185: The ABCs of Real Estate Investing and Property Management with Ken McElroy

March 5, 2018bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 185: THE ABCS OF REAL ESTATE INVESTING AND PROPERTY MANAGEMENT WITH KEN MCELROY

If you are a regular listener of the Old Dawg’s REI Network Podcast, you know that many of our successful real estate investor guests cite Robert Kiyosaki’s classic book, Rich Dad Poor Dad as the book that inspired them to become a real estate investor. But when investors actually take the step to learn how to invest in real estate, they turn to Ken McElroy’s The ABCs of Real Estate Investing, The Advanced Guide to Real Estate Investing and The ABCs of Property Management. In this week’s podcast, Rich Dad Advisor Ken McElroy shares his story of how he has grown from his first 2 bedroom/2 bath rental to over 10,000 units worth over $1 billion.

What You Will Learn

How college athletics motivated Ken to seek out a coach or mentor early on for his real estate investing
How his first job in property management job gave him a competitive advantage as a real estate investor
Why property management companies have such a bad reputation
Why he prefers to buy properties for the long term instead of the typical 5 to 7 year hold
How you can buy profitable rental properties regardless of what the market does
How to locate hot markets before the competition
What “buying for cash flow” really means
Why most property managers are doomed before they even get started

About Our Guest

Ken McElroy

Ken McElroy is the epitome of the word entrepreneur. For over two decades, Ken McElroy has experienced massive success in the real estate world–from investment analysis and property management to acquisitions and property development. With over $700 million investment dollars in real estate, Ken offers a unique perspective on how to get the biggest return on investments.

Ken is the author of the best-selling books The ABC’s of Real Estate Investing, The Advanced Guide to Real Estate Investing, The ABC’s of Property Management, and most recently his book on entrepreneurship: The Sleeping Giant.

As the Real Estate Advisor to Robert Kiyosaki of The Rich Dad Company, Ken and Robert have co-authored several audio programs including How to Increase the Income from your Real Estate Investments, How to Get your Banker to say “Yes!” and How to Find and Keep Good Tenants. Ken is also a chapter contributor in the newly released, The Real Book of Real Estate.

A champion and advocate for entrepreneurs and real estate investors, Ken has spoken worldwide at top industry events. With media appearances on television and radio, Ken also hosts Entrepreneur Magazine’s Real Estate Radio program, where he helps listeners navigate the financial and legal arenas of real estate.

Never taking life for granted and continually giving back, Ken is active in the community and has been the Chair two years in a row for the Autism Speaks Walk in Arizona. Ken has also served on advisory boards for Child Help, and AZ Food Banks where he conducted the largest food drive in the state of Arizona. Ken and his family reside in Scottsdale, Arizona.

More About Ken

Neither of his parents had a formal education
Curious about investing
Got athletic scholarship to college
Majored in business
Sought out relationships with people who were progressing and moving forward
Recognized the power of having mentors and coaches early on (maybe from his experience with athletics)
First job was in property management with a company called Pinnacle in Seattle. They manage over 100,000 units around the country
Managed properties in downtown Seattle
His dad was a contractor and he had learned how to fix things and used that skill
On the job, he learned how to collect rent, manage people, expenses and accounting
Got a real estate license
Started buying real estate
2 bedroom, 2 bath home
Ran out of money

His Business Today

Learned how to syndicate
20 years later, has 10,000 units
$1 billion in properties
300 employees
Does ground-up construction, office buildings, storage units

Reflecting Back

He saw his early property management experience as a “competitive advantage” and key in helping him move forward in his real estate endeavors
He knew how to quickly assess real estate issues and if he could fix them from a management standpoint, grow the cash flow, manage expenses, grow the net operating income (NOI) and create value
When he saw new potential properties, he could tell, when looking at financials and rent rolls, if it was a good property or not
What he didn’t know a lot about was how to buy the properties in the beginning.
He also didn’t know things like:
- How to speak to a banker
- What to look for in a loan
- How to raise money
He did, however, know how to put together a team to manage his properties

Property Management

Not a great field to make money
Takes a great deal of work to do it right
Not highly profitable
However, it is a great business to understand and know
He has bought and formed half-dozen property management companies, sold some
The PM company he has now he started from scratch and now has 300 people
There are some great people out there but they are hard to find
You have to be a pretty large company to make money but the margin is skinny
If you could understand what goes on “behind the scenes” it would better help you select the right firm
You need to know the people behind the property management company

Biggest Mistake

Lost a bunch of investors’ money in a condominium conversion
Sometimes when market gets hot and frothy you can lose sight of some of the basic fundamentals and get caught up in the hype
In 2008, he was converting a 300-unit apartment building in Scottsdale, Arizona into condominiums
Banks were shutting down
Was selling the units off individually to investors and/or home owners
The financing for the “take out buyers” went away overnight – no one was lending
He had no buyers
He lost a bunch or money
His investors lost a bunch of money
Extremely painful
What he learned
- Communication is key
- You need to “over communicate” to your investors
- You need to stick to models you have more control over
- If you buy something today that you think will be worth more next year, you are taking a risk
- How his philosophy on “forced equity” has changed
  - If he buys a building, for example, for $10 million. Before he buys the building, he can know that “operationally” he can improve the value to like $15 million. That has nothing to do with markets going up or cap rates going down. It has everything to do with rent growth, expense savings and growing the NOI

Biggest Success

When he was young, he met a man who was in his 80s from New York who owned 15,000 units in Manhattan. Leonard Lipmann. On Forbes list. One of the richest men in the world.
The man convinced him to buy properties and not be concerned about market cycles, that they should just cash flow and that he should not put that much debt on them
Later, he met Robert Kiyosaki and learned about his cash flow model
He asked himself, “Do I invest for capital gains, try to time the market?”
Today, he does not buy for equity.
He now buys for the long term
Tries not to be too highly leveraged
He just makes sure they cash flow
Concentrates on property management people and develops them personally to make sure they can perform at the highest level for maximum cash flow
He still pays attention to market timing and realizes that there are times when it makes sense to sell but it is way down on their priority scale
Buys for the long term
Makes his philosophy clear to his investors

Market Analysis

“I always skate to where the puck is going, not where the puck is” – Wayne Gretsky
When a market is really hot, everyone wants to buy there and it gets very competitive
The investors who do best are those who can figure out where the next hot market is before competitors get there first
You can still buy in the other markets but you have to be careful with how you buy
Some have short cycles, others have longer cycles
To determine where the market is at, they look at:
- Population
- Employment
- Over-building
- Over-supply
- Rental demand
Examples of misreading a market:
- He invested in a market that was heavily military
- They market was near the Arizona and Mexico border
- The apartment full but as soon as there’s a deployment or government cuts, your apartment can go down to 75-80% occupancy in a matter of months
- When Boeing moved out of Seattle, the market was really impacted
- State Farm announced 3-4 years before moving into Tempe, AZ and Richardson, TX and made a big population jump. Rents jump up. Many things are impacted.
He avoids areas that have government employee dependencies

Property Management Tips

Many multifamily buyers will buy a property assuming that rents will go up in subsequent years organically and, if they don’t, it hurts their projections
Owners blame the property management companies, when the real problem was the buyers faulty underwriting
Property managers usually try to meet the owner’s expectations – faulty or not
Most property managers are pretty decent people unless they’re too busy and missing the point of getting good tenants
Property management’s biggest problem – they agree to a faulty owner’s plan:
- They rush to get a tenant in and put the wrong people in
- They feel pressured to fill the vacancy and compromise on the tenant qualifications

Advice for Old Dawg’s Considering Real Estate Investing

Passive Investing
- People are looking for people they can trust to invest with
- Does the market make sense financially
- The bigger the brochure, the worse the deal
- If they have to sell that hard, you might want to question the deal
- Find a partner that knows what they are doing
- Use you self-directed IRA
Active Investing
- If you have time, buy your own properties
- Be careful but be very realistic on where the market is going

Where He Sees His Business in the Future

Refinancing current properties
$100 million in new construction
Expanding self-storage
Focusing a lot on operations – managing expenses and efficiencies

Rap-It-Up

Favorite real estate book: Art of the Deal by Donald Trump
Favorite business book: Never Split the Difference by Chris Voss
Most valuable web site for success (other than your own): All Pro Dad
Favorite app: Instagram
Favorite quote: “Be the chance you want to see.” – Ghandi
If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? He wouldn’t use any of his own money. Look for ways to make other people money and you’ll make money.

How to Reach Ken

Ken’s Books

This Episode Brought to You by HealthIQ.com

This episode of the “Old Dawg’s REI Podcast” is sponsored by Health IQ, an insurance company that helps health-conscious people like runners, cyclist, weightlifters and vegetarians get lower rates on their life insurance. To see if you qualify, get your free quote today at HealthIQ.com/OldDawg or mention the promo code OldDawg when you talk to a Health IQ agent.

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bmanassero

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