Page 116 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

For my investment in the 300-unit apartment house, my banker put up 80
percent of the $17 million real estate investment. By using my banker’s

money, my leverage is 1:4. For every dollar I invest in the deal, the bank
lends me four dollars.
So why did the financial planner on TV say that real estate was such a
risky investment? Once again, the answer is control. If an investor lacks the

financial intelligence to control the investment, the use of leverage is very
risky. Since most financial planners put people into investments where they
have no control, they should not use leverage. Using leverage to invest in
something you do not control would be like buying a car without a steering

wheel and then stomping on the gas pedal.
Most of the people being hurt by the real estate meltdown are people
who were counting on the real estate market to keep going up and
increasing their home’s value. Many people borrowed money against their

inflated home value. Now their home may be worth less than what they
owe. They have no control over the investment and are at the mercy of the
market.
Many homeowners who still can make their mortgage payments feel bad

because the value of their home has dropped. They watch the equity in their
home disappear. When housing prices drop, many homeowners feel they
have lost money. This is sometimes referred to as the wealth effect. Due to
inflation, which is not really an increase in asset value but a decline in

purchasing power of the dollar, many people feel wealthier as their home’s
value appears to increase. When they feel wealthier, they borrow more
money (leverage) and spend more money on liabilities. This is a direct
result of the new capitalism, an economic expansion based upon the decline

of the dollar and an increase in debt.

My Worth Is Not Based upon Net Worth

The wealth effect is rooted in the illusion of net worth. Net worth is the
value of your possessions minus your debt. When a house goes up in value

most people feel their net worth has gone up. For those of you who have
read my other books, you may already know that I feel net worth is
worthless, for three reasons: