How can investors strategically adjust to the dynamic landscape of the multifamily market? Join us on this insightful episode as we sit down with Ken McElroy, an entrepreneur, CEO of MC Companies, and an authority in real estate.
Ken’s journey in real estate began managing an apartment complex in college, sparking a passion that led him to found McElroy Management. Now, as CEO of MC Companies, overseeing $3 billion in real estate, Ken is a bestselling author and advisor to Robert Kiyosaki of the Rich Dad Company.
In this episode, Ken shares his knowledge. Investing in Real Estate: Defense and Offense reveals Ken’s insights into effective strategies for both defending your investments and seizing new opportunities. Gain an understanding of how the FED’s Dot Plot and its implications impact real estate investments and what it means for your portfolio.
Ken provides a unique perspective on real estate investing in Investing in Real Estate: Perspective & Management, coupled with management tips for sustained success. Learn practical approaches to safeguarding investor funds and assets in the ever-changing real estate landscape in Preserving investor LP money and assets.
Ken distills his experience into actionable tips for aspiring and seasoned real estate investors alike in Real Estate Investing Tips. An influential figure with a popular YouTube channel and podcast, Ken McElroy engages with his audience actively, making this episode a must-listen for anyone seeking to thrive in real estate. Tune in now to gain insights on adjusting to market changes and fortifying your real estate investments!
Get my new book: https://bronsonequity.com/fireyourself
Full Transcript:
Ken McElroy: And what happened is the buyers in the last couple of years were at a massive disadvantage and kind of had to stretch for pricing and stretch for terms and they were shortening their due diligence periods and all those kinds of things. And so it was all coming. So, what this is doing, in my opinion, is it’s making, it’s an adjustment for the sellers.
And I think that gets lost in cash calls and all that stuff. It’s all true that as well.
Bronson Hill: Hey there, my name is Bronson Hill. I got the chance to interview my good friend Ken McElroy at his studio recently and asked him about what is happening in multifamily, what’s happening with the Fed, what should investors do, and what are operators to do when valuations have changed so much because of rising interest rates. Ken, if you don’t know him, he’s an awesome guy.
He has this huge YouTube channel, always creating incredible value for people. He actually wrote the forward in my new book here, called Fire Yourself. You can check it out at Amazon.
And anyway, it’s just a great conversation. I think you’re really going to enjoy it.
Let’s jump in.
We are seeing Ken. He’s going to give all of his thoughts in a few minutes here on what’s happening. I’ve got questions some of you submitted online.
And I’m really excited. I love here, if you follow Ken’s stuff, he’s just got a lot to say about the economy. He’s really well-read, and researched, and everything.
Awesome, Ken. We’re really excited to spend the time with you. It’s great being out in your office here as a beautiful studio you’ve created as well.
So let’s just let’s jump right into it, man. I know a lot of investors these days are just really, there’s some alarm going on. A lot of people have bridge debt or value-add deals.
We’re seeing capital calls, rumors of capital calls. We’ve got a capital call or something going on. And so what are we seeing right now in multifamily?
And you’ve been through, you know, 25 years of this. How are you looking at what’s happening right now?
Ken McElroy: You know, it’s not a great time for folks if they bought the last few years, for sure. But what I mean is if you just fast forward and see how competitive it was. The sellers were getting millions of dollars upfront before even step on the property and due diligence. You start to look at how many people were bidding on these projects.
You know, and what happens in a normal balanced market is there needs to be a little push-pull between buyer and seller. It’s all true that as well. But we needed the sellers to adjust their expectations.
We needed the brokers to adjust their expectations. What was happening, people were stretching for deals. And in many cases, many of those deals are the ones that are in trouble.
So the market, in my opinion, was not in balance. It’s unusually similar to what’s happening, what was happening with the single family market and the same thing. When you have 10, 20, 30 people bidding on houses, showing up, and the prices were jumping and jumping, jumping, it’s not a healthy market.
It’s healthy for a seller, not healthy for a buyer. So I believe that that’s why I say it’s about time, right? So the unfortunate part, of course, about that is that as that starts to unwind itself, there’s pain for many people that have bought and for all kinds of reasons.
But, as the tide goes out and those of us are in the business for the long haul, it’s actually better because prices are adjusting, cap rates are going up, interest rates are up, expenses are up, all of those things are happening. Well, it’s just the pendulum swinging the other way. And for somebody who’s been in it 22 years now, actually longer than my current company’s 22 years, it’s a welcome time because we’re bidding on stuff still.
But with, you know, we’re not putting, we’re putting longer due diligence times on them. We’re not doing non-refundable day one. We’re able to negotiate with sellers while we’re in escrow.
And that all goes away when you have a million dollars hard on day one. If you find a roof or you find problems inside of due diligence, then the seller they’re like, well, we don’t care. You know, we need you to close anyway.
You have a million dollars up or half a million dollars up or 250 grand up or whatever it is. So I think the playing field is starting to flatten again. And it’s actually going to be good for the industry if people can get through this short term pain.
Bronson Hill: Right. Yeah. Now we’re seeing it.
And I think as an investor, I know we have a lot of passive investors in the audience here. And just wondering, what do I do? Or if I have, I talked to one investor and he said, I’ve got five capital calls going on right now.
There’s a lot of challenge, but it’s really counterintuitive. A lot of times it’s the idea of being fearful when others are greedy and being greedy when others are fearful, as Warren Buffett would say, or like, and even I think we were talking about a panel recently and somebody was talking about the playing defense and offense at the same time, defensively, taking care of what you have, as well as going after some of these new deals. So do you think that we’re actually with the cap rate expansion, we’re actually seeing some pretty like some better deals now, or is it we’re not quite there yet?
Ken McElroy: Oh, we’re not quite there. We’re starting to, I think there’s a lag effect with interest rates. There’s a lag effect with cap rates.
There’s a lag effect with sellers and brokers and all that. And so I think that analogy of that we’re playing defense and offense is a good analogy. And by the way, I actually believe that you should be at all time.
Like you should always be playing a little bit of offense. Sometimes you’re playing more offense. And, sometimes I think a lot of people right now are playing maybe a little more and more defense.
But the worst thing that you can do is kind of bury your head in the sand. And if you’re in this business for the long haul, I think that there needs to be a good little balance there. From our standpoint, what’s gotten us through, what’s gotten our investors to trust us over a long, long period of time is full transparency.
We’ve seen some of these articles come out in the news. Now, of course, we all know news can be a little slanted.
But, it does stand to reason if somebody’s in that kind of trouble. How are they managing that? And did they, have they been talking with their lenders?
Have they been talking to their investors? What are they doing on the management side? Because for the last 22 years, the market has not gone up.
So I’ve seen it go up, I’ve seen it go down multiple times. And so there are strategies for all of those things. And I think, again, when there’s been a tremendous amount of focus on influencers raising money online.
Okay. I don’t have a problem with that. However, if that’s their only skill, then they have a problem.
And, if the investor’s invested in those people, then that’s an LP problem. So when stuff like this happens, and it will happen again, you start to look at experience and wisdom and how deep your bench is, your capital reserves, and all those things. And somebody who’s been in the business a while is way ahead of these things.
You know, they are way ahead of these things. So I think that’s what’s showing up now. A lot of these influencers don’t know how to manage property.
They don’t know how to manage a property management company. And so what’s going to happen in the next year is all these management companies are going to get, a lot of them are going to get fired. They’re going to first blame the management company.
And then they’re going to replace it one or two times, and then they’re going to take it in-house. They’re just kicking the can down the road. Maybe it works.
But if they don’t know how to manage the manager, that puts them in a huge disadvantage. They don’t know how to manage lenders. And, do these loan mods and things like that, loan modifications.
Well, then that’s a problem. If they don’t know how to, if their operating agreements aren’t written correctly and they’re not following, you know, the protocols of whether their loans or, or whether they’re bringing in additional equity or preferred equity and squeezing people down and all that stuff, because all that’s happening. I just wonder how much of that is happening that the LPs know about.
And so that’s all going to expose itself. It’ll turn itself into lawsuits.
There’ll be lawsuits for sure. And people will say, well, it’s not what the business plan said.
And then the SEC will start digging into that. So all that’s coming. And so those are all things that somebody that’s an online influencer, that knows how to raise money and brought somebody in and they’re partnering, don’t get.
And so, you know, do I want all that to happen? Do I want all those people to be drug through the mud? Of course not.
It’s all going to depend on that transparency and how they’re managing all this stuff.
Bronson Hill: Right. That’s a really good lesson. I think if you own multifamily between 2010 and basically 21, 22, it was kind of like owning it really made you a genius, right?
Because you’re in the right, the rates are coming down, things are looking good. But as rates have come up, we’ve seen it in valuations, right? So we’re seeing value add deals that are significantly higher valued.
I’m sure you’ve seen a lot of examples where you do all these renovations, and now the property is valued significantly less even after the renovations because of the debt somebody has to get to come in to buy the property. So it’s interesting. What do you think about, I know we’ve talked a lot about this over the last couple of years, but your opinion on the Fed with rates, especially coming in an election year, like what do you think, how is it going to play out?
Are they going to be read the Fed minutes?
Ken McElroy: So which is, for anybody who knows my upbringing in my school, they would not believe me, but I actually have that. And they’re fascinating. The reason I do it is there’s a thing called the dot plot.
And the dot plot is quite simply how each Fed chairman voting? Where do they think they’re voting? I think that that’s a really interesting indicator.
So you find that most of them are grouped in some kind of average and some are, you got a couple that are high and a couple that are low says we need raise rates. And they got others just say we need to lower rates and you got everybody kind of in the middle. So, so that’s a really interesting thing.
So for everyone that’s listening here, I would dig into dot plot. You go back and look at what girl Powell in the Fed chair, he actually hasn’t moved from his positions. So like, if you just go look now, what’s interesting, like all media, they take what he said, and then they try to guess.
And then it comes out as a news article. But if you really take a look at sometimes people are just rewriting news articles. And so you’ve got these, these journalists that, in my opinion, are not doing a very good job.
But they’ve said all along that they are trying to get inflation to two. Period. They’ve never wavered off of that.
Still, even though there’s been all kinds of articles around that, you look at them, they’ve never said we might consider something more than two. They talk about a neutral rate. That’s different.
So I think that it, there’s still a problem with inflation.
Bronson Hill: Yeah.
Ken McElroy: Period.
Bronson Hill: It’s not actually 3% like they say, right?
Ken McElroy: Correct. Right. So I don’t know what you guys, but gas is five, six bucks a gallon.
Rents are going up, albeit not as fast as they were, which is what the media is saying. But we’re not seeing a decline in rent. House prices are going up.
Mortgage payments are going up. Food costs are going up. So, all right.
So you start to look at that. Shelter is one of the biggest pieces. Okay.
They’ve been trying to cave the real estate market. Make no mistake about it. Shelter, I think represents in the 40% range of the CPI.
Okay. If you have a category like that, that represents that much of the CPI and it’s still moving, I don’t see rates going down. My crystal ball says, that they’re either going to stay about where they are.
They could potentially even go up a little bit depending on those categories. Because again, going back to what the Fed’s trying to do, they’re trying to bring that inflation rate to two. It actually went up over the last two months, the inflation rate, the CPI.
So, okay. CPI is going the wrong way after what, 11 rate increases. So for all of you that are hanging on this, you know, rates are going to go down, I would just ask you, why do you think that?
You know, because everything I read and everything I see doesn’t appear that the Fed would do that. And if they do, what are they going to go down to? Five?
I think it’s going to help. We’re talking, what they need to go down to is they punch all the way past from three, four, five, six, right? Now they’re approaching seven.
So think how far they have to go. So even if they say, yes, we’re going to reduce rates, they’re going to do it at what? A quarter point, half a point over time.
Yeah. Okay. So maybe if you’re lucky, that could be a point in a year.
Okay. So great. Now we’re in the sixes again, or five and a half or whatever.
You have to put things in perspective. They’re not going to go from six, seven percent rates or even eight for single family. In some cases, hard money is way over what they’re going to do.
They’re not going to jump down to three and, you know, so all your deals work. That’s not going to happen.
Bronson Hill: Yeah. And I think to your point, it’s like, if you’re an operator, you’re just hoping, you’re not hoping.
Ken McElroy: Of course, if rates just come down, we’ll be and we still be okay.
Bronson Hill: Right. So let me ask you a question. For some of these deals that investors are in, LPs are in, or, you know, GPs operating deals, there gets to be a challenge, especially with bridge and multifamily bridge debt or anything value out or even construction to work through a modification or to go to a lender.
I know some lenders will say, like, hey, you got to make this payment. And until you’re short on the payment, say here’s 80 percent of the amount, and you’re saying this is what we’ve got to pay, then they may set like a workout something with you. But if you watched through that process before.
Ken McElroy: Yeah company, but I’ve been through similar back in the 808. Right. Here’s the truth, like the lender does not want the property back.
That’s a fact. They’re not, what they’re fighting, they’re supposed to create the resistance back to the sponsor.
Right. So when the agreements come out, all that stuff’s clear. But at the end of the day, the foreclosure process, the default process, all that kind of stuff, it’s legal.
At the end of the day, what they are going to have to do is take that and then package it up with some broker somewhere. Right. And take a write down from somebody like us that’s going to buy that at a deep discount.
Right. Okay. So, you know…
Bronson Hill: They don’t want to do that.
Ken McElroy: Correct. So, it’s a poker game and unfortunately, they have a street flush and have an off suit with your paradigms. But it’s a dance.
It’s part of the dance. And what’s going to save people right now is cash. So, the way to do it is to go find that cash.
And if there’s value in the real estate. So that’s the first thing I always say. So what happens is there’s kind of an ego involved.
There’s an emotional attachment involved. There are LP money or maybe your money or whatever. There’s all of that to consider.
But if people can hold these deals for the long term, they’re going to be fine. And I’ll give you a couple examples. So in O5, 6, I bought some stuff in Austin, Texas.
In O7 or 8, I look like an idiot, right? My equity was less than the properties or my loan was more than the property was worth. What saved me was occupancy and cash flow.
So, what happens is people buy things for cash flow or they buy things for capital gain, but you should be buying them for a bowl. So a lot of people were saying, oh, there’s little or no cash flow or negative cash flow on day one. And they’re waiting on this big value at it.
Okay. And so there’s no cash flow, so they’re running out of cash. So the strategy started at the buy.
Everything we do cash flows day one. And so in that scenario, all I had to do was focus on management. How do I keep this place full?
How do I manage my expenses? I had fixed-rate debt at the time, which was obviously not a lot of people have right now or some do, some don’t. So I just wrote it through.
And then, lo and behold, by let’s say 8, not probably 9, 10, 11, I was right back to where it was, and then it punched through. And so you got to think long term. So if you can get enough cash today, and you’ve got a really good asset and you’ve got equity, then you should be preserving the equity, preserving your investors, preserving the LPs, and trying to figure out how to do that first, and then work through it.
So you need cash first. You need to show the lender that you’ve got a plan. Again, the lenders don’t want these assets back.
It’s them having them back is a pain in their butt, right? So cash, then loan mod, long-term hold. Yes, it’s different from what the business plan said.
But if you’re trying to preserve the investor LP money, and the assets worth it, then it’s worth it. It’s just time will heal this. The next 18 to 24 months, it’s going to be rough.
But if you look, if you go 30,000 feet, there’s a massive shortage of housing, nothing’s going to be everything. There’s a lot of new construction, all that stuff that’s all going to be gone by let’s say 2025. And we’re going to we’re going to have massive rent growth again in 26, 27, 28, because nobody’s building.
And all that new supply, there’s a lag in that too. So if you just get through the next couple of years, right, that’s gonna require money, and you’re going to have to do all kinds of creative stuff. And this is when you learn, right, going through this as painful as it is, that’s where all the lessons are.
There’s no lessons at all hardly, when your influence are raising money, and things are going up, and you’re trading it out, and you’re buying new crap, right? Right. Zero, zero lessons.
Actually, they’re all bad lessons. So this is the time or the lessons, you can absolutely preserve the asset, you can preserve the LP equity, you can preserve your relationship with your lenders. Right now, you can do it.
And, if the asset, if you bought it right, and if the asset is worth the loan, right? Yeah. Otherwise, it’s a different path.
Bronson Hill: Yeah, absolutely. That’s great, Ken. I know with your experience, you’ve seen a lot of things.
So I guess for investors, we have a few more minutes to kind of get into this, and you would love to take some questions. Obviously, this isn’t live, but we can pass on some of this. But what would you, I guess, a couple questions around just indicators, things you look for, like what’s some data that you look at now, or even when you’re looking, you mentioned asset management, you’re looking at an asset manager, what are some things that you’re looking at?
So I guess there’s kind of two different questions, you know, just general and as well as in that one.
Ken McElroy: Well, the first thing I always look at is what’s within your control. Right. So one of the things I’ve started to do is really, really dial in on my operations.
Now, I have a massive advantage, because I started in property management, right out of college. So for the first 10 years of my life, I managed 20 30,000 units. So when I step on a project, I know, I have a checklist in my mind, and I’ve been through 100 times.
And so, the first thing I’ve done is I’m scrubbing each one of my assets. Now, I want to make sure that my expenses are completely in order. Everything’s been bid out multiple times, and that my market rents are exactly where they should be.
And then I have the right teams in place, I’m maximizing my revenue, my other income, and my expenses. That’s the first thing that requires a fair amount of work, obviously, because there’s so many lionines and so many things. That’s super important.
Because no matter what, that is going to determine your next loan, your next investor, like they’re going to look at the operations, right? So like I looked at a building yesterday, actually, a new construction, brand new, under in lease up, it stagnated at 60%.
Bronson Hill: Oh, okay. In Phoenix or?
Ken McElroy: Yeah. And I was like, okay, that’s awesome. That’s an opportunity, right?
Because they’re gonna take a haircut, they’re trying to get through lease up. So, there’s a strategy around that. And because I’m strong in operations, I know already, I can bring my own team in there, top it up and make the deal work.
Right. So, when you have that kind of confidence from the operations, it gives you a lot of power, right? That’s the first thing, those are controllables.
Those are things that you can do now. The second thing is you got to dig into your partnership agreement with your LP equity and your profs and all that type of stuff. And you need to take a look at your stress points there, right?
I think that’s super important. Then you can start to bring in other sources to kind of top it up, whether that’s asset management, it could be family office, could be institutional, it could be a number of things. You can give up GP equity, you can bring in more LP equity, you can come in with a loan, all that should be fully transparent to your existing deal, right?
It has to be, right? You can’t just change stuff and then tell later. So, all that stuff, you got a paper out, make sure it’s all correct.
That’s the area I think that people are going to be in trouble thinking, oh, this could be short term. I’m only going to need this for six months, three months, one year, whatever. Well, if they’re right, they’re probably going to be okay.
But if they’re not, people are going to wonder how they got squeezed out. So that’s the next piece. The other thing is, you need to go out and get other opinions, broker’s opinions and values, people are doing that all over the place.
So brokers aren’t listing deals right now, they’re actually giving everybody these EOVs or broker’s opinion and value. That’s really important because that kind of substantiates, what the thing’s worth. Then you got equity and hopefully you have equity, even if it’s half or two thirds or one third or what it was, that’s still okay.
You’re in the money, right? You’re preserving that a little bit. Now, it doesn’t really matter today because you’re not selling.
If you’re selling today, that’s exactly what would happen. You’re playing the long game here, right? So you need to have all that information and then you can go out and make good decisions on the asset, preserving the equity.
I’ve been in a situation where we bought stuff and equity has gone down, probably everyone has something, a car, a house, whatever, like things depreciate, things go down in value, right? But over the long haul, especially with this inflation, I think you’re on the right side of it. Believe it or not, even though it might be feeling a little bit of pain, but I want to be in hard assets during high inflationary times because we all know you can’t build a home affordably right now. You can’t build apartments affordably right now.
Okay. So if you own them, you’re actually in that category, right? I ain’t better say that.
That’s good. I mean, even though it might not feel good, but so, if you can, if you can hold on to it, I believe, I truly believe that, real estate’s got a really, really skyrocket here based on all these crazy things that are going on, you know, globally, really. Yeah.
Bronson Hill: It’s not getting cheaper to do anything. We all see it. And it’s really true.
Ken, I know we’re short on time today, and I’m sorry you weren’t able to be with us in person, but I thought this was an incredible conversation. How much value you bring, just your perspective, your wisdom, your experience. Thank you for hosting me here today.
I feel like hopefully all of you feel like you came into the studio as well. It’s a very nice studio, but I know you’re going to be around next year for the conference as well. I will be playing around with his schedule when I call Robert Kiyosaki and tell him he doesn’t get here.
Ken McElroy: Yeah. No, I appreciate you flying in from LA, guys. That’s what Bronson did just to make sure that, you know, we delivered.
I want to make sure we delivered on the promise. So, not live for sure.
Bronson Hill: Awesome. Well, thanks so much, Ken. Really appreciate you being here.
Thanks, man. Great to see you.
I hope you enjoyed that interview.
I really enjoyed having the time with Ken to be able to talk and ask. It was really amazing to be in a studio and just hear him talk with his, you know, 25, 30 years of experience of investing in real estate. So as he said, you know, just be, have cash, be available, be ready, be able to, you know, fix debt, obviously is much more preferable than having anything variable these days, but really this is our business as well.
So we have over $200 million in multifamily. We’re also doing unique investments, such as carwashes, oil and gas. We have our investor club.
If you’d like to check it out, you can go to Bronson Equity. Check the notes below, or you can check out my book behind me here. This is called Fire Yourself.
Replace your working income with passive income in three years or less available at Amazon. And I look forward to connecting with you and hope you found value in this.
