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MAKE MONEY WITH NO MONEY WITH ROBERT KIYOSAKI, RICH DAD POOR DAD -Robert Kiyosaki - YouTube
Channel: The Rich Dad Channel
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(upbeat music)
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- Hey guys, welcome to Advanced
Lessons in Millennial Money
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featuring Robert Kiyosaki.
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I'm Alexandra Gonzalez.
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In this episode, I got a chance
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to speak with Robert Kiyosaki
and his real estate expert
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and Rich Dad advisor, Ken McElroy.
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For over two decades, Ken McElroy
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has experienced massive success
in the real estate world
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from investment analysis
and property management
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to acquisitions and property development.
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With over 750 investment
dollars in real estate,
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Ken offers a unique perspective
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in how to get the biggest
return on your investment.
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One of the topics Robert talks about
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is using debt to get rich.
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We get a lot of questions
about how that actually works.
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Let's listen to how Ken
and Robert pull this off.
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- So, Kenny, you wanna say anything
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about the beauties of debt
and how you learn to use debt
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to get rich?
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- Sure, sure, well I
think when I was your age,
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everybody just said stay out of debt.
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So, it wasn't until later that I realized
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that you can use it and you
can use it to buy assets.
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So, it's a big difference,
doing good debt and bad debt,
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but essentially, all it
is, it's a form of money
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from somebody to buy something
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in a loan or a mortgage or
whatever you wanna call it.
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So, it's just money.
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And so, being able to
use money from a bank
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or from a life company or a pension
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or something like that.
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- Or an investor like me.
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- Yeah, or an investor.
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In the form of a loan or equity
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is the most important
thing that you could learn
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because I think I certainly grew up
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with no money and my parents didn't either
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and we always used to have
to save for everything
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that we always did, it was always
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how much money can we save
and then we can buy something
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and it wasn't until later that I realized
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that when you use debt,
you can actually do it,
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you don't even have to have any money.
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You just use other people's money.
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- When you go to the bank
and ask to borrow money,
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your bank is going to
consider how much debt
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you can have based on net
operating income or NOI.
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Not sure what that means?
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Let's listen to Ken explain.
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- NOI means net operating income,
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so if you really think about it,
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it's just income minus expenses.
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That's all it is.
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And so, it's important to know
where you are financially,
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so a banker's gonna look at
your income after expenses
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so that's a great way to see it.
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- It's really quite simple.
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So let's say, I'll keep
the numbers simple.
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You have a thousand dollars income
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and you have 500 dollars in expenses,
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this is a prop.
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- Yep, so you have a 500 dollar NOI
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or net operating income.
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- So why is that important?
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- Well, the banker looks at that number
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because that's the number that they see
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to be able to pay back
any debt you might want.
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- [Robert] Right, this is
where this comes in, right?
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- Correct.
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So, they're gonna look
here and they're gonna say,
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okay this person has 500 dollars in NOI,
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therefore we can give them a loan,
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say up to 350 dollars, 250 dollars
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or something like that.
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So, they're not gonna give you
a loan for the whole amount
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because they don't want
you to be that tight,
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so what they're gonna do is
they're gonna look at the NOI
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and say, how much can we loan you?
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- Now that we've learned
about debt and NOI,
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what role does the property play
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when seeking funding for the investment?
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Robert and Ken discuss.
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- Okay, so when Kenny calls me and says,
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I have this property.
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It's in horrible condition,
there's no income,
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there's expenses all over the place,
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you get excited right?
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- Yeah, so I do.
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It can work the opposite too.
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So a lot of people get hung up here
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because they don't have
a financial statement
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or any way to go to a banker, let's say,
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but sometimes a banker will look
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at the property itself.
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So they'll say, like
the one you explained,
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they'll say well this has a bad NOI on it,
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why would we give you money?
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You know what I mean?
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And so that's when the
financial education comes in
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and you say, well this is
what I plan to do with it.
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- Correct, what Kenny is saying,
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we've had, I'm keeping the numbers simple.
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He's had income of zero
and this is a thousand.
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- Yeah, so you'd have a negative NOI.
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- And the banker goes, tell me why.
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- I can't lend on that, right?
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Because it's a higher risk of being able
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to be paid back.
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- My next question was how can you use NOI
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to determine the value of a property
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when you're looking to invest?
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Let's watch.
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So how can you use NOI to determine
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the value of a property,
of an investment property?
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- So, the NOI or the net operating income
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determines the value.
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What you back into it with another vehicle
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called a capitalization rate or cap rate,
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so it's actually, we're
getting a little technical,
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but typically, the cap
rate or capitalization rate
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divided into the NOI determines the price.
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So that's generally how that works.
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But in the case that
we were talking about,
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the value of the building
with no tenant in it
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- Is way low.
- Is way low.
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And there's really no income.
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So it's basically
whatever the structure is.
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So I've seen lots of situations
where a vacant building,
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somebody might've spent
five, ten million dollars
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on a building that's completely vacant,
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vacant warehouses,
vacant whatevers, right?
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Sometimes you see 'em get
converted into clubs or whatever.
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Well, there's value there.
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Somebody spent a lot of
money on it at one time.
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Somebody owns it, too.
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It could be a bank, it could be whatever.
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So taking that and creating value,
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sticking a restaurant in it, a gym in it,
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a club in it, it doesn't
really matter who's in it.
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Well it does because you
want them to pay you,
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but now you're creating the income.
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And that's how you create value.
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So in that example, let's
say you buy a building
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for a million bucks on a block.
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With a tenant in it, it could be worth
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three, four, five million.
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- If it's a tenant in it, the value is up.
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- Yeah, right?
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'Cause now, what you do is
you put all that together
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and then you can actually sell it.
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- Got it.
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And so, even if the NOI is negative,
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if you create a plan that
creates value for the property,
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it shows the increase that you're gonna
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give the property's value,
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the bank will give you the loan.
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- Oftentimes, yeah.
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- [Robert] Not always.
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- Not always.
- Not always, but
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there are ways to do it.
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So, in that particular
case, you might get a loan
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from somebody like Robert.
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Say hey, you know, I need a million bucks
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and this is my plan.
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And then once you get a tenant in it,
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then you go back to the bank and you say,
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hey give me a loan.
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And then they give you a
loan and you pay Robert back.
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- Every investor should be looking at ways
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to increase income and reduce expenses.
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But have you ever wondered
how that's possible?
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Ken gives us a secret.
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- So the thing that Kenny
is always looking for
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is after we stabilize the building,
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he'll tell me, he says
look, in five years,
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I'm gonna get this from one
thousand to 10 thousand.
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- [Ken] Yeah.
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- And I'll go, okay, so I know I'm in it
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for five years with him as an investor.
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And on top of that, we're
gonna reduce the expenses
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back to 500.
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NOI goes up, the value goes up,
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the debt goes up to let's say 10 thousand.
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Does that makes sense to you?
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- Yeah.
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- So I have a friend, for example,
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he actually bought a building
in a town up in Idaho
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where I have a vacation house
for about a million bucks
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and it was sitting, it
was an old Elks building,
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beautiful building downtown.
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But it had been vacant for a long time.
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He bought it and he put
like 30 offices in there,
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small offices, you know
1500 to 2,000 feet each
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and grew the revenue, right?
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So everybody pays.
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- [Robert] So the income went up.
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- Yeah, you know what I mean?
- Yeah.
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- So he broke it up and leased it up.
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So he has his expenses,
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but now he's got 30 people paying rent
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as opposed to just one
big vacant building,
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he turned it into a pretty
cool workspace for everybody.
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- Kenny, in his third book,
Advanced Guide to Real Estate,
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his job is to get this
up, keep this stable,
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then he goes back to the banker and says,
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look, we've got all these
tenants, money's going up.
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And so now we want 12 thousand dollars
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because he's improved
income, kept expenses low,
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building's more valuable.
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- Yeah, the key there is the bank's always
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looking at your NOI to
pay back their loan.
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So the more you can grow that,
the more loan you can get.
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- And so, essentially, the
renters are paying your debt.
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- Of course.
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Essentially, so if that
building I was referring to
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goes to 50 percent vacant,
now he's in trouble.
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But if he can keep it full,
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so now you're getting into management,
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but regardless of that,
that's how you do it.
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There's opportunities
like this everywhere.
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- Once you've bought all these apartments,
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someone has to manage it for you.
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Unless you wanna run the
apartment building yourself,
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you're going to need a
good property manager.
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Here's the importance of a
good property management.
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And I know that another
thing that you always mention
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in all your books and the
ABCs of Real Estate Investing
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is that property management
is very important.
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Poor property management
equals poor profits, right?
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And so, I wanted you to kind of explain
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the importance of the property management.
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- Well, essentially all
property management is
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is taking care of the
property in every way,
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so taking care of the people that might be
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inside of this building, you know,
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for various things that
come up from day to day,
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collecting the rent and
paying all the expenses.
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That's really all it is.
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And so the property manager's job
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is to make sure the place is clean
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and that things are getting
rented and all those things.
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And so the owner of the building
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would hire a company like that
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or they could do it themselves
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and basically keep the place full.
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So in our world, we have a
property management company
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that we have about 300 employees,
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all we do is focus on
this, these two things.
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How do we keep our expenses
low and keep our income high?
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Because we're always
trying to grow our NOI
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so our NOI, you know we have a budget
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for let's say, 2017 or 2018 or 2019,
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the goal is to grow that NOI each year.
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- And Kenny's done such things
as the way he grew the income
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was, this is a little common,
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he put washing machines,
right, in the units.
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There are no washing machines.
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And so when he put washing
machines in the building,
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this went up.
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- Yeah, so in my apartment houses,
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we would buy apartment houses
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that had washer and dryer
hook-ups but no machines.
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And so the people would walk down
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to the laundromat or whatever,
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and it was a bit of an
inconvenience for the people
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and all that.
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So, I said, well let's
just buy for 650 dollars,
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we can buy a washer and dryer set
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and stick 'em in all there.
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And we did that.
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And so I probably bought
three or four thousand
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sets of washers and dryers
for a lot of our properties
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and so now all of a sudden, we can charge
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75 or a hundred dollars more in rent.
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- [Robert] And this goes up.
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This doesn't go up as much.
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- It's a win-win.
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Because they have to go
spend some money anyway
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to go do their laundry, now they can do it
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here and for me, if I can pay back
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those washers and dryers in one year
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because it's only 650 dollars for a set
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and if I can get 75 dollars more
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then all of a sudden, I've got 900
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to almost a thousand dollars more in rent.
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So I'm actually, it's what
I call a one-year payback.
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- So what Kenny does, he
borrows the money here
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to put washing machines in here.
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Again, the tenant pays it all off
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and the washing machines stay there.
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- And I think that's a brilliant idea
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because I know that both of you have
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created incentives for the renters.
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So for example, if they stayed for a year,
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you would do certain renovations
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like including the washing machine.
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And so, every year, there
was another incentive,
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which not only increased
the property's value,
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but also the renter's
paying for it essentially.
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- [Robert] And the banker is happy.
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- My last question was pulled straight
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from the YouTube comments
that you guys left.
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I asked Robert how would
you respond to critics
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who say real estate is
a slow lane approach
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to getting rich.
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This was Robert's reaction.
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Well, one of my last questions
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is what would you guys respond
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to the critics who say that real estate
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is a slow lane approach to getting rich?
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- [Robert] They're entitled
to their point of view.
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- Yeah.
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That's fine with me.
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I can't think of another.
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I mean, I think it's really super simple.
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Real estate is very slow and very dumb.
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- Every month, we got cash flow.
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- Yeah, you know.
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I like that, I like we're not
banking on something going up.
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This is called creating value.
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We're not parking our money in something
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and hoping it goes up.
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This is very strategic.
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- Perfect.
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- Everybody's got their point of view.
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Most people wanna get rich quick.
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That's why they never get rich.
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- [Ken] Yeah, this is not that.
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- [Robert] Yeah, this
is financial education.
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This is smart, this is having your banker
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be your partner.
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- Yeah, and these are
long-term assets, by the way.
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This is business, this is
like managing a business.
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We would not sell these.
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So, unlike the stock market or something,
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we're not trying to time things.
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We're trying to generate cash flow here
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and then move to the next one.
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- Okay, great.
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- So, can I give you one last thing
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'cause those guys always upset me?
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So what Kenny does, he increases this,
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fixes this, and then when this goes up,
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he gives my money back.
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So I might give Kenny a million dollars
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for five years, let's say.
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He increases this, decreases this.
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The bank says, oh yeah, NOI is up,
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so he puts all this money in there.
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I get my million dollars back.
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I still own the property.
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I still have the cash flow going in.
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So all you guys wanna get rich quick,
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it's called an infinite return, right?
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- Yeah, and it's tax free.
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- [Robert] It's tax free.
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- The reason it's tax free
is because when we use debt
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to pay back debt, it's debt.
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So it's owed.
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So, when Robert gets his money back,
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it's actually tax free.
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- [Robert] Yeah, let me say I lend Kenny,
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and this is pretty common numbers.
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I lend him one million.
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He fixes all this, the bank
gives him three million.
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I get my million dollars
back and that is tax free.
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I get it back.
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And I still own the building with Kenny.
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- So yeah, so to your question,
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you gotta wonder why if you
can invest a million dollars
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and get it back tax free and still
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have lots of cash flow--
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- [Robert] And still have
the cash flowing this way.
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- Why somebody would think that.
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It's a pretty simple model.
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- And that's it for this episode
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of Advanced Lessons in Millennial Money.
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If you like this video,
give it a thumbs up,
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subscribe to our channel
and comment below.
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(speaking in foreign language)
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(upbeat music)
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- Who say real estate is a slow--
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Slow lone preach.
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How would you exp--
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My last cut--
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My last question was pulled
straight from the comments
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(laughing)
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I'm sorry.
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