With real estate, our business plan is to use debt, other people's money, to achieve an infinite return and print our own money. The following is an overly simplified real-life example.
Purchase: We buy a two-bedroom, one-bath house in a great neighborhood for $100,000.
Financing: We pay $20,000 as a down payment and borrow $100,000 for the house and extra money for improvements from a bank and/or investors.
Improve property: We improve the property by adding on an extra bedroom and a bathroom.
Increase rents reflecting increased property value: We raise the rent from $600 a month (what two-bedroom, one-bath houses rent for in the market) to $1,200 a month (the market rent for three-bedroom, two-bathroom houses).
Refinance property at new appraised value of $150,000: When we refinance the house, the banker gives us a loan of $120,000 (80 percent of new value). We get back $20,000, plus get an extra $20,000 to invest in a new property.
Costs: The loan interest at 6 percent costs approximately $600 a month. Expenses are another $300 a month, which puts a net $300 a month in our pocket in the form of cash flow.
Key: The new loan and expenses are financed by rent from the tenant.
— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich
