Get Rich Education 212: Savers Are Losers. Debtors Are Winners.
#212: Really? Yes. I unpackage it all.
In fact, these are the words of the Top-Selling Personal Finance Author Of All-Time, Robert Kiyosaki.
*[Complete transcript far below - you can follow along]*
Look, I have no savings account. I own no stocks, bonds, mutual funds, nor ETFs. I have no plans to pay off my home, though I could.
Instead, it’s about durable passive cash flow.
Either you can be conventional, or you can be wealthy. Pick one.
I tell you how savers can be losers and debtors can be winners. Inflation amplifies this notion.
Keep a high velocity of money. You wouldn’t tolerate a lazy employee, so why tolerate lazy money?
Then I discuss how high real estate prices and higher interest rates will affect you.
More Americans believe renting is cheaper than owning their own home.
I tell you why your ROTI increases throughout your life.
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Listen to this week’s show and learn:
03:30 Convention says: “Save money and pay off your house before retirement.”
06:20 I have millions in debt.
08:46 How savers can be losers and debtors can be winners.
10:41 Inflation.
13:10 Debt and equity.
18:04 Mortgage rates should rise 1% in the next year - how this affects you.
23:08 How higher rates affect your tenant.
25:48 Today, more people think it’s wiser to rent than own their own home.
30:31 National homeownership rate.
31:06 Return On Time Invested.
Resources mentioned:
WSJ: Renting Cheaper Than Owning
Mortgage Loans: RidgeLendingGroup.com
Cash Flow Banking: ProducersWealth.com
Turnkey RE: NoradaRealEstate.com
QRP: TotalControlFinancial.com
Find Properties: GREturnkey.com
GRE Book: GetRichEducation.com/Book
Complete transcript:
Welcome to Get Rich Education. I’m your host Keith Weinhold. “Savers Are Losers. Debtors Are Winners.” Could that be true? Well, that’s a quote from none other than the Greatest Selling Financial Author Of All-Time. We’re going to break that down.
and...
What do higher interest rates mean to your future as an investor? Today, on Get Rich Education.
Hey, welcome to Get Rich Education, I’m your host Keith Weinhold.
Savers are losers. Debtors are winners.
Really, how can something that sounds so absurd to most people - be true?
Well, those are actually the words of the Greatest-Selling Personal Finance Author Of All-Time - Robert Kiyosaki.
Let’s unpackage this paradox, “Savers Are Losers, Debtors Are Winners.”
Now, one night recently, I was invited to a housewarming party by my friend, Jeff. Jeff & I have done running races together for years…
...he had just married, so Jeff and his wife had us and a number of friends over to “warm their new house”.
Jeff had a lot of friends at the party that I did NOT know, and so I ended up meeting and striking up a conversation with these two older men.
One of the two men was a retired Engineer, and the other one still had an active work life - to some extent - he told me - as being a mutual fund salesperson.
So...this was about to get really interesting.
Now, I often enjoy talking to people decades older than I.
As the three of us were standing around, I asked them how a younger person like me should prepare for retirement… just kind of to see what would happen.
I figured that their answer to me would be rather predictable… and it sure was.
And these guys don’t know what I do. I had just met them for the first time.
The first thing that they said, is, they told me to save money.
Right after that, the other guy added, “And pay off your house before retirement!”
Now, you probably know that the advice that they just dispensed to me is nearly the polar opposite of how I think about wise financial management - and achieving a good ROI, and managing your equity well.
I just sort of quietly kept eye contact with them as they told me to save and pay off my house.
Next, they asked me, well what do YOU do?
Now, it’s hard to explain to some people what I do, so - rather getting than detailed about that right away - I started replying to them by telling them…
...well, I don’t HAVE a job. In fact, I quit my job years ago, because it took too much of my time.
Now - just between me & you - running Get Rich Education isn’t so much a job - but it is work. It’s work that I enjoy.
Anyway, moving on about my chat with these two older gentlemen, since they told me to SAVE money... I added that, I don’t even have a SAVINGS account actually.
And then I said: “As far as paying off my home by retirement - well, I do happen to own my home - though I often wonder if I would be better off paying rent instead.
In fact, if I did move, it’s fairly likely that I would become a renter, and not own again.”
But as long as do I own, I expect to keep my mortgage balance high into retirement age. In fact, if equity accumulates in my home, I’m always quick to yank it out.”
By now… this was piquing some interest in these two guys that I had told them this.
Since one of the guys was a mutual fund salesperson, I just respectfully added in that,
“Yeah, you know, I don’t own ANY stocks or bonds - or anything like them - no ETFs, no mutual funds.”
Now, I’ll just tell you - though that’s true, it’s likely that I’ll have some exposure to stocks again soon once that stock market feels more adequately valued.
Based on what I told them so far, maybe they were thinking that I couldn’t afford to be invested in stocks.
But anyway, by this time, I am demonstrating to these two guys that I am financially pretty divergent from the mainstream - and certainly far from their concept of financially secure.
They might have even been feeling a little sorry for me at this point.
Now, the next thing I told them, since we were on the topic of savings and debt - was just merely another fact in my life.
And this one was like I completely detonated a verbal bombshell right there in front of their faces - in Jeff’s living room - when I told them - “Yeah, actually, I have millions of dollars in debt that I’m frankly… never going to get paid off.”
At this point, the two older guys might have even wondered why our mutual friend Jeff invited me over to this house party in the first place.
Maybe they thought that it’s a wonder that I’m not homeless… or wondered if I own a car or ever go on vacations.
Well, I sure didn’t tell them that “Savers are losers, debtors are winners at this point.”
But I started to explain my investor life to them, without trying to tell them that they’re wrong, and without pros - hell-I-tie-zing or trying to get them to adopt my point of view..
I think I just opened them up when I told them, that, well, actually, I don’t want to accumulate equity in my home because it has no return, and it’s actually illiquid, and unsafe - and that I reinvest those dollars that aren’t in my home into cash-flowing real estate around the country - and beyond.
...and that I have substantial RE income such that I don’t need a conventional day job.
The millions of dollars in debt could be paid off - and, in a sense - they really are paid off on my balance sheet since the equity across all the properties easily exceeds the debt balance incurred.
And that renting one’s own home often provides them with better cash flow than owning one’s own home...and and on.
Now, were the two older guys DATING THEMSELVES by telling me to save money, put money in a 401(k), and get a paid-off home?
I guess some people would say they’re dating themselves if they’re thinking of dollars as money - back when there was still a gold standard.
But I don’t know that one is dating themselves simply by thinking that way - because there are still a ton of younger people - I’d say the majority - that think that saving and having a retirement account is THE way.
But no one ever got rich saving money… but many acquire wealth by investing it.
By the way, I like to think that I’m still too young to ever say or do something that dates myself.
In fact, I did all the dating of myself back in high school - because you see - I couldn’t get a girlfriend so I HAD to date myself. (Haha!)
See what I did there?
Well, you don’t listen to GRE for the humor - thank goodness.
Yes, when I got my high school diploma at age 17, I still looked like a 13 year-old, so there was no girlfriend, and dating myself was the only option, so..getting back here...
Savers are losers debtors are winners - is more sophisticated than one’s conventional notions of saving and debt.
When you talk about accumulating 50% of your assets in a savings account or CD that has an interest rate that yields you a return that’s one-quarter as much as the rate of inflation - that’s losing.
That’s the “losing” that we’re talking about here.
If you have substantial consumer debt that you have to pay yourself that’s tied to a worthless or depreciating asset - plus you have to pay back that debt yourself - and tenants aren’t doing it for you - THAT’S losing.
When Kiyosaki says, “Savers Are Losers, Debtors Are Winners”, he’s talking about how...
When he borrows money from the bank to buy a rental property, he effectively borrows money that SAVERS have first placed into the bank. Now he just arbitraged the savers low-yield dollar into his high-yield dollar.
Then on top of that, he gets tenants to pay the bank back over a period of time. And he gets the property.
That’s what I do.
“Savers are losers” criticizes the practice of saving as a way of accumulating wealth.
You can store your liquidity in something other than a savings account.
Now, with millions in good debt tied to cash-flowing real estate, why would I want to get involved with paying that down? I would only lose leverage.
Tenants and inflation are paying that debt down for me - that’s pretty great - but I need to pay attention to that because tenants paying down my debt for me actually means that it s-l-o-w-l-y makes me lose leverage too. Think about that.
Now, with inflation, this amplifies the “Savers are losers and debtors are winners” mantra.
Look, think of it this way.
Think about your best friend - a friend so good, that they would hypothetically loan you money. Which is actually the best way to lose a friend fast.
But let’s just say you borrow $10K from this great friend of yours.
Now you’re a debtor. Your best friend is the lender and you are the borrower.
This friend of yours is so nice and so trustworthy of you - and so gullible and “not inflation conscious” as well - that they tell you that you can pay them back the $10,000 that you borrowed in one lump sum 30 years from now, interest-free.
30 years from today, in the year 2048 / 2049.
Sticking with the hypothetical here, you’re a person of your word and you pay them back their $10,000 thirty years from now, just like they asked.
At a 4% inflation rate over those three decades, their $10,000 just had its purchasing power diminished to $3,080.
NOW, can you see how savers are losers and debtors are winners?
Remember, you are taking out interest-free loans when you buy cash-flowing real estate. How is it interest-free - because your tenant pays the interest. That’s why it’s interest-free to you.
Of course, they’re also paying down your principal on top of that - and some cash flow on top of that yet - so it’s a deal that’s substantially better for you than when you struck the deal with your best friend and you had the benefit of using their $10K for thirty years.
Leveraged, cash-flowing real estate makes this even better for you. It’s better than the deal with your best friend. (Or former best friend now that you borrowed money from him.)
Inflation's winners are any form of debtor, particularly governments. The losers are those with cash holdings, bonds, pension savings and welfare claimants.
Most debtors are actually unintentional winners. Most debtors don’t understand this inflation- profiting benefit that makes them winners.
That’s why I practice equity harvesting from my home and other properties. I make equity transfers, which do, in fact, position me for more leverage and debt - at the same time it boosts my cash flow.
This reinforces the velocity of money concept too. I’m practicing keeping my money moving - that high velocity of money - like we’re supposed to keep.
Realize that in your home - your primary residence - when you pay down principal - you convert your cash to your equity monthly.
When you convert your cash into equity that way, you’ve just transitioned from a higher use dollar of yours - because it had been liquid - into a lower use dollar of yours - because not it’s illiquid - it’s trapped as equity.
A dollar is not a dollar is not a dollar. Each dollar in the asset column of your net worth statement could have a different value, for that very reason.
Now in a rental, consider that your TENANTS’ cash flow becomes your equity. That’s a substantially better deal.
Equity that accumulates in a home is much like money sitting in a ceramic piggy bank on your bookshelf, gradually being eaten away by inflation.
Instead, keep it moving. Keep that velocity. Don’t let it get lazy.
Lazy money is like a lazy employee. If you’re someone’s boss and you’ve got a lazy employee, why would you tolerate their late show-ups and two-hour lunch breaks?
You wouldn’t tolerate lazy money just the same way you wouldn’t tolerate a lazy employee.
So, it’s about repositioning dead money, underperforming money.
You sure wouldn’t keep paying a DEAD employee!
If you put $20K down into your rental SFH years ago, but now you have $50K equity in it, you have to ask if you would re-buy it with $50K of equity in it.
You probably wouldn’t! If you don’t hold up your leverage ratio, then your RE ROI will soon approach that of a government bond! Your ROE drops, drops, drops over time.
In this context, savers are losers. Debtors are winners.
So… I probably got the two older guys at Jeff’s party thinking differently if nothing else.
But most people would really rather be affirmed rather than informed.
Information challenges people. Affirmation comforts people.
Some people just want to hear whatever fuels their confirmation bias. Whatever fuels their confirmation bias is the easiest thing to hear.
Well, now inflation is on the uptick - that’s a long-term positive trend for leveraged real estate investors.
But interest rates are also on the uptick, meaning that things aren’t QUITE as good for debtors.
In fact, the last time that macroeconomist Richard Duncan was here on the show, he told us why there’s a positive correlation: higher inflation means higher interest rates.
So let’s talk more about what higher interest rates mean to your future as a real estate investor - or even as a homeowner. That’s next. You’re listening to Get Rich Education.
Welcome back to Get Rich Education.
Mortgage interest rates are now about 1% higher than they were one year ago at this time.
In fact, there have been 8 quarter-point increases over the last three years.
Now, among other things, these rate increases have proven to me that the future rate increases expected really are going to happen.
In fact, it’s not what I think, it’s what the Fed has come out and SAID. They plan to raise rates one more time here at the end of THIS year, and 3 more times next year. Likely a quarter of a point each time.
So therefore - we don’t have to try to anticipate the future, at least, this very open Fed is TELLING us just what they plan on. They didn’t always do that.
So rates could very well be 1% higher by this time next year.
Keeping some historical perspective, stay mindful that over the nearly 50 years that Freddie Mac has tracked rates, which is since 1971, 30-year loans have seen an average of a 7.7% mortgage interest rate, which might be more like 8.7% for a rental property.
Today, you can still get a primary residence loan for about 5 and an income property loan at about 6.
When rates are rising, investors have a sense of urgency to act and close on deals - and we expect to be in a rising rate environment for quite a while.
That’s why I have a sense of urgency to act now.
It’s when rates fall that investors feel the opposite way - they get a sense of complacency - not urgency - but complacency - because they feel like if they wait a few months, rates are going to be lower.
What else do higher interest rates mean?
Well, this matters...as you know how I’m always telling you that you should regularly think about how your tenant - or your prospective tenant - is thinking.
Housing prices rose starting in 2010 or 2011. Now, interest rates have joined in, beginning their rise in 2016 / 2017.
Of course, that begins the crimp the cash flow for new buys that you make.
Well, that crimps affordability for others. This hurts the homebuyer and especially the aspiring first time home buyer.
When renters cannot get into buy something - with this worse affordability - this forces them to stay in renter the pool.
Therefore, that increases the occupancy rate and often increases the rental amount that you can charge as well.
Higher interest rates increase the demand for rent.
So when mortgage interest rates go up, rents go up, although that’s not an immediate cause-and-effect. There is some substantial lag time there - a lag time until rents increase.
And housing prices have risen more than wages as well, meaning that fewer and fewer people can form down payments to BUY a house.
So, that’s some of the good news for real estate investors with rising rates.
How about more bad news with rising rates - there are some metro markets where higher real estate prices and higher interest rates have made cash flow with a 20% down payment nearly impossible...where those numbers worked five years ago or even 2-3 years ago.
The best metro markets to invest in change over time. That’s why we recently added two markets at GREturnkey.com - the Tampa Bay market and the northwestern Indiana market - which is actually the eastern fringe of Chicagoland.
Returns have shrunk in some places. Let me ask you, would you invest if you knew you were going to get, say a 4% CCR on a property or would you not?
If you would, you might figure that with the Five Ways Real Estate Pays You, then maybe you still can’t make a better total passive return anywhere than with 1 to 4-unit income property.
If appreciation on your income property slows down to, say 4%, well, at 5:1 leverage, that’s 20% leveraged appreciation.
Plus your 4% CCR.
Plus your principal paydown yield that the tenant makes for you as another 4%.
Plus 5% from tax advantages.
Plus just 3% from inflation-profiting. That would still be a 36% total rate of return for you when you add up all 5 profit centers.
So, we’re TALKING about investing in today’s higher interest rate environment.
That is, your perception and your reality as an investor.
Let’s talk about that customer of yours’ perception and reality in an arena of higher prices and higher interest rates.
Yes, that customer of yours, that tenant that faithfully shows up inside your brick-and-mortar business every day - called a rental unit - and helps make those “up to” Five Ways possible for you.
This 2-minute clip from a recent CNBC broadcast - is about what society thinks about renting their home versus owning their home. It’s Diana Olick, and then a couple male CNBC commentators comment at the end.
[2-minute CNBC video]
So that’s evidence that more people think it’s wiser to rent their home than buy their home as - you heard it there - the monthly cost of homeownership has risen 14% in the last year - but rents have only gone up 4% in the last year.
What a comment from CNBC’s Diana Olick there - suggesting that it’s increasingly wise to be a renter of your own home because it’s less costly than owning your own home - and then reinvest that difference in income properties that you rent to others.
Dang - Diana really gets it - that might be the smartest comment I’ve ever heard on that show...and I don’t often give a shout out to CNBC.
That was just really interesting wording there with the word “investment” - there in that clip - about how people feel that renting their own home is a better INVESTMENT than buying their own home.
This is good news for us real estate investors that want lots of renters and rental demand.
Now, just last week in the Wall Street Journal, an article was published titled:
Big Jump in Americans Saying Renting Is Cheaper Than Owning Then the subtitle reads: Freddie Mac data shows 78% of people now say that renting is more affordable than owning
I never would have thought that THAT many people would say this. But, here’s what the article says:
More than three-quarters of Americans now view renting as more affordable than owning a home, the latest sign that rising mortgage rates and higher home prices will continue to pressure home sales.
Some 78% of people now say that renting is more affordable than owning, according to survey data released Tuesday by mortgage company Freddie Mac . That is up 11 percentage points from only six months ago.
(So, translation is that six months ago, 67% of people felt that renting was more affordable than owning, now, remarkably, 78% say this.) Back to the article:
The survey also indicates that demand for for-sale housing could remain soft in the coming months.
Some 58% of renters now say they don’t currently have plans to buy a home—up from 54% in February, according to Freddie Mac.
Demand for rentals swelled after the recession, as millions of families lost their homes to foreclosure and tight credit made it difficult for young people to buy homes.
Rents rose by double-digit percentages in many cities and the share of families who couldn’t afford their rent swelled to record highs.
Meanwhile home prices plummeted and, for those who could qualify for mortgages, it was a great time to buy.
But this year, that dynamic has reversed. Rent growth has slowed in line with inflation in the last few quarters, as new rental supply hits a three-decade high.
At the same time, home prices continue to grow significantly faster than incomes and inflation and mortgage rates have risen nearly a percentage point from the beginning of this year.
That has made it significantly more expensive to buy a home.
David Brickman, president of Freddie Mac and the head of its multifamily division, cautioned that renting remains unaffordable for many families.
But buying lately has become even more unaffordable.
“It’s the worst of both worlds,” Mr. Brickman said.
Two-thirds of renters say they have had difficulty affording their rent at some point in the past two years, according to the Freddie survey.
Nearly nine in 10 renters in what Freddie deems “essential” fields like health care and education say they have had significant struggles to pay rent during the past two years.
Mr. Brickman cautioned - and again Mr. Brickman is the President of Freddie Mac and head of its multifamily division - he cautioned that if more people decide to continue renting that could eventually reverse the current dynamic and make rents once again begin to rise quickly.
“I do worry that it may be short-lived, that it’s some reaction to rising rates, but the underlying demographic trends are not slowing at all,” he said.
That’s the end of the Wall Street Journal article published just last week, so an interesting article there.
Remember that national home ownership rates peaked in 2004 at 69%, and bottomed out at 63% in 2015. In 2018, they are only slightly above that low, at 64%.
So, that should get you caught up on the state of the real estate market from the perspective of higher prices, higher interest rates, a little bit higher inflation...but still not all that high, and more people desiring to rent from you than to own their own home.
You’re going to live in an ever-shifting real estate market throughout your life, of course, and I want to remind you of a real positive with all this.
And it has to do with your ROTI - your Return On Time Invested with real estate.
Your ROTI goes up throughout life! It gradually increases as you’re constantly teaching yourself lessons - and you’re getting the lessons faster in your life… the more that you act.
Ten years ago, people learned that buying real estate for speculative capital gains can backfire badly.
Well, then you’re going to get a better Return On Time Invested going forward because you’ll forever tell yourself, “I wouldn’t invest solely for appreciation again.”
At some point, your set of experiences and accumulation of time in real estate will probably tell you, “I wouldn’t self-manage again.”
Maybe you’ll learn, “I wouldn’t hire a Property Management company like that ever again because I can see that they makes extraneous work for themselves in my property & my maintenance costs rack up needlessly.”
Maybe your “Return On Time Invested” will increase as you learn that using 5% of your gross rents as a long-term maintenance expense number is too low…
...or you wouldn’t use a home inspector that’s biased like that and doesn’t want to beat up on the provider or seller enough.”
Your ROTI increases throughout your investor life - and that’s one rate of return...that’s really...pretty...predictable.
I’ve got to tell you that I really appreciate that you value listening to me every week. You’re listening to someone that’s doing it - that’s actively investing in real estate - and sometimes right alongside you.
Learn from somebody that's doing it.
Who do you get your real estate investing information and mindset from? Your parents, or a traditional educator, or someone that's actually been there?
I had a lower middle class upbringing in Appalachia, USA. I do not own an economics degree, no MBA, no business degree at all - nor does my family. I have no RE or entrepreneurship in my family background either. My degree is a Bachelor’s in Geography and Regional Planning.
More importantly, I’m a 16-year investor and spent five of those self-managing my property (uhhh...time that I’ll never get back), and then I realized that the real $ are made by understanding economic concepts specifically applied to investment RE - that’s the major wealth producer.
It’s not replying to tenant requests and fixing broken stuff. The ROTI is simply too low.
And I’m happy to say that I will be back on Forbes RE Council in 2019 - next year - and continuing to write articles for Forbes.
Don’t forget to turn your clocks back one hour this weekend. Gosh, Daylight Saving Time is some nonsense.
Even the name is offensive itself - they named it Daylight Saving Time - but in the history of the world, this has never saved one second of daylight.
It needs to be called what it is - it’s Daylight Shifting Time - daylight is only shifted, not saved.
Nothing has been saved, but our time has been wasted. It gets wasted twice a year.
Maybe the only good news about DST this year is that it means we’ll all have one more hour to spend this weekend at the New Orleans Investment Conference in New Orleans, Louisiana.
Yes, in a few days I’m leaving one great American city - Anchorage to go to another one, New Orleans.
I hope to see you there for a little Meet & Greet both this coming Friday AND this coming Sunday at 11AM each morning at the AgroNosotros booth, Booth #111.
It’s pretty likely that I’ll lift weights or go running outdoors a couple mornings while I’m there there so maybe you can join me there as well.
If you’re listening to the podcast version of Get Rich Education, be sure to SUBSCRIBE on your podcatching device.
By touching the “Subscribe” button, that’s how you will be sure to never miss any episodes. I would be grateful.
I’m your host Keith Weinhold. See you in New Orleans. Don’t Quit Your Daydream.