After reading Robert Kiyosaki’s Rich Dad Poor Dad for the first time, the real estate topic got my attention and I went very deep down into the rabbit hole. I just finished another book of his and learned about a very interesting phenomenon: 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, that I wrote about before, is the protagonist of this book again.
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.
The 4 cashflow quadrant pic.twitter.com/aPVjHNdjtM
— Market Demon (@market_demon) November 12, 2020
Taxes and debt are your best friend when you are on the right side of the quadrant, and your worst enemy when you are on the left side. Real financial education must be about debt and taxes, as these are our biggest expenses.
People that still think they need the security of a decent study, in order to have a steady job, in order to have a fixed salary, in order to buy a house and to save money, tend to avoid risks and debt, and will never reach the fourth quadrant.
The truth 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 message of this book is that good financial education is what we really need. And that’s not what’s taught in schools.
Turns out investing in real estate is mostly about phantom income; invisible tax-free income.
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.
To simplify:
- Employee quadrant tax is ~40%
- Self-employed quadrant tax is ~60%
- Business owner quadrant tax is ~20%
- Investor quadrant tax is ~0%
In what segment do you want to be? Watch the video below if you want some more explanation.
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.
Phantom income greatly reduces the risks of real estate investment because, even if you don’t rent out the property, it is still profitable.
Some phantom income examples 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. Buying a 100k property requires a 20% down payment means that the buyer of the property has to pay 20k. 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 had borrowed that 20k, or use his house’s appreciation for it (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.
It is not enough anymore to be financially ignorant and just say “I have a job“.