Rich Dad, Poor Dad Bad Math?
March 22, 2009 by Tisa Silver
Filed under Finance
I may be the only person who has never finished Rich Dad, Poor Dad. Not too far in I thought I got the point so I stopped reading. That is a bad habit of mine!
I have heard rave reviews and harsh criticisms, but since I have never actually read (or started to read) any of Robert Kiyosaki’s other books, I have no means to evaluate his teachings.
Photo by gawd, courtesy of flickr
Benjamin B. Taylor, President of Brick Financial, commented on one of my posts not too long ago. I decided to visit his blog, The Third Pig, and came across a post entitled “Dear Robert Kiyosaki.”
In the letter, Mr. Taylor questions some absurd figures used in “Who Took My Money?: Why Slow Investors Lose and Fast Money Wins,” another book authored by Kiyosaki with help from Sharon L. Lechter.
It has been quite some time since Mr. Taylor wrote his letter in 2005, but the offense appeared so outrageous that I had to write about it.
He used his “trusty” Hewlett Packard calculator, I used my trusty Texas Instruments TI-BA II+ and neither one of us came up with Mr. Kiyosaki’s answers.
Here is the example that Mr. Taylor pulled from the book:
Suppose you have $20,000 to invest. The following are three choices that you have.
Choice 1: Invest $20,000 in a mutual fund that earns 5 percent a year. After seven years: your $20,000 should have grown to $28,152 assuming no fluctuations.
Choice 2: Invest $20,000 and borrow $180,000 for the bank for a $200,000 rental property and let your equity compound. Assume rental income only breaks even with expenses and the property appreciates at a rate of 5 percent a year. After seven years: the property will be worth $281,000 and your equity is now $101,420, assuming no market fluctuations.
Choice 3: Invest $20,000 and borrow $180,000 from the bank for a $200,000 rental property. Rather than letting the equity compound, you borrow out the appreciation every two years and invest it in a new property at 10 percent down. After seven years: the total of your properties will be worth $2,022,218 and your net equity is $273,198, assuming not market fluctuations.
Summary of a $20,000 investment:
|
|
Net Equity |
Average Annual Return of $20,000 Investment |
|
Choice 1 |
$28,142 |
5.8% |
|
Choice 2 |
$101,420 |
58.2% |
|
Choice 3 |
$273,198 |
180.9% |
Choices 1 and 2 are examples of people who park their money and choice 3 is an example of people that increase the velocity of their money.
Mr. Taylor’s letter asked Mr. Kiyosaki one simple question: How in the world are you coming up with these figures?
I would like to know the same thing. Anyone can throw a bunch of seemingly impressive numbers at you, but not as many people can provide an equally impressive and accurate explanation of where those numbers came from.
Has anyone else tested Rich Dad’s math? Let me know what you came up with!
The real estate example would be generating a negative return at this point if it had been initiated in the last few years.
The strategy is ludicrous in any case.
Thanks for the comment Paul. You are right, the market for real estate has soured in recent years. Even if it hadn’t, this strategy ignores many variables and gives people the impression that it would be easy to implement.
Kiyosaki is a master marketer, but probably not a master investor. I doubt his real estate holdings in the Phoenix area are doing very well now without the cash flow from his books and seminars. If I recall correctly his holdings are in his wife’s name to make them harder to track down. I seriously question his high leverage strategies. They seem to be build around the assumption that housing prices always go up. That may be true in the very long term but most people don’t have the cash flow to support a major market downturn.
Thanks for the comment Jim. I have read some posts in forums for people who have read the books and attended seminars. The most common complaint is that they leave feeling motivated, but with no idea how to channel the motivation because no tools or steps for investing are provided. Like you said: master marketer and probably not a master investor.
It’s amazing how people are not aware of what this man is doing. I know many real estate investors who have praised his books but are struggling in today’s market. He is taking advantage of people and playing on their desire to succeed. He has created a sub-culture based on this false sense of security with inaccurate calculations but people still buy his book! I don’t get it…
Just to answer your question about the math. The interest is compounded yearly. That is how it works in the financial markets, just calculate your mortgage interest sometimes, it is calculated annually, on all money owed. If you think about the rise of real estate in the boom, those numbers are not impossible. I personally bought a condo for $37k and sold it 5 years later for $172K, and that was not even in California, where some properties jumped 100% annually for about 3 years. Do the math, you will see wonderful numbers. Today, same condo selling for $100K, so you see the market has highs & lows, but the interest is compounding.
Tisa Silver, my guess is that you never read to the end of any financial books. Your probably to ignorant to listen to anyone’s opinions except your own.
My other guess is your probably an out of touch baby boomer who’s financial time has come and gone, & the market has moved on without you even being aware.
Because of ignorant boomers like yourself (that’s my guess :). Young internet entrepreneur of our generation are becoming Billionaire in 2 years.
When you middle class guys are going broke & it took you & your financial uneducated generation 30 years to reach 1 lousy billion.
Baby boomers are preaching out dated rules, when the game changed on them 10 years ago. haha
To Mr/Ms. Old Mindset New Rules,
I too wish you luck in your financial endeavors.
But please- before submitting your comments, please make sure that you sound intellectual and are mindful of your grammar.
Hi Ken, thanks for your comment. Congrats on your success in real estate! Both myself and Mr. Taylor used compound interest when reviewing the calculations. I don’t doubt the merits of investing in real estate (and I don’t think Mr. Taylor does either), we just need some clarification on what assumptions and inputs Mr. Kiyosaki used to generate his returns. For me, any potential investment needs to provide details on the expected return and the risk(s) that will be assumed in order to generate the return, especially an investment that offers a return of 180% per year.
Thanks for taking the time to read my blog and sharing your opinion, however I must say your guesses are incorrect.
I am not a baby boomer, and I do not consider them to be ignorant or out of touch. I also think it wise to avoid such broad generalizations.
I wish success to investors and entrepreneurs of all ages.
If it took me 30 years to get a billion dollars I would be ok with that as long as I didn’t lose everything I had worked so hard for trying to do it the fast (2 year) way.