Page 140 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money
P. 140
4. Asset column: Appreciation. Appreciation is the increase in asset
value. This is also income to you. This is not appreciation based upon
some appraiser’s idea of an increase in sales price based on
comparative sales in the area. The way I measure appreciation is by
the actual increase in income to my income column. For example, the
increase of $360,000 in income from my 300-unit apartment house is
measurable.
This is not an exact method for defining IRR, but it gives you an idea of
how an investor can increase his or her return on investment far higher than
most investors can receive from paper assets. At least you have an idea of
what an IRR is. I would guess 95 percent of investors have never heard of
internal rate of return. So you are now smarter and sharper than 95 percent
of the investors out there.
The Exit Strategy
The beauty of the exit strategy on the 300-unit apartment house is once
again the use of leverage to become even richer. Instead of selling the
property and facing substantial capital gains taxes on the profit, we pull out
the money by refinancing. We are able to do this because we have increased
the value of the property through our improvements and management. The
bank recognizes this increase in value and we are able to borrow against it.
By leveraging the property’s value, we pull money out of the property tax-
free, and the improved operations more than cover the higher mortgage
payment through higher income. By borrowing rather than selling, we get
our down payment back, tax-free, and we get to keep the asset. At this
point, the property’s income is an infinite return because we have no money
invested in the deal, yet we receive the income. This is the ultimate
leverage.
Let’s say after five years we are able to refinance the property and pull
out $4 million tax-free. The numbers are in the diagram on page 122.
The $4 million refinanced dollars go to the investors, and pay back all
initial equity and then some. Even better, we still maintain control over the
