Kiyosaki & McElroy recent podcast - Invest in business not RE

24 Replies

Robert Kiyosaki recently had a podcast with Ken McElroy and talked about how the RE market seems to be topping off. They talked about different asset classes to invest in (RE, the stock market, commodities, and businesses). Ken said that they have not purchased much real estate in the last 2 years and Robert mentioned that right now, instead of investing in real estate, he is investing in the asset class of businesses.

When I think of investing in businesses, the first thing that comes to my mind is Shark Tank. In what ways have you invested in the asset class of businesses? 

Here is a link to the podcast: https://itunes.apple.com/us/podcast/rich-dad-radio-show-in-your-face-advice-on-investing/id833641766?mt=2&i=1000424721374

Good find, Shiloh. Sure, you can give money to a VC and invest in startups, but you have to invest it quite a few to see returns. The good side is that when you do get a return, it'll easily make up for all of the losses and a whole lot more. These type of investments are feast or famine, and you should only do it with truly expendable cash. 

If you want to invest in businesses, I'd go the Bain Capital way. Instead of Shark Tank, think The Profit. Invest in established companies that just need someone to help them turn it around or go from $100M in sales to $10B. I have friends that invest with Bain, and they are extremely satisfied. 

The biggest issue will be finding companies/sponsors that most people can invest with. These guys aren't taking your $50k you invested in a multifamily syndication. Think $10M+ for the well known ones. 

Aren't dividend bearing stocks essentially buying into a business?  The business does well they can pay a healthy dividend, business struggles they pay none.  

Statistically businesses have a 90% chance of failing in the first 5 years.  I was at one point employee number 1 at a start up, one of the worst experiences of my life.  I had equity and a healthy salary, however the ship sank and I became the number 1 employee to quit.

I think a lot of us go into real estate because it allows us to grow with out a large human footprint.  Not sure what businesses won't suffer when the generally economy suffers, maybe liquor stores and pay day cash loan places?  A lot of people believe we are in the everything bubble so what businesses do you have in mind that will succeed in good times and bad?

@Shiloh Lundahl  

@Shiloh Lundahl I haven't invested in business the way Robert Kiyosaki does.  With the exception of lending on RE or being a LP in someone else's deal, the most relevant way I have invested in a business, per se, was through a vehicle called StartEngine?  It's pretty much crowd funding for businesses.  I invested into a company called Golf Board about 3 years ago and I will be very surprised if I see that money again!!  Thanks for the link.  I plan to listen.

@Shiloh Lundahl I think that's an excellent question and will check out the podcast. Personally, I'm not sure why people think that investing directly in real estate, as an limited partner in syndicated business that owns real estate or buying shares in a Real Estate Investment Trust is much different. Or, the same spectrum in any other business. For instance, you could own a company that drills oil wells, be an LP partner in a company that does or invest in stock in company that does.

It is all the same with the spectrum being how much control, risk and return you get.

So I would answer your question with a question. Which business?

One fun thing about all businesses is that they are all ruled by math. So my advice would be to compare all investment opportunities on math measures like Cash on Cash return and Internal Rate of Return not on whether they are a 'business' or 'real estate'.

To explain this way better than I ever could I'd recommend you read (or better yet listen to while riding a motorcycle) 'Am I being to Subtle?' by Sam Zell.

Originally posted by @Jeff Kehl :

@Shiloh Lundahl I think that's an excellent question and will check out the podcast. Personally, I'm not sure why people think that investing directly in real estate, as an limited partner in syndicated business that owns real estate or buying shares in a Real Estate Investment Trust is much different. Or, the same spectrum in any other business. For instance, you could own a company that drills oil wells, be an LP partner in a company that does or invest in stock in company that does.

It is all the same with the spectrum being how much control, risk and return you get.

So I would answer your question with a question. Which business?

One fun thing about all businesses is that they are all ruled by math. So my advice would be to compare all investment opportunities on math measures like Cash on Cash return and Internal Rate of Return not on whether they are a 'business' or 'real estate'.

To explain this way better than I ever could I'd recommend you read (or better yet listen to while riding a motorcycle) 'Am I being to Subtle?' by Sam Zell.

I'd be hesitant in solely using IRR or CoC metrics when comparing investment opportunities across different asset classes and different businesses. IRR and CoC don't measure risk, which varies greatly across these areas. It's hard enough to gauge risk just between different markets and different sponsors just for multifamily.

Income producing real estate has a far lower risk than an operating business.  Most failures in real estate come from using high leverage.  Additionally, analyzing business operations is much more difficult than analyzing real estate deals, and requires a much different skill set.  From 1980 - 2001 I mostly invested in operating businesses (nine businesses in which I held 50% or more of the ownership) with investing in real property as a sideline; since 2001 I have invested in two businesses and 40 real estate equity positions and over 100 real estate notes, not including the investments I act as sponsor (syndicator); if I include them over 500 real estate equity and debt deals.   

For me personally, real estate is simpler, more profitable, and A LOT more fun!  However, as a disclaimer I must add that I'm not very good at managing people.  

Buy and hold real estate is a business. I respect Kiyosaki, but you can't go along with everything he says. He also invests a lot of money in Gold, which doesn't produce an income and has a very low ROI historically tracks inflation. He also owns a lot of oil holdings, which I would never get involved with. It's good to get information from several successful people, then edit that information to achieve your own goals.

@Shiloh Lundahl I am grateful that investing is not a 'one size fits all' endeavor. If everybody got into real estate the returns would become seriously diminished. I worked in Silicon Valley high tech for 30 years and learned a bit about equity investing and the Sand Hill Rd guys. Most bets do not pay off but the ones that do you can hit it really big time. Personally I like a more 'hands on' approach and to be more in control of a positive outcome. 

@Anthony Dooley He was interviewed and said he would hold however much gold in his hand that he wanted in monthly income. If he wanted 10k a month he would hold 10k in gold. Rich dad poor dad is amazing, but yes, you need to get multiple opinions and use good judgement.

Its easy to say “ I am investing in business asset class now” if you have millions and millions in funds to invest with. Its a different story if you are just one of the 99%! How many are accredited investors that have extra cash to toss at a start up ( that will inevitably spend farrrrrr too much money and probably die after spending multi millions of others money - yeah I have seen it many times having worked in the start up sector in SF)

The big players made gobs after the crash and have pivoted elsewhere. Me? Well i got lucky once upon a time and hit the start-up jackpot (albeit a small jackpot) but that was a HUGE amount of work and i would not do that again.  Too much risk. 

As long as you are not overleveraged and have bought wisely I believe RE is a good for the long haul investment. 

I'm sure their advice is sound. But I also think many real estate investors on this site are similar to me. They are looking for a way to create financial freedom, or boost their retirement, or get enough cashflow to quit their jobs. I daresay it is easier to do these things in real estate than it is in other asset classes, and you have a significantly greater amount of control. But I'm sure just as soon as I'm an accredited investor, I'll throw a few mill towards business investing. Just for fun! ;)

I'm surprised no one has mentioned this, but you can get loans and buy car washes in your town, self storage, stores, restaurants and so on. The real money maker is finding distressed businesses and thus buying at a discount.

Although now isn't the best time to buy real estate as the market peaks, as long as it cash flows and you have some cushion on ltv and savings, it will keep making money for you regardless of the market.

Harvard business school has created a virtual industry of search funds that target that specialized niche (cash flowing local small businesses). They don’t require $10 million to invest like big private equity, but most do require that someone be at least accredited. For example: Little Engine Ventures targets businesses in its local area of Indiana.

Originally posted by @Jeff Kehl :

@Sam Grooms I never consider the risk of an investment (heavy sarcasm) thanks for the helpful comment.

A reasonably intelligent investor once said " Risk comes from not knowing what you are doing" 

@Don Konipol alluded to a great point, the best thing to invest in depends on lot on a person's knowledge, skills, and abilities. What is good for one person isn't for another. It is the investor's job to constantly figure out their strengths and weakness and identify investment opportunities that provide them a competitive advantage to make above average returns. 

That is one reason I love all this generic one size fits all advice from people who are primary in the business of selling their products. 

If you rephrasing the podcast's advice it sounds like this: "Since the yields are declining in an area that you have probably spend a lot of time learning, analyzing, and thinking about, you shouldn't invest there, but rather chase yield and invest in areas whose characteristics are totally different, and arguably more complex." No one has ever lost money doing that. EVER!

Oh wait, yes, lots of people have. LTCM and the $4.6 BILLION they lost in FOUR months comes to mind first. 

To answer the original question, you can invest in business PPMs, just like you invest in a RE syndication, whether that be a new acquisition, an expansion, or purchase of a new business division. The PE world stretches all the from something as large as a Carlye Group fund down to investing in your local barbershop and everything in between. Like anything else, you need to seek out the opportunities.

@Shiloh Lundahl I think @Bill F. makes some very good points in his post just above mine. To expand on that, I think the next 6-24 months in the RE cycle, and especially multifamily where I'm focused, is going to be about 2 important factors: buying right, and conservative leverage.

The bridge debt world exploded about 12-18 months ago and have been offering very aggressive terms on value-add properties that I could see coming back to bite people in the *** in a few years times if cap rates have any substantial movement. Th reason being, cash flow is so low or even negative sometimes that if the sale isn't hit, the loan usually starts amortizing in year 4, and it's only a 5 year loan, and if the value isn't there then it makes even refinancing hard in 5 years without needing to come out of pocket for extra money! This is why we're seriously considering bridge debt but at lower leverage points, so it makes a potential refinance more conservative in 3-5 years.

Also, the preferred equity space has exploded in the last 6-12 months, which is really just a hybrid between common equity and mezz debt, just labeled as "equity". They're also derived from back end numbers on top of bridge debt, and you're essentially levering the deal even more.

With the inversion of the 2 and 5 year treasury, the 10 year treasury not being far off, and another rate hike imminent, it just seems more and more likely that a flattening, correction or recession is on the horizon.

Back to the question and my long winded point, I think RE is still very attractive, if you can buy correctly and plan for some downside in the near future. I think anyone saying they're moving fully out of real estate and into something else is unnecessary.

Interesting topic @Shiloh Lundahl I recently heard a podcast with the owner of a company called Income Store ( www.incomestore.com ) and they specialize in buying income producing websites and then fixing them up by adding income streams or boosting revenue and then you can hold onto it or even flip it. Basically BRRR for income producing websites haha. Very cool business and the guy has an extensive background of doing this. I believe you can either let them strictly find you the asset and they make some sort of broker fee or for a larger fee they run the entire thing for you. Definitely worth checking out.

Interesting topic. 

I was curious and listened to the podcast. Thought it was interesting that they were talking about how overvalued real estate is today and McElroy mentioned he's selling a bunch of properties and going to 1031 exchange them. So wouldn't that mean he's still going to buy property in the current environment? I believe a 1031 exchange only gives you a pretty short amount of time to purchase the exchange property. So that part seemed to be a contradiction. 

Also they spoke about investing in businesses but they didn't give examples. 

Certain businesses can yield higher returns than rental property, but the thing is they are often more complicated to manage. One can hire a manager but the business has to have enough cash flow to support it , and even with a manager there is usually a lot more time involved versus owning rental property that is professionally managed. 

Of course there are passive ways of investing in other people's businesses so maybe that is what they were talking about.

You can invest in local insurance agents all over the place (good ones are expanding, buying out others), and earn roughly the same returns that you can by lending to RE investors -- except your loan isn't secured by collateral.  I am sure there are plenty of other everyday businesses you can invest in.

If you have some education and training, you can just do basic swing trades, buy/sell options, etc.  You are in and out of trades in a matter of days/weeks, and you can earn a decent return -- and still hedge.  I plan to revisit this in 2019.

Originally posted by @Mark Sewell :

You can invest in local insurance agents all over the place (good ones are expanding, buying out others), and earn roughly the same returns that you can by lending to RE investors -- except your loan isn't secured by collateral.  I am sure there are plenty of other everyday businesses you can invest in.

If you have some education and training, you can just do basic swing trades, buy/sell options, etc.  You are in and out of trades in a matter of days/weeks, and you can earn a decent return -- and still hedge.  I plan to revisit this in 2019.

 If true, that seems like a pretty imbalanced market. Exponentially greater risk, with no premium for that risk?

@Shiloh Lundahl These guys are big money guys. I think they’re right (what do I know) about the RE market, but at my level, there are always more and better deals to be found in RE than sinking dollars in a business w/ no assets and no real track record, which is what they can do w/ big money for big equity positions. Makes more sense for them. If you’re the average REI, just find good deals and hold out for the downturn when deals get even better. At least w/ RE, you own an asset whereas most businesses have no assets other than their AR. And if the AR is juicy, they probably don’t need your money. And does anyone want to rely on a startup CEO to get returns? Huge risk. Huge returns. I’ll take medium risk for medium returns w/ more predictability. My 2¢!
Originally posted by @Sam Grooms :
Originally posted by @Mark Sewell:

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 If true, that seems like a pretty imbalanced market. Exponentially greater risk, with no premium for that risk?

Well, when buying a book of business, you are buying something that has value -- something that you can resell.  But generally these guys don't pledge anything, it is unsecured lending.  Not the same at all, I certainly agree.  

Makes you wonder why more folks aren't lending secured money to RE investors out doing deals.

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