Free Money: How the Rich Invest
In 1974, Ray Kroc, the founder of McDonald’s, was asked to speak to the MBA class at University of Texas at Austin. My friend was a student in that class. After a powerful and inspiring talk, the class adjourned and the students asked Ray if he would join them at their favorite hangout to have a few beers. Ray graciously accepted.
“What business am I in?” Ray asked, once the group all had their beers in hand. No one answered, so Ray asked the question again. “What business do you think I am in?”
The students laughed, and finally someone said, “Ray, who in the world doesn’t know that you’re in the hamburger business.”
Ray chuckled. “That’s what I thought you would say.” He paused and then quickly said, “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”
Ray knew that his primary business focus was to sell hamburger franchises, but he never lost sight of the location of each franchise. He knew that the real estate and its location was the most significant factor in the success of each franchise. Basically, the person that bought the franchise was also paying for the land under the franchise for Ray Kroc’s organization.
Today, McDonald’s is one of the largest owners of real estate in the world, owning some of the most valuable intersections and street corners in the world. And the amazing thing is McDonald’s gets all this real estate for free. Their franchises pay for it.
Free Money Starts With Financial Education
In the world of the asset column, getting something for nothing is vital to building lasting wealth. Sophisticated investors first ask: “How fast do I get my money back?” They also want to know what they get for free, also called a “piece of the action.” That is why ROI, or return on investment, is so important.
For example, I found a small condominium that was in foreclosure a few blocks from where I lived. The bank wanted $60,000, and I submitted a bid for $50,000. The bank accepted my bid because they knew I was serious — I included a $50,000 cashier’s check with the bid.
Most investors would say, “Aren’t you tying up too much cash? Why not get a loan?” The answer is: “not in this case.”
My investment company uses this condominium as a vacation rental in the winter months when the “snowbirds” come to Arizona. It rents for $2,500 a month for four months of the year. During the off-season, it rents for $1,000 a month. After three years, I had my initial investment back. That was years ago. Today, I get money each month in my pocket and the money I spent to buy the condominium has been returned many times over. That’s a great ROI. In fact, now it’s infinite returns — or as I like to call it, printing money legally.
When McDonald’s franchises pay for their real estate, that is an example of “piece of the action.” They sell their intellectual property and brand to a franchise owner and in return they get income from the operations plus the land costs covered by the operations. Something for nothing is built right into the deal.
Isn’t Investing Your Money Risky?
When I talk about the rich getting something for nothing through smart investing, I’m always asked, “Isn’t that risky?” The answer is yes and no.
My poor dad often said, “Investing is risky.” And for him it would be. He had a low financial IQ. As my rich dad often said, “Being financially uneducated is risky.”
Most people know they should invest. The problem is that most people, like my poor dad, believe that investing is risky. The reality is that it’s not — if you are financially educated, have experience, and have good guidance.
In today’s economy, it’s much more risky to rely on your employer for your well being than it is to become financially educated and to invest your money wisely. It’s also risky to put your money in the bank and collect interest that barely covers inflation… and if inflation really takes off, you’ll actually lose money.
As many people learned over the last decade, it’s risky to consider your personal home as your primary investment. And it’s risky to put all your hope in a broker and a 401(k) for your retirement investments.
Today, if you want to be financially secure and free, you must be financially educated and learn to invest well.
Investing Well Means Making Money Work for You
Rich dad said, “When you learn a profession, let’s say to be a doctor, you learn how to work for money. Learning to invest is learning how to have money work for you.”
My poor dad didn’t know how to make money work for him. He spent his whole life working for money. He was a good man and a hard worker, but he struggled financially all his life. If he had been my only example on how money works, I would have grown up to be like him. Thankfully, my best friend’s dad, my rich dad, taught me different things about money and investing.
One way he did this was through the game Monopoly. Over and over again, he’d say, “One of the great formulas for wealth is found in this game: four green houses, one red hotel.”
Monopoly is a cash flow game. For example, having one green house on a property you own could make you $10 when someone lands on it. Then, two houses could make you $20. Three could make you $30. And a hotel could make you $50. Basically, more green houses and red hotels means more cash flow. It’s a simple game, but an important lesson.
The Rich Know Investing Is the Key to Building Wealth
My rich dad played Monopoly in real life, and he often took his son and me to see his real life houses and hotels. Watching my rich dad, I learned many valuable lessons about investing.
- Investing is not risky.
- Investing is fun.
- Investing can make you very, very rich.
- Investing can set you free from the struggle of earning for a living and worrying about money.
In other words, if you are financially educated, you can build a pipeline of cash flow for life by investing — a pipeline that produces cash in good times and bad times, in markets that both boom and bust.
Appropriate Risk + Financial Intelligence = Financial Freedom
On every one of my investments, there must be an upside, something for free — like a condominium, a mini-storage, a piece of free land, a house, stock shares, or an office building. Getting “a piece of the action,” something for free, is essential to attaining financial freedom. I also look for limited or low-risk ideas. I only want to lose the money I’m willing to lose, not a penny more.
Wise investors look for more than just ROI. They look at the assets they get for free once they get their money back. That is financial intelligence, and that is why the rich get more free things than the poor.
Editor, Rich Dad Poor Dad Daily