ALL BOOMS BUST! Words of Caution from Robert Kiyosaki

Lately, I have been asked if we are in a real estate bubble. My answer is, "Duh!" In my opinion, this is the biggest real estate bubble I have ever lived through. Next, I am asked, "Will the bubble burst?" Again, my answer is, "Duh!" It was only a few years ago we were in a real estate depression, which proves how quickly people forget. In 1987, the stock market crashed and the Savings and Loans went out of business. That led to one of the biggest real estate fire sales in history.

By 1991, the real estate market was depressed and it remained depressed until around 1998. In Hawaii, the real estate market remained depressed until 2001. Today, the Hawaii real estate market is on fire and people have already forgotten how bad the market was.

So the answer to the question, "Will the real estate bubble bust?" is an emphatic, "Yes. All bubbles bust." The reason I write this alert is because this time, when the bubble bursts, I think it will be a monster. Never in my life have I seen so much money being made on such weak fundamentals. If you think the last recession caused by the bubble bust was bad, the coming recession will be at least twice as bad. It might lead to a depression.

The reason I put forth this alert is not to frighten anyone. The reason I put forth this alert is to say get prepared for the coming economic changes. Presently, although Kim and I are still buying real estate, we are also selling our "junk" real estate. Eight months ago, Kim put on the market a small apartment house valued at $1 million, for $1.4 million. People complained and no one bought it. So four weeks ago, she raised the price to $2.0 million and it sold in one day for full price. To me, this is more than a bubble... it is a mania.

As many of you know, the best time to get rich is after a crash. My suggestion is: if you are new to real estate investing, this is not the time to jump in. If you are holding "junk" properties that are costing you money, you may want to consider unloading them.

How long will the bubble last and keep expanding? I do not know. I just wanted you to know that I am currently preparing for a crash, an economic recession, and possible global depression. Why? Because this is a very big worldwide bubble... the biggest I have ever seen.

SAVERS ARE LOSERS

Also, I am getting rid of my U.S. dollars. As you may know, the U.S. dollar has lost nearly 40% of its value against other currencies in the last four years. That means if you have $10,000 in savings in the year 2000, it is worth about $6,000 in purchasing power. Rather than holding cash in the bank, Kim and I have been holding our excess cash in gold and silver bars. Why? Because you will know that the dollar is falling because the price of gold and especially silver will begin to rise. When silver goes higher than $8.50 an ounce and gold reaches $500 an ounce, you will know the end is near. When the crash comes, the currency of many countries will go down in purchasing power as the price of these two precious metals rise in value.

A GREAT BOOK

This past weekend, I held a class for about 150 people on the book entitled "The Dollar Crisis," authored by Richard Duncan. If you want to better understand why the real estate bubble bust and the crash of the dollar will probably lead to a prolonged recession, you may want to read this book sooner rather than later. In a nutshell, we really do not have a real estate bubble... the world is in a currency bubble. In other words, the governments of the world have printed too much "funny" money and cash will soon turn to trash.

Even if you are not in real estate or are saving dollars, you may want to read this book to find out what you need to invest in now, before the bubble bursts. If you are in stocks and mutual funds, you definitely want to read this book.

GREAT NEWS

Again, I do not write to frighten anyone. I write primarily to encourage people to prepare for one of the biggest and best opportunities to win financially. My book, Rich Dad Poor Dad, came out in 1997, at the height of the stock market boom. In my book I wrote about my rich dad recommending I learn to invest in real estate. The people that followed my book's advice rather than the advice of their stockbrokers, financial planners, and mutual fund advisors, did very well in real estate. Prior to 2001 and the stock market crash, many financial planners and stockbrokers criticized my book. Today, they are quiet. Today, while I am still in real estate, still buying great properties for cash flow and not flipping them, I am concerned about those who are invested in junk properties or are living in homes that they cannot afford.

If you only have a few dollars, you may want to go to your local coin dealer and buy silver and gold coins as close to the price of gold or silver as possible. I would not invest in "collectible" precious metal coins unless you really know a good collectible coin from a bad one. For as little as $20 you can buy a few precious metal coins and begin to take steps to prepare for one of the biggest crashes in world history.

P.S. There is a saying that goes, "When your picture appears on the cover of Time Magazine, your career is over." If you have access to the June 13, 2005 issue of Time Magazine, you will see a picture of a man hugging his home. The title and subtitle say, "HOME SWEET HOME: Why we're going gaga over real estate."

P.S.S. There is another saying that goes, "As General Motors goes, so does the U.S."
Well, today, both General Motors and Ford have had their corporate bonds downgraded to "junk bond" status.

P.S.S. Rich dad would say, "As one party ends, another begins." This real estate bubble has made many people very, very, rich. I hope it has made you rich. It has certainly made Kim and I very, very rich. But in my opinion, this party is over... so see you at the next party.

HISTORY IN THE MAKING A Follow-Up to "All Booms Bust" by Robert Kiyosaki

Thank you for your response to my Financial News Alert "All Booms Bust." The number of people that responded surprised me. Since the response was substantial, I thought I would continue on with my thoughts on the subject of the probability of a bust coming. Also, I thought I would add what I am doing to profit from the bust. So thank you for your interest in the subject regardless if you agreed or disagreed with my message.

About a week after my message on the coming bust, the June 18^th 2005 issue of The Economist ran two different articles supporting my concerns about the real estate market. The following are some comments I think are noteworthy. They are:

1.       Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history.”

2.       Prices are already sliding in Australia and Britain.  America’s housing market may be a year or so behind.” 

3.       Not only are new buyers taking out bigger mortgages, but existing owners have increased their mortgages to turn capital gains into cash which they spend.  As a result of such borrowing, housing booms tend to be more dangerous than stock market bubbles and are often followed by periods of prolonged economic weakness.” 

4.       A study by the IMF found that output losses after house-price busts in rich countries have, on average, been twice as large as those after stock market crashes, and usually result in a recession.”

5.       Two-fifths of all American jobs created since 2001 have been in housing-related sectors.” 

6.       The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.”

7.       The day of reckoning is closer at hand.  It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years.” 

You may want to obtain a copy of this issue of The Economist and read the entire two articles and then decide for yourself if there is another real estate boom ahead, or a bust. 

RECESSION OR DEPRESSION

On Friday, June 23rd 2005, I was on Your World with Neil Cavuto on the Fox Network.  He asked me what I recommended when it came to investing in real estate.  I replied, “If you’re new to real estate investing, this is not the time to get into the game.”   Unfortunately, many people are in the market late and not only have paid too much for their homes, they are over-leveraged.  

The Economist article went on to say, “42% of all first time buyers and 25% of all buyers made no down-payment on their home purchase last year.”  That is what I call over-leveraged.  They bought late in the cycle, probably paid too much, and have signed their lives away on the dotted line.  I am concerned for these people. 

In 1929, the stock market crash led to The Great Depression. Some of the causes of the Depression were excess credit and too many people buying stocks on margin... i.e. leverage.  In 2005, once again there is too much credit and instead of stocks, individuals are purchasing real estate with leverage.  So is it “Deja-vu all over again?” History shows that there is a depression approximately every 75 years.  The last depression occurred 75 years ago.  Is it time for a really big bust or will the boom continue on?  Only time will tell. 

HOW I AM INVESTING TODAY

As many of you know, I have been in gold and oil for several years now, beginning in 1996.  While Kim and I have continued to invest in real estate, I have been more active in taking my Chinese gold company public on the Toronto Venture Exchange.  I have also invested in several oil and gas wells. 

When it comes to real estate, Kim and I have let go of non-performing properties and made several million dollars.  Does this mean we are selling real estate?  The answer is “No.”  Although selling we are still buying property, we are being very selective.  Although we have “flipped” properties, our primary objective is good properties in good locations with a positive cash flow. Currently, Kim and I are buying properties in Oregon as well as in Arizona. We bought them because we believe they will do well regardless if the real estate market booms or busts. 

PROBABILITY VS PREDICTION

Although I have made predictions, I don’t like to.  Instead of predicting the future, I choose to evaluate probabilities. A friend offered Kim and I the opportunity to buy a piece of land for $1 million.  He said, “In two years the property will be worth $2.5 million.”  If this were year 2002, I would have jumped all over the deal.  But it is year 2005.  The question I ask myself is, “What is the probability that the boom will go on for two to three more years?”  What is the probability that the property will more than double in two to three years?”  My answer is “slim to none.” Your answer may be different.  Can I be wrong?  The answer is, “Yes I can be wrong.  The boom may go on for ten more years and that $1 million dollar piece of land could be worth $10 million maybe $15 million.”  Yet at this late stage of the market, I will only invest in properties that return a cash-on-cash return on a monthly basis.  That is why I like my Oregon and Arizona deals. In the short term, I may not make as much money as the land deal, but they should return a positive cash flow regardless if the market goes up or down. After the crash, I may change my strategy. 

WARREN BUFFET

Even Warren Buffet is seeking safer investments.  Recently he announced he was investing in utility companies... not for capital gains but for capital safety.  Buffet's two most important rules for investing are: 

         Rule #1.  Don’t lose money.

         Rule #2.  Don’t forget rule number one.

THE GREATER FOOL

In the world of investing, there is what is known as The Greater Fool Strategy of Investing.  When someone buys a property to flip, or a share of stock to sell at a higher price, that is the Greater Fool Strategy in Action.  In simpler terms, a person buys a property or a share of stock not to own but in the hopes that there is a fool greater than them.  The problem is, when the bust comes, and it will come, many people who were buying for a fool greater than them, may find out that they were the last fool in line. 

A FINAL WORD FROM THE ECONOMIST

Another interesting comment from The Economist went, “Another sobering warning is that after British house prices fell in the early 1990s, it took at least a decade before they returned to their previous peak.” I’ve made a lot of money in the last few years in real estate, but I believe it is time to move on and invest in other assets. And that is why I am moving more of my money to gold, silver, oil, and gas. While I love real estate as an investment, and will continue to always invest in real estate, this is not the time to let love blind me to reality, the reality that all booms eventually bust. 

All Booms Bust: Making Myself Clear A Follow-Up to "All Booms Bust" by Robert Kiyosaki

This is the third installment to my article on All Booms Bust. I thought two articles would be enough, yet the flak from some people, especially those who earn their living in real estate, has been childish. 

After my appearance, also in July, on Neil Cavuto’s show, "Cavuto on Business," on the Fox Network - a great program, I might add - several friends who are in real estate let me know they were no longer my friends.  One person from Florida called me and said, "I don’t mind you posting your article about the coming real estate bust on your website, but when you go on national television and tell the world, that is too much.  I don’t want to be associated with you anymore."

Why I say such reactions are childish is because this person has been in real estate for over twenty years. He has been through the booms and busts, the good times and the bad times. On top of that, if he were really an investor, he would be excited about a bust because that is when a real investor gets rich. 

Another friend in Honolulu, in a panic, called me and wanted to have dinner. She has been in real estate for over 35 years and was also upset. Over dinner in Waikiki last week she said, "My friends saw you on Neil Cavuto's show and want you to stop saying what you are saying."  Needless to say it was a rough dinner for three reasons.  Reason number one, I do not like my First Amendment right, the freedom of speech, to be stomped on. Secondly, I reminded her that she is supposed to be a real estate professional with years of experience and has had first hand experience of market booms and busts. And third, I wanted to know who her friends were and did they really say what they said... or was she using her friends to say what she really wanted to say?  I hate indirect or third party communication. 

At a book signing in Phoenix, a concerned young man came up to me and said, "Is it true you’re selling everything and getting out of real estate?"  

"Why would I do that?" I asked him.  "Because you said a bust is coming." he replied. 

 Smiling I said, "Just because I think a bust is coming doesn’t mean I get out of real estate.  In fact, I am buying even more real estate." 

MAKING MYSELF CLEAR

First of all, the reason I wrote my article on All Booms Bust is because I know that is the way of all markets. Just as winter follows fall, and spring follows winter, all markets have growth times and periods of hibernation.  

Secondly, I wrote the article because I was concerned about my friends and members of the Rich Dad Global Community.  As you know, in my book, Rich Dad Poor Dad, I strongly emphasized the importance of real estate as a powerful investment tool to escape the rat race…and my view has not changed.  In fact, a national business magazine interviewed me because they met so many people who got into real estate because of my book.  So, feeling responsible to those who followed my advice, I felt it necessary to voice my concerns on what The Economist calls the "biggest financial bubble in history."

Thirdly, I want you to know that I am selling my under-performing real estate because I can get a good price for it today. Yet, I am also buying real estate, even in this over-heated market. As you know, I rarely write about what I specifically invest in. There are many reasons for doing that. One reason is because I protect my privacy as an investor. Two, because I don’t feel comfortable telling people about what I invest in because it might not be received in the same spirit I share the information in.  Some people might think I am bragging. Some people might think my investments are too big for them. And still others might think my investments are too small... chicken scratch. So that is why I keep the specifics about what I invest in private.

Yet, for the sake of clarity, I decided to share with you my investment transactions for just one month, the month of July 2005, to give you an idea of what I invest in and that I am still buying real estate.  The following is our investment activity for the month of July. 

1.       Sold 30 unit apartment house for $2.0 million. Net gain, $1.3 million and did not 1031 exchange the capital gains because I want to roll this money into another investment outside of real estate.  Cash in bank. (Big Deal Card)

2.       Sold 10 condominiums.  Net gain $1.4 million in one year.  1031 exchange proceeds into: (Small Deal Card)

3.       Purchased 288-unit apartment house in Tucson, Arizona with 1031 money. This is a partnership with Ken McElroy, friend, partner, and Rich Dad Advisor who will rehab and manage the project. Purchase price $13 million. Expected cash-on-cash return on investment 16% before tax breaks. Positive cash flow after a year of approximately $240,000 per year or $20,000 per month. Exit strategy: hold for at least 10 years. (Big Deal Card)
                         

4.       Purchased a $2 million, one acre lot on an island in the Caribbean for $1 million because we are friends with the developer.  Exit strategy: sell for $2 million or build our own home on the lot. (Small Deal Card)

5.       Purchased 24 acres of land in an Industrial Park in Tempe, Arizona for $7.50 a square foot.  Price of land in same park is selling for $12.50 a square foot.  Exit strategy: develop the property and sell. (Big Deal Card) 

6.       Purchased 28 acres of land in Bisbee, Arizona for $164,000 cash.  Exit strategy: subdivide into 7 4-acre home sites, selling for an average price of $75,000 per lot, and sell on terms of 20% down, 8% interest. Land is spectacular, on a hill, over looking town and million dollar homes below.  Since land is next to the town, may attempt to get land annex to the city, get city water to the property, and then ask for a higher density development.  If we can get our land zoned to allow 1-acre lots we would have 28 lots to sell, at the same $75,000 per lot price.  But this is a long shot.  If you do your math you will find the numbers look good, if I can get my prices, whether I sell 7 lots or 28 lots. (Small Deal Card) 

7.       Purchased two-bedroom condo with boat slip on Columbia River in the heart of Portland, Oregon. Why did we buy it? Because we are friends of Ken McElroy, the developer of the project, and author of the Rich Dad’s Advisors book, The ABC's of Real Estate Investing.  He offered us the best unit at a below market price.  I am a sucker for a good deal.  Exit strategy.  Do not know yet.  (Small Deal Card) 

8.       Put up for sale a 7-acre home site in Bisbee, Arizona. Asking price $90,000. Purchase price zero. We actually got the piece of land for free when we sold off a piece of land next to it. (Small Deal Card) 

9.       $95,000 invested in an oil and gas drilling venture.  Reason for investing: 70% tax break in year one on our $95,000 investment and the potential of a 30% to 50% cash on cash return, if they strike oil and gas. (Fast Track Investment) 

So this is just one month’s investing activity, the month of July, for Kim and me.  This is on top of running the Rich Dad business; writing a new book; making television appearances; showing up for book signings; teaching groups; going to Seattle to be inducted into the Amazon Hall of Fame; going to New York to attend my neighbor Ryne Sandberg’s induction into the Baseball Hall of Fame; vacationing in Hawaii; attending my high school reunion; playing golf with rich dad’s son and his wife for three days at three different courses; and traveling to Atlanta to speak at Pastor T.D. Jakes Megafest, a convention that is expected to draw over 140,000 people. As you can see, although we are busy, we still find time to invest in real estate. 

Obviously, this past month is busier than most months. Our investing will slow down as we get back to work in the fall and travel overseas. One point I want to make is that even in a very hot market, there are still great deals to be found if you go out and look and have friends who are professionals in the business. Most of the deals were insider deals that never made it to market. 

For those of you who are wondering what "small deal," "big deal," or "Fast Track investment" means, these are references to the size of deals found on my board game CASHFLOW® 101.  The reason I included them in this article is because I want people to know that Kim and I are playing the CASHFLOW game in real life.  To us, it is more than a game, it is our life. We know that the more cash flow we have, the more freedom we have... and that is why we play the game... in real life and real time. 

DO I STILL EXPECT A BUST?

Do I still expect a bust? The answer is "yes."  In fact I am hoping for one so I can buy more real estate. 

My real answer is that the market can go only two ways.  We may have a period of hyper-inflation, which means prices will go even higher or we may have a period of hyper-deflation. While hyper-inflation is better than hyper-deflation, I am prepared for the either market direction. Regardless of which way the market goes, I will still be in the market, buying as well as selling.  That is what professional investors do.  They play the CASHFLOW game in real life and in real time. They know how to make money when the market is hot and when it is not. 

So, good luck to you.  Please don’t get caught in a flip that flops or use your house as an ATM machine, borrowing out the new found and inflated equity in your property.  That is what I am most concerned about and why I write my letters of caution at this time in the over-heated real estate market.  Always remember the line from the song that goes, "Fools rush in where wise men (and women) fear to tread."  Now is not the time to be a fool rushing into a party that is almost ending.  At least, it is my opinion that it is ending.  I could be wrong.  But even if I am wrong, I still plan on making a lot of money.  To me, it’s just a fun game played with real money.  So have fun, study hard, get rich and live free.