By Robert G. Yetman, Jr. Editor At Large
More money advice from Robert Kiyosaki.
Robert Kiyosaki, the author of the bestselling Rich Dad Poor Dad, has a message for Millennials in his new book, Second Chance: For Your Money, Your Life and Our World. Namely, that instead of following the historically “tried and true” rules like going to school, getting a job, working hard all of your life and saving as much as you can, that younger people should do it all differently now. Now, those who want to get ahead should embrace the reality of low interest rates and use those to leverage themselves into income-producing assets, notably real estate.
It is interesting advice, to be sure, and there is certainly some wisdom to finding a way to position historically-low rates in one’s favor as a means to create wealth. However, is it necessary to discard the baby with the bathwater, so to speak? Does the fact that low rates exist, such that they might create investment opportunities on income-producing properties, mean that working hard and saving, in the traditional sense, is now a bad idea?
Part of what is misleading about the idea of saving nothing and going whole-hog into leveraging oneself to buy income-producing assets is that accumulating wealth that way…should wealth even come to you…is generally a longer-term process. When you buy your first few properties, unless lightning strikes for you and you’re able to quickly convert those into quick and substantial profits (something I would not count on), you see only the monthly income from those properties. The problem with that is that when you own rental properties, you need to regularly spend money to maintain them. Ask anyone who has ever owned rental properties about the sudden expenses that can arise from plumbing leaks, roof repairs, heating and cooling systems failures, and on and on. Will the positive cash flow you’re (hopefully) realizing from your properties be enough to cover those expenses? If not, will you leverage yourself even further to pay them? Or, would you be better off actually having some savings set aside…the savings Kiyosaki says you should not bother accumulating…to meet them?
In other words, in order for the Kiyosaki plan to work, you have to realize a large amount of positive cash flow from your income-producing assets, an amount that not only covers the expenses associated with the properties, but, presumably, your family’s living and discretionary expenses, as well as meets your wealth accumulation goals. Are your investment properties, particularly if you just have a few in the beginning, going to do all that for you?
There’s more. For example, how do you plan to buy the investment property, to begin with? Clever financing arrangements have gone the way of the wind, which means that you will typically need a significant down payment for each one you want to buy. Where will that money come from, if not savings? Also, lenders generally want to see that you have six months of reserves (principal, interest, taxes, and insurance) for each property you buy; if that does not come from savings, where does it come from?
Remember, too, that Kiyosaki is speaking to Millennials here. Can Millennials, with their enormous student debt burdens and relative inexperience, professionally, effectively navigate through all of the challenges associated with building a substantial portfolio of income-producing properties?
There are additional problematic issues that can be raised here, but I’ll leave it at that. Yes, the world has changed, as far as money and investing goes, from where it was decades in the past. That said, while making adjustments in the face of prevailing financial winds is always in order, using the current economic climate to tell people to forget about working hard and saving, and borrow to buy property, instead, is a little much for me.
By and large, I like the old rules, even now. Work hard, and save your money. Actually, if I were to suggest any radical change to Millennials (and to the rest of us, for that matter), it would be this: live as cheaply as you can. Rather than assume the risk that goes with a mountain of leverage in order to seek great wealth, keep your financial house solid by living well within your means, and save. If you happen to come across an opportunity to purchase an income-producing property for a great deal, and you can buy it buy borrowing at a great rate, and you have built up a large safety cushion through a combination of living cheaply, maintaining a good income from your job, and through your regular savings efforts…then maybe it is for you.