“Rich Dad, Poor Dad” - Robert Kiyosaki - Genius or Joker?
May 23rd, 2007 Categories: Buying, Financing, Keller Williams
I started out investing in real estate because of 1. My interest 2. The affirmation from the series of books by Robert Kiyosaki that explained it can lead to quicker than expected financial freedom. Fortunately I am on my way! However, over the years I have noticed a few flaws in the approach and tax ramifications I didn’t expect (Ill explain those in another blog). As far as the flaws, noticed I kept hitting the wall to 100% financial freedom when I realized that continuing to leverage OPM (other people’s money) eventually has a cap. “Rich Dad, Poor Dad”, for me, didn’t ever advise there is a limit to what the world will allow you to borrow/leverage. The good news is ‘my’ cap is manageable and the “assets” are appreciating and the leverage is not even close to my net worth (partly due to my own comfort level in leveraging).
Since now we have the ability to share what we know via blogging, I wanted to uncover a few thoughts on “Rich Dad, Poor Dad” especially for those perhaps bitten by his ‘word’- I pulled a portion of the analysis from John T. Reed’s analysis- it is quite an interesting read. It certainly helped me keep things in percpective and I’m hoping it does the same for other Kiyosaki readers….
| Kiyosaki said | Reed comment |
| avoid mutual funds and 401(k)s because they are too risky | Mutual funds vary in their risk. Some are very low risk. 401(k)s have tax benefits that are hard to ignore. Also, you can invest them in almost anything you want in many cases.Bogus gurus like to give extremely simple rules. Ignorant readers love them. That’s fine when the subject permits. But this is an extremely simple rule that is not valid because of the complexity of the subject. |
| says his net worth is “$50 million to $100 million depending on the day” | I don’t believe that. He was bankrupt and homeless in 1985 by his own admission. Although a lawyer who searched the federal case management system on line says he could find no bankruptcy filing for Kiyosaki. He claims to have sold 26 million books. I don’t know if I believe that either. The highly successful book What Color is Your Parachute? has only sold seven million copies since it first came out in 1970. But even if you accept the 26 million figure, Kiyosaki’s co-author royalty would appear to be about 72¢-not enough to get you anywhere near $50 million even if you had no living expenses. He claims to make money in other businesses, but will not disclose enough detail that anyone can check that.Also, what’s this “depending on the day” nonsense? I presume that’s a shameless effort to impress people who are really ignorant about the world of finance. What he is saying is that his net worth doubles or halves within 24 hours. He implies that causes him not the least bit concern. Gimme a break! If my net worth dropped in half in one day, I would be pretty upset about it.What must he be invested in to enable his net worth to double or halve in 24 hours? Pork belly futures? No one in his right mind would invest his entire net worth in an investment vehicle that could double or halve in 24 hours.In the 2/03 Smart Money magazine article, he said his net worth was $35 million. Must have been a really bad day in pork belly futures. Actually, his book selling success notwithstanding, I would guess his net worth is more like $3 million, virtually all of it from book and related sales. |
| the investments of the wealthy are managed well | Laymen think that. I don’t. The main thing in managing an investment is stock picking. That is impossible to do well on purpose. It’s a crap shoot. If anybody ever figured it out, he would not need to work-for the wealthy or anyone else. There have been numerous studies proving this, most notably the classic book, a Random Walk Down Wall Street by Burton G. Malkiel. The wealthy do get good advice on legal implications of their portfolios, but not on how to earn a high return. The notion that anyone gets good advice on how to earn a high return in securities is a laymen’s myth. |
| says he was able to retire at 47 | So why didn’t he? He’s still hustling his butt off to sell stuff. |
| there are three different types of income: earned, portfolio, and passive | This is primarily an income-tax-rate distinction as Kiyosaki explains it. He says these types of income are taxed at 50%, 20%, and 0% respectively.The phrases “passive income” and “portfolio income” do appear in the Internal Revenue Code. I have used “earned income” to describe money you make from your salary or business.In fact, Kiyosaki is spouting nonsense. The federal income tax rates on earned income, passive income, and portfolio income are the same-not 50%-but your overall rate can get to that level when you add state income taxes. The distinction between the different types of income involves whether the losses from one category can be deducted from income of another category.The 20% tax rate of which Kiyosaki speaks only applies to long-term capital gains. Those come from selling assets at a profit after holding them for a specified number of months. You can have such 20% -tax-rate gains in both the passive and portfolio categories.The only income that is taxed at a 0% rate are special things like municipal bonds and gains of less than $250,000 per person from the sale of certain personal residences.It is possible to do transactions where there is no tax due at present, like IRC §1031 exchanges, but the tax-free nature of such transactions stems from the fact that you received no income. Rather you put the proceeds from the sale of one rental property into the purchase of another rental property. If and when you eventually take out your profit by selling your rental property, you will be taxed on the gain that you had when you exchanged. See my books Aggressive Tax Avoidance for Real Estate Investors, How to Do a Delayed Exchange, and Reverse Delayed Exchanges. |
| I own 10 rental buildings in Miami, Austin, and Phoenix. | Most investors use more specific terminology like “apartment complex” or “office building” or “shopping center.” Investors usually use the phrase “rental building” to hide the fact that their properties are mere rental houses.You should not own rental property in three states unless you have a specific reason for doing so. Why not own all ten rental properties in Phoenix, where he lives? With Kiyosaki, I suspect he thinks having property in three states makes him sound like more of a tycoon. To experienced investors, it makes him sound like more of a dilettante. You want the property in the same region-preferably where you live-so you can use the same people to work on all the properties and save on air fares, hotels, and so forth.One reader said investing in three different regions gives you diversification benefits. Only against regional economic downturns and possibly rent control if the buildings are bigger than one family. But rent-control risk is better dealt with by staying out of multifamily and states that do not have a rent-control pre-emption in state law. The risk of regional economic downturns is not great enough to overcome the disadvantages of spreading yourself that thin in terms of travel, personnel, need to learn different laws and markets, etc. |
To read more of John T Reed’s comments visit: visit here.
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Comment by Apurv — May 27, 2007 #