DECEMBER 2019 THINKREALTY.COM/HNR
MARKETS & TRENDS | 12 Manhattan: At a Crossroads MARKETS & TRENDS | 18 Is a Crash Coming? STRATEGY | 20 You Want a Partner?
ROBERT KIYOSAKI TALKS EDUCATION, JOBS, AND MONEY — AND WHY ALMOST ALL OF IT IS FAKE The Real Deal
Contents
DECEMBER 2019
FEATURED
12 MARKETS & TRENDS Manhattan: At a Crossroads The new statewide rent regulations of summer 2019 shook investors and raised more questions about New York City’s proverbial housing crisis. Nonetheless, Manhattan’s multifamily sector is on an upswing.
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THE REAL DEAL Rich Dad Poor Dad author and finance guru Robert Kiyosaki talks education, retirement, and money — and why so much of it is fake. 06
18 MARKETS & TRENDS Is a Crash Coming? The truth about the economy that no one will tell you.
20 STRATEGY You Want a Partner? What you need to know about joint venture agreements.
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FEATURED ARTICLE
Robert Kiyosaki on education, retirement, and money — and why so much of it is fake. REAL DEAL The
BY KELLI WHITE PHOTOS BY THE RICH DAD COMPANY
W hen real estate mogul and finance guru Rob- ert Kiyosaki took a real estate course in the early 1970s, he had a feeling it was what he was destined to do — to be an entrepreneur. Known for his unconventional teachings on finance and his passion for real estate, the best-selling author knows a good deal when he sees one and he is sticking with what works. The real estate class cost $300, which was quite a high sum in the early 1970s for a military pilot making $800 a month. Kiyosaki, a Marine Corps and Vietnam Veteran, bought his first real estate
property in 1973 when he was stationed in Hawaii. Now, he owns more than 7,000 properties — from residential and commercial to hotels — and they all bring cashflow. Armed with a passion for learning and shar- ing his views, no matter how nonconformist they might seem, Kiyosaki, author of Rich Dad Poor Dad and more than a dozen other texts on money management, investing, and financial freedom, said he was a terrible student. But for him, doing poorly in school transferred to becoming a lifelong learner in his own way.
"ONE OF THE
BIGGEST LIESWE HEAR IS YOUNEED MONEY TO MAKE MONEY.”
ROBERT KIYOSAKI
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“I flunked out of school,” he said. “But I study con- stantly. I love learning. I was not good at school, but I kept learning when so many others didn’t.” He joked that he learned everything he knows from playing Monopoly. “I like schools where I can DO some- thing,” he said. So, it’s no wonder why pilot school and the military worked well for him. His point of view is that ‘old’ advice — go to college, get a good job, save money, get out of debt, invest for the long term, and diversify — has become obso- lete advice in today’s fast-paced Information Age. His philosophies and messages challenge the status quo and his teachings encourage people to take initiative to become financially educated and play an active role in investing for the future. Kiyosaki’s most recent book is titled FAKE — Fake Money, Fake Teachers, Fake Assets in which Kiyosaki dispels many of the societal teachings that, in his view, have not worked and are not entirely true. “ FAKE is about how fake our money is, and you can’t pass off fake money without fake teachers. There are so many people my age (Baby Boomers) who have nothing. And so many Millennials are also in serious trouble due to student loans. Banks and Wall Street are fake. To me Rich Dad, Poor Dad was high school, and FAKE is col- lege. I’m essentially saying the same message,” he said. Kiyosaki shares his messages about financial edu- cation via his Rich Dad brand platform in books and myriad outlets including videos, radio, apps, and board games. His CASHFLOW games teach people of all ages about investing, managing assets and liabilities, and building wealth. The Rich Dad brand celebrated its 20th anniversary in 2017, and 2020 is proving to be a big year for Kiyosa- ki as he has three projects in the works. The next book scheduled to release is called The Ravens , which he co-authored with James Rickards. “A raven is a bird of prophecy. My co-writer Rickards and I are always calling market terms. The book is about how you can see the future and predict markets,” he said.
Robert Kiyosaki on Failure… “I’ve lost hundreds of millions of dollars, but it was the best thing that ever happened to me because I got smarter and came back. You learn by falling, but our schools punish those who fall down. Sometimes I win and sometimes I lose millions, but a real winner is one who gets inspired losing. The average person avoids losing, so they never win. How can you win if you’re afraid of losing?” On Job Security… “People pay a high price for job security. In prison it’s called maximum security. I visited a prison in Australia and saw their version of the worst punishment. It was being locked in a room and I thought that’s where most employees are. They’re in maximum security. It’s the worst punishment in the world. And unfortunately, that’s what most kids come out of school looking for.” On Taxes… “How do I make millions and not pay taxes? Invest in real estate! But, you have to understand the tax laws. Tax laws hurt small businesses and those with 401ks. I love passive income that is taxed at zero.”
“AREAL WINNER GETS INSPIRED BY LOSING.”
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He is also working on a doc- umentary called The Future of Money and Who Stole My Pen- sion , a book about Baby Boomers with little or no retirement. “The average 401k for retiring Baby Boomers is only $75,000 total,” Kiyosaki said. “As long as you’re an employee with a 401k, you’re toast. I was destined to be an entrepreneur and invest in real estate, and I believe the world needs more entrepreneurs who will create jobs.” Kiyosaki has been heralded as having a gift for simplifying com- plex concepts related to money, investing, finance, and eco- nomics. His core principles and messages like “Your house is not an asset” and “savers are losers” have ignited a firestorm of crit- icism and ridicule, only to have played out on the world econom- ic stage in prophetic ways. He said the reason he chooses to invest in real estate is be- cause it’s about debt. “The more debt I use, the THE REAL DEALS ARE IN REAL ESTATE
“With real estate, you can always locate your own deal and be in control of your properties. I don’t sell — only rent. If you find a good deal, why would you sell it? I’m not the most popular person on Wall Street, but I just do what I talk about. When you invest in real estate, you’re in shadow banking; you’re out of sight. You operate by a different set of rules using private equity and private credit.” “Debt is tax-free money and my cashflow is tax free. Why would I invest in anything else? When I say I pay no taxes and make millions, people go crazy because they’re in the stock mar- ket not shadow banking. I make the deals and control my deals because it’s private investing. I can’t do that with mutual funds and stocks.” With perspectives on money and investing that often con- tradict conventional wisdom, Kiyosaki has earned an interna- tional reputation for irreverent straight talk and has become an outspoken advocate for financial and real estate education. He said, “Why would you want
A Brief Query with Robert Kiyosaki
What are you reading right now?
A New Earth by Eckhart Tolle and Can't Hurt Me: Master Your Mind and Defy the Odds by Navy Seal David Goggins.
What is your favorite book you’ve written? Why A Students Work for C Students . I was a terrible student, but I love to learn. I just didn’t want to learn what they were teaching and how they were teaching it. Now, A students work for me!
What do you do for fun? Make money! Life really can be like Monopoly. It’s only a game!
a job and pay taxes? Why would you want to save money when the government is printing money? Why would you save money when interest rates are approaching zero? Why invest in the stock market when it’s rigged against you? I don’t talk about things I do not do. You won’t hear me talk about praying because I don’t do that. I’d rather go look for a deal.” •
less tax I pay and the higher returns I make. I love real estate, but you have to educate yourself. If you’re not going to invest in education, you might as well stay in the stock market. One of the biggest lies we hear is you need money to make money,” Kiyosaki said. He further explained why he prefers to be an “inside investor.”
Click here to listen to Think Realty's podcast featuring Robert Kiyosaki, which aired in October 2019.
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MARKETS & TRENDS
Manhattan: At a Crossroads
MANHATTAN RENT GROWTH BY ASSET CLASS (Sequential 3 month, year-over-year)
SOURCE: YARDI MATRIX
A LOOK AT REAL ESTATE TRENDS IN THIS TRENDY METRO.
LIFESTYLE
RENTER-BY-NECESSITY
6.0%
by Yardi Matrix
T he new statewide rent regulations of summer 2019 shook investors and raised more questions about New York City’s proverbial housing crisis. Nonetheless, Manhattan’s multifamily sector is on an upswing. The borough’s year-over-year rent growth as of August sur- passed the U.S. figure for the first time in many years. Meanwhile, at 98.5 percent as of July, occupancy in stabilized assets remained flat over 12 months. New York City gained 111,500 jobs in the 12 months ending in June, with education and health services accounting for nearly two-thirds of this total. While em- ployment growth lagged national figures for the past two years, it marked a 1.5 percent expansion, just 20 basis points below the national growth rate. Although domestic migration is not favoring expen- sive gateway metros at this stage in the cycle, and in
4.0%
fact Manhattan gained just 75,000 residents between 2010 and 2017—a 4.8 percent uptick that was below the 5.3 percent U.S. figure—adding 2,600 people in 2017, it remains a prime destination for international migration. It is also the country’s preferred location, by far, for both domestic and cross-border capital, including real estate investment and development. RENT TRENDS With the metro area’s housing crisis deepening, Man- hattan’s median home value surpassed the $1 million mark last year, representing a 44 percent hike since 2009. Renting and owning are nearly equally unafford- able: In 2018, the average mortgage payment accounted for 58 percent of the area median income, while the
2.0%
0.0%
-2.0%
-4.0%
average rent equated to as much as 60 percent. Costs are on the rise in the borough, and there’s little re- lief in sight for the affordability crisis. According to Freddie
Mac research, Greater New York’s number of multifamily units considered affordable to very low-income households dropped by 5.6 percent between 2010 and 2017.
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Manhattan: At a Crossroads
And rent growth remains unabated for now, having rebounded from the negative figures recorded less than two years ago. The average Manhattan rate was up 3.5 percent year-over-year through August, 20 basis points above the U.S. figure, according to Yardi Matrix data. This is the first time in more than three years that the borough has outperformed the nation for rent growth. At $4,272 as of August, the average Manhattan rent was nearly three times the $1,472 U.S. figure and con- tinued to sport consistent premiums over neighboring Brooklyn ($2,940), Queens ($2,586) and Long Island ($2,165). Manhattan’s Lifestyle segment led growth, with rates up 4.4 percent year-over-year, to $4,706. Mean- while, working-class Renter-by-Necessity rates rose 1.1 percent, reaching $3,405. The list of submarkets driving growth included the Financial District (8.0 percent), Lincoln Square (7.2 percent), Hell’s Kitchen (6.6 percent) and Chelsea (4.8 percent). Meanwhile, rents were still dropping or were flat in submarkets such as Lennox Hill (-2.8 percent), Gramercy Park (-1.1 percent) and Flatiron (0.0 percent). Considering the relative balance between supply and demand, though, as well as the metro’s affordability is- sues and shock waves propagated by the new regulations, Yardi Matrix expects rent growth across New York City to moderate, returning below the U.S. average by year-end.
first eight months of 2019. This companies to 3,890 units that came online last year and accounted for 1.2 per- cent of the borough’s rental stock (which was less than half the average development-to-existing stock ratio for U.S. metros of 2.6 percent). Since the beginning of 2015, more than 16,500 apartments have come online in Man-
hattan, the majority of them in upscale communities. Overall, Yardi Matrix expects developers to add some 7,600 units to New York City’s stock in 2019. The Financial District (1,558 units) is leading devel- opment, followed by East Harlem (1,099 units), Harlem (990 units), Murray Hill (959 units) and Lincoln Square (949). The first three submarkets comprise nearly half of the borough’s total pipeline. While Lower Manhattan’s shift toward more residential projects is not exactly breaking news, Harlem’s recent resurgence is opening many new investment opportunities. The borough had almost 2,000 apartments underway north of Central Park as of September, many of them within or very close to designated Opportunity Zones in Harlem. In the context of decelerating development, occupan- cy in stabilized assets remained flat over 12 months, at 98.5 percent as of July, with the previous 12 months having recorded a 10-basis-point uptick.
DEVELOPMENT PIPELINE (as of August 2019)
SOURCE: YARDI MATRIX
PLANNED
PROSPECTIVE
UNDER CONSTRUCTION
MANHATTAN COMPLETIONS (as of August 2019)
SUPPLY Manhattan had 8,231 units underway in 44 projects as of August, with 1,394 units already completed in the
TRANSACTIONS Meanwhile, the multifamily transaction volume dropped across the city, partially due to investors’ pre- caution following the latest statewide rent regulations. Fifteen assets of 50 or more units traded in Manhattan this year through August, for a total of nearly $1.2 bil- lion. This comes on the heels of last year’s 34 transac- tions totaling $3.3 billion, a far cry from the $8.4 billion cycle peak recorded in 2015. With the market already sluggish in the first half of the year, the new statewide rent regulations caught many in the industry off guard, which in turn deepened the significant drop in transac- tion activity, as investors are reeling and recalibrating their strategies and balance sheets. The average per-unit price in Manhattan reached $909,635 in the year’s first eight months, nearly seven times the U.S. figure and marking a significant gain over 2018’s overall average of $641,542. Prices could soon drop as a result of the rent control laws, though. With investors taking a step back and valuations dropping, owners looking to sell are feeling increasing market pressure. •
SOURCE: YARDI MATRIX
MANHATTAN SALES VOLUME AND NUMBER OF PROPERTIES SOLD (as of August 2019)
6,000
SOURCE: YARDI MATRIX
VOLUME IN MILLIONS
NUMBER OF PROPERTIES
$10,000
100
4,000
$8,000
80
$6,000
60
2,000
$4,000
40
$2,000
20
0
$0
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
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RED FLAG WARNING At some point, something has to give with this policy. Negative interest rates are getting closer to a U.S. reality all the time, and that will likely signal the beginning of the end for this historic period of economic expansion. REAL ESTATE PREPPER TIP Prepare now to buy later. You’ve probably heard plenty of investors say they wish they had bought more when prices were low. Well, you can be “that guy” who literally buys it all if you prepare now. This does not mean you should liquidate your portfolio, but it does mean you need multiple strategies in place that will enable you to access investment capital so you can add to your portfolio and implement emergency tactics to keep your business secure and profitable when economic tightening occurs. One of the things that any good economist will tell you is that “geopolitical shocks” can derail the most accurate of predictions, however rosy or bleak they may be. Geopolitical shocks include things like ter- rorist attacks, widespread I.T. issues like an internet super-virus, and trade tensions. With so many different destabilizers in play, many of which directly affect our industry, it is unlikely that housing will escape the next economic downturn wholly unscathed. Watch the U.S. dollar closely. If it begins to lose value against other national currencies, the trend could trigger hyperinflation. It’s unlikely that this will happen overnight, but other countries could catalyze this type of decline in value by artificially manipulating their own currency values. China has already begun implementing this strategy to pressure the U.S. in the ongoing trade war. REAL ESTATE PREPPER TIP Diversify your portfolio now. You do not necessarily need to buy precious metals instead of turnkey rentals, but your real estate portfolio should have a combination of long- and short-term strategic options for generating capital and cashflow. Implement strategies that will enable you to adjust over the next year, so you are prepared for any economic development. NO. 2 GEOPOLITICAL UNCERTAINTY IS MORE OF A CERTAINTY THAN EVER. RED FLAG WARNING NO. 3 HOUSING AFFORDABILITY PROBLEMS ARE SPIRALING OUT OF CONTROL In June 2019, ATTOM Data Solutions reported that a median-priced home was too expensive for an average wage-earner in 74 percent of U.S. markets. The real estate market will not tolerate this state of affairs indefi-
nitely. Those markets will correct at some point, and the correction may well be particularly devastating in what is presently the $300,000-$600,000 price range because if interest rates rise back to a “normal” 5-7 percent, buyers for these homes will have to either begin earning significantly more money or simply hope and pray for rates to fall again. This red flag is already in effect. Housing markets that were previously considered “hot” are starting to post longer times-on-market and lower sales prices. Plenty of West Coast markets are starting to show signs of strain, particularly in the highest-priced portion of housing stock. As times lengthen and homeowners begin to feel the stress of waiting, we will likely see prices fall farther and faster, quite possibly sparking the fire sale that will signal the start of the next housing crash. REAL ESTATE PREPPER TIP Invest in recession-insulated areas that lag behind national trends. Shield your real estate business and your investment portfolio from the fallout by investing in assets located in parts of the country that have lagged behind in the recovery or that support recession-resistant businesses, like the life sciences, finance, tech, engineering, and certain types of manufacturing. Look for areas bolstered by a relatively low cost of living, since they will resist inflation longer. Focus on areas with diverse industries and populations. Place your capital in real estate assets that are less likely to experience vacancies, such as C-class proper- ties instead of high-end class A developments. Of course, you must be very cognizant of the future when you are investing with an economic shift in mind. After all, you are factoring in changes that are not yet reality. For example, it is possible that in 20 years, houses under $200,000 (as a median retail price) will be a permanent fixture in the past. That would be a big change! Investors who focus on value-add options will be well positioned even if there are major changes in the future. Look for areas where you can solve prob- lems by making wise investments. After all, wherever you find the greatest need for a solution, you find the greatest opportunity to add value! • RED FLAG WARNING SOLUTION-FOCUSED INVESTORS ARE SUCCESSFUL INVESTORS
MARKETS & TRENDS
Is a Crash Coming? THE TRUTH ABOUT THE ECONOMY THAT NO ONE WILL TELL YOU.
by Tom Olson
S ince 2016, I have been hearing from other real estate investors that an economic crash is coming. Every time I attend a mastermind or real estate conference, someone eventually says, “The crash is coming. This can’t go on.” And then…it goes on. Now, we’re in our fourth year of an economic expansion that “can’t go on,” and most investors are finally starting to embrace the idea that maybe it will. Unfortunately, this economic expansion is clearly winding down — and no one wants to believe it. I recently researched to find out how many economists in the real estate sector are predicting a market crash in the near future. The total? Zero. Some are covering their bases with predictions of a “possible downturn in the next 12 to 36 months,” but that window is both too wide and too vague. And the investors who were adamant the good times couldn’t last forever? Well, they’ve been wrong so many times now, they’ve very nearly given up. After all, no one likes to be the lone cloud in a room full of sunshine. I have experienced multiple economic downturns in
my career as a real estate investor, and I can tell you from experience: When no one thinks there is a crash coming, that is when the crash will happen. I don’t know exactly how long we have, but I do know the tipping point is getting closer. Here are just a few of the factors I believe are steering us on an increasingly unavoidable crash course with a signifi- cant economic downturn: NO. 1 WE ARE STUCK IN A SELF-PERPETUATING CYCLE OF MARKET MANIPULATION. The Federal Reserve’s job is, primarily, to control infla- tion while steering the U.S. economy clear of a recession. However, since 2008, the Fed has become increasingly immersed in the politics and policies that revolve around national consumer sentiment. For example, the latest Fed interest-rate cuts make no sense from a historical standpoint and, by all appearances, were mainly enacted to shore up investor confidence and keep stocks from tanking. Catering to the whims of Wall Street is not a sustainable, long-term plan for financial security.
Tom Olson is the founder and president of Good Success, Good Suc- cess Mastermind, and the annual Community Go-Giver event in Gary, Indiana. Read more from Tom about the economy, the real estate market, and small-business success strategies at GoodSuccess.com.
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to do what for the real estate transaction. For example, one person brings and negotiates the deal, another per- son brings money, and even a third person is overseeing a renovation project. Parties to a JV Agreement will be best served if all parties write their roles and responsi- bilities and percentages of profit for each partner. Also, protect the parties from disagreements about how money is spent and type of contractors to use. Be prepared to discuss shortcomings or financial pitfalls if the project goes south. For example, if you have a partner that likes to take shortcuts on rehabbing a property, and you don’t want to take shortcuts like failing to pull permits, then you are not on the same page to complete a project. Imagine your partner hires contractors for a job but doesn’t get written bids for work. You find yourself over- budget quickly. Prior to entering into a JV Agreement, each partner needs to discuss:
• What exact work will be performed on the property
• Who is going to make the decision on what vendor to hire
STRATEGY
• The cost of a project
You Want a Partner? WHAT YOU NEED TO KNOW ABOUT JOINT VENTURE AGREEMENTS.
experienced is the person you are loaning money to? Who will manage the project? Consider the financial “health” of other partners — have they had properties foreclosed on? Filed bankruptcy? Do they have referenc- es from other investors they have worked with? This is business, not personal; however, personalities are often overlooked. If you end up in a JV Agreement with someone who has a hard time talking about money and things go wrong, it will be hard to take out the personali- ties in a financial transaction. In the beginning all is rosy; it is when something happens (and it usually does) that problems arise. NO. 2 Are you in first lien position? If something happens and the project goes sideways, you could find yourself at the bottom of getting paid back, or not paid at all. If you are new to private money lending, always make sure you are in first lien position to cover yourself. NO. 3 What is the final outcome of the project? Is it a flip or a buy and hold, and what is the solution should the property not sell? How will the lender get their investment out of the property? NO. 4 Where is the property? Can you drive by it? How will you determine if this is a good deal for your invest- ment? How will you determine ARV, repair budget, and sales price?
• How to handle a disagreement on the quality of work performed
• Who will oversee that the work meets expectations
by Nancy Wallace-Laabs
• How to handle overages on budget and timeframe for work to be completed.
B eing a passive investor is a great way to gain experi- ence and knowledge in real estate investing. But before you drop that dollar, here are some things you need to know about partnering and investing in real estate. A Joint Venture (JV) agreement is a contract between two or more parties that clearly outlines the specifics of a real estate transaction. The complexity of the JV agreement can be simple or quite complex depending on the number of partners involved, the type of transac- tion, and knowledge of each person. When in doubt, you should always have your attorney review the JV Agree- ment to make sure your investment is protected. A JV Agreement should include the following ele- ments:
• How profit and losses will be shared
Partnering in a real estate transaction is a great way to scale your business. Partnering offers you more time for more deals, more money for deals, and more exper- tise on deals. However, use caution when entering into a JV Agreement as it is a binding contract. When things go wrong, which can quickly happen, that is not the time to find out your JV Agreement is not written in a way to protect the project, your time, or your money. • NancyWallace-Laabs is a licensed real estate broker in Texas. She has more than 15 years of real estate investing experience, owns several rental properties, and manages properties in the North DFWarea. Her bookWinning Deals in Heels hit Number One on Amazon's Best Seller List for Real Estate Sales & Selling. Nancy and her husband own KBN Homes, LLC, a real estate investment company that's making neighborhoods great again, one home at a time. By actively seeking homes that are difficult to sell, and compassionately representing owners in distress, KBN Homes offers hope, relief, and options to sellers while also creating opportunities for investors. Learn more at kbnhomes.com, or connect with Nancy at nancy@kbnhomes.com, or 214.862.8215.
• Worse case scenarios covered — If a member dies or gets divorced, who would take over their role in the JV agreement? • Signatures of all parties — If you do have to enforce the terms of the agreement and you don’t have a signed “contract,” it will be a cumbersome process if you end up in court. But JV agreements are more that just the legalities of the agreement itself. Most new investors get excited about just getting a deal and think partnering is a perfect way to “scale” their business, but they fail to do some investigative steps prior to entering into a JV Agreement. Let’s talk beyond vetting the deal and doing your due diligence. What about vetting your potential partner? Some key questions you should ask:
• Purpose of agreement and parties involved
• Term of agreement — A start and end date with the term for the specific project. I would not recommend a JV agreement that goes longer than 12 months.
NO. 1 Do you personally know this person, and have you seen their prior projects (flips, rehabs, etc.)? How
Be sure to have a negotiated strategy for who is going
• Roles of the members of the JV Agreement
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