Dissecting Kiyosaki ideas in a post-subprime mortgage era
MANILA, Philippines—The following information hopes to encourage the healthy and open discussion of what constitutes sound real estate investment practices in the Philippines. Two books are used as reference:
Rich Dad Poor Dad by Robert T. Kiyosaki
This international bestseller inspired many readers to jump out of their comfort zones. In his July-August 2011 editorial page, Heinz Bulos of MoneySense Magazine ranked this title fourth personal finance book that has changed his life: “It may be more motivational than practical, but Robert Kiyosaki’s book was a wakeup call for millions of cubicle dwellers around the world. It helped me move from the Employee to the Self-Employed to the Business Owner side of the Cash Flow Quadrant (and hopefully soon, to the Investor side).”
Grow Rich, Pinoy! By Larry Gamboa, PhD
The book is an adaptation of Kiyosaki’s ideas. Gamboa writes, “I wrote Think Rich, Pinoy! with one purpose in mind: to show how the principles of Robert Kiyosaki’s Rich Dad, Poor Dad can be applied to the Pinoy of today.”
This second book was also published by Shepherd’s Voice Publication (non-profit foundation of Bo Sanchez) as a follow-up guide “to push you beyond your questions and into action.”
Following are a few ideas that people, depending on their risk appetites, may or may not agree with:
On creating money
Kiyosaki book:
“Houses that were once $100,000 were now $75,000. But instead of shopping at the local real estate office, I began shopping at the bankruptcy attorney’s office, or the courthouse steps. In these shopping places, a $75,000 house could sometimes be bought for $20,000 or less. For $2,000, which was loaned to me from a friend for 90 days for $200, I gave an attorney a cashier’s check as a down payment. While the acquisition was being processed, I ran an ad in the paper advertising a $75,000 house for only $60,000 and no money down…. The house sold in a few minutes. I asked for a $2,500 processing fee, which they gladly handed over, and the escrow and title company took over from there.”
Gamboa book:
“In bank foreclosed real estate, for example, you gain control of an apartment with earnest money of P20,000. In 30 days’ time, you rent the units out at P5,000 monthly while paying amortization of P2,000. You have just “created” a passive income stream of P3,000 (P5,000 less P2,000) monthly for the next 10 to 15 years. That’s how you can make money without money.”
Other info:
In the US, there was a time when borrowers could easily close the real estate deals they wanted. In his April 2007 article for The New Yorker, James Surowiecki explains, “The boom in subprime lending made huge amounts of credit available to people who previously had a very hard time getting any credit at all….Most of these people did not suddenly run into financial trouble; they were betting that they would be able to buy the house and quickly sell it… These loans were ideal for speculative gambles: you could buy far more house than your income justified, and, if you could flip it quickly, you could reap outsized profits.”
On credit-worthiness
Kiyosaki book:
“So if you’re quick, the first time I sold the house, I paid back the $2,000. Technically I have no money in the transaction. My return on investment (ROI) is infinity. It is an example of no money making a lot of money.”
Gamboa book:
Gamboa’s apprentice Roy Nabong relates an experience at the bank auction, “If we won the auction for the apartment building we would bid on the next day, I’d have to sell all six units before the first amortization in 60 days. Otherwise, the monthly P22,000 would come from my pocket. I finally drifted into restless slumber around 2 a.m.… The nice thing about this property was it was going by auction. That meant no papers to show the bank—not even an income tax return. Just an ID and a show money of P20,000.”
Other info:
For many seasoned bankers, a borrower’s real cash flow or ability to pay is a critical point; it is also the basis for a person’s credit worthiness. Thus, it would be difficult to consider financing real estate deals if the transaction details are not ironed out from the very beginning. It is probably the reason certain local buyers resort to investors, instead of bankers, for funds.
The term “subprime mortgage” refers to borrowers who would not otherwise have obtained a bank home loan based on their income and credit records.
In the Philippines, borrowers are usually subjected to certain documentation requirements and credit checks, the thoroughness of which depends on the bank you’re dealing with and how strict they are in implementing rules and guidelines.
On good debt
Kiyosaki book:
“Although I pay my bills last, I am financially astute enough to not get into a tough financial situation. I don’t like consumer debt. I actually have liabilities that are higher than 99 percent of the population, but I don’t pay for them; other people pay for my liabilities. They’re called tenants.”
Gamboa book:
“Good debt is debt that puts money into your pocket. Good debt provides leverage, that magic word, in wealth creation. For example, you buy a bank foreclosed property by paying only 10 percent down. In effect, the bank finances the remaining 90 percent. Immediately, you turn around and sell the property on a rent-to-own basis, covering both your downpayment and the monthly amortization to the bank, while providing you with a steady cash flow month after month for the next 10 to 15 years. Such a deal would qualify as good debt.”
Other info:
With the rise in housing foreclosures in the US, the rental market may be experiencing a huge demand at the moment.
However, when that scenario is mixed with increasing unemployment, the question also arises on what may potentially happen should a good number of those tenants fail to pay their rents on time.
Many real estate opportunities also depend on the supply and demand situation in each locality.
All told, the question of how much leverage or risk to undertake is often unique for each person. You also need to ask yourself how comfortable you are with debt or whether a grand idea is worth the risk you are taking. Countless financial advice abounds but not all of it may be right for you.
For example, if you read another book or hear a local financial planner tell you to get yourself a back-to-back loan (bank loan backed by a cash collateral that cannot be used for other purposes while under lien) in order to finance your home loan, ask him why you should get a bank loan (and pay interest), when you already have the money to begin with.
If the resulting gain from the transaction is positive (like rental income offsets the interest payments) then getting a low-interest loan may be a comfortable idea for some or possibly an opportunity to establish a credit record with a bank. On the other hand, if you’re simply borrowing because an adviser told you so, without any clear reason, then that is another scenario.
You may be surprised that in the end, it may not be a financial genius that saves your life but rather, assimilating something your father or grandmother may have once uttered—after everything is said and done, nothing compares to the serenity you get from learning to live, grow, and expand within the circumstances that you can truly afford to realize.
