Robert Kiyosaki's Rich Dad Poor Dad first drew me into real-estate investing. After reading another of his books, I found myself thinking about a concept he calls phantom income.
In Why the Rich Are Getting Richer, Kiyosaki claims that money is a language you have to learn to get rich. Most people don't speak it because it takes time, practice and dedication.
The cashflow quadrant, which I have written about before, returns as a central idea in this book.
To summarize, there are four quadrants:
- Employee: you have a job.
- Self-employed: you own a job.
- Business owner: you own a system.
- Investor: you own investments.
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Kiyosaki argues that debt and taxes can work very differently for business owners and investors than for employees. Real financial education must be about debt and taxes, as these are our biggest expenses.
People who prioritize a degree, a steady job, a salary, a house and savings may avoid the risks and debt involved in investing. Kiyosaki sees that as an obstacle to reaching the fourth quadrant.
His argument is:
- Studying will leave you with a gigantic debt and will teach you to submit to society's dogma.
- Globalization took out blue-collar jobs, robots will take white-collar jobs. All jobs are insecure.
- Home ownership is a liability, not an asset.
- Saving is not smart because of inflation. The world is printing Fiat money all the time causing inflation. And saved money is taxed heavily.
The book argues for better financial education, especially about debt and taxes. I wish schools taught more of it.
One of Kiyosaki's central ideas in real-estate investing is phantom income: economic gains that may not arrive as spendable cash.
Governments need entrepreneurs to build companies in order to create jobs and investors to buy real estate in order to create housing supply. That's why tax laws are in favor of people on the right side of the quadrant.
In his simplified comparison:
- Employee quadrant tax is ~40%
- Self-employed quadrant tax is ~60%
- Business owner quadrant tax is ~20%
- Investor quadrant tax is ~0%
Which quadrant appeals to you? The video below explains the idea further.
The poor and middle class, in most cases, only have salary income. Those are the most heavily taxed income sources. The advanced investor doesn't work for money, but has phantom income.
Kiyosaki sees phantom income as one way an investor might benefit from property even when rent is not the only source of return.
Examples he discusses in real estate:
- Debt is tax-free. The time and money you save by lending money instead of working for it, transferring taxes, and having to save.
- Real estate appreciation is tax-free. But only if you don't flip it, but refinance it for your next real estate investment. This is a great option for people on the left side of the quadrant that own their homes.
- Repayment is tax-free. If your tenants pay your repayment, you do not have to pay it with your own salary after tax.
- Real estate depreciation gives tax deductions even if the property increases in value.
To elaborate:
When you put money in for a house (deposit), you usually use money that has already been taxed. If a property costs 100k and requires a 20% down payment, the buyer needs 20k upfront. If the investor is in the 40% tax scale, that 20k costs the investor about 35k in ordinary income or salary. About 15k went to the government in the form of tax before.
If you borrowed that 20k, or used the appreciation of an existing home (home equity loan) instead of using your own after-tax money, you would have saved 15k.
Think about how much time and money you could save if you didn't have to work, pay taxes, and live frugally to save up 20k down payment.
I want to understand these choices rather than simply say "I have a job".