Ken McElroy: 2008 Prices Return for These Properties

24:40You know, you have to be a little bit indifferent. You can fall in love with it after the inspection and after the offer is accepted. Yeah. Once you already own it, fall in love with it, but not until then. Yeah, that makes sense. And is it really 100 to 1? Like, do you feel like it's really that many offers you have to make to get a deal right now? It's a lot. Like, I think you can look for things. Like, I look for Airbnbs because I know that those, are going to be more motivated to sell. I look for flips because I know those are going to be more motivated to sell. But yeah, I mean, I think that you do have to make a lot of offers and you have to look at a lot of properties.

25:11And it's one of those things you have to put more work into being a buyer right now to get a deal that pencils, but it's very possible. Ken, on the multifamily side, you mentioned Texas and Kansas City. Yeah. What's your buy box right now? Is it anywhere? No. We're actually very, very strategic. We follow migration patterns, work, population growth, building permits, walkability, school districts, all of it. So we like markets that are progressive somehow, right? I'm not talking about politically either, but that has been a factor too. People have left because of those kinds of things. But it's really simple.

25:52Without people, real estate doesn't work. It's so simple. They go to the end of the earth or they go to the edge of town because it's cheap and they can't figure out why they can't get a tenant and all that stuff. So you're better off to buy in areas that are growing progressively somehow or whatever it might be and focus on that. And so there are very specific markets that we like. And even I mentioned Kansas City, but there's not very many areas in Kansas City we would buy, but there are a couple. Even within. You know what I mean? And the same thing in Tucson, the same thing in Phoenix, and the same thing in Dallas.

26:29And on and on and on. You have areas like North Dallas that's incredibly progressive. Richardson, Frisco, Carrollton, you're going to have really good growth. And that's kind of the path of progress. So those are the things we look at. Danelle, how has your buy box shifted over time? And are you adjusting it at all based on just market conditions? I'd say my buy box is right around$500 ,000 in North Phoenix or Scottsdale because I just see that those are paths of growth. Tenants want to be there. I've never had any issues, you know, any vacancies really. And I'm getting about the same rent I've gotten from the high.

27:07Like I might be down 100 bucks a month, but it's pretty darn close. That's great. Yeah. And so those are the deals you're starting to see more of. Yeah, I'm not really seeing them at five, but I'm seeing them at like 550. And you might be able to, you know, negotiate closer to that 500 mark. I think what might be interesting, though, is you could tell Dave. So, Daniil had an imputed equity issue, which meant that she had a lot of equity in her condo, but it wasn't cash flowing a lot, right? Yeah, because the HOA was$400. So, she's sitting at, so a lot of times people don't look at their, they look at their equity, but it's not actually producing.

27:41So, she's, even though she had a low fixed mortgage, she goes, you know, I'm going to, 2.8. It's so hard to get up. But, now all of a sudden, she's turned that into a big cash flow. Real cash. Yeah, I'm cash flowing$1 ,600 a month on this property. So that's really great. But on the other one, I was only cash flowing$700 because of the HOA cost. And also, like I said, the downward pressure on condo rents due to multifamily building. Two things I want to reinforce here. One, thinking about your competition, I think, is something a lot of real estate investors miss at front. They're like, this is a great property.

28:18Might be. There might be 300 of them right next door to them too. And if they face some financial distress, they're going to be quicker to lower rents than you are. And that's going to impact you. The other thing that I want to mention is talking about return on equity and measuring the efficiency of your deals. A lot of people, when they get in, they're like, I just want to get 500 bucks a month in cash flow. 500 bucks a month is great if you're invested 15K into that property. If you invested a million dollars into that property, not so good. which is why we always talk about thinking about either cash on cash return, or ideally, the one we really like is return on equity, as Ken was mentioning.

28:56It's a good problem to have. Like if you build up too much equity in your deal, that your cash flow is no longer efficient, it is a problem. It's a good one because you just made a lot of equity, but it is something you should address. And you do that either by doing a 1031 exchange, selling and optimizing, taking out line of credit, whatever it is that you're doing, but trying to access that equity to move it into another deal where you can do better, which it sounds like you're able to do right now. Well, what was interesting is when Ken and I first started talking about this, because about a year ago, I'm like, I think I need to sell one of my condos just because of these HOA fees.

29:31And I was going to sell the one that I just sold because I had debt on it, where the other one was free and clear and I was cash flowing more because I didn't owe anything on it. And Ken made me stop and think and say, okay, I know you're making more on this one over here, but you have so much more money tied up over here. So then we actually did the math and come to find out because I was sitting on this 2.8 % mortgage, my return on equity was so much better on this one that had the loan. And so that's what prompted me to sell the other condo first. And to your point, I never would have looked at that.

30:03So I think some people are like, oh, this is paid off. I'm making all this money, but are you really making all this money? Yeah. Not efficiently. Right. And that's, I mean, it sounds like a little difference, but difference between, you know, a 10 % return on equity and even 12 % return on equity, you compound that for an investing career, it's millions of dollars, probably. And those kinds of optimizations, you don't need to do it immediately in your first deal. But as you grow as an investor, this is one of the key skills, being able to optimize, trade up, trade out. You really got to learn how to do it.

30:37But I think it's the fun part, actually. I think it's where you get to tinker a little bit, move your chess pieces around is the fun part. It's not a bad problem to have. I always thought that I would be a buy and hold, never sell anything. And then you have to really start looking at your portfolio. And it's been really fun, to your point, to 1031 some of these deals into better deals. Yeah, absolutely. All right, everyone, we've got to take one quick break, but we'll be back with Danil and Ken right after this. If my house had a resume, it would probably say great at structure and not much else.

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34:26Welcome back to the BiggerPockets podcast. I'm here with Danil and Ken McElroy. Let's jump back in. All right. So let's talk some advice for our investors. Ken, you were talking about deals. You're seeing them, but lenders are bringing you deals from your hard-earned experience and reputation. But how does like an average investor who's trying to get into multifamily and take advantage of opportunities in the market do that? I think it's going to be hard right now, just to be clear. So what does a lender look for during times of distress? And I think that's the issue. So by the way, you can do this.

35:03But the very first thing that they look for is I'm a lender, I have a problem, and I'm going to sell something to Dave. Can Dave pull it off? Period. yeah it's not if you have the money right like nobody cares about that right now because everyone has the money right you're going to buy everyone can buy a distressed deal the issue is do you have the team do you have the experience can you pull it off and so i'll give you a really good example i had a one of the bigger banks in the country had a 680 unit building in in san antonio that i bought from them directly from the bank so the bank took a write down but the thing was 30 percent occupied almost 200 people living there so obviously couldn't pay its bills couldn't pay so so now what does the bank look at the bank's looking at my ability to renovate the property manage it well manage the construction manage the renovations manage the interest reserve and all the stuff you know do i have the systems and the people and the team to pull all that off because the last thing they want to do is just sell it right and they can't they're it's not financeable, right?

36:10You don't finance something. So they are looking for you to operate it, not just to unload it. Yeah. So that's the big issue. That's going to be the defining moment for people. This is not about putting money together. This is about the team. This is where we're headed, right? So this isn't about going to a weekend seminar and learn how to syndicate. Like, you know, it's not. Really? This is going to be, you know, can you do a 30, $40 million renovation, right. And manage your way out of this scenario for somebody else, right. And so the lenders, or the debt funds, or whoever they are, they're looking at the team, the experience, the wisdom.

36:48And so if you're new in the game, you can absolutely put those people together, right? Like, obviously, you know, this year at Limitless, we're going to have the rooms going to be full of those folks, those folks, the people that have, you know, been through it could help, you know, and that would be a great year to put together your team and your dry powder. vote for what's next. But just to go out and do it and raise the capital would be very, very difficult because even though you might have the money, they might not want to take the risk. Yeah, that makes sense. And you might not want to take the risk just because you have the money.

37:19Yeah, that's true. It's another really good point. Yeah, it's a very good point. Do you think, what about like a smaller multifamily asset if you're looking at 10, 25, 30 units? Do you think there'll be distress with smaller investors and could Should someone who's got a small portfolio of small multis take something like that down? For sure. Yeah. Actually, they're all over the place. Here's what I would look for. I would look for a small multi operator that did a full renovation and their prices are 30%, 40 % adjusted. You could step in and buy that thing for pennies on the dollar and not have to do anything.

38:01Because they bought. They did the renovation. their debt adjusted and now they're not covering their cash flow and they got to get rid of it. And even if it's fixed, uh, you know, maybe they fixed and maybe they did all the renovations, but the, you know, the cap rates are up over six now. So they probably bought it when they're in their fours. Yeah. A lot of people. Yeah. So you're talking about two points on an NOI, even if they have the NOI. So I think if they're holders, they don't have to worry. but if they have any kind of maturity in any way, this really boils down to the cost of the money.

38:35Yeah. Dino, what do you see in this single family? Do you have any advice for people who are wanting to get into this market and how do you navigate it? We talked a little bit about negotiating but any other thoughts? Well, I think there's hesitation. I work with homebuyers and I work with really experienced investors and I work with people maybe looking to buy their first investment. And the difference with the investors is, you know, we negotiate a good deal and they take it, you know, and it's cash flowing. Where my first time homebuyers, it's just good advice even for homebuyers, first time homebuyers and beginning investors, they're like, okay, but if they're so desperate that they're going to go from 550 to 500, maybe we should just wait and just see, you know, and they always want to wait and see.

39:16And you can't do that because you miss out on opportunities when you just wait and wait and wait. Sure, maybe you're right. And maybe, but are you going to act if it does go down a little bit? No, because you're going to wait and think it's going to go down further. So you just have to focus on the numbers. And if you're able to cash flow, then that's really all you need. Absolutely. I think for everyone watching this or listening to this, I think the key here is that multifamily has distress, probably will continue to have some distress. And that's where you can see these huge discounts. And hopefully we'll see a rebound and you'll be able to take advantage of that.

39:51With residential, the discount isn't there. And even if it comes in the next year, at least everyone who listens to this knows my opinion about this, it might go down a little bit. And I don't think we're going to see some dramatic crash in housing prices. And so it's really just about what you said, finding good assets that cash flow. If you find them, the question is, what else are you going to do with your money? Are you just going to sit on it and wait? If you have something that cash flows and is a good asset, it usually makes sense to actually go out and buy that. And just because the seller's willing to negotiate with you does not mean if you wait, they're going to negotiate more.

40:26I've had so many clients where it's like, I'm just going to wait. And then a few days later, the deal's gone. And you want to have the data and you want to make sure you're cash flowing. But then after that, you just have to just trust and do it. And if you're going to hold it, you're going to be fine. Now, when people come to me and say, I want an investment or to buy a home for five years and then I'm going to move or I'm going to sell it, then now might not be your best time to buy, you know, because who knows what the real estate market is going to be like in five years. But if you're planning on holding it, then you just need to just do it.

40:56Yeah. Great advice. Well, that's a perfect example, what Danil and Ken just said of how we talk about looking at data, but grouping things into a metro area, especially in a place as big as Phoenix or LA or wherever you're investing, just doesn't make sense. You really need to dig into individual levels. You can find that data. If you're in the single family space, a lot of it is available for free. You can go on Redfin or Zillow. Use ChatGPT with caution, but you could get some of that out there. It's a little harder to come by in the multifamily space. You usually have to pay for it. But if you're going to invest in multifamily, go pay for it.

41:34You have to do it. Data is everything. Honestly, every single move we make is data driven. I love it. Yeah. And you really have to look at even going on Zillow or Redfin and looking at the different rents in the different areas and how many rentals are available in that area. I mean, it's all, you know, everyone always asks my buy box and my buy box is like certain roads, certain blocks. Like it's not this big ever expanding area because you have to look at where you want to be and where tenants want to live. And because of that, I have very low vacancy rates where to Ken's point, some people to get a better deal, they want to invest way outside of town.

42:10And that really works when rents are going crazy and everyone's moving here and everything's booming. But now that things have pulled back, those rentals are empty or they're significantly discounted because now people can't afford to live where they want to live. And so you see them kind of moving inwards. I'll give you a great example. We have an area like everybody has these old aging malls all over the country. We passed one driving. Yeah, right. They're everywhere. right so where daniel decided to focus um and anyone can do this um a big big developer bought them all they ripped it down i'm talking about macy's i'm talking about sears i'm talking about jc penny gone and what did they replace it with whole foods lifetime fitness apartments really cool edgy you know outdoor concept yeah it's not very often you can buy a big chunk of town yeah Right.

43:05So, so she's like, this area is going through a resurgence. Yeah. So she's been focusing, you know, within several blocks of that. And that's, she's bought two properties over there. Yeah. It's just paying attention. That's it. Like, it's just, you know what I mean? It's going on everywhere. It's just paying attention. But it's important if you're going to buy in an area that you don't live in, that you have someone really knowledgeable about the area. Because like, if you're not from Phoenix, you're not going to really understand it. And I see investors do this a lot where they find a good deal with maybe a realtor or somebody that doesn't know a lot about the area.

43:40And then, you know, now they have this rental that doesn't rent what they thought it was going to rent for. It's in a bad area, even though three blocks up might be a great area. It can be that nuanced. It really is. That's the job of the investor, right? Like that is the research that everyone should be doing. Even if you have a great agent, like go learn these things for yourself. It's why I always recommend if you are investing out of state, go visit. I know, again, it's a thousand bucks, but whatever. Go do it. You will learn more in those 24 hours than you do months sitting on Zillow or listening to me blab on the podcast.

44:12I promise you, you will go learn more doing that. And you just get the vibes. The data is important, but you can see, hey, I want to invest in the zip code. But when you go drive around and see it, you'll understand. And the other thing that you mentioned, Danila, it's so important is that it changes really quickly too. Sometimes like if you're looking at rental vacancies or where the supply is or, you know, you might find out about this mall being redeveloped. And if you're two months late on that, people like Danil who are smart are going to know to go buy that. So it's something that you have to continuously pay attention to.

44:47It's not like it takes that much work, but it is something that you need to build into your process as an investor when you're going to acquire things. But I also think, you know, when you hear of I always tell my clients like I hate the word up and coming areas because I just hate that. Because to me, that just means edge of town. They're maybe building some new homes down there. But what you really have to look for is somebody putting a lot of money into an area to make it up and coming. Because to me, just because they're doing a lot of new development and it's far out, once again, you get into that same thing.

45:15People like to move towards the center of town if rents get cheaper. So I like to look at where's somebody putting a lot of money? Where's Whole Foods investing? Where are they putting a ton of money that they're expecting this area to grow? Because that's the stuff that actually moves the needle on home prices and rents. Yeah. My theory, when I first started, I started investing in Denver's booming. And my whole philosophy for like 10 years was just how close can I get to the center of town with a good asset? Like something that's good quality, get as close to it. And Denver's going through a big correction right now.

45:45It's not doing well, but my properties, they're in that inner core circle. It might not have been the most units, but they're still doing fine. And I think that's what you see historically. If you look at the data, the pattern is always people are going to move. If every rent comes down and your paycheck stays the same, you're going to go take the nicer apartment with more amenities and a better place. And I think that that's the opportunity right now. It's like prices are coming down on these good assets. If you want to buy them and hold them for 10 or 20 years, I'm seeing better quality assets.

46:17Even if the prices are still somewhat flat, the quality of the assets is getting better, at least in the residential space. And you have more negotiation. Like if there's stuff on the inspection, you can negotiate that. Where a few years ago, it was just pound sand, you know? So you have to look at all this stuff. And to your point, like if you find an asset, like I always like the cheapest asset in the best area, you know, and people are turned off by that. Like, oh, this house isn't that nice. I'm like, yeah, but the nice house that you want surrounded by crummy homes, that's not going to rent well.

46:44Yeah, you're going to get all these tailwinds. Right. Right. Like what's going to rent so good is this little house. It's the cheapest house. You know, people always told me, don't buy two bed, two baths. They're going to be two bed, two bath homes are going to be so hard to rent. Well, that is three out of the five of my portfolio. And they run amazing because guess what? A single parent with two kids will rent that all day. They get to be right in the heart of Scottsdale and they can afford it. And if they want to go up to three bedrooms, it's expensive and people don't have the money right now.

47:08Yeah, it's true. If you just put yourself in the mind of the tenant, right? Everyone decides where they want to live. most people decide where they want to live, what neighborhoods before they decide on the unit. And so if you're in those out of, you know, sort of tertiary areas, like you don't even get in the search when they type in Zillow, right? Like they're not even going to be in there. So they'll, most people for convenience, for schools, for whatever, choose that first. And you want to be in those good areas. Yeah. And people are, you know, they're on budgets right now. So, you know, before everyone had a bedroom and it was really important.

47:37And now, you know, talking to single parents, it's like, no, like if it saves me 500 bucks a month, my kids can share a room. You know, it's not as big of a deal when people are limited on their budget. Yeah, for sure. All right. Well, thank you both so much. It's been long overdue to have you both here. This is awesome. And when, if people want to learn more from you both, where should they do that? Well, we have the Ken McElroy show, which is a podcast and on YouTube and we go live every Monday and we have a podcast every Thursday. And then also if you go to kenmcelroy.com, We have a subscription for$10 a month.

48:10You can subscribe and get a bunch of great content. Great. Well, Ken, Danelle, thank you guys so much for being here. Thank you. Thank you. And I'm soon going to be on the Ken McElroy channel as well. So make sure to go there and check it out. Thanks so much for listening to this episode. We'll see you all next time. Thank you all for listening to the BiggerPockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer.

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