158. $2B Investor: Anyone Can Build Wealth with Real Estate

23:07We would have done cash out refis a couple of times. And it would have been part of my passive income long-term strategy instead of a short-term capital gain strategy, which is extremely short-term in thinking. So we completely went away from a short-term hold model to a long-term hold model that benefits the investors and takes advantage of the tax loss. Yeah, absolutely. There's a lot of lessons we learned there. And that's a very expensive lesson, obviously, but obviously it makes you better for who you are today and makes you better suited to make decisions based off of those experiences. And you threw out a lot of terms there that people are going to love to hear.

23:43And people are probably thinking right now, and I'm like, you know what? Twist my arm. I'm ready to get into real estate investing. So for the listeners that are listening right now and they want to get started, what are some of those essential steps to take before they buy their first investment property? I've given this a lot of thought. I really believe that people should go through your traditional real estate school for the education, not necessarily for the license. So, I mean, I'm not saying that you shouldn't do the license, but what I'm saying is that's like a, you know, fire hose of information.

24:13Let's just break it down. You got property management, you got commercial, you got residential, you got land, you got title, you got legal, you got appraisal, you got all the stuff being thrown at you in a short period of time. Now, there's only one reason that you want to do that. And that is just purely so you know the lingo, you know what to ask. You might only partly know, but you know, if you're going to immerse yourself in this business and you're going to lock horns with some investor or you're going to try to raise capital or you're going to invest with somebody, you actually need to know this stuff.

24:44Otherwise, you're basically taking money out of a stock market and giving it to somebody. You don't even know what to ask them. So I just believe that it doesn't take long. You know, I mean, we're talking about four or five weeks of immersion. Then from there, you can decide, OK, I want to be an appraiser. I want to be a land developer. I want to be in property management. I want to get into the commercial office or the retail or industrial or apartments or whatever it is. I also recommend you do it in person because what you're doing is like, I still am friends with people. I went to real estate school years ago.

25:18I did it in Washington, Nevada, and Arizona because I wanted my broker's licenses in those markets. Now, oddly enough, I got rid of my licenses. I actually don't need them to do business. I just wanted to know what the state laws were, the property management laws, the landlord-tenant laws. Those are important things if you're going to be a property manager. So what that does, Ryan, is it just establishes the base. And it's no different in your world if you're going to one of these tech conferences annually and you're sitting in there for two days, just pouring yourself into your craft. It's the same.

25:50But to be able to just to say, hey, I've got some money, I'm going to invest it without that backbone. It's really, really not smart. And then if you want to make it into a career, then the next step, of course, is just to pick a lane. And it doesn't have to be a lane you stay with either. Like you could say, I'm going to be a residential realtor. OK. And then from there, I'm going to get on MLS and I'm going to start buying fourplexes or whatever. And then you start there and then become an investor and then you get into wholesaling and then you get into whatever. And that's all I'm saying. You just got to get yourself into the right environments, the right circles, but you have to start with a base of knowledge.

26:23And that's actually, you're not going to get that anywhere else than those basic local schools. I want to be mindful of people listening that are trying to decide on what lane that they should choose. Is there one that you think is best for, let's just say someone doesn't know anything like a just typical beginner? Yeah. Is there one that's better? Okay. So here's what my experience has been. Like when I went, there was probably a hundred people going through this at the same time, let's say, and I've still in touch with a fair amount of them. And we all went so many different directions. And you know why?

26:54It's because it's like, this interests me, I'm going to go this way. And this interests me, I'm going to go that way. So what I always tell people is that's why I like this. You're going to be exposed to 20, 30 subjects. Go find a mentor, or a coach. You don't have to pay for it. Just go through the knowledge, start your network, get in those arenas. The best thing you could do is this is why internships are so important. My kids, when they went into university, like I had one son that was really interested in advertising, you know, marketing. And so as a junior, he went to go work at an internship for free at an advertising agency.

27:27And after that three month period, he said, you know, it's not a business I want to be in. That's actually the most important thing. It's really about saying, no, I'm not interested in that. I don't want to do that. I don't want to be an appraiser. That's boring. I don't want to do this. I don't want to. And so you can decide. And that's why I think it's a personal. Some people are going to want to quit cash. That's unfortunately, that's not, in my opinion, that's probably not the way to look at it, but that's going to be in the commercial arena, right? You're going to get the bigger commissions, but it's a long process.

27:56If you're going to jump on board with a company like CBRE in their beginning program, which is phenomenal, they're going to train you, you're going to be 10, 15 years before you're in the big money. And so there are really, really, really good set paths. And I just suggest everybody go in first and then do what they want to do and then be quick to say, okay, I don't like this. I'm going to move on. What I've started reading between everything that you're saying is one, real estate is truly a long-term game, both from an investment perspective, but also a career perspective as well. And there's a lot of value in saying no, especially to a lot of different things.

28:31Yeah. On deals and everything. I love that. Let's talk about deals. How do you determine whether a potential property is a good deal? Are there any specific metrics you're looking for or red flags you look for? Oh my gosh, so many. Probably so many. Yeah, there's so many. I'd like the no guy in our office, believe it or not. I mean, you go on the internet and you look, oh my God, he's got all these assets, I've said no a hundred times more. So as an example, over the last three years, we probably looked at, gosh, at least a hundred deals and we bought two. So I think that you really, really have to get in the game, process them.

29:09And then the criteria, my criteria to answer your question is super tight. So if I'm taking my own money and putting it into a deal, it better well cashflow. There has to be a story too. There has to be some kind of story because stories are, easy to figure out. So I'll give you an example. I bought 182 unit building in a senior market years ago. And it was 80 % occupied and the expenses were high and the ownership was frustrated, the management was frustrated, and they couldn't do anything with it. So I went to them and I took a look at the deal and I'm like, okay, I'll buy it. Because one, I'm buying it based on the current operations, which is 80 % occupied, barely cash flows.

29:51And so I got it for a really, really good deal. But I had a plan before I bought it. My plan was simple. The issue was, it's super simple, common sense. And this is the story. Seniors didn't like walking upstairs. That's it. They just did not like. So the downstairs were 100 % occupied and the upstairs were in the 60s. So the upstairs were vacant. The downstairs were full. That was it. Okay. So again, that's the story. So now when I'm going to raise money from a lender or from whatever, I'm like, listen, here's what I'm going to do. I'm going to make the downstairs more expensive. And I raised them$75.

30:29That's it. So every downstairs, now there was a price difference, which is exactly the mistake that this owner had made. So now the upstairs was less. So now people were saying, you know, for$75 less, I can live upstairs. And so the upstairs started to fill up. The downstairs always stayed full. And all of a sudden, it took a while. Don't get me wrong. It took well over a year, almost two, because people are on six months to year leases. Now I'm in the 90s. And my cashflow went up several hundred thousand dollars. I also did a couple other moves. I added a activity director and I bought a 26 passenger van.

31:04That's awesome. To take them to all these places. Now this is a senior community. The cool part about it is the seniors don't like to move if they're treated well. That should be exactly what you do for every single thing. Every property you manage should be the same way. But the seniors particularly, they're not people that are, you know, they're picking up their bags and going across town because they got a new job, right? And so the thing is, is once you're full, it's a nice little cash flowing project. I still own the property and I was able to grow the value of that property by seven or eight million bucks.

31:34And I knew that before I bought it. So when I look at something, I look at, okay, sometimes there's a management underlying problem like this one. Sometimes there's a change of use issue. Sometimes the lender owns it. Sometimes it just needs a tenant and you can immediately increase the value. So I always look at that. Then you drill down into some of the smaller things too. And that is what I think people, I think the most overlooked thing with real estate is that it doesn't actually work at all without people. I know that sounds so obvious, but let's take a look at commercial office buildings right now and with the work from home.

32:15Okay, it's getting clobbered. Okay, three years ago, wasn't a problem. Now that's changed. So you start to look at people when they leave an area, when a big employer or let's say a military base redeploys or shuts down or whatever it is. As people move around, it affects real estate significantly. And so those are the bigger picture things that you got to pay attention to. You want to be where the market's headed. You want to be where people are going to be because you'll always be better there. Those would be good deals, whether it's retail, industrial, office, multifamily, single family, land development.

32:50It always works in markets that are growing. How should a new investor choose the right market for their investment property? Should they stick to a market that's close to them? Is it the ones that are growing? How should a first beginner side? Another great question. So I get this a lot. If you're in a market that's dying on the vine, I like to pick on Detroit. Detroit was the fifth largest city in the country, right? Now it's less than half, okay? And there's a bunch of reasons. But now you're starting to see it in San Francisco. You're starting to see it in Portland. You're starting to see it in Chicago.

33:23So why is that? It doesn't really matter. Like, honestly, it's irrelevant. The reality is, is people are moving out for whatever reason. And not to get political, they just are, period. So how do you check? Well, there's a bunch of ways. So Ryan, when you moved from Iowa to Texas, you got a new driver's license. And that's a data point. Okay. You probably moved your stuff, you know, from Iowa to Texas on a rider truck. That's a data point or a U-Haul or a moving truck or United Van Lines or whatever it is. So those are all data points and they're available online. All you got to do is Google this stuff.

33:58And you'll see, especially pandemic, there's migration patterns of people moving all over the place for work from home. And so these are very important things. Like, as you know, we do business in Austin. Austin is on fire, right? It's hard to get a house. It's hard to get a restaurant reservation. It's hard to get your kid in a school. It's hard to get a doctor's appointment. You know, some of these like veterinarians and doctors are not even taking new patients. Why is that? That's because a lot of people move to an area with a current infrastructure and it's putting a lot of pressure on this place and it's driving prices up, period.

34:33And everyone who can charge more is charging more. Okay. The other thing happens where they're moving from, right? So I grew up in Seattle, north of Seattle. And that's a very different scenario. You know, there's people that don't want to live in downtown Seattle. So therefore, you have the opposite effect. And so you start to look at where people are going, back to my people comment. And so when you are looking at where to invest, always look at, you know, what's going on, Like what's going on here? Like what's going on with college campuses? Are they trying to do the, you know, teach from home?

35:08You know, what's going on with the dorms? What's going on with the housing around there? Every single college has a story, right? And so you look at that and then you start to look at the tech business, like where you are, like why is UT on fire? Well, Michael Dell probably started it and then the whole bunch of other people started it. You know, it's kind of the new Silicon Valley. You know, there's a lot of reasons to be in Austin. And so you start to look at these things that way, and then you start to realize the impacts that it has on the surrounding economy. And then you just try to put yourself in the right place.

35:39For someone that wants to invest in a super hot market like Austin, Miami comes to mind as well, but they might have limited capital. What are some creative strategies can they use to get into real estate investing in these hot markets then? Well, there's a lot. First of all, those would be two very hard markets to get into as a beginner, just to be blunt. But like, I'm not saying you shouldn't try, but what I'm saying is when you're talking about it and I'm talking about, it's game over. What you want is you want the town 30 minutes from Miami because Miami is too expensive. What you want is you want Dripping Springs, you know, instead of Austin.

36:14You know, you want like, what are the little suburbs, you know, like out by the domain, like out by in Austin. You know Austin well. Yeah. So those are markets that blew up as a result of the unaffordability of a downtown. That's what you want. And so you can still look at those markets, but you got to think of the people, right? So, okay, why are people driving an hour, 45 minutes one way to work? It's because they can't afford to live there. And so that's the hidden sauce, secret sauce. That's what you want. You want to drill down to Austin, drill down to Miami, and then you want to look at what's going on in those individual sub markets.

36:50That's actually where the real money is going to be made because you got these little bedroom communities in the little suburbs that are getting overrun with people because affordability problems. So the question is what you do there is first you do all that homework. The second thing is, is then now you go and you find a deal. And one of the quickest, easiest ones is just seller financing. That's a really, really good one. I was playing golf yesterday with my son and a young man who's 22 years old that just bought a home less than a year ago with seller financing in Tempe, Arizona. And I asked him, is it cash flowing?

37:23And he's like, yes, barely, but it is, you know, but it's all seller finance. And I asked him what rate and we got into all the details. But the point is, is the seller financing is a big deal, especially now with these higher rates because the banks aren't really helping people. You know what I mean? Like these rates are high. So if a seller can offer 5%, which they can, seller could do whatever they want. They're selling their property. And also sometimes they can defer their tax. A seller, if you're paying them over time, it helps them on a tax standpoint. So there's lots of ways to slice real estate.

37:55There's lots of ways to get into the game. I'm a big believer that you actually don't need money. Every single deal we find, we don't have the money before. We just bought a building in Vegas two weeks ago, actually. Low 90s, 90 million. Our loan, we got a loan for in the 50s. So I needed like 40 million. We don't have 40 million sitting in our bank account. here at our office, right? Now I'm heavily invested in this too. So as my partner, so are other people that I know. But the point is we put it out to our database. You don't have to have the money. You have to have the deal. You have to find the right deal that cash flows, makes sense, has the story we talked about.

38:34So if you find something in Miami or in Austin that has a great story, like as an example, let's say you guys find a vacant building down the road and your company, the one you've grown masterfully, you need 30 ,000 feet. Okay, you find a building and they're everywhere that's vacant. And you say, you put it under contract for a vacant price and you move your business into it. All of a sudden, you create a lot of value. So it's what you think. It's what you see. That's a good way to think about it. How do you create value in real estate? What do you see that no one else sees? That's a really actually interesting way to build.

39:08I love the point of building that story into that. Two more questions about this. Number one, you've talked a lot about cash flowing in business or in real estate investing, give us a reason, of course, why is it important, but how can beginners focus on it from the very start? Yeah. Well, because everything doesn't always work out. I mean, seriously, what saves everybody? Cash and savings. And you never want to have to dip into it, but it's the truth. So if everything's based on tomorrow getting more expensive or more value and you're creating, you know, I'm going to sell for X more later, or I'm going to buy a stock for a hundred and sell, you know, in a year for one 50.

39:47You can't, that's gambling. Yeah, that is. You have to have the cushion, you know, like my partner and I, Ross, I mean, we are like 50 % loan to value. Like we're in the low fifties, our whole company. And so there's a lot that has to happen, you know, for us to actually ever default on rent. And, you know, we can get into good debt, bad debt, and all that kind of stuff. But I think the real point is cash flow is king. So when I bought in Austin and the market turned and it did turn, the value of the property went down. So what I paid was more than it was worth two years later. What saved my butt were my tenants.

40:27I still could pay the mortgage. I still could pay the expenses. My cash flow was way down from what I thought it was going to be, but I was never in trouble on that property ever, even though the value was less. We held it for a longer period. It came back. You know what Austin did after that. And we ended up actually selling it and 1031-ing into something else. But the point is I could have never predicted. The future is uncertain. And so you have to have that cash flow. You have to have the reserves. You have to have, you know, all these safety nets to do this business because there's always, you know, something coming.

41:09There's always something that knocks you off your feet, man. I tell you, you can never, ever anticipate it. And it's never the same thing. And, you know, it's again, I'm like, okay, I missed that. But now put that in the wisdom column, you know, okay, now I'm going to make sure I don't make that mistake next time. So that's why what happens is when you've been investing for 30 years like I have, you've seen a lot. And so you're trying to mitigate risk the whole time. I want to talk one more question. We've talked a lot about real estate. We talked about different markets, hot markets. Is now still a good time to invest in real estate?

41:41Or does it kind of depend on the market and the area you're in? How would you advise? I always think it is. And it's not just because I'm in it. But we're investing right now. We got one. We just closed in Las Vegas in the area called Green Valley. We're buying another one. in Tempe. We're actually building a bunch. I told you about that. We have one leasing up right now we're putting new debt on. We have another one about 25 % occupied and we have another one breaking ground on in January. And so, yes, we believe strongly. And here's why. Again, now, a lot of people put commercial real estate in one big category.

42:14I'm in multifamily. Big difference. Okay. People move from my properties to buy houses. Okay. So I compete with home builders, Right. Even though we're real estate, we're the same industry right now. So when housing prices are high and interest rates are high, it forces people into rentals. Period. It's significantly cheaper to rent today than it is to buy. And that was not always the case just several years ago. And there's all kinds of reasons why. And we don't need to go down that rabbit hole. I think people figure that out. The point is, so right now, if you're looking to be a landlord and you're looking to have cashflow, it looks pretty favorable if you own stuff.

42:56The fact that you're going to have renters is probably pretty high and not in every market and not in every case. So if you just look at the 30 ,000 foot view, I think you'll find that it is a good time based on whatever's happening. Sometimes it's not a good time. When interest rates are low and housing prices are low, it's the hardest time to be in my business. Absolutely. Well, I know that this has been a good time. So we are going to wind down with our five fan blitz questions. And these are questions submitted from our YouTube community. And guys, if you want to join in on amazing entrepreneurs, you guys can go to www.youtube.com slash upflip and submit your questions there.

43:30But Ken, ready for these last five quick questions? Let's do it. Number one, how has your business changed the person who you are today? Oh, so many ways. Like when I was in my twenties, I was surviving. Honestly, I was just trying to pay off my student debt and all that. And then in my 30s, I started scaling my company and I started to support other people. And then you start to realize huge responsibility. And then in my 40s, I started raising money and now I'm investing other people's money. And then you start to realize when you're at that point, you have to have everything firing. So I had to really dive into my employee culture.

44:07I was looking at long-term legacy. I was looking at succession plans. I was looking at how I am as a manager and all the people. So our company has really, really moved to more of a, we have a full-time director of philanthropy on staff. Oh, that's amazing. Yeah. But again, I didn't realize the importance. So I think in order to be sustainable, you have to have an incredible culture. You have to attract the best people. The best people want to work at the best places and the smartest people look for that. So that's probably a huge, huge learning lesson over time. I love that. Number two, who are your heroes?

44:46Wow, that's a good one. Well, I want to say that, tell me your heroes and I'll tell you your values. So I think everybody has a different view on that. I'll tell you who mine are. Mine are first responders, military, really, truly. I think that they do so much. They don't ask for much. and my parents, of course, are in that category just for giving me the character and the values that I have. But I will tell you that people that have a strong moral compass, it's not actors or athletes or anything like that. It's everyday regular people. I know you talked about it, that real estate investing is not a get rich quick scheme, but if you have six months to get rich, how are you doing it?

45:28Well, again, I think what it boils down to, Ryan, is exactly what you guys have done. I would step back from it and I would say, okay, what problems can I solve for other people today? And that's actually it. And so I start with that. And so the first thing that I would do is I would get rid of anybody inside of my circle that doesn't support my future. And by the way, there's a lot of people that have toxic people around them. It just makes things a lot more difficult. Get a new circle. Mine is YPO, EO, those kinds of organizations have helped me realize that there's a lot of people out there that will support you because there are very down moments.

46:09But then you find your niche and go hard on it, like what you guys have done. And then I think that another one is just eliminate any high cost of capital. Anything that's a credit card debt, any hard money, any of that stuff, don't do that stuff. Do not leverage your future that way. And then the third thing is learn to use OPM or other people's money. So what I've realized, especially in this business, and I've had lots of different companies that I've started over the years, Wall Street wants Main Street's money, period. They do. They've created products like insurance policies and pensions and 401ks and all kinds of stuff.

46:46And anybody that's putting a fund together, that's Wall Street trying to get Main Street. So even banks, like when you put money into a bank, the bank's a Wall Street company. They're holding your money. And then you have to beg them to get it back. So the whole system is set up that way. Now, I'm not bashing the system, but once you understand that they need you to place it. So I'm getting the money from pensions, insurance companies, retirement plans, and banks to invest. So all these folks that are putting money into these policies and all these different things, those companies come to groups like me and they say, we're going to give you a hundred million for this, or we're going to give you$200 million for this.

47:23Once you understand the system, I would plug right into that because there's so much money looking for a home, especially for a good operator. I love that. Real quick, these last two, what's the most expensive property you've ever purchased? Gosh, well, over$100 million. Back 10 years ago, we bought eight properties. And I can't remember the price of that. It was somewhere between$100 and$200 at the time. That's crazy. That one freaked me out because I had to put a million dollars hard day one. So I had to put a million bucks up before we even looked at the numbers, but I knew the deal. So that was probably our biggest one at the time.

48:00That was the one I still remember. I was like, I better not screw this up. But now, you know, the thing with inflation is everything, you know, we'll do 150 million in the fourth quarter. Oh, wow. That's a good quarter ahead for you guys. Sounds like a good Christmas coming your way. Yeah. And then last one for you, what are the unwritten rules of your workplace? We actually have core values in our company and they're super basic. By the way, these have been beat up for years. We always seem to go back to them. But one is to be open-minded. Two is to be kind. Three is to be respectful. We navigate with a moral compass.

48:35So do what you should, not what you can. And so especially today, it's hard to call people out. I have no problem doing it. You have the right to. Yeah. I think we just got to get back to respecting each other and stop fighting and treat people with empathy. Absolutely. Well, Ken, throughout this whole podcast, you were so, so amazing. And if someone's like, oh my gosh, I need to learn more about real estate and Ken is the person for me. Where can they learn more about you? Please plug your YouTube channel, LinkedIn, all that good stuff. You've got some great stuff. Oh, sure. Yeah. Thanks, That's right.

49:09Well, KenMcElroy.com is a great place to start. Our company is MC Companies, but we've got the Ken McElroy Show, which is a podcast. We're doing a couple million views a month on our YouTube channel, which is the Ken McElroy YouTube channel. So there's lots of ways to get bits and pieces. Awesome, everyone. Amazing episode with Ken. Three quick takeaways for you. Number one, real estate is a long-term game. If you're looking to invest in properties or make a career. It is a long-term game. There is no get rich quick schemes. There's a ton of value in saying no. That is our second point. Ken has said no.

49:44He said like a hundred times more than he has said yes. And I think he gave the example of last year, they had like a hundred potential deals, but they only said yes to two. So there's a lot of value in saying no. Number three, if you guys are looking for markets to invest in, look at population growth. We talked a lot about it in Austin and Miami, but look around for those suburbs because with people moving to Austin, moving to Miami, the prices are going to shoot up and they're going to move actually outside, 30 minutes out and commute in. So that is where the money is going to be made. And if you're looking for more great insights, don't miss my interview with John Kassman.

50:16He breaks down how to generate passive income each month through real estate investing. Catch episode 152 on your favorite podcast platform in that he gives a great equation on how to get started. So be in tune with that. Everyone, thank you so much for joining today. Ken, you are the absolute best. Thank you so, so much for being here today. Thank you, Ryan. I appreciate your time.