“Rich Dad” Leading You to the Poor House

I had the pleasure of attending Rich Dad’s “Learn to be Rich” conference yesterday.  It was free, so I thought “What the hell, what else am I going to do on a Thursday night?”  Now I should preface this article by saying that the presentation I saw was not made by either Robert Kiyosaki, or Mike Maloney.  Those two gentlemen actually make some sense.  They talk about how to effectively manage debt, the ridiculousness of fiat currency and the value of precious metals.  What I did hear though was some of the most reckless financial advice I ever came across, period.  I guess it’s true what they say about the value of free advice.  It’s worth exactly what you paid for it.

I thought what was going to be presented would be based on Kiyosaki’s original book, which contains some decent advice.  There’s a reason why it’s one of the best selling books on personal finance there is.  However what the audience was presented with was an unabashed advertisement for investing in real estate.  We were regaled with anecdotes of get-rich stories about how owning real estate would be the path to living out your dreams.  We’ve all heard this stuff before.  Unfortunately for most in the audience, they didn’t seem to know where that path really led for millions of Americans.

There were a number of get-rich techniques presented that anyone could use starting from any point.  Even if you were two weeks from living on the streets, you could find your saviour in real estate… apparently.

The Greater Fool Strategy

No, it isn’t actually called this.  It was referred to as “wholesaling”.  This is a quaint term they used to describe essentially becoming an unlicensed real-estate agent.  It involves you, the home seller and a home buyer.  The idea is that you somehow gain exclusive rights to “fix up” a house that is currently on the market.  The longer it’s been there the better.  Once you convince the seller that this is a good idea, you then market that right to house flipping individuals or companies.  It’s the house-flipping company that actually takes all of the risk and does all of the work.  All this amounts to is getting a finder’s fee for a house that the flipping company probably already knew about.  After all, house renovation companies are constantly scanning the market for opportunities and with MLS, anyone can pull up every listed home in the province, for free.

Buy, Buy, Buy!

Once our prospective real estate investor has built up enough cash in order to get bank financing, it’s time to start buying up properties.  Of course, normal 30%-down mortgages won’t do.  Why do that when you can get six 5% down mortgages and get 6 times the houses!?  Then you live in one and rent out the other five.  I wonder if this strategy has anything to do with this:

Do these guys think this is really a sustainable, long term investment strategy?  To go deeper and deeper in to debt in order to buy in to an unsustainable asset price boom?  Don’t worry though, we’re told.  If any of the properties start realizing a negative cash flow, you can just sell the property… at a profit we’re to assume.  However, just ask an American if they think this is how it is really all going to pan out.  The other solution offered to a negative flowing property is to just raise the rent.    Somebody better tell these guys about the Landlord & Tenant Board because they’re going to throw a wet blanket all over that idea.  You’re only allowed to raise rents by as much as the provincial government decides to let you, which is generally not more than the inflation rate.

Live the Dream, Tax Free

Now that you’ve got half a dozen properties under your belt, and your tenants paying off all of your mortgages for you, it’s time to get some tax free income.  But rental income is taxable, so are capital gains.  So how?  Why, borrow it of course!  It’s not really income when you have to pay it back.  After all, those houses are going up in value and all that ‘equity’ is yours for the taking.  So grab yourself a nice HELOC and start living the high life.  It’ll all work out, they swear.

After seeing all of this, I don’t know what’s more disappointing, that someone like Robert Kiyosaki would actually put his name to such reckless trite, or the fact that most of the people in the room seemed to be eating it up.  Maybe it would be different if it was 2001 and they specifically said that they would be playing a market bubble for all it’s worth, but this is 2011 and we all know where this path will take us.  Sadly, as Canadians, we seem to have a lot of waking up to do.

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