949-392-1999
SHOW NOTES FOR EPISODE 267: BEST OF OLD DAWG’S REI NETWORK PODCAST – THE ABCS OF REAL ESTATE INVESTING WITH KEN MCELROY
Come join us for one of our best podcasts ever with Ken McElroy, the author of 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 grew his real estate portfolio from a 2 bedroom/2 bath single family home 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
- The ABCs of Real Estate Investing
- The ABCs of Property Management
- The Advanced Guide to Real Estate Investing
IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast. This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement.
Check out our other podcasts at olddawgsreinetwork.com.
Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.
Episode Sponsor: Meno Studio – menostudio777@gmail.com
