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 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.
By Jonathan Ping | Real Estate | 7/20/09, 3:17am