It’s hard to argue with the success that Robert T. Kiyoski has had with his Rich Dad series. Head over to Amazon.com and you’ll see almost fifty items on offer; Rich Dad in English, Rich Dad in Spanish, Rich Dad for women and kids. Even Rich Dad in Chinese. My personal favorite is the DVD Rich Dad’s 60 Minutes to Getting Rich. Ok, it’s a bit pricy at $79.99…but that’s a small price to pay for a DVD that will make you rich in 60 minutes, right?

Kiyosaki has developed an almost religious following (how else could one sell a Monopoly-like boardgame for $149.99) so the conventional wisdom is that I won’t win a lot of friends by criticizing his approach in a public forum like this one. But… dissenters are starting to pop up – interestingly John T. Reed’s blistering critique shows up at the top of a Google search for both “Kiyosaki” and “Rich Dad”.

Kiyosaki has become wildly wealthy selling his books and tapes and he couldn’t have done this without making an emotional connection with a lot of people. However, whether or not Kiyosaki is an investor that one would want to emulate is subject to debate; Rich Dad is full of questionable, vague advice and it’s tough to verify that he had any real success in his pre Rich Dad career.

The problem that I have with the Rich Dad is that the philosophy that he’s selling is not what the majority of readers really need. Analogies abound. Take a look at weight loss: Slim-fast, Hoodia and Anatrim all offer seductive sales pitches to overweight customers and rake in the big bucks doing so, but what these customers really need is a change in lifestyle, not a pill.

But lifestyle change is hard - doesn’t matter if you’re talking about getting a bit more exercise, or starting to save and invest with discipline – and advocating hard solutions doesn’t sell books. So better to offer up some folksy stories, a few vague truisms, and a heaping helping of motivational prose. There is a silver lining of wisdom that runs through Rich Dad, but the sales pitch is to glamorize a lifestyle of wealth and ease, and to do this Kiyosaki repeatedly emphasizes the material trappings of wealth. If the book motivates a few people to get off the sofa and take charge of their financial future then good for him, but the real message his is a compelling vision of a unlimited wealth just around the corner. You can glimpse it in the hazy distance when you read Rich Dad, but the implicit promise is that you’ll be able to pull it a bit closer with every Rich Dad product you buy. And, voila, before you know it you end up purchasing the $79.99 DVD and the $149.99 boardgame.

There’s not much substantive advice on investing offered in Rich Dad. His main theme is that you get rich by buying assets. Period. Most investors (and some speculators) realize that this isn’t true. You don’t get rich by buying assets, you get rich by buying the right assets. And buying the right assets is something that involves skill, discipline and knowledge. Education helps. So does a bit of luck and a lot of hard work.

Education and hard work are two elements that Kiyosaki specifically downplays. Working hard is for suckers in the Rich Dad world, and education is for dreamers who want to waste their time working for the man. That, in my view, is the greatest danger that Rich Dad holds for most readers. A solid college education, hands down, is the best investment that any young person can make. No other investment offers the return that can beat investing in a college education.

But that’s not a viewpoint that sells books. Kiyosaki’s target audience is made up primarily of folks who covet the lifestyle of the rich and famous, and he doesn’t want them to think that a lack of a formal education is an obstacle. His “education is a waste of time” pitch is designed to sell books.

Can you get ahead without an education?  Sure you can.  But arguing that an education is a waste of time is wrongheaded. 

In reality, real estate investing isn’t fluff. And it’s not rocket science or mysterious. It’s a practical, hands-on form of investing and a proven way to diversify your returns and build wealth. It’s not particularly sexy to talk about discipline, managing risk, building credit, evaluating properties, managing tenants and negotiating with contractors – but that’s what real estate investing is all about.

They say that imitation is the sincerest form of flattery and there are Kiyosaki imitators all over the net – but scattered here and there you’ll find a few solid resources that will help point you towards the practices and skills you need to be a long-term successful investor.

Here are a few that I like:

• CRE Online Forum The forum is great, but careful about the courses
• Landlord Success Blog  Tales from the trenches.  Hands-on, informative, and sometimes entertaining
• The Mortgage Professor  Wharton Professor Jack Guttentag's take on the mortgage market
• John T. Reed's Guru Guide  Probably not the most objective piece of journalism you'll ever read, but this will keep you wary of some of the courses on offer out there.  

Unrelated sidenote:  I was profiled yesterday by OneBlogADay.com, a great site for discovering new destinations on the web - and I'd say that even if they hadn't profiled me.  Go check 'em out.  

Update, 10 August:  There's an interesting thread over at the Consumerism Commentary blog. 

Not long ago I wrote a post on Real Estate Speculating vs. Real Estate Investing. My main point was that  speculating and investing are two different activities which require two different skill sets and risk appetites. Either might be right for you, but the danger comes when you think you’re doing one but you’re actually doing the other.

At least that’s the point I wanted to make. But it would appear from some comments that my post was interpreted as bashing speculators. That’s not my view.  Sometimes you gotta roll the dice. 

So today as we stand in the shadow of Enron and the collapse of the dot.coms and foreclosures pop up all around us like mushrooms who in his right mind would try and defend the defamed speculator?  Well...I would.  Risk and reward are correlated in efficient markets, so there's nothing wrong with taking a risky position if you know what you're getting into.  So..here are four points that I like to keep in mind when it comes to speculation:

• Buy what you know: Ever had someone tell you “my brother’s roommate says that nanotechnology is the next big thing…and here’s a penny stock in the sector that’s about to go through the roof!”   That's bad advice, probably. Take your money and go to Vegas instead – at least you’ll have some fun in the process. However, taking a speculative view in a market that you know intimately is a different proposition. Example: I recently bought a fourplex that had yielded a decent return, but the real reason I bought it is that I’m bullish on the neighborhood, and I expect that the city might announce a light rail station a block away. This was a speculative view, but it’s a risk-reward that I’m happy to shoulder.  I know the market.  I know the risks.  And I accept the trade-off.
• Be ready to lose: Speculators win big and lose big. Gambling your retirement on a speculative position is silly. Having some speculative purchases in your portfolio is a good diversification strategy, in my book, but don’t bet more than you’re willing to lose. USA Today wrote a goofy article recently about real estate investors which was really about speculators. It was full of misinformation, but it did highlight the fact that people sometime do foolish things when it comes to real estate.
• Flippers are speculators, not investors:  Well, most of them are. If you have mastered techniques that allow you to consistently buy at 20% below market value then you have a strategy that’s fit for all seasons. But by now most of us have noticed that the flippers come out of the woodwork during a bull market and they disappear back to their day jobs once the markets correct and cool. Why is that? It’s because flipping in inherently a speculative activity. Here’s a news flash: it’s not the tile that you put in the foyer or the paint job that added $50 thousand to the price of that house you just bought and flipped; it was the rising market. In a falling market you can’t make money making cosmetic improvements to an ugly house.
• Buying in an overheated market? You’re a speculator:  Here’s a test – do you need a double digit rate of appreciation to get a decent rate of return on a property? If you’re buying right now in most areas of California, Florida, and a lot of other hot markets then that’s going to be the case. If you’re investing in a property that doesn’t immediately yield positive cashflow then you’re betting on a rising market. Again – that might be okay – as long as you realize that’s what you’re doing.

So here’s to the real estate speculators - at least to the prudent speculators who don’t get in over their heads and don’t bet more than they’re willing to lose. But with investors suing to back out of underwater deals and states like Massachusetts taking measures to protect overleveraged investors from foreclosure  it would appear that prudent speculators are outnumbered by the get-rich-quick guys who get themselves in trouble.

But that’s okay…a rash of foreclosures just means more distressed below-market properties for smart investors to scoop up.

Three academics from Northwestern University have just published a study comparing for-sale-by-owner sellers with sellers who used a Realtor. The researchers started with the hypothesis that a good Realtor might make up some of the commission that he or she is paid by helping the seller to get a better outcome – either in terms of higher price or a quicker sale.

They tested this by evaluating sales in Madison Wisconsin from 1998 to 2004. The dominance of a single local FSBO website makes Madison an ideal location to compare results – working with the local MLS and www.fsbomadison.com the authors of the study were able to access nearly every sale that occurred during the period.

The results are surprising: the average sale price of FSBO homes is higher than the average price of homes sold by a Realtor.

This directly contradicts a claim made by the National Association of Realtors that using a Realtor results in a 16 percent increase in average sales price. The NAR does not detail their methodology or the assumptions that they used to reach this number.

The Northwestern University study, however, is meticulous and transparent. The authors discuss the consistency of their data sets, study methodology, and their approach to resolving biases in the data sets.

But…the gig isn’t up for Realtors…yet.

1. The study was conducted in a relatively special place – Madison, Wisconsin – a region which has, for reasons not discussed in the study, developed a special culture in which FSBO sales have captured a significant percentage of the market. This fact, in itself, might skew the results. FSBO penetration hasn’t reached these levels in most other markets, and an FSBO seller is more likely to be viewed as an oddball, and that matters.

2. There’s a self-selecting factor which the study doesn’t adequately address. Negotiating a sale isn’t for everyone. Logic dictates that a) sellers who are good negotiators are more likely to get a higher price whether or not they use a Realtor and, b) sellers who are good negotiations are more likely, on average, to sell FSBO. The study addresses this, but not to my satisfaction (if anyone cares about this you can ask in the comments…)

FSBO conditions haven’t spread nationwide, and FSBO isn’t for everyone. The later condition won’t change, but the first one will.

So…who cares? What does this mean to me?

You’re an investor and this trend will impact you. Thoughtful studies like this one will continue to demonstrate that paying a Realtor $18,000 to sell your $300,000 house isn’t good value. FSBO listings will proliferate, and that’s a good thing for the investor market. A commission is a classic transaction cost, and transaction costs decrease liquidity and pull profit out of every trade, both for the buyer and the seller.

Realtors, however, will continue to be an important part of your business as a real estate investor. To respond to market pressures the real estate industry will have to start offering a suite of products that meet your needs and price them accordingly. As an investor you don’t need help finding your dream home, you don’t need a negotiator, and you don’t need to have your hand held through the transaction. What you do need is a competent business partner to supervise the paperwork drill and help make sure the deal closes efficiently.

That’s not $18 thousand worth of service that you’re asking for. Realtors who understand this and tailor their offerings and pricing will have investors beating a path to their doors

The media scares me. We all rely on journalists to make a big world small and help us digest current events, but whenever I see an article on something that is within my area of expertise – like energy policy or real estate – I’m often appalled at how badly some publications mangle the facts and principles in order to spin an entertaining story.

The worst offender among the popular press, hands down, is USA Today.  Check out the feature story on Real Estate entitled Many Investors Feel Like Running Away by Matt Krantz.

If you take this article as light entertainment – kind of like reality TV – I guess an article like this might be relatively harmless. But many people go to USA Today for information – and that makes journalists like Krantz dangerous.

Where to start? Well here are some of the more egregious flaws in the article’s reasoning:

Cash in the stocks, baby, we’re buyin’ real estate! The article states that the current market is “a complete flip-flop from 2002, when investors tired of the bear market ravaging Wall Street cashed in their stocks and bought homes and investment property.” This is goofy. Smart investors might tilt their investment portfolio more heavily in one direction than the other, but it doesn’t make sense to flip your life savings from one asset class to the other in an effort to catch a hot market.  Articles like this treat investing and speculating as interchangable concepts.  They're not.  

Taxes, toilets and tenants! For some reason, the popular press loves to exaggerate the pain and suffering that landlords go through. USA Today comments that “wannabe real estate tycoons stuck with properties they can't sell have been turned into landlords, forced to fix toilets and take tenant calls in the middle of the night.” Ok – show of hands – how many of you landlords are running out at 2 in the morning with a plunger in your hand? Note that these articles are written by journalists who don’t know anything about investing – take their advice at your peril.

Stocks have always outperformed real estate! The article suggests that real estate investors who are underwater now could have “shaved themselves some trouble if they had done some research,” pointing out that stocks have appreciated at a faster rate than real estate over the short and long term.

That's silly.  The source neglects many key factors about real estate and stocks.  Here's two of them:

• Leverage: the gains that you realize due to the appreciation of your real estate investment are backed by the bank’s money via a mortgage. Unless you’re a mega-aggressive margin investor, your stock portfolio is backed primarily by cash out of your pocket.

• Cashflow: The article points out that the average new home has appreciated from $4,030 to $276,400 from 1920 to 2006, a rate of appreciation that does not beat the stock market. However, this doesn’t consider the fact that real estate puts cash in your pocket. That $276k in investment properties that were purchased decades ago would be free and clear of a mortgage and would be generating from $30,000 to $35,000 per year in rental income. Compare that the dividends that an equivalent portfolio of stocks would be generating.

An interesting note: the article quotes Nigel Swaby, who’s hooked up with that iamfacingforeclosure.com guy. You’ll often see Nigel’s comments on various forums giving “advice” to investors on getting rich, but from his quotes in the article it appears that he’s sitting on the sidelines.

The bottom line: USA Today is fluff. But it’s fluff with an audience: 5.2 million daily readers. That’s a lot of bad information soaked up by a lot of people. And it’s not just the USA Today that gets basic concepts wrong; lots of other publications are just as bad.  It’s up to all of us to be discriminating consumers of information.

But here's the good news - and it's something you know already.  All markets are cyclical, and misinformation like this is great for spooking the herd.  That can be a good thing; keep your eyes open for buying opportunities. 

I'm a fan of Blog Carnivals and we're happy to be hosting this week's Carinval of Real Estate Investing here at EquityScout.com. 

No snappy theme this week - we're gonna keep it simple with a top three and a couple of honorable mention posts.  Check 'em out. 

Taking poll position, The Landlord channels Real Estate Investing's favorite curmudgeon John T. Reed in 4 lies that the Gurus will tell you posted at Lording the Land. These are points that you can't hear too often. 

Running a close second, Steve Faber discusses an alternate way of investing in real estate with- REITs – A good Investment for Tishman Speyer Properties, But Is a REIT Right for You?

Rounding out the trio, The Dough Roller presents The 1% Solution to Real Estate Investing posted at The Dough Roller, saying, The 1% rule is a rule-of-thumb that has fallen out of favor in many markets as property prices have outraced rental rates - but it's a good screening tool - if you stray too far then you're more of a speculator than an investor. 

Congratulations to the top three!  Some other notable entries follow...

Bryce Beattie presents Seven Habits of Highly-Successful Real Estate Investors. posted at Middle Class Millionaires.  I'm not sure I agree with Bryce's habit #1, avoid overleveraging to reduce negative cashflow.  In some markets good investors can find quality investments that will produce positive cashflow even with 100% financing.