Ken: When I got to the point where I didn’t have any money, I mean, for most people, they were running at a higher level. Then it becomes, what does the investor sees and what the sponsors see and the sponsor being of course the […] deal. How do they show the investor one, here’s what they invest in, but two here’s what […] back. Here’s what will create value. I always just focus on that. Here’s where the property is and here’s where it should be.
Chad: This is Start FM. Now here’s your host, active real estate investor, and entrepreneur, Chad Duval. Ken McElroy, welcome to the show. How are you doing man?
Ken: Great, Chad. Thanks for having me on.
Chad: Yeah, no problem. Actually, I’m just super honored to have you here. Ken here has been one of my, from a distance, mentors for probably 10 years. His book, The ABCs of Real Estate Investing, definitely changed my life. When I first started in real estate, it was the second book today I read. Again, I think it was 10 years ago and it was second to I think your buddy’s Robert Kiyosaki’s Rich Dad Poor Dad. But your book definitely was an inspiration and got me motivated to keep buying real estate. I wanted to officially thank you on air for that.
Ken: Thank you. I appreciate you saying that. That’s been great. It was written from an experienced mindset. Robert asked me. I hadn’t written a book before and I was knee-deep in real estate investing and he asked me to write it. I swear I was like, well, I hope somebody buys it. Here we are all these years later and my partner, Ross, she’s like, that book, man, just keeps… It was great and it was fun. It was a fun experience and I appreciate that.
Chad: Just a small little antidote too, I didn’t realize. I was so green to real estate when I read that book. At that time, I only had one property, my main residence. I was trying to house hack it. I had used a USDA rural development loan. I thought that I had to live in that property forever because it was an owner-occupant loan. Until I read your book and you said you don’t have to be there for 12 months and then you could move out and “hint” repeat.
Before I even read that book, I thought I had to just live in that house, just live there for a couple of years, then sell it, and then move on to the next. It’s a great book. I’ll link that book in the show notes for all you listeners out there.
For anybody who is new to the real estate space, let’s give a little background to who Ken is. Where it comes from. I know you grew up in the Seattle area, but you have a very interesting and relatable story that I love for you to share with the audience.
Ken: Certainly. It’s interesting, Chad. I don’t know many people that start off in high school or college and say, I’m going to be a real estate investor. We’re reading something, know somebody, or go somewhere. Our minds open a little bit. We’re like, okay how did you do that? How can I do that? That seems to be the path. That’s what happened to me. I ended up managing a property I was finishing up at university.
The owner of the property and the property manager who I knew from high school said free rent, plus a little bit of money. I’m like, I’m done. I’ve been racking up student loans and trying to save on expenses. My parents didn’t have a lot of means. They were helping me as best as they could. My mom was a hairdresser and my dad was in construction. We were just fumbling away trying to figure out a way to get educated. I started managing property. That’s where I learned the inside look of how they run. It was honestly the best education I’ve got.
I was collecting rent, I was […] bills, Really slowly understanding how properties run. You don’t clock […] for it. You don’t pay the bills. You collect a lot of rent and there’s profit if it’s done well and done right. I was finishing school with the best education I could ever get […]. Then the owner came by and he was really nice. He was like, hey, thanks for turning around this property and making it profitable. It was a 60-unit apartment building I’ve been handling. I just felt like it was a common sense thing. You fill good property up with good people that rent and then you pay their rent. […] a lot of problems along the way.
You learn how to manage the expenses as best as you can, but it’s the way I was trying to run my life. He was so happy. I said, man, I’m on the wrong side of the desk here, how can I own these things? That was for me the big aha moment. That happened right as I was finishing school. I ended up getting a real estate license and I started managing properties.
My first 10 years of being out of university are running properties all up and down in the west of the United States with various ownership groups, various […]. I met with people and tried to manage their properties for them. It was really an incredible opportunity. I learned how to pay for property and figure out how to make it more profitable.
When people get to a property, manage a property, it’s usually […] or two. They get in big trouble and realize that […]. We really get all kinds of properties, technically brokers. Then you would have to apply all these […]. Just like anything, if you get experience and you learn the things that work and things that don’t work. I only have that background, that’s when I decided to start buying. That was my […].
Chad: Through the 10 years working with these management companies, did you wait 10 years then jump into your own, or were you buying these within the 10 years while you’re working for these property management companies?
Ken: Good question. I actually was with only one company and I was with them for just under 10. I was slowly buying small two-bedroom, two-bath, small little raw-type properties with my own money. I was trying to chip away at it. I was always focused on cash flow, but I was never a high market capital gain guy. I have done that. Now I look back and I’m like, I wish I would’ve sold it. You make good cash but it’s not a big long term strategy. I was pretty much a long term cash flow guy.
But when you use your own money, you get out of it pretty quickly. I didn’t have any and my parents didn’t have any. I had student loans and all that. I was balancing all those payments that you have, the rent, your car, student loans, or whatever else I might have. You slowly accumulate. It’s either going well, or this isn’t going to work in the long term.
I can buy property every once in a while, but at some point, I’m going to have to figure out another way to bring more money to the table. I turned that into a business after that. That’s the current company that I had. I had multiple companies and obviously, lots of properties. We currently own right around $1 billion of real estate, mostly […] multi-family. We’ve got office buildings, storage, and all that stuff.
We have quite an organization now of 150 people, but really I started out, Chad, just like everyone else. Confused, not knowing how to do it, and didn’t have a real estate license, I had to figure that out. I had to find people to mentor me and help me understand how to get a loan, how to buy something, how to make money, how to […] be better, how to build a company. All those things […] with the right people.
Chad: Yeah, that makes sense. I mean I see that in a lot of people that are on the show. Now going back to those early days, you had a great competitive advantage working for a property manager which is invaluable. Clearly, that’s one of the best places to start, I would think, to get some experience if you’re trying to get into real estate. But you also mentioned that you went and got a real estate license.
Is there enough value now that you look back on it for people to pursue that as far as trying to sharpen their sword as far as their real estate knowledge and getting into the business that way as well? It’s an ongoing argument that you don’t really need it later when you’re buying a multi-million apartment building. But maybe, when you get started, it might help you understand the buying process and that sort of thing. What kind of thoughts do you have on that?
Ken: Great question. I had my broker’s license in Washington, Nevada, and […]. I have […] in all those different states and […] states. I personally believe that it’s high value. Now, there’s a lot of things that are reciprocal from state to state that are true, but there’s a lot of things that are very unique to a state. As an example, when I was in Nevada, they had all kinds of laws around growth and also […] around water. Water management, as an example, is part of the real estate piece.
I actually bought a […] because it came with water rights and […] specifically because of that class. There are things that you learn as you’re getting your license that are, I would call them, one-foot pots that we have with all the states and they’re pretty basic. But then, there are other things that are not.
I learned a lot. I didn’t really need to know—you need to know about […] leads and things that, company, real estate—there are a lot of professional companies […]. But if you get into finance, you get into IRR, cash-on-cash, […]. I think there’s a tremendous value. On a local level, you’d be very surprised at how different laws can be in a state.
I went on and did the same thing with my CPM, my certified property management, […] NAA, National Apartment Association. Also, I’m with […] Association. I’ve been an animal all around those kinds of […]. The industry changes a lot. I’ve never been with a class on when we changed the […]. When I first came into the business, we were starting to do a family section. In both sections, you have to be familiar with […] law and the type of class. All these things that creep into the industry are real and you need to know and need to understand.
For me, the license itself is not necessarily needed if you try […]. That’s very true. But the knowledge that you get from the information, I think, can really help.
Chad: Yeah. I agree with that, totally. I’m of the proponent to have somebody else do and specialize it is probably beneficial long term. But if you’re new to the game, I like the idea of getting it so that you learn a lot about the local markets, the regulations. I mean, there’s a lot of laws around real estate that you don’t really realize when you’re a newbie real estate investor. I agree. I wanted to shift into a little bit.
Continuing along with your story, you had your real estate license, you’re working at property management companies for 10 years or so, then you make a switch into your own business. What did that switch look like where you were realizing that you are running out of money every time you bought a property and knowing that you had to bring in some equities from some other investors?
Ken: You know what’s interesting, I have a unique perspective of being able to look at a property and see it for what it is and see it for what it could be. I always have that perspective. I believe that was because of my property management strength. What I mean by that is, I would look at a property and they would be, let’s say, 67% occupied which you can find even today and say, okay, what is that property worth now and what is it worth later once you have fixed it? They’re very different prices. As you know, they’re very different values.
To answer your question, when I got to the point where I didn’t have any money, I mean, for most people, they were running at a higher level. Then it becomes what the investors see and what the sponsors see. The sponsor being the person who finds the deal. How do they show the investor one, here’s what they invested in but two, here’s how they get your money back. Here’s how I’m creating value.
I always just go from that. Here’s where the property is and here’s where it could be. Because I’ve just focused on that, it’s been pretty easy to raise capital. I always tell people, it’s as simple as I’m tying up a […]. Right now, let’s say we’re $500,000 big, but with a tenant that has cash flow, it’s $2 million. People can’t wrap their heads around that. What happened? There are two things that happen. One is like, I saw the opportunity and they keep growing, Two, I found it […] because you can do. As you know, it’s definitely worth more with a tenant in it.
I don’t know if you heard the story about the billboard guy. […] As a smaller deal came across our desk […] so there’s nothing that we can build on but it had a billboard. I was like, well, the billboard could make you $3000–$4000, $5000 a year, that’s all. It’s a risky move. I didn’t believe him […]. I call up a company and say, hey, how do you guys price billboards? How does it work? The guy was like, well, we […] on our account […]. Again, I’m just being inquisitive.
I said, I’m looking at this property, what about this location. He goes, well, that location should do anywhere from $2000–$4000 a month on each side. So $1000–$2000 per side depending on the contract, et cetera. I said, okay, but you’re saying that this billboard should pick out $30,000–$40,000 a year? He said, yeah, for sure. We should be able to do that. […] I put an easement on the billboard and then I sold the property for around […]. I had the billboard for free.
I signed an agreement with this guy. Our deal was $3000–$4000 a month. That’s what real estate play. It’s seeing the deal, […], and finding out the people that are successful […]. They understand that they don’t even know […]. All they got to do is make phone calls work, […]. When you put that in front of an investor, let’s say I didn’t have that $300,000 to buy that. I gave that to you and said, hey, here’s the deal. I got this thing and it’s growing for $290,000. I need $300,000. It’s going to cost me $10,000 to put an easement around it. Let’s split the profit.
You gave me $300,000, I’m going to give it back to you in a period of six months, and then after that, we’re going to make […] a month. You’re going to do that? Great.
Chad: 100%, yeah. That’s a great deal.
Ken: That’s it. An investor wants to know, if I give you the money, one, can I trust you […], and two, how am I going to get my money back? Most of it is after these big, lengthy business plans. They’re just concepts. Things that they just point it out.
Chad: Yeah, and I think it’s easier to sell the deal to investors when it is simple. I mean, you can get super complicated. There’s a lot of really sophisticated investors. I mean you’re one of them as well but I like how you have a soft touch with it. I was just talking with Michael Becker recently too. There’s a lot of details and waterfalls, and there’s a lot of things that can complicate things really quickly and turn investors off. I like how you put that. That’s a really good point. Something to keep in mind as you progress in your real estate investing.
Hey guys, I ask this question on almost every episode. How do you get started in real estate? I ask it to almost every guest, and the most common answer is to try and get a house hack. If you’re a fan of the show, you know that I like to refer to house hacking as real estate with training wheels. It’s a great way to get into real estate with a low down payment and basically live for free.
Everything sounds awesome, but a lot of you guys are busy. Especially now, with everything going on in the world. Everybody knows we spent hours and hours searching for info in multiple places and listening to podcasts. Most people just don’t have the time. Most people are trying to juggle kids right now, especially transitioning and working from home because of COVID. Just trying to keep track of everything, eating, exercise. I know it’s a struggle. I struggle with them too almost every day.
That’s why I reached out to my friends over at House Hacking Success. Drew and Brad, they’re awesome guys over there. They become the go-to resource online for everything house hacking. I reached out to them this week to try and get you guys a discount on any of their courses that they have over there. They were kind enough to give you guys 10% off anything on their website.
They do have a lot of resources. They have a free eBook and a podcast. But they also have a course that puts everything you need to know about house hacking into a 42-episode course, all video content, which is really awesome. Because if you decide to have something on in the background while you’re doing your 9:00 AM–5:00 PM at home and you just pop in one video or a couple of videos on your TV in the background.
I know I do that every day with a bunch of other resources that I use to continually sharpen my knowledge in the real estate game. Head over to househackingsuccess.com, use the discount code, STARTFM, and you’ll definitely get 10% off anything on the site. If you decide to buy, again, there are plenty of free resources on there. Their podcast is awesome. I was just recently on it. They were going to be on next week’s episode as well, too. I hope this helps you guys. Use discount code, STARTFM, get 10% off now and enjoy the show.
To keep the path moving forward, you’re up to $1 billion dollars in assets right now. I’m assuming you’re still looking to buy and you’re still operating the business. I wanted to wrap in the COVID scenario right now and see how that has affected your business and what strategies you guys have come up with to navigate these crazy waters?
Ken: Yeah, it’s been quite an ordeal for sure. Honestly, we had people on […] payment. The one thing that we chose to not do is the […] because that will affect […] our ability to borrow. That’s going to come up, trust me. Luckily, we set up our deal where we weren’t even close to […] cash flow issues. But we were really concerned, obviously, about not being able to pay our mortgages, our bills, and all that. We did not know, like everybody.
The first thing was paying all of it with cash. That’s how I did a video earlier on YouTube, on that issue. Cash is king. […] a year later in this condition. If you think about it, cash is killing all small businesses. If they had cash, they wouldn’t have a problem. That was the first thing.
The second thing was we really want to pick […], and that was a big thing. It’s like listen, they were told not to worry and they’re paying. Everybody was freaking out a little bit over the virus as they should be. But how do we keep people in their homes? Work with them, pay our bills, and keep everyone safe in the meantime.
That was the messaging from me. We’ve been pretty successful around that. Most of it is, we […] communicate with our tenants and find out how they were doing, what they needed from us. By the way, I went through this in 2008. It was way worse. There were people just really in big trouble then. We were familiar with this, and most of it was just purely done through communication with our tenants. We had people on payment plans. By the way, not everyone’s affected.
We had a lot of people, a lot of companies, a lot of businesses, but there was a big percentage of people that were not. Then there’s a handful of people, Chad, that chose not to communicate with us at all. But it’s really been a small handful. […] at the end of March, April, and May just trying to find out what their needs were. Staff says, […] in your homes. We let them know that, moratorium or not, we will not kick people out during all of this.
These people came in with good credit. They’re good people. They wanted to know about the […] check, the application, and all that. How do we work together? Just communicate the best we can. I’m happy to say we’ve been collecting, as a portfolio, in the mid, to high 90s over time.
Chad: Wow, that’s really good. A lot of your properties are they A-class, B-class, or the lower C-class areas as well where I’ve seen it—at least in our properties—that we weren’t hit too badly with the C-class. A lot of them were working at the local Walmart, the Targets, or the fast-food restaurants that all stayed open. Then I think as you move up into some of the B and A classes, a lot of those people, I don’t think were affected as much because a lot of those people can work from home. Is that what you guys are seeing?
Ken: Yeah. For us, it was more industry-related. As an example, we have property […], which is kind of an oil and gas there. A lot of those people were really disrupted because […]. We had a little more of a challenge there. But markets were, let’s say, near healthcare, like in San Antonio, we have about 3000 units in San Antonio, not all-around healthcare. It’s kind of a healthcare town, and we’re actually doing okay. A lot of it has depended on that. It was more about where the people were, as opposed to what type of units they’re in.
Now, there is a difference between A’s, B’s, and C’s, of course, but I think a lot of it has to do with the individuals. Because one working, two, […] or whatever it might be. There’s a lot of people that can’t afford to live in the A and live in the C. There’s a lot of people that probably should be living in the C but they’re living in an A. We had all that going on. For us, it’s been all over the map, and it hasn’t been an A, B, or C issue. It’s more of an individual issue.
Chad: Yeah, I like that. That’s a great point. I didn’t think of it as industry-based. You’ve been in real estate for a long time, and of course, this is just another cycle. I’m going to be a little selfish here and I wanted to ask your expertise as to what you see right now. In this economic cycle, where do you see it right now in the next 12 months to 24 months, with all the vaccines rolling out and things seeming to get back to normal?
I know, every time is a good time to buy real estate if you find the right deal, but are we talking about right now clawing our way to the bottom still, or are we on our way on the upswing? What are you seeing right now based on all your experiences and cycles?
Ken: Well, a couple of things. I don’t think that the government has allowed any of this to hit the bottom cap. It’s been propped up, rightly so PPP, mortgage forbearance, rental assistance, moratoriums, and all those things. […] stopping things. But the truth is, we really haven’t seen anything yet. We know there are people behind on their mortgage, we know that. They’re on track. We know millions and millions of people are behind on their rent, we know that. We know inventories are really low because people are being disrupted in their lives in so many ways and they don’t know COVID, financially.
We know that hundreds of thousands of businesses are being closed permanently, we know that. Those are real people buying cars, buying houses, renting places, going to pawn shops. We know that the downtown areas are being vetted out—laundry, […] dry cleaners, family shops, coffee shops, […]. We know all that stuff. All that stuff has yet to really […] in every city, every town. Plus, we also know that people are moving and living […].
All of that is a permanent change. Those are all growing in the suburbs, regarding the prices out there we’re seeing right now, mostly because of the demand-supply issues. Real estate is just that. If there’s not enough supply and there’s a lot of people looking for a place, then you’re going to see home prices go up, you’re going to see rent go up, and all of that stuff going up. […] there is more supply. That’s just how it works. There are also areas that have gone the other way.
To answer your question, I don’t think we fully know yet.
I’m hopeful that the vaccine will get through this year. People will be more comfortable, but we see really serious permanent changes in office buildings, travel, hotels, and retail. I do think that more people are going to get foreclosed on, maybe sell their homes to pay off some of the debt. Who knows where they’ll end up? All of that is still on the table. Obviously, we’re […] coming out here soon. I was going to talk about it a little bit more, which again, people need. It’s not good news in any way.
At the end of the day, the […] will stop somewhere, so if a renter can’t pay, then the landlord probably can’t pay unless they have the reserves. Right now, they’re still in this queue […] a lot of problems. I do think we’re going to see a lot of disruption this year. Some markets are going to be in big trouble. Migration patterns, […], fascinating. The suburbs in those areas […], 20–30 miles away. It’s kind of neat.
Chad: It’s an interesting dynamic because you’re right. It’s the forcing of people to work remotely, which also helps spawn people moving to the suburbs where they have space, and they don’t need to commute to the office every day. It’s very interesting. I mean, just five years ago, it feels like everybody (me included) wanted to move out of the suburbs, move into downtown and walk around everywhere. Now it just seems like there’s not much going on downtown. You can’t walk to a lot of restaurants around anymore and that sort of thing.
It’s interesting how real estate can shift year over year. I appreciate your perspective on that. I wanted to ask you one last thing before we dive into some of maybe your training, your courses, and that sort of thing. You’ve got a billion dollars worth of assets under management. You’ve got a lot of experience.
What is something that I like to call a “learning experience” or a “war story” that you’ve had over the years that you’ve learned from that maybe somebody who’s listening right now who’s looking at Ken McElroy, he’s got this big portfolio? I’m just this guy over here with one unit. What are some of the “learning experiences” that you’ve had to go through to get you to where you are that somebody could relate to?
Ken: I think what happens to most of us, all of us is we get very biased on what we believe and what we think is true. There’s nothing wrong with that. But if you’re so biased, and this happened to me, sometimes real estate is the way. You’re sitting down negotiating with this guy […], a financial planner. Hundreds of conversations […]. I just had another one last week about life insurance.
Everybody has their limited view on what it is they’re doing. There’s nothing wrong with it. If you’re selling life insurance or you’re selling financial planning, you’re commissioned through […] on managing somebody else’s assets, you basically are not looking at the big picture in so many other ways.
Not to say that people don’t, but we do it on the real estate side too, discount other things that we believe are true. Once I got out of that […], once I started to back up and really look at it actually objectively and feel objectively, what happens is we certainly see this a lot. We start to say, oh my gosh, real estate went up 10% this year in the market. Then what happens is there’s a flood of more buyers just pushing it up even more. It’s very common. The herd mentality is very normal. If you have the ability to back up the objective, then I think that’s the biggest, biggest thing that will save you a lot of money because everybody has biases—everybody.
If you can recognize that you have that, then I think that’s the first step. It’s part of the mindset. When I’m looking at a deal, I look at everything […]. A lot of people that already do sell […]. I’m not saying that you shouldn’t have that in your toolbox. You just have that in your toolbox then you’ll know just the high-pressure sales pitch. You have a bow and you’re looking at it objectively. I know that when I’m raising money or I’m looking at things, either that can make me lots of money, but I’m telling the truth what I see in transparency […] sharing the risks. When I find that I’m building relationships with people and know […] that this is the guy telling the truth. Looking at trying everything […].
Even in my own company, I have my acquisition guy who I love. He was a commercial real estate guy for many years. I always say to him, Bobby, take the broker hat off, put it on the table, put the owner hat on. He’s just so used to not listening, pushing through why something’s so good. I don’t want to hit a spirit at all because I love that part. You have to look at it objectively and take that emotional piece out of it. Look at the underlying drivers […]. Is it because they’re trying to pay your rent, your mortgage, or your car payment? […] make your investors money.
Chad: Yeah, I absolutely love that. That’s a very similar thread to my life right now. Me and Holly, my fiancé, go back and forth a lot on this. She’s my Ken McElroy telling me to look at it objectively more so than me because I’m always super optimistic. Oh my god, I could do this and that. We’ll make this much more money over here and always looking at things almost too positively instead of putting on, like you said that, the checks and balances hat there and look at all the negatives that could go wrong with this thing as well.
That’s a really good tip for listeners going forward. I wanted to talk a little bit more about your books and some of the training courses that you guys are doing right now. Again, we were talking earlier, I’ve read I think almost all of your books, definitely remember ABCs of Real Estate Investing. That was a great book. But if you want to talk a little bit more about your courses and how people can connect with you to maybe have a little bit more of a—I don’t know if it’s more of a one on one advantage to getting into real estate, but some more resources for them in one place.
Ken: Sure. Thank you. During COVID, obviously what I really do with time is buy real estate, build real estate, raise money for my investors. But during COVID, I got kicked […]. I decided that I was going to put out a course, which everybody […] on how to get started on real estate. It’s absolutely free. We just have one course available at kenmcelroy.com.
Then in addition to that, Chad, I started a YouTube channel about a year ago and we just passed 200,000 subscribers. Now what I’m trying to do is just put out a really good message. This is what I learned, not salesy. I’m not in the business to sell courses. I’m not in the business to sell books. As a matter of fact, I donated my book to charity. We have a big nonprofit. Last year, […] charity.
The point here is to educate and have something in your toolbox. You’re looking to invest and you’re looking to take your family money, your money, or someone else’s money, you want to make sure that you do a lot of research. You listen to a lot of things and learn as much as you can so that […].
I did an ebook called The 21 Keys to Real Estate Success. We’ll put that on our website for you at kenmcelroy.com/startfm. We’ll put that up. There are resources for people for free. We have a lot of videos, obviously, YouTube’s free. You can pay for the course, of course, if you really want to pay for the next level. It’s just an education thing. I think it’s around $450 or something for 8-10 hours that I did on how to set this up. […] people can work a deal. […], what’s happened there during COVID is I was never a big social media guy. I was doing my thing and I decided to do the YouTube thing then I started to write the book.
All of a sudden […] different things and a great resource […]. That’s how I embraced it. I was like okay, this is great. I’m getting DMs and comments saying, would you do a video on this? Can we try that? Absolutely, this is great because I’m just sitting here, the guy who has a lot of experience trying to figure out what people want. I rather have people tell me what they need. That’s how I used it. The videos, collateral, and stuff that we’ve done are all resources for people to take to the next level. They’re wonderful. Honestly, […].
Chad: Perfect. Yeah. I’ll definitely link all this stuff. Amy sent me some info, your assistant over there, for the links and everything for all the listeners. Of course, I’ll get all the books linked up. Again, I highly recommend all of the books. I think with that, thanks again, Ken for coming on the show. I’m honored and I appreciate your time. I know you’re a busy guy. Again, I appreciate you being on.
Ken: You bet, Chad. Best of luck to you. If you have any questions or anything you want to just brainstorm on, give me a shout.
Chad: Absolutely. Thank you.