(upbeat music) – Hey guys, welcome to Advanced
Lessons in Millennial Money featuring Robert Kiyosaki. I'm Alexandra Gonzalez. In this episode, I got a chance to speak with Robert Kiyosaki
and his real estate expert and Rich Dad advisor, Ken McElroy. For over two decades, Ken McElroy has experienced massive success
in the real estate world from investment analysis
and property management to acquisitions and property development. With over 750 investment
dollars in real estate, Ken offers a unique perspective in how to get the biggest
return on your investment. One of the topics Robert talks about is using debt to get rich. We get a lot of questions
about how that actually works. Let's listen to how Ken
and Robert pull this off. – So, Kenny, you wanna say anything about the beauties of debt
and how you learn to use debt to get rich? – Sure, sure, well I
think when I was your age, everybody just said stay out of debt.
So, it wasn't until later that I realized that you can use it and you
can use it to buy assets. So, it's a big difference,
doing good debt and bad debt, but essentially, all it
is, it's a form of money from somebody to buy something in a loan or a mortgage or
whatever you wanna call it. So, it's just money. And so, being able to
use money from a bank or from a life company or a pension or something like that.
– Or an investor like me. – Yeah, or an investor. In the form of a loan or equity is the most important
thing that you could learn because I think I certainly grew up with no money and my parents didn't either and we always used to have
to save for everything that we always did, it was always how much money can we save
and then we can buy something and it wasn't until later that I realized that when you use debt,
you can actually do it, you don't even have to have any money. You just use other people's money. – When you go to the bank
and ask to borrow money, your bank is going to
consider how much debt you can have based on net
operating income or NOI. Not sure what that means? Let's listen to Ken explain. – NOI means net operating income, so if you really think about it, it's just income minus expenses.
That's all it is. And so, it's important to know
where you are financially, so a banker's gonna look at
your income after expenses so that's a great way to see it. – It's really quite simple. So let's say, I'll keep
the numbers simple. You have a thousand dollars income and you have 500 dollars in expenses, this is a prop. – Yep, so you have a 500 dollar NOI or net operating income. – So why is that important? – Well, the banker looks at that number because that's the number that they see to be able to pay back
any debt you might want. – [Robert] Right, this is
where this comes in, right? – Correct.
So, they're gonna look
here and they're gonna say, okay this person has 500 dollars in NOI, therefore we can give them a loan, say up to 350 dollars, 250 dollars or something like that. So, they're not gonna give you
a loan for the whole amount because they don't want
you to be that tight, so what they're gonna do is
they're gonna look at the NOI and say, how much can we loan you? – Now that we've learned
about debt and NOI, what role does the property play when seeking funding for the investment? Robert and Ken discuss. – Okay, so when Kenny calls me and says, I have this property. It's in horrible condition,
there's no income, there's expenses all over the place, you get excited right? – Yeah, so I do.
It can work the opposite too. So a lot of people get hung up here because they don't have
a financial statement or any way to go to a banker, let's say, but sometimes a banker will look at the property itself. So they'll say, like
the one you explained, they'll say well this has a bad NOI on it, why would we give you money? You know what I mean? And so that's when the
financial education comes in and you say, well this is
what I plan to do with it. – Correct, what Kenny is saying, we've had, I'm keeping the numbers simple. He's had income of zero
and this is a thousand. – Yeah, so you'd have a negative NOI. – And the banker goes, tell me why. – I can't lend on that, right? Because it's a higher risk of being able to be paid back.
– My next question was how can you use NOI to determine the value of a property when you're looking to invest? Let's watch. So how can you use NOI to determine the value of a property,
of an investment property? – So, the NOI or the net operating income determines the value. What you back into it with another vehicle called a capitalization rate or cap rate, so it's actually, we're
getting a little technical, but typically, the cap
rate or capitalization rate divided into the NOI determines the price. So that's generally how that works. But in the case that
we were talking about, the value of the building
with no tenant in it – Is way low.
– Is way low.
And there's really no income. So it's basically
whatever the structure is. So I've seen lots of situations
where a vacant building, somebody might've spent
five, ten million dollars on a building that's completely vacant, vacant warehouses,
vacant whatevers, right? Sometimes you see 'em get
converted into clubs or whatever. Well, there's value there. Somebody spent a lot of
money on it at one time. Somebody owns it, too. It could be a bank, it could be whatever. So taking that and creating value, sticking a restaurant in it, a gym in it, a club in it, it doesn't
really matter who's in it. Well it does because you
want them to pay you, but now you're creating the income. And that's how you create value. So in that example, let's
say you buy a building for a million bucks on a block. With a tenant in it, it could be worth three, four, five million. – If it's a tenant in it, the value is up.
– Yeah, right? 'Cause now, what you do is
you put all that together and then you can actually sell it. – Got it. And so, even if the NOI is negative, if you create a plan that
creates value for the property, it shows the increase that you're gonna give the property's value, the bank will give you the loan. – Oftentimes, yeah. – [Robert] Not always. – Not always.
– Not always, but there are ways to do it. So, in that particular
case, you might get a loan from somebody like Robert. Say hey, you know, I need a million bucks and this is my plan. And then once you get a tenant in it, then you go back to the bank and you say, hey give me a loan. And then they give you a
loan and you pay Robert back. – Every investor should be looking at ways to increase income and reduce expenses. But have you ever wondered
how that's possible? Ken gives us a secret. – So the thing that Kenny
is always looking for is after we stabilize the building, he'll tell me, he says
look, in five years, I'm gonna get this from one
thousand to 10 thousand.
– [Ken] Yeah. – And I'll go, okay, so I know I'm in it for five years with him as an investor. And on top of that, we're
gonna reduce the expenses back to 500. NOI goes up, the value goes up, the debt goes up to let's say 10 thousand. Does that makes sense to you? – Yeah. – So I have a friend, for example, he actually bought a building
in a town up in Idaho where I have a vacation house
for about a million bucks and it was sitting, it
was an old Elks building, beautiful building downtown. But it had been vacant for a long time. He bought it and he put
like 30 offices in there, small offices, you know
1500 to 2,000 feet each and grew the revenue, right? So everybody pays.
– [Robert] So the income went up. – Yeah, you know what I mean?
– Yeah. – So he broke it up and leased it up. So he has his expenses, but now he's got 30 people paying rent as opposed to just one
big vacant building, he turned it into a pretty
cool workspace for everybody. – Kenny, in his third book,
Advanced Guide to Real Estate, his job is to get this
up, keep this stable, then he goes back to the banker and says, look, we've got all these
tenants, money's going up. And so now we want 12 thousand dollars because he's improved
income, kept expenses low, building's more valuable. – Yeah, the key there is the bank's always looking at your NOI to
pay back their loan. So the more you can grow that,
the more loan you can get. – And so, essentially, the
renters are paying your debt.
– Of course. Essentially, so if that
building I was referring to goes to 50 percent vacant,
now he's in trouble. But if he can keep it full, so now you're getting into management, but regardless of that,
that's how you do it. There's opportunities
like this everywhere. – Once you've bought all these apartments, someone has to manage it for you. Unless you wanna run the
apartment building yourself, you're going to need a
good property manager. Here's the importance of a
good property management. And I know that another
thing that you always mention in all your books and the
ABCs of Real Estate Investing is that property management
is very important. Poor property management
equals poor profits, right? And so, I wanted you to kind of explain the importance of the property management. – Well, essentially all
property management is is taking care of the
property in every way, so taking care of the people that might be inside of this building, you know, for various things that
come up from day to day, collecting the rent and
paying all the expenses.
That's really all it is. And so the property manager's job is to make sure the place is clean and that things are getting
rented and all those things. And so the owner of the building would hire a company like that or they could do it themselves and basically keep the place full. So in our world, we have a
property management company that we have about 300 employees, all we do is focus on
this, these two things. How do we keep our expenses
low and keep our income high? Because we're always
trying to grow our NOI so our NOI, you know we have a budget for let's say, 2017 or 2018 or 2019, the goal is to grow that NOI each year. – And Kenny's done such things
as the way he grew the income was, this is a little common, he put washing machines,
right, in the units. There are no washing machines. And so when he put washing
machines in the building, this went up. – Yeah, so in my apartment houses, we would buy apartment houses that had washer and dryer
hook-ups but no machines.
And so the people would walk down to the laundromat or whatever, and it was a bit of an
inconvenience for the people and all that. So, I said, well let's
just buy for 650 dollars, we can buy a washer and dryer set and stick 'em in all there. And we did that. And so I probably bought
three or four thousand sets of washers and dryers
for a lot of our properties and so now all of a sudden, we can charge 75 or a hundred dollars more in rent. – [Robert] And this goes up. This doesn't go up as much.
– It's a win-win. Because they have to go
spend some money anyway to go do their laundry, now they can do it here and for me, if I can pay back those washers and dryers in one year because it's only 650 dollars for a set and if I can get 75 dollars more then all of a sudden, I've got 900 to almost a thousand dollars more in rent. So I'm actually, it's what
I call a one-year payback. – So what Kenny does, he
borrows the money here to put washing machines in here. Again, the tenant pays it all off and the washing machines stay there. – And I think that's a brilliant idea because I know that both of you have created incentives for the renters. So for example, if they stayed for a year, you would do certain renovations like including the washing machine. And so, every year, there
was another incentive, which not only increased
the property's value, but also the renter's
paying for it essentially. – [Robert] And the banker is happy. – My last question was pulled straight from the YouTube comments
that you guys left.
I asked Robert how would
you respond to critics who say real estate is
a slow lane approach to getting rich. This was Robert's reaction. Well, one of my last questions is what would you guys respond to the critics who say that real estate is a slow lane approach to getting rich? – [Robert] They're entitled
to their point of view. – Yeah. That's fine with me. I can't think of another. I mean, I think it's really super simple. Real estate is very slow and very dumb. – Every month, we got cash flow. – Yeah, you know. I like that, I like we're not
banking on something going up. This is called creating value. We're not parking our money in something and hoping it goes up. This is very strategic. – Perfect. – Everybody's got their point of view. Most people wanna get rich quick. That's why they never get rich. – [Ken] Yeah, this is not that. – [Robert] Yeah, this
is financial education. This is smart, this is having your banker be your partner.
– Yeah, and these are
long-term assets, by the way. This is business, this is
like managing a business. We would not sell these. So, unlike the stock market or something, we're not trying to time things. We're trying to generate cash flow here and then move to the next one. – Okay, great. – So, can I give you one last thing 'cause those guys always upset me? So what Kenny does, he increases this, fixes this, and then when this goes up, he gives my money back. So I might give Kenny a million dollars for five years, let's say. He increases this, decreases this. The bank says, oh yeah, NOI is up, so he puts all this money in there. I get my million dollars back. I still own the property. I still have the cash flow going in. So all you guys wanna get rich quick, it's called an infinite return, right? – Yeah, and it's tax free. – [Robert] It's tax free. – The reason it's tax free
is because when we use debt to pay back debt, it's debt. So it's owed. So, when Robert gets his money back, it's actually tax free.
– [Robert] Yeah, let me say I lend Kenny, and this is pretty common numbers. I lend him one million. He fixes all this, the bank
gives him three million. I get my million dollars
back and that is tax free. I get it back. And I still own the building with Kenny. – So yeah, so to your question, you gotta wonder why if you
can invest a million dollars and get it back tax free and still have lots of cash flow– – [Robert] And still have
the cash flowing this way. – Why somebody would think that. It's a pretty simple model. – And that's it for this episode of Advanced Lessons in Millennial Money.
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and comment below. (speaking in foreign language) (upbeat music) – Who say real estate is a slow– Slow lone preach. How would you exp– My last cut– My last question was pulled
straight from the comments (laughing) I'm sorry..