the brain damage and risk that is

inherent in complex, difﬁcult deals? Some are worth it, and you may want to

continue. Most are not, and you will be better off letting those go. Let someone

else deal with all the headaches and problems if the potential beneﬁt to you is

really not worth the trouble. If the beneﬁt is there and you decide to go ahead,

then the help of a good lawyer and the need for clear contracts become doubly

important. However, even a good lawyer can do only so much to overcome the

risks inherent in a difﬁcult deal.

The more complicated and difficult the deal becomes, the more likely

there are to be disputes later on—and problem people and problem deals often

go hand in hand.

The purchase of a large ranch that I helped a friend put together several

years ago was a deal that was just too difﬁcult and complicated. A limited part-

nership owned the ranch and the general partner who originally formed the

group that owned the ranch had sold his interest to a stranger who had gotten

into litigation with the holder of the grazing license. In order to buy the ranch,

my friend had to put together another partnership composed of some of the

partners in the original partnership that owned the ranch and some new in-

vestor partners. We also had to get a federal farm loan, renegotiate the under-

lying ground lease to extend it to twenty-ﬁve years, settle the litigation between

the general partner and the licensee, and resolve the disagreements among

everyone as to how all this should be done. I was the person responsible for do-

ing all of this. As I look back, the brain damage, work, and stress involved in

trying to put this extremely complicated deal together clearly outweighed any

gain. The deal ﬁnally collapsed of its own weight when the buyer went on a

long-planned, month-long family vacation when the deal was supposed to close.

Luckily, no one involved got sued; we just wasted a lot of time and money on a

deal that was just too difﬁcult and complicated.

TIP

ROBERT KIYOSAKI 159

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 159

Another point to consider is that problem people and problem deals often

go hand in hand. Clear contracts can go only so far in controlling problem people

in the context of a problem deal. The probability of serious disputes that will

be difﬁcult, if not impossible to resolve without litigation goes up exponentially.

Some experienced real estate developers and investors would say that no deal

is worth going through the brain damage, emotional drain, and risk of problem

people and problem deals and would advise you to just walk away from them. I

will just say that the problems will be more numerous and much worse than

you expect so you need to be sure the deal is really worth it. A few deals are

that good, but the vast majority are simply not worth it.

Do a Thorough Due Diligence, Including Legal Due Diligence

Due diligence is a period of time designated within a contract that allows a

buyer to check out the property and the deal before committing to close. Usually

the buyer’s deposits are refundable until the buyer notiﬁes the seller that the

property and the deal are acceptable. At that point, the buyer’s deposit “goes

hard” (becomes nonrefundable) and the buyer is also usually required to in-

crease the deposit so that the buyer will lose a substantial amount of money if

the buyer fails to close. This nonrefundable deposit also gives the seller comfort

that the deal will close.

If you are a buyer and you think a deal is worth doing, then it is worth

spending the money to do a thorough due diligence, including careful legal

due diligence.

If you are a buyer and you think a deal is worth doing, then it is worth spend-

ing the money to do a thorough due diligence, including careful legal due dili-

gence. If the deal is big, then you need to spend a substantial amount of money

to check it out carefully before you agree to close. Many disputes can be

avoided if you check out the property and the deal very carefully before you

commit to close. If you discover problems or issues at the due diligence stage,

you can insist that the contract be amended to fairly deal with the problems

you have discovered. If you need more time to complete your due diligence,

show the seller the effort you are making and the money you are spending on

the deal and ask for an extension of time. You will usually get it if the seller is

convinced you are proceeding in good faith. But sometimes the seller won’t

feel that way.

TIP

160 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 160

I recently had a development property in escrow and delayed the legal due

diligence to save money. I instead focused a lot of time and money on planning

the proposed subdivision and locating an adequate water source for the prop-

erty. When I ﬁnally started the legal due diligence, my lawyers discovered an

unusual legal restriction that prevented us from developing the subdivision

project we had planned for the property. As a result, all the money we had spent

on engineering and land planning was completely wasted.

How to Avoid Real Estate Disputes

Avoid disputes in your real estate deals by doing the following:

• Work with a good, experienced broker.

• Consult with a good, experienced lawyer early and often.

• Insist on clear contracts that protect your interests.

• Carefully specify and limit remedies in the contract.

• Avoid problem people.

• Avoid problem deals.

• Do a thorough due diligence, including legal due diligence.

How to Handle Real Estate Disputes

Even if you follow the steps I have outlined above, no contract is perfect, and

conditions may change in ways that may make the deal more difﬁcult for one

or more of the parties. As a result, disputes can arise, even when you have clear

contracts with decent people: One party may also just want to try to improve

the deal after it is agreed upon. So how do you handle the disagreements that

do arise in your real estate deals? The simple answer is that you should always

do your best to work it out. In doing this, you may want to consider the following

suggestions:

Consult with a Good, Experienced Litigation

Lawyer to Avoid Litigation

Strangely enough, a good litigation lawyer knows better than anyone that liti-

gation in real estate deals seldom pays off and also knows the best ways to avoid

it. While helping you avoid litigation, an experienced litigation lawyer can also

put you in the best position possible if litigation cannot be avoided. He or she

ROBERT KIYOSAKI 161

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 161

can also make sure you do not give up the farm or get bullied by the other par-

ties. There is usually some middle ground between getting pushed around and

doing your part to resolve disagreements. A good lawyer can help you ﬁnd that

middle ground.

But here is a fair warning. Litigation lawyers make a lot more money by rep-

resenting you in litigation than they do in helping you avoid it. Some do not

have enough work and may have a ﬁnancial self interest in prolonging your dis-

pute, or even aggravating it. Some lawyers also are just enamored with the liti-

gation process and get carried away with protecting your position to the point

they lose sight of the real objective, which is resolving the dispute for you as

quickly and cheaply as possible. You do not want these unbalanced lawyers rep-

resenting you. You want lawyers helping you who have the experience and good

judgment to strike the right balance between protecting your interests and re-

solving your dispute.

Experience warning: Litigation lawyers make a lot more money by repre-

senting you in litigation than they do in helping you avoid it. Choose carefully.

When Disputes Arise, Do Whatever You Can to Work It Out

As I have said, disagreements may occur in real estate deals, even though you

have had clear contracts prepared by a good lawyer. Generally, the more com-

plicated the deal and the longer it lasts, the more likely there are to be disagree-

ments. For example, a joint venture agreement to develop a planned community

over a ten- to twenty-year period is almost certain to involve a number of dis-

agreements, while the sale of a house in “as is condition” for cash to close in

thirty days is much less likely to generate disagreements.

My advice is when disagreements arise, you should do your best to work out

the disagreements as soon as possible. This can usually be done by respecting

the other party’s interests while protecting your own. There is no need to force

the other party to live up to the letter of the contract if you can accommodate

their legitimate interests without hurting yourself. You are almost always better

off giving up a little ground, generating some good will, and resolving the dis-

agreement before it becomes a serious dispute. Here are some suggestions:

• Respect the legitimate interests of the other party, and try to accommodate

them whenever you can. There is usually a way to respect the other party’s

interests while protecting your own. For example, if you are selling a prop-

TIP

162 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 162

erty, and the buyer wants to extend due diligence for thirty days, ﬁgure out a

way to do it, maybe by getting a cash payment. This point is demonstrated

by a case I handled several years ago for a very wealthy client whose name

some of you would recognize. He was buying a large oceanfront resort prop-

erty for development, and the seller refused to extend the time for due dili-

gence in a situation where it was reasonable to do so. The seller’s refusal to

extend due diligence and abrupt cancellation of the sale precipitated a law-

suit by my client that tied up the seller’s property for years and eventually

led the seller to sell the property to my client for about $2 million less than

the contract price, even though the real estate market had gone up. All this

could have been avoided if the seller had just given my client a thirty-day ex-

tension for due diligence.

• Generate clear correspondence to the other side with the help of your lawyer.

This will often help avoid litigation and, if not, this correspondence will be

valuable evidence for you in any litigation.

• You can usually make substantial concessions to resolve disputes and avoid

litigation and still come out way ahead. The cost of litigation is always higher

than you expect. The case always costs more than you expect and there are

hidden costs. The emotional cost of litigation can be overwhelming for many

people and the lost time, energy, and opportunities can also be huge and may

be more expensive than the direct costs of the lawyers and experts who par-

ticipate in the case. The adage “avoid litigation at all costs” is only slightly

off the mark.

You are almost always better off giving up a little ground, generating

some good will and resolving the disagreement before it becomes a serious

dispute.

Try Mediation

When you have tried your best and have been unable to settle the dispute di-

rectly with the other party, you may want to try mediation. Mediation is an ab-

breviated dispute resolution process where an experienced professional helps

the parties reach a voluntary settlement of their dispute.

A number of years ago when mediation was ﬁrst used, it had a very high suc-

cess rate, between 80 and 90 percent. In recent years, the success rate is much

lower. Today, the mediation process is only as good as the mediator. Highly

skilled, experienced mediators still maintain a high success ratio while less

skilled mediators probably succeed in less than half their attempts. Mediation

TIP

ROBERT KIYOSAKI 163

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 163

164 THE REAL BOOK OF REAL ESTATE

can work when you select the right mediator, and that is probably the most im-

portant factor in a successful mediation.

The second most important factor is a mutual desire by the parties to resolve

the dispute in the mediation. Mediations used to take place in one day, but today

a good mediator may work for as long as one or two months, going back and

forth with the parties to resolve a dispute. A good mediator will put in whatever

effort it takes to succeed. I was the mediator appointed by the court to resolve

a series of interrelated cases that were estimated to use up one year of court

time if they were not settled. That mediation lasted several months before I

succeeded, but it saved a fortune in lawyers’ fees and court time. It was well

worth the effort I put into it.

Mediation can work when you select the right mediator and when there

is a mutual desire by the parties to resolve the dispute.

Another way to improve the odds for success in mediation is to begin the

process with a comprehensive settlement offer that includes all the details of a

settlement. You then want to insist that the negotiation of major terms take

place within the context of this comprehensive agreement so you will know

exactly what you are agreeing to.

Mediation is relatively inexpensive if it is successful and is much better than

any other method of formal dispute resolution. However, if it is unsuccessful,

then nothing has been accomplished, and the mediation will have been a waste

of time and money. Because mediation can be so efﬁcient and effective, many

real estate contracts require mediation before arbitration or litigation. I rec-

ommend that you include a provision requiring mediation in most contracts.

Several years ago, I represented a client in a case that seemed ripe for medi-

ation. The parties decided to pay a blue ribbon mediator $10,000 for one day,

and we all ﬂew to San Francisco to have him mediate the case. Although the

mediator was very experienced and had a good reputation, he completely

screwed up this mediation and failed to get any concrete settlement offer out

of the other side. My client was so anxious to resolve the case that he made re-

peatedly lower offers to the other side without any counter offer, all contrary

to the instructions his business advisor and I gave him repeatedly. The client

negotiated against himself throughout the day and reduced his settlement offer

from $500,000 (which was a fair deal for the other side) down to something

substantially under $100,000, which the arrogant folks on the other side should

have jumped at.

TIP

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 164

The case ﬁnally settled years later when the vice president of the real estate

title insurance company (who was himself an attorney) called me directly and

said we had to settle the case right then. He said that he could no longer take

the amount the case was costing. He indicated his lawyer’s fees had already ex-

ceeded $1 million with no end in sight. I recalled that his attorney had bragged

after an earlier hearing in the case that he had “bought a new car” with the fees

from the case. The title company ﬁnally agreed to pay my client $850,000 in

cash to settle a case that could have been settled at the outset for less than

$100,000 in the mediation. I estimate the total cost to the title company was

well over $2 million, all because it did not accept my client’s offer in the medi-

ation. You should avoid making this mistake!

Consider Arbitration

If settlement fails and mediation fails, you may want to consider arbitration as

an alternative to litigation in court. Arbitration is a trial conducted by an expe-

rienced arbitrator paid by the parties instead of a judge or jury who are paid by

the federal or state government. Many real estate contracts require arbitration

instead of litigation. Where the contract requires arbitration, then the parties

are required to resolve the dispute by arbitration, and any court litigation initi-

ated by either party based upon the contract will be dismissed by the court in

favor of arbitration under the terms of the contract.

The arbitrator hears the evidence and makes a binding and ﬁnal decision

based upon the evidence and the law. Your ability to appeal a bad decision made

by an arbitrator is very limited. Arbitration used to be quicker and cheaper than

litigation, but today it is unclear whether there is any net beneﬁt to arbitration

over litigation. Because the arbitrator is getting paid and a refusal to hear all

evidence may be grounds to upset the arbitration decision, arbitrations can tend

to go on forever, can become more expensive than litigation, and may not get

the case resolved any quicker.

The quality of arbitrators can also vary greatly with some having difﬁculty

deciding cases correctly. Because the beneﬁts of arbitration are unclear, the trend

toward requiring arbitration instead of litigation in real estate contracts has been

curtailed to some extent. The arbitration requirement has now been deleted

from some real estate contracts in favor of traditional court litigation. For exam-

ple, the standard real estate “Purchase Contract” used by real estate agents in

Hawai’i was recently revised to delete the mandatory arbitration requirement.

To me, arbitration and litigation are now a toss up with no clear-cut advan-

tage to either. If your case is assigned to a good judge that your attorney has

ROBERT KIYOSAKI 165

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 165

conﬁdence in then you should stick with the judge. On the other hand, if your

case is assigned to a poor judge and you can agree with the other side on a good

arbitrator, then you may want to opt for arbitration. For example, both sides in

a court case I handled recently agreed to arbitration instead of going through

the litigation process. We selected a very experienced retired judge as the arbi-

trator, and my client just received a very fair award that the other side has paid

in full. In that case, the arbitration was completed promptly and worked out

very well for my client.

Arbitrations can tend to go on forever, become more expensive than

litigation, and may not get the case resolved any quicker. Because the benefits

of arbitration are unclear, the trend toward requiring arbitration instead of

litigation in real estate contracts has been curtailed somewhat.

Litigation Is Your Last Resort

If you are unable to resolve the dispute by negotiation or mediation and your

contract does not require arbitration, then you are left with litigation. As I said

earlier, litigation can be very expensive and emotionally draining. The direct

cost—meaning cash—can be very high, and the indirect costs in terms of wasted

time and emotional energy can be even higher. But there are also opportunities

to resolve the dispute. The court will usually agree upon a request by either

party to conduct settlement conferences in an effort to resolve the case early

and without the expense of a trial. The court may also appoint a mediator to

help settle the case. In my experience, a court-appointed mediator has a better

chance of success than one without court backing.

In one case where I was acting as a court-appointed mediator, several of the

parties were not even paying their own lawyers or returning their phone calls,

much less contributing to a settlement of the case. Because I had been appointed

by the court, I was able to get the presidents of those large companies on the

phone and get their attention with some direct talk, and eventually I got their

cooperation in contributing to a global settlement of a number of complicated

interrelated cases.

There may also be opportunities to ﬁle motions to decide or limit issues in

advance of the trial. However, generally things are not going well if you are em-

broiled in the litigation process. If you end up there, then you are left with no

alternative but to do your best to win with the understanding that it will be

very expensive.

A case earlier in my career demonstrates the ﬁnancial and emotional toll

that litigation can take. I recall sitting at the counsel table in court in the morn-

TIP

166 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 166

ing waiting for the trial to resume. The man on the opposing side was sitting at

his table, waiting for his lawyer to arrive. I could not help feeling sorry for him;

he looked so dejected. His lawyer had refused to settle the case, and he had

been forced to go into this trial that was not going well for him. Things took a

turn for the worse when the sheriff came in and served him with a complaint

in a separate case that had been ﬁled against him by his own lawyer to collect

the fees he was owed. This caused a great deal of dissention between the client

and his lawyer who arrived a few minutes later. The dissention lasted through

the rest of the trial and probably contributed to the large monetary award the

court made against this poor individual. Leaving aside the ethical problems

with his lawyer, this graphically demonstrates the emotional and ﬁnancial cost

of litigation.

The direct cost—meaning cash—of litigation can be very high,

and the indirect costs in terms of wasted time and emotional energy

can be even higher.

Never Quit Trying to Resolve the Dispute

No Matter Where You Are in the Process

Always keep in mind that mediation, arbitration, and litigation are only means

to an end: resolving a dispute. No matter where you stand in these processes,

you should never quit trying to resolve the case on some basis you can live with.

Never quit trying to work things out with the other side. Also never hesitate to

take the initiative in trying to settle. Don’t worry too much about appearing

weak because you have taken the initiative. Only a fool would not want to settle

a case if it is at all possible. The other side is probably not having any more fun

than you are, and as both sides get progressively more fed up with the time and

expense of litigation, they may be more willing to settle. So never stop trying to

come up with alternative ways to resolve the dispute.

Don’t worry too much about appearing weak because you have

taken the initiative to settle. Only a fool would not want to settle a case

if it is at all possible.

Several years ago I represented the developer of the only large, new oceanfront

hotel developed in Waikiki over the past twenty years. The owners and residents

of the condominium apartment building across the street had opposed his project

from the beginning through their association of apartment owners. They had

contested the shoreline permit required for any oceanfront development in

TIP

ROBERT KIYOSAKI 167

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 167

Hawai’i and had appealed the granting of that permit all the way through the

court system. They also contested a number of zoning variances that the devel-

oper required for the construction of the hotel. To say that my client had a great

deal of animosity toward these people would be an understatement.

I ﬁled a motion in the case to have the variances upheld as a matter of law so

that my client could proceed with the construction of the hotel. The argument

before the judge went very well. We were well organized and made a clear,

compelling presentation using visual aids, while our opposition made a sloppy,

disjointed presentation. The judge also appeared receptive to our arguments.

To observers in the courtroom, including my client, it looked like we were sure

to win. I told my client after the hearing that I thought the judge’s positive re-

action was because of my favorable relationship with him, and that my intuition

was telling me that we were going to lose the motion and the variances that

would sabotage his plans for the hotel. My client was not buying it. He was at

the hearing, and he was conﬁdent we were going to win.

Nevertheless, I started negotiations with the lawyer on the other side for my

client to make a cash payment to the condo association in exchange for dropping

its opposition to the variances. The association ﬁnally agreed to accept $150,000

to drop the case. My client refused, even though this case could sabotage his

$100 million hotel project if he lost. He was also infuriated with me for wasting

time and showing weakness by negotiating with his enemies. He told me to stop

dealing with them and just wait for the judge’s favorable decision. I got the judge

to postpone his decision and continued to negotiate a reduced amount with the

association. The client also rejected that offer and threatened to ﬁre me. I con-

tinued to negotiate. Finally, the association agreed to accept $55,000 to settle

the case. My client was very angry with me, but I kept calling and recommending

that he accept the offer. I pointed out how small the amount was and how much

was at stake. He told me never to call again about the offer. I continued to call.

He again threatened to ﬁre me. I did not let up, and he ﬁnally agreed to accept

the offer and paid the $55,000 to settle the case. My client considered it a com-

plete waste of money since he was conﬁdent he was going to win.

I went to see the judge after the case was settled, and he told me that he

thought all the variances were wrong and that he was going to strike down all

of them. Shortly after we settled the case on the variances, we won the appeal

on the shoreline permit, and my client was able to proceed with what is now a

beautiful oceanfront hotel owned and operated by another one of my clients.

So this story had a happy and proﬁtable ending, which is your goal in all real

168 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 168

estate deals. The moral here is this: Keep trying to settle, and never take the

risk of an adverse court decision if you can avoid it.

So, don’t reconcile yourself to trudge down the path of seemingly endless

acrimony in litigation if you can get a resolution you can live with. You are al-

most always better off settling than you will be by taking the risk of an uncertain

outcome in litigation. Because of the complication of real estate deals and the

limited remedies that can be provided by the court, in many situations a settle-

ment is often a much better resolution for both parties than litigation, even for

the “winner.” In short, you may not be able to get what you really need from a

court decision, even if you win.

How to Resolve Real Estate Disputes

Try to resolve the disputes you cannot avoid by doing the following:

• Consult with an experienced litigation lawyer to avoid litigation.

• When disputes arise, do whatever you can to work it out.

• Try mediation.

• Consider arbitration.

• Litigation is your last resort.

• Never stop trying to resolve the dispute no matter where you are in this process.

Conclusion

You are almost always better off settling your disputes in a reasonable, fair way

that respects the interests of the other parties while protecting your own than

you are having the dispute decided by an arbitrator, a judge, or a jury. And most

of all, the best solution is to avoid disputes altogether by going into the right

real estate projects, with the right people, the right mind-set, the right contracts,

and the right legal representation.

Bernie Bays is a partner in Bays, Deaver, Lung, Rose & Holma, a boutique

real estate ﬁrm based in Honolulu, Hawai’i, and is one of the few attorneys

in Hawai’i who is board certiﬁed as a civil trial specialist by the National

Board of Trial Advocacy and the Hawai’i Supreme Court. During his thirty-

eight year career, Bernie has represented clients in landmark real estate

cases before the Hawai’i Intermediate Court, the Hawai’i Supreme Court,

ROBERT KIYOSAKI 169

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 169

and the U.S. Supreme Court. His experience encompasses a broad range of business and

real estate cases, including the representation of minority and majority shareholders, cor-

porate proxy ﬁghts, antitrust representation of both plaintiffs and defendants, as well as lit-

igation concerning real estate sales, commercial leases, land use problems, rent

renegotiations, claims for economic loss and lost proﬁt, property damage, general and lim-

ited partner disputes, condominium and subdivision problems, land valuation issues, and

condemnation.

170 THE REAL BOOK OF REAL ESTATE

9781593155322_1:real estate_new 3/25/09 4:04 PM Page 170

PART 2

Your Real Estate

Project

•

MEL SHULTZ

•

CURTIS OAKES

•

JOHN FINNEY

•

SCOTT MCPHERSON

•

KIM DALTON

•

CRAIG COPPOLA

•

KEN MCELROY

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 171

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 172

This page intentionally left blank

el is my neighbor. We met at a neighborhood holiday party. I liked him im-

mediately because he is a real estate developer and was a longtime owner

of two professional sports teams. There is nothing like sitting in the owner’s seat

at a Phoenix Suns basketball game. The players, cheerleaders, and the action are

much more intense at the court level. Usually I sit higher up and need to use binoc-

ulars to see the game.

One of the advantages of having a friend like Mel is that I get to ﬁnd out where

the next growth areas are going to be. Being a land developer, he is operating three-

to-ten years out into the future. Not only do his developments expand the city,

Mel and his high-proﬁle team are responsible for bringing new life back into down-

town urban areas.

Mel is a great neighbor, friend, and a real estate visionary. Whenever I want to

know about the future and where to invest, I call Mel Shultz.

—Robert Kiyosaki

ave you ever been driving around your city or town and passed by an

open ﬁeld and wondered if that ﬁeld might be the only undeveloped land

in the area? I asked myself that question many times, and actually found it

9Mel SHULTZ

Buy by the Acre,

Sell by the Foot

Understanding Real Needs, Financial

Logic, and Asking Questions

173

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 173

pretty fascinating. I found it so fascinating, in fact, that the question itself actu-

ally jump-started my real estate career, and the discovery became my strategy.

Driving through your city or town can reveal a great deal about real estate.

For instance, you may have noticed that houses tend to dot the interiors of most

cities and towns while shopping, ofﬁce, and other commercial properties gen-

erally run along the major streets. This all makes sense once you start to notice

and make mental notes of how most cities and towns develop.

In the late 1970s, driving around seemed like a good way to ﬁnd real estate. I

didn’t own any sophisticated tools other than maps and a car to explore oppor-

tunities, although I did buy one of the ﬁrst giant mobile phones that looked and

felt like a brick. Driving along the main streets of my city provided all the options

needed to buy property during this time before instant information. When I

saw larger parcels that were skipped over by development, yet were right in

the path of growth or on the beaten path, it made sense to ﬁnd out who owned

these underserved parcels and inquire about the status. It seems pretty simple

and obvious; however, there were ample spots that were ignored by most land

buyers and developers. Finding the owners was just one call away to the title

company. Once I found the owner’s number, I handled it just like I learned in

my insurance business training: pick up the phone and meet the prospect. These

prospects were slightly different, though. Rather than the buyers I was used to

calling, this time I was calling sellers, and I was offering to give people money

rather than asking them to write checks.

Hard to believe, but it’s always easier to buy something than it is to sell.

Think about it. In your own life, you’ll ﬁnd it to be true. The problem is that the

owner knows that what they own is valuable, so it’s worth holding on to. On

the other hand, the owner may not want to go through the process and the risk

of investing the time and money it takes to plan and perform feasibility studies,

as well as other land-use studies that may be required to develop the property.

Even though real estate can be very tax favorable, the process and ﬁnal enti-

tlement received on the land may negatively affect the tax status for some own-

ers. We always discuss these kinds of tax issues with our tax advisors to be sure

we are never crossing the lines, or if we are, to be fully informed of the negative

tax implications. This is a complex part of the equation, and I absolutely rec-

ommend ﬁnding the best real estate tax counsel before even beginning to zone

or make any changes to a piece of real estate. It is just as important to under-

stand the tax and legal aspects at the beginning of a property transaction so you

can get off on the right foot, as it is to understand these same implications when

selling the property purchased. This cannot be emphasized enough. Talk to

professional tax and legal experts.

174 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 174

I regularly hire and talk to CPAs and lawyers before getting too far down the

road in real estate. My brother’s law practice was the logical entry place for me.

It is the oldest law ﬁrm in Arizona with expertise in all areas of real estate. I be-

lieved from the beginning that a portion of my investment dollars were to be

earmarked, ﬁrst for the land and, second for lawyers and other consultants who

could better my chances for success.

The value of a team is self-evident. I always wanted to be the quarterback of

our team at school. I knew the position was less about heroics and more about

being sure the best support was in front of me. My job then was simply to re-

member the plays and throw or hand the ball to the best players.

The

Dictionary of Real Estate Terms,

Sixth Edition, defines “entitlement”

as this: The right to develop land with government approvals for zoning

density, utility installations, occupancy permits, use permits, and streets.

Matching Market Needs with

Product Creation

Just because you buy a hotel doesn’t mean it has to stay a traditional hotel. Just

because you buy an apartment building doesn’t mean it needs to stay an apart-

ment building. Markets change, market needs change, and in order to be suc-

cessful, you may ﬁnd you have to change a property from one kind of product

to another. Here are a few examples:

Converting a traditional hotel into a timeshare property.

Converting a rental apartment into a for-purchase apartment to the renter

or another buyer.

These are examples of matching market needs with product creation. Space

that already existed was transformed to create new revenue sources based on

market demands.

When it comes to land, changes may involve simply splitting one larger lot

into two or more residential lots or changing land permitted for one use to a

different use that is usually better economically. Most often this requires the

approval of the city or town (municipality) to consent to the proposed use

change. This is called rezoning and/or the entitlement process.

TIP

ROBERT KIYOSAKI 175

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 175

Real Life Story: The Education on 32nd Street

n the mid 1970s, I bought a house on about five acres for $240,000. Within a

short time, a friend asked if he could buy the home. His intent was to change the

zoning from one house per acre to commercial/office use. He offered to pay triple

my price with the caveat that the closing had to wait for up to twelve months. He

figured it would take that long to convince all the residents on the north and south

sides of the property to agree and the city to approve his rezoning plan. This was

my first personal experience watching someone change the use (rezoning) of a

property. I was in my mid-twenties, and it seemed worth waiting a year to make

such a compelling profit.

Time passed; his rezoning was approved, and we closed the deal. This was an

early eye opener. Suddenly, it hit me! I could add value by changing the use of the

underlying land. I decided this was to be part of my new investment path.

Real Life Story: View from the Mountain

ith confidence from my 32nd Street experience, I purchased the twenty-nine-

thousand-square-foot McCune Mansion in Paradise Valley, Arizona. The mon-

strous mansion was built by oil tycoon Walker McCune in the 1960s for more than

$3 million. The mansion sat on forty acres of hillside that overlooked the entire city

and the spectacular Camelback Mountain. My plan was to change the use from a

single home to a resort. The city fought the rezoning, so I decided to go with what

they called preferred residential zoning, which included the “hillside ordinance.”

This is where I truly became a real estate developer and gained firsthand knowledge

about the zoning process and lot layout. Each lot building pad had to meet compli-

cated cut-and-fill requirements—how much you could cut into the mountainside

and fill back in to create a building pad. I ended up on the committee with real home-

builders rewriting the town ordinances for slope-and-hillside cutting and refilling.

In the process, I found a buyer who purchased the mansion for the price I paid for

the entire forty acres and mansion. The sale included the mansion and five acres,

which I carved out around the house. I then held onto the remaining land, which

was now converted into twenty-eight one-acre-plus home sites. The lots sold from

$200,000 to $600,000, and I had made my biggest profit yet. I retained one lot to

build a home for my family, but the “desert snakes” were not my friends, so I made

the decision to sell at a later time. Sales topped $10 million.

176 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 176

My early experience with the mansion on the mountain got me thinking

about the economics of the land business. There’s a story about Abe Lincoln’s

farm that makes the point about creative ﬁnancial engineering better than I

could ever make on my own. It seems Abe Lincoln bought his family’s farm

from his father, Thomas, when cash got a little tight as a way to bail him out.

Eventually, after Abe became president and one of the great ﬁgures of our coun-

try, the friends of the Abe Lincoln Historical Farm near Lerna, Illinois, took on

the ownership. It seems the owners of this land had a brilliant idea. They wanted

to give people of Illinois and the nation the opportunity to own a tiny piece of

American history in an effort to raise money for the owner’s family. They

planned to sell off small parcels of the estate to interested people. When they

parceled out the designated acre, they had more than six million squares to

offer the public. The net return on this is not known, but even with a low price

for the land parcel, I am sure it was substantial.

This is the ultimate subdivision of land, almost beyond the scope of imagi-

nation. But I’m sure it won’t be the last ingenious idea. If I had to start over

today in the real estate business, what would I do? I can answer that question

this way. In the late 1970s we would joke about a wealthy private lender and in-

vestor named Bill Levine. We’d say that if he were dropped out of a plane with

a parachute on his back in the middle of China and with no money, within a

few years he would be one of the wealthiest men in China or wherever else he

happened to fall. Some people just seem to know how to create wealth. They

are the true ﬁnancial engineers.

Starting is the hardest part of anything in life.

Starting is the hardest part of anything in life. In the early 1970s I had saved

up about $5,000 from my life insurance sales commissions. A real estate ﬁrm in

my building had several older, unoccupied houses it was trying to unload. Inside

these old house bones lay bright red carpeting, purple-painted walls, and

linoleum ﬂoors from the 1950s. Even the carpet stains were better than the

original colors.

The cash requirement to acquire these homes was straightforward: pay clos-

ing costs, include a few hundred dollars in commissions, and assume the debt.

I thought why not? I soon found that renting these showplaces was not easy

because after I had purchased the properties I didn’t have enough money to re-

paint and update the interiors, nor did I have the mechanical skills to do it my-

self. But somehow, enough renters were willing to take the houses and do their

TIP

ROBERT KIYOSAKI 177

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 177

own ﬁx ups. From the cash ﬂow I received, I was able to buy more houses and

sell some along the way, accumulating about $10,000 in cash. I didn’t like the

rent collection process much, so after selling my last house in 1973, I immedi-

ately moved on to something a little more sophisticated.

My ﬁrst ofﬁce building was just east of 24th Street on Thomas Road in

Phoenix, Arizona, as were my second and third buildings. My logic was after

buying my ﬁrst building and not knowing where else to buy, it seemed like a

good idea to go next door and buy those buildings, too. If it hadn’t been for

other opportunities that came my way, I may have just kept buying along the

same major road in Phoenix. What did I know? These small ofﬁce buildings

were, for me, where it really all began.

After selling the ﬁrst building and making $30,000, I began to get some trac-

tion. The next two were sold as a package with $130,000 in net proﬁt. A Cali-

fornia syndicator was looking for more buildings in Phoenix, and I liked the

idea of negotiating the purchase and sale. My strategy was to buy and improve

the properties, much like the houses I owned, except this time I wanted to be

able to afford to hire contractors. After my house experiences, I learned to set

aside cash up front for this purpose. The old painted white brick needed a mod-

ern look, so we put in new windows and doors, added beige-colored stucco to

the brick exterior, new signage, and a parking lot. This clean, new exterior

brought the building back to life. First impressions are lasting.

Starting Off with Real Estate Math

Getting started with basic real estate math is helpful to me. There are 43,560

square feet in one acre, and there are 640 acres in a section of land. The question

arises regarding land uses and valuations. Commercial land is a higher economic

use than a similar size residential-sized lot. In the course of planning, develop-

ers study the market demands and the appropriate use of a parcel of land and

determine the best land use before buying. The planning and zoning process,

which I learned after my house buying experience, incorporates the information

learned along with the market demand to create the highest and best use. With

that said, consider the math for a parcel of land. It may look something like

this:

On the next page is a very simple illustration of buying in bulk at a “per acre”

price and converting to a “square foot” price. Usually land owners sell large

parcels of unzoned land in areas outside traditional development cores in bulk

at a per-acre price. In urban areas, commercial or multifamily property is usually

178 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 178

sold by the square foot. It’s really a convenience because it all reverts back to

the dollar amount paid for the land, the ultimate sales price, and proﬁt. This

practice is convenient for both the buyer and seller. It’s similar to the way we

use inches as a measurement division of a foot. For example, rather than say it’s

one-quarter of a foot, we say say three inches, which is easily understood. Per-

haps smaller measurement practices were used to inﬂuence a buyer’s percep-

tion of the amount being paid for the product. It is like ﬁguring out why gold is

sold by the ounce and not by the pound. At the end of the day, it’s perception.

Many other projects followed for me. I developed everything from business

parks to large, master-planned communities. The lesson I learned through it all

was to plan and divide the land, visualizing what a property could be and what

it “wanted” to be. A residential community wants a compatible use like a grocery

store, restaurant, pharmacy, or other convenience. That means forcing a prop-

erty to a higher-return use doesn’t make sense if it doesn’t blend and ﬁt into the

surroundings. You’ve driven around your town and seen buildings that don’t

ﬁt. The right products in the right places feel right and look right, and the neigh-

bors know that. I saw how my friend, Joe Beer, went house-to-house to let the

neighbors give input, to ask them questions, and most important, to listen as he

petitioned for rezoning. This is a good practice particularly if you do this with

forethought and patience and are willing to modify and compromise and be

sensitive to the neighbors. You may actually ﬁnd throughout the process that

the land you bought by the acre may indeed be sold by the square foot.

Let me share a personal story. I was involved a few years back in the sale of a

site for a post ofﬁce. The buyer wanted an environmental report to ensure there

were no hazardous substances on the site. This is very typical. But as my partners

ROBERT KIYOSAKI 179

Buying by the Acre, and Selling by the Foot

This example may help you see the potential of real estate in a new way.

The purchase price of ten acres is $50,000 per acre, or $500,000 total (zoned

for ten houses).

The final plan for ten acres may be 250 apartment units, which may be worth

$10,000 per unit or $250,000 per acre (after rezoning approval).

This equates to about $5.75 per square foot (43,560 square foot x $5.74 =

$250,000 per acre).

Since the land was acquired for single family and changed to multifamily, the

underlying use created an increased value of five times the original purchase.

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 179

180 THE REAL BOOK OF REAL ESTATE

and I were working our way through the

due diligence process with the buyer, an

environmental problem came to our at-

tention. Although the issue seemed to

possess a very low chance of causing any

real problem, the inspectors sent over a

backhoe to test the area. During the test,

a sample of soil showed a completely new

problem: The sample contained oil. Im-

possible, we thought. So, they tested the

same sample again with the same results.

Perplexed and bracing ourselves for a

costly soil remediation, which given the past use of the property seemed un-

fathomable, we decided to take a walk around the property. Thank goodness

we did this. While we were walking by the backhoe, one of us noticed it had an

oil leak. Upon further inspection, the oils matched up with the leaky equipment.

Retested with a new backhoe, the soil turned up clean as originally expected.

Walking the site can make all the difference. Hands on requires a physical look,

not just reading a report.

I have always enjoyed walking around the properties we are buying.

For me, seeing is the difference between knowing and guessing.

Wisdom from the Field

If you want to get involved in real estate (and not just when the economy is

booming) then the following questions may come in handy:

How Can I Learn the Basics of Property Uses

and Potential Changes to Use?

Each city and or municipality has its own ordinances and laws for permitted

uses for property. Find a good zoning lawyer and inquire about current zoning

and permitted changes. A planner or architect who has planned and designed

other local projects is the best source for ideas. Real estate brokers are also an

important part of determining potential tenants or other buyers and/or devel-

opers for parts or all of a properly thought-out land use plan.

TIP

Three “Must Do’s”

to Buy by the Acre

and Sell by the Foot:

1. Plan and divide the land

thoughtfully.

2. Work with the neighbors in

the community.

3. Always be willing to listen

and compromise.

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 180

Who Are the Key Members of My Team, and What Do They Do?

In addition to the zoning lawyer, the land planner or architect and the brokers

(both leasing and sales) are critical. You’ll need the following team members to

help you along the way:

Feasibility Experts

This may include economists and often larger brokerage companies who gather

and compile sector reports for vacancy, lease rates, absorption and other reports

to help determine need for product type.

Accountant

This person can put together a ﬁnancial pro forma to estimate sales, costs, and

potential proﬁts so you can determine your offer price and capital/debt/equity

requirements. The broker should provide sales input projections.

Civil Engineers, Soil Experts, and Contractors

These experts will help you determine the improvement cost estimates you

will need to fully evaluate the property’s potential from topographical and phys-

ical maps to understanding wet and dry utilities.

When you consider the many disciplines required to make all this come to-

gether you see why many avoid this aspect of real estate. It sounds harder than

it really is. Although patience and knowledge are required, after the ﬁrst few

deals the process becomes clear. It is much like an NBA point guard or a quar-

terback on a football ﬁeld. Most of your time is spent knowing where your team-

mates are and who to get the ball to. Rarely do you shoot or run; passing the

ball is essential. You learn by doing, and starting with a simple lot split for a

couple of houses is an easy way to experience the process ﬁrsthand.

How Do I Find Property That Can Be Rezoned or Changed

to Become a Profitable Venture?

This is the bottom line of the whole exercise. Knowing the market needs and

economics of the speciﬁc product that will ultimately be built on the site takes

study and some imagination. Ask questions and write them down. The more ques -

tions you have, the better. A few, but important questions you could ask are these:

What would improve the living quality and/or convenience for the people

who live or work in the area?

ROBERT KIYOSAKI 181

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 181

How many people drive by this particular property each day?

How can I help people afford to live in the area or give them a better alterna-

tive for a retail shopping or dining experience?

What about better medical care closer to home or more convenient services

in a certain area?

These questions stimulate the imagination and the possibilities. Most people

ask too few questions. You can build a case for almost any business model if

you ask enough of the right questions.

Bill Gates, founder of Microsoft, was interested in information at the speed

of thought. Billionaire Warren Buffett considered simple businesses that are

run well and provide capital to grow, as places to invest. These investment

strategies have vaulted them to become two of the wealthiest men in the world.

Mr. Buffett is the master of asking questions then boiling them down to the few

most direct and succinct ones that become repeatable observations. True genius

is when you can make the unnoticed concise. Ask and write down a few ques-

tions about land you have noticed regularly.

Why has this been skipped over by the path of development?

Who owns it?

What is the right use or ﬁt for it?

How would the math look if it were used in a different way?

Who would buy or rent whatever I think should be built on this site?

After the experience of completing your ﬁrst real estate process, you will

have exercised your mind in a way that will help you look at land through new

eyes. The fun for me is to drive by or walk into a project I have been a part of

and know this was a piece of land few considered would ever be a place where

people would want to live, work and play.

After thirty years of planning, negotiating, visualizing, building, and selling

these ideas, I’ve learned that virtually anything is possible if you ask questions.

Analyze and think through the answers, and take the steps to get your mind’s

ideas into pictures and then later into bricks. Remember, bricks are laid one

upon another just like your thoughts. The hardest part is setting the ﬁrst brick

in place.

182 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 182

Mel Shultz cofounded JDM Properties, Inc., in 1983 as a full-service real

estate ﬁrm that develops and manages quality properties in Arizona and

Colorado, including upscale residential and commercial space, and busi-

ness parks. A principal of JDMD Investments, LLC, Mel and his partners

are developing the largest master-planned community in the greater

Phoenix area for more than three hundred thousand residents. Mel was

a general partner of the Phoenix Suns basketball team until the team sold in 2005, and he

was one of the original general partners of the 2001 World Championship Arizona Diamond-

backs baseball team. Mel led the design and build team for the ﬁve-thousand-seat Dodge

Theatre in downtown Phoenix. The company’s Web site is www.jdmpartnersllc.com.

ROBERT KIYOSAKI 183

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 183

once accused Curtis of going “where white men fear to tread.” He laughed out

loud and said, “That’s true.” He went on to say, “I have basketball star Magic

Johnson’s philosophy of going into urban areas and bringing in development and

businesses that lift the area up.” Curtis then added, “Regardless of race, too many

investors just suck the cash out of a neighborhood but never reinvest to improve

it. I invest to reinvest and improve a neighborhood.” This is why Curtis and his

wife, Diana, are respected friends as well as fellow real estate investors.

Today, some of the most beautiful real estate is being boarded up as casualties

of economic decline. It takes a special kind of investor to invest not only to make

money, but to also bring an area in decline back up. I tried it once and did okay

but not great. Truthfully, I was an outsider coming in, hoping to make a quick

buck from a bad situation. Now personally wiser, I have a better appreciation for

what Curtis does. It takes more than knowing about real estate. It takes knowing

the people and the psychology of the neighborhood, and, most importantly, having

a desire to be a part of the community. This is what I have learned about real

estate from Curtis and Diana.

—Robert Kiyosaki

10 Curtis OAKES

It’s All About Adding Value

184

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 184

ROBERT KIYOSAKI 185

s a successful real estate agent, investor, and developer, I’ve shared a stage

as a presenter with Robert Kiyosaki, who is a personal mentor to me. His

ideas and guidance have been instrumental in much of my success. I have pre-

sented seminars with Donald Trump, as well as coauthored with him an audio

CD entitled Three Master Secrets of Real Estate Success. At this writing, my wife

and I are renovating a multimillion-dollar home in an exclusive San Francisco

neighborhood. To boil it all down, I have achieved all of this by following a sim-

ple mantra, one that anyone can understand and apply to achieve similar real

estate successes: Proﬁt from problems. There are two foundational things that

have been a constant for my wife, Diana, and I throughout our process: knowl-

edge and faith.

“My people shall be destroyed because of a lack of knowledge,” Hosea 4:6.

“Faith is the conﬁdence that what we hope for will actually happen. It gives

us assurance about things we cannot see,” Hebrews 11:1.

Your mantra should be this: Profit from problems.

A pristine property with afﬂuent tenants sounds wonderful, doesn’t it? No

huge maintenance issues, little problem collecting rents, and so on. Yes, these

types of properties are easy on the mind, but they also have a signiﬁcant cost

and little chance to appreciate.

A problem property, on the other hand, has an amazing, and fast, upside po-

tential. For example, let’s say that the going rate for a building in a certain area

is $200,000. The problem property might be worth $140,000. Once the prob-

lems are ﬁxed, however, its value will zoom to the going rate for similar prop-

erties: $200,000. Likewise, rents in a problem building might be low. After you

improve the property, however, you can raise rents—increasing your amount of

income.

This is the concept of “forced appreciation,” which occurs when an investor

purchases a property that’s less than the going market value (usually due to in-

herent problems, such as high vacancy rates, severely deteriorated buildings,

environmental problems, etc.), then ﬁxes the problems that “force” substantial

appreciation in value back up to the current market value. I also call this the

value-added approach, where you take an asset, make various improvements,

and have the asset increase in value. Forced appreciation provides you with a

short-term paper proﬁt, which you can then use to your advantage in a variety

of ways. This value-added approach has helped many, many real estate investors

build everything from small nest eggs to multibillion-dollar fortunes.

TIP

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 185

I never focus on or count on appreciation when analyzing whether

or not to purchase a property. To me, market appreciation is always a bonus:

if it happens, great, but if the property doesn’t go up in value based on the

market, that’s okay, too, because I know that I am making what I need to

make on the property in terms of cash flow and depreciation. Likewise, when

someone says that they have an investment that will provide capital gains,

thank them, then turn and run in the other direction! Why? Capital gains are

based on the speculation that something “might” happen in the future to

drive up the value of that investment. The key word here is speculation;

something might happen. By focusing on a value-added approach to real

estate investing, you have much greater control over a property’s

ultimate value.

If you resolve to become a problem solver—someone who embraces rather

than runs away from problems—your chances of achieving success in real estate

investing will dramatically increase. The next step becomes ﬁnding appropriate

problem properties.

My Story

I purchased my ﬁrst home in Philadelphia, Pennsylvania, in 1979 for $27,800. I

used the G.I. Bill, which meant I had 100 percent ﬁnancing. I had an adjustable

rate loan with an interest rate of 17.5 percent. That’s obscene by today’s stan-

dards, but at the time I didn’t care. I was thrilled to be a new homeowner,

period. This also was my introduction to leverage, which is using a small amount

of money to purchase a large amount of something else (in this case, real estate).

I began to buy properties as long as I didn’t have to put much money down. I

didn’t care what the interest rate was; as long as I had a positive cash ﬂow,

I bought.

My life as a real estate entrepreneur took another big leap in 1982 when I re-

signed from my government job for the Naval Aviation Supply Ofﬁce. From the

beginning, I specialized in value-added properties. In Philadelphia, boarded-

up houses were practically everywhere, and that’s what I looked for. Buying

and then turning was easy because I could buy a property for between $5,000

and $30,000 and then decide to either rent or sell.

I had an uncle who came to visit me from San Francisco, California. Every

time he came to visit, he would go on and on about the San Francisco real estate

market. In 1985 he ﬁnally convinced me to move to San Francisco to invest in

value-added real estate. However, little did I know that my Philadelphia success

TIP

186 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 186

in renting and ﬂipping houses couldn’t be duplicated in San Francisco. Why?

Simply because property was so much more expensive. The average duplex at

the time was $250,000. These prices sent my nervous system into shock and

fear. While I had accumulated some funds to invest, I needed a lot more infor-

mation about California real estate before I could begin.

I’ve had my share of challenges and problems. But with patience and

the right approach, value-added real estate investing can work for you, too.

In the meantime, the cost of living and real estate school was beginning to

deplete my investment nest egg. What’s more, this fear of potentially losing

everything held me captive. I wouldn’t do a deal if I saw one! I ﬁnally got my

real estate license and immediately went to work in an area in San Francisco to

duplicate my success in Philadelphia. However, in Philadelphia it was relatively

easy to identify value-added real estate. Just ﬁnd a boarded-up house at a cheap

price, ﬁx it up, and sell it. In San Francisco, however, there were no boarded-up

houses. I had to ﬁgure out how to add value in other ways. I ﬁnally found the

area and the niche. The area was called Bayview Hunter’s Point, and the niche

was called “in-law apartments.” So I went to work buying single-family homes

(which were selling, at the time, for $50,000 to $75,000) and adding in-law

apartments in the rear of the garages for rental units. Once construction was

completed, I could sell the house for between $175,000 and $199,000. I had a

full-time construction crew, and we were rehabbing and ﬂipping, and life was

good. Now, there are potential pitfalls—I’ve had my share of challenges and

problems. But with patience and the right approach, value-added real estate

investing can work for you, too.

Finding the Right Properties

Now we’ve come to the exciting part, right? Right! Finding the right properties

to invest in is obviously at the heart of long-term and sustained guaranteed suc-

cess in real estate investing. It’s the area that will tap all of your knowledge and

creativity, and where over time you’ll build experience and expertise. You’ll

come to rely on this time and time again. Finding the right properties is equal

parts knowledge and your ability to creatively “see” a property’s potential. In

short, here’s where we marry your brain with your intuition to achieve a com-

plete solution (wholeness).

First, let’s review property types and property classes.

TIP

ROBERT KIYOSAKI 187

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 187

Property Types

The three types of buildings I’d like to focus on in this chapter are as follows:

Residential. Users live in one to four units. Can be various types, such as single

family, duplex (two units), triplex (three units), and fourplex (four units).

Commercial. Five or more business units, such as an ofﬁce building or a strip

mall.

Mixed Use. A single building with both residential (people live there) and com-

mercial (businesses) options.

If you are just starting out investing in real estate, I suggest that you begin by

purchasing a two-or four-unit property. This way, you can begin small, leverage

your way into a property, learn all you can, and then move up to a larger property

when you have experience and a positive cash ﬂow.

Property Classes

There are four classes of properties:

Class A. A property less than ten years old, in excellent condition, and with de-

sired amenities, such as a pool or workout center. Class A properties can ask

for, and receive, high rents, generally have a better quality of tenants, usually

have lower maintenance costs, and are easier to manage. These properties are

usually held by (owned by) investor groups and have a lower rate of return.

They are the most sensitive to any downturn in the local or national economy.

Class B. Buildings that are ten to twenty years old and in fairly good overall

condition. Class B properties are considered the most stable of the different

property classes, and are usually located in well-established, middle-income

neighborhoods. They are new enough to offer amenities, yet still old enough to

be affordable to the average investor and tenants.

Class C. Buildings between twenty and thirty years old with limited or nonex-

istent amenities. Both ongoing and long-term maintenance costs are higher be-

cause of aging and the general need for a cosmetic “facelift.” They have a lower

quality of tenants, including those on government assistance. Value can be added

by updating the property.

Class D. Buildings more than thirty years old that need substantial capital im-

provements. Usually located in declining areas, Class D properties usually have

substantial deferred maintenance issues, such as the need to replace the roof,

the electrical system, the HVAC system, etc.

For beginning investors, I suggest that you focus most of your attention

on finding

undervalued Class C buildings

TIP

188 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 188

You can look for undervalued properties in any of the four classes. However,

please note that for Class A properties, the velocity of your money—the amount

ﬂowing to you—will slow down simply because there is less upside potential.

For beginning investors, I suggest that you focus most of your attention on ﬁnd-

ing undervalued Class C buildings.

Starting Your Search

Here are the steps I recommend to ﬁnd undervalued properties.

Step One: Become an Expert in a Particular Area

This generally is the area in which you live. Attempting to become an expert in

a city outside of the state in which you reside, for example, would be time con-

suming and costly. Do as much as you can to study the area. Read the real estate

sections in the local newspapers, drive around, and attend open houses.

This area should be large enough to have diverse neighbors. For example

your initial area might be San Francisco. Over time, once you feel that you’ve

mastered this particular area, then move on to another area.

Here’s an example:

1. Select San Francisco as your area

2. Explore it, study it, drive around, etc.

3. “Master” this area

4. Then select another area such as Oakland

Step Two: Seek Out the Least Expensive Sections

within That Area

Again, you want to ﬁnd problem properties and then solve the problems. You’ll

ﬁnd the juiciest problems—and thus the potential for the largest returns—in

the least expensive sections of your focus area.

Step Three: Look for Problem Properties

Once you’ve become an expert in a particular area and identiﬁed the least ex-

pensive section within that area, the next step is to begin hunting for problem

properties in that least expensive section.

How do you identify problem properties? They’re usually the eyesore on a

street or block. Signs to look for include buildings with one or more of these

attributes:

ROBERT KIYOSAKI 189

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 189

• vacant

• boarded up

• tall grass / weeds

• trash strewn about / overflowing trash cans

• broken windows

• peeling paint

• general poor appearance

You also should be alert to potential property changes, such as:

• building owner wanting to retire / leave

• foreclosures

• probate

• code violations

• zoning variances not renewed or up for re-hearing

• a big-box tenant just left a strip mall

Please note that searching for real estate investment opportunities can be

extremely fun, but it also can be an extremely frustrating process.

Tips As You Begin Your Property Search:

• Stay positive. Searches take time and involve walking around neighborhoods.

There will be missteps and false alarms. Stay positive and have fun, and you’ll be in

the right frame of mind when the right property appears.

• Be present and focused. As much as possible, shut out past failures, negative

thoughts (“The market hasn’t bottomed out yet”), fears of failure, fears of success,

and all other factors that might prevent you from seeing—really seeing—an oppor-

tunity. Those who are present and open to opportunities are almost always the peo-

ple who are able to grab a new opportunity when it comes along.

• Put in the time. There’s a saying in the writing world: To write a book, apply the

seat of your pants to the chair. The same is true when searching for real estate in-

vestment opportunities. You must get out and look for the opportunities. You have

to study the newspapers, drive around town, and network with real estate agents

and lenders.

• Don’t be put off by market conditions. Rarely will you find “perfect” market

conditions when making any investment. There are always problems and potential

pitfalls. Know this and accept it. Don’t let the media, friends, or anyone else dis-

courage you from seeking opportunities.

190 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 190

This last point bears repeating—never be discouraged by ﬂuctuating market

conditions. Interest rates will always go up, unless they happen to be going

down. Property values will continue to decline until they hit bottom, and then

they will rebound. And so on.

This should be your “Real Estate Opportunity Search” mantra: In

any

market, at

any

time, I can find a great deal.

Here is your “Never Give Up” mantra: Diligence leads to destiny.

You should actively search out potential deals. As well, you should create

networks of people, tools, and resources to send potential deals your way. Here

are ways to create a ﬂow of deals—or at least whispers about potential deals:

• www.loopnet.com

• other investors

• real estate agents and brokers

• real estate lenders

• attorneys

• CPAs

• property management companies

TIP

ROBERT KIYOSAKI 191

TABLE 10.1 Personal Reflections

Brainstorm and list who else might be a “deal source” for you:

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 191

Property Criteria and Analysis

Once you’ve identiﬁed a potential investment property, it’s time to closely study

the property for both short-term and long-term opportunities. You will want to

put each prospective property through a rigorous review, using the following

criteria:

1. Guiding Investment Principles

a. Leverage

b. Cash Flow

c. Cash-on-Cash Return

d. Capitalization Rate

e. Gross Rent Multiplier

2. S.W.O.T. (Strengths, Weaknesses, Opportunities, Threats)

3. Trends

4. Demographics

Now, I could write an entire book about these four key areas of property analy-

sis. Here, though, let me summarize each of these points quickly.

Leverage

Leverage simply means that you want as little of your money as possible used

to secure the biggest opportunity possible. The less money you have to invest

in a property, in other words, the larger the opportunity for a big payoff. When

analyzing a property, know exactly what you will initially need to invest.

Positive Cash Flow

A key to building my real estate fortune over the years has been cash ﬂow. We

call cash ﬂow “king” because having cash is always our primary objective. Pos-

itive cash ﬂow creates and maintains your investment’s momentum. It also has

signiﬁcant ﬁnancing and lending implications. For example, when purchasing

an apartment building containing more than ﬁve units, the bank will base the

amount it will lend you on the building’s cash ﬂow abilities. (Your credit score

is secondary.) Cash ﬂow also is a signiﬁcant factor in the building’s overall value.

A building with poor cash ﬂow will appraise much lower than another compa-

rable building in the same area that has a stronger cash ﬂow. Never forget that.

Double Digit Cash-on-Cash Return

This is the velocity of your money. In other words, you want to know at the be-

ginning of an investment how long it will take the money you invest (primarily

192 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 192

the down payment) to come back to you. This is critical because you want to

invest that down payment over and over again in other investment properties,

so the quicker that you’re able to receive back that initial payment, the quicker

you can apply it to another opportunity.

Cash-on-Cash Return defined: This is the amount of cash you receive

from a property investment in a specified time period as a percentage of your

initial investment in that property.

Here are several examples using the same down payment amount ($20,000)

but different cash ﬂow amounts per year.

As you can see, this table shows how many years it takes for your down pay-

ment to come back to you. In the ﬁrst scenario, it takes one year. In the second

scenario, it takes two years, and in the third, three years. Your cash-on-cash re-

turn is 100 percent, 50 percent, and 33 percent, respectively.

Your goal as an investor should be a cash-on-cash return in the 10 percent to

20 percent range. Anything above 20 percent is considered an exceptional cash-

on-cash return.

Capitalization Rate of 7 Percent or Higher

The cap rate measures a building’s performance without considering the mort-

gage ﬁnancing. If you paid all cash for the invest property, how much money

would it potentially make? What’s the return? A high cap rate usually means a

higher risk investment and a low sales price. High cap rates are typically found

in poor, low-income areas. A low cap rate usually indicates there’s less risk and

a high sales price. Low cap rates are generally found in middle-class to upper-

income areas. If you know the net operating income (NOI) and the cap rate,

you can calculate what the sales price should be using this formula:

NOI / Cap Rate = Sales Price

TIP

ROBERT KIYOSAKI 193

TABLE 10.2

Down

Payment

Yearly

Cash Flow

Years to Pay Back

Down Payment

Cash-on-Cash

Return

$20 ,000 $2 0, 000 1 100%

$20 ,000 $10,000 2 50%

$20 ,000 $6 ,000 3 33%

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 193

The Cap Rate measures a building’s performance without taking into

consideration the mortgage financing. It is the Net Operating Income divided

by the sale price.

Gross Rent Multiplier of 9 or Lower

Gross Rent Multipliers (GRM) are used as a measure to compare income prop-

erties within a particular area or neighborhood. For example, for three proper-

ties within a similar area of town, you could calculate the gross rent multiplier

for each, then compare the three. If all other factors were equal, you would se-

lect the property with the lowest GRM. In general, as the gross rent multiplier

decreases, cash ﬂow increases. And conversely, as the GRM increases, cash ﬂow

typically decreases.

Gross Rent Multiplier is the ratio of the price of a real estate investment

to its annual rental income. The lower the ratio, the better.

S .W.O.T.

S.W.O.T. stands for Strengths, Weaknesses, Opportunities, and Threats. A com-

mon business evaluation tool, S.W.O.T. also applies to investment real estate

simply because each property will have its own unique strengths, weaknesses,

opportunities, and threats. The savvy real estate investor—the one seeking guar-

anteed success—will put each property through a detailed S.W.O.T. analysis.

Please note that generally speaking, this is a subjective analysis. In other

words, there are no “right” or “wrong” answers. Likewise, many factors are in-

terconnected. For example, a property’s weakness—such as needing a fresh coat

of paint—might also be an opportunity—a fresh coat of paint can quickly in-

crease the overall look of the property, and thus its value.

Trends

Part of your property-seeking work should be to pay close attention to trends,

or similar new tendencies displayed by a large number of people. For example,

in the past, many city dwellers moved out of the city into the suburbs. Over the

last several years, however, the trend has become the opposite. Because of rising

gasoline prices and other factors, people in cities are “cocooning”—they want

to live within walking distance of work, stores, restaurants, and so on.

Learning about new trends through the media and other information outlets

is important. An investor will have become exposed to even more opportunities

TIP

194 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 194

if he “sees” a new or developing trend before it becomes known and published

through the media.

How can you spot new trends as they begin to develop? It’s a bit of an art,

but generally speaking you can:

• Observe what’s going on around you. Pay particular attention to what peo-

ple are doing differently. For example, eight or ten years ago, SUVs were all

the rage. It seemed like everyone had one. Over time, however—again, be-

cause of rising gasoline prices and other environmental issues—SUV pur-

chases declined, and a new type of transportation emerged called hybrid

cars.

• Read, read, read. Read as much as you can: newspapers, magazines, local

real estate magazines, and so on. And vary the sources and subject matter.

What do I mean by “varied”? Every so often, read something different, a

newspaper or periodical that you normally wouldn’t read. As well, do a little

Web surfing. What are people discussing on blogs in your community? What

new Web sites are popping up on housing, community life, and other related

topics? The more that you can broaden the information you take in, the more

you can begin to see emerging trends and other issues. This is known, gener-

ally, as “connecting the dots.” Become a dot-connector.

• Listen, listen, listen. Get out in the world, and then listen to people. What

are they doing differently? What are thinking about doing differently? What

are they interested in? Excited about? Fed up with? Your friends, family,

neighbors, and business colleagues are a fantastic wealth of information re-

garding what’s going on in the world. Ask questions, then listen to them.

Demographics

A ﬁnal part of your property analysis should be demographics, or statistical

data about a particular population, such as the people in the city in which you

want to invest. Demographic research provides a snapshot of population, in-

come, industries, biggest employers, and other economic details for a particular

city or area.

Demographic information can be found at libraries, city and county govern-

ment ofﬁces, and of course the Internet offers an abundance of demographic

information. Suggested Web sites to locate demographic information include:

• www.freedemographics.com

• http://realestate.yahoo.com/Neighborhoods

• http://realestate.yahoo.com/Homevalues

ROBERT KIYOSAKI 195

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 195

196 THE REAL BOOK OF REAL ESTATE

• www.elook.org

• www.economy.com (fee site)

• www.city-data.com

• http://quickfacts.census.gove/qfd/

Demographics That Favor Investing

hen reviewing demographic information and trends, watch for these charac-

teristics that are generally favorable for investing in a particular property:

• More females than males (females tend to “nest”)

• Higher percentage of singles vs. married (singles rent apartments)

• Higher percentage of younger and older people versus middle-age (middle-age

people buy homes).

• Annual income at or lower than $40,000 (home prices push them to rent apart-

ments)

•The stability and profitability of the area’s largest employer

Key information you also want to review regarding the property’s physical

location include the following:

• How close is it to public transportation?

• What’s the city’s plan for that particular area?

• How close is it to a park?

• How close is it to a school?

• How close is it to shopping and restaurants?

Finally, you should ask yourself a simple question:

Do you want to invest in this area?

Key Success Principle: Have a Great Team

As my wife, Diana, and I began to acquire what become more than twenty cash-

ﬂowing properties in San Francisco, we eventually put together a team to begin

tackling larger problems. Our most successful team consisted of attorney Eliz-

abeth Erhardt, who specializes in evictions, and Sia Tahbazof, whose engineer-

ing and architectural brilliance could always see the intrinsic value that others

often could not see on adding value to a property. Diana and I would buy build-

ings in San Francisco with brick foundations or with difﬁcult tenants paying

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 196

very low rents under rent control, and we would quickly pull the trigger and

close the deal. Our goal was to add value by completely remodeling all the build-

ings we purchased. Liz would negotiate deals with the tenants, and Sia would

get all our plans quickly through the planning process. On most of our projects

we used a 1031 Exchange to acquire larger properties and others we rented.

They all cash-ﬂowed, but what was even better was that for most of the prop-

erties the value tripled and not because the market went up or down.

Here’s an important point: The relationship we had with our team was far

more important than all of the money we ever made. There will never be a deal

that is more important than the relationships. Today, Liz Erhardt is one of San

Francisco’s top attorneys regarding tenant/landlord issues. We are still very

good friends; she will take my call and we go on and on about our “war stories”

from the trenches ﬁfteen years ago. Sia Tahbazof is semi-retired and works only

on his own projects these days, but we are still very good friends. To this day

Diana and I work exclusively with Sia Consulting Engineering on our local

projects.

The relationship we had with our team was far more important than all

of the money we ever made. There will never be a deal that is more important

than the relationships.

I believe a large part of our success as a team was based on the saying, “Every-

one stay in their lane.” (I remember running anchor at the Penn State relays in

middle school and the track coach always saying, “Stay in your lane!”) Staying

in your lane shortens the race. Curtis’s lane was to be in charge of the demo

and rough work, and Diana’s was in charge of the ﬁnishes; Liz was in charge of

tenants; and Sia was engineering, design, plans, and the city’s approval.

Always be thinking about how you can build the best team possible to support

both your short- and long-term efforts.

I believe a large part of our success as a team was based on the saying

“Everyone stay in their lane” because staying in your lane shortens the race.

Problems... or Opportunities

If you resolve to become a problem solver, your chances of success in real estate

investing will dramatically increase. The key question then becomes: What is

your tolerance for problems?

TIP

ROBERT KIYOSAKI 197

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 197

You see, opportunities are never easy. Problems, challenges, and setbacks al-

most always occur. Those who shy away from the hard work needed to embrace

opportunities fail. Over the years I’ve had friends and acquaintances come to

me wanting to partner with me on various real estate projects. Often they back

out. Why? It’s like a rope strung across the two sides of the Grand Canyon.

They see a tightrope; I see a bridge.

What can we do to strengthen our faith so that we can embrace and overcome

more problems? That answer is easy. Take more chances. Truly successful peo-

ple pursue opportunities based on faith. They don’t let fear get in their way.

Successful people—the Donald Trumps of the world, for example—also are con-

stantly strengthening their faith. They are admitting their fears but pursuing

opportunities anyway. When we let fear rule our lives, we don’t take chances.

When we live by faith, we pursue opportunities and take controlled risks.

When I was younger, I left my government job, where I was earning $60,000

a year, to become a real estate agent and investor. I was excited. I had recently

read Napoleon Hill’s Think and Grow Rich and was ready to set the world on

ﬁre—and to do so immediately. But things didn’t happen so quickly. In fact, for

several months, no opportunities materialized. Zero, none, nada. My savings

began to dwindle. And then do you know what happened? My mind, which had

been positive and focused on possibilities, began to worry. My dreams turned—

mentally—from delights to disasters.

Eventually I overcame this initial slow time, and my investing took off. Only

those who have the courage and the tenacity to never give up in the face of set-

backs and other obstacles will achieve success.

Success then isn’t a straight line; it’s a series of starts and stops, two steps

forward, and then one step back. Here’s what I thought success would look

like:

198 THE REAL BOOK OF REAL ESTATE

FIGURE 10.1 What I Thought Success Would Look Like

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 198

And here is what it actually did look like:

Only those who have the courage and the tenacity to never give up

in the face of setbacks and other obstacles

will achieve success.

If you have the patience to pursue and overcome problems, your chances for

real estate successes will skyrocket. Remember your mantra:

Proﬁt from Problems

You see, I believe that this concept of adding value to real estate can carry

over into your life in many, many other ways. For example, too often I see and

meet people who are focused on making less of other people or things. Instead,

I want to encourage you to make more of every person you come in contact

with. Avoid labels; there’s no real right and wrong, just different points of view.

Regardless of where you are in life right now, you can make the decision to

reach up and out in your life and help others do the same.

Curtis Oakes has been a top-performing realtor for Coldwell Banker in

San Francisco for more than two decades, placing him in the top 3 percent

of all Coldwell Banker agents nationwide. In 1994, Curtis and his wife

formed the Oakes Group, specializing in San Francisco Bay Area real estate

sales, investment, and development. His passion for helping others has

permeated his real estate practice, and he’s helped countless individuals

realize their dream of home ownership and investment property acquisition. Through his pro-

prietary Oakes Group Mentoring Program, he teaches wealth building through real estate.

TIP

ROBERT KIYOSAKI 199

FIGURE 10.2 What the Path to Success Really Looks Like

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 199

have known John for more than thirty years. He and I were both Marine Corps

ofﬁcers and played on the same rugby team in Hawai’i. He is known as the

Burger King of Hawai’i because he brought the franchise to the islands. Although

he no longer owns the franchise, having sold it a number of years ago for a stunning

proﬁt, he is still known as the Burger King of Hawai’i because the name ﬁts. John

is the king of using fast food franchises to acquire priceless real estate.

In my book Rich Dad Poor Dad I wrote about Ray Kroc, the person who made

McDonald’s famous and built it into a multibillion-dollar enterprise. In the book,

Ray asks a group of students from the University of Texas, “What business am I

in?” The response from the students was, “You’re in the hamburger business.” Ray

shook his head and said, “No, I’m in the real estate business.” Today, McDonald’s

owns the most expensive real estate in the world. Ray’s formula was to use a Mc-

Donald’s franchise to pay for the real estate.

John, the Burger King of Hawai’i, uses the same formula, the formula of using

a business to buy property. I too use the same formula today. Today my apartment

house business, ﬁtness club business, and ofﬁce rental business pay for my real es-

tate. It is a formula used all over the world. The formula of your business buys

your real estate.

—Robert Kiyosaki

11 John FINNEY

Analyzing the Deal, or

Adventures in Real Estate

200

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 200

ROBERT KIYOSAKI 201

have always been intrigued by the acquisition, ownership, and sale of real

estate. For the majority of my professional life I’ve been advising people and

making personal decisions about whether or not I should acquire real estate,

how to acquire a particular piece of real estate, and ﬁnally whether to sell it,

develop it, or simply hold it. That means as a practicing attorney and a private

investor, I’ve reviewed hundreds of real estate transactions with a “stop or go”

decision point. And the projects are varied. I have developed and sold ofﬁce

and residential condominiums (small and large); acquired and operated ranches

and farms; developed and operated warehouse complexes; and ﬁnanced, de-

veloped, and reﬁnanced myriad other real estate–related business ventures.

However, my principal focus today and over the last forty years has been the

consistent ﬁnancing, development, and operation of quick-serve (fast-food)

restaurants and convenience stores under franchise agreements with national

franchise companies. It’s fascinating work acquiring sites and handling the ﬁ-

nancing and development of those properties. It’s also been fascinating to own,

operate, and sell nearly one hundred of these quick-serve establishments over

these past forty years. My efforts have taken me all over the western United

States, Guam, Hawai’i, and Russia.

With this kind of background, analyzing deals has become second nature.

And that’s what this chapter is all about: “Analyzing the Deal” as it relates to

the intelligent acquisition and operation of fast-food restaurants, convenience

stores, and related franchise businesses. However, don’t be mistaken that the

principles set out here will apply only to quick-serve restaurants and conven-

ience stores. That couldn’t be further from the truth. The principles here are

fundamental and will apply to entrepreneurial ventures of all kinds, particularly

if they involve real estate.

Time and again, having a law background has helped when it comes to ana-

lyzing the deal at hand. But the true tempering of my deal-related judgment

comes from my involvement in building and operating fast-food companies in

Hawai’i, Guam, Nevada, Colorado, and Russia. The scope of my experience in-

cludes the location, ﬁnancing, development, and operation of Burger King

restaurants, Carl’s Jr. restaurants, El Pollo Loco restaurants, Subway sandwich

restaurants, Circle K convenience stores, and 76 gas stations, among others.

This involvement in franchise deals has necessarily brought me in direct contact

with major national brand franchisors with whom I have had extensive negoti-

ations. Most of these franchise opportunities have proved successful, but there

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 201

were a couple of spectacular exceptions, which I will get into later. In every

case my experience in analyzing the deal at the outset proved to be a key to

success or failure.

In this chapter, I will set out the principles that you can use in your own

pursuit of workable, proﬁtable real estate deals that meet your expectations. I

am always suspect of people who talk only of their successes but not of their

failures. The reality, as you and I know, is that no business endeavor is perfect.

Heartache and despair happen from time to time. That’s par for the course for

someone who is truly driven by and committed to success. So don’t expect all

blue sky success stories; I will share with you some signiﬁcant failures I have

experienced as well. They were important learning opportunities for me, teach-

ing me lasting lessons about this ﬁeld. I know they will be important for you,

too, because in most cases these costly mistakes resulted from my failure to an-

alyze the deal correctly at the outset.

My goal is to provide you with a basic construct to direct your analysis of

real estate and other deals, and to aid you in making intelligent stop-and-go de-

cisions concerning these deals. It’s critical to put some meat on these “bones of

wisdom” so that you will be able to address any deal presented to you with

practical and useful guidelines. These guidelines to intelligent deal analysis are

particularly relevant in a tough economic climate, but they are also foundational

and have stood and will continue to stand the test of time.

The Real World of Me

At the very outset of any deal consideration, one needs to engage in some serious

introspection. Is this deal ( job, purchase, career, etc.) what you really want or

need? Does your self image allow you to be passionate about the basic endeavor

you are considering? Does the deal with its projected result produce the kind

of monetary and emotional return you are looking for? Does “doing” the deal

involve a sacriﬁce of time and/or require relocation, thereby effectively pre-

venting you from pursuing more important life goals such as good and involved

parenting, active and healthy lifestyle choices, team sports activity, church or

civic leadership, continued or advanced formal education, personal relation-

ships, or living in a safe and attractive home environment. In other words, if

doing the deal, no matter how successful, will make your life or your family’s

life miserable, then keep moving. It’s not for you.

202 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 202

You don’t need to do the first deal you see, nor do you need to pursue

every deal that seems halfway good or reasonable. Wait for the deal to come

down the track that is really for you.

My former partner, Robert Pulley, used to frequently say that deals are like

streetcars since there’s always another one coming down the track. Over time I

have come to realize how true this postulate is. I used to pursue to thoughtful

decision almost every deal that came across my desk regardless of what it was,

where it was, or what it cost. By allowing my curiosity to take charge, I spent

too much time spinning my wheels rather than focusing on realities. That cu-

riosity and arrogance concerning my personal entrepreneurial capacity (I

thought I could ﬁnance and manage anything) got me into some bad business

spots, literally and ﬁguratively. My experiences in Russia and in the nightclub

and cemetery businesses (discussed later) represent painful memories that have

stayed with me.

The fact is, you don’t need to close on the ﬁrst deal you see, nor do you need

to pursue every deal that seems halfway good or reasonable. Wait for the deal

to come down the track that is right for you. Your time is your most valuable as-

set, so spend it wisely. Let the obvious impracticalities of any deal you consider

speak to you loudly. This is true no matter how apparently lucrative any deal

may seem. Just because the latest and seemingly hottest franchise deal is avail-

able in your city doesn’t mean that it’s right for you. If ﬂipping hamburgers in

Detroit, selling cemetery plots in Guam, or polishing cars, creating signs and

banners, or teaching math to preteens doesn’t really ﬁt you or create a passion

within you to succeed, don’t do it. Just fold up your cards and wait for a new

hand to be dealt. Don’t let your current circumstances, no matter how unsatis-

fying, chase you into a situation where you will work harder, go into debt, and

actually lose money doing something you hate.

The Real World of Me

• Engage in serious introspection.

• Ask yourself: Will doing the deal prevent me from achieving my personal life goals?

• Deals are like streetcars since there’s always another one coming down the track.

• If the deal doesn’t fit, don’t submit!

TIP

ROBERT KIYOSAKI 203

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 203

Spend some quality time on “the real world of me” before you invest your

time chasing a deal that just doesn’t suit you or takes you to places that will ul-

timately make you unhappy, even if you are successful.

Will the Dogs Like It?

You’ve taken the time to be introspective; it’s now time to look hard at the deal

that’s in front of you. You know, the one that looks, smells, and feels right for

you.

A very astute Hawai’i-based Chinese businessman, whom I had the pleasure

to work with in my early legal career, used to have a favorite saying to charac-

terize any deal. He applied this saying to the many, many deals he considered.

He would pause after reviewing the deal situation and ask, “But will the dogs

like it?”

He meant that if a deal looks good, is workable, is affordable, and is in a good

location, then the customers (tenants, purchasers, etc.) still have to show up to

make it happen. He insisted at the outset that just because something may look

right to you, it may not be quite so right to the man or woman on the street. You

and your wife (partner, friend, banker, college business professor, etc.) might

think you have the newest take on sliced bread; however, you must take off the

rose-tinted glasses and look at the deal high and low. In other words, strive for

total objectivity in your deal analysis.

Just because something may look right to you, it may not be quite so

right to the man or woman on the street.

A couple of deals from my past point out the usefulness of being truly objec-

tive. In 1977, my partner, Robert Pulley, and I opened the ﬁrst Burger King

restaurant in the state of Hawai’i, right across the street from a busy and well-

located McDonald’s restaurant. At that time in Hawai’i, McDonald’s was pretty

much the whole ballgame in terms of branded quick-serve hamburgers. After

sampling Burger King’s food and visiting existing Burger King restaurants on

the mainland, we both agreed that the concept would work well in the Islands.

And, even before we opened in Honolulu, we had customers banging on our

restaurant doors to get in while we were still obviously under construction. We

realized that we had a real winner on our hands. The “dogs” really liked our

hamburgers. We set ﬁrst day, ﬁrst week, and ﬁrst month sales records for gross

sales for the entire Burger King chain. In fact, our drive-through service lane

TIP

204 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 204

routinely ﬁlled up and cars backed up on the very busy Beretania Street for

more than a mile. We had to hire off-duty policemen to control and direct trafﬁc

for seven months before we got things under control.

Our customers fell in love with Burger King. We had a very good product

that was absolutely unique to Hawai’i at that time. There was a pent-up demand

for fast-food hamburgers other than McDonald’s hamburgers. To my partner’s

credit, we obtained a “bulletproof” location right across from a key competitor

that we knew was very successful. And, we delivered good food fast. We had

analyzed the deal objectively based on good information. In fact, as it turned

out, we underestimated how much the dogs would like it.

On the other hand, I had the opposite experience with the introduction of

the El Pollo Loco restaurant chain into Hawai’i some years later. I, along with

my key employees, had eaten at El Pollo Loco in Southern California. The El

Pollo Loco concept essentially involves charbroiling fresh and big fryer chickens

to golden brown and serving the charbroiled chicken with tortillas, beans, and

rice. The “dogs” really liked this product in Southern California where there is

a strong Hispanic tradition. People there of all types are quite familiar with

tacos, tamales, and tortillas, and fajitas. They viewed El Pollo Loco as a good

Mexican food concept and made it very popular.

In addition to knowing the food was good and popular (in Southern Califor-

nia at least), we had the money and expertise to develop the chain in premier

locations in Hawai’i. So we obtained the area franchise, and with the success of

Burger King in Hawai’i encouraging us, we felt sure we could create another

major quick-serve restaurant success. We opened two El Pollo Loco locations

at about the same time. Imagine our disappointment when we found that the

dogs didn’t like the product in Hawai’i. Imagine our ﬁnancial losses.

The El Pollo Loco concept depended on some customer familiarity with

Mexican food preparation and service. What seemed routine in terms of Mexi-

can food service to Southern Californians mystiﬁed many (if not most) of our

good Hawaiian customers. The concept involved the simple act of pulling the

chicken meat off the half-chicken serving and wrapping it in a warm tortilla

with beans, rice, and salsa, thereby creating a world-class chicken fajita. In

Hawai’i, the customers did not combine the ingredients (despite clever and in-

structive graphics on every table and menu); they typically ate the chicken serv-

ing, which was delicious, picked at the rice and beans, and threw the beautiful,

warm ﬂour tortillas away. We were stunned.

There was already huli-huli (ﬂame-broiled) chicken all over the island of

Oahu, which was a popular and long-standing fund-raising vehicle. Typically,

ROBERT KIYOSAKI 205

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 205

community groups involved in fund-raising would set up huli-huli wagons in

parking lots on weekends at several locations on the island. They would build

charcoal ﬁres in the huli-huli wagons and proceed to prepare and sell tasty

ﬂame-broiled chickens (whole and halves) to the public at relatively inexpensive

prices. So in addition to our customer’s failure to grasp the El Pollo Loco concept,

we had a serious competitor that we never considered until it was too late.

Will the Dogs Like It?

• Is the product something that you would personally buy at the likely asking price?

• Is the product unique or better than the comparable products sold by competitors?

• Is the product too complicated or too much trouble for your customers?

• Take off your rose-tinted deal glasses and look at the relevant market objectively.

Without the customers’ grasp of the chicken fajita preparation, the El Pollo

Loco chicken was simply good chicken. It wasn’t really very unique, and it was

pretty expensive compared to huli-huli chicken. We actually didn’t fail com-

pletely, but our losses forced us to sell out to Kentucky Fried Chicken. KFC

wanted to get rid of El Pollo Loco on the Islands, and our modest success was

hurting their business. So we took the easy way out with a lesson well learned.

Garbage In, Garbage Out

Projected ﬁnancial results, as you can imagine, are the primary concern in ana-

lyzing any deal, and when it comes to the numbers it’s garbage in, garbage out.

Essentially, if your sales projections or your cost projections are bad going in,

the resulting projected bottom line (proﬁt and cash ﬂow) numbers are not only

unreliable but outright dangerous to your ﬁnancial well-being.

Up until now, everything we have discussed has been preparatory to real

deal focus. Now it’s time to get to the heart of our task. As you’ve seen, the

numbers aren’t the only consideration, but they certainly are most critical to

the stop-or-go deal decision. With my focus on the development of franchise

deals, I often had access to very reliable historical sales data from other fran-

chise operations in comparable demographic areas. Typical numbers relating

to fast-food operations, convenience stores, gas stations, and other similar op-

erations are often made available to the prospective franchisees in the manda-

206 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 206

tory disclosure document that each prospective franchisee must receive under

the Uniform Franchise Act enacted in most states. These “pro forma” (pro-

jected) numbers are useful in analyzing the deal—and other deals involving the

same or similar product delivery—in most franchise opportunities.

Of course, using pro forma numbers to analyze a potential deal amounts to,

at best, intelligent guesswork. In every case, one has to massage these pro forma

numbers to ﬁt the situation at hand. The pricing construct has to be adjusted

up or down to ﬁt the intended location. Additionally, an equally important con-

cern is to evaluate the relevant market (assuming the dogs like the product) to

arrive at reasonable projected transaction counts and customer counts.

Counting “heads” is the ﬁrst step in evaluating a fast-food location. I have

spent many hours personally counting every vehicle passing by my target loca-

tion. In tourist locations, I often count the people who walk by every hour in

high- and low-trafﬁc periods. Getting a good handle on real numbers of poten-

tial customers who have direct exposure to your location is really chapter one

in the sales number guessing book. So don’t skip actually doing a thorough, re-

alistic head count or trafﬁc count.

Of course, what your closest and most relevant competitor is actually achiev-

ing in gross sales is also absolutely key to your analysis of projected gross sales.

And if you don’t have a close competitor you are either really lucky or more of-

ten than not, in the wrong location altogether. I don’t care how you get these

competitor numbers, but you must get them. This sales data can often be dis-

covered through a review of public tax ﬁlings (i.e., gross excise tax data) or by

simply interviewing your competitor’s former employees or managers. You

might want to hire them anyway, so you certainly can interview them. In sum-

mary, you must get solid and realistic projected gross sales numbers to avoid

creating garbage in, garbage out projections.

Projected sales are only half the story. Projected expenses are equally im-

portant when it comes to developing usable bottom-line projections. Projected

expenses can almost always be estimated reasonably with hard work. We are

fortunate in the United States to have the remarkably efﬁcient distribution of

goods and services at comparable and fair pricing (assuming you pay your bills

on time). With the exception of utility costs and gas, which historically can

make dramatic moves to the upside, your costs for food, paper, products, pro-

duce, and people tend to be relatively stable. In quick-serve restaurants, gas

stations, and convenience stores, you can move your pricing daily if necessary

so you can preserve your proﬁt margins as costs move up. Of course, you are

ROBERT KIYOSAKI 207

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 207

always limited by the competitive atmosphere, but given a product or products

the dogs like, reasonable pricing, and a good location, you can come up with

projected ﬁnancial results that are sensible enough to make a deal decision.

If you have hit your mark in projecting future gross sales and have a good

understanding of your expenses, you should be able to derive some fairly good

and usable guesses at cash ﬂow and proﬁtability numbers. When I have really

done my homework, I have been able to avoid the garbage in, garbage out syn-

drome that turns business projections into birdcage lining. When I didn’t do

the work of counting vehicles and heads, or failed to research the success or

failure of my closest competitors, my deal analysis was faulty. If I failed to be

diligent in projecting reliable expense numbers, I had garbage or unrealistic

expense numbers to factor into my proﬁtability formula. Sometimes I got lucky

and things turned out better than I had hoped for. However, you can’t rely on

luck and the mistakes that are burned into my brain resulted from overly ag-

gressive sales projections and garbage out at the projected bottom line.

When I have really done my homework, I have been able to avoid

the garbage in, garbage out syndrome that turns business projections into

birdcage lining.

Years ago, I along with my partner, Robert Pulley, built a Burger King restau-

rant in the heart of Waikiki in Honolulu, Hawai’i. Although the site was on the

ground ﬂoor in the front of the popular Kings Village shopping center, the actual

walk-by trafﬁc seemed a little thin for this very expensive location. However,

one-half block away on Waikiki Beach were absolute throngs of tourists, mostly

milling about at the popular corner of Liliuokalani and Kalakaua avenues. My

personal tourist head count revealed several thousand potential customers pass-

ing through this adjacent and very popular intersection every hour.

The downside of this location was that the view from this key corner to my

target restaurant site was largely blocked by a ticket and information booth. A

bad deal! So if I was going to choose this site, I’d have to adjust my sales projec-

tions way down. After all, they were based on actual walk-by trafﬁc at the time.

The obstruction by the ticket booth meant there was nothing to draw customers

our way from that busy corner. My partner and I fortunately engaged in some

“what-if” analysis before passing on this potentially great site. Our conclusion

was that if we could create unobstructed sight-line visibility from this major

tourist corner to our site, the deal would work. So I made a last-minute potential

“deal-breaker” demand to the landlord that the offending ticket booth be re-

TIP

208 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 208

moved to clear up the sight line. Fortunately, the landlord agreed. They wanted

us in the center. So we ended up with probably the most successful quick-serve

restaurant I have ever built. The dogs liked us, now they could see us, and there

were plenty of dogs! Our ﬁrst-year sales were more than $2.7 million out of less

than twenty-seven hundred square feet. These are hall of fame numbers for

fast food.

On the other hand, I once developed a cemetery on a parcel of land that my

then partner, Bernard Bays—also a contributor in this book—and I had acquired

to develop high-end residential condominiums. How did a parcel of land go

from high-end condos to burial plots? Simple answer: Hurricane Iniki and an-

cient but unmarked graves on the property. As you can well imagine, everyone

I knew razzed me with the old joke, “Hey John, I hear people are dying to get

into your new project.” Yeah, wrong kind of dying. All joking aside, the gross

sales potential on paper from any new cemetery is just phenomenal. Anytime

you can convert, as an example, six acres into six thousand saleable grave plots

in a major metro area, your potential ultimate sellout can be as high as $15 to

$20 million! Since our land was already paid for, I had only to face cemetery

approval and development costs, which I had a pretty good handle on. So I con-

structed some very elaborate and detailed sales and cash-ﬂow projections that

convinced Bays, myself, and several of our associates that we had a winner in-

deed, even if it wasn’t via condo development. The cash ﬂow-to-cost ratio was

very favorable on what seemed to be ultimately reasonable sales projections.

Our deal analysis looked really good, but it was very wrong.

Unfortunately, I grossly overestimated how quickly people would buy burial

plots in the cemetery. We had originally built the cemetery with the thought of

selling it to a major company involved in the funeral home/cemetery business.

In fact, we had a basic agreement that this company would run the cemetery

and ultimately buy the operation and property at a price yielding a substantial

proﬁt to our group. So, even though we really had no experience actually oper-

ating a cemetery, we proceeded to develop it anyway. We wrongly assumed that

our deal to sell to the pros would go through before we actually had to operate

the cemetery business. The projected cash ﬂow made us conﬁdent of closing

such a sale. Unfortunately, our prospective buyers went into bankruptcy a short

time after completion of the cemetery. There I was a fast food impresario, taking

over cemetery operations.

I was stuck with the job as head “cemeterian,” which I knew little about and

greatly disliked. I soldiered ahead because our projected numbers still looked

terriﬁc. We still had millions of dollars in unsold inventory already paid for and

ROBERT KIYOSAKI 209

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 209

210 THE REAL BOOK OF REAL ESTATE

waiting to be sold. I just didn’t ﬁgure that it might take my lifetime to sell this

inventory. Talk about garbage in, garbage out. I would likely be buried in this

cemetery, and there still would be more than half the plots left to sell!

Many years later after investing countless and thankless hours learning about

and actually running the cemetery, I ﬁnally ended up selling it at a loss. My

partners and I are now much older and wiser. My projections of cemetery plot

sales were based on selling signiﬁcant numbers of plots from the get-go. We

did ﬁnally begin to see signiﬁcant sales of plots every month. However, this

sales tempo took years to achieve. What I did not factor into my projected plot

sales was the essential attribute of “heritage,” which every new cemetery must

gain slowly if at all before signiﬁcant plot sales can be achieved. This is particu-

larly true in smaller cities with more limited population bases.

The simple truth is that it is hard to get families to bury their deceased loved

ones in new places. If aunty and uncle are buried in the public cemetery, the rest

of the family will also likely want to be interred there no matter how “seedy” the

old town cemetery has become. People will come to a new cemetery, but it takes

time. They are dying to get in but just not fast enough at a new cemetery. So my

decision to proceed to build a cemetery was driven by sales projections that

were honestly derived but simply too aggressive for this kind of business. This

was particularly true since we lost our major cemetery consolidator/operator at

the very outset. My deal analysis was faulty because of overly aggressive “gar -

bage” sales projections.

Garbage In, Garbage Out

• Access and use sales numbers from the best sources available (franchisor stan-

dard disclosures and competitor numbers, for example)

• Count the “heads” and/or traffic personally

• Do your homework when you work up expense projections

• Ask the “what-if” question before passing on a deal

• If you build it to sell, you better have a “bulletproof” buyer

Build It and They Will Come (or Not)

Now that I have discussed some practical concerns that will prepare you for

getting into a deal and shared some stories and my opinion about the relevance

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 210

of numbers to every deal, it’s time to focus on the question of location. Although

I have related most of my discussion to quick-serve restaurants, convenience

stores, and related businesses, the location question is central to analyzing any

real estate deal.

It is often said that the three most important aspects of any real estate deal

are location, location, and location. This is true, true, and true in any fast-food-

type deal, but it is also the compelling issue in most real estate deals. Certainly,

it is the central issue in the real estate deals I am referring to in this chapter.

Choosing the right locations for fast-food, quick-serve, gas, and convenience

store businesses becomes an art after you have done it time and again and en-

joyed success and experienced failures. I discussed above in the numbers analy-

sis section the importance of counting heads and checking competitors’ sales. I

also stressed that the visibility of any site is a key part of this location issue.

And ﬁnally I emphasized being in an area where the demographics support

your product, where it is both needed and wanted by the people. Remember,

will the dogs like it? For as simple as those concepts seem, be assured that you

cannot properly analyze any real estate deal involving commercial sales to the

public without paying close attention to these basic principles of site selection.

Take it from someone who has learned these lessons the hard way.

In most cases, the location you want and are sure of is easy to ﬁgure out but

is unavailable because of zoning, expense, public ownership, size (too big to af-

ford or too small to be workable), and/or access. The locations that are available

often are available because no one wants them or can afford them. This is espe-

cially true in major metro areas. If the site is available, you’d better go slow be-

cause usually there is something wrong with it. Never assume your competitors

are dumb or lazy. Proceed with caution or you will build the perfect store and

nobody will come.

I can’t tell you how many times I have fortunately passed on real estate deals

that were just about right, meaning just about in a great location, but were

slightly off for one reason or another. Maybe the site was just interior from the

key dominant corner or was in a perfect corner location but on the second ﬂoor

or down a half-ﬂight of stairs. Or the site was blocked by a huge banyan tree,

ticket booth, adjacent building, or some other obstruction so you couldn’t see it

from the “coming home” side of the road. I will assure you that you can’t build

or manage your way out of a poor location, no matter how hard you try or how

much you spend. I refer here to my area of expertise involving quick-serve

restaurants and convenience/gas facilities; however, I believe this location issue

is at the heart of every deal that involves sales to the general public.

ROBERT KIYOSAKI 211

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 211

You can’t build or manage your way out of a poor location, no matter

how hard you try or how much you spend.

Aside from location visibility, access for your customers is another important

consideration. I have thankfully passed on a number of sites that seemed per-

fectly located but suffered from limited access because of trafﬁc, trafﬁc controls,

or limited parking. If it’s not convenient the “dogs” will pass on by to someplace

that’s easier to deal with. So, if you build on a location that your customers can’t

get to, they won’t come.

My partner, Robert Pulley, and I had some fantastic successes by securing

locations that were seemingly unavailable or unattainable for our quick-serve

hamburger restaurants. I mentioned above the Waikiki location with the prob-

lematic ticket booth. Once we got rid of this visual impairment we had an ab-

solute grade “A” location. We had many other successes that I like to think

were enabled by creative thinking and action.

When I was looking for deals that would compete favorably with my number-

one competitor, McDonald’s, I had to be creative since this competitor had seem-

ingly tied up all the available, really good locations. I always laughed when a

real estate broker would tell me that I was ahead of McDonald’s on any particular

site or that I was being offered the site ﬁrst. I assumed, usually with complete

accuracy, that any site McDonald’s wanted in my city would end up in their

hands no matter who else was interested. They were deﬁnitely the “big kahuna”

in my development area, and they usually got the ﬁrst right of refusal on any

newly available sites. I guess it’s good to be the real boss.

So I, along with my partner, had to think creatively if we were going to grow

and succeed. Our deal analysis on sites had to be not only accurate but innova-

tive. This creative mind-set led us to open the ﬁrst nationally branded fast-food

outlet ever in a U.S. military installation at the Navy Exchange at Pearl Harbor,

Hawai’i. (We lost this location some years later when we sold out to a Japanese

company, but that is another story.) We opened, with great success, the ﬁrst

fast-food restaurant with a partner in the Honolulu International Airport, and

we opened the ﬁrst national fast-food franchise operation in a Hawai’i public

park at Ala Moana park in downtown Honolulu. We actually retroﬁtted part of

a YMCA building to create a Burger King restaurant next to the University of

Hawai’i, which was another ﬁrst.

We deﬁnitely had to be creative in our site selection to survive and grow our

company. We actually built ﬁve or more of the most successful restaurants in

TIP

212 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 212

ROBERT KIYOSAKI 213

terms of sales volume in the history of quick-serve restaurants. In every case,

the successful location was equal or superior to our competitors’ locations or

was uniquely situated to avoid any competition. In every case, the location was

the key to our success. Our deal analysis was spot-on in these unique locations.

However, I would be less than honest if I didn’t tell you about a couple of

bad experiences I’ve had because of poor site selection. By that I mean, I built

it and they didn’t come. The ﬁrst example involved building a very fancy and

expensive Burger King restaurant on the ground ﬂoor of a high-end residential

condominium that my partner had developed in Waikiki. Honestly, my site

(deal) analysis was skewed by the ready availability of this commercial site,

which my partner had in his back pocket as the condominium developer. What

I didn’t see were some major problems with this “captive site,” although it was

located on a busy Waikiki corner. First, the dogs didn’t like it. The homeowners

were less than enamored by a fast-food hamburger restaurant at the entrance

to their new, exclusive, and expensive condominium complex. To add further

insult, a fellow high-end restaurant tenant sued to stop our restaurant’s con-

struction as a violation of his exclusivity clause. But the real oversight in our

deal analysis was that our location was on the busy corner but one-half ﬂoor

below street grade. The walk-by trafﬁc didn’t seem to ﬁnd our location because

it was below their sight line. A ﬁnal straw was that, even though there were

hundreds of cars passing by every hour, there was no parking.

Here’s a lesson I learned that is for everyone: If you are in the convenience

food/store business you had better be convenient and readily accessible. I have

never had much success in this quick-serve/convenience area when I locate

below or above street level. So in analyzing site locations, don’t count on too

much tenacity or insight on the part of your customers—they just don’t care

that much.

In analyzing site locations don’t count on too much tenacity or insight

on the part of your customers—they just don’t care that much.

My experience in developing, owning, and operating a nightclub was equally

painful. In this instance, a close personal friend, Robert Mardian Jr., had given

me some solid advice against building this club on the Big Island of Hawai’i. He

was in the club business there, as well, and knew the ropes. Unfortunately, I ig-

nored that good advice and proceeded with the nightclub development. My

reason for going forward was simply that I had space in a warehouse complex

TIP

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 213

that I owned, which had already been substantially built out as a nightclub at

great expense. I recaptured the space after my tenant defaulted (that should

have been my ﬁrst clue), and I decided the best idea was to ﬁnish out the club

and operate it. So I spent hundreds of thousands of dollars building a state-of-

the-art nightclub that opened with considerable fanfare. Unfortunately, I soon

found out that, even if the dogs liked the club, they wouldn’t come if they

couldn’t ﬁnd it.

Another important and costly lesson I learned is that you can’t

turn a sow’s ear into a silk purse.

I had committed two major mistakes here concerning location. I had failed

to heed the clear and sound advice from a knowledgeable consultant who ad-

vised me that the club would fail because of location. Also, I should have

known that no matter how much money you spend, you cannot build yourself

out of a bad location. This just wasn’t appropriate space for a nightclub be-

cause it was in the back of an industrial warehouse that was off the beaten

track. People who actually wanted to come couldn’t find it. I used to joke that

people just needed to drive until they heard gunfire (this was a rough area

late at night). I ended up disliking the nightclub business as much as the ceme-

tery business.

By now I think you get it. Deals where the location is “bad, bad, and bad”

won’t work no matter what you do. We ﬁnally tore out the nightclub improve-

ments and returned it to warehouse use. The entire complex has been full since.

Another important and costly lesson I learned is that you can’t turn a sow’s ear

into a silk purse.

Build It and They Will Come (or Not)

• Location, location, location is true, true, and true.

• Count heads, review access and visibility, and check out the competition.

• If the site is readily available there is probably something wrong with it.

• Think “outside the box” to get unique locations.

• If you are in the convenience business you’d better be convenient.

• Seek out and listen to the experts.

• Don’t try to turn a sow’s ear into a silk purse.

TIP

214 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 214

Trouble with Travel

With any deal you are considering, you simply have to ask yourself, “Can I man-

age the deal effectively? If the deal is located more than one day’s travel from

your home, you’d better ask (and answer) some serious questions about your

personal span of control. You can’t manage the type of deals I have been dis-

cussing by staring at a computer. You need to be at the site at least weekly if you

are the majority partner. Or you’d better have a good, capable, and trustworthy

operator/partner.

And that leads to an important point. One of the most important considera-

tions in analyzing whether to proceed with any real estate deal or development

is the availability of good management. And usually the key to good management

is your personal involvement in the development and operation. Having good

partners can solve many of the concerns about good management; however, if

your own money is at risk in any deal it will require your personal attention.

The question then is whether realistically you will actually be able to devote

sufﬁcient time to a deal to make it successful.

One of the most important considerations in analyzing whether to

proceed with any real estate deal or development is the availability of good

management. And, usually that means you, with direct personal involvement

in the development and operation.

I have found if a deal or operation is located too far from my home base or is

difﬁcult to get to, I won’t pay enough personal oversight and attention to the

situation to ensure good management. I have also found that it is very rare to

see any deal run on its own without major problems. If I have to get on an air-

plane or drive several hours to a location, you are not going to see me very often.

It really amounts to the trouble with travel.

I once stretched the limit concerning my effective span of control by agreeing

to be a founding member of a company formed to develop Subway sandwich

restaurants in the old Soviet Union. Before we got the ﬁrst restaurant built, the

Soviet Union imploded, so we had to be satisﬁed with the nation of Russia with

only 300 million people or so. My major point here is that you don’t need to

travel to the other side of the world to ﬁnd trouble. You can usually ﬁnd plenty

of trouble right at home.

How I ever got involved in Soviet Subway restaurants is a story of seduction.

I was intoxicated by the sheer potential magnitude of a deal that involved an

TIP

ROBERT KIYOSAKI 215

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 215

entire nation, despite the fact that it happened to be Russia—a mere 12,500

miles from my home. The prevalent “kleptocracy” that seemed to be the domi-

nant ideology in the early nineties in Russia should have raised a cautionary

note in my Russia deal analysis. The fact that I would have very little to do with

day-to-day management of the restaurants should also have raised my personal

red ﬂag. Despite these serious road blocks to good deal formation, I along with

some other U.S. partners built the ﬁrst Subway sandwich restaurant in Russia

on Nevsky Prospect in St. Petersburg. It took some real creativity and out-of-

the-box thinking to build a workable and visible restaurant in a two-hundred-

year-old building.

The restaurant was a rousing success primarily because I sent one of my

very best partners from Hawai’i, Steve Brown, along with his wife, Roberta, to

build and run the Russian Subway operations. Of course, Steve was also enam-

ored with the prospect of owning part of the hundred or more Subway Restau-

rants we intended to build throughout Russia, so I am not entirely to blame for

disrupting his life. Shockingly, we were taking in wheelbarrow loads of rubles

(literally) and lots of hard currency (dollars, marks, etc.) from the very start of

operations in St. Petersburg. Under Steve’s management with some help from

me and the other three principals, we had one of the most successful Subway

sandwich restaurants in the world—for about three months.

After weeks of hard work and success, Steve and Roberta ﬁnally took a short

trip out of Russia to decompress, leaving one of our partners in charge as the

managing director, which was required by Russian corporate law. Call it confu-

sion about travel plans and return dates, but we had literally one day without a

so-called managing director in charge of operations in St. Petersburg. Our Russ-

ian partner, whom we took on at the outset of our plans because of his apparent

control over some key real estate and his political connections, chose that day

to make his move. He had been sitting on the sidelines as we operated for ninety

days without any active part in management. He expressed great frustration

that we were banking all our net receipts to pay start-up bills before making

any partner distributions. What we didn’t realize at the time, was that our part-

ner had some very bad characters who had control over him and were part of a

major Russian mob.

Under mob instructions (we think), he was waiting for his chance to gain

control over the restaurant as managing director. He seized that one day’s op-

portunity. When Steve Brown returned from Russia a day later he found our

Russian partner’s security people (formerly our security people, ex-KGB ap-

parently) in charge. They literally ran Steve out of the restaurant at gunpoint!

216 THE REAL BOOK OF REAL ESTATE

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 216

So we lost control of the restaurant

and the backing we had lined up to

build many more restaurants. And

our Russian “partner” soon ran the

existing restaurant into the ground.

Talk about a mess!

Despite the fact that our company

ﬁnally got the restaurant back years

later, we all lost most of our invest-

ment in this deal. Now we may ulti-

mately get back some of our money

as my old U.S. partners continue to

build Subway sandwich restaurants

through franchise agreements in Russia under the auspices of our former com-

pany. However, I have often reﬂected on my poor decision in getting involved in

a deal so far from home and on hazardous turf we knew little about. I can’t help

but repeat that you don’t need to travel halfway around the world to invest your

way into trouble; there are plenty of landmines to step on right here at home.

Deals Are Like Parachutes

So far, we’ve covered many of the considerations involved in analyzing and ne-

gotiating good deals. Now let’s discuss the importance of getting out of a bad or

marginal deal. Think of deals as if they were parachutes. If you’re freefalling or

sinking fast, you need to be able to pull the rip cord to save yourself and get out

of a deal that’s simply not working. That means ﬁrst and foremost, determine

whether you can negotiate an “out” clause in your initial deal analysis. If you

don’t succeed in obtaining this concession from the landlord/seller you may

want to pass on the deal.

When I ﬁrst started building restaurants, my partner and I routinely signed

personal guaranties on leases for long-term leasehold properties. We were reach-

ing to obtain the best real estate available and believed, in many cases correctly,

that we had no chance to obtain these superior sites without “kissing the paper,”

which is another way of saying signing personal guaranties. We ultimately

stopped doing this since a personal guaranty on a long-term lease is like a life

sentence. If the lease term is long enough you have to worry about whether the

lease rent is being paid for the rest of your life. This is especially true if you

have assigned this lease to someone else.

ROBERT KIYOSAKI 217

The Trouble With Travel

• The trouble with travel is that it

reduces your span of control.

• Will you actually go there after you

have built it?

• Deals don’t run on their own.

• Foreign countries are especially

dangerous turf.

• You don’t have to leave home to

find trouble.

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 217

Although we ultimately got our names off most of these guaranties when we

sold the restaurants and assigned these long-term leases, in some instances we

could not get releases because the landlords were just too tough. And, our

marker (guaranty) was called in a couple of times by landlords who we had no

dealings with for years. So, if a personal guaranty is demanded, you must care-

fully consider whether you want to accept this liability for the term of the lease

(or loan). This extra liability greatly burdens the beneﬁt of any potential deal

and should be factored into your deal decision making.

If a personal guaranty is demanded, you must carefully consider

whether you want to accept this liability for the term of the lease or loan—

a potential life sentence.

After a couple of bad experiences, I not only stopped giving my personal

guaranty on lease deals, but I began to insist on “rip cord” clauses to get out of

leases that proved to be for marginal locations. In most instances, landlords

met this demand for an “out” of a long-term real estate lease with stiff resistance

or refusal. My resolve to leave a par-

tially open door to get out of a bad

deal was equally strong. My negoti-

ating stance was to point out that I

would be fronting signiﬁcant im-

provement costs at the outset, which

I would not walk away from without

a really compelling reason. Some-

times I was able to negotiate only a

qualiﬁed release from my personal

guaranty, which was better than

nothing. For example, my personal

guaranty would go away after the rent had been paid for a short term of three

to ﬁve years or on payment of a lump sum. But I was always prepared to walk

away from deals that were just too tough in terms of personal guaranties or

long-term lock-ins.

Make My Day, Make My Life

At some point in every viable real estate deal you have the opportunity, or at

least the consideration, of whether or not to sell. In my experience, the decision

TIP

218 THE REAL BOOK OF REAL ESTATE

Deals Are Like

Parachutes

• A long-term personal guaranty can

amount to a “life-sentence.”

• Negotiate a “rip cord” clause in

long-term leases if possible.

• Be prepared to “walk” if terms are

too tough.

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 218

to sell or not to sell is usually an easy or obvious one. If the price is right, every-

thing is for sale. The analysis issue is which course of action—sale or retention—

will optimize the return from your deal. I have personally made some great

selling decisions and also some pretty bad decisions that irk me to this day.

Generally speaking, there are certain rules of thumb that are commonly used

in the sale of operating businesses. Of course, these rules can be warped in a

hundred different ways to accommodate the unique features of every different

deal. Fast-food restaurants often sell based on a ratio of annual (trailing twelve-

month) cash ﬂow. Six times annual cash ﬂow is generally considered at the

high-end while four-and-a-half times cash ﬂow is considered at the low-end of

selling prices for such operating businesses. And, my reference to cash-ﬂow re-

ally more correctly refers to earnings before interest, taxes, depreciation, and

amortization, or EBITDA. There are other variations of this cash-ﬂow acronym,

but this is the one I use.

There are certain rules of thumb that are commonly used in the

sale of operating businesses. Of course, these rules can be warped in

a hundred different ways to accommodate the unique features of every

different deal.

Of course, operating businesses are sold for all kinds of reasons and all kinds

of prices. I remember an old legend concerning the sale of a gas station/conve-

nience store. Essentially, the owner of this business was a sharp operator who

was trying to push the sales price beyond normal cash-ﬂow rules of thumb. So

every time a potential buyer was due to inspect the business, the owner would

dump trash around the buildings, leave the restrooms in a mess, and generally

present an untidy, dirty appearance about the business. Then when the buyer

showed up, the owner would take him aside and point out the seemingly obvious

fact that if someone would “just run the business properly” sales and proﬁts

would soar. It is also common for the owner/seller and spouse to add back to

the cash ﬂow their salaries (car allowance, expense account, etc.) to pump up

the cash ﬂow. This is true, even if the owner/seller and spouse are the very

heart of the business management and operation. Owners play all kinds of

games with the sale of operating businesses. More sophisticated buyers and

sellers will rely on industry norms concerning cash ﬂow and a real objective

analysis of the numbers to arrive at a price.

Robert Pulley and I sold our Burger King restaurants in Hawai’i at a price

that approached one times the gross sales, which probably doesn’t happen very

TIP

ROBERT KIYOSAKI 219

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 219

220 THE REAL BOOK OF REAL ESTATE

often. However, we had a business in the seemingly terriﬁc state of Hawai’i, we

had good management and good locations, and we had enthusiastic foreign

buyers. The analysis of whether to sell or not in our case was an easy yes. I have

sold restaurants at other times on the six-times cash ﬂow multiple, but I per-

sonally have not seen another deal with a price approaching parity with gross

sales.

Analyzing the deal in raw land sales, presuming one has staying power to

hold on to the land, relates basically to the greed factor. How much gain is

enough? There are no real rules of thumb concerning the sale of raw land or

development land. You need to make the hard decision of whether holding the

land or the further development of the land will justify holding costs. Of course,

these decisions to sell raw land are often driven by the owner’s inability to con-

tinue to pay carrying costs. In cases where you are going to lose the property

otherwise, selling becomes an easy decision.

My most memorable mistakes in terms of selling prematurely involve selling

houses in Hawai’i that practically doubled in value a year or two after my sale.

We all have had or know of examples of seller’s remorse in personal house sales.

This was particularly true in many areas of the United States that were experi-

encing explosive increases in house prices. I, along with lots of other sellers,

failed to judge the rapid upward move of the market.

Of course failure to sell during market peak can be an equally grievous error.

We also have become familiar with holding strategies that lead to dramatic

losses in rapidly declining residential and commercial real estate markets.

There are factors other than price that may impact the decision to sell or to

buy. You might decide to sell if you no longer are able to manage a business or

take care of a house. You may know of planned major infrastructure changes

that will impact the relevant market negatively or positively. You might want to

Make My Day, Make My Life

• Utilize common “rules of thumb” to reach a realistic valuation decision.

• Cash flow rather than assets determine sales prices (usually).

• Unless you have a “crystal ball,” you can get burned on market directions (up or

down).

• If you can’t afford the deal you need to sell it.

• Don’t miss a once-in-a-lifetime opportunity to sell; i.e., the “make my day, make

my life” decision.

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 220

sell to key employees to avoid losing them. In every case, the analysis of the

deal, or the sale, requires every bit as much consideration as a deal to build or

acquire.

Ways To Learn More

Look for future writings by John Finney on the adventures on real estate.

Rich Dad Poor Dad, by Robert Kiyosaki

ABC’s of Real Estate Investing, by Ken McElroy

John Finney is the current president of Industrial Income Properties,

Inc., a company he formed to ﬁnd, develop, own, and operate real estate,

ranging from residential and ofﬁce condominiums, cattle ranches, fast-

food restaurants with adjunct convenience store and gas facilities, single

family residences, farm properties, nightclubs, and other real estate ven-

tures in Hawai’i, Guam, and the western United States. Prior to that, he

and his partner Robert W. Pulley secured the Burger King franchise rights in Hawai’i and in

ten years opened thirty-ﬁve stores and sold them in one of the biggest deals in Burger King

history. And each has had many other real estate ventures in the United States. John is an

attorney and a graduate of Stanford Law School and a former U.S. Marine.

ROBERT KIYOSAKI 221

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 221

met Scott in 1999 at the Phoenix Open golf event. I knew of his reputation as

one of the biggest mortgage bankers in Arizona, but I did not know that he

knew me. Smiling as he walked up, he said, “I’m glad you’re saying what you say

about stocks and mutual funds. They’re terrible investments.”

At the time, I was under blistering attacks from ﬁnancial planners and ﬁnancial

magazines that were supported by mutual fund company’s advertising dollars.

You may recall that in 1999, the stock market was red hot and people believed they

were making billions in the new economy of the dot-com world. So to have a person

of Scott’s reputation back up my philosophy that stocks and mutual funds were

risky investments was a welcome relief and validation. His pat on my back made

watching the Phoenix Open even more enjoyable.

Today Scott is one of the three mortgage bankers I call when I need the straight

story about real estate ﬁnancing. It was Scott who, years ago, warned me of the

real estate bubble being formed by the sub-prime mortgage ﬁasco. It was because

of Scott that my wife, Kim, and I became more conservative in our real estate in-

vestments while others became real estate gamblers.

I’m an advocate for ﬁnancial education because when you get smarter, you

minimize risk. That’s what this chapter is about. Scott has made me smarter, and

12 Scott D. McPHERSON

Real Estate Due Diligence

222

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 222

ROBERT KIYOSAKI 223

the knowledge he has shared with me minimizes my risk with every new invest-

ment I make. His wisdom in this chapter will do the same for you.

—Robert Kiyosaki

When talking about the subject of real estate due diligence, you are really talking

about nothing more than a team effort of discovery and veriﬁcation. That’s

what due diligence is, and every real estate transaction you do, whether it is a

single family home purchase or a very complex commercial real estate devel-

opment, will require the buyer to take certain fundamental steps of underwrit-

ing. Only through that process can a buyer fully assess all aspects of the property

he or she is purchasing. And if you are the buyer, you’ll want to make sure you

are diligent about due diligence.

Benjamin Franklin once said, “Diligence is the mother of good luck.”

When you as a real estate investor have identiﬁed a property that you want

to purchase, you have come to the conclusion to buy it based on a series of some-

what superﬁcial facts. You have usually seen the property, and generally have

reviewed some of the ﬁnancial information that the seller or broker has provided

you. And based on this information and your belief that the property ﬁts your

business plan, you make an offer to purchase. Once the seller has accepted your

offer, your work—or should I say your team’s work—has just begun!

I am a real believer in putting together a very strong team when you approach

a real estate acquisition. Many of the authors in this book have stated the exact

same thing in their chapters. The fact is, most highly successful people or com-

panies are built using a team approach to getting things done. No one can be an

expert on every aspect of real estate, and frankly if you are investing on behalf

of other people and are using their money, you should always seek competent

third-party input.

In this chapter, I am going to walk you through a due diligence process and

give you an overview of why the various members of your team are important. I

am also going to include my Eight Tips and some real-life examples of why se-

curing qualiﬁed and unbiased advice on your proposed acquisition is so critical.

To me, assembling a team to assist you with your due diligence is just like

putting a puzzle together. Each of the team members have separate and spe-

cialized disciplines, but when they are brought together by you as the leader,

TIP

9781593155322_2:real estate_new 3/25/09 4:05 PM Page 223

the pieces come together, and all of a

sudden the full picture comes to life.

You can see what you are really buying!

I have separated the due diligence

process into ﬁve main categories: phys-

ical review, legal, title, third party re-

ports, and accounting tax. Let’s start

with the ﬁrst one on this list.

Physical Review

During the physical review, you and your team inspect the property to see if it

falls in line with your business plan and your expectations. Let me expand a bit

on this. As an example, let’s say that you are planning to buy an apartment

building and then do some slight renovations to the units that will allow you to

increase the rents over the next couple of years. So how does the process start?

Before you make your offer to purchase the property, you will want to inter-

view and select a property management company to help you prepare your op-

erating and renovation budgets for the property. The key word here is before!

This is not something you want to do after you make the offer. The results of

this work will help you decide whether the property is worth making an offer

at all.

If you are going to be a professional real estate investor, have your

team lined up

before

you make the offer!

A successful and competent property management company can go over

your operating and renovation budgets to make sure they are realistic and give

you credible feedback on all the previous assumptions you may have made on

the property—assumptions such as operating expense savings, new income op-

portunities, and even cash ﬂow projections. They can look at your business plan

and give it a thumbs up or a thumbs down and help you adjust it so it is attain-

able and realistic. Remember, you will rely on a property management company

to make your business plan work, so you had better make sure you are both on

the same page from the beginning.

The property management company will have its own sub checklists for its

own due diligence process. The people in the company will walk through every

TIP

224 THE REAL BOOK OF REAL ESTATE

Due Diligence Process