The Business of Real Estate

Tom Wheelwright is a rare combination of CPA, real estate investor, and teacher. He has the ability to take the complex and often boring subject of tax and tax law and make it into something that's simple enough for a person like me to understand.

Tom understands the tax code. He actually enjoys reading the tax code, and because he is such a student of it, he understands this lengthy document better than anyone I know. Most CPAs focus on a very small part of the tax code. They focus on the part that lets you and most Americans defer taxes until retirement—the code relating to IRAs, 401(k)s, and other so-called retirement plans. Tom also pays close attention to the other, much lengthier part of the code that shows you how to reduce or eliminate your taxes permanently. The difference between Tom and other CPAs is that Tom understands the purpose of the tax code. It's not just a set of rules. It's a document that when followed is designed to reward certain behaviors through lowering or eliminating taxes. Does your CPA see the tax code this way?

I consider Tom to be a very moral and ethical man. He is very religious, raised in the Mormon faith. While I am not Mormon, I do share many of the values of the Mormon religion—values such as tithing, giving at least 10 percent to spiritual matters, and dedicating a number of years as a missionary. While I have never been a religious missionary, I have spent nearly ten years as a military missionary: a Marine Corps pilot in Vietnam, serving my country.

One important lesson I have learned from Tom and others of the Mormon faith is the saying, "God does not need to receive, but humans need to give." This reminds me of the importance of being generous. It is my opinion that greed rather than generosity has taken over the world. Every time I meet someone who is short of money, or if I am short of money, I am reminded to be generous and to give what I would like to get. For example, if I want money, I need to give money. Having been out of money a number of times in my life, I have had to remind myself to give money at times when I needed money the most. Today I make a point of donating regularly to charities and causes that are dear to my heart. My opinion is, if I cannot personally work at a cause near to my heart, then my money needs to work there for me. Going further, if I want kindness, then I need to give more kindness. If I want a smile, then I need to first give a smile. And if I want a punch in the mouth, then all I have to do is throw the first one.

I asked my friend Tom Wheelwright to be a part of this book not only because he is a smart accountant—a team player that anyone who wants to be rich needs to add to his his team—but also because he comes from a generous and sound philosophical background.

Tom is a smart CPA who is an advocate of investing in real estate. Why? Because he knows that tax laws reward real estate investors more than they reward stock investors. He is a great teacher, a generous man, and, most importantly, a friend I respect.

—Robert Kiyosaki

I was one of the fortunate few growing up. Unlike much of the rest of the world—people who have been told to save their pennies and invest in mutual funds—my parents taught me to invest in real estate and business. My father had a printing business, and my mother handled their real estate portfolio.

So, it was natural that once I had received my education, both formal and work related, I opened my own business. (I had a lot of education before I finally opened my own business—a master's degree in professional accounting, thirteen years of experience with international accounting firms, as well as experience as the in-house tax advisor to a Fortune 1000 company. I was a little slow to realize the power of business.) When I started my accounting firm, I did it like most people: I worked all hours of the day and rarely took a vacation.

When I did take a vacation, I still took calls from clients and colleagues. After all, business never rests, so why should I?

Several years into my business, we had experienced significant growth, but I was still working day and night and never taking a real vacation. And outside of my business, I had no substantial assets. That's when I read Rich Dad Poor Dad and first met Robert Kiyosaki. He helped me realize that I was thinking about business all wrong. It was not about how hard I worked, but rather about how smart I worked.

Like many of you, my first real experience with Robert was at a Rich Dad seminar. There I was, sitting next to my business partner, Ann Mathis, and her husband, Joe. Robert was talking about a subject near and dear to my heart— the tax benefits of real estate. Out of the blue, Robert asked me to come up to the front of the room to explain the tax benefits of depreciation, introducing me as his "other accountant."

I had come to learn about Robert Kiyosaki and Rich Dad only a few months earlier. One of my good friends, George Duck, had become the chief financial officer at Rich Dad and had introduced us. I'm not sure who was more nervous that first time I went on stage, Robert or me. Can you imagine putting an accountant on stage? Robert had no idea that I had spent my life teaching in one capacity or another, but he took the chance and put me up there anyway. This began a long and inspiring relationship between us, and it really launched my journey toward financial freedom.

I remember one of the first times Robert and I worked together. He used me as "muscle." That's right, he used his accountant as his muscle. Robert had been asked by a reporter to give an interview for the business section of the Arizona Republic. The primary topic was how Robert could claim that he routinely received 40 percent returns on his investments.

I went as the authoritative backup to Robert's ideas. After all, someone might not believe a marketing genius (i.e., Robert) when he says he gets these levels of returns, but who wouldn't believe an accountant? When it comes to investing, numbers are everything, and who better to support the numbers than someone who spends his life documenting, reviewing, and analyzing them?

That was one of the first opportunities I had to explain the benefits of leverage that comes from real estate. Not long before, I had started my own real estate investing. You would think that with parents who were real estate investors, that I, too, would become a real estate investor. I had even spent my career helping real estate investors and developers reduce their tax burdens.

Not so. I didn't actually begin investing in real estate until after the first time I played Robert's game, CASHFLOW 101®. This game had a powerful impact on me. I saw, with my own eyes, the power of leverage in real estate. The game was so powerful that the next day after playing the game, I called one of my clients who had been investing in real estate for several years and asked him to meet with me to show me how I could begin my own real estate investing.

And then I began making serious changes to my business. My partner, Ann, a systems genius, created the systems, policies, and procedures in our firm so we could focus on running the business and not working in the business. It took a few years, but eventually we were able to step away from working for hourly professional fees and instead supervise and grow a business that worked without us.

Now, I can take three weeks off each year with no e-mail or phone access, as I did just recently when I took my oldest son on a trip to the châteaux region of northern France. I didn't have to worry about my accounting firm or my real estate investments while I was gone because they were both running without my daily attention.

TIP| Real estate investing is a business and should be run like a business.

Robert talks a lot about the CASHFLOW Quadrant, with each labeled as E, S, B, and I. He emphasizes that we need to move out of the E (employee) and S (self employed) quadrants and into the B (business) and I (investor) quadrants. I have learned to take this one step further. That is, to move all I-quadrant investing into the B quadrant.

Think about what you could do with the time you would have if you didn't have to worry about tenants, repairs, and cash flow. How would it feel to eliminate the frustration that comes from constantly watching your real estate investments and worrying about if a tenant might call you in the middle of the night with a problem? You can eliminate all of this stress and free up hundreds of hours of your time simply by running your real estate investments as a B-quadrant business.

sv figure 1.1 I've learned to take the quadrant a step further and free up hundreds of hours of my time simply by running my real estate investments like a B-quadrant business.

It's really not that difficult. You simply have to start acting like a business and apply fundamental business principles to your real estate investing.

Business Principle No. 1: Strategy

Every business has to have a plan. Your real estate investing business is no different. A strategy is simply a systematic plan of action designed to accomplish specific goals. There are seven simple steps to creating a successful strategy.

STEP 1: ImAgiNE

Begin your strategy with goals. Imagine where you would like your real estate investing to take you. It may be a white sand beach in the Caribbean, unlimited time with your family, or working for your favorite charity. My favorite places in the world are Hawai'i, France, Arizona, and Park City, Utah. So my dream is to own a house in each of these locations.

Don't be afraid of being too aggressive. These are your dreams, after all, not some number that is artificially imposed by a financial advisor. Our clients frequently have dreams of financial freedom in as few as five to ten years. And with a good strategy in place, anyone can be financially free in less than ten years if they just start by applying these few basic business principles to their real estate investing. So far, after six years of investing, I now have houses in Hawai'i, Arizona, and Park City. France is on the agenda for next year. Pretty aggressive goals, but I have been able to reach them in six short years by applying basic business principles to my real estate and business.

Step 2: Financial Goals

Determine what it will take to realize these dreams in terms of wealth and cash flow. And commit to a date for accomplishing this goal. Then write down what you currently have available in terms of investable assets less the liabilities. This is your current wealth (also called net worth).

Step 3: CASh Flow TArgET

Of course, you will need to figure out the amount of wealth that it will take in order to create your desired cash flow. A simple rule of thumb for calculating this number is to multiply your desired cash flow by twenty. For me, I needed $5 million in order to create an after-tax cash flow of $250,000 each year.

Step 4: Current Wealth

Once you have your dream firmly in mind, the next step is to identify where you are today. When considering where you are today, list only your real assets, that is, those that are available to invest. Don't list your car or your jewelry. But do list the amount of equity in your home if it can be made available for investing through a home equity loan. Here is an example of what I mean:

table 1.1

Liquid:

Long-Term:

Savings

Loans

Stocks & Bonds

Real Estate

Mutual Funds

Oil & Gas

CDs

Business

Other

Intellectual

Other

Other

Sub-Total:

Sub-Total:

These first four steps are the essence of a process referred to as "dreamlin-ing," and I will use a simple illustration to show you what I mean. Here is what my dreamline looked like when I first met Robert and started down my road to financial freedom.

figure 1.2 Tom's "Dreamline" When He First Met Robert Kiyosaki

Step 5: Vision, Mission, and Values

After you have your dreamline in place, you can make a plan to reach those dreams. This plan should include your vision, mission and values, the type of real estate you will specialize in buying, and the criteria you use for choosing your real estate investments.

At this point, you may be wondering if I have truly lost my mind. After all, aren't vision, mission, and value statements only for true businesses? Exactly! And your real estate investments are a true business. At least they should be if you are going to reach your dreams in the shortest amount of time possible and with the least amount of work.

When creating your vision, remember that this represents your focus for the future, that is, what you want your life to look like when everything is in place. Your mission is simply a statement of how you are going to go about your investing business. And your values are the values that you insist everyone you work with in real estate share with you.

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