How the Rich Legally Pay Zero Taxes With Real Estate | ENCORE - Robert Kiyosaki, Kim Kiyosaki

The Importance of Financial Education in Market Crashes [0:00]

• Market crashes negatively impact average individuals' 401ks and retirement plans.
• Financial education is crucial for understanding how to profit during market downturns.
• The ability to prepare for and capitalize on market crashes is a key aspect of financial literacy.

  "For the average guy, girl out there, when the market crashes, they crash too. Their 401k crashes, their retirement plan crashes. They don't know how to make money when the markets crash."

Understanding Asset Classes and Taxes [0:35]

• There are four main asset classes: business, real estate, paper assets (stocks, bonds, mutual funds), and commodities (gold, silver, Bitcoin, oil).
• Each asset class is taxed differently based on how it's acquired and sold.
• Real estate offers various tax implications depending on the purchase and sale timing.

  "And we always say that, you know, you gotta find the asset that fits you best. So we always recommend, go look at all the different asset classes, see what one fits you best."

The Misuse of Diversification [2:09]

• Financial planners often advise diversification, but it can mean 'de-worsifying' by spreading investments thinly.
• Owning various paper assets does not equate to true diversification.
• Real estate, gold, and silver are cited as better assets in current times, according to Jim Rickards.

  "You know, when a financial planner tells you diversify, they really are saying de-worsify."

Real Estate Investing with Debt [3:26]

• Ken McElroy, a real estate expert, emphasizes using other people's money (debt) to invest.
• Borrowing from banks allows investors to leverage funds for property acquisition, only requiring down payments.
• This strategy, combined with tax advantages like depreciation, enables significant wealth creation.

  "So we use debt and then, you know, Tom works his miracles on the depreciation side and the bonus depreciation and all the other advantages that we get on the tax side."

The Power of a Team in Real Estate [5:25]

• Individual investors often hit a limit due to time constraints, especially with property management.
• Building a team, including property managers and tax advisors, is essential for scaling real estate investments.
• Kenny's refusal to manage properties under 120 units highlights the scale required for his team's efficiency.

  "So you've got to bring a team on. So we had Kenny and then we brought on Tom and it's the team that lets us grow."

Real Estate Management: The Crucial Factor [6:30]

• Property management is a critical and often challenging aspect of real estate investing.
• Unlike stocks, real estate requires active management, making experienced managers like Kenny invaluable.
• Investors are consistently asked about their team's experience and management capabilities.

  "And unless you've been in real estate, you don't know that is the magilla. If you can manage real estate, you got it, right, Kenny?"

Kenny's Journey into Real Estate Management [8:20]

• Kenny started managing properties in college to avoid student debt, earning $600 a month plus a free apartment.
• He discovered a passion for the business side after improving a poorly managed building.
• His focus shifted to acquiring properties and applying effective management principles.

  "And I liked it. I actually really liked the business. I felt like it was really horribly managed when I moved in and, and I was like, well, if I just get people in here that can pay rent and I can clean this place up, it'll be a lot less work for me."

Cash as a Liability and the Role of Debt [10:34]

• Cash is considered a liability because it doesn't produce returns and loses value due to inflation.
• The government prints more money, devaluing existing cash.
• Converting cash into debt, particularly through real estate, is a strategy to combat this.

  "For the people on the B and the I side, the biggest liability is cash. Yes. Am I correct, Tom? Absolutely. It doesn't produce, it doesn't produce anything."

Tax Incentives for Real Estate Development [12:42]

• Tax laws offer incentives for building housing and commercial properties.
• Depreciation is a key benefit, allowing deductions for the property's value, including the borrowed amount.
• This encourages borrowing money, which the government views as beneficial for the economy.

  "So what happens is that the benefit that they give is what's called the primary benefits, what's called depreciation. And depreciation is magic."

The Mechanics of Tax-Free Income [15:00]

• A million dollars in business income can be converted into $10 million in real estate through debt.
• This significantly reduces or eliminates taxes on the initial income.
• The government incentivizes borrowing because the US dollar became debt in 1971.

  "What that does is reduce taxes here. Is that correct, Tom? Right. Because that, that $1 million is not just a liability because they're printing it, but it's a liability because there's $400,000 of taxes associated with that million dollars of income."

Real Estate: A Global Tax Advantage [17:15]

• The US offers some of the best real estate tax laws globally.
• Most countries provide depreciation benefits for investment real estate.
• The strategy of using debt to reduce taxes is applicable worldwide.

  "The U.S. right now has the best tax laws in the world when it comes to real estate. There's no question."

Infinite Returns and Tax-Free Cash-Outs [19:00]

• Real estate investors can achieve 'infinite returns' by getting their initial investment back tax-free through cash-out refinances.
• When a property's value increases, the equity can be borrowed against tax-free.
• This borrowed money can then be reinvested into new properties.

  "So you, so you give me money. I give it back and you pay tax legally, um, uh, you know, over that depreciation amount only."

The Value-Add Strategy and Forced Equity [21:30]

• Investors can create 'forced equity' by improving properties, increasing their value beyond market appreciation.
• This involves having a business plan to significantly enhance the property's worth before or shortly after purchase.
• The increased value allows for larger tax-free loans.

  "So I, I buy a property of 10 million with the idea of bringing it to 20 before I buy it. That's the value add, yes."

Real Estate: Reducing Taxes Today and Tomorrow [24:00]

• Real estate is one of the few investments that can reduce current taxes and eliminate future taxes, even upon sale.
• This requires proper financial education and tax advice.
• The complexity of property management is highlighted as a deterrent for casual investors.

  "Now real estate, let me say one last thing on, on, on the importance of real estate from a tax standpoint. It is one of the few places where you can actually reduce your taxes today and to never pay taxes in the future."

The 2008 Crash and Real Estate Opportunities [27:00]

• The 2008 market crash presented significant opportunities in real estate due to falling prices and interest rates.
• Investors like Ken McElroy were able to borrow substantial amounts and acquire properties at low valuations.
• This period demonstrated how savvy investors can thrive when the market crashes.

  "In 2008, when the market crashed, we all thought we died and went to heaven because the real estate prices dropped, but so did interest rates."

Debt as a Tool: The Government's Incentive [29:30]

• The government incentivizes borrowing because the US dollar became debt in 1971.
• Money is created when debt is incurred; ceasing to borrow can cripple the economy.
• Living debt-free, while often advised, can lead to paying significantly more in taxes.

  "The government wants you to borrow money because if we don't borrow money, the whole fricking economy grinds to a halt. Am I correct on that one?"

The Mechanics of Tax-Free Loan Repayments [31:30]

• When borrowing money, it's considered owed and not income, thus not taxed.
• In real estate, tenants pay down the debt, and depreciation offsets the income, creating a 'perfect storm' for tax benefits.
• This incentivizes actions the government desires, aligning with the 'inside investor' quadrant.

  "Well, yeah, for sure. I mean, first of all, the reason you don't pay tax when you borrow money is because you, that money is still owed to somebody. And so it's not income to you."

The Professional Investor Advantage [34:30]

• The tax benefits in real estate are more accessible to 'professional' or 'inside' investors, not casual ones.
• Professional investors gain access to better deals, interest rates, and tax advantages.
• This requires understanding the law and actively engaging in real estate.

  "And that's what allows her to get these tax benefits that the average casual investors never going to get, because they don't understand how the law works."

Tackling Problem Properties for Profit [36:30]

• Investors like Kenny seek out properties with problems, as they often represent significant opportunities.
• A vacant, dilapidated property can be worth far less than a well-managed, occupied one, allowing for value creation.
• Fixing up such properties benefits the neighborhood and community.

  "He was an expert. He like you, he, he just, he was mission driven. He knew exactly what we needed to do again."

Leveraging Tax Benefits: The Power of 20% Down [41:00]

• When purchasing real estate, putting down 20% cash still allows for 100% of the tax benefits.
• This means investors can leverage their tax benefits five times more than if they paid cash.
• Key tax benefits include appreciation (tax-free), depreciation (income tax benefit), and amortization (offset by depreciation).

  "So you leverage your tax benefits. In other words, you get five times the tax benefits than if you just put down the, than if you paid cash for it."

The Importance of a Team and Starting Small [44:30]

• While advanced strategies exist, starting small with one's own money is crucial for gaining experience.
• As investors grow, they need to build a team of experts.
• Kenny's initial refusal to manage small properties highlights the scale his team operates at.

  "It doesn't mean don't start small. No, start small. Start small. Yeah. But the benefit is you always have dreams of going to big on this side here, right?"

The Formula for Infinite Returns [47:00]

• The core formula involves converting cash into debt, improving the asset, and borrowing out the increased value tax-free.
• This borrowed money can then be reinvested.
• The process is designed to generate cash flow while minimizing or eliminating taxes.

  "So Kim and I have a million on to us, the cash is a liability that coming from rich dad, we move it into the 20 million in the asset column. We turn it into debt. We took cash convert to debt."

Learning and Continuous Education [50:30]

• All successful investors started with little knowledge and learned through practice and education.
• Surrounding oneself with knowledgeable people and asking questions is key.
• Resources like books by Kenny McElroy and Tom Realwright are recommended for learning.

  "And, uh, I learned how to do that. And now they're like, how did he do that? And so, uh, the, the point is, uh, you have to, uh, you have to surround yourself with people that know how to do it, ask a lot of questions."

The Power of Debt and Avoiding Cash [53:00]

• The US dollar became debt in 1971, making debt a fundamental part of the financial system.
• Using debt is a key strategy for wealth creation and tax avoidance.
• Holding excess cash is detrimental due to inflation and government money printing.

  "I just like using debt. I love debt, but that's why Kim and I have so much money to save and gold silver or Bitcoin because we don't need cash."