What Schools Will Never Teach You About Money By Robert T. Kiyosaki

Ken McElroy Shares How to Use Debt 
Have you ever wondered why your checking account is free? Banks need 
your deposits so they can lend money. Banks can’t make money until they 
have your money to lend. At this point, you have two choices: Use bank 
debt to make you rich, or use bank debt to make others rich. 

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Chapter Three
Unfair Advantage
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Tom Wheelwright on Love from the Government
 
The tax law is a series of stimulus packages for business owners and 
investors. Nowhere is this more true than for real estate investors. I’m not 
talking about people who fix and flip real estate. They are not investors. 
I’m talking about those who buy, improve, and hold on to real estate for 
long-term investment.
As an incentive for investors to buy, improve, and hold real estate, 
the government gives two primary tax benefits. The first and largest is 
depreciation. Depreciation is a deduction you receive over time for the
cost of the property, whether you bought it with your money or with
someone else’s money (debt). Here is how it works.
Suppose you purchase a rental property for $200,000, using $20,000
or 10 percent of your own money and $180,000 or 90 percent of the 
bank’s money. What did you really buy? You bought land worth, say, 
$40,000 and improvements, including a building, landscaping and 
fixtures, of $160,000.
The government lets you take a deduction, called depreciation, for the
wear and tear on the building. If this is a residential property, your 
deduction is about 3.64 percent per year in the United States. (It’s more
in some other countries.)
That means that you get a deduction on your tax return of almost $6,000 
per year for depreciation ($160,000 x 3.64 percent). Let’s say your cash 
flow is 1 percent per month on your initial investment of $20,000. That 
means you will have cash flow of $2,400 per year. With a tax deduction 
of $6,000, you will show a loss on your tax return of $3,600 per year 
($2,400 minus $6,000). This $3,600 loss can be used to reduce your taxes 
from your salary, your business or your other investments. So depreciation 
protects your cash flow from taxes and produces an additional tax benefit 
by lowering your taxes from your other income. And remember that you 
get depreciation, not only on the dollars you invest, but also on the money 
the bank loaned.
You get a similar benefit called amortization, which refers to your costs of 
borrowing money from the bank, such as points and loan-origination fees. 
All along, our strategy was to install new washers and dryers in all the 
units, which could eventually get us an additional $25 in rent per unit,
a total of $86,400 in additional income annually. (Math: 288 units x
$25 x 12 months = $86,400).
In just three and a half years, we have been able to increase this property’s 
annual net operating income by over $300,000. The original mortgage 
has decreased more than $600,000 because we paid the mortgage using 
the residents’ rental payments during that same period of time.
Today, this property is now worth about $20 million. The value is 
increased because the net cash flow increased. 
By using good debt and leverage and with just $3.4 million down, this 
property’s value has increased by over $6 million, nearly $2 million a year. 
The annual cash flow also increased by over $300,000 and is distributed 
to the investors.
The original business plan was always to refinance using new debt and
to leverage and return the original investor equity. In late 2011, we plan
on refinancing this property with new debt and leverage with a new
$15 million low-interest fixed-rate loan, which will pay off the existing
$10 million in loans and leave $5 million to distribute. 
There is nothing better than returning investors’ money. In this case, if the 
proceeds are $5 million, we will return not only the original $3.4 million 
but an additional $1.6 million. Don’t forget the investors also receive a
nice monthly cash flow while the money is invested! 
Once the investors receive their money back in full, their investment in this 
property will be zero. The “returned original investment” and additional 
proceeds are tax-free because it is a refinance.
In 2012 with a new loan in place, the property will continue to pay out 
cash flow to all the investors, which will create an infinite return. 
I do want to emphasize that this scenario was planned from the beginning. 
Investors using leverage and debt are able to reap the rewards of the 
increased value on the “loaned” amount.
If you use good debt and buy assets that generate cash flow, you can become 
very wealthy. 

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Chapter Three
Unfair Advantage
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112
S can stand for sales.) As an investor, I must know what kind of ROI the 
sales person is talking about. Is it 10 percent on cash flow or capital gains, 
and what are the tax consequences? Am I punished with taxes, or given 
tax breaks? More importantly, how do I achieve an infinite return (aka 
“money for nothing” or “printing my own money”)?
If you know what you are doing, debt can be an unfair advantage.