How the Successful Invest image

How the Successful Invest

Avoiding losing money by asking the right questions

In late 1974, while most of my friends were going to school or trying to find a good job, I was getting a different kind of education—a financial education.

I purchased a small condominium on the fringes of Waikiki. It was one of my first investment properties. It was a nice two-bedroom, one-bath unit in an average building. The price was $56,000. It was a perfect rental unit, and I knew I could fill it quickly.

I was excited about the investment and went to show the deal to my rich dad. He looked over the document, and in less than a minute, he looked up and asked, "How much money are you losing each month?"

"About $100," I said.

"Don't be foolish," rich dad said. "I haven't gone over the numbers in detail, but I can tell just from these documents that you're losing more than that. Why would you invest in something that knowingly loses money each month?"

"The unit looked nice," I said. "And my real estate agent said not to worry about losing money. He said that in a few years the price of the unit will double. Plus, I get tax breaks from the government on the money I lose. It was a good deal, and I was afraid someone else would buy it before me."

Rich dad stood up and closed his office door. I knew I was about to learn an important lesson. I had mistaken a liability for an asset.

Money is seen with your mind

"It's not what your eyes see that make you successful," said rich dad. "A piece of real estate is a piece of real estate. A company's stock is a company's stock. You can see those things. But it's what you can't see that's important. It's the deal, the financial agreement, the market, the management, the risk factors, the cash flow, the corporate structuring, the tax laws, and a thousand other things that make something a good investment or not."

The unasked questions

Rich dad then began to tear my investment deal apart by asking questions that I had failed to ask.

  • Why was the interest rate so high?
  • How did the deal fit into my long-term investment strategy?
  • What vacancy factor was I using?
  • What was the cap rate?
  • Had I checked the HOA's history of assessments?
  • Did I factor in repair and management costs?
  • Did I know that major construction was scheduled outside the building?

I felt defeated that I hadn't factored any of these things into my calculations. "It looked like a good deal," I said.

Rich dad smiled, stood up, and shook my hand. "I'm glad you took action," he said. "Most people think, but never do. If you do something, you make mistakes, and it's from our mistakes that we learn them most. Now you know the right questions to ask."

Applying knowledge

More than just learn financial knowledge from rich dad, I took his advice and applied it. The next morning I went back to the real estate agent and rejected the deal as it stood. Renegotiation wasn't a pleasant process, but I learned a lot.

Three days later, I returned to see rich dad. The price of the condo was the same, but the terms were vastly different. By renegotiating the interest rate, payment terms, and amortization period, I was making $80 per month rather than losing money each month. And that was even after factoring in management costs and vacancy.

"I estimated you were probably going to lose $150 per month based on how the deal was structured before," said rich dad. "How long could you have done that, and how many properties could you invest in with that kind of loss each month?"

I acknowledged that I could barely handle that one loss and wouldn't be able to invest in any other properties. I said I might have even had to take another job just to cover a loss like that.

"And now, how many of these deals at $80 positive cash flow can you afford?" asked rich dad.

I smiled and said, "As many as I can get my hands on."

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Original publish date: September 17, 2013