Why Most People Will Never Get Rich from Real Estate

0:00Hey, Chicagoland! The Wayfair store is in your neighborhood at Edens Plaza and Wilmette. Finally, you can feel the fabric, sit on the sectionals, and even open the refrigerators. Plus, our in-store designers will help you bring it all together with free one-on-one design support for any project on any budget. Yep, we said free. Oh, and did we mention the cafe? So what are you waiting for? Come see all that's in store. Visit the Wayfair store today at Edens Plaza and Wilmette. Wayfair, every style, every home Prep for a busy week with Whole Foods Market Start your day with fully cooked breakfast sausages from Amy Lu 365 brand frozen waffles with no bleached flours And of course Whole Foods Market eggs Which are all cage-free or better In the evening, bring home a build-your-own family meal that feeds four For just$35 Choose one entree and two sides Shop smarter, not harder At Whole Foods Market This is the Rich Dad Radio Show.

1:00The good news and bad news about money. Here's Robert Kiyosaki. Hi, this is Robert Kiyosaki, and I'm here with Ken McElroy. He is my personal friend, advisor, investor. I invest with him. We've made millions of dollars together. And he is the author of the Rich Dad books on real estate. So what we're going to be talking about today is an update on the real estate investing, not only in America, but throughout the world. And the real estate market all throughout the world is changing at a high rate of speed. So this is kind of an update, but Kenny and I will also be talking about the fundamentals of investing in real estate, because these are not ordinary times.

1:45And so often I meet people come up to me and they say, hey, I'm jumping into real estate. estate. And I think that's one of the most stupid things you can do. So with that, I'll introduce Kenny, one of my best friends, but also my personal advisor, but also a person that's made me a multimillionaire over and over again. So Kenny, what do you have to say to somebody who wants to jump into real estate? Well, first of all, I always ask him why. A lot of people want to, but I think they feel like it's super easy and they can get rich quick. So that's usually the reason they say it. But if it's a, not always, but sometimes it's a long-term strategy.

2:30And then if they say that, then I love it because then that's really what it is. It's a long-term strategy of cashflow. Correct. And so let me give you a Kenny and I come from different backgrounds when it comes to real estate, I've never been in the real estate business. I don't have a real estate salesman's license or any of that. So I went and took a real estate course way back in 1973. I was watching a TV infomercial in Hawaii. I was still flying for the Marine Corps. And I asked my rich dad, can you teach me about real estate? And he said, that's not my job. Your job is to learn about real estate.

3:13So why don't you just teach me? He says, that's not my job. So he says, go learn for yourself. And so I still remember I was at Honolulu. I was flying out of Hawaii. And I was watching this infomercial. And it says, you too can become a multimillionaire with nothing down investing in real estate. So since I had nothing down anyway, I called up and I said, sign me up. So the course was free. the introductory course was free. And so I strolled into it and it cost$385, which I really didn't have because I was making about$600 a month as a Marine pilot. So$385 was a lot of money, a lot of money for me.

3:55But I signed up for the course. I figured out how to get the money as we can all do. And I took this three-day course. And that's how I started in real estate. And the most important lesson my advisor or the teacher gave me, the guy was sort of like Ken, a real real estate professional. He said to our class, there's about 30 of us in the class, and he says, ladies and gentlemen, your education begins the day you leave this class. And he says, what you do when you leave this class is will determine whether or not you become a real estate investor or not. And his assignment was that each of us in the class had to look at 100 properties, do a one-page evaluation on the property, why it was good or bad, pros and cons of it, in 90 days.

4:43So the assignment was 100 properties in 90 days, one page written, written a documentary of why it was good or bad, evaluation. Not very sophisticated. And everybody in the class, let's say those 30 of us, we all agreed, we'd all do it. At the end of 90 days, I think five of us completed it, which is usually the stats there are about it. And so let's say 25 dropped out. And that's why they're not successful. So one of the things I, and I was looking for a nothing down piece of real estate, and I found on an island of Maui, which as some of you may know, is some of the most expensive real estate in Hawaii.

5:23And I found a one bedroom, one bath condo on the beach. It was$18 ,000 down. and that's, and I, so I gave him my credit card. I put$1 ,800 down and I made$25 a month. In other words, I made$25 a month with nothing. I use a hundred percent debt. So the course kept the promise that they would teach me how to make nothing money with nothing down, but I had to do the work. So that's how I got started in real estate. So Kenny, how'd you, how'd you become, got started in real estate. Thanks, Robert. Well, it's interesting. Now people look at us now, you know, we have a billion dollars in real estate and 10 ,000 apartments and 300 employees, et cetera, et cetera, et cetera.

6:10But I started very similarly like you. I was in college 30 years ago and my buddy said, hey, would you manage this apartment building, you know, for free rent? And I said, yes, I will because, you know, free rent is good. And I was, you know, I was racking up student loans and going through school. And so the idea of managing a property, it was only 60 units, but I remember it wasn't easy. And, you know, collecting rent and maintenance and all that kind of stuff. I was like, how hard can it be? So that was my first experience in real estate, really. And the guy who owned the building came, you know, I would deposit all the money and then he would show up and there's nice Mercedes.

6:55And he would sit down and he'd go, thank you very much for keeping the property full. And then he would drive off as a Mercedes. And I was like, okay, I'm on the wrong side of the desk here. Like something's wrong. And I was just finishing school. I was in the business school. And so really, I just decided at that point, I was going to get my real estate license at the same time. So I started to get my real estate license and got that. And then I went to work directly right out of university for a very large company that does commercial real estate and brokerage and land development, property management and all that based in Seattle, which is where I'm from.

7:38And boy, did my education start there. I started managing properties. And so for the first 10 years of my career, I was managing properties. I probably managed somewhere between 20 ,000 and 30 ,000 apartments up and down the Western in the United States. And then at some point I decided to start to buy them and own them myself. And so I've been doing that for 20 years, but I've been in the real estate business for 30. So the point that Kenny makes, which everybody should listen to there is that he got his experience and he got experience, not in the acquisition necessarily, but the hardest part about real estate, which is the management.

8:19And when I look at people, when I look at people who lose money in real estate, they're pretty good at buying because almost any idiot can buy a property. You have to be very smart to manage the property. And I think, and so that's why when Kim and I started investing in real estate 30 something years ago, is that we bought our first property, but she managed it. And although she has a business degree, that's when she really started to learn about business, is not only acquiring the property, it was a two-bedroom, one-bath house in Portland, Oregon, but she learned more by managing it. And I think that's one of the key reasons that people fail at real estate, because they can't manage.

9:06And so when Kim and I met Kenny, and he found out he could manage real estate, he was like a godsend to us. God, we really wanted to partner with Kenny. So Kim and I at that time had about 40 rental units. And so Kim asked Kenny, he says, Kenny, would you manage my properties for us? And I don't remember if you know what you said to her, Kenny, but you deflated her balloon so hard. Sorry. You know, it was like, because up to then, we thought we were Donald Trump. We had 40 units, you know. and what did you say to her about well yeah i i just you know what happened is as you evolve and you start to buy properties at that point i think when robert when you and i met and kim um you know i had already owned you know several thousand units at that time and we were just handling properties that were 200 units and larger so that was uh you know because it takes a lot of effort to manage anything.

10:09So a 40 unit building is hard. So is a 200 unit building, but really they're not that much different. The basics are pretty much the same. And so a 40 unit building is not very profitable or even, you know, a 10 unit or 12 unit or eight unit is not very profitable for any property manager really. So that's why I had already, you know, been in the business long enough to know that 150 to 200 units is really required for us in order to even make a profit in the management side. So that's one of the biggest lessons that I, if you could listen to what the fundamentals are, is start small. And as Kenny knows, Kim is a far better real estate investor than me because she has the management experience.

10:54and management of property is the management of people. And when I was a kid starting out when I was 10 years old, one of the first shows my rich dad gave me, his son of me, Mike, was in Hawaii when we collected rent. You haven't lived until you've collected rent. You'll hear every bullshit story, every lie, every victim, everything you could ever think about. and so Mike and I would be pounding on these doors as little kids and say, hey, you're 30 days, your rent's behind, and then you hear lie, cheating, stealing, BS, and all this stuff, and the hard part was if we didn't collect the rent, we had to go talk to Rich Dad, so the question for Mike and May was which is worse, this tenant or Rich Dad, and finally we grew some backbone gahones and we started pressing the guys for the rent and it was even worse when they totaled it you know sometimes we peak in the unit and these guys had dogs and chickens and cats and donkeys inside their units and they were destroying the property and that's when you really start to understand management so Kenny is that true today?

12:17Yeah. Yeah. So as you know, the backstory of how Kim and Robert and I met was I was already in the business full on. And I actually read I was raising money and this guy said to me, hey, you should meet Robert and Kim because we both lived in Phoenix at the time. And I went down, I read your book before I met with you, Robert, Rich Dad, Poor Dad. And I said, I want to know, you know, get in this guy's head and figure it out. and this was brand new. The Rich Dad Porta was just out. It wasn't the big hit that it is now. But I remember in the book, you actually said the most important person on your team is a property manager.

12:56And so, I had actually never read that before because I do. Now, keep in mind, I was in the trenches at that time. And most, what happened in my world was people would buy real estate. You know, I have a great story of a guy that he had a property that was 75 units, fully rented, cash flowing like crazy. He was out on a sailboat. He lived in San Diego and a broker convinced him to sell that and to buy 140 unit in Mesa, Arizona. Okay. So he did that. It's called the 1031 tax deferred exchange. But here's what I remember the most. He called me the day they were closing. he said we need a manager and and unfortunately this is what happens so what he really needed was a property manager to actually look at that 140 unit in mesa and tell them whether it was a good deal or not because the broker they're just working for commissions the property managers they're the ones that actually have to make it perform and so what happened was he was so far behind.

14:00He was already committed and he had to close. And so, he ended up buying it. And here's the problem. The property was filled with a bunch of bad things. So, we actually had, it was already had a lot of vacancy. It had a lot of deferred maintenance. And in addition to that, we had to evict a number of people that weren't paying rent because, you know, why would you rent to anybody that can't pay? And so, pretty soon, the occupancy on that thing was like 60, 70%. And so, then guess what he did. He fired us. You know what I mean? He's like, oh, it kept me my fault. You know? And I'm like, dude, like, you know, you bought a mess and so we'll clean it up for you.

14:40And it took a while. It took like eight or 10 months. But finally, he was trying to, you know, project back onto me, like, as if I had something to do with it. I'm like, all I'm trying to do is fill this thing up with good people. You know? And he's like, well, now I'm like flying over to Phoenix all the time. I'm working all the time. I go, dude, you sold a hundred percent occupied boat property that had a lot of cashflow. You're sitting out on your boat and now you're flying to Phoenix and you bought this property that's, you know, in a borderline area. It's your own fault. He didn't want anything to hear about it.

15:11And the point is, is that, you know, people, like you said in the beginning, Robert, it's easy to buy something. It honestly is easy. It's not that hard to get money. Having money can be very dangerous, you know? And so people are doing that right now. And this is a, that was a great example where a guy, you know, he just, he had, he had a comfortable life. And then all of a sudden it was riddled with, and he fired the property manager after that. And then after that, and then he ended up selling the property again for a loss. And sometimes those are your best investments. Yeah, I know. I know.

15:47I wish I, I wish I was just managing property at that time. And I wish I would have had the cash because I would have went in and swooped in and bought that thing. Because it really, you know, it takes a while to turn around a property. You know, in some cases, it's taken me a year, year and a half on big ones. You know, we have a 680 unit property in San Antonio, Texas, for example. It was, I think, remember you and I went to it. It was 300 units. There were 300 vacant when we bought it. Wait, wait, wait. What's worse than that? it was the worst property i've ever seen we walk into the first unit all the walls are taken out because they took all the wire out of it and sitting in front of the fireplace was the toilet i'm looking at that and said and kenneth says god this is a good deal there's an effing toilet sitting in front of the fireplace all the drywall was taken out all the electrical, all the copper wires taken out and there's no carpet.

16:45And I said, Ken, I said, this is the best deal he's ever seen. This is the worst I've ever seen. So that, but the guy I listened to was the guy that turned the property. What was his name? Ken, his name was Ken also. Yeah. Remember? And yeah, no, you're right. He was the property manager. Yeah. He looked at this thing. He said to me on the side, he says, this is the best deal I've ever seen. He said, but eBay, you guys are nuts or I'm blind. I'm missing something here. And that turned out to be one of the best cash on cash returns we have. Still in the last 10 years, it's been the best deal that I've been able to buy.

17:17You know, we bought it for$25 million. We got the bank to write down another three. So our basis was like 22. And then we put seven into it. And now it's worth over 60. And we got our money back. And the bank loans you the money to rehab it, right? Yes, right, right. Right. So that's, and that's the, that is actually the power of real estate investing is seeing that, you know, as you say, Robert, a lot, you say, you know, deals are done in your mind. You know, it's something that you see that no one else sees. And I knew in two years, I would be able to turn that property around, put new debt on it, get all the investor money back and own it free and clear, as we like to say, infinite returns.

18:02An infinite return is we get money, but we have no money in the deal. Right. We still own that building. We have 30 million in equity in that deal, just the one. And it kicks off about 800 ,000 a year in cashflow, and we have no money in the deal. And that's a property that we own right now today. And because it's real estate, we get the right off depreciation, amortization, and appreciation. Right, right. It's really a great deal. The point here, as I want to make is this, is that if you can't do that, you should stick with stocks and bonds because there's one word about property that is bad.

18:38Property is not liquid. In other words, the moment you buy it, you own it. And if you've made a mistake and it's SS Titanic, you're going down with it. So that's why you better know what you're doing before you buy it. Because if you make a mistake, you can't sell it. And that's what I see happening to so many people They just jump into real estate thinking it's a mutual fund or an ETF or an REIT, but then they can't get out of it because it's illiquid. And so that's why real estate requires much more financial education and real life education than stocks and bonds and mutual funds. Any comments on that, Kenny?

19:17Yeah, I think that probably the thing that I would just want all the listeners to know is that before I buy something on, I mean, literally, before we close on it, we already know what the value is going to be in year one and year two and year three. And we already know how we're going to get our equity back. And it's almost never via sale. Almost never. So, in other words, we don't buy to sell. We buy to hold in cash flow, and it's a very different philosophy. And that takes a tremendous amount of experience and education. And a team to do it. Yeah, yeah. And it's so worth it. But the thing is, even if you don't know how to do it, there are lots of people that will help assist you in that.

20:08Remember, I was telling you about my billboard story, how we're buying billboards. I didn't know anything about billboards, but there's lots of people that know them. There's lots of people that put ads on them. There's lots of people that own them. There's lots of people that manage them. So, I just found the people that could help me understand it. That's all. And they're out there and these people are everywhere. And that's the mistake the guy from San Diego made is that he just thought, well, I can roll my money from my San Diego property into one in Phoenix and it's going to do the same thing.

20:42And, you know, I don't really need a team. I don't really need, I don't need to understand it because it's going to be full just like the one I have. What's not the case, he bought it in a very bad area. And so you have to have that team. Hey, Chicagoland, the Wayfair store is in your neighborhood at Edens Plaza and Wilmette. Finally, you can feel the fabric, sit on the sectionals and even open the refrigerators. Plus our in-store designers will help you bring it all together with free one-on-one design support for any project on any budget. Yep, we said free. Oh, and did we mention the cafe? So what are you waiting for?

21:17Come see all that's in store. Visit the Wayfair store today at Edens Plaza and Wilmette. Wayfair, every style, every home. Hey, I've got the campaign brief ready, built from last quarter's data and the competitive landscape. Approved? Oh, agents, where would we be without you? Somewhere with a lot more tabs open. Create your first Monday agent in minutes at monday.com. And there's one more thing that I learned the hard way is that when a salesman, a real estate broker, and as I would say, the reason they call them brokers is because they're broker than you are. And they have to sell you this property.

22:00And it's not against the law to lie. So they'll give you all these numbers called pro forma. And a lot of times, pro forma really should begin with the words, once upon a time or in a perfect world. No lies. So, Kenny, if you were looking at a property like the building I'm in right now that I own, and I gave you a pro forma, the broker gave you a pro forma, would you believe the numbers? Well, no. There's several reasons. You know, I always take the position that they're, you know, that maybe they are trying to lie, but I always take the position that they just don't know the property. And so a broker doesn't understand management generally.

22:55Most of them. Some of them do. Some of the very good ones do. But most of them don't. Most of them are just trying to get a listing and sell it to the next person and move on. Commission. Yeah, their commission or, you know, as we like to call it, tips, you know. But the, and so that's the position I take every single time. I take the position. And so I always, you know, because I have the knowledge and experience that I'm always managing the broker. So I'm always saying, well, I understand that I just had this scenario two weeks ago. I understand that you start your first month at 92 % occupancy in your pro forma or your your budget, but the property is at 78 % occupied today.

23:38So if you buy it today, the beginning number should be 78%, not 92. So how can you, you know, you know what I mean? So you just get into the nuts and bolts of what really is. And so you're, what you're always trying to do is you're always trying to buy the property on how it's operating today, period. That's what you want to buy it on. You want to buy it on how it's operating today, and then you want to turn it into of value. Well, this is my question because this is what I was really weak at, which Kevin was really good at, is how do you get the real numbers? So when you're in a property, you have the stuff that the sales sheet the broker gives you, but what do you do next if you're interested to get the real numbers?

24:21It's a great question. So here's what we do. First of all, they're almost never correct, as you pointed out, when you get them. But if you know what the area, if you're really studying an area and you understand an area. So, you know, we'll just pick San Antonio, like where we were. What I knew was even what the broker had was lower than what the market was. So it's the equivalent of seeing a, you know, a$200 ,000 house in an area where everything's selling for 250 or something like that, except it's on the red side. So, so I already knew that, but I actually, as you pointed out, I already knew it was worse, right?

25:00Yeah. I already knew that, whatever the broker said it was. Because what the brokers do is they take whatever the last few leases were, even that might be wrong. And then they may say, okay, that's what the whole property is. Well, really there's what we call legacy issues. We got tenants that have been in there one year, two year, three year, five year, in this particular case, even longer, their rents might be one, two, three,$400 under the market. And so what you have to do is understand that there's a lot of room there. And so what we do is if we see that there's a lot of market lift, even from what the broker says to what the market is, then we like to go in and make an offer.

25:39And then from there, we get into due diligence and that's where the magic happens. So we will pull every single lease on every single file. So on the property that you visited, Robert, The backstory of it is, you know, of the 350 units or plus or minus that were occupied, we pull every single lease and we do our own rent roll and we figure out what our own rents are. You know what I mean? And so that's what we did. And then we put together our own projections based on our due diligence timeframe. So for those of you who listen to this thing, if you're just starting out in real estate, don't jump in, don't start with a hundred units.

26:21Maybe start with a duplex or four units. And then you'll learn more from those four units. And if you've made some serious mistake, you might be able to get out quicker. But when people buy large properties, they can't get out. That's when the whole thing comes out like a house of cards. So that's what I enjoyed about Kenny working with him, because I learned more from bad properties than from pristine properties. and so anything else would you suggest that people look at and do before jumping in yeah well i think what happens is um you know what you want the biggest thing for me is you can make sometimes you can even make a mistake on the buy in a real estate market like in other words you know maybe you're buying in at at and you're not getting a great deal but if the market itself is really jumping.

27:16You know, like Phoenix right now, as you know, Robert, is one of the fastest growing. Arizona was the fastest growing state. Well, okay. So, that's a result of a lot of job growth, a lot of population growth, and people are moving here, et cetera, et cetera, et cetera. That's also California, people leaving California. That's right. Yeah, because of tax and high expenses, et cetera, et cetera, et cetera. So, what you can take a look at, sometimes that will save you. So, in other words, sometimes demographics when there's stress on supply and demand. So there's more people moving to Arizona than there are housing, let's say.

27:52Well, then housing is going to go up, period. Rents are going to go up. Lands prices are going to go up. All that's going to go up because there's a lot of people trying to buy in an area that has, you know, small demand. It can work the other way around, as you know, like in Detroit, you know what I mean? When everybody moved out, not everybody, But, you know, when the manufacturing stopped and bubble up and all of a sudden the real estate started to go down. So sometimes you can buy at a market and the market can save you, but you really need to understand both. Yeah. For those of you, please pay attention because remember our friend Richard Todd.

28:31Yeah, I remember this. He's the funniest guy in real estate I've ever seen. And he said, he's such a dear friend of ours, but we're as friends because we need some entertainment. Remember we were on stage in Singapore and he put that map up on the behind us. Yeah. This is the guy here. So Richard says, yeah, I did. I did what you guys advised. I'm investing in America. And what was this mistake getting? Okay. So first of all, he's like, we're on stage and he's happy. Remember this? He was so excited. He's like, I finally bought some real estate. And so the first piece that he bought was he bought a church.

29:18Remember? Yeah. And then I said, oh, great. So that could be a good investment. How much is the church paying you? Well, I felt bad charging him rent. So he bought the building, but he didn't have any income. So that was the first thing. because Richard and Veronica Tann, they're true Christians. And I reserve those words for true Christians. They really are. They practice what they preach. They're very good people. Incredible people. But it was funny because I said, okay, well, Richard, when you buy some real estate, it's okay that you bought a church and let them rent free. That's fine. But it's not necessarily going to be a good deal for you.