Analyzing Rich Dad Poor Dad Investing Principles—Are They Still Good?

by | BiggerPockets.com

A fellow investor from Arizona, Shiloh Lundahl, posted a thread recently on the forums entitled Rich Dad investing principles — good or bad?  While the book Rich Dad Poor Dad is oftimes credited as having shined the light on many principles of personal finance and REI, the question is posed: Is it legit? Is the book that sold millions of copies — and the advice therein — actually legit?

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A Look Back at the Book

Kidding aside, this is actually a very interesting question. Rich Dad Poor Dad was eye-opening for a lot of us. The interesting thing, though, is that while after having done a couple of deals, many of us felt like we were given the keys to the kingdom. Years and many hard knocks later, those of us still standing are now aware of how lacking (to say the least) — and possibly even misleading — Rich Dad Poor Dad actually is. Quite literally, unless you find a way to break away from that original mentality, your efforts could amount to treading water (if you are lucky), and lots of pain (if you are less lucky).

I suppose, in the spirit of intellectual honesty, we must preface this conversation with acknowledging that Rich Dad Poor Dad was likely never intended to be a true how-to manual with any valid technical data — nor viable investment advice. Likely, the book was intended only as a big-picture motivational and inspirational tool. And as such, it was a complete and total success. And I, for one, have nothing but positive commentary to offer. After all, the book certainly motivated a slew of investors.

However, continuing with this line of intellectual honesty, let us acknowledge that beyond being motivated, many of us started out with the belief that within the pages of that book was a bonafide formula — an actual, intellectually cohesive, mathematically stable formula for investing in rentals.

If you believe that, you are shit out of luck.

The image of real estate investing painted in the book is highly misleading from the technical and mechanical standpoints. And there are many items we could mention here, but there is one falsehood stand stands out more so than anything else. Frankly, I am not at all sure that even if this had been properly addressed in the book, that I’d have been able to internalize it. After all, our capacity to understand is tied to our intellectual worth, which in turn is tied to our experiences. I didn’t have any…

Thirteen years later, here are some thoughts for you.

Related: Book Review: Rich Dad Poor Dad

Rentals Are For Cash Flow

I understood this to be the central message in the book. Whether you don’t want to punch the clock (which was the case for Brandon Turner because he hated being a bank teller) or you can’t work (which was the story Ben Leybovich) passive cash flow from the rentals will pay your ticket, according to the book. Even in the accompanying board game, Cashflow, winning is a function of buying enough rentals to equal or exceed the amount of monthly liabilities. Whether in the book or the game, the main message is cash flow.

This was my understanding. Maybe you saw something different. But this is how my intellectual worth lead me to interpret the messaging, which influenced my thinking to focus exclusively on the cash flow.

I am willing to bet this is how most of you think about rentals.

Unfortunately, this is wrong.

We Buy Income Property for Appreciation

This is something sophisticated players figure out sooner or later. The best way I can illustrate this to you is like this: Suppose you have a small six-unit apartment building. You bought it five years back. You financed 100 percent of it because you read articles by Ben Leybovich. It cash flows about $500 per month. Nothing special. But nothing wrong with it. Rich Dad would approve.

You get an offer to sell it. You worked hard to get the building. You like having it. You were looking for cash flow, and that’s what you’ve got. And with no money in the deal, to boot.

But, you realize that between the appreciated equity and principal pay-down, you would put in your pocket a x15 multiple on your annual cash flow if you do sell. In other words, if you sell, you’d get 15 years worth of cash flow prepaid.

Do you sell? Or, would you hold and keep the cash flow?

Don’t answer yet.

Related: Life-Changing Lessons From 9 Awesome Real Estate Books

Time Value

Maybe you already know this, but for those who don’t, time value is a concept that alludes to the reality that there is a time and place when value of everything is maximized. This is as true with money as it is with food and relationships. For instance, if you read one of my articles before you are ready to internalize what’s in it, not only will you miss the point, but you will likely think of me as a jerk. I promise, I am not a jerk — you may simply be reading my stuff at a time that is not appropriate. Perhaps, sometime in the future, you’ll re-read these things and think highly of them. Time value is the concept.

As this relates to money, the same $5,000 of cash flow 15 years from now is not all the same thing in terms of new preset value (NPV) as it is today. NPV essentially aims to conceive of future cash flows in terms of today’s buying power and opportunity premium.

What this necessarily means is that even if you were able to achieve the same level of cash flows 15 years from now as you can today, and even if you did set enough money aside for capex so that you won’t need to cannibalize the cash flow, the value of these cash flows 15 years from now adjusted to net present value are much lower than you’d think. Indeed, you better plan on making much more cash flow 15 years from now.

Mathematically this is represented with the internal rate of return (IRR), XIRR, and modified internal rate of return (MIRR) (which allows you to select your own discount rate). But, those are more than I want to get into today.

So, Do You Sell?

I did. I sold that six-unit. I had bought it about five years prior. I financed it 100 percent. It made about $6,000 per year of cash flow. But, I sold it and put about $85,000 in my pocket, which I was able to reinvest in a way that doubled my cash flow.

Mathematically, the reason I sold is because doing so represented infinitely higher IRR than not selling. In fact, this was about a 40 percent IRR in 5 years. But, the important syllogism here is this:

Major premise: If we want outsized returns.

Minor premise: If appreciation is necessary to achieve outsized returns.

Conclusion: We must buy for appreciation.

Conclusion

With that said, our “buy” decision has to be based on appreciation. Which, of course, means that if you’re focusing on cash flow as the goal, you’re not doing it right. Cash flow has a lot to do with it, but it’s not the end goal.

This, to me, is the biggest thing missing in Rich Dad Poor Dad.

Have you read Rich Dad Poor Dad? What advice do you agree or disagree with?

Share your thoughts below!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben the author of the Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

92 Comments

  1. Thomas Phelan

    I think Rich Dad Poor Dad did exactly what the author wanted, created a belief that there was a way to escape mediocrity and the lie the middle class has been told that a higher “Education” is the only path to riches. Is it any more or less information than “The Art Of The Deal”?

    Now that have pulled back the drapes just a bit, imagine 30,000,000 Americans being wrong about one of the most hallowed and revered retirement vehicles in the Financial Kingdom, the 401(k). The creator of the 401(k), Ted Benna, was quoted as saying, “I have created a monster”.

    Wow, kind of makes Robert Kiyasaki look like a lightweight doesn’t it.

      • Jonathan Kincaid

        401K= handing your money over to Wall Street, where they lend it out at 2x your rate of return, and you get penalized if you ask for your money back before your age 60. It’s a scheme for big banks to profit off people and corporations to retain their workforce by offering matching funds.
        Run from it….invest in real estate and your business instead.

        • John Barnette

          1 million percent my thinking. It is a product sold to those who don’t want to work to figure out a better earning retirement mechanism. It is a product. Much like a turn key rental. More or less. At least with turn key you can leverage.

        • Tim Schroeder

          Jonathan, that’s pretty cynical outlook on the 401k system. 401k’s let average people uneducated in finance save for retirement, reduce their tax bill, get free matching employer funds (sometimes), and earn compounded gains (8% historical if using index funds) over the course of their working life, and take it out at retirement at a lower tax rate. These are HUGE benefits, and easily taken advantage of by the average working Joe, as well as RE investors. We all need 401k’s, especially with Social Security’s impending implosion. Telling people to run from that is bad advice. Furthermore, you can’t just “run from it and invest in RE” because the tax deductions of 401k come right out of a paycheck – you can’t just ask for cash to invest in RE and still get an income-offsetting tax deduction, also your employer isn’t going to give you matching funds for your RE deals. Finally, putting all your retirement eggs in one RE basket is too risky. Having a nice fat 401k to fall back on if your investments go to hell is a smart move.

      • Bill Fugitt

        Agree completely with your explanation of Time Value of Money. The only thing I would challenge is the assumption of flat rent price. If you can increase your rent price at the same rate as your discount rate then future cash flow is equal to current cash flow. Just something to consider in the calc. I also think you meant NET Present Value not NEW Present Value.

        • Ben Leybovich

          True, but in reality it’s not enough for the rents to inflate in tandem with OpEx. They have to inflate faster for the numbers to really work. And that, unfortunately, doesn’t happen in most places around the country…

    • Jonathan Kincaid

      The intent behind Rich Dad Poor Dad was to promote the economic benefit of real estate, as a way to engineer passive cash flow, not get into the nitty gritty of the “how to”. Robert was spot in. The idea is to replace active with passive income. How quickly we’ve forgotten the lessons learned from 2007/2008. No, we don’t buy for appreciation , rather, we buy for cash flow. Appreciation , tax benefits, inflation hedge, etc… are remarkable benefits of real estate, but purchases must cash flow. What if your property deprecciates? We mustn’t lose sight of the fundamentals that Robert and Garret Anderson have taught us during this bull market.

  2. Patrick Liska

    Cash flow is great to have, it pays the bills and puts some money in your pocket and i have always made sure my properties can do so, but appreciation will bring even more of today’s money in your pocket for future investments ( the value of today’s dollar will be worth less in the future, costs will rise and that dollar will not buy the same in the future). If there is no natural appreciation in your investment area, find a way to make forced appreciation, ex: turn a single family home into a two family ( as long as it’s zoned for it) sell both sides separate. have to agree with Ben on this.

    • Jonathan Kincaid

      This is why you raise the rents…. rentometer.com Do you charge the same amount today, that you charged for the same apartment 10 years ago? Rents are not stagnant and should be an inflation hedge.

      Also, I refinance and buy more properties. I harness the power of more labor, master of labor, the more tenants that I have. If 30% of each tenants wage goes to you for rent, wouldn-t you want to capitolize on as many tenants as possible (scaling). When you sell, a portion of your labor force is no longer habding over 30% of their paycheck to you.I write off the interest associated with a loan refinance. Whereas, capitol gains tax from a sale can be upwards of 22%. Hope you guys are utilizing the 1031 tax exchange….?

  3. Christopher Smith

    Agree on the appreciation point, although many seem to disagree. I was never a big fan of real estate (way too much grief), but 2008 to 2013 created some opportunities I couldn’t pass up so I jumped in with both feet.

    My approach was to capitalize primarily on appreciation potential, not cash flow. I made sure there was ample cash flow to fully carry the properties, but that was the only require ment.

    All my West Coast properties (2010 to 2012) are up well over 100 percent not including the rental income. I’ve actually gotten pretty good at maximizing the annual rental take earning much more with that elemwnt than I need to live off of yearly.

    But ultimately its been the appreciation that has produced the killer returns, and that was the goal from the outset. My decision now is to sell and reinvest or not, but with prices as they are currently my likely path will be more REIT acquisitions, decent return with none of the personal overhead.

  4. Enrique Gonzalez

    “A real estate property will always appreciate” was a commonly accepted belief (hence “Your house is an Asset”) untill the Great Depression of 2008 where a lot of people sawwith dismay the value of their house to actually go down and down. Your scenario where after a few years the value of the property has increased, you decide to sell makes perfect economic sense to you, to me and to Robert Kiyosaki. The thing to consider is that you can´t possibly know for sure is if that a property´s value will increase in 5 years, 10 years or whatever time frame. Your present predictions might tell that the value will 2X, 10X or 100X but don´t forget that it is just a prediction/speculation. As for using Rich Dad-Poor Dad book as a step by step learning manual for real estate just watch this: https://www.youtube.com/watch?v=QNauilZRzHk&feature=youtu.be

  5. Alexandra Hightower

    I have a triplex with a net income of $12,000 per year, bought for $300,000 and I could conservatively sell it now for $500,000. But, a large part of its value to me is that I can continue to raise the rents and therefore net income, and (having lived through the hyperinflation ’70s and early ’80s) that rents will go up when everything else is stagnant. So, yes I bought this with the hope of appreciation but primarily for income as a hedge against inflation.

  6. joseph ball

    I would agree with Ben that RD,PD is not a roadmap to success, but it served as an inspirational tool. However, I would respectfully disagree with Ben about cash flow. It depends upon the investment vehicle. His commenst may be perfectly true about multi-family, of which I concede his is an expert. I have never owned multi-family, but I am sure he is correct. However, single family cash flow is very important. I often say, if you can own ten free and clear single family homes, you are going to do well.
    As to Property Appreciation? I regard Property Appreciation as I do sex in marriage after the kids come. It is very desirable, something to dream about, and every great once in awhile, it happens. Maybe.
    Tnank you, Ben, for a thoughtful article.

  7. Proncias MacAnEan

    “Rich Dad” was a tedious annoying book with enough good information to make a good pamphlet. But since there probably isn’t any money in pamphlets, we end up with a good paragraph being made into a boring chapter.

    One thing I would note: agreeing with the notion that one had to have a certain maturity to read certain things, I read a post on another website where a guy had decided to rent rather than purchase his residence, as he’d learned that one’s residence is a liability not an asset. I vaguely recall that when reading the book (nearly 2-decades ago), that I wondered where Kiyosaki lived, did he rent. Perhaps a short extra paragraph in the book maybe comparing a house to a car in terms of expenses, or just pointing out that one ought to make one’s house purchase as modest as possible, or that one ought to justify extra stuff with some kind of house hacking.

  8. Jonathan Malote

    Great article here Ben!

    I am curious though, for individuals who are looking to get started in real estate investing would you recommend that we prioritize appreciation over cashflow? and similarly, if you were planning on retiring would you reallocate your efforts more towards cashflow then, or would you still maintain the same focus on appreciation?

    As for Rich Dad Poor Dad, I agree that it was more of a mindset book. Additionally, like yourself, I believe that it did a wonderful job at inspiring and challenging individuals. That being said, because it was so effective in accomplishing that task, my belief is that it pushes individuals to seek out more information and as a result they find the actionable steps and teachings that eventually lead to their success. Therefore, I don’t discount the value of a mindset book such as Rich Dad Poor Dad, especially if someone were to read it when their time value is at its greatest.

  9. Chad Peyton

    Good thought provoking article Ben. I would agree that you can make a lot of money through appreciation, however, it’s the cash flow that allows you to hold that property until you can realize the equity gained through appreciation/principle pay down. You can not bank on appreciation and those who do so without ensuring that the property cash flows or at least breaks even, will learn that lesson the hard way if they have to sale or refinance during a down market.

  10. Marcus Auerbach

    How can you make $1,000,000 with rental properties? I ask most of my new investor clients in Milwaukee that question – it’s just a mental exercise to snap them out of the cash-flow-exclusive thinking and show that there is a bigger picture. The math is super simplified, so please don’t hang me for that!

    Suppose you make $500 a month in cash flow of your rental property. That’s $6,000 a year. Hopefully tax sheltered for the first few years, but then subject to taxation. It takes 166 years to accumulate a million USD. Plus you have to spend $50,000 every 30-40 years for a general rehab, so there goes $200k for that. (Think about that before you want to buy a $50k property!) Most of has don’t have that much time.

    Real estate is a game of leverage. Let’s say you accumulate a million dollar worth pf properties, for example five SFR for worth 200k a piece. You can either put 20% down and buy them new or BRRRR them over a few years. Now you have three sources of wealth: cash flow ($6,000 x 5 = $30,000), appreciation (potentially; 6.4% since 1962, or 3.8% if you adjust for the fact that houses became bigger, you pick your assumption, I’ll go with 5%, that’s 50k on a million dollar portfolio per year) and finally: mortgage pay down (that happens even if appreciation does not) – let’s say 3% on average for simple math. That’s a total of $110,000 in the first year, more in the years to follow. If you run it through a BP calculator you will see that it takes you less than 10 years to generate a million. And that does not even include the fact that you will probably buy an additional property every year and a half or so just from the cash flow.

    The moral of the story is – cash flow pay’s the bills and you need it like the air to breath, but it does not amount to much money. Wealth is created from appreciation (natural and forced) and for debt pay down. So pick your investment wisely, if you want all three forces to work for you. Like Ben L pointed out many times before – a $50k pig won’t cut it.

    • Ron Gallagher

      This is the smartest thing I have read all week. I buy properties in Washington DC that cash flow and I hope/know will appreciate over time. Some people buy in the midwest for cash flow, some people buy in California for appreciation. I buy in DC for both. Then I can tap into that equity with a HELOC or refi with cash out and buy more properties that cash flow AND appreciate. The numbers are bigger in high priced areas. I am talking about buying a $800k house with six bedrooms and renting out all the bedrooms and parking spots for a total of $7000 a month. So at little less than the 1% rule but it cash flows nicely and I can bet on appreciation. So it takes a little longer to build up the cash reserves to put 20% down on a $800k property but building wealth in real estate is a waiting game and this method gives me all four ways of making money in real estate- cash flow, appreciation, mortgage pay down, and tax savings.

  11. Eric Jacobs

    First, I want to say that while I disagree with the author’s conclusion, he puts forth a thought provoking argument. Having said that, the problem with buying for property appreciation as opposed to cash flow is that essentially you are not investing as much as gambling. Property value appreciation is a sweetener just as the forced savings account component is a sweetener.

  12. Gary L Jones

    Ben didn’t say he included the income taxes that must be paid because he sold the property. The “profit” doesn’t look near as good when you figure closing costs and taxes. It’s still all about cash flow in most markets.

  13. Frank Sanchez

    “I suppose, in the spirit of intellectual honesty, we must preface this conversation with acknowledging that Rich Dad Poor Dad was likely never intended to be a true how-to manual with any valid technical data — nor viable investment advice. ”

    Bob Kiyosaki presented RDPD as his life story and made a lot of money based on that. It was presented as a how to manual. That’s what con artist do. I can’t stand Bob Kiyosaki and I honestly believe presenting this book as non-fiction caused a lot of damage to gullible and naive people.

    He then switched to say it was fiction, many gullible people believe in this storyteller/ self-appointed financial adviser. That’s a shame. People should read it, and then realize this book is a hunk of junk.

    https://johntreed.com/blogs/john-t-reed-s-real-estate-investment-blog/61651011-john-t-reeds-analysis-of-robert-t-kiyosakis-book-rich-dad-poor-dad-part-1

    • Sam Cherry

      Frank you nailed it! To bad no one else understands this on Bigger Pockets. BP is just a modern day RDPD in blog form. Very little info with alot of hype to “motivate” people to go for the premium service.

      You may have price appreciation in San Fran but the rest of rentals in America work on CF PERIOD.

      The wizards who say they are making a mint on appreciation are leveraged to the hilt. Don’t worry we are do for another recession soon and as Warren Buffet always says “you don’t know who has been swimming naked, until the tide goes out” The next economic crisis will affect all asset classes pretty much equally.

      Price appreciation is a factor of 100% financing and the debasement of the dollar. We are due for a dollar reset.

      The only landlords who will make it through the next crisis are the ones with no or extremely low leverage.

      Good luck to all.

      • Frank Sanchez

        Hello Sam,

        Yep. It is my personal and honest opinion, Kiyosaki is nothing but another financial porn clown. The stolen and half-cooked ideas he presents are moronic in nature and horrendous financial advice. Then, he has this whole life story BS. There are many more like that.

        “It’s easier to fool people than to convince them that they have been fooled.”

        I think BP is much better than a RPDP blog. This place has been a great source of information; you need to filter all the noise, however. Sure, the BP business structure is based on hype, maybe you can call it greed, hope, passion, or whatever. This is necessary to survive, otherwise they won’t sell books, advertising, sponsors, etc. They try to contain it, I believe that. At the end, it’s a business and all business have to sell something to keep the lights on. They work very hard and it’s an admirable machine.

        I read about many people here overleveraged with no cash reserves, and take the word of “wizards” as truth without crossrefercing their info. They will get hurt. All corrections are painful and the pigs always get slaughtered.

        • Chris Ayers

          BP doesn’t sell information, they sell dreams and ideas.

          There is good information on the site, but you have to sift through a lot of sales and marketing to get to it.

  14. Eric Jones

    The author’s actions actually support Kiyosaki’s claim that it’s about cash flow – he simply sold one cash flowing investment and reinvested in a higher cash flowing investment. You should be investing for appreciation of CASH FLOW.. if you do this, the appreciation will come.

  15. Gino Barbaro

    Equity, not transactions create wealth. Cash flow and appreciation do not have to be mutually exclusive unless you are investing on the coasts or a 3 cap market, where I would not consider that speculating and not investing.
    The way to create massive wealth is to buy right, reposition the asset to add value, cost segregate the asset and refinance.
    This is how you take full advantage of real estate, and the tax laws. There are times when you sell, when the Return on Equity becomes so small that you repurpose the money.

    Rich dad was a fantastic book on “why”. It falls short on how, just as all of his other books do.

  16. Tim Daunch

    As for most of the debates and advice on BP, I say it depends on your market.

    C. Smith says he has realized over 100% appreciation in his West Coast rentals. Perhaps Ben is in a similar market. Here in the Midwest (Cleveland to be exact) there is no way in hell most small operators would base their RE investing on appreciation (alone). With the exception of a few “hot” areas, Cuyahoga County (Cleveland) is lucky to see 2%/year on owner-occupied. Hot “B-“, “C” and “D” markets are actually dropping in price. Try to sell a SF rental, and the sharks will try to beat you down below your all-in price from 5 years ago! In my market (with few exceptions), it’s cash flow, cash flow, cash flow. Of course, I’m not talking about sweat equity or BRRR, but that’s not “appreciation” (purely by market forces) in my mind.

    I wish the various authors here on BP would preface their thesis with “In my market, of ‘X’ characteristics, the following is an immutable rule or sage advice. If your market does not possess these characteristics (e.g. high rate of appreciation), then this article may not be for you.”

      • Tim Daunch

        Ben, I don’t understand your reply. What causes appreciation, other than market forces, such as supply and demand? The selling price is based on what a free seller and buyer agree to. While there are always exceptions, most sale prices are based on some sort of average or benchmark, at least as a starting point. If I’m looking at 5 REOs, of more or less the same condition and amenities, location, etc. then I expect them to be priced similarly. You’d have to have some great data to convince me to pay a premium over the others. This “comparables” approach is used by Realtors and appraisers (i.e, they look at The Market), as we all know, and greatly influences price, and hence, appreciation. What am I missing?

      • Tyson Robertson

        Thats not a particular helpful reply here Ben. there are several tings on here that you simply”disagree” with, without providing your opinion. its not very helpful. To say that the market has nothing to do with it is asinine, it has everything to do with how you structure your business goals.

        Frankly, I decided to take the whole article with a few grains of salt after I read “new preset value” instead of Net Present Value”

  17. David Wright

    I’ll premise this with “I’m not an experienced investor”. But, I’ve analyzed a bunch of deals and have one rental now; I think each deal has to be looked at individually. It might be a cash flow deal, or it might be a forced appreciation deal, or it might be an organic appreciation deal. Knowing what the play is up front is key. Like in the board game Cashflow, you might even choose to buy a negative cash flow deal because of the anticipated appreciation, or you might choose a property in a town where you can’t hope for anything better than organic appreciation (i.e. inflation) because the economy is stagnant, but it’s got a good cashflow. You also might change your strategy and look for different types of plays depending on your situation.

    What I felt was lacking in RDPD was complete silence on the topic of forced appreciation in commercial multi-family (5 units and bigger). This is a concept that just floored me when I finally grasped it (thanks, Grant Cardone!). Anyone feel the same?

  18. Charles A.

    I agree with Gino.

    This is not an either/or,all-or-none thing.
    You get paid 5 ways in real estate.
    *Listen to Keith Weinhold.Get Rich Education podcast*
    Dwelling on just 1 of 5 because you got a big pay day is a mistake and grossly misleading to newbies.

    I understand the author moved from Lima OH to AZ.
    So he must be drunk with the sheer euphoria of the appreciation he suddenly sees on this one deal.

    In my market,Jacksonville,we are used to BOTH cash flow and appreciation.
    And no reasonable investor would forego one for the other.

    Justifying selling with IRR math is also likely disingenuous.

    Like Gino said,”Return on Equity” ROE,(not ROI) is where all the juice is.
    You must constantly evaluate your ROE.
    When that dwindles,savvy investors know refinancing and taking cash out beats selling every single time.
    Unless you no longer have margin to refy with residual cash flow that covers expenses.

    And cash out Refy is a non-taxable event.
    Read that again slowly.

    I don’t know where all this Rich Dad Poor Dad disdain is coming from.
    The investing public has voted with their dollars.
    When its detractors sell 10% of the copies it has sold,I will start listening to them instead of Kiyosaki.

    I will however say that since RDPD was heavily modeled on the game of monopoly,it’s important for me to point out what I see as the major flaw in monopoly:
    Yes buy that red hotel,but by gosh,keep your 4 green houses!
    That’s how you build legacy wealth.

  19. John Wanberg

    Ben,

    Good article. The subtleties of IRR were probably too much for the audience that “rich dad poor dad” was targeting, but I think you explained it quite eloquently. I bought a SFR using a BRRRR strategy for $105k, put $40k into it, and have been renting it as a nicely cash-flowing property for the past three years. Now it is worth $325k I have $0 invested, so there is an infinite rate of return right? By one metric, yes. But IRR forces me to consider the overall value I have in the property, not just my cash.

    So here is the fun part… (math is a rough approximation, don’t come at me for slight inaccuracies) let’s say the best I can do is find a property with THE SAME CAP RATE (~6%), and I do 20% down and 80% as a loan. I have $180k of equity, which we can assume is my 20% down payment on a $900k property. My gross annual income at the first property is $20k/yr, but my annual gross income potential in a new property at the same cap rate is $57k/yr. Without accounting for costs (which is critical, and could tank the numbers), that is just a lot more pie to work with.

    A valuable reminder. In my hot market, I am thinking I will take the cash and try to trade up.

  20. John C.

    Ben – thank you for writing this article as these are important considerations. A couple points that should be addressed:

    1) There are huge frictional costs associated with buying and selling real estate. To complete a 1031 is not always straightforward and unless you’re working with private money — will require a day job for financing. In California, long term capital gains is 31% (federal + state).

    2) What was Kiyosaki really teaching? How to create wealth? I’d argue something different. The Cashflow game is all about “escaping the rat race” (aka your day job). Unless you have some other source of passive income — you must revert to cannibalizing the funds in your bank account when you sell income producing assets or get a job.

    I understand the NPV, etc. calcs and the point you’re making. Those only mean anything if you reinvest. Kiyosaki educates quite a bit about “trading up” in Rat Race from condos to multi family to apartments, etc. I don’t think he would disagree that there is a “right moment” to sell.

    3) A third point to consider is the fundamentals of real estate — leverage. Does NPV take into account that you are leveraged on a $1 million dollar property with only $200k down? If we ARE going to speak about wealth creation — then I think holding leveraged real estate for huge returns on the capital invested is very lucrative.

    Personally (living in California) and bc of the price points, I’ve found it difficult to refinance out my equity so selling to trade up has been a necessary evil. Alas though – I 1031 exchange as much as possible to grow my cash flow and continue holding large, LEVERAGED, income producing assets.

    Interested in your thoughts – thank you.

  21. Anthony Hill

    I loved this article, but I think there is a perspective difference with how you are approaching Real Estate versus how RK was approaching wealth creation. While I’m not the author, I think he was trying to lay down perspective for creating wealth through businesses and investments (the quadrants) rather than paint by numbers to use real estate to build wealth.

    I think what RK did well, was lay down a fundamental that in order to get wealthy, you need “other people’s money” to work for your own. If you’re not cash flow positive, you are not really using other people’s money as well as you need to be, and are in fact creating a liability on your own personal balance sheet. THIS… I think was his point for chasing cash flow. Not to exclude your avenue of wealth growth, but to illustrate a fundamental concept that to be wealthy, your money has to be creating more money (in the asset column). The path you propose is fine, but I think that it would be beyond the desire of the book, which was to illustrate how personal liability are a stumbling block to getting wealthy. Now, Is that a mathematical formula to getting wealthy? I guess it depends on how you want to define your variables. To me, the math is the age old: Assets – Liabilities = Equity . Trying to define wealth creation beyond that would take away from the concepts he was conveying, which inherently are what stand the test of time.

    Last, having read RKs books on wealth creation and Real Estate, I think there is something worth pointing out – your example would trigger a Taxable event unless you 1031 it. While I get the point of your example (and still agree the sale is probably the way to go) Holding the property through a business would create all sorts of benefits that a pile of cash would forgo – In this case the opportunity cost of the 500 annuity, future appreciation, the paper losses of deprivation and the new pass-through deduction, plus whatever tax your going to incur at the long-term rate against the 85K in your pocket. Now, it sounds like you had plans to compound and leverage the 85k further, but even those carried their own risk, and should be discounted accordingly if you are truly being fair with an analysis at that point in time.

    Anyway, please don’t let my thoughts send the wrong message, I thoroughly enjoyed the read.

    • Ben Leybovich

      Anthony – thanks so much for your thoughts!

      Taxes is not something that should be a concern in RE. An agile investor will always find a way to shield the gain 🙂

      I am not sure I follow you on holding property through a business. Passive income should never be put into an S or C Corp structure, as it creates double taxation which otherwise is not present. Please elaborate…

  22. John Weiderman

    The main thing to keep in mind about Rich Dad is what it’s intended to be – the first book most people will ever read about finance and investing, and what it’s NOT intended to be – the LAST book they read on investing and finance.

    Kiyosaki himself stresses being a lifelong learner, so hopefully as investors and learners we do outgrow the basics and become more sophisticated in our thinking.

  23. Rob Jones

    So what’s your advice to the investor who couldn’t fund a monthly loss in favor of expected appreciation? I absolutely had to have cash flow early on in my investing career because my salary could not support me funding a loss with a rental property.

  24. Justin R.

    Thanks, Ben. Most people aren’t going to understand what you’re saying because their experiences (and life’s survival, from a practical perspective) have taught them to think about money transactionally – dollars they get and dollars they spend. Apply that to rental investing and success looks like getting more cash every month than you’re spending.

    RDPD meets people where they are, and that’s probably necessary to do the most good in the world. You can’t go to someone who thinks about money transactionally and expect them to adopt a Net Worth investing mindset. Owning money means you’re not poor. Controlling quality assets makes you wealthy.

  25. Jay Kaulitzke

    It has been a while since I read Rich Dad Poor Dad but didn’t he also talk about selling your properties and using the profit to trade up to bigger multifamily properties? Pretty much exactly what you are talking about here.

  26. Nancy Bachety

    In simpler terms, RDPD introduced me, a wage earner, to the understanding that our government rewards those who hold real estate with benefits. In my W2 world, there were no tax benefits. That in itself, was my starting point when I read that book. Everyone needs a place to live, not all people buy their homes, and the government can’t house everyone on its own= tax advantages to you and me.

    What’s common knowledge to you is an entry point to someone else.

    Ben might have 1031’d his gain into any kind of RE, perhaps another casita, or MF, or whatever floats his boat. Everyone needs a home. Defer taxes until death and that’s your legacy.

    My 403b/IRA’s etc are going to force me to take RMD but my cash flowing properties won’t.

    • Ben Leybovich

      Understood, Nancy. But we have to get past the generalities. Yes – holding RE is good. But, what kind of RE, where, how, why, for how long? In other words, the actual tools and road map – this is what I am touching on in this article…

  27. John Barnette

    1 million percent my thinking. It is a product sold to those who don’t want to work to figure out a better earning retirement mechanism. It is a product. Much like a turn key rental. More or less. At least with turn key you can leverage.

  28. John Barnette

    Ok now on to Ben’s question and thoughts. And I really appreciate the level of depth and matatical theory analysis that he incorporates.

    My two cents. Good book. More as a conversation starter and to expand your “thought box” if you will. For most cash flow will be more critical as it is the hear and now and pays for current and near future needs. Lots of hot air and look at me in the book but it has made an impression on me. Namely invest in yourself, businesses, real estate, whatever creates value or cash flow.

    Appreciation vs cash flow. About as classic as a world series of the Yankees and Dodgers.

    Personally I live right in San Francisco. AND I have managed to put together a portfolio of 18 doors (within 20 miles) that cash flow on average of $1000 a month with appropriate reserves for capex. All assuming no major earthquake, fire, hurricane, etc.

    Even then I have most buildings in areas of better geologic structure for earthquakes.

    AND it has been a very well appreciating portfolio. In fact it is because of investing in Denver and then SF since 1997, and reading a lot of insights on BP and huge varity of books that I have intentionally strategically invested in specific properties that showed high probability of appreciation via repairs, repositioning, market trends, or just plain buying a discounted property when or where nobody else was looking. I don’t buy often but am generally looking always. I have done several 1031’s so have accumulated capital tax deferred.

    I used to flip condos and small homes but stopped that in 2012 and decided to keep the properties. BRRR to some extent. I did a big refinance of several properties two years ago and pulled out a large chunk of money that I used to buy other properties that cash flow and appreciate.

    To Bens point about cash flow pushing appreciation. More so for non owner multi unit buildings. Even then I think the whole world of returns for risk free Treasuries, corporate debt, Dow 30 dividend yield, and borrowing rates all play into valuations of these assets. When all rates and returns are low (and they are all tied together or are alternative uses of money for someone) , cap rates must drop and thus prices increase.

    All assuming no forced appreciation, imperfect information leading to a wise purchase, timing, intellect, etc.

    Single family. My main investment and also my “9-5 as a realtor”. You do have market appreciation or depreciation. Yes it is still cash flow…but that of the individual home consumer and also of the sheer number of home consumers in aggregate. Combined with a study of local supply and demand for specific property types and demographics.

    I LOVE C class starter homes that can hopefully be purchased for less than replacement value. That being land value and cost of construction. Also close to transit and some amenities. In places like the Bay Area, Seattle, Denver, Austin some extent. There is zero construction of affordable or even “moderate” single family within 20 miles of the city core. Yet you have demand from both renters who cannot or do not want to buy. Families who do not want multi unit living. In California you have a lot of multi-generational consumers. Millennials starting families too. There is a large and growing pool of people to rent or buy these properties. Even if there is some loss in population as has been reported due to excessive cost of living there is a HUGE demand for basic houses in non trendy , non ghetto areas.

    Has been my ideal asset of choice for both great cash flow and appreciation.

    Latest thoughts and my crystal ball for some future market trends. ? As planning, strategy, and putting myself in the path of appreciation.

    I think we will have a pretty heavy adjustment in prices at some point. High end as that has gone up so so so so much. Urban condos that are not really suitable for families. Too many have been built. That buyer pool of millennials demand is dropping. Already happening in SF. High end condo prices peaked in 2015/2016. Higher interest rates will hit multifamily values as numbers and DCR’s will be adjusted.

    Perhaps a good time to sell some starter homes and exchange into some multifamily with higher interest rates thus forcing lower values. And refinance when rates are reduced to fight recession.

    And a really killer deal on a REO view condo would be sweet.

    Got me thinking. Buy for appreciation when blood is in the streets and prices are severely discounted below actual values. Cash flow is just there for the ride. As the cycle swings up buy for cash flow and forced appreciation potential. Peak times pocket cash and/or look for markets at a different point in the cycle.

    I really like your analysis. You do really need to think long and see how important appreciation is. It does come with risk. But I think less risk than investing in “flat” assets that get slowly destroyed by inflation and actual depreciation of the land and physical structure.

      • John Barnette

        Ben, I agree this must be the case in the long term. That being the strong and sustainable. Cash flow increase does drive property appreciation absolutely. And really a MUST. In some unique markets like the Bay Area you have on many occasions though not always market appreciation somewhat independent of increase in cash flow.

        To the point of generating true wealth. I believe this appreciation (via market, buying under priced asset, forced appreciation, BRRR, rezoning, whatever) that is above and beyond being able to extract more cash flow is where there is exponential growth in wealth.

        Akin to the difference between being a salaried employee that is staying ahead of the game and is increasing cash flow more than inflation every year. And being an equity partner or executive with stock options where there can be and often is significant “appreciation events” in ones balance sheet. And similarly can be hard to use and not as liquid as a monthly salary or rent receipts.

        Related material that would be another conversation. What do you think of build up of equity in properties up to the point of no leverage? Obviously you have s declining ROE over time. A large equity position can be passed along to future generations or a charity, etc. I personally feel that a large chunk of equity is dead money if it is not doing anything for you. About 70% of my portfolio is financed by interest only ARM with 10 year fixed period. That does force increased cash flow. Live below my means and provides for funds to acquire additional income producing assets that cash flow and appreciate.

        The one major risk I fear would be stagflation in the future. Low appreciation and higher rates. Otherwise there should be higher rates and thus higher inflation and therefore higher rents and values. Or low rate scenario which is fine with me as well. Or something in between.

        Appreciate your insights on BP

  29. Jason W.

    Interesting post Ben. I think most people who read RDPD and then sought to apply the concepts would agree with the first part of your premise. It’s a motivational book about a big picture concept.

    But I don’t think “we invest for appreciation” is a global truth for all investors. It depends on where you are in life (age, goals, needs) and the assets you choose. Everyone loves appreciation I think, but relying on it to make your investment successful is not the best plan in my opinion.

    For instance, if you have an income property with strong cashflow, it can easily remain a good investment from a cashflow standpoint even if the market value drops below your purchase price (negative appreciation / decrease in value). Rents can climb upward or remain stable even while cap rates rise and fall.

    As others have pointed out, you probably won’t leave the rental rate unchanged for 15 years, as rents typically rise with inflation.

    Maybe I’m misunderstanding your points. If so, please let me know. Thank you for posting this. I’ve often reflected on the impractical nature of RDPD, so it’s great to hear your thoughts on that. The book really changed my concept of wealth, and as you pointed out, thats the real value of it.

    Thank you Ben!

    • Ben Leybovich

      You won’t leave the rental rate unchanged – that’s subject in and of itself for a lot of properties that are being bought “for CF”. But, even if it’s true, the OpEx and CapEx don’t stay the same either. Rent growth has to outpace growth of expenses, and by default this means a certain class of property in a certain location – i.e. Appreciation 🙂

      Don’t argue. I’m right on this 🙂

  30. Kurt K.

    It is my understanding that specifically with commercial real estate (the aforementioned 6-plex) cash flow, or more correctly NOI, drives prices.

    Warren Buffett details a real investment he partnered in and holds to this day. Where they bought an under-managed building next to NYU as leases expired they could triple the rent. Initially rents yielded a 10% Cash on cash return for the investors, before the tripling. They did raise rents and in 3 years after buying it and another 3 years after that they refinanced and everyone had 135% of their money they put in back.

    Yet they still hold that property. They took the equity from appreciation via refinancing, not selling. They all own an asset in which they have “no money” into, that pays them. No reason to sell something you got for free and pays you!

    From my understanding RDPD was saying one should not invest for appreciation because it is not as reliable. That investing for cash flow is more conservative. Then via inflation, (fixed rate debt, rising rents) you’ll begin to earn a higher rate of return. Of course one can “cash out” with refinancing to keep a high return on capital without selling. Investing in cash flow negative property in hopes of appreciation could turn into a nightmare.

  31. Ed Emmons

    It’s interesting reading all the different posts and opinions. As many have mentioned, not everyone invests for the same purpose. In my case I wanted to “get out of the rat race” Asap. It took me a year or so but to do that I needed cash flow. Once I had my cash flow that exceeded my expenses I could look at other investments where appreciation could be the aim. However, in almost every case I bought properties where there was a large upside in cash flow allowing me to hire a staff that could manage everything. I have employees. For me, some of the rich dad poor dad series were very valuable particularly Cashflow Quadrant. Another book that I found very helpful was E-mith Revisited. From the beginning my goal was to set up my business so I didn’t have to be there giving me the time flexibility that I was looking for.
    That being said I realize that many on BP have very different situations and different goals. If you have a job that you like and real estate is a vehicle for retirement or some extra money then seeking appreciation makes sense. On the other hand if leaving the rat race is your goal then cash flow should be your focus.

  32. John Murray

    I am a multimillionaire and I will tell you how I did it. I made sure that all my income streams were not earned income. My income streams are passive, portfolio and capital gains. I pay very little taxes and leverage about $3.6M worth of real estate. I work about 60 hours per week managing my rentals and flip a few a year. If you think you are going to become a multimillionaire by sitting at home crunching numbers, working an earned income job and dreaming your plans you are mistaken. You have to relocate, work smart and gain as much skill as possible. You must purchase 3 items, 1. Safety and security, education and health care. Do all these things and you will join the 10 million or so Americans that work hard and are multimillionaires. You can read all the books about how to become a multimillionaire, most will never tell you what is reality. Seek freedom not money, this is what you must do.

  33. Walter Milam

    Buy rentals for cash flow. If it is appreciates so that you can get several years of profit in a sale, then its time to sell. This idea can work very well with forced appreciate (repair/upgrades, finding good tenants, etc) .

    This is a simple mechanic that Rich Dad, Poor Dad does not go into because the idea behind it is that you no longer have an asset that is giving money every month. That is assuming that one does not reinvest the money, 1031 Exchange, or otherwise, into another cash flowing investment.

    This idea is outside the scope and intent of Rich Dad, Poor Dad.

  34. Jerry W.

    First, this article is not about RK or RDPD. it is about moving up the ladder in investing in real estate. The first time buyer has to prioritize cash flow, period. You need properties that make money. Just like you wouldn’t buy a 120 apartment building that needs massive renovation for your first purchase, you don’t focus on appreciation on your first buy. That being said Ben is pointing out that you will make money doing cash flow in rentals, but you make so much more when you become aware of and pursue cash flow rentals in areas in the path of appreciation. You are not speculating, you still buying cash flow, you are just being 3x as smart on where you buy cash flow.
    The story is in a way about the life and growth of Ben as an investor. Ben was killing it as a real estate investor. He took folks to the next level talking about internal rate of return. He introduced a higher level of insight in what really makes you money. His midwest properties were making good cash flow, and he knew when to sale and when to keep, but eventually he realized he could do all of that and be in a market with great appreciation. You can double what you eventually make from real estate investing if the annual income from appreciation is as great or more than from cash flow. Its like showing someone a very pretty girl and a very nice car and asking what one do you want? The correct answer is both. You don’t have to settle for just one or the other if you do it right.

  35. Aurelio Limone

    I think you’re both right as both appreciation and cashflow are desirable. The point is that there is a fast way to get rich (I’m not talking about get rich quick schemes), that in terms of Real Estate would involve Flipping, BRRR etc., while the slow way (the one Rich Dad advocates) involves progressively (and painfully) building a passive income to cover monthly expenses. I agree with you that the fast way should be the starting point, especially for young investors, and once one has reached a good amount of equity, then it could be a good idea to pull out from it a constant cash flow, yes with a lower Rate of Return but still consistent, being a percentage of quite a good amount of money

  36. Peter Mojassamian

    The 2 books (RD/PD and Cash Flow) are mindset books. There is no point in mechanics if you don’t have the mindset. The mechanics/how to part came in their coaching program. Once you have the mindset, you can become very inventive, and the books do accomplish that.

  37. Greg W.

    One of the best articles I have read in a long time. “We Buy Income Property for Appreciation” You use cash flow and debt to control the asset and appreciation (whether organic or forced) to get most of the gains.

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