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217: Ken McElroy: What’s Happening with Multifamily Real Estate?

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Buck: Welcome back to their show everyone. Today my guest on Wealth Formula Podcast is Ken McElroy. Ken’s been on before. He is Robert Kiyosaki’s Rich Dad Advisor on real estate you know and he wrote these books called the ABCs of Real Estate Investing and The Advanced Guide to Real Estate Investing. He’s written several other books including some in that are completely fiction and we’ll get into that as well. Ken is also the founder and principal of MC Companies which is a real estate syndication company as well. Ken, again it’s been a long time since you were on the show. Welcome back.

Ken: Yeah thanks Buck, great to be on. I appreciate it. New times we’re in right now.

Buck: Yeah, yeah I know. I was excited to talk to you because I mean seriously it’s kind of fun to talk to people who have seen more than a few cycles and then really talk about you know what’s going on right now, I mean for perspective. But you know before we start that I mean listen most people already know who you are but for those who don’t or maybe just read your books but don’t really know much about MC Companies and kind of what you’re doing yeah within the real estate realm, do you want to give us just a little bit of perspective?

Ken: Sure. I started like a lot of people and didn’t know how to raise it and used my own to buy my first deal which was a 2-bedroom 2-bath that was years ago. Since then but you know we bought well over a billion dollars with a real estate and built to where a commercial multifamily group so we do apartments so we build them, buy them, renovate them, manage them you know and we’re a general contractor. So we have about 250 folks that work for us in the management company and all we do is is buy multifamily. I also have some office and some self-storage and you know I’ve done those four years and you know where land development so all those things over a span of you know a short 30 years and you know learn a lot and along the way you know Robert Kiyosaki and I met gosh going on 20 years ago I guess, I was already well you know into the business and buying stuff and owning stuff and he asked me to write the book and I wrote a series of books and you know that took me out in a whole nother journey you know which was very fun.

Buck: Fortuitous in many ways for everyone involved.

Ken: Yeah it’s very great everything the whole process has been a blessing honestly.

Buck: That’s great. So you know having exposure to mostly multifamily you also mentioned some office and some of the other things that you’re doing with this whole you know pandemic that we have, you know what’s happened to your business? I mean you can never prepare for something like this, exactly like this because it was a truly, well listen, I think some documentaries might have predicted couple years ago but you know it’s an event that we probably didn’t see coming. So tell us about your business. What’s happened in the last few months and how it’s been going.

Ken: Well, first of all, I wanna first point out that these things happen. This one’s a virus and you know it’s a little different, but the truth is this is an economic downturn or recession. You know a lot of very different things but very many same things and so you know probably the one that a lot of people will remember was 2008. You know when 2008 hit it was a bank bailout and as you know and Lehman Brothers and all that stuff happened during that time we were right in the fray as well and you know our first issue was to basically preserve the asset you know and preserve the investors and you know to maintain our mortgage payments and all that. And so we first reached out to our resident and said hey you know we know a lot of you maybe have lost your jobs and you know there are all kinds of things happening during that time and so we built a community around that and then we work with everybody. And so for us when this happened, we did the exact same thing. We just walked right back to the community of the people we at that time I knew I said something’s gonna happen, I in no way could have predicted this okay you know the market was already super hot it was very, very hard to buy and you know been trying to buy for two years and you know we thought people were overpaying the last couple of years so we were kind of out of the market we were building and so we were kind of watching and waiting for some kind of an economic downturn to happen and just happens to be this and so for us we already were in place with reserves with excess cash you know and all those things sure but we didn’t know when everything got a lockdown you know call it mid-march we didn’t know how long it would last we didn’t know if people would pay not pay you know I mean the government’s telling people you know they couldn’t open their businesses and weren’t working all those kinds of things and we didn’t know initially if people were going to get money. So you know all that did happen yet we ended up collecting ninety-nine percent in April, ninety-nine percent in May our occupancy has almost stayed the same, you know we’ve learned how to lease online virtually collect rent you know we were already moving that direction. The biggest issue although at the beginning but we thought okay you know we did stress tests on all of our projects and said you know which basically means expenses plus debt you know what’s that breakeven occupancy so you know in some cases they were in the 40s and 50s because we’re not heavily leveraged a lot of our stuff right and that is also by design you know things happen so if I can see falls ten percent 20 percent, you know I’m am I worried yes, but I’m not gonna lose anything, because you know this is part of preparation and owning things.

Buck: Got it so it’s interesting that you mentioned basically the thing I’ve been telling a lot of business owners and investors around me as well, you know as you know you know our group Wealth Formula Investor Club is you know partnered with some others that you know like Western Wealth Capital and Dave steel and those guys and people have been really surprised at how strong you know these assets are performing they have essentially like you said pretty much you know ninety-nine percent performance of before Covid but it almost seems a little bit too good to be true in some respects right? Now I’ve been telling my my listeners that Covid 19 at least this initial part is it’s sort of like an earthquake right and who survived this earthquake but there’s also frequently in after an earthquake a tsunami right there’s a tsunami like for example in Fukushima and then all of the sudden you have a nuclear reactor that goes down you have all of these after-effects and it seems to me that we haven’t even really scratched the surface on that part, do you agree with that?

Ken: Oh completely yeah. The thing about real estate specifically you know if you think about it, real estate fills a need for the people, not the other way around. So you know it’s only as good as who can afford it and pay for it. And so that’s my big concern to be quite honest is gonna be September October right you know because them you know the stimulus money is gonna run out you know who knows how many businesses are gonna reopen we know we’re over 40 million unemployed so I think it’s somewhere between 30 and 40 percent or not so you know that’s you know call it ten million twelve million more on top of the five-point that we started so you know looking at a 15 to 20 million person unemployment rate and I think the stimulus line is gonna go away. That’s actually I think when you’re gonna start to see you know basically who’s swimming naked you know when the tide goes out, right and the government stopped funding employers and people you know you’re gonna see as you know, I don’t know if you follow personal savings, you know personal savings is the highest it’s ever been since the 70s and that’s because people are afraid. They’re hoarding cash right now at the end of the day what people do, Buck, is they need a place to live you know and so they might downsize, they might double up you know there’s all these things happening, but at the same time people are working from home and so they’re setting up their home offices and their home communication you know so they need more space and so in a weird way roommates are actually moving out and getting two places yeah there’s been a lot of unfortunately divorces during this time and so that’s a real estate move to you know where one household goes to two. So there’s all these things happening right now and you know I wouldn’t want to be in high-rise in a city center but I think the garden style stuff that we do you know that you’ve been involved with about tremendous respect you know for David you know him for 20-plus years and you know what people don’t know about real estate folks like myself like Dave is we pick up the phone and talk best practices you know we don’t consider ourselves competitors at all yeah you know and so you know we’re all one of the cool things that happened is we’re on them I was on the board of the National Park Association on the Housing Association and I was on an email chain started off in in mid May or mid mid March oh my god there was hundreds of people on the sink and they were just sitting on her hey we’re doing this we’re doing that we’re doing this it was best practices from all the biggest management companies and all the biggest landlords in the country and I mean everybody just stepped up and we’re sharing you know here’s how were handling this and people were doing Q&As out on this email chain it was awesome you know and being part of an association like that you know really we brought a lot of those a lot of those things to our own organization but we literally changed our company and had two week period.

Buck: Yeah and you know the other thing that I think it’s worth mentioning because you know you talked about Western Wealth Capital and Dave Steele’s business too and the market selection, I think was really fortuitous as well. I mean listen, I think we’re always looking in areas that are you know not California typically or landlord friendly etc. I live in California and I have investors who live in California who are very worried because their California assets you know there’s rent strikes and all these things going on, it’s not necessarily the same across the entire country right now is it?

Ken: No gosh no, not even close. You know rent control was a thing literally before all this happened. And the reason that came up was because you know as landlords and management companies and owners and general partners we had incredible retros you know for a 10-year run okay you’re all like I mean honestly if you bought something you know and then went on vacation you come back it’s you know the rents are more like yeah you know it was not a complicated business, it’s about ready to be a very difficult business and you’re gonna start to see who the really good management companies are because there’s a lot of strategies are in keeping people etc, etc and so you know I think that’s what you’re gonna see next is you know it’s your gonna have fallout but for sure they’re gonna be people that can’t pay and I’m really concerned about my office and retail guys I got a lot of friends and you know they’re really hurting.

Buck: So assume what you and I both have a hunch about the tsunami happens all right and we start seeing a lot of defaults in that case you know it just seems like the number of defaults would be so humongous, what does Fannie or Freddie what do they do in that scenario? I mean there’s already some forbearance options out there they’re not terribly attractive and they also don’t want to create sort of a moral hazard you know so what do they do? What do you think they’ll do?

Ken: Well I think first you gotta take a look at the bubble that we are in you know as as the market got bigger and then and the balloon just got bigger and bigger and bigger and bigger, it comes out it comes down in the same way. So even though you know all we’re hearing about on the news is all these things and you know what happens, Buck, it’s like death of a thousand cuts literally. So the first thing they’ll happen is you’ll start to see concessions which you’re already starting to see and you’ll only see them in some markets versus other markets like you’re obviously gonna see a massive vacancy in concession market in like downtown Seattle and downtown San Francisco in downtown New York for example because you have migration rolling out of there. You might have a row property you know 30 minutes away that’s chock full, you know what I mean just right if no issue and so you’re gonna what you’re gonna see is you’ll start to see concessions which is essentially rent loss you know you can call whatever you want but you know we’re seeing in Scottsdale Arizona here we’re on some of the new construction you know one building that just recently opened has 300 vacant units so they’re doing two months free on a 12-month lease okay so you know that’s $200 a month off right so that’s Dennis so you’re gonna start to see that. Now they might fill up based on that or they might not you know what I mean and so they’ll start pulling down on the B’s and then the C’s so you know the A class first and as people also move into the B’s you know cuz you know they want to save four or five hundred a month. So all that’s gonna happen. But there’s gonna be some some buildings that will you come’ be completely surprised by and others that will just get hammered and it’s almost all about migration and where people are moving and where they’re going and whether or not there’s enough people to fill the vacancies and so it’s gonna it’s it’s gonna be hard to figure out but it will definitely happen. And then what will happen is you know the ones that any property that was based on a value-add strategy is in trouble so anything that was bought in the last couple of years that hey we’re buying this for 150 thousand or one hundred eighty thousand a unit we think it’s gonna be worth 200 210 for 220 and the rents are gonna go from 1500 to 1700 or whatever it is and we’re gonna put 10 grand in those are in trouble because rent growth you know value adds are not happening right now. And so as a company we had about 10 million gone in renovations, I stopped it on March 15 I said no more renovations because I want to see and you know people aren’t you know before like I said you know throw some new cabinets and new flooring and you know all the stuff in there and boom they were rented, it’s a different time now.

Buck: You know I gotta ask you though it’s weird and I know your business is typically now like A class and new construction right? What we actually have been finding the value add paradoxically I would have never believed this can but it seems to be still working in this sort of working class you know B-minus C-plus area it’s really unusual. Do you think there’s something just about the demographics here?

Ken: Yeah are you gonna find a value-add n somewhere that’s working yeah right you know, but there as a general rule rent growth is not gonna have shirt over the next couple years and so yeah that’s what value add is right you know it’s and so you know call it classics or whatever you want to call it yeah you know the classic unit of what you bought is probably an option for a lot of people that are in the value add, they might move back in the class so you know is it possible of course.

Buck: You know what’s interesting to me is that we, of course, are you know interested in real estate particularly multifamily, but if you look at the other markets out there right the other asset classes particularly I’m looking at the stock market, and I’m not a stock market investor and I know you’re not big into it either, but you know you look at it and it’s only about you know 10 12 percent off of all-time highs. Today I think despite being in the pandemic despite you know the social unrest across the US you’ve got a 500 point rise in the Dow. A lot of this I suspect and I think it’s fair to say is because the investors have this sort of unusual confidence in maybe the Fed maybe in you know it not only in monetary policy but also in fiscal policy. What do you make of that? Because obviously markets are correlated to a certain degree right what do you make of that does that affect real estate at all if it seems like the equity markets actually are not taking a beating they may of course later on as well but let’s assume that they just stay relatively stable does that make a difference to us?

Ken: Well there’s no doubt I mean you know people park their wealth all over so you know we have you know 1500 investors or something and you know I mean these are folks that have with us they might have money with you know Dave you know they have money in some retail they have money in the stock market and they’re heavily in equities you know they’re all over the place you know everybody has their own investment strategy. So what we are hearing from our own investors is that a lot of them got clobbered in the stock market you know initially right and I don’t know where they stand today, you know and everybody’s got a different makeup on what they’re invested in but the truth is when when people take a hit financially then they don’t invest you know they’re they’re hunkered down and they’re gonna meet you know that’s what happened in ’08 that’s what kind that’s what’s happening now. You know it’d be very interesting it’s gonna be very interesting to see you know how many folks are you know still on that list are able you know because some got really hurt some didn’t get hurt at all probably so you know and we’ve heard all kinds of stories you know with like you like you could you talk to your investors all the time sort of week you know and we’re on you know we have a full we have full time people were you know just talking to our investors right is all that so well you know we’re hearing from them and a lot of them, yeah I mean we have people that said I need to sell all my shares because they got hurt and you know in the real estate is doing pretty well and they you know so we have that you know there’s all kinds of scenarios it just depends on where people had their money.

Buck: Yeah let’s I’m also curious to knowing that you guys are doing really well a multi-family our groups continue to be strong in terms of performance so far say this say this somehow miraculously we we have a relatively soft landing as we move forward here, does that, and then we don’t have a lot of bumps because you know right now you know most good operators seem to be doing okay right? Is it possible that because of that and because of sort of that resilience that multifamily could see a paradoxical rise in prices after this all happens almost as a safe haven?

Ken: I mean anything’s possible you know but yeah I don’t think it’s gonna happen yeah you know I think you got you know let’s not forget the people who are renting from us are gonna be many of them are gonna be unemployed. Tight now they’re propped up artificially no with cash from the government yep and you know they’re gonna be you know that’s gonna determine a lot you know those are real people a lot of them renters a lot of homeowners and a lot of business owners and you know what happens when the money stops? Those are the people that pay us so I I think that you know is it possible absolutely you know like I said you there’s always you can find one property I’m sure that’s very just fine. I will tell you the ones of mine that have done great are my senior properties because they’re not really plugged in you know they’re already getting their retirement money sure and you know we never they never missed a beat not one of them because you know they already have their fixed incomes already set up some of them are in the stock market but they had pensions and Social Security and all the other things that were rolling in for them. Those are the ones in our case that have done the best but we have properties that are heavily service-based you know restaurant tourism you know Airlines for example what are they gonna do? Right now they’re furloughed they’re getting money well what happens when they don’t? So you know those are real those are real things that’s I think real estate multifamily it’s gonna take it in the chin you know in certain markets. Certain markets are gonna be great. You know like it’s interesting I’m not a big fan of Cleveland personally but Cleveland Clinic is booming as you would imagine you know and so you know the I know friends that are buying there and they’re killing it you know they’re like oh nothing we have missed a beat there and you know I mean being a physician all right strong Cleveland Clinic is right it’s gonna be based on that.

Buck: When will we know, like what signals to you that it’s when it is time to buy? Because even when okay say as you and I both suggested that there are some defaults coming maybe in September and October you start seeing some defaults you start seeing some distress, but at that point is it still a falling knife? At what point do you know that it’s okay to get back in?

Ken: Well I think that you know 2020 is gonna be observation time and you know if I want something for example bar and I’m having a tough time paying the mortgage, I’m talking to the lender right now and you know so I’m probably working on that and you know and so what happens is again death of a thousand cuts. The first thing that happens is the landscaper doesn’t get paid when the advertising doesn’t get paid then you know and it kind of works its way up and then you cut back on your payroll and then you know then now you basically have three things: you have your insurance your property taxes and your mortgage and you have to pay those and when those start to tank then the lender starts to get involved and then the foreclosure process can be you know wow. But most people in the multifamily space are not going to just come turn the keys over you know like an at home it’s not that’s not how it works right it’s a slow progressive thing and they’re gonna be working with the lender and trying to restructure the loan and you know can we get rid of principle and just still interest only and can we lower the interest rate can we put the forbearance on the back end and you know can we draw this out can we do that blah blah blah blah blah blah blah blah. And so the lenders either gonna say no or yes and that’s gonna put stress on the asset or not you know all the while the ownership groups gonna fire a management company bringing out another one fire another one bring another one on you know thinking that they can you know bring in some miracle. So all that’s gonna happen and it’s gonna happen this year next year and personally I wouldn’t even start looking for about a year.

Buck: Got it so let’s shift gears a little bit. You were nice enough to send me a copy of a book that you wrote and I was surprised because it was fiction. How did you get into fiction? Tell us about the book.

Ken: Yeah and thanks yeah well alright well I’ll tell you first of all you know I think that’s my sixth book and so you know there’s books that are super technical how to do this, how to buy real estate, how do this you know, how to get a mortgage all those kinds of things. Nothing wrong with those they’re great I have written those and a property management one you know to on real estate. And so what I wanted to do Buck, was I wanted to some of the best books ever you know Rich Dad Poor Dad, What Color Is Your Parachute?, Who Moved My Cheese?, you know those books and many others, they’re stories and you know and they have what we call you know staying power year to year to year. And you know sometimes like if you look at I actually own a publishing company too and so I’ve been able to watch and I’ve been in New York a zillion times and these book fairs and book shows and talked to publishers and authors and all that. The autobiographies they’re you know they’re kinda like they go up all done you know up down up yeah you know and then some books you know go for a long period of time and then there’s people you know like Napoleon Hill you know that’s more of a philosophy book you know that’s you know continues to chug along really really well and same Rich Dad Poor Dad it was in that category and being good friends with Robert you know I said you know I obviously I said how do you you know how did you make that happen? He said well you just gotta take real business principles and stick him in his story you know like the Monopoly game. So that’s what I was trying to do in this book was you know to work a story around you know real things are happening and boy I tell you the book’s just taking off so far you know I’ve gotten a really really good review from Publishers Weekly and you know people are loving in and then I would could have never time this had damn it cuz basically the books about a 50-year-old guy that loses his job at 50 you know and he doesn’t have real assets and it’s essentially with the books about and then his dad was an entrepreneur and he’s trying to put his daughter through college and his ex-wife is an entrepreneur and you know he’s like you know you went the whole corporate route and so you know so I was able to leave things in like inflation and currency you know like the printing of money even though I put it in the book and you know here we are. So stuff like that you know little things that happen in history that sometimes people forget and the best part is is it’s all centered around a property that I own which is called Orchard Canyon it’s a resort that I own in Sedona.

Buck: And the book is called Return To Orchard Canyon.

Ken: Yeah so it’s a real resort. It’s been around for 100 years in Arizona. It’s kind of an iconic place and we were actually full for the entire year until this happened and then we return all those deposits and close and you know that’s another asset that I own. I don’t know if you know the real estate guys did a big mastermind book study with like a hundred people or something and then I did a zoom call for all of them and that was really cool to hear everybody’s perspective ask me questions about why they put that in the book and why did you put that in the book and you know sometimes real estate books are technical and boring and so I was trying to open people’s minds up through story.

Buck: Yeah fantastic night and obviously you know your commitment to education there and it’s just you know understanding how best to teach people. You know speaking of education tell us about you know you’ve got some other educational channels right some other ways you can learn.

Ken: Yeah well I have another book coming out another ABCs of Buying Rental Property that’s coming out in September. I started this YouTube channel just recently and that’s taking off like crazy, you know and because obviously we’re on lockdown I’m like well it’s time to teach people yeah you know and so obviously the and then https://kenmcelroy.com/ you know we’ve got videos and educational videos all that there but we’ve just been I’ve been on an education man I’m working on another book with Robert Kiyosaki called the infinite return you know which is fun as you know that’s what you do yeah all right great I’m having fun right now just pop with this stuff out and like gosh I don’t I just put a video on I got 350 views in two weeks or something. I don’t know how that works but at least we’re having fun.

Buck: No that’s great and obviously the one last thing that you left out was that if you’re interested in finding out what Ken does on you know and becoming part of his investor list we have a lot of accredited investors in our group and make sure to visit, it’s mccompanies.com right that’s where you would sign up for you know if you’re interested in investing with you guys?

Ken: Yeah thank you.

Buck: Yeah you bet. So mccompanies.com and I’m personally an investor with Ken. He’s one of the few people out there I would trust my money with as well. Ken thanks so much for being on the show today it’s been great having your perspective.

Ken: Buck, I always love your questions. You know you’re always I think a little bit more I had than a lot of people you know you’re trying to figure out and looking forward so I always enjoy being on your show so thank you.

Buck: Thank you. We’ll be right back.