Common Sense For Buying Investment Property

By Author: Alexandria Anderson
Total Articles: 46
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Robert Kiyosaki, Author of the Cash Flow Quadrant book, says his rich dad swore that investing in real estate is not rocket-science. Rich Dad suggested it was simply an issue of using logic. But we all know that reasoning is not, in fact, all that wide-spread.

Rich Dad also says, the worst investors are those who simply haven't studied the process. They adopt the point of view that investing in real estate is either too much of a risk or a rip off. Others skip their do-diligence and end up losing money.

The best opinion anyone can have having to do with investing is simply to educate yourself. If, in your hurry to make money, you jump in without that education, you will be doing yourself a great disservice. One of your most important resources is time and if you waste it, you will usually find that the money will come next - money you have that you end up losing, equity you could have saved if you had simply invested the time to study the process.

That is great, you might say. You most likely accede that getting a good education is always a smart thing. Knowledge is power, after all. What type of education ...
... do I need? may be your biggest question. Your 2nd question is probably, How do I get it?

The 1st thing you should do is study some basic accounting, which is not as ambiguous as it appears to be. Accounting is the lexicon of finance. If you're investing in a business or a piece of property or what have you, you will need to be able to check in on it and see whether it'll be an asset (make you income) or a liability (lose your money). It seems like logic when you look at it, doesn't it? But in order to be able to determine these things, you will need to be able to understand your balance sheets.

There are 4 basic types of financial statements: balance sheets, income statements, cash flow statements, and statements of changes in share-holder equity. The latter is pretty self explanatory, and addresses the characteristics that lie between at two different windows of time. Shareholder equity is it's total assets subtracting it's total liabilities, essentially the net worth of a business.

The cash flow statement is a certificate that depicts the cash used in making a company run, plus where that money originated. Wikipedia relates a business to a very big container of water which catches more of the water and also has lines running from within to the outside of it - into the pockets of the investors and others to whom the business owes money to. The cash-flow-statement aspires to give an account the activity of that water - or the flow of that money.

The income (or P&L statement) watches out for a company's income and expenses over a period of time, while a balance sheet provides a description the same thing for a particular moment in time and addresses your assets and liabilities.

It may seem quite simple until you think about Rich Dad's words on discerning your assets and liabilities apart from one another. He says that the bank, for instance, will claim your house as an asset. It sounds rational. After all, it is a thing you own, correct? Yet according to Kiyosaki's rich dad's definition of assets and liabilities, your house is actually a liability. It is a financial obligation because it will eventually cost you money in monthly fees and updates. It certainly isn't making income for you, and up to the time it begins doing that (say, you buy another house and are able to rent the first property out to make you some money), at this point the property still is not an asset on your balance sheet.

Not that the bank is lying to you outright. The house you are living in is an asset on their balance sheet because it is making money for them.

That is the type of thing you can figure out for yourself and determine whether you are losing or making money on an investment, if you make the time to get an education. Remember: Knowledge is power.