Kiyosaki Joins The Crowd

My interest in real estate investing started with my discovery of Rich Dad, Poor Dad in a local bookstore. After reading that, I read the next several books by Robert Kiyosaki, went to see him speak, and even got to meet him a few times. I liked his approach - namely that wealthy people thought about money and investments differently than most people and that he would teach us how to think like they did. Whether or not he really had "two dads" or if his story was 100% true didn't, and still doesn't, matter to me. He opened my eyes to a different way of looking and evaluating investments.

When the real estate bubble started to burst, I wondered if and how Kiyosaki was going to change his message. It now seems I know the answer.

Now, to be honest, I haven't read any of his recent books. I think the last one I read was Retire Young, Retire Rich. I couldn't even tell you how many have come out after that one. Once a daily reader and poster, I haven't visited his website or discussion boards in over 3 years. This wasn't due to any change in my opinion of him or his methods. Rather, I just felt I had learned all I could from him and he was starting to repeat himself. But I am still on his mailing list and I get email about his new products occasionally.

I have recently gotten a couple of emails for his latest project, called Conspiracy Of The Rich and am dissappointed in what I see. As public opinion has turned against bankers, Wall Street, and government bailouts, it seems Robert has changed his tune to ride that wave. A perfect example is the title. Now, instead of showing the masses (us) how to become rich, he is writing about a "conspiracy" of the rich against the rest of us. Suddenly, he is no longer the nice father figure trying to educate us to join him in the easily attainable ranks of the wealthy, but the champion of the poor and middle class protecting us from the "evil" rich and their scheming ways.

This is from his latest email:

Yes, you read correctly. In his latest Conspiracy of the Rich Bulletin, Robert discusses how the government is proposing a plan to have the banks bailout the government – and how the FDIC is not the solution, but the problem.

"The conspiracy of the rich knows no boundaries. For months now, the government has bailed out the banks. Now the government is proposing that banks bail out the government, which, of course, the banks are enthusiastically supporting."

He is referring, I figure, to an option the FDIC is exploring to raise funds, which have dried up from all the bank failures of late, in which banks will loan the FDIC money. You can read about it here and here. If you read the articles, you'll find out the banks are supporting this because it means the FDIC will not have to impose new fees on banks, so this will save them some money. Yet Kiyosaki's quote above clearly implies some massive collusion between the banking industry and the government - two groups that are none too popular right now.

Now I will be the first to admit that I have not read Conspiracy of the Rich. All I am basing my view on are the marketing emails for it that I have received. And I will also admit that marketing materials are, by definition, meant to be intriguing, draw people in, and make people want to buy or at least further investigate, a product. It is entirely possible that the marketing message and the actual message of the book are completely at odds. It wouldn't be the first time the truth was stretched in advertisements.

But still, I am disappointed in what I perceive to be a shift in tone in his work. There are many people who criticize Kiyosaki for many things. Some of those criticisms are valid. Personally, I don't believe he advocated what many of his readers did - bought houses with negative cash flow, hoping for rising equity to make them money. In fact, I always found his advice to be "make sure the property will be cashflow positive from Day 1 and don't count on property values increasing." I am still glad he got me interested in real estate and I don't think the bursting of the real estate bubble invalidates his main lessons. But I am sad to see him switch to an "us versus them" position. It makes it clear to me that what he really is is a salesman interested in selling more of his products - books. And he will write whatever the public wants to hear at the moment.

Strategic Mortgage Defaults

The L.A. Times reports that a study shows borrowers with good credit are actually more likely to default on their mortgages than borrowers with lower credit scores. These "strategic defaults" appear to be done based on a simple business analysis and with full knowledge of the consequences: if the property is seriously underwater, just give it up.

When I first read this, my thought was the defaulters were mainly people who bought investment properties during the bubble and were now giving up This does not appear to be the case, however. "Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes." And, not surprisingly, the study found "Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006."

One site I was reading opined that this would make loan modifications harder to obtain. But I'm not sure that is a bad thing. A report published in April showed "Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent... [while] nearly one in four loan modifications in the fourth quarter [of 2008] actually resulted in increased monthly payments."

The Next Mortage Crisis: Option ARMS

Now that the subprime loan debacle is pretty much behind us, the next threat on the horizon for the mortgage industry are Option-ARMs and Alt-A loans. Alt-A loans are loans made to people just above the sub-prime cutoff. Option-ARMs are loans that allow the borrow to choose from a variety of different payments each months, including payments that are less than the interest that has accrued during the previous month. As the graph here shows, a large wave of these loans are getting ready to reset (have their interest rate adjusted) in the next two years.

Reuters has a story about the Option-ARMs here.

The Hard Money Blog?

It appears this blog is turning into a blog about hard money lending. This was not a conscious decision on my part, but just an evolution caused by the real estate market collapse and my relative lack of free time. When the real estate bubble burst, flipping houses because financially more dangerous. With prices dropping steadily, it was difficult to find a house at a low enough price that could be rehabbed quickly and sold at a profit some time later. It is the nature of the rehab business that delays occur. Large delays coupled with rapidly dropping prices made estimating the eventual sale price of the property difficult. An unforeseen delay could end up costing tens of thousands of dollars in lost value, thus rendering the rehab project a financial loss. So, I got out of that business until the markets stabilized.In my area, prices were dropping too rapidly and properties could not be bought cheap enough for deals to make sense. I also had some additional commitments on my time, so I was no longer able to devote as much time as I had in the past to finding deals and, should one be found, to the rehab project itself.

However, other parts of the country are seeing some stabilization. Other people have the time to find and work the deals. So I delved a bit deeper into hard money lending, and that’s the direction the blog has taken. Having the experience of rehabbing houses myself, I feel I have some additional insights into the hard money deals that come my way. Although my deals are primarily in another part of the country, I still have a general idea of the costs and effort involved. This allows me to make more informed decisions on whether or not to invest in a hard money opportunity. It also helps to have partners you trust and who have more experience than you, as I do. As I look back over the last several months of my real estate investments, I find myself moving more and more into the passive income arena. The various hard money loans I have made are passive, as is my investment in the Houston apartment complex. While the returns may not be as great as doing deals completely myself, I am getting good returns and still have my time available for other things. I recently turned 41 years old. I have a 5 year old daughter. At this point in my life, the passive investment route suits me fine.

Which is a long way of saying I received more passive income checks yesterday. I got my monthly payments for hard money loans #8 and #9, right on schedule.