Best Advice: Robert Kiyosaki

I've written several "best advice" pieces (see my best advice category for details) and love to hear short takes on what financial "experts" view to be their best piece of financial advice. Over the next several days, I'll share some of these from a Bankrate article on best personal finance advice and give you my comments on them. Today, we'll hear from Robert Kiyosaki, author of "Rich Dad, Poor Dad":

"My rich dad gave me lots of advice. One of the better ones: There's good debt and bad debt. Bad debt is debt you have to pay for and makes you poor. If I use credit cards to buy new shoes it makes me poor. Good debt makes me rich and someone else pays for it."

One example: "I'm closing on a $17 million property and financing $14 million. That $14 million is good debt. It makes me richer every month by putting $20,000 in my pocket."

Ok, work with me on this one.

So he pays $17 million to make $240k. That's a return of 1.4%. Not good.

But let's just say he really pays on the $14 million he borrows. Still, that's only a 1.7% return.

Now let's give him the biggest break and say he only paid $3 million to earn $240k a year. Now he has a return of 8%. Not bad, but he's not getting fabulously wealthy here. Or am I missing something?

What about you? What do you think of Kiyosaki's advice?

Click here to read part 5 of this series.

Click here to read part 1 of this series.

Comments

[Dan]

I think the last sentence of the first paragraph of Kiyosaki's excerpt is poorly written. Based on his example, the sentence should read: "Good debt makes someone else poor and gives me a better return on my money for taking a great deal of risk." Someone has to pay the interest on the debt and therefore become poorer.

I believe the point he is attempting to make is that with the "good debt" he can invest in 5 of these properties with the cash it would take to buy one outright. With 5 similar investments, he would be putting $100,000 into his pockets every month. Or, we lowly readers could invest in a $17M property even though we only have $3M (good luck finding a bank to loan you $14M.) Either way, a discussion of risk is absent. If the market turned and he had to sell the property for $15M, there goes 100 of the monthly checks. If you or I, with our paltry $3M to invest, were in that situation, we'd now have only $1M. Not exactly getting rich.

[StoppedClock]

I've read Kiyosaki's book, and have come to believe that he is a self-promoting fraud, making his fortune by selling false hope to fools. His advice, such as that stated above, is just a bunch of vague nonsense. And I think his rich-dad poor dad story is a self-created myth. Just my 2 cents ....

[Toby]

Why do people still talk to this guy? He wrote a great fable about getting rich (Rich dad, Poor dad) akin to the _Wealthy Barber_ or _The Richest Man in Babylon_ and that's about it. He's basically admitted in the past that "Rich Dad" is not an actual person. Furthermore, I've never seen anyone be able to link Kiyosaki to a single piece of real estate. As far as anyone knows, his millions come from selling his books and overpriced board games and seminars.

Besides his advice being vague and useless, the specifics he does share can be downright wreckless! Search around on Google for "Casey Serin". Following Kiyosaki's advice, he bought 2 million in homes before RE took a turn for the worst. His blog seems to be defunct now, but write-ups should still be out there. While his predicament was not completely the fault of Kiyosaki's advice, his choice to leverage-to-the-hilt was definitely inspired by Kiyosaki. it made his situation that much worse when his house of cards finally crumbled.

Kiyosaki = Motivational Hack

[Curtis]

I think the advice, in general, is about right. The specifics though are not really stated well. For instance, I've been going into a little extra debt the last couple of years getting a business started. I've invested my time and money to do this.

We had a patent filed yesterday and have a meeting with our first potential client today. Spending that time and money to create something that will generate my income in future years is definitely a good trade off when compared to the alternatives of going into debt for shoes.

Granted, there are other options of where I could have invested that money, but if just comparing different ways of going in debt, there are acceptable ways. Still, I'm looking forward to being out of it in the next few years.

[Kevin]

This guy is a total whack job. I read his book and it is just laced with little stories and hardly any real-world advice. In my opinion, his books should be filed under "fiction". He doesn't even write that well as seen in the paragraph listed. It is really vague if the $20k a month is net or gross, not to mention as FMF said, it's not clear what type of return he's getting. Why take on that much risk for 8%? I think he just likes to use big numbers to impress people.

[Richard]

I'd like to know what some examples of "good debt" is, specifically good business debt. I have a side business and realized I'm not going to be successful bootstrapping. Other than going to the bank and asking for a loan I'm not aware of other options. And to me bank loans are bad debt.

[Todd]

I agree with other comments. I have trouble believing Kiyosaki made millions in real estate as he claims. Nor can I believe that he built several businesses that made him rich. He provides extremely vague advice with no specific details. (must have learned from Trump) Some of the larger concepts are sound but they are also nearly common sense. i.e. assets put money in your pocket, liabilites take money out of your pocket. I think he made a lot of money from the rich dad/poor dad story/series. You have to give him credit for all of the success he has had with his books and speaking engagements. This is where he made his money. However, the advice of value within his material is at the most several small tibits with are still very general.

[Douglas]

I've read the books. And RD-PD is a good book to get a beginner into the right mindset of "get involved with your own finances". That's it. I've also read his articules in Yahoo Finance, and both the books and the articules are full of vague, non-concrete statements. He's always telling us that the rich get richer, and that we losers don't get to get richer, becuase we don't think and act as rich people. But he never, in specific terms, tell you how is that the rich people behave. It's all fluf. All a bunch of hot words. His advice above is a perfect example.

[Ed]

This is required reading: http://www.johntreed.com/Kiyosaki.html

[ryan]

the example was poorly explained.

what he means is that he bought a $17M prop and financed $14M, thus putting up $3M.

he makes 20K a month after all expenses (financing costs as well), so thats $240K a year.

240K/3M is an 8% cash on cash return the first year.

and this doesnt account for after tax (deprec. etc.) incentives.

[Dan]

Maybe I'll write a book and tell people to finance $16M of the $17M of the property. That's three times better - a 24% APY before tax incentives! Or we can go no money down and have an infinite APY.

Seriously, there are a lot of hacks like him out there selling the same thing he is selling - dreams. No self-respecting personal finance author would consider it helpful to tell the general public, who make an average $30,000 per year, how to finance a $17M property. To 99.99% of the public, all personal debt is bad debt. The rest are lenders.

[Mark]

This guy is nothing short of a crook. He has absolutely no professional credentials and he has failed at most of his business ventures. In fact, he has even admitted that "Rich Dad" was all made up. I cannot take any of his advice seriously. His advice can get you in a lot of trouble.

[aa]

What I'm sure is that people who love his books or admire him are idiots.

Read some of his articles at Yahoo! Finance. He recommended real estate in the last two years and said stocks sucked. Now, the stock markets are near all-time highs and real estate bubble just bursted, he started recommending silver. Let's see...

[CF]

I think I would have defended him a few years ago, but after reading some of his later books, I'd have to agree with most people here.

I did get some value out of RDPD - looking at things as assets/liabilities, getting out of the Rat Race, striving toward living off of your passive income etc., but there are other books that put forth these ideals in a way that doesn't insult the average investor.

The last book of his that I read, "Who took my money", completely turned me off. As many of you mention, he basically lumps most of us into the "loser" category because we don't do things "his" way.

[Griffin]

I tend to believe that RK is mostly hot air in terms of his financial advice. I think a lot of it is misleading and some of it is flat our incorrect. His books sometimes seem to contain the seeds of some good ideas but the books rarely seem to contain any specifics. I agree with a previous commenter that he seems to throw out big numbers in an attempt to create excitement or make it seem like a reader should believe him since he has "made such big deals" (maybe he does, but it doesn't seem like anybody has ever been able to confirm them). I also agree that reading John Reed's take on RK is absolutely essential.

Having said this, I believe that in the case of commerical real estate, the numbers he mentions might be possible under the right circumstances. Assuming that you can purchase a property for 17.65% down ($3M / $17M), and assuming a loan for $14M at 10% with a 10 year amortization period with five year ballon (terms that might be available for a real estate investor with experience and collateral), and assuming a going in cap rate (NOI divided by Purchase Price) of 11 (not likely in today's market), and assuming average expense and vacancy rates, it is possible to end up with a first year cash-on-cash return of about 8%. Assuming reasonable appreciation of the rents and property value over a five year holding period, the total after tax IRR for a five year hold would be about 19%. Buying the same property for cash with the same assumptions would result in an after tax IRR of about 10%. So yes, the going-in return is low, but the return over a longer holding period can be much better and the leverage created by debt can magnify the return.

One of the risks to those who read RK is that he makes it seem like anybody can just go out and make these kinds of real estate deals. While these kinds of deals are definitely out there, it takes a lot of work to find them. In addition, real estate investing is like other businesses and investments -- there is a lot to know and learn. Again, a reading of John Reed's take provides some perspective on this.

I'm not sure I would use the terms "good" and "bad" when describing debt, but using debt to finance income-producing assets under the right circumstances can certainly improve returns on equity. Think about the fact that almost all large corporations use debt financing to some extent (not all, but most). Almost all commercial and investment real estate is financed with debt. Using fixed rate debt to finance an appreciating asset can also produce wealth.

Financing an asset that throws off enough cash to cover interest and principal can be advantageous. If the debt coverage ratio is low, then the risk of default is also low.

Contrast the above use of debt with using debt to buy new clothes, or eat out, or buy a big-screen TV. None of these things produce income and all of them depreciate.

[Brooks]

I've read Kiyosaki's stuff and agree he can be hard to follow. But he does have some good information to share. The key here is to understand the difference between INVESTMENTS and INCOME. The return he will see in this specific example will be when he sells the property and makes a profit from his initial 3 million minus interest paid. The $20,000 that he receives per month is income generated from his investment. Much like a dividend on a stock investment.

[Lord]

A return of 8% is not fabulous, but it is solid and likely not that risky, and one can also expect inflation to diminish the value of the loan and the value of the property may increase much more than that if well located. It likely is very good debt.

I agree he is not the best at exposition and exaggerates to convey his points, but what he has to say is very valuable and a necessary antidote to the middle class advice most advisors push. He is not shy about unveiling how the financial industry takes advantage of whoever it can. As with all advice, one must integrate it with what you know and other advice to understand and use it. His is not 'how to' advice, but 'how to think about it' advice, and this likely disappoints many, but it is this change of viewpoint that is most valuable about it. Now most people don't think like the wealthy, most may not even be capable of thinking like the wealthy, but if you want to be wealthy, this is very much the way to think about it. I know of no one else that presents such a deep, unique, and truthful perspective on wealth. He is a revelation against all the common financial pablum offered to the public.

[Hawkmoon Nine]

Agree with most of the people here that RK is long on vague and short on specifics. On the general point, RK is right, there is "good" debt and "bad" debt. For example: good = affordable mortgage for your house, bad = running up credit cards to buy "stuff." But another version of bad debt is debt that you cannot service such as too big of a mortgage (say a $14 million mortgage).

[John]

This is why he is making money. Look at all the post about him, some negative, a few positive. The best thing that RK has done for the people I know who have read his books was to get their tired butts to read something about money. Yes, he blows all kinds of smoke screens and he does not give details on much of anything. Again, because of all the hoopla about his book made non readers become readers. What did they learn . . . . not to purchase any more of his books, but to continue to purchase books of other credible authors.

[Josie]

Well,
Isnt it true that he's making 8% on his original cash investment, but the bigger reward is that somebody else is also paying his property off for him? I imagine after 30 years (for commercial properties terms are actually usually 15-25 years) when the 14MM gets paid off he will be flooded with much, much more than 20M per month.

And as others mentioned, depreciation will save him taxes, and at he could always never pay tax by 1031 exchange into another property.

[FinanceIsPersonal]

I don't see why anyone is still accepting Kiyosaki's advice. He goes on and on about his alleged neighbor's father who supposedly taught him all these great financial lessons, but cannot prove that individual existed. Kiyosaki offers a few hints of good financial advice here and there, but most of it's just a thinly veiled attempt to sell people his books and real estate programs.

[benp]

Kiyosaki was quoted:
"One example: "I'm closing on a $17 million property and financing $14 million. That $14 million is good debt. It makes me richer every month by putting $20,000 in my pocket.""

Kiyosaki is a complete fraud. If he is closing on a deal then its not complete and it can't actually have been making him 20k richer every month like the second sentence implies. Maybe his projections are correct and it will make him 20K a month richer in the future, or maybe he's just making the whole thing up.

[ken]

it seems like people don't realize that percentage gain should be based upon the money that you use to buy something. Remember your house may appreciate only 5%, but you have used a small percentage of money to secure the home.

Unlike a stock when you need 100% of the money or 50% on margin.

Also, I'm not so sure RK was quoted correctly.

[ken]

it seems like people don't realize that percentage gain should be based upon the money that you use to buy something. Remember your house may appreciate only 5%, but you have used a small percentage of money to secure the home.

Unlike a stock when you need 100% of the money or 50% on margin.

Also, I'm not so sure RK was quoted correctly.