Smart. It’s the word of the day, it seems. As we find ourselves in the throes of a pandemic the world knows as COVID-19, people are admonished to “stay safe.” And, in my opinion, that starts with being smart—in the decisions and choices we make. There is always opportunity in adversity and there are many who see the onslaught of this virus as a wake-up call. A reminder that being smart can be your edge, your advantage.
Our brain is our great asset. It can also be our greatest liability. How will you use this wake-up call? As a chance to get smarter and invest in yourself . . . or as just another obstacle in life to be navigated?
Here’s a story:
At a dinner party, not long ago, a young woman asked me, “Is real estate a good investment?”
“I don’t know,” I replied.
Puzzled, because she knew I was a real estate investor, she asked, “But don’t you invest in real estate?”
“I do,” I replied. “I have many real estate investments, mostly apartment complexes, commercial properties and hotels.”
“Do you make money?” she asked.
“I do quite well.”
“So, why did you say that you don’t know if real estate is a good investment?
Smiling patiently, I replied, “A better question is, ‘Are you a good real estate investor?’”
Repeating my question, she asked, “Am I a good real estate investor?”
I nodded and continued. “If you are a bad real estate investor,” I said, “all real estate is a bad investment.”
“But I have a college degree,” she said.
“Congratulations,” I replied. “But what did you learn about money in college, much less about real estate?”
“But I have a Master’s degree. I was top in my graduating class.”
“So, what?” I asked. “Did you study finance, accounting, law or property management?”
She shook her head and asked, “So, it is the investor that is good or bad, not real estate?”
I nodded and said, “Investing in real estate is not the same as investing in paper assets such as stocks, bonds, mutual funds or ETFs. Investing in real estate is extremely risky. Paper assets are probably best for college graduates like you.”
“So, how do I become a good real estate investor?”
“I strongly encourage you to invest in yourself, in your financial education—even if you have a college degree. In 1973, when I was 26 years old, I invested in real estate seminars before I began investing in real estate,” I told her.
“But I thought your rich dad taught you to invest in real estate?”
“I did ask him, but he refused. He refused because there was too much to learn and he did not have the time to teach me. He gave me the same advice I’m giving you. He said, ‘Stocks and bonds are best for the uneducated investor. Real estate requires much more education.’”
“So, where did you get your real estate education?”
“One night while watching television, an infomercial came on advertising ‘Learn how to invest in real estate with nothing down.’ Since I had nothing to put down, I called the number on the screen and signed up for the free seminar they were offering. The free seminar promoted a three-day workshop that cost $385. That was a lot of money in 1973, and nearly half my paycheck.”
“Did you learn everything you needed to learn about investing in real estate?” asked the young woman.
“Heavens no,” I replied. I added, “As the instructor told us: ‘Your education begins when you leave the seminar.’”
“So, he didn’t teach you anything?”
Laughing, I replied, “Typical response from a college graduate! He taught our class a lot in three days. He taught us what was important to learn, after the three-day seminar was over. The class learned what we needed to learn in the real world if we wanted to be a real, real estate investor . . . in the real world.”
The young woman said nothing, absorbing what I was saying, so I continued on. “My poor dad was much like you. He was very smart in school, a PhD in education. His problem was, he believed he learned everything he needed to learn in school. He knew all the answers as long as he stayed in school. He was smart as long as he was in school.” I took a breath before adding: “Unfortunately, when he was in his fifties, he lost his job, his paycheck and his pension. It was only then—on the streets, without a job, in the real world—that he found out how much he did not know. Even with a PhD, he found out how uneducated he was in the real world.”
“What about your rich dad?” asked the young woman. “Was he an educated man?”
“He was not educated, in terms of an academic education, like my poor dad. Rich dad’s father passed away when he was 13 years old, so he had to drop out of school. He gained his real-life financial education by running the family business.”
“So, your highly educated poor dad did not have a financial education and your rich dad did not have an academic education. Is that what you’re saying?”
“You got it,” I said. “When the real estate instructor told his class, ‘Your real education begins when you leave the class,’ I understood exactly what he was saying. Unfortunately, a number of students did not. Like many academics, they wanted to memorize ‘right’ answers. Too many educated people think that memorizing the right answers means you are educated . . . and they leave school as the uneducated educated. Rich dad called them ‘stupid.’”
“And what did you get from the three-day seminar?”
“The instructor, a real, real estate investor, taught the class what we needed to learn in the real world. We had to find our own answers, in the real world, through real life experiences,” I said.
“Tell me one thing he had you learn once you left the seminar.”
“As I said, he told us our education began once we left class. Our first assignment was to look at 100 properties in 90 days and write a one-page summary of each property, detailing what was good about the property and what was bad. After 90 days, I purchased my first property for nothing down. That seminar, looking at 100 properties in 90 days—and realizing that most of them were bad investments—changed my life.”
“How many students finished the assignment?”
“Only ten percent of us,” I replied, “or approximately three of the 30 students in our class.”
“Is that why 10 percent of the population are rich, and 90 percent are not?”
I nodded. She was beginning to understand what I was saying.
“And is that what most academics do?” asked the young woman. “They look for answers in the classroom, not in the real world?”
“Most academics are like my poor dad, people who have been trained to be told what to do, to memorize ‘right answers,’ and to not make mistakes, because mistakes mean you’re stupid.” I added: “So, most educated people save money, get out of debt and invest for the long-term in a well-diversified portfolio of stocks, bonds, mutual funds and ETFs.”
“Is that wrong?”
“No,” I said, and paused for that to sink in. “That advice is only wrong if you want to learn to be a professional investor. I wanted to be like my rich dad, so following the 90-day plan, making a lot of mistakes and learning from my mistakes made sense. It did not make sense to those who wanted to be told what to do . . . like my poor dad.”
“What about investing with people like Warren Buffett?”
“Again, if you do not want to learn to be a professional investor, investing with Warren Buffett makes sense. It did not make sense to me.”
“Are people who invest with Buffett uneducated investors?”
“Most of Buffett’s investors are rich because they invested with him, and most are highly academically-educated people,” I replied. “Yet, if Buffett lost all their money, which I doubt he would, they would be in serious trouble. If Buffett lost their money, they would be like my poor dad, highly educated people but uneducated investors.”
The young woman left, pondering the question of whether or not she wanted to invest in becoming a real, real estate investor or invest with Warren Buffett in stocks, bonds and mutual funds.
Why Investing in Financial Education Is Smart
Almost every week, someone will approach me and say, “Because of your books, I am getting into real estate.”
And, whenever I hear those words, I smile, thank them for saying “hello” and for reading my books. I also warn them, “Be careful. Invest in your financial education before investing in real estate.”
Unfortunately, rarely do I have the time to explain why I caution them and say, “Be careful.” The following are a few reasons why I encourage everyone to invest—first—in their real estate education before investing in real estate.
Why Real Estate Is the Best Investment
Real Estate is the best investment in the world for the following reasons:
- Real estate is about investing with debt, or OPM: Other People’s Money.
- It can deliver cash flow income for years.
- Investors may pay little if anything in taxes.
- There are often opportunities to buy more when markets crash . . . using OPM.
It’s worth noting that when the subprime real estate bubble crashed in 2008, over 6.5 million Americans lost their homes. Financially educated investors, working for private equity companies like BlackRock, went in and began buying most of those 6.5 million homes in foreclosure.
The good news is that the markets recovered and most of those 6.5 million homes have gone up in price, and most are more expensive today.
The bad news is: most of those 6.5 million people who lost their homes are poorer today. Rather than seeing their net worth go up with their home’s value, most remain renters, because their credit scores were damaged when they lost their homes.
Why Real Estate Is the Worst Investment
Real Estate is the worst investment in the world for the following reasons:
1. Real estate is illiquid. That means, if you make a mistake, real estate can be very difficult to sell or get rid of. If you make a mistake in stocks, bonds, mutual funds or ETFs, you can “liquidate,” which means sell quickly and cut loses, almost instantly.
2. Real estate is a business. Real estate is management intensive. Real estate requires real business skills and a business mind. Many real estate dreams turn into real estate nightmares, not because real estate is bad, but because the investor’s business skills are bad. If you do not have the mindset and business skills of an entrepreneur or are not willing to learn to be an entrepreneur, do not invest in real estate.
3. Real estate is not for “do-it -yourselfers.” Stock, bond and mutual fund investors can get away with being “do-it-yourselfers.”
Real estate investing is about rules, regulations, laws, records, repairs, profits, losses and management. Real estate is about debt. And debt is like a loaded gun: it can make you very rich or kill you.
Because real estate is a business that requires debt financing and professional management, real estate investing is a team sport, played by a team of professionals. Professional real estate investors must have a bookkeeper, lawyer, accountant and insurance agent on their team.
4. Real estate is about maintenance and repairs. Real estate investors must have a handyman on call 24 hours a day, 7 days a week . . . unless the investor enjoys fixing toilets at midnight.
What about Flipping Real Estate?
Another question I’m frequently asked is “What about flipping real estate? Then you don’t have to manage the property.”
If I have the time, I explain by telling a story. “During the decade-long ‘Flipper Fest,’ the years between 1998 to 2008, my wife Kim and I explained to countless people who were excited about making fortunes flipping real estate that “We do not flip real estate. We are real estate investors.”
I remember walking through the Phoenix airport when a woman recognized me saying, “I have a 3-bedroom / 2-bath house I just bought for $86,000. If you give me $5,000 cash, I will let you have it.”
“And what would I do with it?” I asked.
Looking at me like I had holes in my head, she indignantly said: “You’d flip it.” When
I didn’t reply she added, “You can probably make $20,000 in a few weeks.”
“I don’t flip real estate,” I replied politely.
She stared at me, shaking her head. “And I thought you were a big-time real estate investor,” she said. “You’re just like everyone else . . . a big fat phony.” And with that she walked away.
Rich dad taught his son and me to invest in real estate for cash flow. When a person flips a house, they are subject to capital gains taxes which can be much higher than taxes on cash flow. Short-term capital gains are taxed like ordinary income, at the 37 percent top bracket.
Capital gains investors, aka “flippers,” are “buy low, sell high” investors. Cash flow investors are “buy low, keep collecting money forever, and pay-as-little-in-taxes-as-possible” investors.
With a professional financial education, cash flow investors may pay zero percent in taxes.
When investing for cash flow, an educated real estate investor can invest for both capital gains and cash flow and still pay little to nothing in taxes, legally. On top of that, an educated cash flow investor also knows how to flip a property and still not pay capital gains (or “flipper”) taxes, legally.
Not surprisingly, uneducated investors most always pay the highest taxes while educated, professional investors always pay the lowest taxes.
Since leaving the three-day seminar, I have continued to attend investment seminars, and have taught investment seminars. Ken McElroy, a Rich Dad Advisor and partner with Kim and me in real estate investments, has acquired numerous apartment complexes across the southwestern United States totaling over 7,000 rental units and costing over a half-billion dollars, using OPM, debt financing . . . and earning us millions a year in income, with most of that income tax free.
When real estate markets crash, we go back into the market, picking up more investment properties—often from real estate flippers.
That $385, three-day seminar taught by a real, real estate investor was the foundation of my real estate education. His lesson: Real life education begins outside the classroom.
I’ll close by posing a question for you: What kind of education do you have?
Books by Real Estate Investing expert Ken McElroy
- The ABCs of Real Estate Investing
- The ABCs of Property Management
- The Advanced Guide to Real Estate Investing
- New for Fall 2020: The ABCs of Buying Rental Property
At under $20 a book, your real estate education can start for less than the $385 seminar I took years ago—and for much less than a college education.