There's nothing wrong with debt

Installment number three in my Kiyosaki watch and he’s really beginning to show his true colors with this one. There is no redeeming aspect to this post by Mr. Kiyosaki at all.

The premise of his post is that real estate is the best investment out there and that using your own money to buy real estate is stupid. He contradicts himself and uses dubious reasoning to make his points.

Mr. Kiyosaki chronicles his first real estate investment, a condo purchased for $18,000. He was unable to afford the down payment and so charged it on a credit card.

“Even though I was leveraged 100 percent, which I do not recommend even though I did it, I was netting approximately $20 a month positive cash flow after all expenses and debt were paid.”

What does that sentence mean? Does he mean that it’s wrong to take such a big risk? Does he mean that you should never use 100 percent financing? Does he mean to recommend using only your own money? I would think he means that taking such a big risk is not a good idea but he continues to show why he was right to do it. Is this one of those do as I say not as I do things?

To further bolster his point Robert points out that his wife had a similar experience in real estate. “She bought her first property in 1988…The purchase price was $45,000. She put $5,000 down and earned approximately $25 a month after expenses and debt service.”

Well at least she didn’t use 100% financing! Or maybe she missed an opportunity there. Isn’t using your own money for suckers Robert?

He continues: “Some of her girlfriends made the same comments my friends did. They thought $25 a month was not worth the risk of borrowing money. What her girlfriends failed to understand is that it wasn’t the money that was important at that point. It was the experience.”

Again I’m not sure what the point of that story is. It’s ok to invest in something that isn’t going to make a lot of money simply because you’ll get experience? That doesn’t sound like great advice to me.

Mr. Kiyosaki then skips forward 16 years saying his wife purchased a 7 million dollar commercial property using the experience she gained from her first real estate investment. Huh? I imagine there was a lot more in those 16 years that contributed to her ability to purchase that property. That’s kind of like saying getting my current job position was due to my first after school job when I was 15 since I gained the experience of having an income.

“Since the property was such a great investment,” he says, “a banker gave her most of the money -- yes, as debt.” Well no one ever said that debt was a bad thing. Too much debt, yes but debt on its own is not a bad thing. And the banker didn’t give her the loan because it was “such a good investment,” he gave her the loan because her income and net worth were enough to indicate she would have the ability to repay the loan.

“Every month, after paying all expenses, the net income into her bank account is approximately $29,000. That's more than many people earn in a year.

“In her talks, she often asks people, ‘How long would it take you to save $7 million?’”

What Mr. Kiyosaki does is distort reality. By asking how long it would take to save $7 million, he’s implying that those who don’t agree with him are suggesting that you never use debt and always pay cash. That’s not true. What I will say, however, is that real estate investing, especially at these levels, is not easy and certainly not without risk.

“She tells her listeners that it took her two weeks to find the $7 million as debt financing, which is tax-free money.

“She closes by asking, ‘Will your banker loan you $7 million to invest in mutual funds?’ No and neither will hers because mutual funds are not real estate. When people compare apples to oranges to make a point they aren’t being honest with themselves and they aren’t being honest with us.

“Between 1995 and 2005, savers -- people who saved money in bank accounts or in mutual funds -- were the big losers. They lost because the stock market crashed. Between 1995 and 2005, many of the debtors who took advantage of low interest rates to invest in real estate made fortunes in the biggest real estate boom in the history of the world.”

A statement like this makes it sound as if there was never a downturn in real estate but there have indeed been downturns that have wiped out some investors completely. This post exposes Mr. Kiyosaki for what he really is: a salesman hyping his product without regard for facts or common sense.