Tuesday, November 6, 2007

Why Do People Believe Robert Kiyosaki Has a Clue?

Several of the people I meet who want to become real estate investors, have been reading Rich Dad Poor Dad, and they’d like me to tell them how to hurry up and get rich off real estate. Usually I refrain from telling them that not even Kiyosaki, himself, got rich overnight in real estate. He got rich giving seminars and writing books about how to get rich overnight in real estate (and once he had a lot of money to invest, he was able to make some nice real estate investments too – just like anyone with several thousands of dollars burning a hole in their pocket can do).

But some of his investment advice isn’t really so bad, if you have the time, the wherewithal and the cash to do it. However, there's one piece of advice that he gives that is so false and ridiculous, I’m surprised when I hear people believing it. He says that his (nonexistent) “rich dad” told him that his personal residence is not an asset, but a liability.

So let’s first put this nonsense to the Accounting 101 test. Accounting 101 says that anything you own is an asset, and anything you owe is a liability. Therefore the mortgage against your house is a liability, the house itself is an asset. With any luck the house is worth more than you owe, so that you have a positive net worth. If that’s not the case, it doesn’t turn the house into a liability, it just means you, unfortunately, have a negative net worth. Even your car is an asset, though a deprecating asset and therefore not really a sound investment - your car loan is still the liability.

Furthermore Kiyosaki only considers real estate an “asset” if it’s paying you cash every month. This is not the definition of an asset. If it’s making you money every month, it’s generating positive cash flow in accounting-speak. But even if you’re feeding it because the payment is higher than the rent or because it's vacant, it is still your asset. It’s just not a money-making asset – yet. In this marketplace, unless you have about a 35% down payment, the odds are slim that you’ll be able to buy an investment property that will generate a positive cash flow. That doesn’t mean that real estate is not a good investment. You’ll still have an appreciating asset, and over time rents will increase with inflation while your mortgage payment will remain fixed.

The bottom line is twofold. First,a real financial advisor is a far better bet for good information on investing than a clever infomercial creator. And second, real estate investing is part of a long-term investment plan, not a get-rich quick scheme.

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5 comments:

Jeffrey Austin White said...

Well written! I have been renting for 5 years now with no rent increase. I would like to buy property. However I am saving several grand a month. I worry abort The maintenance cost of a house and whether the property will appreciate more then I am able to save. Is there a calculation for this? Any feedback would be greatly appreciated.

staci@allpacificmortgage.com said...

Hi Jeffrey -- for general information, this is a really great calculator:

http://www.dinkytown.com/java/MortgageRentvsBuy.html

In terms of appreciation that largely depends on where you live. Over the long-haul real estate everywhere will increase in value. But many places are going to continue to decrease first.

I see that you're a stock investor and pretty much advice about stock buying translates into real estate investment -- as in, you're usually better off just getting in the market, than sitting around trying to time the market. Usually!

Hope that helps.

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