The Popular Myth of "Good Debt" à la Robert Kiyosaki

OK, we loved this book and still love it.

It gets a lot of bad press because many arm-chair "professionals" claim that it doesn't contain enough detail.

Hogwash.

This book is brilliant because it uses the power of a story to motivate and inspire people to think differently about their lives and their money.

We give this book full credit for taking us on the journey from:

Employee, to Self-Employed, to Business Owner and Investor.

And if you're one of the few people on earth who haven't read this book yet - go get it.

We do have one bone to pick with Rich Dad Poor Dad though.

Robert Kiyosaki did such a brilliant job mentally reshaping the perception of debt that it's become almost dangerous.

Like too much of any good thing does.

You see, the book explains how you shouldn't think of debt as bad.

That when used to buy assets, debt can actually be good.  So take the decade of brainwashing your parents drilled into you about not wanting debt and just give it a chance.

Kiyosaki explains that how by leveraging yourself with the "bank's money" to buy property you can create an explosive mechanism to create wealth.

And of course, he's right.

Buying property by putting 10% or 20% as a down payment and then using the bank's money for the rest is a pretty powerful form of monetary leverage.

Using debt to buy assets = GOOD.

Using debt, like your credit card and credit lines, to buy 55" LCD TVs = BAD.

Now it's difficult for us to critique this guy because his books really did have an huge impact on us BUT perhaps he could have just spent a little more time explaining one little important nugget of info.

Debt can be good but...

You need to be able to SERVICE your debt in ALL economic conditions or it can FRY YOU.

What do we mean?

Have you ever attended a real estate meeting of some sort and someone walks up to you and asks you this, "Hey, so how many doors to you own?"

Huh?

The first time we heard that we had no idea what it meant and we had been investing in property for years already.

I think it's some real estate investing code or something.

"Doors" is investing lingo for how many properties, units, apartments or condos you own.

And it seems to us that investors in Canada right now are walking around with a badge of honour if they own more than the next guy.

Like the guy with the most property, or "doors", is the winner of some sort of contest.

LOL.

LOL!

LOL!!

What a joke.

Most people who own a lot of "doors" are so leveraged on "good debt" that they're in a world of hurt when the first economic storm rolls through.

How do we know?

We know it from direct experience and more recently we know it because we watched the horror unfold in real time to our friends south of the border.

We've seen first hand what happens when you get drunk on the good debt juice.

It ain't pretty.

We know all kinds of people who owned (please not the past tense) ... a lot of doors.

They were the ones that were usually so leveraged that when the first sign of property values dropped they lost a lot.

They struggled to hold it all together and many couldn't make their payments on the "good debt" so they lost their good properties.

They initially survived by refinancing other properties, using savings and pulling out cash out of where ever possible to pay for the debt that initially seemed good but quickly turned so bad.

Who would you like to be?

Someone controlling five or six properties and growing your equity and cash flow in them nicely.

Or owning 15 or 16 properties with little equity and cash flow but you get to win the "most doors contest"?

Let us put it to you this way....

Are you investing in real estate to become a landlord or to live life on your terms?  To live a lifestyle of greater independence and freedom.

When you're on a boat cruising the Mediterranean is it easier to manage 5 properties fully paid off or 15 properties highly leveraged?

If a tenant misses a rent payment while you're sipping cocktails on the Lido Deck during Happy Hour who can handle that missed rent payment easiest?

Now, to each their own of course.

And we truly believe with all our hearts that good debt (aka, mortgages on property) are an amazing way to build your wealth.

But we also believe that the real estate market has enjoyed a beautiful, exquisite, run in Canada over the last dozen years.

And it make be a really good idea for someone to remind all of us investors that we should keep in mind that we need to service the debt in good times and bad.

Remember, in many, but not all, of the U.S. States you can walk away from properties fairly easily because their mortgages are "non-recourse".

We don't have that in Canada (except perhaps in Alberta and Saskatchewan...maybe any locals in Sasketchewan can confirm that for us).

In most of Canada if you walk away from a mortgage the bank can come after other assets you own, aside from the property that you're walking away from.

So if property appreciation slows down and maybe even dips (as it did in the U.S.  rather drastically falling off a cliff in some markets) will you be able to pay your mortgages?

If you're out of work for a few months will that change things for you?

Will you be able to honour your commitments?  Don't get too drunk on the good debt juice without remembering that you'll need to pay for it.

Keep a little cash tucked under the mattress for a rainy day.

Use leverage to your advantage and be smart about it.  Stretch yourself but don't stretch too thin.

Our friends south of the border have proven that "good debt" is only good when you can pay for it.

If you are prudent and plan for rainy days today you'll be one of the few left standing when a storm hits and you'll likely be able to take advantage of some great deals when everyone else is fighting for their lives.

We're actually writing about the latest lessons we've learned from watching U.S. investors over the last few years in this month's issue of the 12-page Rock Star Inner Circle Newsletter.

Until next time ... Your Life! Your Terms!!

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0 comments on “The Popular Myth of "Good Debt" à la Robert Kiyosaki”

  1. This is a point well taken. One strategy I have developed is to pick a property in your portfolio and never refinance it. Dependeding what stage you are in your investing career you may want to make small additional payments against the mortgage. Once this property gets paid off, use the extra cash flow to pay off the next one. This strategy allows for a system of eventually having all the properties in my portfolio paid for. It also allows for a money buffer for those tough times as Tom and Nick have mentioned. Happy investing. Steve

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