(upbeat music) – Hey guys, welcome to AdvancedLessons in Millennial Money featuring Robert Kiyosaki. I’m Alexandra Gonzalez. In this episode, I got a chance to speak with Robert Kiyosakiand his real estate expert and Rich Dad advisor, Ken McElroy. For over two decades, Ken McElroy has experienced massive successin the real estate world from investment analysisand property management to acquisitions and property development. With over 750 investmentdollars in real estate, Ken offers a unique perspective in how to get the biggestreturn on your investment. One of the topics Robert talks about is using debt to get rich. We get a lot of questionsabout how that actually works.Let’s listen to how Kenand Robert pull this off. – So, Kenny, you wanna say anything about the beauties of debtand how you learn to use debt to get rich? – Sure, sure, well Ithink 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 youcan use it to buy assets. So, it’s a big difference,doing good debt and bad debt, but essentially, all itis, it’s a form of money from somebody to buy something in a loan or a mortgage orwhatever you wanna call it.So, it’s just money. And so, being able touse 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 importantthing 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 haveto save for everything that we always did, it was always how much money can we saveand 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 bankand ask to borrow money, your bank is going toconsider how much debt you can have based on netoperating 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 knowwhere you are financially, so a banker’s gonna look atyour income after expenses so that’s a great way to see it. – It’s really quite simple.So let’s say, I’ll keepthe 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 backany debt you might want. – [Robert] Right, this iswhere this comes in, right? – Correct. So, they’re gonna lookhere 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 youa loan for the whole amount because they don’t wantyou to be that tight, so what they’re gonna do isthey’re gonna look at the NOI and say, how much can we loan you? – Now that we’ve learnedabout 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 havea 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, likethe 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 thefinancial education comes in and you say, well this iswhat 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 zeroand 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’regetting a little technical, but typically, the caprate or capitalization rate divided into the NOI determines the price. So that’s generally how that works. But in the case thatwe were talking about, the value of the buildingwith no tenant in it – Is way low.- Is way low. And there’s really no income. So it’s basicallywhatever the structure is.So I’ve seen lots of situationswhere a vacant building, somebody might’ve spentfive, ten million dollars on a building that’s completely vacant, vacant warehouses,vacant whatevers, right? Sometimes you see ’em getconverted into clubs or whatever. Well, there’s value there. Somebody spent a lot ofmoney 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’treally matter who’s in it. Well it does because youwant them to pay you, but now you’re creating the income. And that’s how you create value. So in that example, let’ssay 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 isyou 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 thatcreates 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 particularcase, 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 aloan and you pay Robert back. – Every investor should be looking at ways to increase income and reduce expenses. But have you ever wonderedhow that’s possible? Ken gives us a secret. – So the thing that Kennyis always looking for is after we stabilize the building, he’ll tell me, he sayslook, in five years, I’m gonna get this from onethousand 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’regonna 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 buildingin a town up in Idaho where I have a vacation housefor about a million bucks and it was sitting, itwas an old Elks building, beautiful building downtown.But it had been vacant for a long time. He bought it and he putlike 30 offices in there, small offices, you know1500 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 onebig vacant building, he turned it into a prettycool workspace for everybody. – Kenny, in his third book,Advanced Guide to Real Estate, his job is to get thisup, keep this stable, then he goes back to the banker and says, look, we’ve got all thesetenants, money’s going up.And so now we want 12 thousand dollars because he’s improvedincome, kept expenses low, building’s more valuable. – Yeah, the key there is the bank’s always looking at your NOI topay back their loan. So the more you can grow that,the more loan you can get. – And so, essentially, therenters are paying your debt. – Of course. Essentially, so if thatbuilding 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 opportunitieslike this everywhere. – Once you’ve bought all these apartments, someone has to manage it for you.Unless you wanna run theapartment building yourself, you’re going to need agood property manager. Here’s the importance of agood property management. And I know that anotherthing that you always mention in all your books and theABCs of Real Estate Investing is that property managementis very important. Poor property managementequals poor profits, right? And so, I wanted you to kind of explain the importance of the property management. – Well, essentially allproperty management is is taking care of theproperty in every way, so taking care of the people that might be inside of this building, you know, for various things thatcome up from day to day, collecting the rent andpaying 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 gettingrented 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 aproperty management company that we have about 300 employees, all we do is focus onthis, these two things. How do we keep our expenseslow and keep our income high? Because we’re alwaystrying 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 thingsas 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 washingmachines in the building, this went up. – Yeah, so in my apartment houses, we would buy apartment houses that had washer and dryerhook-ups but no machines. And so the people would walk down to the laundromat or whatever, and it was a bit of aninconvenience for the people and all that. So, I said, well let’sjust 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 boughtthree or four thousand sets of washers and dryersfor 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 gospend 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 whatI call a one-year payback. – So what Kenny does, heborrows 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, therewas another incentive, which not only increasedthe property’s value, but also the renter’spaying for it essentially.- [Robert] And the banker is happy. – My last question was pulled straight from the YouTube commentsthat you guys left. I asked Robert how wouldyou respond to critics who say real estate isa 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 entitledto 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 notbanking 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, thisis financial education. This is smart, this is having your banker be your partner. – Yeah, and these arelong-term assets, by the way. This is business, this islike 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 freeis 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 bankgives him three million. I get my million dollarsback 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 youcan invest a million dollars and get it back tax free and still have lots of cash flow– – [Robert] And still havethe 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. If you like this video,give it a thumbs up, subscribe to our channeland 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 pulledstraight from the comments (laughing) I’m sorry..