Opinions on Rich Dad Poor Dad

BCEagle91 · November 5, 2011, 11:25pm

We all enjoy ourselves in various ways. Some of those ways maybe quite
inexpensive. What does a sunset cost?

Pretty type-A mentality.

My recollection from the book is that they drove relatively late-model
domestics that didn’t particularly draw attention to themselves. It was
the professionals that really couldn’t afford flashy luxury models that
earned a lot but weren’t millionaires.

I have a friend that has a bunch of rental properties that he
purchased in the real estate downturn back in the early 1980s. He
certainly has enough rental income to retire or he could sell a few of
them and retire but he’s in the office before 7 and he leaves around
6. He drives old cars and he lives in a place that’s not as nice as
the apartments that he rents to Section 8 tenants.

Fine. Give me a million today and I’ll give you 7% less in a year.

Me too.

If you go to that page, you will see a chart of the $SPX on top and a
chart of the $USB on the bottom.

Dennis Koslowski wasn’t wealthy?

Kozlowski became notorious for his extravagant lifestyle supported by the booming stock market of the late 1990s and early 2000s; allegedly, he had Tyco pay for his $30 million New York City apartment which included $6,000 shower curtains and $15,000 “dog umbrella stands”.

According to Forbes, Kozlowski also purchased several acres in the private gated community, “The Sanctuary”, in Boca Raton, Florida, while he was CEO at Tyco International.

Tyco paid $1 million (half of the $2 million bill) for the 40th birthday party of Kozlowski’s second wife, Karen Mayo Kozlowski. The extravagant party, held on the Italian island of Sardinia, featured an ice sculpture of the Statue of Michelangelo’s David[clarification needed] urinating Stolichnaya vodka. This birthday bash was disguised as a shareholder meeting in order to get corporate funding. In a camcorder video, Dennis Kozlowski states that this party will bring out a Tyco core competency - the ability to party hard. Subsequently, this shareholder meeting/birthday party became known as the Tyco Roman Orgy.[5]

– Wikipedia

John Mauldin did a rather large and detailed survey of Millionaires last
year for an upcoming book. It should have far more detailed data than
the books already out there. Perhaps we will get a better feel for how
taxes affect millionaires from it.

Taxes can cause problems for those with high incomes but they don’t
have to. There are lots of people that live with a fraction of those
incomes.

CCsniper · November 5, 2011, 11:27pm

I just dont understand why investing in say a real estate venture or company with an entrepreneur with a history of success needs to be risky. Sure there is some risk involved but if calculated and due diligence is done, it is minimal.

EDIT. @BC

I lost track of the argument somewhere in there. I am not sure who you are quoting from and I am unsure why these people are relevant.

BCEagle91 · November 5, 2011, 11:42pm

50% of businesses fail within five years. Ever lose 100% on an
investment? It sucks.

As many as half the funds that existed earlier this year, when the industry topped out at 10,000 funds in business, could fail or be wound up in a year’s time, industry watchers estimate. Assets under management at hedge funds are falling as investors rush to pull money out of good funds and bad. In September, investors took out an estimated $41 billion from the sector, the largest monthly outflow of money since experts began tracking numbers. October looked even worse.

Read more: [Collapsing</a> Hedge Fund Industry - Wall Street - Portfolio.com](<a href=“http://www.portfolio.com/views/columns/wall-street/2008/11/11/Collapsing-Hedge-Fund-Industry/#ixzz1ctP53QBb]Collapsing”>http://www.portfolio.com/views/columns/wall-street/2008/11/11/Collapsing-Hedge-Fund-Industry/#ixzz1ctP53QBb)

Ever hear of Long Term Capital Management?

Have you read about the agreements that universities make with hedge funds in their investments that require annual capital injections from the investor? That sort of thing can really cramp your cash-flow.

Are you willing to fix a leaking toilet at 2:00 AM? Are you willing to
deal with an eviction? A tenant that trashes the place? That sues you
for whatever slight they’re feeling at the time? Prices of multifamily
homes go down too.

“When Lehman collapsed last fall, its bonds became virtually worthless. Mr. McAfee’s stock investments cost him millions more.”

He dabbled in other property investments - it isn’t mentioned in this
article though.

He could just google hedge fund collapse. Or hedge fund illiquidity.

BCEagle91 · November 5, 2011, 11:54pm

Take a look at a ten-year chart of Boston Properties (REIT). It was $45
in 2001, rose to $134 in 2007, fell to $30 in 2009 and has tripled
since then.

SPG is similarly volatile and I do trade SPG from time to time. It lost
75% in value from 2007 to 2009. The people that run SPG are very smart
people and know how to scout out and build malls. But there are always
factors that are not within the control of the company that can create
significant risk.

Barings Bank was the oldest merchant bank in London. It was founded in
1762 and collapsed in 1995 due to one rogue trader. Certainly a company
with a history of success.

CCsniper · November 6, 2011, 12:05am

Agree with most things said.

When Im talking about private equity, I mean actually meeting entrepreneurs in your area and investing in the small business/venture rather than thrusting money into an institution.

“Are you willing to fix a leaking toilet at 2:00 AM? Are you willing to
deal with an eviction? A tenant that trashes the place? That sues you
for whatever slight they’re feeling at the time? Prices of multifamily
homes go down too.”

Property manager does all of that for you. Limit liability limits suit to just that one investment. Prices of multifamily homes do not go down unless operations screw it up. The value of the apartments is solely dependent on the operations: operating income divided by the average capitalization rate of the area. The only way it goes down is if income falls, which should not happen too often because housing is a necessity.

performersmom · November 6, 2011, 12:13am

“The value of the apartments is solely dependent on the operations”
HUH??
Real estate needs occupancy, and to break even, the rent needs to cover all sorts of costs, including maintenance, finding new tenants, maintenance and upgrades, taxes, debt service, book-keeper/accountant, taxes, paying your property manager and janitor…
Rent and occupancy are not in your control. The overhead is there no matter what.

The value of the property fluctuates with all these factors, as well as cost of capital to potential buyers, and, of course, with the overall strength of the economy.

BCEagle91 · November 6, 2011, 12:25am

People with high incomes are often very busy people. Where are you
going to get the time to do the level of research and checking to
ensure that someone wanting capital is not a crook and has some level
of competency? People put money in mutual funds, stock indexes and
hedge funds because they want a return without knowing the details
because, presumably, they don’t care to spend the time to learn about
them.

Are you going to do the contracts or are you going to hire a lawyer
to write them up and examine them? Are you going to be an expert at
the business or will the details go over your head?

And this property manager is going to do this all for free? What if
they screw up? Do you want a tenant calling you directly because they
can’t get a hold of the property management company at 3:00 AM on the
weekend?

And what about criminal liability?

I just found a listing for an apartment building in Detroit with an
asking price of $9,900. It features 8 1-bedroom units and is a
two-story brick building. It is currently vacant and bank-owned.
Do you think that it was originally built for $9,900?

There’s another apartment building, 12 units, brick building for
$14,900. Also bank-owned.

I see a 32-unit building (brick, looks quite nice) for $89,000.
Bank-owned and vacant. Looks like it cost over a million to build.
How’d you like to be the guy with a 90% haircut?

When I got my first professional job, I had roommates to defray the
costs of housing. With prosperity in the 90s, college grads didn’t
need as many roommates or they got their own apartments.

1.2 million households were lost from 2005 to 2008, despite the population increase of 3.4 million in the study area, as Americans experienced one of the deepest recessions in decades, according to a study released today by the Mortgage Bankers Association (MBA). This decline in households is likely what contributed significantly to the excess supply of apartments and single family homes on the market.

The study entitled, “What Happens to Household Formation in a Recession,” which was conducted by Professor Gary Painter of USC and sponsored by the Research Institute for Housing America (RIHA), analyzes the impact of economic and housing conditions on household formation and how the recent recession has affected Americans’ propensity to form new households, mobility trends, and changes in the rate of overcrowding.

“With such a significant drop in households nationwide, it is clear the most recent recession impacted individuals’ decisions to move out on their own and caused many Americans to join already formed households,” said Gary Painter, Associate Professor in the School of Policy, Planning and Development at the University of Southern California. “Due to data limitations, my analysis had to focus on household formation as of 2008. Clearly, given the depth of the downturn in 2009, and the ongoing weakness in the job market through the beginning of this year, this study gives no reason to expect that household formation has picked up at all.”

[MBA:</a> An Estimated 1.2 Million Households Were Lost During Recession](<a href=“http://www.mbaa.org/NewsandMedia/PressCenter/72490.htm]MBA:”>http://www.mbaa.org/NewsandMedia/PressCenter/72490.htm)

What would you do if voters passed rent control in the city where you own your apartments?

lookingforward · November 6, 2011, 1:01am

I think the point is: there is thinking based on familiarity with principles and a willingness to take a stand, based on one’s interpretation and ability to propose and defend an argument.

Then, there’s thinking based on experience with hard, cold reality.
…

How can anyone look at the current housing crisis and say, prices of multifamily homes do not go down unless operations screw it up?

CCsniper · November 6, 2011, 2:16pm

Family households are lost. Apartments are not. I do not see where it says apartments are lost.

Where do these 1.2 million households go? I do not believe the homeless population has grown 3.6-4.8 million in the recession. These 3.6-4.8 million people rented. I am certain demand for rentals actually INCREASED during the recession.

Edit: <a href=“http://www.economist.com/blogs/freeexchange/2011/04/housing_markets[/url]”>http://www.economist.com/blogs/freeexchange/2011/04/housing_markets</a>
<a href=“Rent now, buy later”>Rent now, buy later; : “rising rents” due to increased demand
Occupancy increases from 93.4 to 93.8% in the past few quarters. It certainly isn’t going down.

Voters cannot pass rent control in areas without referendum and most real estate interests serve as powerful lobbies. On the other hand, what if real estate lobbies passed urban development boundaries? Voters get screwed because supply is capped and rents soar. Its a great time to be a landlord.

The true value of a multifamily housing complex should never move with market trends unless operations change. If they are bank possessed, that simply means the owners or managers screwed up and went under. Fine. But at the end of the day, the multifamily housing complex is valued as an operational business. The “market value” is simply ignored in negotiations.

Hire property manager: does it for 50-60k a year. Give him a room and pay him the difference and you are free to do your thing. This is possible once you work with around 100 unit complexes.

“And what about criminal liability?”

What about it? Limit liability and a good lawyer is all you need to walk out without loss of personal assets. Only corporate assets can be touched.

With regards to those buildings you see listed for 10k… How in the world do they argue your point? They simply conclude that the piece of property is not profitable and hence the low value. If they generate no income, they should be given away for free because they become a liability. 10k is too much for the 8-plex. Even $0 is too much. Value = operating income divided by capitalization rate. The bank would have to pay me money to accept a 32-plex that is bleeding money.

barrons · November 6, 2011, 2:36pm

There is a thing in real estate that determines value called the cap rate. It changes and the change can be large–100% swings no matter what the apt complex is cash flowing. And there is nothing you can do about it but wait until it changes in your favor.

CCsniper · November 6, 2011, 2:37pm

All of this is again moving away from the original topic:

Most professionals pay 50% in taxes. They COULD make choices to work in states with no income and sales taxes… but they don’t. They COULD live well below their means and become wealthy… but they take on mortgages 300%-400% of their pretax income (common ratio). They could drive a 2000’s Camry but they choose to drive a 2010 luxury import. They COULD theoretically pay 33% in taxes… but it doesn’t happen often.

They COULD also become businessmen and pay <20% in taxes… well we know that doesn’t happen either when society conditions our smartest kids to become professionals and buy the nice house and car. After all, someone has to goose the economy.

CCsniper · November 6, 2011, 2:44pm

If the cap rate changes, simply treat the apartment complex as a leveraged buy out. If cap rate falls, refinance for high amounts to draw capital out. The strong operations can absorb the new mortgage payments.

I also don’t understand why the average area cap rate would swing 100% in either direction. It is simply income over value. I don’t understand how competently run properties can have its income half or double when it is such a recession resistant industry.

The value of it is simply related to how much debt operations can service. The amount of debt it can reasonably take on is the value of the house.

The operations directly impact how much debt it sustain and this debt = value. You can extract the difference by refinancing at an amount much higher than the “market value.” You do not need to wait for cap rate to change.

BCEagle91 · November 6, 2011, 3:35pm

Are you sure you go to Columbia? Are you in a frat house or dorm?

Do you read a daily newpaper? This stuff has been in the news for the
last two years.

<ul>
<li>College grads move back with their parents</li>
<li>Parents move in with their adult children</li>
<li>Families double or triple up in a home or apartment</li>
<li>Singles with their own apartments double, triple, quadruple up</li>
<li>Homeowners rent out their finished basement, garage or attic</li>
</ul>

Have you ever signed a lease?

You may not have noticed but the real estate lobby is looking a little
shaky these days. That’s what happens when your revenue gets knocked out
from under you.

My point is that there are risks.

Revenue is based on the ability and desire of customers to pay. If the
customers go away, then revenue declines and the value of the property
declines. Of course you could just go and talk to a commercial real
estate developer. He’d probably look at you as if you just got off the
boat.

Have you ever hired someone? Have you ever had to reprimand an
employee? Have you ever had to fire an employee? Do you know what
benefits cost? You make it sound so easy - as if it were written in
a textbook.

Let’s say that your property manager screws up and didn’t install or
check the smoke detectors in the building and a tenant dies. Then there’s
a criminal investigation into why the smoke detectors didn’t work.

Let’s say that there’s drug dealing going on in one of the apartments.
What do you say to drug property forfeiture laws?

You stated that the value goes up or down based on operations. Perhaps
you will one day take a course in logic and learn about the
counter-example.

BCEagle91 · November 6, 2011, 3:40pm

Source please.

There are a lot of people that live in one state and commute to
another to save taxes or acquire cheaper real estate. We made the
decision to locate in NH two decades ago. Real estate wanted to locate
in MA but the employees didn’t want to pay income taxes to MA so they
allowed us to build in NH. We now have a lot of employees that work in
MA offices but try to squat in our building when they don’t need to be
in MA so that they can decrease their income taxes.

You’re stating that they don’t. I only need to provide one
counterexample.

What’s Warrent Buffet driving these days? What’s his tax rate?

Have you ever owned a business?

performersmom · November 6, 2011, 7:00pm

You are very very patient, BCE.
CCsniper is lucky that you are here to address each of these statements.

IMO this is how one thinks when one is behind a screen all day, punching in numbers and creating fancy formulas, after reading a book written by an evangelist during the boom.

CCsniper, please get a job in the real estate business for a while, say, managing a property and renting apts- you will learn how all the theories are not really enough to explain what is happening

Price is what people are willing to pay. Price is not generated by a formula or computer program. Risk is also an elusive, always changing/hard to pin down, psychological/emotional factor.

katliamom · November 6, 2011, 7:15pm

Any professional who pays 50% in taxes either earns in the tens of millions – or has a very, very, very bad tax guy.

CCsniper · November 6, 2011, 9:48pm

^^^

Please go back to my original post calculating tax rates. Most professionals pay 50% in taxes at around 250k.

Source: <a href=“http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.svg[/url]”>http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.svg</a>

The MEAN income (mean income is around what $40k?) tax paid in USA is 40%. It is very very easy to see how this climbs up to 50% at $250k, which is a good 2-3 standard deviations from the mean.

This source also answers: “Source please.”

@BCE. I have given links to to numerous source that claim that rental demand has increased. You continue to argue that they have decreased. I do not understand. Please give source that rental demand has collapsed. Please also give source that rental revenue has gone down. By most economic accounts, Rents are going up.

Demand is increasing, leading to higher revenue and in turn higher operating income.

“Do you read a daily newpaper?” Do you?

They sell insurance for all of the things that can go wrong. It’s expensive… but it allows one to sleep very safely at night knowing that most mishaps one can think of are taken care of. Hell, even if 100 tenants die because smoke detectors malfunction, one would still be covered.

“You’re stating that they don’t. I only need to provide one
counterexample.”

Fine. Most professionals.

“What’s Warrent Buffet driving these days? What’s his tax rate?”

Lincoln Town Car. His tax rate is 17%. Is he a high income low net worth professional? I do not see how he is related to the demographic group that I am referring to. This is a non sequitur. I have yet to meet a doctor or an investment banker who pays only 17% in taxes.

BCEagle91 · November 6, 2011, 10:00pm

Your calculations are not research. They are merely assertions.

Source please.

Please provide a quote to where I said that rental demand has
decreased.

Demand is increasing but so is supply.

I read several daily newspapers. Other traders send us articles that
they think our trading group can benefit from.

Insurance doesn’t cover criminal charges.

Source please.

“What’s Warrent Buffet driving these days? What’s his tax rate?”

Why do you care about such a person?

CCsniper · November 6, 2011, 10:12pm

“Revenue is based on the ability and desire of customers to pay. If the
customers go away, then revenue declines and the value of the property
declines. Of course you could just go and talk to a commercial real
estate developer. He’d probably look at you as if you just got off the
boat.”

While you do not claim that rental demand has declined, the connotation is that it has because of your negative outlook due to the “if” statement. The statement about the real estate developer further suggests that you believe the current climate is not positive for multifamily housing owners.

“Source please.”

I am unable to provide a direct source for my claim. I can say that the average taxation percentage in America is 40%. I make a reasonable assumption that is grows to 50%+ when you increase the income by 3 standard deviations ($250k is top 1% of income). Source for the tax percentage is given by the wiki link. Follow the wiki reference link for source.

“Demand is increasing but so is supply.”

Increase in demand outpaces increase in supply. Hence we have occupancy rates going up. We have rents going up. If supply increases = demand increases, everything would be stagnant.

I care about warren buffet because he has a high net worth. Most professionals do not have a high net worth. The Millionaire Next Door can attest to this.

BCEagle91 · November 6, 2011, 10:35pm

So why did you claim that I did make that claim?

I am merely pointing out risks and difficulties regarding the pursuit
of the “easy” 20 to 25 percent a year gains.

You’re assuming that the tax rate goes up with income.

There are a lot of people and organizations which would love to
make the claims that you do but you can’t find any of them? Perhaps
they don’t exist. Do your professors accept this kind of reasoning
in research papers?

Consumers are fleeing or getting pushed out of home ownership
resulting in more rental demand but what happens to the home that they
leave? At the moment, the banks are taking them back and they are
hanging onto them as they don’t want to mark to market the losses.
But at some point they will sell.

“CoreLogic (NYSE: CLGX), a leading provider of consumer, financial and
property information and business services, reported today that shadow
inventory of residential property as of August 2010, reached 2.1
million units, or eight months worth of supply, up from 1.9 million,
or a five-months’ supply, from one year earlier. With visible
inventory remaining flat at 4.2 million units, the change in shadow
inventory increased the total supply of unsold inventory by 3
percent. The total visible and shadow inventory was 6.3 million units
in August, up from 6.1 million a year ago. The total months’ supply of
unsold homes was 23 months in August, up from 17 months a year
ago. Although it can vary and it depends on the market and real estate
cycle, typically a reading of six to seven months is considered normal
so the current total months’ supply is roughly three times the normal
rate.”

I used to follow him because I had a few shares of his company for
several years. I read his annual reports and some of his
pontifications. Wading into politics seems to have dinged his
performance.

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