Americans can now retain both low income housing tax credit and private activity bonds with the new tax reform in act. This is a need that the government recognized so they created this tax break. Author of The ABCs Of Real Estate Investment, Ken McElroy deals with rental business but is a big fan of home ownership. While he understands why most investors look for good deals with low down payment, he does the complete opposite by finding rental demands in affluent areas because it will lead to less property management problems. Learn more on how you can start getting on track with you financial setting and how to stay on the course.
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This episode is very exciting because I have a very special guest. A lot of you may know him. If you don’t, you’re going to get to know him. Ken McElroy is an extremely successful individual and one of Robert Kiyosaki’s Rich Dad Advisors. We had a great interview, chock-full of nuggets and wisdom. I just want to take a moment to thank everybody for the success the show has had over the last two and a half years. We have over 500 five-star reviews on iTunes US. Every country has its own iTunes store, so it has its own review and rating system. This is just the US. In speaking of other countries, we are also heard in over 125 countries. Thank you to everybody from as far as Israel, Australia, the UK, Portugal, France, you name it. It’s because of you that the show is a success. The reason I do it is to help share information, wisdom and knowledge with you.
Once again, I just want to say that we had an incredible 2017. It was our busiest year ever. We’re on track to make 2018 the same. We love helping real estate investors, people who are real estate investors or want to be real estate investors. If you’re one of those people that have been listening for a while, sitting on the fence, you’ve got some investable capital and you know you need to make a decision on your financial future, let us help you take it to the next level or let us help you get started. That’s what we’re here to do. Just schedule a free strategy session with one of our investment counselors. Have that initial 30 or 60-minute conversation to figure out where you are today, where you want to go, what is the plan and the path to get you there. We can take that roadmap and help you take it one step at a time to achieve those financial goals. It really just comes down to having a plan, executing that plan, and having a criteria that’s attached to it. It’s not that hard to do and we want to help you do it. In fact, I’m probably going to record a podcast episode about that topic. I will try to do that here in the very near future.
Last but not least, I’ve been very busy looking at underwriting some syndication deals as well. I’ve looked at a number of them last year. Unfortunately, they just didn’t meet my criteria and my underwriting basically just punted it out the door. One of them took over three months to underwrite. What we have on the table right now for people who are either accredited or are not accredited but have a smaller amount of investment capital, I’m looking to put together syndicated or group investments of ten-pack or twenty-pack single-family homes. That’s something that I have started working on. However, I’m probably not going to release or announce that for a month or two. Two opportunities I’m working on actively right now and that actually is open to accredited investors are cannabis-related investments. Believe it or not, real estate does play into some of those opportunities. You would have to just reach out to me directly for that information and I would need to connect with you via email and/or phone before I can send you that information.
If you missed our last episode, be sure to listen to Exploring New Markets.
Enjoy the show!
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Ken McElroy on The Economy, Finding Deals, Real Estate Myths, Property Management, and Achieving Goals
It’s my pleasure to welcome Ken McElroy to the show. Ken is the Founder and Principal of MC Companies where he oversees the asset portfolio and leads the day-to-day operations. With over $700 million invested in real estate, Ken offers a unique perspective on how to get the biggest return on your investments. Ken is also an advisor to Robert Kiyosaki of the Rich Dad Company and wrote numerous books and audio programs, including his first best-selling book in 2004, The ABCs of Real Estate Investing, followed by The ABC’s of Property Management, The Advanced Guide to Real Estate Investing, and most recently his book on entrepreneurship, The Sleeping Giant. Ken, welcome to the show.
Thank you. It’s great to be on. I’m really looking forward to this.
It’s great to have you on. I’ve been wanting to get you on the show for quite a while. I’ve been a little too busy and I’ve actually skipped some episodes. I finally had the privilege of meeting you at a video recording studio in Phoenix where you and I were part of a curriculum for an upcoming wealth training program along with guys like Russell Gray, Tom Wheelwright and several others. That was a lot of fun and it was great to connect with you there.
It was a nice day, anytime we can do good quality education. There’s not a lot out there. I like to show up to those things.
Ken, I love your books and I feel that they should be on everyone’s must-read list. Some people might not know who you are, so let’s just start by learning a little bit about you. If you don’t mind, just tell us how you got started in real estate.
It was a little bit of a fluke out of university. I grew up in Seattle. In the ‘80s, as I was graduating from school, a friend of mine asked me if I wanted to manage an apartment building in Downtown Seattle. Being broke and had student debt and all the things that come with that, he said, “It’s a free apartment plus a little bit of a salary on it. All you’ve got to do is collect rent.” Obviously, that turned into really an opportunity for me to learn the business. While I was finishing school, I was managing the 60-unit building and ended up doing everything to it. The construction, I had a construction background because my dad was a contractor, and collecting the rents. That’s really when you can take all the stuff that you learn in business class and apply it. I decided to get my real estate license and I ended up managing a bunch of properties all up and down Seattle and Tacoma, the corridor there and all the way up Canada. I really jumped into the property management world. I was in property management for the first eight to ten years. Then I made the decision to start buying.
I would say the property management side of the business really gave me the courage to understand the numbers and understand how to run things and understand how to take on bad projects and turn them around. I was really grateful of having that opportunity. I never looked back from there. Now I own 10,000 apartments, about $1 billion worth. We have 300 employees and we’re in multiple states, primarily Arizona and Texas. We do ground-up construction and we do value-add. We’ve done condo conversions. I own some commercial buildings. I own storage facilities. I’m building them. I’ve just expanded my knowledge into other industries now. We got there through syndication. You quickly run out of money and you have to learn how to raise it, so I had to learn that. I had to learn how to talk to lenders. I had to learn basically everything.
Along the way, I met Robert Kiyosaki. A lot of people know who he is. I actually did not know who he was when we first met because I hadn’t read Rich Dad Poor Dad. I was already knee-deep in real estate. Before I met him, I actually did read it. I ended up reading the book and then meeting with him and Kim. They ended up investing with us. Most of the stuff that Robert talks about, if not all of it, is with our firm, any of his real estate investments that he talks about publicly. He asked me to write a book and I did. I donate all my books to charity. All my speaking engagements, they all go to charity. That’s why I write them actually because it’s a great way to fund non-profits. It’s been really fun and it keeps the edge. When I have to speak or teach, I get very prepared for those things and I really enjoy doing it. It keeps me on the leading edge of a lot of issues, so it’s been a great balance for me.
To think of where you came from about twenty years ago to where you are today is unbelievable. A lot of people might look at that and say, “He’s an overnight success.” It was an overnight success that was twenty years in the making. I look forward to getting some of that wisdom shared with our audience. In terms of your books, I didn’t realize that you were giving the proceeds to charity. I think that’s a great idea.
It’s a great way to do it. I’m writing another one. I always have some kind of non-profit in mind.
Let’s just start with a macro thing here. I’ve been looking at the news recently and Congress just passed a new tax plan, which is over 560 pages. It’s the first major tax reform in decades. There are people out there saying that it’s going to hurt the economy and then there’s a whole other group of people that are cheering it on and saying it will stimulate the economy. They both make valid points, but I wanted to just get your opinion on this. Do you think this new tax plan will be bullish for our economy and especially for real estate investors? What do you think?
I do. I think Tom Wheelwright would be a great person to talk about this. Tom is a Rich Dad advisor and is an expert in tax. I’ll give you my limited viewpoint on what I think. This tax reform, for my industry, gave us numerous critical victories. It provides tax cuts for individuals. It provides pass-throughs for our LLCs, our Limited Liability Companies, our partnerships, our S corps and the REIT entities, not that I’m a REIT. While it does that, it leaves intact critical provisions that promote the development or operation of apartment housing. There were a lot of things in the tax code and that is why a lot of people invest in our deals is because they can invest and cashflow tax-free with the depreciation. As a multifamily firm, we’re going to be able to continue to fully deduct the business interest and conduct like-kind exchanges, the 1031 exchanges, and we’re still going to be able to depreciate our buildings over 30 years. It was 27.5 but that’s really insignificant. There is big victory for the production of affordable housing in the act too to retain both the Low-Income Housing Tax Credit in the private activity bonds. There are a lot of things that bode really well for us.
I’m throwing out a lot of jargon and a lot of people might not understand what that means. Basically, what that means is that my industry as a whole benefits by investing into housing for people. As Tom Wheelwright will tell you, “The government essentially tells you where they want you to put your money, through tax.” Right now, there’s a big, serious supply issue. There’s not enough apartment housing, which is why we’re having these crazy rent rates and the prices are going crazy right now, at least in my arena. That’s because there’s not enough. The government has recognized that and this is an incentive for multifamily investors and builders, contractors to keep investing into the sector and they get rewarded for it.
We’ve had Tom on the show before and he’s always said that the tax code is really a playbook for investors on where you should be putting your money and where you can get the most tax benefits, which is an immediate return on the bottom line because the less tax you pay, it’ll go straight into your pocket.
The tax book, the tax code and just really legal, it can be overwhelming. He’s right. The point is that the government, if they want you to invest in alternative fuels, they give you incentives for that. We’ve seen this over time. When the government recognizes a need, they create tax breaks in that area for people to benefit from if they want to go into that area. It is a very important thing to watch. For my industry, multifamily, we did very, very on well this round.
What about for the individual investor, the guy who’s out there building a small portfolio of single-family homes or duplexes? Is the same true for those guys?
I’m a layman when it comes to this. From what I’ve read, I believe so. The biggest reason to invest in real estate, in my opinion, there are two. Cashflow is one, but also you can generate cashflow with no tax. Most people have a tough time getting their head around that. My company is distributing over $1 million a month and we’re hardly paying any tax on that legally because of the depreciation. Let’s say you buy a $30 million apartment building. You get $1 million a year of depreciation expense. If the property is kicking out $500,000, $600,000, $700,000 in cash, then what happens is that you actually get to write the $1 million off of that. You’re actually showing a loss. You’re distributing money and you’re showing a loss. It’s ridiculous.
It’s a loss on paper but in actuality, you have hard-earned spendable dollars that flow through to your pocket.
That hasn’t gone away. It’s an incredible benefit.
I don’t think there’s any other asset class that provides that benefit. Real estate is by far the king of preferred investments. That’s a good segue way here to the topic of home ownership because you mentioned the fact that there is tightening in the market, that there’s a shortage of supply. Today in the US, home ownership is about 63.5%, plus or minus, which is down from about 69% just twelve years ago. That number has been propped up because of the people that are 65 and above. At the same time, I read a Harvard study recently that the home ownership rate for those that are age 35, I guess that would include a lot of the millennials, is only 31% which is very, very low. John Burns is forecasting home ownership to fall below 61% in 2025 because of low incomes and other factors. Is home ownership a myth and what do you see in the future here?
It’s low. If you look at other countries, which is a good and healthy thing to do, we’re healthy. If you go to Europe or Canada, there’s a balance everywhere. When we got up into the high ‘60s, that was actually under Bush. He was promoting, “Everyone needs to own home,” and that created the bubble which everybody is still dealing with right now. It wasn’t actually even Obama, although he had to deal with it. There’s a balance that’s necessary. I’m a member of the National Apartment Association and the . There’s about a 35% need for multi-housing no matter where you are in every sector. There are always going to be people that are mobile or they’re tentative on their jobs. There are a lot of people that are actually selling their homes and renting right now. Then you’ve got your students and you’ve got your folks that can’t quite afford a home right now. I’m a big fan of home ownership for one reason and one reason only. I don’t think people are very diligent on saving any money at all. I think that people consume so much. Every time they get an increase, they go buy a bigger house or get another car or buy a boat or whatever. I think if people had a home, then they can build up equity in that home hopefully as they pay down because that mortgage interest is also a tax break. I’m a big fan of home ownership even though it directly competes with my industry. I think it’s a necessary piece for Americans to survive.
We live in a consumeristic society and people love to spend. 50% of the US population cannot scrape together $500 in an emergency if they needed to, which is a scary statistic. What you’re saying is that home ownership is essentially a forced savings plan because you have no choice but to amortize your loan to build equity because you don’t have a choice but to pay a mortgage payment every month.
I think without knowing it, they’re building their own equity. In all honesty, even though I’m in the rental business, I think it forces people to pay their mortgage on time and build equity in a home. I’m a big fan of home ownership because a lot of people right now don’t have a lot of savings. It’s really crazy to me.
I don’t know if that means it’s bearish or bullish for us as real estate investors. You’re pro home ownership but at the same time, we have crippling credit levels across the country, including student loans. The millennials are not in a big rush to go out and buy a home, so that just means more tenants for people like you and me. I think that’s bullish for us.
It is. Whenever we see home ownership go from 69% to 63%, that’s the entire reason there’s so much pressure on the multi-family industry. There are literally not enough apartments for demand. They say that the demand goes out to 20%, 25%. We’re really, really undersupplied right now. My industry is hotter than hot and it will be for a while.
I like to look at trends and that’s exactly the trend. The trend is that, for the foreseeable future and probably up until 2025 according to John Burns, we’re going to see home ownership continue to fall, which means an increasing demand for rentals whether it’s single-families, duplexes, fourplexes, apartment buildings, whatever the case may be. I think it’s a great time to be in real estate as a real estate investor. I’m very happy about that. Two of the major things I look for when I’m looking at markets and choosing markets are job growth and population growth. However, because of cap rate compression here over the last four or five years and the thinning inventories that we’re seeing in all these markets, we’re having a hard time finding more markets and more inventory. My question to you is, how and where are you finding investable real estate deals today? Although we’re getting through, we’re having a challenge.
Those are the two primary drivers that we follow as well, Marco. A lot of people are moving to second and third-tier markets. I would say Las Vegas is a third-tier market. New York and Boston would be first tier. Phoenix would actually be second tier. Tucson would be third tier. Vegas would be third tier. You really have to do your homework and to see, as Wayne Gretzky says, “Where is the puck going?” They asked him why he was such a good hockey player. He was like, “I would skate to where I thought the puck was going.” It’s the same thing. Each city is so unique in the way that they’re attracting business or not. If you can get your arms around the little nuances that go on all over the country, whether it’s Florida or Arizona or Washington, it doesn’t really matter. Every state and every city is pro this or not. I’ve seen entire communities resurrect over the price of oil. I’ve seen them crash over a military deployment. You start to get a little smarter about things like that. You’ve got to be careful of those things. It’s like bitcoin. I remember everybody’s running up to the Bakken when oil was going crazy and they had all those oil reserves up in North Dakota. Everybody was going up there and building housing. Then a lot of people lost money at the end. I’m not saying bitcoin will or won’t. I’m just saying that you want to invest in a market that has some diversity and has some stability and isn’t predicated on one kind of industry.
We were pitched a lot of deals up in North Dakota when oil was $100-plus a barrel and that market was booming because there was literally no housing for people. You look back now and you realize, “That place is almost a ghost town.” I call those markets one-trick pony markets. Although, I’m just ever so slightly surprised to hear you call Las Vegas a tier-three market. I’m guessing that’s because so much of that economy is based on tourism. Is that true?
I used to live there and I used to run 4,000, 5,000 units there and I bought investments there. It’s only an hour flight for me. The entire engine for Las Vegas is around the person that flies in and spends $1,000 on hotels and dinners and bottles of wines or going out or whatever and then flies out. If people aren’t doing that, Las Vegas gets hurt. If you really want to take an interesting view on Las Vegas, all you have to do is take a look at the big boys and see what they’re doing for hotel rates. When you start to see the $99 hotel rate, you know they’re hurting. That means that things aren’t going so well. You’re not going to see that around March Madness or Super Bowl or things like that. Generally, the health of Las Vegas has to do with casino occupancy. They say that every room in Vegas produces seven jobs. The seven jobs would be not just the people inside the casino, but they would be the people that handle the linens, the people that deliver the food, anything and everything that would happen outside of the casino too. There are not a lot of new casinos being built although the economy is starting to come back and Vegas is actually doing okay. The point is that I consider it a third-tier city because it rises and falls based on consumer spending.
My interview with Ken McElroy will be continued on the next episode. I look forward to seeing you there in continued success.
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