Real Estate Investor Magazine South Africa October 2015 | Page 22

UPFRONT

of the three, for approximately $35,000 each and paid
capital gains taxes on the profit.
I held on to the remaining unit, that1-bedroom
condo, for about 15 years and eventually sold it for
$375,000 when the real estate market boomed on
the island of Maui. As I’ve said: Start small and gain
experience.
A few years before I sold that last 1-bedroom unit,
it was renting for $850 a month—and delivering an
infinite return, since I never had any of my own money
in the investment. As rents went up, I refinanced the
condo, taking out approximately $100,000 in debt.
That $100,000 was tax-free money, because it was debt,
not income. The rental income paid the mortgage loan
and I was still receiving net rental income of about
$300 a month, after expenses.
I eventually sold the condo because managing a
single property, on an outer island was a hassle—and I
had learned enough from that experience. I had learned
to make money out of nothing.
Today, in 2015, I continue to use the same formula.
The only difference is that the number of units, total
dollars, and number of people required making the deal
work have increased.
My latest property, which closed in May of 2015,
was 1,600 units for $80 million. Once again, I have
none of my money in the deal. Rather than use my
“hard-earned” after-tax dollars for the purchase, I used
a series of rolling-equity refinances and government
tax incentives, plus debt—a formula very similar to my
first, $18,000 Maui property.

I’ll review the formula:
1. Acquire undervalued property.
2. Improve the property.
3. Raise rents.
4. Increase NOI (Net Operating Income).
5. Refinance—taking out cash, tax-free.
6. Reduce taxes using fundamental

accounting principles, of amortization,

appreciation, depreciation, and component
depreciation.
Here again, like in virtually every group in cities all
over the world, hands go up and people say, “You can’t
do that here.” Many of the people who say, “You can’t
do that here” that are high-income professionals such
as doctors, accountants, and lawyers.
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OCTOBER 2015 SA Real Estate Investor

Frosting on the Cake
The real financial benefit to acquiring millions in
income-producing real estate is to legally pay as close
to nothing in taxes as possible. In other words, because
I invest in real estate in the I quadrant, I pay almost
nothing in taxes on income I earn in the E, S, and B
quadrants. For example, I earn considerable income
as an author on my book sales in the S quadrant. The
tax write-offs from real estate investments—in the I
quadrant—offset my book income in the S quadrant.
The same is true for income from The Rich Dad
Company, income from the E and B quadrants.
Every year my income in the E, S, B and I quadrants
goes up, which means I must acquire more real estate
in the I quadrant—or face the taxman and pay more in
taxes. This is another reason why the rich get richer and
the gap between poor and middle class grows wider. It
is a matter of financial education.
If you would like to learn more about this formula
for real estate investing, you may want to read the
books of my Rich Dad Advisors and business partners,
Ken McElroy and Tom Wheelwright, CPA.
Ken’s books are: The ABCs of Real Estate Investing,
The ABCs of Property Management, and The
Advanced Guide to Real Estate Investing. Tom’s book
is titled Tax-Free Wealth.
www.reimag.co.za