How Realistic is This? - Robert Kiyosaki Article

[Matt D'Arco]

Hi BP community.

I’ve just read an article written by Robert Kiyosaki about 3 steps to owning real estate with very little money down.

A little background on myself, I am a real estate agent in MA. It is my full time job and I have been doing this for a little over a year now. It’s been slow to start but I’m getting there. I got into this because of the opportunity to make money to buy investment properties and to learn as much as I can about the local markets I plan to invest in and learn as much as I can about real estate in general.

My plan has been to save up my commissions and buy a 2 or 3 family rental. If I buy a 3 family I'd like to use a MA Housing loan, similar to FHA and house hack. Down payment is 3%. If I find a 2 unit home, I'd rather use a portfolio loan with a down payment of 11% so I can rent out both units. I won't invest unless there's positive, strong cash flow.

So that’s been my plan and needless to say it’s been frustrating not being able to start. I’m 27 now, going on 28 in August. I was 24 when I discovered real estate investing and have had setbacks and probably could have made better choices to get myself an investment property sooner.

The article I just read by Robert Kiyosaki is here: https://www.richdad.com/how-to-get-rich-in-real-estate?feed=blogs

Rich Dad Poor Dad is what completely changed my perspective on money and investing/real estate. So I definitely soak up whatever he says. But sometimes his stuff can be a bit vague.

In this article he talks about finding a great investment property that isn't living up to its full potential, starting an LLC for the property and then selling shares of that LLC to investors in order to acquire the property Basically, nearly a no money down scenario or at least a lot less money than you'd need if you were going down my route. Here in MA in order to get a property, I'll need anywhere from $20-$60k down.

So my question, is what RK says in this article realistic? Has anyone here ever done this? How could this be done? I’m looking for a more detailed and in depth explanation than what he gives in the article.

[Jake S.]

Hey @Matt D'Arco Without reading the article, I think Kiyosaki is just simply referring to raising private capital to help you acquire assets with none of your own cash, which is 100% doable

[Heath Ryans]

@Matt D'Arco

Without reading the article, it sounds like all he's saying is get some partners to take down the deal. Basically, you find a deal and bring it to another investor or someone with money and offer them a percentage of the profits. You go in together and form an LLC and buy the deal. People do it every day.

if you create an LLC and start "selling shares" then im pretty positive that makes it a security and that opens up a whole other expensive legal can of worms.

[Matt D'Arco]

Thank you both for the replies.

Do either of you have experience doing this? One of the guys I work with at my brokerage does stuff on the investment side of things. He’s definitely someone I could go to as a private investor.

What would my steps be if I did do this? I do analyze a lot of properties and have found some great ones over the months. Would this method be recommended over saving my commissions (for the down payment and closing costs)? Or is this a wiser method for someone with little capital?

[Caleb Heimsoth]

@Matt D'Arco if you want to raise money, you’re going to need to use an attorney and that’s going to cost you a minimum 5-10k up front out of your own pocket.

[Heath Ryans]

@Matt D'Arco

I haven't done it yet personally, although it's been brought up. Once I get a deal that I can't take down myself, I know exactly who I'm going to go to first to partner with. It's a pretty simple process. Find someone you want to partner with who understands that they are bringing most if not all of the money to the deal that you found, decide on profit/equity splits (50/50, 60/40, ect), then have an attorney create a LLC for the two of you with a very detailed Operating Agreement so that it leaves nothing up for debate if an issue were to come up. Then purchase the deal.

It's a great strategy for people of all experience levels, but especially when your just starting out and either don't have the money or a full working understanding of how the investment side operates. It allows you to get in with no money with a front row seat for learning operations. The value you bring is in the deal. So it has to be a good one. Otherwise it's just a lot of work and risk for the other investor IF they even decide to come on board.

[Matt D'Arco]

@Caleb Heimsoth thanks for the response. When you say raise money do you mean in the sense of selling shares of the LLC to investors? Or as Heath was talking about, just having an attorney write up all the docs for me and the investor?

[Caleb Heimsoth]

Originally posted by @Matt D'Arco:

@Caleb Heimsoth thanks for the response. When you say raise money do you mean in the sense of selling shares of the LLC to investors? Or as Heath was talking about, just having an attorney write up all the docs for me and the investor?

Selling shares to an investor and raising money would be the same thing.

Don’t take advice from the rich dad poor dad guy, he gives dubious advice often  

[Matt D'Arco]

@Heath Ryans thanks for the info. The article made it sound pretty straightforward and it looks like from your explanation that this would be. Reading it got me thinking that maybe there’s a faster way to my first investment than I thought. My brokerage business is picking up so more than likely I’ll be using my money for the down payment and closing costs but it’s good to know that this other option isn’t so far fetched. Sometimes I read Kiyosaki and think the stuff is just too good to be true. Almost like it’s too vague and leaves out a lot of the more complicated aspects.

[Matt D'Arco]

@Caleb Heimsoth yeah that’s why I posed this question. Because although I do love the book, a lot of his work seems to be vague and leave a lot of detail out. I don’t like the idea of investing with no money because you lose the control but I also don’t see why anyone would front the money to someone, take on all that risk so maybe they get their promised return. And I get that people do this everyday but for someone like me, just starting out and with little money to put down, I feel like it’s not a realistic way to start out. I could be wrong though I’m sure there’s someone on here who did do this their first deal or does this now. I’d definitely like to hear both sides of it.

[Rob Massopust]

Crowdfunding, syndication, TIC Partnerships all ways to raise money - Best way with FHA type property is ask Mom.

These deals are too small for most investors you just need someone you know that can help cosign or gift it. You can record a note and give them a percentage.

If you are going FHA [or MA something] you can do those deals with 3.5% to 5% down, but you need to qualify and need a w-2, tax return etc. Income from 1099 most likely needs 2 years seasoning. Or find someone that has the w-2.

If you can get those units to cash flow with low down then that is like printing money.

I would buy it, fix it up, rent it out and refi when you can 6-12 months. Easier said than done.

Instead of waiting you just need to get something "cooking" a property that you can live in[or not, you can expand your area and as long as its within an hour it can be considered an owner occupied] and build equity. You can find a fixer owner occupied and buy, fix, live, refi or sell 1-2 years, this should give you some equity to do next deal. I know RK always talks about your house is not an asset but a liability but you are gaining equity, taking advantage of low interest rates, demand and housing shortage, strong jobs etc. Your house is not an asset but an "offset".

[David Lilley]

@Matt D'Arco you don't necessarily need an attorney if you have partners in the deal versus investors who are entirely passive. You simply create an LLC and split ownership pro rata.

Your biggest hurdle will be finding partners/investors who will trust you when you have no experience. So, in order to get them comfortable enough to give you their hard earned money, you better know your stuff. 

Next, do you know if you can even qualify for a loan on a 3 unit property? Do you know how the qualifications for debt on 3 unit properties differ from 5 unit properties? No? Then you aren't ready. 

I own a 6 and 16 unit property at the moment. Purchased both last year. Feel free to reach out with any questions.

[Pat L.]

Yes many years ago while having the steak & beers after the weekly squash games I put forward the same concept to several engineers working with me. We all made great money & had unlimited o/time & company expenses so dropping $2000 each was easy. At the time I planned to go into new build startups whereby the builder had a trailer on the land & was selling from the plans before digging. It was usually a $2-$3k deposit with the rest coming in later as the build progressed. We would choose the lowest cost build, did it a number of times & made a good return for as long as we stayed together as a group. But they were the days of a hand shake & just a one page agreement.

If it gets you into a project & you cover all the nuances in an operating agreement Just Do IT as they say.

[Dennis M.]

Sure anything the gurus say is possible if the stars are in perfect alignment. Reality is much different than what they often teach .real estate costs money ...alot of it and it is risky .i loved Roberts books but some of the things he discussed for strategy are just flat out BS . He gives bad tax advise which isn’t even true or legal .He tells you to buy 100k houses for 20k at the court house steps which is impossible .. touts lying on loan forms about using his house cat as a partner . Brags about illegal insider trading on stocks .. the list goes on . One thing is for sure and that is there is no elevator to success, everyone has to take the stairs 

[Kenneth Garrett]

@Matt D'Arco

I read the article, it's the concept of opm. There are a number of ways to fund deals. Private money, hard money, syndication, etc. I use private lenders in my deals. These are people I know and have met through meetups, REIA meetings and other networking events. When you find an investor they are investing in you as much as the deal. If you don't have any experience bring in an experienced investor to partner with on the first deal or two to learn the ropes.

Good Luck.

[Anthony Rosa]

 Just save enough for a down payment or borrow down payment money from family if you're looking to buy a 2 or 3 family rental. 

[Michael Boyle]

@Matt D'Arco good to see another new investor in MA! I feel your pain on capital raising, 60-120k on even the most basic properties in decent areas is a huge barrier to getting started. My partner and I are currently looking to finance a deal in Framingham so we are asking ourselves the same kind of questions.

I like Kiyosaki as a source of motivation to be creative in personal finance, but starting from BP podcast 1 and working forwards has been a much better source of practical advice for me, especially since they discuss new investor topics so much. I think their advice on being transparent and honest about being new and showing that you are putting in the work to learn the business goes a long way, and it seems like you're doing just that!

BTW i just recently turned 28 myself, it's not that bad ;)

[Matt D'Arco]

Thanks for all the responses, great discussion here.

I’m just for now going to stick to my plan of saving my commission checks to cover the down payment and closing costs. Mass Housing loan offers a 3% down payment for first time home buyers and they offer down payment assistance up to $12k. This is as close to no money down as I’ll get. Obviously I need to owner occupy one unit but I’m fine with that. I’ll work on fixing up the property so I can refinance it and use that to buy my second.

I did read into the 2 years of income in order to qualify. Basically what I read is that even as a 1099, if the brokerage you work doe has been doing business for 2 years then you can use that as your qualifying factor. And the brokerage I’m at has been in business now for over 41 years. I do know the owner and his son very well (graduated with his son). We talk this stuff all the time and I’m sure I could turn to him if I run into a snag.

[John Corey]

Ignore the LLC & anything other structure for a minute. I am not saying LLC is wrong. Just that it is not the point of my warning below.

Selling shares to members of the public is highly regulated by the SEC (in the USA) and by the state equivalent. There are some minor exceptions (family for example). That said, you really need to be careful about any pooling of funds or collective investment schemes.  Get it wrong, you can go to jail. A few of the comments above are over the line in my opinion.

If the investors are active as part of the management and are really helping to make the decisions, run the show and otherwise key, another exception might be possible. Avoid passive investors until you get legal advice. Get it in writing so you can plead with the judge when you get investigated.

When the projects are big enough, covering all the legal and regulatory requirements becomes cost-effective. Syndication is a term you will hear. Search for it here and on the podcasts.

Random tangent. I grew up in Lawrence, went to high school in Danvers and university in Worcester. I left MA for CA in the 'early days' of Silicon Valley (pre-dot com era).