Call it a recession, call it a little bump in the economy, you can call it anything that you like as long as you are taking advantage of the great investment opportunities going on right now. While many folks have befallen hard times as the dollar, economy, and job market slides off America’s cracker, others have taken advantage of these times to create even greater wealth than would be possible in a good economy.
Robert: “Let’s put it this way. Let’s say a T-Bone steak is selling at $10 a pound and the meat department announces that they are having a sale on steak for $1 a pound. What would steak lovers do? They would rush in the store to buy, right? The place would be jammed. But when the stock market or real estate market has a sale, they run away (laughs). The stock market today is down 200 points—it’s on sale! Now can it go lower, that is the real question.”
Eric J: What is one of the biggest questions you are being asked about the recession?
Robert: The big question is… what am I doing? And my answer is nothing has changed. Fundamentals are fundamentals. I don’t subscribe to what I call the standard financial planning dogma which is get a job, work hard, save money, get out of debt, invest in a 401K and diversify in mutual funds. I don’t do any of that.
First of all I am a cash flow guy. I don’t care about the price of real estate or stock going up or down. All I want to know is how much is my cash flow. In other words, when will my cash start to flow and when do I get my money back. I am not a specular. They go for capital gains. They want the price of the stock to go up. I don’t really care. I just want to know my dividend. If I don’t get an 8 percent dividend off my stocks, I don’t buy it. If the price goes up or down, I don’t really care.
For instance we just saw a deal in Austin, Texas that we would have had to of put in X-amount of dollars and get zero return. I said well, why would I put my money in that. The answer was, we can sell it in 5 years for more money. Well, that’s gambling, speculation, capital gains—that is not what I do. I have a very simple, simple philosophy. If it doesn’t produce immediate income (cash flow), then I won’t buy it.
I don’t save money because the US dollar is toxic and is dropping at a high rate of speed. Instead of save money, I hedge my positions by buying gold and silver. The price of silver and gold always goes up when the dollar goes down. The next primary thing I am investing in is real estate.
The reason I love real estate is because I can use my bankers money or debt. I have property for capital appreciation, I don’t buy it for the price going up. My only question is how much cash flow and what is my ROI (Return On Investment). If I put in a million dollars I want to know that I will get at least a 20 percent return every year on my money. If there is no cash flow in it for me I won’t buy.
I am also investing in oil. I hate to tell you this, but as I stand at the gas pump and feel the same fury as most people do when pumping 50 or 60 dollars into the gas tank—but every time oil prices go up, oil hit $133 today, I celebrate. My last oil deal my base number was $60 a barrel. So that means I am making $73 every time a barrel is sold.
EJ: What do you think our readers attitudes should be towards the recession?
Kim: There are a lot of people who are scared and rightfully so. I think the number one piece of advice I can offer is you can’t keep doing the same thing, you’ve got to start looking for new answers. Because a lot of my friends right now, all they are seeing is opportunity. People without any financial education are seeing fear, stress, foreclosures, and job loss.
One example I read about, there were these two women who were real estate agents in Florida. They were nervous because the Miami area was really in bad shape. So, they rented a limo and they do these limo tours, taking people to the foreclosed properties. They just flipped their situation looking for the opportunity.
I think the main thing in your mind set is if something isn’t working, then you’ve got to start looking for new answers. It takes time, but it is yours and your families financial well being and you’ve got to get out there and get yourself educated and find new ways to do things. There are going to be a lot of opportunity coming up, but if you don’t look, you are going to miss them.
EJ: Do you have any examples of opportunities at the current moment?
Kim: Besides silver, gold, real estate, and Roberts oil (laughs), I see huge opportunity in small business. I think one of the best financial security opportunities you can do is start your own business, even if it is only a part time business. It will give you a much greater financial security than getting a job these days with what’s happening in the employment market.
EJ: How do you know where to look for the best investment deals?
Robert: The number one thing is you must know the difference between capital gains and cash flow. When somebody says to you that in five years the price will be up, you are fundamentally capital gains. My response to that is will you guarantee that. I guarantee that a bond will say that they will give you 5 percent. That’s too low for me. Are you a capital gains investor, which is betting on the future, or are you a cash flow investor, which is today?
The best statement of all is when somebody says well on average the stock market goes up 8 percent per year, you just ask that person will they guarantee that. If they say no, then you know that it is capital gains. When I buy an apartment house I have to know what my total expenses are including mortgage payment and what the renter will pay. So If a renter will pay $1,000 a month and my expenses are $500 a month, I’ll take that deal all day long.
It is no different when I bought my oil field. I got to know my expenses and my income and that is my margins. It is just fundamental common sense. Would I buy oil today? Not at $133 a barrel, no way. I was just fortunate to get in when my base cost was at $60. Even at $60 most people were saying that I didn’t know what I was talking about, but I knew in the long term the trend would continue to increase. It was already at $85 when I bought it at $60, so I already had a $25 dollar margin in there.
EJ: What are the particular advantages of investing now during a “recession”?
Robert: I cannot think of a better time for investing that right now. You always want to buy low and sell high right? The average person buys high and sells low (laughs), and they do this because they are buying for capital gains. The real estate market is in trouble right now because the general market doesn’t want to touch it because they come in late when they think that prices are going up.
A professional investor is in the market when the prices are going down. It makes cash flow more realistic. Your cash flow is dependent on the price that you buy it. So right now is a great time to be in stocks, specifically silver, because I think it is under priced. I also think real estate is fantastic right now because it is going to keep going down.
This is really the time to get rich and I am very serious about that. I am buying stocks, while people are saying, but the prices have dropped. I say yeah, but the dividend is the same. I’ll pay an 8 to 10 percent dividend because when the stocks drop, technically the dividend goes up. It is just fundamentals of investing. The lower it goes, the more I buy of it.
EJ: Where does the typical person go wrong when it comes to making money?
Robert: If you look at it, schools tell you that you should go to school, get a job, work hard, then get a higher paycheck. The problem with that is the higher your paycheck the more tax you pay. In my business I pay less tax the more money I make, so why would I want a high paying job.
EJ: What can parents do to teach their children about proper money management?
Kim: Robert and I do not have children by choice. I have a big kid named Robert (laughs). I don’t know why we don’t teach kids about money in school, that just floors me. I do talk to a lot of parents and what is fun is as the parents are learning, they include their kids in the process. For example, when I mentioned the silver dollars, my girlfriend decided to go to the bank with her kids and open savings accounts.
After two months she realized the amounts they were putting in were going down because the bank fees were greater that the interest they were earning. So she went in and closed down the accounts and bought lots of silver coins. Every night before they go to bed they go online and look at where the price of silver is and they have discussions about it, so they are learning about silver and gold commodities.
I have another friend who likes properties and goes around on the weekends with their kids and play a game where they look at houses and fliers and decide how much they think each house is worth. Then they get their ice cream cone at the end of the day. I think that kids are really fascinated by money and they want to learn, but it is up to the parents to be the teachers.
EJ: How can adults become better educated about investing their money?
Robert: There are three types of people. One is the person who does nothing, which is masses of Americans. They have nothing. I have friends who have zero set aside for retirement. I think they think Barack or McKeen is going to take care of them and I doubt that. This is approximately 60 percent of the population who think that the government is going to take care of them. The second person, who encompass 30 percent of the population, turn their money over to mutual funds or money managers. That is not what I do either because you don’t learn anything.
The third group (the last 10 percent) are proactive and very entrepreneurial. They are their own investor. What all of these financial planners tell you to do is when you turn 25 with your first job, is to start turning your money over to them. That may be a great strategy for somebody who really doesn’t want to know anything about money, but I want top make my own decisions. I play the tax laws, I have accountants, attorneys, and the best real estate, business, and stock brokers. I am a professional investor.
The good news is that it doesn’t take long to become an investor on your own, maybe a couple years and you’ll be in the swing of it. This is a good time to get started right now in a bad economy. All the amateurs are gone today. The amateurs are finished, they are all wiped out. The big mutual funds are still in business, but I don’t play that game either.
When a mutual fund moves money, they can’t move it because they effect the market. Where if it was me and I move my money, nobody even notices. I might trade mine away over to Buffet, the Berkshire Hathaway Fund (laughs). But Buffet, he can’t move money. He has to be so secretive about his moves. I am just the little guy around the place and I like my little guy position because I’ve got deals that are just really nice, controllable, and manageable.
EJ: What are the top three things every person should do to achieve financial freedom?
Robert: I think they have to decide who is responsible for them. One is the government, which is who Mom and Dad thought was going to take care of them. Two, is to turn your money over to professional management, and three is to turn professional. Bogle says the mutual fund guy puts of 100 percent of the capital, takes 100 percent of the risk, but only gets 20 percent of the return. There is a problem there. I am not against mutual funds, but I’d rather make the 80 percent.
EJ: How can you minimize the risk of investment?
Robert: I always quote Buffet on that one. He says that risk comes from not knowing what you’re doing. He also says that Wall Street in the only place that people drive to in their Rolls Royce, so don’t take advice from people who take the subway. Diversification is for people who do not know what they are doing. If you turn pro, you cannot follow the rules of amateurs. Everything is risky to someone who does not know what they are doing. The other thing I have found is that while people say the higher your return the higher your risk. That is absolutely not true. It is the higher your return the lower the risk (laughs).
EJ: With the dwindling power of the dollar, where would you tell a friend or family member to invest their money?
Robert: When Kim and I had no money, we had a big piggy bank that we saved our US coins in it. When the piggy bank was full we would go and buy gold and silver coins. Today we have a ton of gold and silver coins. In 1971 when Nixon took us off the gold standard, cash became trash. That is why I don’t hold the US dollar. The reason I knew not to hold it, is that I am a history buff. Ever since the days of the Romans, Greeks, German’s, French, English, Japaneses, and Chinese, every time the government has debased money, in other words turned money into funny money, financial volatility has always come into the marketplace. This has happened throughout history and it is happening today. Oil is not going up, the dollar is going down. The US government says that there is no inflation because they pull out energy and food, so they lie to us.
Kim: I am very passionate about educating women about investing. Men or Women, number one we love silver because it is used in so many things, like cell phones, computers, microwaves, light bulbs, it is used in everything. With China, India, and all the developing countries coming up there is going to be a huge demand for silver. I think that is a very good investment for today as the dollar goes down. What I tell people is that if they are going to be saving money in a bank, you are going to be losing money most every day, so instead go out and buy one ounce silver coins. Especially if you are just starting in investing. For a very little amount of money you can gain this commodity that will be a great way to get educated by putting some of your own money on the line. You can go online and watch the price of silver climb up, down, read what is causing the difference, and just because you put a little money down, your education goes up.
My second favorite investment will probably always be real estate. I like now with the sub prime and prices coming down, now is really the time to start looking. I think prices are going to keep coming down for several years. I think it is a good time to start learning about real estate, or if you know about it, to start looking for those deals. As Robert said, we are all about cash flow, so when the market comes down and the pricing doesn’t effect us we are all about risk. I look at income producing properties that will give me positive cash flow every month. With the prices coming down, that is more and more doable than say two years ago when the prices were so high.
EJ: What economic indicators do you use to decide on buying real estate?
Kim: Something that is interesting that is happening with the sub prime is so many speculators bought these homes expecting the price to go up and were going to flip these homes. Well, that didn’t happen because the prices came down, so a lot of people are sitting on these homes that they cannot sell. They owe more than the house is worth.
Two things are happening. One, people are moving out of their houses because they are being foreclosed on. Two, they are walking away from their home and moving to rental properties. We are doing very well in the apartment industry because of this. There has been a quick twist to this story, which is all of these properties that people cannot sell, they are now renting out very inexpensively.
An indicator of success in terms of rental properties is where jobs are located. Where are people moving to find them and how much more can you build within those cities? For example, we like Portland Oregon because it has what we call a girdle, which means they can only build so much more.
EJ: What is your advice on the best way to go about paying down debt right now?
Robert: When somebody says get out of debt, I say that there is good debt and bad debt. I don’t have any bad debt. My cars are paid off, my house is almost paid off, so most all my debt goes into income producing real estate.
Kim: Robert and I at one point were overwhelmed in debt. Part of it was because we had begun to build a business and it took a lot longer than we thought, so we had a lot of credit card debt, so I understand people who are struggling right now. What the traditional financial advisors tell you about getting out of debt is not what we did. Example, they say to pay off the credit card with the highest interest. That is not what we did. Instead, the very first debt we paid off was the one that we could payoff the quickest. The reason was, that we wanted some success.
The other thing they tell you is to pay a little bit more on all of your credit cards. It never got me anywhere. We select one debt and focus on getting rid of it while paying the minimum on everything else. Once we get rid of that one debt, then we move onto the next one. There is one important rule I would add to these. If you have a lot f credit card debt, anything that you put on your credit card on the current month, you pay off by the end of the month. If you accumulate more debt that will kill you. If you are in a lot of debt, chances are you have some bad financial habits. In many cases they key is to get your personal habits in line and under control.
One last thing that we did when we had a lot more money going out than coming in, we hired a bookkeeper. People would ask why we hired a bookkeeper even though we didn’t have any money. The reason we did it is because I had to sit down with this bookkeeper twice a month and stare at those numbers and face the truth of how much we had coming in and how much we had going out. The people who are willing to tell themselves the truth of where they are financially, it is so easy to lie to yourself, can then figure out the plan of how to get out of the debt and decide where they want to go.
EJ: Would you recommend paying off your mortgage more quickly or using extra money for investing during the current market?
Kim: It depends on how much financial education you have. For us personally, we have a mortgage, our strategy is not to pay off our mortgage quickly. We want to use that money and leverage it in investments. You can make more money that way. Somebody that is not educated or does not want to get financially educated, their best strategy may be to pay off their house. They may sleep better at night. The mortgage on our house costs us money every month, that’s bad debt. Credit cards, bad debt. School loans, bad debt. Car loan, bad debt. But mortgages on our rental properties that every month make us money, that’s good debt. We like debt, but it has to be good debt!
Before you turn to the next page, think about what you are currently doing to take advantage of the great opportunities around you. If that thought makes you uneasy, chances are you aren’t doing enough and it is time to ask yourself this question. If the Kiyosaki’s are right and the middle class is heading to extinction. Do you want to be on top of the food chain when this economic downturn spins around, or in the ant hills with the rest of the amateur investors?
(Originally Featured in Growing Wealth Magazine)