Common Sense On Buying Investment Property

Alexandria Anderson

In his book “Cash Flow Quadrant,” Robert Kiyosaki, author of the Rich Dad book series, says his “Rich Dad” asserts that investing is not rocket-science. He suggested it’s just a matter of using logic. But it’s common knowledge that reasoning is not, in fact, terribly wide-spread.

According to “Rich Dad”, the least effective investors are those who simply have not educated themselves about the things that produce positive results. They assume that investing is either too much of a risk or a rip off. Others skip their do-diligence and wind up losing money.

The best opinion anyone can have concerning buying investment property is just to educate oneself. If, in your haste to make money, you take action without that education, you’ll be doing yourself a tragic disservice. Time is your most important resource and if you squander that, you’ll often find that your money will be lost as well - money you have in hand that you wind up squandering, money you could have saved if you’d just taken the time to learn the process.

“That’s great,” you might say. You probably agree that getting a good education is typically a helpful thing. Knowledge is power, after all…. “What type of instruction do I need?” may be what you are asking. Your second question is probably going to be, “How do I get it?”

The very 1st concept you might want to learn is some basic accounting, which is not as nebulous as it appears to be. Accounting is the vocabulary of business. If you are investing in a company or an investment property (or whatever), you’ll need to be willing to check in on it to see if it will be an asset (earn you money) or a liability (lose your money). It seems like common wisdom when you look at it, doesn't it? But if you want to be able to ascertain these things, you’ll need to be able to evaluate your financial-statements.

There are 4 common kinds of financial statements: cash flow statements, income statements, balance sheets, and statements of changes in shareholder equity. The latter is pretty self explanatory, and addresses the characteristics that lie between at two different points in time. Shareholder equity is the net worth of a company, or it’s total assets minus its total liabilities.

Your “cash flow statement” is a document that details the cash used in making a company operate, plus where that money originated. Wikipedia relates a business to a large kettle of water which catches more of the water and has lines pouring from within to the outside of it - into the pockets of the investors and others to whom the company is in debt. The cash flow statement attempts to give an account the displacement of that water – or the flow of that money.

The earnings (or profit-and-loss statement) watches out for a businesses earnings and losses due to expenditures over a given time period, while the balance sheet gives accounts for the same thing for 1 single moment in time and presents your liabilities and assets.

It all seems very simple until you consider Kiyosaki's words on discerning your assets and your liabilities apart. He said that your lending institution, for example, will list your property of residence as an asset. It seems rational. After all, it is some thing you own, right? But as stated by Kiyosaki's rich dad's statement of liabilities and assets, your house is in fact a liability. It’s a liability because it ultimately costs you money in dues and repairs. It definitely is not earning money for you, and up to the time it begins doing that (say, you change residence and are able to charge enough rent to make you some money), then it still is not an asset on your balance sheet.

The bank isn’t actually lying to you outright. Your house is an asset on THEIR balance sheet because it is making money for THEM.

That is the sort of thing you can decide for yourself and determine whether you are earning or losing money on an investment, if you take the time to educate yourself education. Remember: Knowledge is POWER.

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