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Conspiracy of the Rich.

Sunday, February 28, 2010

On my way home after Chap Gor Mei dinner (home cooked food by my mom and sis is the best!), I made a detour and visited Borders as a friend told me they are having a 20% storewide discount.  The first book I picked up was a book by Robert Kiyosaki, titled "Conspiracy of the Rich".  The title was intriguing and captured my attention.

As I flipped through the book, I was actually thinking of buying it until I reached a section which made me put it back on the shelf.

Robert says that most people are lacking in financial education or do not have the right financial education.  Having the right financial education gives people an unfair advantage.  That, I agree.

Robert went on to say that there are many ways to build passive income, which is true.  He went on to say that running businesses (and by that he meant big businesses with hundreds of employees) to generate passive income requires the greatest financial intelligence.  This is followed by investments in real estate but as most people do not have a high level of financial intelligence, they opt to invest in real estate mutual funds known as REITs.  This is followed by paper investments such as stocks, mutual funds and the likes as paper investments require the least amount of financial intelligence.

Now, I will not discuss his choice of words (stylistics) here although that particular section was somewhat disturbing as I sensed snobbery in the writing.  Maybe, I am too sensitive.  So, I shall just discuss his contention that since most people do not have a high level of financial intelligence, they opt to invest in real estate mutual funds known as REITs instead of actual real estate.

Personally, I think investing in real estate is a good way to build our wealth if we know how to.  I have been very open about it in my blog and I have shared my experience.  Definitely, collecting rent is another way to build passive income.  However, I also enjoy investing in REITs.  Not all REITs, mind you, but REITs which meet certain criteria: low gearing, high yields and trading at an attractive discount to NAV.

Now, let's go through these three criteria one by one:

LOW GEARING
When we invest in a piece of real estate, we put down 20% of our own money and borrow the rest.  The idea is to make sure that we borrow at a low rate of interest and let the rental income cover the monthly repayment of the loan and still have money leftover.  We are talking about a gearing level of 0.8x here in such a case.

REITs would probably have borrowings but for listed REITs and in the current environment, it is hard to find a REIT with a gearing level higher than 0.4x (well, CIT is an exception).

Robert talks about good debts and bad debts.  This is something many of us are familiar with but most would agree that less debt is rarely a bad thing.  Many, in fact, work towards reducing debt in their lives.

HIGH YIELDS
If we decide to buy a condominium, for example, what kind of yield could we expect?  Let's say it is a $1m studio apartment somewhere near town, the yield is probably something close to 3.5% per annum.  Not fantastic and even in a low interest rate environment, the returns would not be attractive.

Now, if we look at some of the REITs available in the stock market here in Singapore, there are some REITs with yields of 10% or so.  Attractive?  You bet.

DISCOUNT TO NAV
When we buy a piece of real estate, we are usually buying it at valuation or above valuation (just look at the COVs being asked for HDB flats!) and during bad times, we might just get a bargain at below valuation.

With REITs, we have an opportunity to own real estate at a discount to their NAVs in most cases.  We do have a few REITs which are trading at or above their NAVs (and I don't invest in those).  I like to ask my friends, if a nice condominium in a good location is valued at $2.9m and is now being sold to you for $1.6m, would you buy it?  The answer is always a unanimous "YES!".  It's a no brainer.

Perhaps, the book is meant for an American audience but I do not know how Robert arrived at the conclusion that people with lower financial intelligence invest in REITs instead of actual real estate.  For me, it's just a simple case of value for money.  I invest in the REITs that I do today simply because they provide extraordinary value for money.

15 comments:

Createwealth8888 said...

Prove it to him and blog your REIT transaction and your annualized or CAGR of your investmnet in REITs. Show it to the world. REIT is as good if not better.

AK71 said...

Hi CW,

This post is to point out what I think is a fallacy in the writer's ideas and I think I've managed to do it quite easily.

The book is about passive income generation and why it is better to focus on passive income than capital gains. The writer is not really interested in CAGRs.

However, I will keep your suggestion in mind and if I feel comfortable enough to share more numbers regarding my investments, I will blog about it. Thanks. :)

Createwealth8888 said...

Sharing in terms of % should be good enough and still maintain privacy.

AK71 said...

Hi CW,

My next blog post will be in response to your comments. You might be disappointed but you will see what I am comfortable enough to share in cyberspace. :)

Musicwhiz said...

Hi,

I don't think much of Kiyosaki. He's rather hyped up, like an overvalued stock.

la papillion said...

Hi AK,

I've read some of his books. After a few titles, all sound the same, so I can't really tell the difference anymore. The only one that sticks in my mind is still the first one - the 4 quadrants.

The rest, I will say, is plain bullshit.

No need to waste money and time on them. I'm not even sure he wrote them actually.

AK71 said...

Hi MW and LP,

Thank you very much for your comments. Much obliged. :)

SGDividends said...

hi AK71,

I feel that robert might be too harsh to call people who invest in paper as ppl having low FI.

I shun reits because of the constant dilution given as management fees to the trust managers. I really hate it when they issue rights or new shares that one has to buy or face dilution if one does not buy or not have the spare cash to buy when they ask for it.
I dont like reit managers earning fees for a work to maintain a property, feel that they are overpaid. If i am not mistaken, they earn additional fees when they acquire new properties, so f i were a reit manager, a possibility is just to acquire as many properties as i can, just to earn fees...

sgdividends

AK71 said...

Hi Sgdividends,

I do not shun any counter based on which group they belong to although I must admit I have a slight phobia when it comes to S-chips. Haha..

Whichever group we are talking about, be it REITs, Singapore blue chips, S-chips, Singapore small caps or Singapore mid caps, there will be members which are well run and those which are not.

REITs pay their managers and so do companies. REITs issue rights or new shares when they need to and so do companies.

There are ways in which systems could be exploited and shareholders or, in the case of REITs, unitholders could be put at a disadvantage. This applies to REITs and companies too.

We simply have to separate the good from the bad. First REIT and LMIR, for example, did not issue rights or acquire many new properties since their listing. They have kept their gearing levels low and have delivered more or less constant income distribution to unitholders.

"If you don't feel comfortable with it. Don't invest in it." I still have to remind myself from time to time. ;)

To be able to sleep soundly at night is priceless. :)

Anonymous said...

Investing in real estate is not buying a property with 20% cash down and then renting it out for passive income. A recent seminar I attended has opened my eyes to the fact that it can require no money at all to invest. I am now reading books on my own to discover more about investing in property using little to no money. So maybe that was what Robert Kiyosaki meant by investing in real estate requiring high intelligence.

AK71 said...

Hi Anonymous,

Nope. That is not what Robert Kiyosaki meant in his book. You might want to pick up his book and go through his ideas.

Invest in real estate with no money required and make money from it? That is unbelievable. Some form of leverage or collateral has to be involved, at least. No?

Could you include your name or your initials in your next comment? Thanks.

Anonymous said...

Hi Ak,

With regards to the message by Anonymous, I have actually read a book by Robert Allen on how to buy real estates with no money down.

In Singapore, there is a company that holds seminars teaching people how to do this. Have you heard of Executive Directions Pte Ltd? I have never attended any of their seminars, but I do know the founders Wendy and Jerome.

Best regards,
Naomi

AK71 said...

Hi Naomi,

I am familiar with the virtuous cycle of putting money in a good investment to grow more money to put into other good investments to grow even more money and so on. However, to make money without having to put down any money in the first place is simply unbelievable.

I might go dig into this more. Thanks for the leads. :-)

Anonymous said...

When I lost my job last year, I had lots of time on my hand and I actually attended one of those talks by Executive Directions about how you can own properties with little or no money. As you would expect from such 'previews' where they are supposed to 'tease' you, there was a lot of hot air but no substance. Well, at least that was my takeway from the session and I did not bother to sign up to find out more (cannot remember how much it was but frankly I had no money to sign up too at that time anyway since I was jobless).

One of the 'tips' they offered was that people who signed up with them could participate and pool resources to jointly buy some good property deals that they may have. I am sure they run a legitimate business and that legal issues would be addressed but it simply sounded too good to be true and too 'risky' to me. I would rather do such 'joint ventures' with people I know well and trust rather than with strangers from some kind of 'investment club'.

JT

AK71 said...

Hi JT,

Thanks for sharing your thoughts on the subject. Well, at least you have attended a talk by this company and got a first hand experience.

So, to own properties with no money, basically, the company gets participants to pool resources to buy properties? Hmmm... sounds like the participants still have to cough up some money to own properties. Will the company have to cough up some money too or not, I wonder?

Well, a saying that we have been hearing a lot of in the last couple of years with all the Mini Bonds and Jubilee Series products going down the jamban is that if it sounds too good to be true, it probably is.

I will have to go dig into this Executive Directions a bit more. Maybe, they should take up some advertising space in my blog and explain to my readers what they are all about and how they do it. Hahaha... ;-p

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