While going through some old boxes, I found an old CD case containing some audiobook recordings from a real estate program by Robert Kiyosaki and Dolf De Roos. I’m pretty sure they are from this set called Rich Dad’s Roads To Riches – 6 Steps To Becoming A Successful Real Estate Investor.
Kiyosaki is best known for his book Rich Dad, Poor Dad (my 2005 review). People tend to either hate him or love him, but to me he’s just a guy who has wrapped up a legitimate way to make money – investing in real estate – and tried to simplify and market it to the general public in a palatable way. You can read about most of the criticisms at this link, although it is a bit long (Reed really hates this guy.). I see his books as having the occasional nugget of wisdom buried in a pile of shiny happy fluff.
Luckily, I took notes when I listened to it the first time, so I didn’t have to go through it all over again. Here’s the stuff I decided was worth remembering.
- Avoiding Alligators. A general rule is that you should never invest in a home that does not immediately produce positive cashflow. In other words, the rent covers your mortgage plus other expenses, and you don’t have to keep making monthly payments out of your savings or income. A property that requires more money every month is called an “alligator”. Why? Because you have to constantly feed it and feed it. If you ever stop, it eats you.
- When To Expand. Along the same lines, if you keep buying alligators, you can only buy a finite number before all your money is tied up feeding them. If you buy cashflow-positive properties, it is much easier to keep buying them. Once your property value increases, you can extract the equity by refinancing and use to invest in another cashflow positive house. This way, you’re never in a bind with regards to cashflow.
- Tenant Screening Tip. When looking for tenants, always ask for the contact information of the current landlord and the landlord before that. This is because the current landlord might lie to you in order for you to accept their nightmare tenant, and have them move out peacefully. The previous landlord will be willing to tell you the truth.
- Treat It Like A Business. Don’t put up with tenants that chronically pay rent late. Maintain concrete rules for due dates, charge late fees when applicable, and if necessary, initiate the eviction process promptly. If you show them that you won’t tolerate late payments, this will either whip the wishy-washy ones into shape, or get rid of the bad ones as soon as possible.
The rest:
- The 100:10:3:1 Rule. This rule basically states that to find an appropriate real estate investment, you’ll need to look a 100 properties, makes offers on 10 of them, attempt to finance 3, and you may finally buy one of them. Basically: look hard and be picky.
- On Leverage. $10,000 can control $10,000 worth of stocks. If it goes up 10%, then you are up $1,000. Alternatively, $10,000 can control $100,000 worth of real estate through borrowing money (leverage). If your real estate goes up 10%, then you’re up $10,000. Of course, they don’t focus on the fact that if your home’s value drops by just 10%, you’re completely wiped out. The ability to leverage cuts both ways, but can help with cashflow.
- Property Manager. Hate the idea of fixing toilets at 3am in the morning? Hire a “good” property manager. Unfortunately, no tips were included on how to find such a mythical creature. (Similar to unicorns and the “cheap and prompt handyman”) Also, property managers usually charge about 10% of your gross rent.
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Hello! I found your blog through a comment you left in mine, and I think it’s fantastic! There’s so much material in here!
I read “Rich Dad Poor Dad”, and thought it was ok, although it works mainly just as a motivational book -if you want more concrete steps to follow, I suppose you have to read or listen to the rest of Kiyosaki’s products, such as the one you mention here.
I’m glad you point out that the power of leverage when your investment goes up also means that your losses will multiply when the price goes down. I’m amazed at how often this type of authors that try to show you how easy it’s to get rich forget to mention the negative side!
Anyway, I really like your blog, and I’ll make sure I keep coming back.
The Rich Dad’s books were certainly a source of inspiration to get me started in real estate investing. Once you are actually doing it though, most of the information appears to be superficial.
However, for most people the most critical step to success is to first take action. If the books help you do that, they have been worth it to you.
I feel like the older I get, the less I ever want to be a landlord. I totally see the “work” side to this, despite the possible gains. In any event though, I am likely to be a landlord one day on the house I now live in. I hope to buy something within the next 2 years and rent out my current home — if only to wait until the market rebounds. Right now, houses aren’t selling very well in my area — and if I were lucky enough to get a buyer, I’m sure they wouldn’t be bidding very high. My house is really nice too — all fixed up now and in the right market, I’m pretty sure, it would get me a really fast and nice return. So I’ll probably be the reluctant landlord for about 5-10 years. I mean, we might like being landlords, but it really depends on the tenant.
That post pretty much sums up my disappointment with Kiyosaki. One can adequately summarize his books with 500 words of bullet points, and he leaves unsaid the really useful stuff.
Jonathan, I’m surprised a smart guy like you would waste more than a minute or two on Kiyosaki. I knew this guy was a snake oil salesman when early on he talked about buying property and selling it “x” weeks later for “y” thousand more than he paid. (don’t recall the exact numbers). The obvious question is, where was the second buyer during the first sale?
I called/interviewed several Property Managers in 2007. I would recommend visiting their offices. When I was down to the last to candidates, both visited my condo, both asked that I visit their offices.
One of them I went about an hour early and her Office was closed and it looked like no one was there. When our appointment time came I went in and it looked very busy, and she mentioned they had been busy all morning and were “here.” At that moment I didn’t trust her, as it was obvious she and her assistant weren’t there all morning.
The other PM (actually the owner of the business), introduced me to his staff and the persons that would be handling my property and the finances. He also made it clear he wouldn’t charge any money for as long as they don’t rent out the property.
They both had a good track record and were in business for many years, but it came down to who do I trust more.
I haven’t yet read Kiyosaki, but I’m curious to read him given how much he’s talked about. Looking at Reed’s site it looks like Kiyosaki exaggerates the success he’s seen with real estate and gives people too high expectations. But the bullet points above all seem like decent advice to me.
While some people can sort through reality vs lofty sales pitches, many people are suckered by Kiyosaki’s tales. Many of his examples are pipe dreams, which are most likely fabricated or exaggerated. The danger is that he makes real estate investing sound so simple, but it’s not. Cash flow positive properties are extremely difficult to find nowadays. The reality is that real estate investing is very dangerous, and not everyone should be doing it.
Bottom line is this: If you’re smart enough to sort through reality vs his sales pitches, then you don’t need to read his book (look for cash flow positive investments… duh!). If you’re not that smart, then you’ll be a lot worse off believing and doing everything he says.
I’ve never been a Kiyosaki fan. I found this website on him.
http://johntreed.com/Kiyosaki.html
True or false, you decide.
I am not at all handy; that’s why I prefer to have the instant diversification of real estate by buying a real estate investment trust (REIT). That way I could have exposure to commercial real estate and not only deal with individual tennants.
As for stocks and leverage, it is quite possible to achieve a 10:1 leverage factor with stocks, using stock index futures. One thing I agree on is that people need to increase their financial literacy. Otherwise, they’d keep buying get rich quick guides ( i meants inspirational products ) like Rich Dad, Poor Dad 😉
I have read Robert Kiyosaki’s books with amazement, namely; Poor Dad Rich Dad, Ritire Young, Ritire Rich.
May God reward the effort of your work and may more people get rich from the use of your experience.
The rich dad poor dad series of books are indeed excellent, but has anyone caught the new book “YOU HAVE A COLLEG DEGREE, NOW WHAT?”
Its an excellent new book and curious if anyone else had read it?
Joe