02 April 2007

Mistake on the Pizza Hut Deal

First of all, I believe most of you have already figured this out, but I wanted to post it here anyway, just to set the record straight.

Second, I apologize for not getting this out sooner. Here is what we got from a viewer:

Hey Rich Dad!

I think the math is off in this video. I would love to hear your thoughts, thanks!

**Here are the numbers in the video**

Price = $825,000
Down Payment = $206,250
Mortgage = $618,750
Monthly Cash flow = $1,840

If you get a monthly return of $1,840 {$22,300 a year} on a $206,250 down payment, that is a 10.7% return on invested capital. If you borrow the $206K down payment and pay 6% on that money, that leaves $9,705 dollars a year, and a 5% spread. Not $40,000 as suggested in the video.

Also, Wayne incorrectly referred to a capitalization rate in the video. If the total cash flow generated by this property is $22,300 per year, then the cap rate would be an abysmal 2.7% on this deal. The cap rate, and investors ROI are not necessarily related.

Thanks! Hope all is well!

Bill Blalock

Thanks Bill! You are absolutely correct.

The bottom line is Robert and Wayne made a mistake. That day, 10+ videos were shot. I believe they were simply confused. They had a ton of numbers rolling around in their heads and they got mixed up. Not to cut them any slack as I will call their mistakes all day long.

Now, my personal thoughts and a question to you all. Did you find Wayne's style, creativity, approach to a deal, insights, level of education and experience valuable? If not, then you are on a whole different level than anyone I know and should probably not be reading my measly little blog, or any Rich Dad material for that matter.

If you did find those traits valuable, then who cares if the numbers are correct? That is like discounting an entire book because there are a few spelling mistakes. Of course the numbers should work out. But did you miss the point? Did you find value in the overall context of the piece, or were you concentrating too much on the minutia?