Kiyosaki on Real Estate Guys Radio predicting massive crash

https://www.youtube.com/watch?v=z2gd0Es8cxQ

Jayme Carlson

Investor · Belvidere, IL · Member since 2016 · 8 posts · 5 votes

9y

I didn't start paying attention to Kiyosaki until the early part of 2016. And I saw him make several predictions about a collapse in 2016 and it never happened. So I take it with a grain of salt. I do believe he is a very smart man for sure. So I'm curious if he's got something else up his sleeve, marketing wise, when he makes these predictions.

Here are a few examples:

https://www.youtube.com/watch?v=cFkHeHuuQyc

https://www.youtube.com/watch?v=o8sErW8Wxlw

5 Reply

Rob Drum

Real Estate Broker · Bradenton, FL · Member since 2017 · 544 posts · 363 votes

9y

No one can predict the timing of a market crash. There will of course be another crash at some point, but It's much easier to get rich warning people about the trouble to come, than actually making bets to profit from a crash.

Its fun to speculate intellectually on when the next crash will be, and you can make a lot of smart sounding arguments. Google Harry Dent.

It's very difficult to speculate financially on the next crash. Dr. Michael Burry from "The Big Short" was right about the financial crises but was way too early, and almost didn't reach his payday.

1 Reply

Karen Young

Investor · Greenville South Carolina and Lihue, HI · Member since 2016 · 69 posts · 14 votes

9y

There are things in life that you can't control-market corrections is one of them. Concentrate on the things you can control-your savings rate, how much leverage you have, etc.

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Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

9y

Peter Lynch once aptly said that much more money has been lost by people trying to anticipate market corrections than has actually been lost in market corrections.

Crashes and corrections are not to be feared, but should be welcomed with open arms as they create great buying opportunities. The last one has made me decently wealthy for someone my age.

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17 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

When the crash comes investors should benefit, they certainly did after 2008.

Rental rates stay fairly constant and in a down turn there are often more people looking to rent therefor fewer vacancies and in some cases higher rents.

The hardest hit in a downturn are those with large equity in a rental. Any reduction in value comes out of the equity. The more the equity in a property the greater the financial loss if there is a forced sale.

I trust my rentals will continue to produce through the down turn and I make sure there is next to none of my own money in my investments.

For anyone still growing their investments the sooner the bubble bursts the better.

Robert GuilfoylePro Member

Mount Laurel, NJ · Member since 2012 · 125 posts · 36 votes

9y

What's that Warren Buffet quote: "Be fearful when others are greedy and greedy when others are fearful."

13 Reply

Las Vegas, NV · Member since 2014 · 284 posts · 123 votes

9y

@Thomas S. "The hardest hit in a downturn are those with large equity in a rental. Any reduction in value comes out of the equity. The more the equity in a property the greater the financial loss if there is a forced sale."

This statement makes no sense. The more equity you have in a property, the less financial leverage. Therefore, the value of the property can fall more without affecting the solvency of your position.

While rents aren't per se related to the amount of equity in a property, to the extent that property value usually bears a relationship to rental value, they are in most practical circumstances. Therefore, the higher your equity, the higher your likelihood to be able to service the debt in the event of a crash, because value/rents can fall more before affecting your ability to service the debt.

Low equity and high financial leverage are what kills in a crash.

11 Reply

Bart H.

Dallas, TX · Member since 2016 · 1k+ posts · 745 votes

9y

I am of the belief that property prices 20 years from now will be a lot higher than they are now. Are we close to the top in real estate prices? yeah probably. But I don't see a massive correction.

Home ownership is very low by historical standards, and there is a real chance that millennials aren't going to run out and buy houses, since they pretty much came of age during the financial crisis.

I predict that our next recession will be cause by a spike in inflation. If that happens, then property owners will end up doing really well if they have strong cash flow and long term financing.

I think the risk is for those who have shorter term or variable rate financing.

End of the day I think there is still money to be made in real estate, if you buy something 10-20% below market and we get a 15-20% correction followed by a rebound 5-10 years later, its not catastrophic.

4 Reply

JR M.

Investor · SC · Member since 2016 · 89 posts · 35 votes

9y

My general rule is to never trust anybody predicting... anything. Not your tarot cards, financial markets, or college acceptance. Instead I suggest more people study economic history and the causes of boom and bust cycles.

With that being said, we have been in a historically long bull market while at the same time historically low interest rates for an extended time. I tend to believe that these are correlated, but weakly so in this inastance. The most practical advice I can give is to try to answer the following questions:

How well I am positioned to absorb market and interest rate fluctuation? I am a cash flow guy, so refinancing and potential loss of tenant's jobs are what make me worry. Increased rates will likely increase my rents and and hopefully drive institutional investors from my markets.
What will signal sustained changes in the market? Obviously the FED rate will indicate rate changes, but market changes will be varied and local (look at how differently the financial crisis affected places like NYC and Nashville compared to Detroit and Riverside, CA).

Las Vegas, NV · Member since 2014 · 284 posts · 123 votes

9y

@JR M. "How well I am positioned to absorb market and interest rate fluctuation?"

Yup, totally agree. Those who have high leverage and variable rates will get killed if there is a sudden spike in interest rates. Given the current political instability worldwide (hello President Trump), the likelihood of some kind of political/economic white swan event has gone up, in my opinion.

My strategy has been to pick up undervalued properties in B+ (but soon to be A) areas with long term money (30 years). Rents could fall 50% and I could still break even. Is this conservative? Sure. I could refinance out all my initial investment times 5 right now and then give the property back to the bank if the market tanks, but in my view that's irresponsible and doesn't put you in a position to obtain financing when you really want it...mainly when prices are low and money is scarce.

6 Reply

Andrey Y.

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

9y

Originally posted by @Hal Thompson:

@Thomas S. "The hardest hit in a downturn are those with large equity in a rental. Any reduction in value comes out of the equity. The more the equity in a property the greater the financial loss if there is a forced sale."

This statement makes no sense. The more equity you have in a property, the less financial leverage. Therefore, the value of the property can fall more without affecting the solvency of your position.

While rents aren't per se related to the amount of equity in a property, to the extent that property value usually bears a relationship to rental value, they are in most practical circumstances. Therefore, the higher your equity, the higher your likelihood to be able to service the debt in the event of a crash, because value/rents can fall more before affecting your ability to service the debt.

Low equity and high financial leverage are what kills in a crash.

Someone else here had this same position a few weeks ago, and were not able to articulate their point to be anything resembling the truth.

"Therefore, the higher your equity, the higher your likelihood to be able to service the debt in the event of a crash" This is your exact quote. If I have 1% or 99% leverage in a given property, my mortgage payment (and therefore my expenses) ARE EXACTLY THE SAME. So are my reserves. So tell me grasshopper, how is higher equity going to help me 'service the debt in the event of a crash'?

The more equity in the property (by the owner), the more risk to the owner, and the less risk to the bank.

Las Vegas, NV · Member since 2014 · 284 posts · 123 votes

9y

@Andrey Y. If I have 1% or 99% leverage in a given property, my mortgage payment (and therefore my expenses) ARE EXACTLY THE SAME.

That's fascinating, tell me more. So on a $100,000 property, if you borrowed $99,000 to purchase the property, then your payment will be the same as if you borrowed $1,000? As a practical matter, equity and financial leverage are generally correlated. We can come up with counterexamples, but we're focusing on the practical, not the outliers.

1 Reply

Las Vegas, NV · Member since 2014 · 284 posts · 123 votes

9y

@Andrey Y. "The more equity in the property (by the owner), the more risk to the owner, and the less risk to the bank."

This is true, but it's the position of every moron who overleverages themselves and loses everything when the market turns against them. The point is to do well in the peaks AND THE VALLEYS. If you want to hand everything over the bank when the market crashes, be my guest, but it's not a long term plan for success.

Andy D.

Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes

9y

I tend to agree with @Hal Thompson regarding the comment about doing well "in the valley" as well. Doing well when everybody and everything is doing well is the bare minimum. I can't even call it success since everybody, apart from the necessary losers, is having the same "success" by merely following what the masses are doing. Being truly successful, however, is to predict when the lemmings are going to fall off the cliff - and making a turn in time to avoid following suit.

Regarding (over) leveraging: I'm not convinced that this necesarily leads to a problem. Because, if cash flow and possibly otherwise existing funds can sustain the mortgage payment, I - at that point - do not care how much my property is worth and how high my mortgage is and whether it's techincally overleveraged or not. This only becomes relevant if I need to sell. If I do not need to sell then I simply do not care and sit it out. It's like a stock that tanks and is worth less than I paid for. Who cares. If it's a generally good investment I wait for it to go back up. This even more so if it pays a dividend (in real estate terms = positive cash flow).

However, this will probably only work if one does not only have 1 property and is not totally dependent on the rent coming in to pay the bills. The 2008 crisis with people losing their homes did not start with investors. It started with owner-occupied properties with ridiculously high mortgage payments and people losing their jobs and having NO reserves whatsoever to pay the mortage during their time without a job. At that point those people wanted/had to sell. But guess what: they couldn't or at least not at an amount that covered their mortgage. And this is where the s*** hits the fan. For these people.

Again, the problem lies with the masses who are not investors. An investor should not have an issue so his leveraging situation is not all that relevant. At least this is my current opinion. And I'm coming from a point of view with several properties and sufficient reserves and income.

Andy D.

Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes

9y

Originally posted by @Hal Thompson:

@Thomas S. "The hardest hit in a downturn are those with large equity in a rental. Any reduction in value comes out of the equity. The more the equity in a property the greater the financial loss if there is a forced sale."

This statement makes no sense. The more equity you have in a property, the less financial leverage. Therefore, the value of the property can fall more without affecting the solvency of your position.

Hal, it does make sense when you look at it from the point of "overall investment success". I think that Greg's position and logic is that a) if you pull out the equity AND b) make this equity work for you then you are safer with respect to "business success" than if you had not pulled out that equity with the market going down and you no longer being able to use that equity since the value of the property has decreased and you're now back at the minmium LTV.

Again, stating that "pulling out equity is more beneficial" is probably only true if you use that fresh money to invest. But this is what an investor does: they leverage and use the money for more investments. At least those who want to move ahead.

Maybe an anlogy helps: you buy a dividend paying stock at 100. It goes up to 120. At that point you sell 20 worth of this stock and buy another, different dividend paying stock for those 20 and maybe some additional money you have lying around. You will now have not only diversified (due to you now holding 2 instead of only 1 stock) but you will have also increased your cash flow as you have added a second dividend stream. Now, if you didn't sell at the point when the first stock was at 120 and it went back down to 100 then you are back at square one, with no diversification and no additional income from the second dividend paying stock . Selling those 20 worth of stock is equal to pulling out equity on a property. And I would believe that you would not have any objection to pulling out 20 from a stock to buy more and capitalize on a capital gain?

I do concur with you that you are, by increasing leverage, reducing the overal solvency. But as I have stated in my other post, I do not consider this an issue if the overall picture on one's personal financial situation is sound. AND one is sufficiently diversified (be it only within RE).

1 Reply

Jason V.

Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes

9y

Three words for you: Massive Underground Bunker.

Sure, if you don't die of malnutrition from eating nothing but cans of baked beans you'll eventually go insane and murder everyone else in the bunker (and start eating them) but at least you'll be alive!

But seriously, Kiyosaki has been pushing people to buy precious metals for a while now, but that's one "investment" I could never quite understand, personally. If you're playing the currency arbitrage game, that's fine, but you're gambling. If you're "preparing for disaster" by buying gold.....what's the point? You're assuming anyone will care about gold after this anticipated Global disaster, meaning there is still some sort of economy, and that people still want gold for some reason. In my mind, I'd think food, bullets, and booze would be the currency of choice in a world post-economic catastrophe.

If we're in a situation where things have gone sideways, but people still want gold, it'll mean they probably still want other "things" (like a place to live) too. Which would mean every physical "investment" would make just as much sense to buy as gold if you're trying to hedge against runaway inflation - so why not buy something that's a good investment both right now, and in just about any future situation you can think of....like real estate.

Buying gold as "protection" seems kind of like buying a crash helmet that only works between 100 and 105 mph, and does nothing for you if you're going any faster or slower. But I'm not expert, either.

And if, after the end, there's still an internet, I can guarantee you there will be at least 3 guys shouting about how they were right, and hocking their books.

Good luck in the Zombie Wasteland!

12 Reply

Jeff Filali

Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes

9y

For those who buy good deals, don't overleverage themselves and keep plenty of reserves, you can survive any down period. But for those why believe in maxing out their leverage, have limited cash in the bank, and only a month or two of reserves... Those are the ones who lose their a** in any kind of negative time. But that's the approach the majority use and the one that the gurus preach. That approach isn't for me!! I'll stick with limited debt and lots of equity and cash available.

Sergio Jimenez

Fresno, CA · Member since 2016 · 1 post · 0 votes

9y

Well there might be some truth to that but he was predicting the Big One to happen back in 2015 so chances are sooner or later the economy will drop again, and if you are prepared you can capitalize on it and if your not then who knows, but he also writes that a great investor is good in any economy so it's not all so gloomy

0 Reply

Account Closed

Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes

9y

The fiat money argument is consistent with what silver hoarders and gold buggers have been saying for many years. Kiyosaki loves gold and silver. Dave Ramsay hates it saying "it just sits there". Silver has been bouncing between $16 and $22/ounce for the past few months. Gold dropped tremendously last year and has recently started to recover (currently around $1,280/oz - about two years ago it was over $2,000/oz). The dollar itself has declined as compared to other currencies. Trump has stated he likes a weeker dollar.

I don't agree with many of the posts above....here is Kiyosaki's perspective...

Greece had a huge financial crisis last year - people couldn't even get money out of the bank.

India in the last couple of months has tried to get away from paper money. Everything is electronic (at least that's what they're trying to do).

There are various countries in South America who regularly de-value their currency because of inflation...that's been going on since the 60's.

That's Kiyosaki's perspective and how he's viewing things.

If you think "only fools get lucky on the upside" then you need to do some research with relation to Berkshire Hathaway and their success story. They will sit on cash (Charlie Munger says you need to sit on $10 million for when that deal comes along - Berkshire's philosophy is to sit on $72 million) and when they see an opportunity for an undervalued asset/company with good fundamentals, they will go all in, and then sit on their hands and let it play out while looking for the next deal. Kiyosaki has the same philosophy. There is no "get rich quick" effort involved. There is also no debt leveraging involved (though Munger started early on this way and eventually realized it was too risky).