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Copyright by John T. Reed
Real Estate Riches, a book by Dolf de Roos, is on the business best-seller list because Mr. de Roos associated himself with best-selling Rich Dad Poor Dad author Robert Kiyosaki. The book is in the Rich Dad Advisor series, has a foreword by Kiyosaki, and a cover with the Rich Dad purple-and-black color scheme. On 2/25/04, I received an email saying De Roos was no longer associated with Kiyosaki. Thats pretty amazing considering the importance of Kiyosaki to de Rooss success selling books.
Its not a how-to book, its an advertising brochure that costs $17.95. Roughly speaking, the message of the book is that you can get rich quickly and easily in real estate with little riskwith advice from de Roos and Kiyosaki.
One unique thing about de Roos among U.S. real-estate gurus is that he is from New Zealand and lived in various countries. He advocates investing in real estate in multiple foreign countries, although he gives no reason for doing so other than his contention that it is easy. Thats ridiculous. You would have to learn the real estate portions of the federal income tax code of each country, numerous real-estate laws and customs and, worst of all, how to value properties in each country. I mentioned this advice to one of my friends who is a multi-millionaire real-estate investor and he asked, What would be the point of investing in different countries?
You would get some diversification against certain nationwide risks like adverse changes in the income tax code. But most other countries are so socialistic that you would lose far more than you would gain. Also, owning in different countries does not protect you from multi-national risks like higher interest rates or worldwide recession or depression. I know of a couple of real-estate investors who have a vacation home or two in foreign countries, but no one who owns rental properties in multiple countries. Some major U.S. developers have decided to conquer the world by doing their thing outside the U.S.. Everyone I have read about regretted it. About the only real-estate investors who should be in multiple countries are owners of hotel chains and theme parks like Disneyland.
I suspect the real reason de Roos is saying to invest in multiple countries is to make himself sound like a jet setting international tycoon. Your rental properties generally should be in one U.S. metropolitan areamaybe two.
No one bothered to translate the book into American even though the U.S. is by far its main market. He uses the word property to mean real estate, gearing for leverage, requisition for eminent domain, etc. The most egregious example, which is extremely misleading, is his use of the word rent when he means net operating income. The sort of laymen he targets are likely to think rent means rent, not the amount left over after you pay your operating expenses.
De Roos has a Ph.D. in electrical engineering, but manages to sound like a college dropout from a non-selective liberal arts program. He constantly spouts facts that are merely conventional wisdom and, after cautioning against comparing apples and oranges, proceeds to do just that repeatedly.
Rich Dad is a pack of lies. My initial reaction to hearing about de Roos was that anyone who would associate himself with a liar should not be trusted himself. In the preface, de Roos says that he found, almost without exception, the rich had integrity. First Ive never heard of that phenomenon. Apparently, news of the Enron bankruptcy has not yet reached New Zealandnot to mention a million other stories about guys like Charles Ponzi, Al Capone, Charles Keating, Marc Rich, etc..
de Roos misleads mainly by omission and implication. A laymen reading his book would come away with the impression that real-estate investment is far easier and less risky than it is.
Book stores have become unprofitable for many authors in recent years because of widespread discounting and consolidation among book sellers.
One consequence is that book stores are becoming mere advertising media. That is, a number of book authors just have a book to get you to reveal your name and phone number to them, after which high-pressure telephone salespeople try to get you to buy multi-thousand-dollar mentoring or other expensive products or services.
Real Estate Riches appears to be such a book. Its first three pages and last eight pages are a catalog of other Rich Dad books. About 10% of the pages are blank. There is no index or bibliography of other authors books on the subject as you would see in legitimate, stand-alone, how-to books. The book primarily tries to sell you on the idea that it is easy to make a lot of money in real estate and that Kiyosaki and de Roos are the guys to tell you how.
One unique aspect of de Roos book is his 100:10:3:1 Rule: if you look at 100 properties, put offers in on 10, and try to arrange financing for 3, you may end up buying 1. I applaud him for fessing up to the fact that you have to consider a lot of properties to find one good investment. Although I suspect his fellow B.S. artists are going to take him aside and persuade him to remove that from future writings. Such harsh truths depress sales of their courses.
In fact, the correct number of properties you have to consider is 50 to 1,000. Thats based on my many interviews with professional investors. It varies according to your strategy. Bogus gurus often offer rules that are simpler and more precise than the facts allow because such rules attract novices.
Also, de Roos is telling you to physically inspect 100 properties. There arent enough hours in a day and may not be enough dumb Realtors® to escort you through that many properties. Also, pros use an abnormal sequence and make physical inspections late in the process to hold down the number of such inspections.
Making more than ten offers for every purchase will soon end your relationship with the local Realtor® community. The average buyer probably makes two offers for every purchase. Working with a buyer who made more than ten would cut a Realtor®s hourly income by more than 80%.
Theyre required to present all offers, but they would present yours by phone, telling the seller that you were well known for making dozens of low-ball offers. Most brokerages would probably blacklist you.
I do not understand the three attempts to arrange financing for every loan obtained. I do not recall ever being turned down for a mortgage after I made a formal application, nor do I recall any other such incidents in the brokerage I worked for. I have had some offers containing seller financing rejected, but not loan applications. Realtors® are required to qualify buyers. Nowadays, they often are pre-approved for a mortgage before they make an offer. A borrower who failed to get a mortgage two out of three times should be rejected by a competent Realtor® as unqualified even to be shown a property.
The bogus gurus all have an aint-wealth-grand gimmick. Dave del Dotto had Hawaii. Tom Vu had bikini-clad babes. De Roos is that he never had a job. He claims he was offered a $32,000-a-year job when he got his Ph.D., but turned it down because the week before he completed a real estate deal worth $35,000.
Note the odd phraseology: a deal worth $35,000. He implies that he made a $35,000 profit. But he doesnt say that. He uses the word worth instead.
Where does a lifelong grad student get the cash to do a real-estate deal? How can he pay off his student loans from eight straight years of study without a job? (New Zealanders have told me college was almost free there when De Roos was a student.) Wouldnt it be eating the seed corn for a novice real-estate investor to live off the first $35,000 profit he made? Where will he get the money for another investment if he lives off the profits of his first one?
The deal in question was apparently done in New Zealand which limits my ability to check it out. I suspect he used the word worth because that was merely the purchase price of a property he bought and that he was able to turn down the job only because he was an adult dependent of his parentsdads house dot mom.
We cannot tell if his lack of employment is admirable and reproducible by his readers until we know how he supported himself during his early adult years. His vagueness strongly suggests to me that his joblessness was neither admirable nor a course that his typical reader could or should follow.
The book devotes more space to selling readers on the idea of investing in real estate and on getting advice from De Roos and Kiyosaki than it does on telling how and when it does tell how, it offers oversimplified rules, inaccurate statements, and old shibboleths of real estate.
|de Roos says||Reed comment|
|almost without exception, the rich got that way through real estate or keep their money in real estate p. xviii||Not true. Forbes devotes an annual issue to the richest 400 people in the U.S. It tells how each made his money. Real estate is the source of their wealth for a minority of the 400. According to the 3/18/02 Forbes, the U.S. has 243 billionaires, only 14 of whom made their money in real estate. That’s just 5.8%, far from the “almost without exception” that de Roos claims.|
|there is no right or wrong way [to invest in real estate] p. xix||This statement is so diplomatic its mindless. There are lots of right ways and lots of wrong ways. If there were no right way, beginners would do as well as experienced investors and there would be no need for real-estate-investment books, courses, or mentors.|
|easy [to get] returns [of] 20%, 30%, 50%, or 100% p. 3||If you believe this, you have a childlike naiveté that disqualifies you from handling your own money. A legal guardian should be appointed to handle your affairs.|
|for the sake of simplicity, ignore brokerage fees and commissions p. 4||One of the biggest disadvantages of real estate is it has the highest transaction fees of any investment. Ignoring those costs greatly exaggerates the returns you get from real estate.|
|says real-estate mortgages offer more leverage than buying stocks on margin p.4||When a stock market investor wants leverage, he uses options, not margin buying. Options offer far more leverage than mortgages.|
|If you had bought wisely, then the rent would more than cover your expenses. p. 5||When rent exceeds all expenses, it is called positive cash flow. Positive cash flow is extremely rare in real estate with normal mortgages. To have positive cash flow, tenants have to be willing to pay more to rent than they would have to pay to own their own home or apartment. That typically only happens in extremely depressed areas like Anchorage in 1989.|
|most common reason why properties are sold at way below market value is divorce p. 9||Not true. I have interviewed hundreds, maybe thousands, of bargain-purchase investors. Divorce occasionally produces bargains. It is part of one chapter of my two-volume book How to Buy Real Estate for at Least 20% Below Market Value. I also wrote an article called Divorce and real estate in the 5/92 issue of my newsletter Real Estate Investors Monthly. My research on the subject indicates that de Roos did not do any research on the subject. He is shooting from the lip.|
|sellers should always hire appraisers p. 10||Nonsense. Appraisers are ivory-tower academics. Investors are better appraisers than the appraisers arebecause they bet their own money on their appraisals. To become a successful investor, you must be a better appraiser than the appraisers. Real investors only hire appraisers when lenders require them.|
|implies $400 paint job will increase the value of $60,000 house to $80,000 p. 10||Home Remodeling magazine, which is biased in favor of painting, says exterior painting is, indeed, the most cost-effective improvement, but that it only adds 120% of its cost to the value of the property. In this case, that would be $480, not $20,000.
Around 1980, Dutch Boy Paint Companyanother organization that is biased in favor of paintran an ad showing a house before and after it was painted inside and out with quality Dutch Boy paint. The house appeared to be a perfect candidate for a paint job, as you would expect Dutch Boy to choose. The ad claimed that the average appraised value went from $75,400 before painting to $86,100 after according to three professional appraisers. They did not say how much the paint job cost. But even Dutch Boy did not claim the $20,000 increase de Roos says you can get with a $400 exterior-only paint job.
My wife and I had our house built in 1983around the time of the Dutch Boy ad. The total cost of the interior and exterior painting and staining was $10,900. Our house is 3,360 square feet. The house in the Dutch Boy ad appeared to be about 1,500 square feet, so it would probably have cost at least $5,000 to paint inside and out. Painting an existing house is more expensive than painting a brand new one.
|suggests increasing building value by painting the roof p. 12||I have never heard of painting a roof. Maybe they do that in New Zealand. (A new Zealand reader wrote to tell me they do, indeed, paint roofs in Australia and NZ. Memo to U.S. readers: Painting a roof here could get you hauled off to the funny farm.)|
|p. 12 has a long list of supposedly value-increasing improvements||The list generally includes things that are well known in real-estate circles as not being cost effective, like adding a swimming pool. Even Home Remodeling magazine says they pay back less than their cost.|
|says real estate is indexed to inflation p. 13||Not true. Real-estate values sometimes move faster than inflation; sometimes slower, and sometimes go in the opposite direction. If you want indexing to inflation, you have to buy certain federal bonds.|
|You buy $1.5 million property for $1 million price with $100,000 down. It doubles in value to $3 million and you refinance it to a loan-to-value ratio of 90%. After refinancing, you would have $1.8 million surplus cash p.13-14||In your dreams. My book How to Buy Real Estate for at Least 20% Below Market Value tells how to get bargain purchases, which is difficult, but it also says that superbargains33% or more offare rare. To get any bargain, you have to use some off-the-beaten-track approach like buying at IRS auctions. De Roos seems to imply that this is a relatively normal real-estate deal. Buying a $1.5 million dollar property for $1 million is extremely rare and difficult. It would have to be a really odd deal like a sheriffs auction or purchase of a closely held tenant-in-common interest.
90%-of-value financing on million dollar properties other than single-family, owner-occupied homes is also extremely rare, although if you could prove to the lender that you were buying at 33% below market value, your chances of getting such financing would increase. See my book How to Buy Real Estate for Little or No Money Down.
De Roos does not state the time period during which the property doubled in value. Typically in the post-WW II era, that has taken a decade or more.
Refinancing a $3 million rental property to a 90% loan-to-value ratio may never have been done in the history of the world. About the only way it would be possible is if there were some high-credit personal guarantee from an extremely wealthy landlord or a high-credit tenant, like the U.S. Postal Service, on a long-term lease.
The surplus cash is loan proceeds. He means you just borrowed $1.8 million more than you needed. I hope you had a good reason. Its just a loan that has to be paid off with interest. Its not a winning lottery ticket.
|Continuing the above example, de Roos says the $1.8 million surplus cash is tax free||Correct. Borrowing money is not a taxable event.|
|and he says you can buy the things you want with the $1.8 million, like an airplane, and deduct the interest||Not so fast. You can only deduct the interest if the proceeds are spent for business purposes (Internal Revenue Code Section 162). The fact that the loan is secured by a rental property means absolutely nothing regarding whether the interest on that loan is deductible. Buying the things you want generally would not qualify. If you used the money to buy an airplane, you could only deduct the interest if you used the plane exclusively for business purposes. Furthermore, it would have to be ordinary and necessary. You cant buy an airplane to, say, look after your properties if they are within easy driving distance. Doing so would neither be ordinary nor necessary.
He also fails to note an issue called excess loans over basis. When you refinance, you generally have a higher mortgage balance than your depreciation basis in the property. This would be absolutely true if you mortgaged out more than $1.8 million above the property cost. If you sell, and the buyer takes over your mortgage, or you abandon the property, it is considered the same as selling it for the loan balance in the eyes of the tax law (assuming the lender cant or wont come after you for the full loan balance). That would give you an enormous phantom (taxable gain, but no cash sales proceeds) gain (loan balance minus depreciation basis). The tax on such a gain is due within 90 days of the end of your ownership. See my book Aggressive Tax Avoidance for Real Estate Investors for an accurate account of these issues.
|For every argument and example I present in this book, there will be scores of detractors who will cry foul. They will seize specific clauses, phrases, sentences, and passages, and quote them in such a way to try to convince themselves or their audience that what I am saying cannot be right. They will say things like: Where I come from you certainly cannot get 90 percent mortgages! or You cannot make $20,000 profit by spending $400 on paint and throwing in a weekend of labor in my town! I will address the doom-and-gloom merchants, naysayers, disbelievers, and detractors later in this book. p. 15-16||My reputation precedes me.
There are two intellectually honest ways to debate: facts and logic. As you will note, my criticism of Kiyosaki, de Roos, and others provides just that.
There are a number of intellectually dishonest ways to debate, like changing the subject or meaningless slogans. This is an example of another one of them: name calling.
Lawyers say, If the facts are on your side, pound on the facts. If the law is on your side, pound on the law. If neither is on your side, pound on the table. In this paragraph, de Roos is pounding on the table in anticipation of the pounding on the facts and the law that he knew I would eventually deliver regarding his book.
Where did the throwing in a weekend of labor come from? Page 10 only referred to a $400 paint job. Sounds like hes already backing away from that claim after only five pages. At that rate, his $20,000 increase in property value will require $400 worth of paint brushes by the end of the book.
|Compares stock market to home appreciation in 2000 p. 17||I do not care for the stock market. Its a crap shoot at best and a fraud, as with Enron, at worst. But comparing home price appreciation to stock appreciation in 2000 is not very fair. 2000 was the year of the high tech crash. Also, transaction costs are much higher in homes, so home prices are less representative of the investors actual yield than stock prices are.|
|Have you ever known real estate to fall in value by 60%, 90% or 100%? p19||Yes. Income property values fell about 67% in Texas, Alaska, and Oklahoma in the eighties. 90% to 100% or greater losses occur in such cases as uninsured earthquakes or other casualties, downzoning of land, and the discovery of toxic contamination on a property. An investor can also lose 100% or more of his real estate investment without decline in property value as a result of a successful lawsuit by a tenant or visitor to the property.|
|stocks are a bit of a gamble p. 19||Correct, but so is real estate.|
|The city with the highest growth in a year is likely to be at the top or near the top the following year.||Maybe so, but the exceptions, like Houston around 1980, can bankrupt you. Houston went from first to last in job creation in one year. Unless you invest in the top five or so metro areas, de Roos statement is a useless fact. Even if you diversify, that only protects you against regional economic downturns. You still are exposed to risks like national economic downturns, higher interest rates (which depress real estate values), and adverse changes in tax laws, like the Tax Reform Act of 1986, which instantly lowered income-property values by 25%.|
|Imagine you own a property that is generating $20,000 a year in rent. Your expenses (mortgage interest, maintenance, property taxes, and so on) amount to $15,000. That leaves you with a pretax profit of $5,000.||The first wordimagine is telling because the only place this deal will ever exist is in de Roos imagination and yours.
The typical operating expense ratio in residential rental properties is 45%, plus or minus about 2%. This is well established by hundreds of surveys by the Institute of Real Estate Management, the National Apartment Association, and other organizations. 45% of $20,000 is $9,000. That means the net operating income is $20,000 - $9,000 = $11,000. The average capitalization rate in a Seattle survey was 7.8%. Thats probably normal for the U.S. in general. If the cap rate is 7.8%, the purchase price of the property is $11,000 ÷ 7.8% = $141,026.
De Roos advocates 90% loans. 90% of $141,026 = $126,923. At current 7.5% interest rates, the mortgage payments on that $126,923 mortgage would be $881.95 per month or $10,583.42 a year. So the mortgage plus operating expenses number that de Roos says is $15,000 is, in the real world, $19,583.42. That means the $5,000 profit de Roos says you will get is, in fact, $20,000 - $19,583.42 = $416.58.
Note that these numbers apply to apartment buildings. Single-family rental houses, which are about all you could get for $141,000, would have much worse numbers. On a rental house with $20,000 annual income, you would typically have negative cash flow of several thousand dollars.
Whats the title of this book again? Real Estate Riches That apparently refers to what happens to de Roos when you buy it, not what happens to you when you apply it.
|says above example is a $200,000 property and has 25% before-tax cash on cash return and 33% after-tax cash-on-cash return (because of the value of $9,000 of depreciation deductions)||If the price is $200,000, the return is much worse than I just said. I assumed a cap rate of 7.8%. At a $200,000 purchase price, the cap rate would be $11,000 ÷ $200,000 = 5.5%, which is awful!
The mortgage would be 90% x $200,000 = $180,000 and the annual payments on a 7.5% mortgage that big would be $15,009. So your before-tax cash flow would be $20,000 - $9,000 operating expenses - $15,009 mortgage payments = minus $4,009! Your before tax cash-on-cash return would be -$4,009 ÷ $20,000 (down payment) = minus 20% not plus 25%.
What would the depreciation deduction be? Lets say the land value is $25,000 leaving $200,000 - $25,000 = $175,000 for the structure, which is the only part that can be depreciated. For residential property, you can depreciate 3.64% in most years. 3.64% x $175,000 = $6,370, not $9,000. Even if you could somehow claim that you had no land at all and depreciate the whole $200,000, you could never deduct $9,000 depreciation in one year on a $200,000 property.
My book Aggressive Tax Avoidance for Real Estate Investors recommends a couple of ways to get the deduction a bit higher than that in the first five to fifteen years, but I doubt even those techniques could get you to $9,000 on this property.
|hire an appraiser to itemize every building component so you can depreciate each individually and thereby increase your deduction||This is called component depreciation. It was advisable and legal in the U.S. before the Economic Recovery Tax Act of 1981. After that Act, it was neither. Even before, hiring an appraiser to make the breakdown was neither required by law nor cost effective.|
|In Chapter 4, he compares stocks to real estate attempting to prove real estate is better because stock prices fluctuate more widely than real estate prices||Real estate is better than the stock market because it lets you control things more, which enables you to use your diligence and intelligence to perform better. In stocks, you are a mere spectator.
De Roos tries to prove real estate is better by showing average stock prices and average home prices. One big flaw in that is you can buy the average stock by investing in an index fund. But you cannot buy the average U.S. home. You can only buy 123 Elm Street or 562 El Cerrito Boulevard or some other unique property. The stock index fund will perform the same as the stock market if you buy a marketwide index fund. But the performance of any unique parcel of real estate you buy will likely deviate significantly from the U.S. national average home price.
|You need specialist knowledge to do really well in other investments, but only common sense and a few key words to do well in real estate p. 37||This is the opposite of the truth. Real estate investors need to know management, finance, income taxes, marketing, real estate law, asset protection, appraisal, etc., etc. In real estate, you make hundreds of decisions regarding technical areas. In the stock market, you only make three decisions: what to buy, when to buy, and when to sell.|
|1,000 randomly selected real estate investors will do better than 1,000 randomly selected stock market investors in the long run||It would depend on the time period you picked. Realtors® had Real estate is alive in 75 bumper stickers because things were so awful then in real estate. In 1999, the stock market was soaring. Sometimes real estate does better; sometimes, securities.|
|can lower your chances of earthquake damage by not buying in known earthquake zones. New York City built on some of the most stable land on the planet. San Francisco is prone to earthquakes.||This is the kind of analysis you would get from Cliff Claven of Cheers fame. To minimize earthquake risk, you need a frame structure that is bolted to the foundation. You avoid known faults and fill areas, which are shown on maps sold by the U.S.G.S.
The most powerful earthquake ever to hit the U.S. was centered in New Madrid, MO on December 16, 1811. Charleston, SC had a powerful earthquake in 1886 and Anchorage, AK in 1964. There was an earthquake in the Philadelphia area when I lived there. Boston had a bad quake in the 18th century. New York Citys invulnerability to earthquake loss would come as news to the New York City Area Consortium for Earthquake Loss Mitigation. Heres a line from one of their reports:
However unrecognized or unacknowledged the threat from earthquakes may be in New York City, seismic events have occurred and, until recently, no codes have existed to mandate earthquake strengthening of structures.
There is a report at http://nycem.org/techdocs/EstEQlossNYC/EstEQlossNYC.pdf that shows, on its page 176, a color-coded map of the earthquake resistance soil quality in Manhattan. It has no Class A (best) soil and much class D (second worst). In other words, de Roos pulled his most stable land on the planet comment out of thin air.
San Francisco has more frequent earthquakes than East Coast cities, but earthquakes in the West that would have a 50-mile damage radius would have a 500-mile damage radius in the east because of the different geology in each area. If you have to own a building in an earthquake, you would prefer it to be in San Francisco where they know earthquakes and have numerous laws regarding structure strength and location, water cisterns for fire fighting, numerous earthquake drills, and so forth. In the East, they are extremely complacent about earthquake risk and therefore woefully unprepared.
But the main point here for readers of de Roos book is that the guy is spouting off about an important and even dangerous subject without doing any homework.
|most people have earthquake insurance p. 39||Only about 10% of my insurance agents clients have earthquake insurance and I live in the San Francisco area. Earthquake insurance is extremely expensive, has very high deductibles, excludes the items most likely to be damaged like brickwork, and has extremely low limits on personal property damage. Earthquake risk is arguably uninsurable. I do not have earthquake insurance, nor does my insurance agent. Writing earthquake insurance in an area with frequent quakes is like writing life insurance in a chronic war zone without excluding deaths caused by war.
De Roos reminds me of what Winston Churchill once said about one of his enemies: He knows many facts which are not true.
|claims he has properties on multiple continents and that he spends three hours per property per year at most p. 55||On-site resident manager duties require about 3.6 hours per unit per month. Off-site property manager duties require about one hour per unit per month. Approximately one-third of carefully selected managers must be fired and replaced. The notion that you can hire property managers and rely almost totally on them is false. Almost all neglect the properties they manage and take kickbacks from suppliers and subcontractors who overcharge the property managers client in order to pay the kickbacks. Competent real estate investors manage their properties themselves or have in-house salaried employees to do it.
Nothing Down author Robert Allen hired a property manager and told him I dont want to hear from you until the end of the yearthe sort of three-hours-per-property per year involvement that de Roos claims. At the end of the year, the property manager reported to Allen that all his properties had an average vacancy rate of 60% for the year, which, of course, means they lost gobs of money. Allen sued him, which probably took more than three hours per property.
There is no free lunch. In addition to the fact that operating a rental business profitably is very hard, owning rental property is a large responsibility. You have tenants, employees, equipment, and structures to take care of. Landlords get sued. I shudder at the thought of an attorney representing one of de Roos injured tenants, visitors, or employees making him read this three-hours-a-year line and his bragging about how rich he is, from his book, to the jury at a negligence trial. When I got sued once by a tenant, her attorney tried to depict me as an uncaring absentee landlord. They had me read to the court a line from my book about investing in real estate to get rich. Unlike de Roos, my book had no bragging about how little time I spent on each property. I was able to disprove the uncaring absentee landlord accusation by showing detailed logs of my at least weekly calls to the on-site managers. If de Roos really owns properties on more than one continent and really only devotes three hours max per year to each property, and he gets sued for negligence, he is toast.
|Get 80% loan from a bank and another 30% from the seller for a total of 110% of the purchase price. You pocket the extra 10%. Seller loan is at 6%. There is no law against that.||Actually, there are laws against not disclosing it, and if you do disclose it, the bank will refuse to make the loan. The laws in question are criminal. 18 United States Code 1001 (failure to disclose a material fact), 1014 (false statement on loan application) and possibly 371 (conspiracy) and 1341 (mail fraud). Those are not just laws I picked at random from the U.S. Code. Rather they are the actual laws that I have seen real estate investors charged with in many case that I have written about. Such a transaction would also probably violate similar state criminal laws and common laws like those against fraud if you did not disclose to both lenders the total loans being obtained.|
|if all your offers are accepted youre offering way too much p. 68||Not necessarily. It is true that most properties sell for less than their asking price. The asking price and selling price stats are in the front of most MLS books. One that I have shows sale-price-to-listing-price ratios of 96% to 106% for homes. In my career, I twice paid full asking price and was correct to do so in each case. In some so-called sellers markets, a buyer who insisted on offering less than asking would never have an offer accepted. Competent investors know value. When the asking price is a fair one, they do not haggle. They have done so in the past and lost good deals as a result. The notion that you never pay full asking price is a myth that is widely believed by novice investors.|
|for sale by owners will often ask for a price that is way below the market value of their property p. 73||Guru John Schaub is a bit of a specialist in for sale by owners. He says his students call them and 90% are not worth pursuing. They actually physically visit the other 10% and occasionally make a deal to buy for 20% below market value. FSBOs who ask for below market prices are rare and if you want to buy from them, youd better move real fast, because a mob of other buyers saw the same ad.|
|rent was $10,400 a year and price was $59,000 giving a yield of 17.63% p. 74||The only way you can say the gross rent divided by the purchase price is your yield is if you are a rent skimmer. That is, you collect the rents and do not pay a single expense or mortgage payment. That is generally a crime and it is a game you can only play for a month or two because the various creditors will start turning off the utilities and initiating foreclosure and other collection actions.|
|Tells of investing in a free-standing fish supply store the size of a one-bedroom apartment (p. 74), a butcher shop (p. 82), and a custom-built funeral parlor (p. 82)||While I would acknowledge that there could be significant profit opportunities in such properties in certain situations, they also present unknowns so unique that any story about them in a book for novices should be accompanied by a warning not to try this at home. Investing in such properties should only be done by advanced, experienced investors.|
|cash-on-cash return far more useful than yield to tell if good investment||Not true. Unusually good mortgage terms can inflate the initial cash-on-cash return like the teaser rates on some credit card loans. The yield, which is called the capitalization rate in real estate, is the best way to evaluate the price you are paying in relation to the net operating income of the property. Even a long-term, fixed-rate mortgage on unusually good terms is suspect because of tax laws that ignore overly low interest rate seller financing, as well as the likelihood that you will sell the property and thereby eliminate the good-deal mortgage before the end of its term. If you are going to overpay for a property based on better-than-market terms, you must make sure to get a discount for early payoff and that you only rely on the present value of the interest savings over the likely time until payoff, not the stated term of the loan.|
|you can put anything you like in a contract p. 96||Numerous laws render contracts unenforceable if they contain or omit certain clauses or punish the person who put in offending clauses or leave out required clauses. For example, below-market interest rates in seller financing trigger IRSs imputed interest rules. The truth-in-lending law requires disclosures about all consumer interest rates regardless of whether they are neither too low nor too high. Overly high interest rates violate usury laws. Putting an illegal clause in a New Jersey lease renders the whole lease unenforceable.
The legal doctrine of substance over form says that what you put in a contract will often be ignored by the law. For example, most single family lease options would arguably be treated as land contract sales in a court because of this doctrine. Persons buying homes being foreclosed in CA must be very careful what clauses they put in and which they leave out. All contracts, to be enforceable, must have legal purpose. Many things that you might put in a contract would make its purpose illegal, thereby rendering it unenforceable and possibly providing evidence for a criminal conspiracy charge.
|I usually sign my name plus or nominee on a contract when I buy real estate p. 99||This is an old chestnut of real estate gurus. In the real world, the seller and/or his agent will ask, Whats that about? De Roos says its so he can assign the contract to anyone else of my choosing. The typical seller response would be, The hell you can. Im not taking my property off the market for a sale to some unknown person who may not have the ability or willingness to close the deal.
If there is any seller financing in the dealand de Roos is a big advocate of seller financingthe words or nominee would arguably render the contract unenforceable on the grounds that there could not have been a meeting of the minds because no seller in his right mind would agree to make a huge mortgage loan to anyone of de Rooss choosing. People only make mortgage loans to those whose credit they have checked.
|I usually put in a clause saying purchase in contingent on buyer arranging financing suitable to himself p. 99||Once again, this would render the contract unenforceable because it gives a blank check to the buyer to walk away. Basically, if either party gives himself such a blank check, there is no contract. The real world version of this is to state the financing terms that are acceptable to buyer in the contract, then the seller can gauge whether the buyer is likely to find those terms. If not, he will refuse to tie the property up with this buyer.|
|same deal only contingent on approval of buyers attorney of title, etc. p. 99||Ditto. This is so broad is nullifies the contract. The real world version is that the buyer makes the deal contingent on his getting marketable title.
This and the item above are so-called weasel clauses. They exist only in seminars and books by gurus who target novices. In the real world, contingency clauses must be specific so the seller can still force the buyer to close if the contingency is satisfied.
|Stapling an earnest money check to your offer has phenomenal psychological power p. 101||In my experience, all offers must be accompanied by an earnest money check. As I recall, it is unethical for an agent to present an offer without an earnest money check. If a checkless offer were accepted by the seller, and the buyer did not buy the property, the seller would have been damaged by the buyers welshing and would have no money to cover his loss from taking the property off the market.|
|tells of hypothetical example in which a property bought for $4,000 in 1960 is worth $250,000 in 2001 p. 108||If you go to http://minneapolisfed.org/economy/calc/cpihome.html, you will find a neat little Internet calculator that shows what a dollar is worth for any year you pick. I put in $4,000 and 1960 and asked it what that would be worth in 2001 dollars. Answer: $23,945.95.
My mom bought her home for $12,000 in 1963 and we sold it for about $80,000 in 1993. The Census Bureau says the average one-family house sold for $21,500 in 1965 and $149,800 in 1990. That is somewhat misleading because homes have gotten bigger and have more bathrooms, central-air, and so forth since 1965. The home that existed in 1960 would not have grown in value to $149,800 in 1990 because it probably only had one bath, no central-air, etc.
The main point is de Roos shows a value growing $250,000 ÷ $4,000 = 62.5 times in his example, whereas various real world stats indicate values growing only around 6 times during that period. This is a specific example of how he makes it sound far easierten times easier in this examplethan it really is to make money in real estate.
|debt on appreciating property is a good thing p. 109||Actually, what he is trying to say is that fixed-rate debt on assets that go up in value is good. If both the payments and the value go up, you are not making progress. In fact, its more complicated than that. If, as is almost always the case, the debt payments on your new acquisition exceed your propertys net operating income, you will have negative cash flow. In order for you to come out ahead in the long run: 1. the appreciation must be great enough to more than compensate for the negative cash flow and 2. you must have the cash reserves to pay the negative cash flow for years so you will be around for the long run to reap whatever appreciation benefits there might be.|
|says plumbers and such will always work on your job first if you pay their bills the day you receive them. claims this is a foolproof method p. 120||In my experience, subcontractors expect to be paid when they complete the jobbefore they leave your property. Merely paying them when their bill arrives would actually be slow. Paying them upon completion would be normal. There is no way to make yourself a favorite of contractors other than paying big tips, but that would diminish or eliminate your profits. Read this passage from de Roos book to your next subcontractor and see if he agrees with it. I predict they will laugh at de Roos claims.|
|says to use property managers p. 124||It is almost universal for mass-market gurus to recommend property managers. I suspect this is because it enables them to overcome the objection, I dont want to get calls about stopped-up toilets at 3 AM. A guru frequently cannot sell his real estate investment information until he convinces the prospect that he will not have to manage the property he buys.
In reality, property managers almost universally neglect properties and take kickbacks from suppliers and subcontractors who overcharge the client in order to cover the kickbacks.
You should either manage your properties yourself or hire salaried employees to do it. Most large companies that own income properties around the U.S. use local suppliers and subcontractors for everything except property management. They have found from hard experience that quality property management is not a service you can hire from independent companies. For example, Consolidated Capital used to be one of the biggest owners of apartments in the U.S. They used local carpet installers, plumbers, and so forth, but they had to form their own in-house property management companyJohnstown Properties. A major pension fund told me they had to form their own in-house property management company to manage their office buildings nationwide. Some cynics think companies who form in-house property management companies do so to get more fees. Not in that case. There is little or no profit in property management. Many real estate brokerages do property management as a loss leader just to get the listing on the property when it is sold. Landlords would prefer to avoid in-house property managers for the same reason they avoid in-house plumbers, carpet installers, and so forth. However, they have found they cannot avoid managing their own properties.
Do not, under any circumstances, hire an independent property manager to manage your properties. The notion that you can hire out property management is a myth promulgated by real estate investment information salesmen (and independent property managers).
|Says to put in lease of $9,000 a month commercial building that rent is $10,000 a month, but only $9,000 will be due if paid on time. p. 131||This is an ancient gimmick. The first Realtor® I ever met told me to do this in 1969. In the real world of 2002, its probably illegal. It is obviously a $1,000 per month late penalty, not a discountespecially since the space was advertised at $9,000. Since it could be levied for as much as one day of lateness, it is potentially a $1,000 ÷ $9,000 = 11% per day interest rate! Thats 11% x 365 = 4,056% per year! This would likely violate usury laws.
The basic idea in civil law is that you may contract for a penalty that reflects the actual damage done to you by the lateness. That typically would include an initial minimum charge for the administrative hassle triggered by any lateness, plus interest at a reasonable rate. You cannot do what do Roos said earlier in the book: put anything you want into a contract. Not only would the lease be rendered unenforceable by such a clause, you would almost certainly be penalized for charging a usurious interest rate.
|takes same effort to buy building worth one million as building worth 100 million p. 139||A house in a nice neighborhood costs one million. A hundred-million dollar building would be a mid-rise office building or some such. Obviously, the effort required would be much greater. You would have to inspect elevators, massive central heating and air-conditioning systems, numerous long-term leases, find office building financing, arrange for night-time cleaning and window washing, hire security staff, etc., etc. Not to mention the fact that you need a hundred times more money to put down on a 100 million dollar purchase. I have often heard beginners spout this swaggering nonsense that the only difference between the guys who do the big deals and the guys who do the little deals is guts. No, actually, its also expertise and net worth.|
|Always make the other guy say a price firstthat person always loses p. 149||It is a convention in real estate that sellers must name an asking price when they put a property up for sale. Sellers do not always lose. What is the definition of lose in this context anyway? This is salesman trash talkused to convince themselves they are really in charge in a world that looks down on them.|
|Never put more than zero or very little down p. 151||In the real world, nothing-down deals are very rare. Experienced investors regard them with suspicion. They typically mean the buyer overpaid and/or defrauded a lender. But in beginner land, youre not a real man unless you buy for nothing down.
The main reason the mass market gurus push nothing down is to overcome the objection I dont have any cash to invest when they try to peddle their expensive boot camps or mentoring services. Gurus do not push nothing down because it makes sense for an investor. Rather they push it because it helps them market their products and services.
Many successful investors always put 100% down, like those who buy foreclosure auction properties. Investors who specialize in property wanted ads always advertise fast cash. It is much more time consuming to do nothing down deals, so it is mainly a strategy for those whose time has very little value. If you always put little or no money down, you would be forced into a few niches where you would wander the land as a sort of beggar pleading with sellers to deed you their property for nothing. I offer a book on How to Buy Real Estate for Little or No Money Down, but I said in that book that it often is a bad ideathat you would be better off in most cases spending the extra time working a second job and saving money for a down payment instead.
|hardly ever sell p. 151||The fact that transaction costs are unusually high in real estate compared to other investments does suggest that you should minimize the number of transactions. But there are many other considerations.
Flippers, for example, sell all the time by definition. Builders always sell, and many of them drive real nice cars. Almost all the profit in real estate comes from selling; hardly any from operating rentals. To never sell is to consign yourself to a lifetime of marginally profitable property management.
Even if you adopt a long-term holding strategy, there are times when you need to sell. For example, if the neighborhood where one of your properties is turns bad, you need to get out.
How often you sell depends on your investment strategy. For some strategies, you would rarely sell; for others, you would always sell. You should not restrict yourself to only those strategies where you rarely sell. Pick the one that best fits you.
|says he has never been asked [by agents or sellers] how much money he has to invest in a real estate deal p. 156||I find that hard to believe. As I recall, I was asked in every single case.
I used to be an agent. Agents have a duty to qualify prospective buyers. That is, they must find out how much they have to put down and what their income is so as to avoid wasting time showing property to persons who have no hope of buying it. At the lastest, the agent and seller must make sure the buyer has enough cash and income to close before they sign a contract and take the property off the market.
When I read a book, I underline it and make marginal notes. Some of the notes are favorable; some, unfavorable. When I read Robert Kiyosakis Rich Dad Poor Dad, I did not make a single positive marginal note. I do not remember any other book where that was true.
I did find a number of good things in de Roos Real Estate Riches. I agree that stocks are a bit of a gamble (p. 19), that calculating the return on a home should include the value of living in it (p. 20). He says on p. 27 that part of your tax depreciation deduction actually reflects real decline in the value of parts of the building. I said the same in my book Aggressive Tax Avoidance for Real Estate Investors. I liked a brief discussion of gambling on page 45. On page 71, he says you will get a feel for values after look at a bunch of properties. Correct. I have said the same. There is brief mention of the sometime value of changing the size of a commercial rental space on page 115. On page 148, he says to focus on the deal, not the property. Thats good advice.
But thats it. In a 161-page book, he only has enough good stuff for a brief article. And the rest of the book is not harmless. Its dangerous because it misleads readers in an area involving serious amounts of money, debt, and time.
Many people say they are happy if a book just gives them one good idea. For Gods sake, raise your standards. If an author only has one good idea, he should write a fortune cookie, not a book. One good idea might be worth the price of a book store book, but what about the value of your time? It takes many hours to read a book.
The more important problem is that the novices that de Roos and Kiyosaki target cannot tell which one idea in a bad book is the one good idea.
Botom line: If you bought de Roos Real Esate Riches, you got ripped off. About the only way to make things worse would be to follow its advice. Instead, discard it, get sound advice on real estate investment, and follow that.
My real estate B.S. artist detection check list has a number of items pertinent to books. Here is how de Roos book rates.
|2. Subjective self-description||Not guilty|
|3. Current copyright||Has one, but accurate|
|10. Emphasis on low down||Guilty. Big on 10% down|
|11. Blank paper and/or filler||Guilty. Many blank pages, catalog pages, space between lines. No filler, though.|
|13. No index||Guilty|
|14. No acknowledgements||Not guilty|
|15. No bibliography||Guilty, unless you count ads for other stuff by Kiyosaki and de Roos. Gurus who are trying to help you provide lists of recommended books and other useful products whether or not they sell those products. Gurus who are using you to help themselves get rich refuse to even mention products they do not sell.|
|16. Use of hype words||Guilty. I added the word riches to the list as a result of reading this book.|
|29. Inaccurate book title||Not guilty ostensibly, although I do not regard the book as having any merit for someone who wants to invest in real estate successfully.|
|30. Focus on beginners||Guilty|
|31. Denounce opponents as negative thinkers||Guilty|
|32. Dictionary that is not in alphabetical order||Not guilty|
|38. Denunciation of traditional education||Guilty. I doubt you get Kiyosakis endorsement unless you take that pledge. De Roos has a Ph.D. in EE, but brags about never having worked a day in that field.|
Here is a nutty email I got about my “DeRoos rant” on 11/2/11???
quote "the seller would have been damaged by the buyer's 'welshing' and would have no money to cover his loss from taking the property off the market."
Welshing?? really?? I'll bet you don't have the balls to write a sentence with the word 'niggardly' (if you in fact know the definition).
Why do you demean Welsh people?? Because we are white, a small minority, and you can get away with it?
Judging by your surname, could I assume that you are 'Paddy' or worse yet a 'Mollie', who were the first US terrorists in the late 1800's. Better yet, can I assume a synonym referring to a' drunk' also
I doubt by the age of the rant, that you are still around.
George Horwatt George C. Horwatt <email@example.com>
The only response I will bother with is to say that my father was a mean drunk and because of that I never have touched alcohol.