Years ago, when I was just starting my real estate investing career, I considered a condominium in Waikiki as an investment.
The problem was that the investment would have cost me about $300 a month.
A Meaningful Exchange
Back then, a $300-a-month loss would've been the same for me as $300,000-a-month loss would be today. When I ran the numbers past my rich dad, he asked, "Why do you want to lose $300 a month?" In other words, my rich dad wanted to know why I wanted to pay money to invest.
"Well," I told him, "the real estate agent said the condo would go up in value and I would make a profit."
Rich dad chuckled and asked, "How many condos can you afford that cost you $300 a month?"
"But it will probably go up in value, and then I can get my money back when I sell it."
"You're probably right," said rich dad, "but you didn't answer my question. How many investments can you afford that cost you $300 a month?"
At the time, my net after-tax income was only about $2,000 a month, and my expenses were about $1,800 a month, so the reality was that I couldn't afford even one condo that cost me $300 a month -- even if it went up in price sometime in the future.
So my answer was a sheepish, "I can't afford even one that loses me money."
With a smile on his face, rich dad said, "Remember what I've been teaching you. Any fool can lose money on an investment. That doesn't take much financial intelligence."
Investing for a Bleak Future
This advice may sound simple, but if you think about it, millions of investors invest their hard-earned money every day and receive little to nothing in return. In other words, their investment costs them money rather than makes them money.
For example, millions of workers put their money in 401(k) plans, hoping that someday in the future there will be enough in the account for them to retire on. And millions of people put a little money aside, either in a bank or under the mattress, and receive little to nothing in return. They all pay to invest rather than getting paid to invest.
The lesson my rich dad was drumming into my head, and I mean to drum into yours, is that investing should make me richer every month, not poorer. It should put money in my pocket every month, not take money out. To him, it was a miracle that so many financial services salespeople could convince financially naive people that it was smart to pay money to invest.
He wanted people to learn to look harder for better investments -- to be professional investors rather than naive investors. When he asked me, "How many investments can you afford that cost you $300 a month?" he was also asking, "How many investments can you afford that earn you $300 a month?" The obvious answer is, "As many as I can find."
Learn to Earn
If this idea challenges you, don't fret. As I said, my rich dad had to drum this idea into my head.
You have no idea how many times I came to him with great investments that cost me money rather than made me money. And even though he's passed on, I can still hear him reminding me, with every deal I look at, that it should earn, not cost, money.
The good news is that once you understand this lesson and start finding investments that make money, your life is never the same. In my opinion, grasping this distinction is one of the biggest differences between the rich and everybody else.
Not getting this lesson sets people up to fall victim to sales pitches from financial services salespeople, who sell them on the idea that it's smart to "invest for tomorrow" or "put a little bit away today for a brighter future."
If you've read my books, you already know that I invest primarily for cash flow, not capital gains. Most people invest for capital gains, which is why they buy a stock, mutual fund, or piece of real estate and hope the price will go up. Not me. While I occasionally invest for capital gains, I prefer to invest for cash flow.
Now, I can hear some of you complaining that it is harder to find investments for cash flow, and that's true. That's why most investors invest for capital gains. It's also why most salespeople sell naive investors on the promise of riches tomorrow rather than riches today.
Separating the Pros from the Know-Nothings
I realize that some of you may be asking, "But how do I find investments that make me money today?" I know from personal experience how frustrating this question can be.
All I can do is encourage you to keep asking yourself that question. That's what I did and continue to do today. I'll repeat myself yet again: Knowing the difference between investments that cost you money and ones that make you money is what separates rich investors from naive investors.
This even applies to business. I'm always amazed at how many people assume a business has to lose money before it makes money.
Recently, I had to let go a whole team of managers from one of my businesses because all they did was lose money. When I pressured them as to why the business was failing, many in the group reiterated this cracked philosophy. As I said, I had to let them go and replace them with people who knew how to make money.
Nothing Worthwhile Is Easy
I often use my wife Kim as an example of my rich dad's lesson. Her first investment made her a net $25 a month. It was a two-bedroom, one-bath house. To consistently see moneymaking investments required time, study, discipline, and effort on her part.
Yet once she learned to spot an investment that made money, she was part of a world very few people ever see. Today, she makes tens of thousands of dollars a month from her investments.
I'm not saying it's simple to find investments that make money right away. As the saying goes, "If it was easy, everyone would do it." Yet we all know how easy it is to find investments that lose money or that cost money -- that's why there are so many people who invest for tomorrow rather than for today.
My rich dad would advise you to keep looking, and train yourself to invest like a pro.