Get Rich Education 86: Ken McElroy | Recent Deal Flow, How Banks Work, Demographics, and KenFlix
#86: Ken McElroy is our guest today. He’s the Rich Dad Advisor for real estate, controls more than 10,000 residential units, and is one of the best-known and most successful real estate investors in the United States.
He reveals where he finds his deals today! Learn about how you can profit by acting just like the bank does.
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Listen to this week’s show and learn:
02:35 Keith brings you today’s show from Alyeska Resort in Girdwood, Alaska.
05:50 When real estate prices rise, cap rates fall.
7:58 Can’t beat the bank? Then BE the bank. Here’s how.
14:16 Why are (uninformed) people still saving money?
18:50 Here’s where Ken McElroy is finding his deals today. Primary, secondary, tertiary markets.
24:15 When oil prices fall, how soon does it hurt a real estate market?
28:17 Why Ken avoids buying in the U.S. Northeast, Southeast, and upper Midwest.
34:02 Demographics.
36:42 Self-storage units, mobile home parks, luxury real estate, resorts, office, retail, efficiency apartments.
40:40 So many news articles pertain to real estate somehow.
41:36 KENFlix - Ken’s instructional video series.
45:10 Say you’ve been given $10 million. Here’s how to deal with it.
Resources Mentioned:
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Keith Weinhold:
Hey, welcome to GRE. This is Get Rich Education episode 86. I’m your host, Keith Weinhold. Here’s hoping that you’ve lived an abundant week. I’m back to help you build wealth for yourself. What we’re talking about is very realistic, extra income and life-changing income for the average Joe here and you won’t end up as an average Joe. You will be able to do what most people can’t because you did what most people wouldn’t.
Today, we’re talking to one of the best known real estate investors in the nation that is Rich Dad advisor, Ken McElroy. Ken’s contributed to our real estate investing education industry with countless real estate investing books both inside and outside the Rich Dad series and at last check, he controlled more than 10,000 real estate units.
I recorded Ken and I’s chat the other day when I was in Anchorage. Today, I’m bringing you this show from the Alyeska Prince Hotel at the fantastic Alyeska Resort here in the rain-forested, ski community of Girdwood, Alaska. Although summer is in full swing now, this is the premier ski resort in the entire state of Alaska in the winter time. In this time of year, we’re enjoying the spa-like amenities, the really luxurious accommodations and there’s an aerial tram that will ride up the mountain later today.
Really a fantastic scene here at this resort nestled in the Chugach mountains. Now, if you look down lower, you can see tidewater. You can see sea level here and if you look up higher, you can see at least five hanging glaciers from this vantage point. You have the paradox of seeing blue Alaska glaciers but because you’re near sea water, you can also see seagulls.
Interestingly here in Girdwood, this adjacent forest is recognized as the northernmost rainforest on earth and its climate is distinctly different from that of my home in Anchorage which is just about 40 miles north of here. I think you’ll like this Ken McElroy interview today. If you’ve ever been around Kenny, he’s very easy to talk to and by the end of this thing, we’re just chatting as I’m throwing questions and ideas out there. He joins me from the Phoenix area today, Scottsdale, Arizona and this is his second Get Rich Education appearance, so here we go.
From the early days of managing properties for others, to being a well-known investing guru and successful entrepreneur, Ken McElroy has considerable experience in property management as well as real estate investing in both Phoenix Arizona and across the United States with 26 plus years of elite level experience under his belt.
He has offered his fans multiple real estate investing books and is a longstanding Rich Dad advisor to the author of the Rich Dad, Poor Dad series, Robert Kiyosaki. Ken’s true passion to educate others has led him to speak internationally on real estate investing, entrepreneurship and the keys to financial freedom. Welcome back to Get Rich Education for your first appearance since you were here on episode 25, Rich Dad advisor, Ken McElroy.
Ken McElroy:
Hi, Keith. Thank you. Great to be on your show again.
Keith Weinhold:
Hey, it's good to have you back. It was good to see you [inaudible 00:04:57] a few months ago as well. How are things going there? When you think about Ken McElroy, I think about the MC Companies deals that you syndicate. You know what, five years ago, I was thinking, Ken is probably looking at so many deals with prices being run down. He must be going nuts with all these deals and today what do you do? The cap rates have run down so much. I mean, what are you doing if you’re not looking for deals or if you still are where are you looking?
Ken McElroy:
We’re definitely looking. We have a full acquisition team out meeting with brokers and flying around looking at markets. It’s harder. That’s for sure. It actually got harder. The reason cap rates are down is when interest rates started going down. Of course lower interest rates lower cost of debt, more cash flow. The prices started going up and we’ve been battling this for a few years. It’s not something that just came about.
Keith Weinhold:
Now first of all, that’s a paradigm to some people. When a market heats up, sometimes people think, “Oh, well then cap rates must be heating up and going up,” but that's actually just the opposite. Sometimes people need to wrap their mind around that since the cap rate is the net operating income divided by the value of a building when that net operating income stays about the same and the building value shoots up faster that lowers one’s capitalization rates.
Cap rates actually get driven down. I guess my thing is since arbitrage really is the cap rate minus a mortgage interest rate, even if cap rates have been driven down say to six-and-a-half on a building and you can still get a mortgage interest rate at five-and-a-half, that's 1% arbitrage. I mean, wouldn’t you still do the deal then? Of course there’s going to be a lot of “it depends” factors but even if cap rates have been driven down to a point where they’re still higher than mortgage interest rates, do you still go ahead? Do you still look?
Ken McElroy:
That’s a really good question. We look at things a little bit differently. I don’t always use the cap rate as a determining factor of whether we buy something. I’ll give you an example. I think cap rates are definitely something you need to watch. If you’re trying to buy a property that is in really good condition and full, and has a stable operating history, then I think cap rate means something, but if you’re buying something that, let’s say has a value add component to it and or maybe some occupancy issues, your cap rate is not going to look good because you’re going to buy it based on the way the property is performing and the way the rents are currently not necessarily on the future.
We do look at cap rate, but mostly we look at cash flow. We start with cash flow and if we can find something that is cash flowing in the first few months of buying it and we can improve it, then of course we’ve got what would be a true value add.
Keith Weinhold:
I think what we’re basically doing here as a real estate investor where you have a cap rate that exceeds an interest rate, kind of what you’re trying to do is be the bank effectively or do what the bank does by borrowing a lower rate and investing at a higher rate. I saw you write a Rich Dad Advisors article recently about how banks work and how we can exploit that as real estate investors. Tell us a little bit about how banks work and how that plays into what a real estate investor does in being the bank.
Ken McElroy:
Sure. This also ties with your last question about arbitrage. For example, we’re in the process of buying a property right now in Mesa, Arizona and the rate that we‘re projecting, the fixed interest rate is going to be under 4%. This is a quote we actually already have. Rates should be under four fixed and we’ll have three years of interest only as part of the loan.
You think of the banks, the reason why the interest rates are so low right now is because there’s a lot of people saving money. The article that I wrote for Rich Dad was … What happens is money like anything is there’s a supply and a demand on money. If there’s a lot of money in banks then the only way banks make money is to lend it.
That’s why they’re trying to get everybody in credit card debt. That’s why you see all these credit cards. That’s why they’re doing it with student debt. They’re doing it with all kinds of things. They’re not doing it right now with the refi. The investor loans and all the cash out refis that they were doing before the subprime crashed, but there’s a tremendous pressure on banks to get money out because that is the way that they make money speaking of arbitrage. If let’s say somebody has $10,000 in the bank and they’re making 1% which I think today would be generous.
Keith Weinhold:
We’re just talking about your everyday depositor.
Ken McElroy:
Everyday depositor, right. That’s an expense to the bank.
Keith Weinhold:
Right. Now, that’s a paradigm for some people. When you put 10,000 in the bank, that is an expense to the bank at that point.
Ken McElroy:
Correct. Right and that’s what I wrote in that article because if you think about it, it’s true, right? I mean if you give the bank money, you’re going to want interest on it so that’s an expense to the bank. Less than 1% is not necessarily very good. Now, the bank has your money and their job is to let it out at say 4 or 5, 6%. That’s how banks make money. That’s not the only way banks make money but that is a big way that banks make money.
Keith Weinhold:
An everyday savings depositor might go ahead and deposit their money in the bank and the bank has an obligation at that point to go ahead and pay that depositor 1% and then what the bank is doing is they’re turning around and they’re loaning it to you like the deal that you just described in Mesa, Arizona for 4%.The bank’s arbitrage in that case is 4-1 or 3% and then what you’re doing with the 4% at that point, tell us about that and how that arbitrage works for you?
Ken McElroy:
That’s exactly how it works. Exactly. I’m glad you’re walking it down this way. Then I borrow the money at four, let’s say, I put it into, in this particular case, it’s a $35 million apartment deal. Actually the deal is 35 million and we’re actually borrowing 28. Now, I’m borrowing 28 million at 4%. Now, I get into the nuts and bolts of how the deal is itself.
The deal of course pays for the mortgage but in addition to that, it generates about 7% cash on cash return on the actual investment. People call it loans, but I call it OPM, other people’s money because that's what it is. People I think sometimes get confused about money. It’s really very simple. If I borrow something from you, you can actually give it to me in a form of equity or you can give it to me in a form of a loan.
It's the same with the bank. The difference is the bank is using your money. You can give it to somebody directly or you can give it to the bank and then of course they’re dishing it out in the form of equity and debt because banks actually do equities too in some cases, a lot of banks. It’s the same thing with a life insurance policy or a 401k or even a pension.
Let’s say you’re a union worker and you pay it to a pension or a teacher or a fireman or a policeman or something like that. That money that you’re putting away gets invested. Unfortunately you’re giving away all your power and not knowing what it’s invested in, but regardless, let’s say over a period of a long time, you’re putting money into a pension or even a life insurance policy for that matter.
The reason why when you get your statements and you see return on that money, it's because it’s invested in something. It’s not just put into the bank. They’re actually physically investing it. Believe it or not, pensions, life insurance companies and banks are all trying to invest in similar things.
Keith Weinhold:
Right. They’re opportunist like we want to be opportunist in a sense when a depositor goes ahead and puts her $10,000 in the bank, that’s the bank’s problem so the bank has a problem and they’re encumbered with those interest payments and they need to flip that around and go ahead and find an investment opportunity to solve that problem.
Ken McElroy:
That’s exactly right. That’s why as you watch, it’s very interesting to watch how banks compete for deposits. They want deposits. They give away free checking and they give away free toasters or whatever they might do and the people are like, “Oh my god. This is great. I get free checking.” What they’re really trying to do is get you to open bank accounts so that they can actually use that money to lend it.
Keith Weinhold:
Really, the genesis of that process is one individual saver and first of all you said there are more people saving these days. Why are they saving more these days?
Ken McElroy:
I don’t think that they’ve completely understand the system.
Keith Weinhold:
They definitely don’t if they’re saving.
Ken McElroy:
Correct. That's one reason. Also I believe that there’s still some hang over from the recession. I live in Phoenix and home prizes are still the inventory and everything that went back to the banks and everything. We’re still starting to see home prizes relatively flat even though they’ve increased a little bit. I think a lot of people got freaked out during the subprime crash. They lost jobs, they lost all the equity in their houses and I think this time around, they’re having a little bit more of a cushion which is probably smart.
Keith Weinhold:
If more people are saving these days, in a sense, that creates more of a problem for the bank if you will because they need to go ahead and get that money reinvested and when more banks have more problems, that's when banks begin to compete for each other and that’s probably why you’re able to get terms like 4% fixed on the Mesa, Arizona apartment building and three years interest only. In the genesis of that, begins with there being more demand for savers.
Ken McElroy:
That’s exactly right. That’s exactly what I would have said. Again, if you can look at it like if there’s a … Let’s say you live in a town where there’s a lot of excess development for houses, the supply of houses are going to keep the prices down and they’ll start to do concessions as they try to move through that. It’s the same with money. People just don’t think of it that way. When there’s a lot of money looking for a home, then the price of money goes down and that's what we’re seeing right now. There’s a tremendous amount of money looking for a home which is why interest rates are low.
Keith Weinhold:
That tells me that I have a problem too. I need to convert more people to Get Rich Education listeners because if there are a lot of savers, none of them are Get Rich Education listeners. I can tell you that. Ken and I are going to come after the break. I’m going to ask him a few more questions about now that cap rates have been run down, where does it go for deals? Does it go into a secondary market? Does it go into a tertiary market and more? You’re listening to Get Rich Education. Our guest is Rich Dad advisor, Ken McElroy. More when we come back. I’m your host, Keith Weinhold.
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Robert Kiyosaki:
This is our Rich Dad, Poor Dad author Robert Kiyosaki. Listen to Get Rich Education with Keith Weinhold. Don’t quit your daydream.
Keith Weinhold:
Welcome back to Get Rich Education with our featured guest, Rich Dad advisor, Ken McElroy. Ken, this is a really interesting time here while prices of real estate have heated up and cap rates have been run dow. You are one of the biggest syndicators on the entire globe today so I want to know where in the heck are you fighting your deals today in this market? How are you doing?
Ken McElroy:
They’re hard to find. I will tell you that. We like to focus on … I’ve talked to you before about this. I’ve written quite a bit about it. We don’t like to be a pioneer in any town so we basically can’t invest right now in the primary markets so that’s important to know. The primary markets would be Seattle, San Francisco, LA, New York, Boston, Chicago, those kinds of markets because what I call the dumb money is coming and do it which Wall Street because that’s really other people’s money again like we talked about in the first segment and it’s just being invested by a bunch of people, placing it.
What we’ve had to do is go into second and third tier markets. The third tier markets can be risky however if they’re based too heavily on let’s say one employer or just a few or it could be like a great example would be North Dakota. Everybody went there because of oil. That’s probably the best example. That would be considered a third tier market and I probably got asked at least once or twice a month over a period of two years to go do something up there and I never did because I’ve seen a boom and bust before like that.
Something that is entirely based on oil prices is not necessarily a good spot to be. I think that if you’re looking at it from a what we would call a capital gain standpoint, you might time it right. I’m sure, there’s a bunch of people that made very good money up there during that time but there’s also a bunch of people that lost a bunch just recently.
It could be the exact same thing around a military base or something like that. We’ve had properties in and around military basis and as they deploy, let’s say personnel out into other areas, it reduces the population [inaudible 00:20:52] and things like that. Those third tier markets can be tough and so you just got to be very careful about those. We prefer the second tier although there’s a lot of money moving into second tier right now.
The second tier market believe it or not is something like let’s say Tucson or even Las Vegas. Las Vegas however is also based heavily on tourism so when the economy is doing well, Las Vegas is doing well. Not necessarily the best market because it’s not as diverse as you would want. It is well over a million-and-a-half people now. Again, it’s only based on people flying into town and staying at the casinos and going out and spending a thousand dollars a day on bottles of wine and all that.
I think you just got to be careful of those but there are definitely ways to make money in those markets. What we like to do is try to take a look at where employers are going and try to be ahead of that a little bit. The other thing that can really throw a market off is construction. Some of these small markets like Austin, Texas which is really a second tier market is I think it has 16,000 apartments under construction right now.
It’s heading into some real tough few years ahead of it. Whereas Phoenix, I think has eight and Phoenix is much bigger. You got to look at supply at the same time but as we start to look at these markets, we like Austin, believe it or not and some areas we like San Antonio, we like Tucson. We like of course Phoenix which is where I’m based and we like Tulsa, Oklahoma, some of those markets. Salt Lake City. We’re looking at all those.
Keith Weinhold:
We’re talking about different marketers here and I’m saying this mostly for the benefit of listener primary, secondary or tertiary which is third tier. We’re generally talking about the population, the metro size of an urban agglomeration and typically when you have greater size, you do have more market industry and sector diversification so just a general, just a general correlation, bigger size, you’re more likely to be hedged against economic downturn but there are shorter term things going on as well and it sounds like in Austin, perhaps demand could be lagging behind supply little bit since there’s an awful lot of new construction coming on board. You can’t just look at the size of a metro area and know how safe you are just simply based on the size of it.
Ken McElroy:
Right. I think if you take a look at … The nice thing about real estate is that there’s quite a lag with it. As occupancy rates tick up or rent growth ticks up, you can almost bet that there’s going to be development to throw it off at some point. Banks like to lend in strong markets so if the occupancy and the rent has year over year growth then people are going to be buying land and building. At some point however, there’s too much being built and then the numbers change again.
Keith Weinhold:
With this lag effect in real estate, I want to get a number from you in approximate period of time in which when one sees oil prices fall so dramatically like they have and they really just begin their decline about two years ago, when that really catches up with the market of course there’s plenty of “it depends” factors but for me I live in Anchorage, Alaska. That’s where I am today. I have local rentals and I still have great occupancy.
I have not gotten rent increase in the past two years but I still have fantastic occupancy which is really the important thing. I’ve held on for about two years. What do you think that period of time is where you can see a precipitous decline in the price of barrel of oil to when that really catches up with you and you really have significant effects in vacancies in a market?
Ken McElroy:
We’re seeing it. I can just speak from real experience. We have property in Houston, Texas and it shows up at the moment people lose jobs. If there are jobs that are lost, the people typically move and/or look for other jobs which means sometimes they’re moving. Not necessarily always but whenever you start to see that, it shows up immediately. As oil went down, we definitely saw it within just a few months in Corpus Christi, in the Houston area and then of course it spills over into Dallas, and Fort Worth, and San Antonio and some of the other markets.
On the supply side however, if you’re looking at that, it can take a year-and-a-half, two years before it starts to show up because you have to buy the land, you have to go get the loan. It takes a year to build it. It’s not even ready to be moved into. That’s why I’m saying on the supply side it doesn’t show up as quickly which is nice.
If you already own something then you can really, really, really be careful and watch that supply side. For example, where we actually listed a property in Austin, two weeks ago, and five years, it’s being listed for 10 million more than we bought it for. That’s entirely based on the demand of the market.
Keith Weinhold:
Congrats.
Ken McElroy:
We’ll have to close it but we’ll see where it goes.
Keith Weinhold:
We’re getting a little idea of your deal flow here. Where do you find your deals as far as not geographically but conduit wise? I mean do you have someone to go through LoopNet? I’m sure you’ve got a lot of great relationships with brokers. I mean does some of your deals still come from a resource like LoopNet or are they all pocket listings at this point?
Ken McElroy:
Great question. We look at all of those things. We’re tied in to everything. We like to work with brokers. Here’s typically my experience. A lot of times what happens with the LoopNet stuff is the seller has typically been a little bit unrealistic and maybe they even listed it before. Sometimes you find deals with just top sellers.
I think that we like to work with brokers because that means that the seller has agreed to some kind of value and the broker is putting it out on the market at that kind of value. Nothing wrong with working with sellers directly but my experience is that they’re typically a little bit unrealistic on what they want and you’re not always getting the great deals that you would think by going to a seller directly.
The best deals that we’ve ever gotten were when we bought from banks because what happens when a bank takes back a piece of real estate, it’s actually toxic for them to have that on their books. It affects their ability to lend. I can’t remember exactly what it’s called but I know when we buy it, it’s from the REO department, that real estate owned department of the bank and if the bank has too many assets in that category, then they get penalized on being able to put money out. They’re typically losses on a loan and selling it back out to somebody. The best deals that we’ve ever gotten were buying directly from banks.
Keith Weinhold:
Good to know. I had another question pop in my head. We were just talking about geography a little bit earlier there. We’re talking about buying in primary, secondary or tertiary markets. I know that you an MC Companies which is a large company and you do have hundreds of employees at MC companies, right?
Ken McElroy:
Yes, 350.
Keith Weinhold:
350?
Ken McElroy:
Yeah.
Keith Weinhold:
That’s a lot of a central place for not just buying power but for knowledge and everything else. I want to know why would MC Companies maybe go to a secondary market in the geography where you continue to hang out which is mostly the southwestern United States in the south. Why not try a primary market? For example, I know that there are markets with sweet spots in places like Philadelphia, in Milwaukee. Why not go in a primary market because we do have more and more people moving to cities between censuses and society has urbanized a little bit more. Why not try those out or have you and I just haven’t heard about it?
Ken McElroy:
Another very good question. First of all, just being selfish, I don’t really want to be on a plane that much and so my deal with my family was two hours on a plane. That basically gets me to the western half of the US and the truth is there’s deals everywhere. There’s deals to be had everywhere.
From where we are in Phoenix, I can be in Salt Lake in just little over an hour, all over LA or all over California, an hour to two hours. Same with Washington and Oregon, Idaho, Montana. We’re looking at all of those markets and then of course Texas is just two hours as well. That’s primarily the reason. There’s just a lot to do. There’s a lot of markets and a lot … There’s plenty of inventory but maybe someday we’ll look a little more east.
Keith Weinhold:
I think that’s really an appropriate answer and it just tells the listeners that, you don’t need the entire country. We’re a big country and there’s a lot of deals. There’s even a lot of deals in the town that you live in. It always doesn’t have to be buying the whole real estate investing either. I know a bit about Ken. I know he’s quite a family guy. He’s really involved with his children and every summer you have essentially a retreat with your children where you take a lot of the summer months off.
Ken McElroy:
I do. I take the whole summer off, actually. They get out of school in 10 days and I move. I don’t work all of June and all of July. Then one last thing I wanted to say on that last piece that I think is important because I get, I don't know, hundreds of deals a week to my email just like probably a lot of people. After a while as you start to show up on lists and you don’t even know how, but you’re on people’s lists and in the beginning you’re trying to get on everybody’s lists and now you’re trying to get off everybody’s lists.
Keith Weinhold:
Right.
Ken McElroy:
The point is I get deals from Philadelphia, I get deals from Wisconsin. I probably get five or six deals a week from Florida. I just delete them. This has a lot to do with focus and I think that … I’m trying to be as efficient as I can. We totally understand most of the big Texas markets. We completely understand Oklahoma. We completely understand Arizona.
Not that we just focus on those markets, but those are deals that I can look in less than 10 minutes and know whether or not I want to pursue to the next thing. We even focused on those deals. We looked at 600 deals last year and we made 58 offers and we got into about 28 best in finals. I think it was 28 or somewhere around 30 best in finals and we only have one.
That’s just in the western areas that we’re looking at. You can go crazy looking all over the place and the biggest issue I think people have is when they buy something. Let’s say they live in Phoenix and they buy something in Florida, is not having what I call boots on the ground, not having people there that can help you if something goes sideways or even people there that they can trust.
The intangible are the relationships that we have in those markets with the brokers and the property managers. I can look at something in Dallas on paper and call up some people that I know there and have a rent survey done within 24 hours, whereas in Florida, I get a call. Somebody I don't know. There’s tremendous amount of risk closure, I guess. It’s by just having some of those relationships.
Keith Weinhold:
When you’ve narrowed your focus, you’re just more, I guess, preview to and in tuned with the type of information. We talked about brokers in your relationships but also that type of information where you might learn that at large hospital campus is going to be breaking ground in a certain section of San Antonio and you know that’s going to be good for sustainable demand for renters that can pay incomes for many years so therefore that may increase the chances that you would want to buy a 500 unit complex in northeast of San Antonio or something like that for example?
Ken McElroy:
That’s exactly right. Versus at the same time in the hour, I met get a deal from Florida and it might look beautiful on the brochure and it’s on a lake in Orlando let’s say. I just don’t have the relationships there and of course there’s markets nuances too on one side. I was looking at a deal today in Austin whereas literally the interstate 35 on one side of the street has different rates than the other. Literally on one side of the interstate versus the other. Those little things can show up in every market. You have to know that information before you go in blindly.
Keith Weinhold:
As you’re analyzing markets, are there really, I guess any more broad demographic trends that you see coming in the near term future. You can want to skate to where the hockey puck is going. You want to FOCUS, F-O-C-U-S, Follow One Course Until Successful. What about demographic trends whether that’s people moving to low tech, states or people moving in the central business districts and downtowns? How does that influence what you buy? What are you looking at? What are you looking for? Where are we going to go?
Ken McElroy:
It influences a lot. I mean that’s the other part that I think it’s very fun because what happens a lot of times is people chase real estate because of the price. It’s way down the list for me at least. If you just look at, for example, I know we’ve talked before about seniors, there’s a huge number of seniors that are moving to their primary homes and moving in to rentals.
They want to have a little bit different lifestyle without that anchor on their home. You can track where they’re all going. Most of them are active. That’s one demographic. Another demographic is the millennials which are coming out of school right now perhaps or even maybe they already have or maybe they haven’t at all and they’re living at their home with their parents. That’s a huge number.
I’ve read it could as much as 25 million people living at home right now that are under the age of 25. That’s a renter demographic. You start to see these trends show up and really what generates, I think everything is jobs. Which markets are progressive and which ones aren’t. You start to look at cities, even counties that are shrinking and a lot of that has to do with tax and a lot of that has to do with jobs like … Obviously the one that gets used a lot is Detroit.
Detroit after the cars, manufacturing got outsourced or anything that’s based manufacturing is generally shrinking. Although that I think it’s starting to make some moves back the other way, now you’re starting to see all the tech popup, right? Austin is tech. Silicon Valley of course is all tech but there’s also little other areas that are all competing for tech right now and so those are all good things to watch. Once you figured that out, then the real estate, then you realize that there’s demand in a market, that’s how you invest. You don’t do the other way around and hope.
Keith Weinhold:
You don’t hope and you typically don’t start with a property either. You usually finish up with the property when you’re looking at invest it rather at analyzing a real estate market.
Ken McElroy:
Right. Hope is not a good strategy.
Keith Weinhold:
Never has been, never will be. We’re talking about demographic trends and where people are moving to and people need jobs and jobs produce incomes and that’s largely a residential base phenomenon we’re talking about there. Do you see any, I guess sectors within real estate that are good to exploit in the next five to 10 years other than residential whether that’s self-storage or mobile home parks or a luxury real estate or resort real estate or efficiency apartments for millennials? What’s a good place to focus on there to profit?
Ken McElroy:
The answer is yes on all those things. I’m actually in the process of looking at self-storages. We’re actually building one. We have some in Escrow. I’ve looked at mobile home parks. We have a lot of land. I’ve done condos. We’ve done single family. Primarily we’re known as apartment guys. I just bought an office building about six months ago in Scottsdale.
I’m looking at all kinds of things I guess is the point. Again. I don’t think you should be all in, in one sector but I think you should understand it. They all have different kinds of … They're all different. As an example, if you think about it, office buildings are in trouble right now because online retailing, online retail. Retailers are in trouble. If you look, there’s an article that came out in the national real estate investor magazine that talked about some very big stores are going out of business right now.
In Scottsdale here which is growing incredibly. We had Barneys go out of business in the last month which is at our big Scottsdale fashion mall and Barneys is a big national retailer. You start to look at these companies that are struggling with online retail. I don't know about you but my wife, we have more Amazon boxes showing up at our house from Nordstrom and all kinds of stuff. That’s how she shops now.
I think it’s common sense. If you start to look at those kinds of things, then you start to realize maybe I shouldn’t go into retail or malls. Malls are in trouble right now and office buildings are also potentially in trouble for that reason but not all office building. I bought an office building in Scottsdale and the sizes are 1,500 to 2,500 square feet and there’s like 20 tenants.
Their insurance agents, their CPAs, their lawyers and things like that that aren’t going to be affected at that level. People painting a broad brush and they say, “Oh, office buildings are bad or retail is bad or self-storage is bad,” but it’s not. You just have to look at where it is and is there an under demand or an over demand. I bought land five, six, years ago and everybody thought we were crazy but now that land has doubled in price.
We have the option now to sell it or build on it, both are good options and I’m not sure which we’re going to do. You just got to watch. When everybody is running to the hills, prices are going down, that’s when you want to start to take a look at those things but even then, it’s not necessarily always a good price and a good deal. You just got to be careful.
Keith Weinhold:
Yeah, that’s right. Just like the answer is to most real estate questions. It depends. The answer to most real estate questions is more than one sentence long.
Ken McElroy:
People really get frustrated with that answer and I get it. They want the answer. They want to know my situation is different. They all think that their situation is different. They want the quick answer. It can’t be that way. Just even in your community, in anchorage, you guys have gone through ups and downs in your own community for tourism and fishing and all that kind of stuff, and oil. I think as things happen in different communities around the country, you just got to pay attention to it and try to be in front of it.
Keith Weinhold:
That’s actually interesting when you’re a real estate investor, it just seems like at least one third of the USA Today articles you read, you can tie in to what you can do and what you can invest in yourself. That might be insider information in stocks but you can use every bit of that as a real estate investor.
Ken McElroy:
I think that is a great, great analogy. I actually did a seminar once where we opened up a newspaper in front of the room and we went through it. We said, this is how this article affects real estate. This is how this article affects real estate. This is how this article affects real estate whether it was a downsizing of an employer or an upsizing of an employer or a merger or in interest rates or bank closures or property openings or whatever. I’m telling you, you can open any business journal or any newspaper and most of the articles in there will have some kind of an influence on real estate.
Keith Weinhold:
I believe every bit of that could be true. Ken, by this point, you’ve really amassed so many books that have sold well. I mean you’ve really been one of the more I think prolific contributors to real estate investing education and financial education today. One of the ways you contributed is something I’m very familiar with because I’ve been a long time subscriber myself and that is your video series, Kenflix. Tell us about Kenflix.
Ken McElroy:
Thank you by the way. What happened is the books for me where not planned. Robert became one of my investors, Robert Kiyosaki and then he asked me to write some books on what I do. We donated all our money to charity for all our books. All the book sales all go to our nonprofit and then get distributed out to cystic fibrosis and autism and I think we have 25 charities that we support.
What was happening when the books came out, the emails and you can imagine we’re just pouring in. They’re all good people, really good people asking very good questions. There is just no way I could keep up on it. I mean literally my system will put them into a file and the problem was I would email somebody back. I tried to work this into my work and I just couldn’t.
I would email somebody back and then they have to two or three more questions back which is totally fine. I get it. What I started to do was just take all those questions and the do videos because it’s a lot easier. Also I found that a lot of questions were similar. Not all of them but a lot of them were very similar. The whole idea behind Kenflix was to … It still is. It’s entirely the questions and the videos that I have on there is information that I get from people asking questions. It’s not really something that I thought about it, it’s actually entirely driven by the questions that people have.
Keith Weinhold:
It’s nice. I don't know if they're giving you all the content but they’re giving you leads about the content that they want to hear about back. You’re ahead of me. I continue to get more and more questions mostly through email with Get Rich Education and I know I sure cannot respond to all of them and I feel a little bit bad sometimes but your videos are really well done.
I got to admit, sometimes I watch those videos, a lot of times you have a big easel and a big pad of paper or you’re demonstrating things. I get a couple of ideas from my show. I’m like, “Oh, I haven’t talked about that on my show yet and I really like the way Ken described that visually in the video so Kenflix is totally worth checking out.
Ken McElroy:
Thanks a lot. It’s been a lot fun. The other part that’s been great for me is for my time, we get all the emails from all the people and then we go through them and I’ll go into the studio for three or four hours and I’ll knock out maybe 15 of them. It’s just really nice to be able to accommodate what people want. Direct everybody in one location and also just to help.
Keith Weinhold:
Kenflix, that’s K-E-N-F-L-I-X.com or you can check out ken’s video series. That’s great. Ken, how can our listeners find out more about you?
Ken McElroy:
Either Kenfllix, K-E-N-F-L-I-X or KenMcElroy.com K-E-N M-C-E-L-R-O-Y or our company website is MC Companies, that's M-C-C-OM-P-A-N-I-E-S.com. We’re pretty efficient on getting back to people and happy to answer any questions we can.
Keith Weinhold:
Ken McElroy. Thanks for coming back on to Get Rich Education.
Ken McElroy:
Thank you, Keith. Great chatting again.
Keith Weinhold:
One of the more fun chats with Kenny there. Now, you understood this from earlier right. Now, let’s just say that you’re given $10 million. That’s your liability. You’ve just been given a job. Dealing with that $10 million is your problem. That doesn’t exactly feel like a problem to you. Say that you are the bank and you need to pay a depositor 1% interest on that $10 million, your problem is that now you’ve got to make $100,000 a year in interest payments on that. Therefore, you must, you absolutely must find an investment that pays more than 1% per year because you can’t dip into the $10 million principle.
As a bank, what you do is you go ahead and make a 4% interest rate loan to someone like a real estate investor like me to solve your problem. Now, your profit is the 4% interest rate loan that you made to me minus the 1% that you’re paying your depositor and the spread, that 3%, that's your arbitrage.
Annually, you're profiting 3% on that $10 million deposit. Now, you transfer the problem to me is what you’ve done because now, I need to pay the 4% interest rate over to you. What I do to solve my problem, I do what you, the bank just did. What I do is I go buy an apartment building with the $10 million that I got from you. That apartment building yields an 8% cap rate, we’ll just say, so 8% minus the 4% interest rate and now I have a 4% arbitrage myself so I beat the banks by doing exactly what banks do.
I borrow at a bank for a lower rate and invest it at a higher rate which I will do all day and you know, I’ve got to credit GRE listeners for doing the same thing. You, yes you are acting by purchasing cash flowing turnkey real estate. Turnkey means that you’re buying the property already tenanted, already renovated, already under management and typically warranted for you too. These properties should provide you with passive income from day one.
GRE listeners have scooped up dozens of homes from that extraordinary provider, Mid South Home Buyers in Memphis, Tennessee. That’s it. midsouthhomebuyers.com and for more opportunities in markets outside Memphis GRE listeners are subscribing to our newsletter at getricheducation.com.
You have been an action taker by purchasing properties through the webinar link that we send out in our newsletter. You’ve been buying turnkeys in Philadelphia, Chicago, Kansas City and Indianapolis. With those free newsletters, I only have a webinar link sent out every one to two months. I don’t blow up anyone’s inbox with too many newsletters, I only send out information on opportunities when I feel like I have something of real value to provide to you.
Subscribe to that free newsletter yourself simply by visiting getricheducation.com. Special thanks to Rich Dad advisor, Ken McElroy today. Sincere thanks to you for joining me today. Next week, you’re going to meet a real estate entrepreneur and she has such a fantastic creative system for increasing her cash flow on her buy and hold real estate that I just had to bring it to you because you can use the same technique too. Until then, you might quit your day job but don’t quit your day dream.
Speaker 7:
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Speaker 8:
Nothing on this show should be considered specific, personal or professional advice. Please consult an appropriate tax legal real estate financial or business professional for individualized advice. Opinions of guests are their own. Information is not guaranteed. All investment strategies have a potential for profit or loss. The host is operating on behalf of Get Rich Education LLC exclusively.