Real Estate Meltdown AirBNB Residential and Commercial: Ken McElroy

➡ The speaker discusses their experience with real estate amid crises, emphasizing the importance of cash reserves and keeping property rented. They also warn against purchasing property with the sole expectation of market timing, recounting a painful lesson where an unsold $12 million property was eventually sold for $4 million due to inability to sustain it. They promote their emphasis on ensuring properties generate cash flow, even in downturns.
➡ The single-family home market fluctuates due to various factors such as changing home prices, government policies, and economic conditions. When it becomes more expensive to buy than rent, people naturally shift towards rentals, putting pressure on the supply. This further contributes to a constant tug of war between homeownership and rental markets, affecting investment decisions. Understanding these dynamics is crucial for successful property investment.
➡ Despite losing nothing to the bank during the credit market crash, the speaker learned the importance of maintaining a cash flow during times of crisis and managing properties effectively. Shifts in commercial real estate markets caused by changes like the rise of e-commerce and work-from-home culture have affected investments and debt cycles. Matters have been complicated by increased debt costs, causing reduction in property values and prompting reevaluation of commercial assets. The speaker suggests that such situations should be a learning experience for investors, reinforcing the importance of cash reserves for emergencies.
➡ The text discusses the current state of the real estate market, including fluctuations in valuation and strategies for dealing with market instability. The speaker highlights the current challenges such as the massive demand-supply gap in housing, rising interests rates, and soaring construction costs. The discussion touches on investment strategies, focusing on multifamily home building, and stresses on the need for businesses to adapt to market changes. There is skepticism about Airbnb causing the crash of the real estate market, with the speaker labeling such claims as “clickbait”.
➡ The text discusses the challenges and shifts in the real estate market, specifically relating to rental homes. The high-end rental market is softening, and properties that were bought with the expectation of hefty weekly rental incomes are facing difficulties. Many individual property owners are transitioning from self-management to professional property management to avoid operational issues and instead focus on growing wealth. The text also stresses the importance of thoroughly vetting potential investments and their promoters, underlining the importance of track records and operational experience.
➡ The speaker shares their experience in real estate, stressing the importance of knowledge and experience in property management. They talk about different investment strategies, such as renovating old properties or new constructions, and stress readiness for opportunities in market downturns. They close by encouraging viewers to prepare for these opportunities and attend a free event about gaining access to credit lines.

What are your cash positions in time of crisis? It got tested again when the pandemic, when Biden said, okay, renters don’t have to pay rent if you remember. So obviously I was like, oh no, like you could imagine, right? I got 10,000, I got 10,000 units. I was like, that’s not good for me. The bank’s not going to say you don’t have to pay the mortgage. So we went from three months to six months, reserves internally after that and you know, so some of it’s just experience and lessons and making sure that you have enough cash to kind of survive these periods.

So Kenny, let’s do this. I wanted to do an interview with you. I have a lot of questions on my own. Obviously I study these markets and I see some things framing up that kind of has me waiting. I want to get your ideas around this and then at the end maybe we’ll talk about some opportunities that you have with your fund and maybe some answer some questions first.

I want to start first by talking about you. I and Kiyosaki were on a show together, one of his shows that he did. And I remember he was telling us a story of how you and him basically backed up the truck on debt in 2008 and how that you guys are billionaires today because of that. Hey, I want to just take a break real quick and let you know as we’re talking about this real estate market, commercial real estate market, and a potential downturn coming.

And you have to know that this means that there is an opportunity to buy. My base case, as I’ve been talking about for a long time, is that money printing is inevitable and inflation and higher prices is in our future. So if there is a big crash coming, that will be a buying opportunity that I’ll be taking advantage of. I have dry gunpowder waiting. Now one of the things that I lost in 2008 was I lost my ability to access capital.

And so when the sales in 2000 and 910 1112 on real estate were there, I didn’t have the money to tap into those. But I’m not making the same mistake twice. And so I’m having a special event next week with my good friend Jack McCall and he’s known as the King of Debt. And we’re going to talk about how you can access hundreds of thousands of dollars of untapped capital ready and waiting.

So when this inevitable market crash comes, you have the funds ready to take advantage of it. This is what I got wrong in 2008, I won’t be doing it again. And so I have my dry gunpowder waiting. But do you? So if you want to find out how you can do this, he’s going to walk us through that exactly the steps you need to do. How you can be able to get hundreds of thousands of dollars of credit available.

Don’t miss this chance. All right, so there’s a link down below if you want to come hang out with us next week. We’re going to go live. He’s going to explain it all, and he’s going to answer all your questions live. There’s a link down below. Come hang out and join us. You don’t want to miss this opportunity. Kind of give us a story, historical story of someone who’s sort of been through these times and how you’ve used this opportunity in the past.

Certainly. Yeah. Right now, we’re at around 2 billion in assets. Most of those are multifamily. So we’ve got about 9000 units at the moment, some self storage, office, land development. But primarily, I’m an apartment guy, multifamily guy. I’ve been doing it. My company is 22 years in business. And so what we were talking about in 2008 now, keep in mind, I was buying in five, six, seven, and eight.

So I watched everything happen. I would call that like, at the midpoint of my career. Nobody knew what was going to happen. But there was one thing that was happening, and that is my rental business, my apartments. As you know, I have an in house property management company. We have about 300 people in that company. And my apartment managers are saying, hey, these people, we’re turning them down to rent, and they’re buying houses.

I’m like, okay, that’s a red flag. Obviously, when you rent an apartment, you run their criminal credit background check. You know who they are, you know where they’re working or they’re not. What happens in the single family market is it’s actually countercyclical to the multifamily market, because obviously most renters want to buy, which is especially in the class that we’re in, we’re in class A or high B type assets and newer assets.

And that’s where you were back in 2005. And six is also that. Okay. Yeah. So I was like, okay, there’s a problem here. This is not sustainable. These people are buying homes. So I was chatting with Robert about that, and I said, I think there’s going to be a real problem in the credit markets for single family. There has to be, because we’re losing people to single family purchases that can’t even afford at the time, maybe $1,000, $1,500 a month.

And so, sure enough, we didn’t know they were packaging those up and selling them off. And the credit ratings and all that stuff that happened, they were taking C paper and making it a Moody’s rated at A, and then that’s the movie The Big Short. But what happened was I saw the markets completely changing, and everybody that lent on that debt, that was taken back. You can’t buy a house with 100% debt, so you’ve got debt plus equity.

So the equity was gone, and then all that debt was making its way back into the lending market. So we were starting to see all these assets that were coming back to the banks. So this was 8910, I would say, and they were kind of being pieced. Some was an office building or a retail or single family or multifamily, it didn’t really matter. It’s just there was irrational exuberance going on during that period.

This is great because real estate was peaking in early 2007 and I was during that cycle, so I also got caught in some of that. So I bought property in Austin, Texas, like a 250 unit building in 2007 2008, or no, it was 2006, 2007 that the value went down. What saved my butt were my tenants, my property management side. If I just kept it full, then it cash flowed, but the value went down.

So all boats, when the water went down, everything went down, all values went down. So we weren’t insulated from it either. The difference was, Mark, I didn’t have to sell anything, right. All I had to do was keep that thing full. And that’s why I always say cash flow is king. Make sure it cash flows. If you’re trying to buy something and time the market, you’re in big trouble.

But if you do both, if you can time the market and make sure it cash flows, at the very least, it’s like these folks right now with the know, if you buy something that just works with an airbnb income and you can’t default back to just a renter, you’re going to be in trouble. And so that’s what we’re starting to see now in single family. So it’s the exact same scenario.

It’s just big apartment buildings. Yeah, I know what you’re saying. Firsthand, this studio that I have here, the 1600 square foot studio, is in a mixed use building that I actually built. And I had it for sale for 12 million. I turned an offer down at 11 million because I knew I was going to get the twelve I wanted and I couldn’t carry. It was like about $185,000 a month and I couldn’t carry it.

It wasn’t full. And even if it was, it would never have cash flowed. It went back to the bank. They sold it for four. Ken yeah, they sold it for four. So from twelve to four in nine months. And the family that bought it, I’m renting from them today and to the point that you said because I couldn’t carry it. And so then as I had to rebuild my portfolio, it was always making sure I cash flow first.

That’s like always the number one. And I guess that turned you into a really good operator because you couldn’t allow those units to sit empty. So you kind of got those operator chops. Now I saw, and I’m curious, I’m guessing you saw the same thing, but during that downturn you saw a lot of weakness in the prices, but actually more people ended up renting. So the rental markets actually worked pretty good.

Did you have problems with some of the rents coming down and then having trouble carrying during that time. So great question. So that’s actually what I’ve been doing a lot on my YouTube channel lately is to you, if you watch the news today, it’ll say, oh, rents are down, rents are down, rents are down. And we can talk about that in a second. Exact same scenario. Again, two different markets.

When the single family market is in trouble, doesn’t really matter what kind of trouble, people default into the rental side and then they put a lot of pressure on the rentals. That’s it. So there’s a fixed number of rentals and a fixed number of single family. And when one is lopsided, of course, one benefits, the other does not. And so that’s what happened in eight. They said what actually really happened if you go back, president Bush believed that everyone should own a home.

This is before Obama, and he said, American dream, american dream, American dream, no big deal. All kinds of stuff passed, made it easy for people to buy houses. So that’s actually what pushed the bubble up. Then Obama got in there and it looked like he did all this, but he didn’t actually. It was already in the process of being so what was happening is when that started to cave from that cheap credit, then people started falling back into the rental side.

And so when you look at the percentage of homeownership versus the percentage of rentals at the time, under Bush and through Obama, it got up to about 68, 69% homeownership. Okay? So this is important because that means that the rental market was going from 35 to 34 to 33 to 32, and they were going over to the single family. Well, so that started to reverse. And so if you want to watch a really cool metric, just pay attention to that because every one percentage of home ownership reduction is 1 million people, and that actually transfers over to the rental side.

So if you just watch home ownership and rental ownership, because home builders and people that are investing in single families, their target are renters high, people that can pay, and they’re paying rent. That’s their target. Or that’s not only their target. And so this battle has been going on forever. That’s a really good thing to watch. And so the same thing is happening now, Mark, but for a different reason.

So right now, home prices are up 450, I think, on the average, and they don’t seem to be coming down for all kinds of reasons. And then you throw on these eleven rate increases and so all of a sudden what I always watch is the delta between the average mortgage and the average rent. And the average mortgage has gone like this, and the rent has not changed too much.

Is it cheaper to rent or buy? Right. You got it. Yeah. So right now it’s cheaper to rent but that hasn’t always been the case. Right. And so when it’s cheaper to rent, people rent, and when it’s cheaper to buy, people buy. You got it. And yeah, of course, in the down payment and how much all that stuff comes into play, but it’s just constantly a tug of war between the two, and it’s fascinating to watch.

And so all you have to do is just know where you are at, where it’s all headed, and then you make good decisions. Yeah. So going back and I want to kind of learn this lesson from the past, and then we’ll kind of bring it forward, where we’re at in the markets and what we think we’re doing moving forward from here, but just kind of going back to that example.

So you kind of got caught into a little bit of trouble yourself. You bought some buildings that lost value, but because you were able to cover the rents, you were able to carry them. And of course, the value is higher today than it was back then. And so the big takeaway is, one, making sure you can cover, but two, then you and Robert were able to kind of back up the truck on debt, go buy a bunch of buildings, as you said.

Now, that was more like 2000 and 910. Eleven at that time. I remember going through that period in 2007, 2008, my credit lines were cut, all my credit was taken away. The banks were just resending it. Right? And so part of the reason was like, hey, go get this credit while you can still get it. Today I post a picture on my Instagram, like, this morning, my mailbox is full of credit card offers.

They’re still just, like, seem to be throwing credit out at me. But at that time, we saw credit being rescinded. Right? I mean, I’m sure you probably saw the same thing. So how was that navigating that situation and then trying to go get all this credit so you could go take advantage of these opportunities? Great question. So there’s three things. Number one is keep in mind what was happening.

Banks actually were taking back real estate, and they’re not in the business to own it. So that’s number one. So they’re creating these real estate departments, and with people, quite frankly, they didn’t quite know what they were doing. The bank is taking back they’re defaulting and they’re foreclosing on loans. So it doesn’t really matter what kind of loan, whether it’s an office building or retail or multifamily or medical or single family, it doesn’t really matter.

So each bank is dealing with that. That’s number one. And this is really important. What does the bank then have to do? They have to go and see what the value of that is today and compare it and size it up with the loan. So let’s say they lent on something and they take back an asset that’s $30 million on their books, but the value is 20. They know that they got to take a $10 million haircut.

So all that stuff’s happening at the bank level, that’s number one. Number two, they have a problem because when they take on that real estate they actually can’t lend more out. In other words, it’s negative on their credit rating. So they have that problem because that’s how they make money. And so three, the third one is they look for people like myself that can solve that problem for them.

The irony is that the banks actually got the problem. And I of course to your point, how do you get the credit? All that kind of stuff. So there’s deal after deal after deal that came back to me, not necessarily any of ours. And the bank would say, okay, in one particular case in Arlington, Texas, the bank came to me and said I’m going to give you 200 units, literally give them to you with no down payment and we’re going to give you $2 million to fix it.

And I calculated it and I passed because I said okay, well the debt plus the two if I fix it’s, not going to be worth what the market says it’s worth today. I just bring that story up because the banks are trying not to write down their loans, right, because that’s negative for them in so many ways with their shareholders and all that kind of stuff. So all that stuff’s happening.

And so the one thing that did not exist is that everybody was pulling back. And this is happening right now. Right now we’re seeing banks pull back, investors pull back for all kinds of reasons. So what I did is I went to Canada and I put together a fund in Canada because at the same time I was just paying attention to the US dollar. The US dollar was actually par with the Canadian dollar, which hasn’t been that way in a long time.

So which means that the Canadian dollar is strong, which means that the US was on sale for Canada. So I went up there, we put together a fund, 100 million and with RSP or retirement savings plan, which is basically our four hundred and one K. And we ended up started buying properties in Texas using Canadian money. Got it in 1995 when I bought my first piece of real estate to fix and flip, it was here in South Central La.

Actually my first one was actually a VA repo that was in Riverside, California. But at the time HUD and the VA had all these properties they were giving away, no money down, same thing. And so I bought my first property, no money down. I couldn’t even come up with the $3,000 for closing cost. So I brought in a partner and we did a lot of work and from 95 through the rest of the 90s we were just getting properties from the banks, no money down, single family home, so sort of the same deal.

So, yeah, what an amazing opportunity. The problem for me was as I got bigger, bigger, bigger, then I started doing development and multifamily and mixed use. Then I had hard money lenders and I had just credit. At the stroke of a pen, I could do cash deals 24 hours, et cetera. But when the whole market crashed, so did my lenders. Not only did I lose a lot of my assets, I lost my liquidity.

And so when I saw 2000 and 910 eleven happening, I didn’t have those same relationships that I had before. So that was my problem. I didn’t get as creative. I guess it happened to me too, Mark. I mean, that nobody knew what was going to happen now. I didn’t lose anything and we didn’t have to give anything back to the bank. But all the credit markets left, there was nobody investing and the banks were taking all this stuff.

And thankfully, everything. I had that philosophy way back, which was everything needs a cash flow in case of crisis. And so we went back, we didn’t buy for several years. We just said, okay, we just need to keep these properties in the mid ninety s. Just keep everything highly occupied with tenants and try to manage the expenses the best we can. And we were looking at our cash positions on everything.

And that was another real lesson for me, is what are your cash positions in time of crisis? It got tested again when the pandemic, when biden said, okay, renters don’t have to pay rent, if you remember. So obviously I was like, oh, no, you could imagine, right, I got 10,000 units. And I was like, that’s not good for me. The bank is not going to say you don’t have to pay the mortgage.

We went from three months to six months reserves internally after that, some of it’s just experience and lessons and making sure that you have enough cash to kind of survive these periods. Yeah, great. So now that we’ve sort of framed that up, I mean, massive opportunity for you and it worked out really well for you. Let’s jump now to where we’re at now in this sort of a cycle, and I’d like to get your take on the commercial real estate market now.

We’ll just frame it up for everybody. I like to say there is no such thing as the real estate market. There’s thousands of markets broken down by size, type, location, et cetera. So even within commercial, you already kind of mentioned office spaces, et cetera, but you’re more like multifamily. So maybe just want to kind of talk about multifamily, unless you think the greater commercial impacts that. But where are we in this market cycle as of right now? Well, I think that it’s a great question.

So I am going to back up a little bit and just talk about commercial, so people understand we’re talking about office, retail, medical, mall, multifamily, self storage, all in that commercial sector. And of course, each one of those can be a different markets. They could be new, old, whatever. So it’s important to understand that first because we all have seen the deterioration of malls, right? With the Amazon effect, let’s call it.

So malls started several years ago. While that might not seem like a big deal, there are real lenders and real people behind the debt and the equity of those regional malls. So that’s been happening. And then work from home put a massive, massive black eye in office. San Francisco office is probably the biggest story. I think the last time I talked to a guy there, they were somewhere around 30% vacant, 30% to 40% vacant of people that decided not they didn’t want to come back.

You can’t pay mortgages if you’re 50, 60% occupied. So the commercial office is the one that’s the biggest, biggest issue right now. Now, the reason I bring those two up first is because, as you know, Mark, bank of America lends to me. They lend to the person with an office building and lend to the person that’s doing the mall. So the bank is in the center of all this.

And as they’re taking on a default on something, it affects their credit with other things. That’s what we’re seeing now is we’re seeing big cracks in the commercial real estate market, and it’s extending into the debt cycles and the debt markets in the debt community, even though it might not be affecting at all, like industrial or something. So it’s really interesting. So what we’re seeing is we’re seeing a massive pullback on loan to value that started over a year ago on how much the banks want to lend on loan.

You got it. Yeah. When things were good, you might see 70, 80% debt. Now you’re looking at 50. Weren’t they even going as high as I heard? Like 95% in some cases? Yeah, exactly right. Which means that you only have 5% equity, so now you need 50% equity. So they’ve already pulled back. They’re doing extra reserves and those kinds of things now for multifamily, which is what I focus on.

There’s a bunch of syndicators that bought a whole bunch of stuff in the last three years, and in my opinion, they overpaid. And they believed that debt would be 3% today, so they bought it at three and they thought today would be three. So if that worked, then they make a lot of money. But now debt is over six. All those deals that people bought in the last three years, let’s say, on the multifamily, with that in mind, you’re looking at a 2030, even 40% reduction in value of the property market, of the multifamily market.

I’ll just give you one example. I had a property in escrow, it was $100 million. It was 350 units in Tucson and it was like, let’s call it 30 million down and 70 of debt. And I’m in escrow and I’m looking at all the stuff and it was a massive value add, like 500, $600 each unit in growth. The property was dated. It was really a great asset, still is a great asset.

My debt costs went up because I was in escrow refundable and the Fed was passing all those increases and all of a sudden my debt was moving. So my cost on my debt went up a million dollars while I had it in escrow, which wiped out a million of cash flow, same property. So what happens is we said to the seller, hey, we’re not going to be able to close on this because what we originally thought was going to be about 3 million in cash flow, it’s now two.

And they said, well, make us an offer. And we figured that it was probably in the low 80s. So the property got repriced from 100 to say low 80s because debt went up. And so that’s it. It’s same property, same opportunity, same market. We were excited about it. So what’s happened is people now have to pay less for that exact same asset because everyone’s solving for cash flow.

If we break that down for a second. So I hear constantly in the single family market, the prices have to come down, the prices have to come down, the rates are so high and I’m like they don’t have to come down. People can just buy less house. Right? And that’s what we’ve seen happen. But in the multifamily it’s a different market because to the point that you’re making, people buy for cash flow.

And cash flow is typically driven by what would be called a cap rate. And that cap rate is usually kind of set based off of the area and the building type and a couple of different factors. Right. And so I think what you’re saying is that cap rate is going to be at 8% or 6% or whatever that cap rate is going to be, and then depending on what the price of the debt is, then going to adjust the price of that building, the purchase, this amount, because I have to be in at the cap rate.

Yes. Is that right? You got it. Absolutely. So in the single family market, homeowners can just buy a less house. But in the multifamily market, specifically large multifamily, where I’m buying specifically for cash flow, as those interest rates go up, the prices have to come back down, which means as long as prices are up, prices are going to be down. And potentially if we buy in at these new adjusted cap rate or price cap rates and prices come back, or I should say yields or rates come back down, then the values could come back up on those.

That’s right. You got that? Cheap money creates asset bubbles. That’s all that happened in single family. That’s what happened in multifamily. The difference, of course, you hit perfectly is on the commercial. If I’m raising money from everybody on this call, and I’m saying I’m going to give you a six, seven, 8910 percent cash on cash return. You’re investing the money, you want a return. You don’t necessarily have that on the single family side.

Those returns go down as debt costs go up because my cash flow is less. And so what gets repriced is the asset itself. So there’s a massive repricing going on in commercial. Yeah. And then you have the situation where, like you said, over the last couple of years, so many syndicators got in probably bought wrong, potentially bought completely wrong, plus got caught offside by the rate increases as well.

And then you have the situation where, as you said kind of earlier, the banks don’t want to hold these assets. And so that also kind of creates this cycle where the prices could come back down. Are we already starting to see that? Are you starting to see these prices starting to be marked down based off of that? Yeah, I call that the Doom Loop. Yes, we’re at the tail end of the Doom Loop.

So the Doom Loop. Is everybody’s excited? Look how smart I am. We’re buying this stuff. The rates go up. The banks now are all being notified. The LPs and GPS are seeing how much cash they have. They’re either raising money from their LPs or bringing in new money or whatever, or trying to hold or defaulting, either one. And that’s all creating price adjustments, massively in office. So if people can just Google, they’ll see there’s a beautiful building downtown San Francisco.

It’s an office building on state street where Wells Fargo is headquartered. 250,000,002 years ago, it just sold for 70. So you think about that. So there’s $180,000,000 loss, right? And by the way, I don’t even know if it’s worth 70, but that’s in a whole nother topic. The point is, somebody on the debt side got smoked and all the equity is gone for sure. And then what that does is that makes its way through probably a pension, retirement plan, insurance company or something like that, because usually those trophy assets like that are big managed money.

Wall street, typically. Yeah. I remember seeing buildings in Detroit, downtown Detroit, same thing, that just were selling for literally pennies on the dollar. Beautiful buildings made out of marble, like the most ornate buildings, and one for pennies on the dollar. And it can continue going down. So I’m curious where you’re at as far as your outlook and what you’re doing in the industry as of right now. If the smoking deal comes across, you’re taking a stab at it? Or are you kind of like getting your dry gunpowder ready, so to speak, that maybe in the next six, eight, nine months, something big is going to.

Happen. It looks like the Fed has sort of kind of signaled they’re probably going to stop raising rates about here. They could leave them there for a while, but that should probably get real estate repriced somewhat. So kind of what’s your outlook on this and the opportunities that are available? Yeah, it’s a good question. So first of all, I do not see single family popping anytime soon popping as far as the prices coming back down, correct? Yeah, I do not we have a massive shortage in homes, in housing.

We’re still at way below our historical average for listings. And so the only thing that’s going to help that is prices go down from a sales standpoint. But all that does potentially could push you back up on what we’re doing. So I kept our team here. We have analysts. I have full time acquisition folks flying around. We have an investment committee call every week. So every single week we’re going over.

Um, which is why it’s interesting to me know two years ago, one year ago, one month know, we’re know deals kind of come and go and repeat reprice. And we’re talking to all the brokers in the markets we’re in, which is basically Arizona and Texas, primarily at the and I think that what we’re also seeing at the same time is they’re going to experience a massive lag of new construction in about a year.

So you think about go back to interest rates because we’re also a builder. We have six multifamily deals right now. I have two under construction and four in pre development. And we put four on hold because our construction costs are up, our interest rates are up, all that stuff. So there’s all this uncertainty on what is it going to cost to build these and delivery and labor and all those things.

Those are things that we deal with here. There’s a lot of single family home builders and a lot of multifamily home builders and lenders are going construction. New construction is risky. As you know, you’ve done it. So what you’re seeing right now are projects just finishing and you’re going to see a real lag right now is not a good snapshot of what’s to come. But what’s to come is we’re going to have a pretty small number of new supply come into the market.

We’re going to see more and more people from single family into multifamily. And it’s going to put pressure on rents, I believe. And I think you’re going to see probably in the next three years, it’s not necessarily good news if you’re a renter, but you’re going to see some pretty robust and aggressive rent growth, even though right now it’s kind of stabilized. But what’s about to come is not necessarily good for a renter, good for a landlord.

Yeah. And you like that section of the market, I’m guessing, because there’s always people there. There’s always people coming up and always people coming down. And so there’s always, like, demand in that size. We do the market. Yeah, we do. We kind of specialize in that B plus. We also build a course so that kind of low end Class A, so gated pools and fitness centers and all that stuff.

But we try to do Class A affordable if we can. And we like that market because there are Class A brand new buildings that you could pay five, six, seven, $800 more per month, somewhere within a mile, 2 miles. So we’ve just decided to have that kind of entry level a new product or high level B. Where we’renovating the reason we like that is because we don’t have a lot of delinquencies.

Most of the people, like in the Pandemic, when Biden said, hey, nobody has to pay rent, we actually did just fine. We were fine. We freaked out, all hands on deck. But the reality of what was a very small percentage, I mean, like, just a few hundred people were dark on us. Out of 10,000 tenants. That was pretty good. That’s because of the quality of the tenant that you had at that IB or A level versus a low income housing would have probably had much higher delinquencies.

Correct. You got that? Yes. So that’s the market we like. So I would agree with you. I’ve been very vocal, even when inflation was still seven 8%, that this would probably still be some of the lowest inflation we’ll see for the rest of the decade. I think it comes in waves. It’s already starting to go back up. Energy is coming back up. I would agree. Probably rents continue to go back up as well.

So you have two sides of the equation. I mean, it’s about cash flow, so it’s expenses and income. Income is the rent. And so we expect the income, the rent side to go up. But what do you think about the purchase price and the interest rates? And how are you kind of planning and forecasting on that? Yeah, so if you’re trying to buy something today with new debt, in most cases it’s not working.

So, again, I always tell everybody it’s just math. You know what I mean? Just follow the math. To your point. Rents minus expenses, minus debt, is there cash flow or not? In most cases, you’re not finding it. So the deals that are getting done are the ones where the sellers have to sell at lower prices, and that actually helps, of course. And then also assumable loans, which in the multifamily space is a thing.

So I can lock and load a deal, let’s say three years ago, and I’m sitting at two and a half, 2. 75 or 3% or three and a quarter, I can sell the asset with the loan on it. And so debt, if you have debt, it’s the same with the single family house. If you’ve got 3% debt, I tell everybody now, debt is an asset. It used to be a liability.

But if you’re at less than inflation and you’re borrowing at less than inflation, which certainly has been the case, do not get rid of that debt. So people will actually pay a premium for that. So the deals that we’re trading, like right now, I have a deal in escrow. It’s low, 200 units, let’s say, and it’s got assumable debt. It was brand new. It was built, finished up in, I think, 2021.

And at the end of the construction, they put really good debt on it. Low price, fixed long term. So you can step into the shoes as the person who has that debt, and then they do charge a little bit of a premium for that. But again, if you’re just solving the cash flow, it doesn’t matter. Yeah. Now, you had mentioned Airbnb earlier in the conversation, and of course, that seems to be getting all the headlines for the last couple of weeks.

And it was even in 2020. I remember the same thing. It’s kind of the same story resurfacing that the Airbnb bubble is finally going to be the piece that crashes the real estate market. I don’t really tend to agree with that, but I’m curious what your thoughts are on that. No, I completely agree with you. It’s clickbait stuff. That’s all people are. It’s ridiculous to think that Airbnb is going to crash the residential market.

By the way, we have a whole short term division of our company. I’ve been doing before even Airbnb was around, we used to do furnished rentals a week, one month, three months. I live in Scottsdale, so we had like the San Francisco Giants, the, you know, so we house baseball teams and stuff like that. So we’ve been doing this a while. What we are seeing, though, is on the higher end stuff, people are not paying those kinds of five, six, seven, $8,000 a night stuff.

And that’s everywhere. Where at? And so there is some softness there. But it’s a small piece of the market. But if you own a home and you bought it in Scottsdale, let’s say a million, um, and it’s worth three cares, you know, just go back to a rental. You know what? Yeah, the rental market’s still it’s, it’s the people, and we know several in multiple markets, it’s the people that bought them based on this $4,000 a week model.

Those are the people that are in trouble because they financed it typically, sometimes with hard money. And they’re expecting 1520 even more per month in revenue that it’s so much higher than just the regular rental market. Those are the ones that we’re starting to see make their way back to the listings. Yeah, I would agree. I was talking to someone about this, I think last night or the day before, and I just said nine out of ten businesses fail.

So these are sort of businesses, and most people have no idea what they were doing. And so they’ve started a business that they don’t know how to manage. A lot of these areas, you see, they still have 60, 70% Occupancy, but that’s the average. That means a lot of people are below and some people are higher. And so if you’re good in business, you’re above that. If you’re bad in business, like, we see so many people, they’re below.

And to the point, I’ve also said the same thing. I run a couple of short term rentals as well. And I just told people, learning from my unfortunate painful lessons is, would it rent out long term and would you be okay with that amount to the point that you’re making? And if you’re okay with that amount, then I’m okay doing the short term on top of it to try to get a little alpha, but understand my risk position on the way back down if I could do it long term.

Yes, I completely agree with you. It’s a business issue, and most people figure it out. And there’s nothing wrong with plan A, B, and plan B, which is straight rental, if it started there and you went up, you started making a bunch of money and you got to go retreat back to there, that’s still okay. Yeah. So probably maybe my last question, and this is my selfish question, is that for myself and having owned real estate now for decades, at this point, I’ve kind of gotten to the point where I just don’t want to really want to manage that anymore.

I’m tired of dealing with even my multifamily properties, obviously none as large as yours. I won’t go into that. But I’m kind of at the point where I don’t really want to manage all this. And moving into a model that you have seems very attractive to me at this point where I get all the benefits of owning real estate, pass through tax benefits, et cetera, the benefits of having professional management without having me do the work.

And so for somebody that may be like me that’s maybe sitting on a little bit of cash and wondering, is this a good opportunity for me? Or should I maybe be thinking that probably by next summer maybe the prices sort of get adjusted back down? What are your thoughts kind of on that? Well, yeah, we’re already seeing prices adjust down, and I think that’s going to continue too.

I don’t see a rate cut in the future. I don’t know if we’re going to see more increases, but I tell everybody, stay alive to 25, just hunker down. My entire career was based on 6% interest rates, probably like yours. So what we just got was a complete gift. For them to go back down to three would be awesome. It could happen, but you need to make sure that it works at today’s numbers.

And then you hedge the up and take advantage of the down. That’s what I say. And then on the property management side, Mark, I think you bring up a good point at some point you just get the heck beat up with all these tenants and all these kinds of issues. I’m telling you, like I said, we have a full property management company. We only manage our own stuff, and 70% of my week, it seems to be all centered around operational issues.

And if you’re in a position where you can avoid all that and just focus on growing your wealth, I think that’s a good decision. We look at it like we’re managing our own money and our investors money. So I feel like I have to. I love being able to walk down the hall, sit down with the president of my management company when I see something that came in on Monday, let’s say, and put a strategy around trying to grow occupancy or lower expenses, or I see Eloise mentioned about the insurance rates and property taxes.

Those are two big issues that we’re tackling this year, massive problems. Rent control is another one like where are you going to invest? Smart money goes where it’s treated best. And so you’re seeing lenders kind of navigate these kinds of things now and investors. So all that stuff is something you got to look for, I think. Never before have I believed that the governor and the mayor is so important these days on where you’re going to be next.

Because before I’m speaking to the choir here with California, I know you’re out there, but before it was never really that big of a deal for the rest of the I think yeah, yeah, certainly I couldn’t imagine owning or buying into a long term deal in California today. And even then you look at like a state like Colorado, which is going down the same path very quickly. And so I probably would stay out of Colorado as so.

So for people that might be thinking along same lines as me, like, hey, you know, I’m done with owning all these individual properties. Maybe I’ll just work with somebody like you. What would somebody typically be one looking at? So typically you do them at a preferred return, plus you get upside, they refinance every couple of years. What does that sort of look like? And then the second part of that question would be what would be a couple of the key pieces that people should be looking at? Like in vetting, so for example, being vertically integrated, having long term track record and things like that.

Yeah, well, a couple things, I’ll tell you. I sold a building in Houston. This is a really short story, but it’s a good one. We listed a building with a national broker and we selected a buyer. There’s all these people wanting to buy it. We selected them and then I got the business plan from the buyer. So you imagine I’m the seller. I get the business plan unsolicited.

They don’t even know because I’m on some list somewhere, right? So I pull it up. What does it say? It has all the reasons that the property management company sucks and the ownership sucks and all that stuff, which is me, by the way. And so I said it to my partner, I go check this out. So in the package it said, oh, we’re going to be able to grow rents $200 and we’re going to be able to lower expenses and we’re going to get better insurance prices and we’re going to get all the stuff that any suspecting limited partner would want to see.

Basically a value add play. I can tell you that we checked all this stuff out before we listed it. Like we started pushing rents and we renovated some units and said, okay, well let’s do four units and see if we can get more rent. And then we looked at all the expenses and all that stuff and once we realized that we weren’t going to get any more juice out of the orange, we listed it well.

So I got a package saying, oh, we’re going to be able to do all this stuff. The lesson there is anybody can put anything on paper and sell anything they want. And so you have to really dig into, I would say trust, but verify. Just really take a look at is there really rent growth? Can you really squeeze more juice out of this orange? And where and do they have the track record? I mean you touched on that.

A lot of these syndicators, they had third party management companies and these third party management companies, they hadn’t even hired them. They’re just raising money. And then they raise money, get the property in escrow, then they bring on the property manager to help them with due diligence, which they may or may not hire. They don’t have management experience. And so what we’re seeing right now with these syndicators is that’s all starting to bubble up.

They don’t know how to manage. All they are is online influencers that have a database to sell stuff and they don’t understand the economics. I’m not the best in the world, but I started on site in college. I worked my way up through the business. I understand multifamily. I managed it. I worked for a large national company. Then I started my own firm of 25 years ago. I get management.

That’s why I do it. So I have a competitive advantage when I’m buying from a broker, buying from a seller, because I can weed through the bullshit. So you want to find somebody that is going to perform and has been in business a while, has that thick skin. So really it’s about that questioning the business plan and the syndication itself and the asset itself and the track record in the team and walk me through the process of an average deal.

I would imagine each deal is sort of differently, but if I were to jump in a deal with you again, you typically would pay a preferred return, plus there’s an upside. And then typically, the strategy is to kind of refinance it or sell within a couple of years and roll into the next. Like, walk me through kind of like, that path. Yeah. So there’s several different kinds of buckets that we put assets into.

So there’s what I would call a value add bucket. So the value add would be like, we bought a building in Dallas that had not been touched in 30 years. Okay. So you buy that at a low number, you renovate it, it’s worth more at the end. That may be a sale, may not be a sale, because, again, I’m in the cash flow, long term business. So the goal would always be to keep the asset and give all the money back to the investors.

So every deal is a little bit unique to the actual deal itself. So that deal, of course, has a very different outcome than we just opened a property in June. 330 units in Tucson. That’s brand new, new construction. Okay, so when you open on day one, you have 330 vacants. You know what I mean? So you’re leasing it up and all, et cetera. It takes a year, year plus to lease it up, and then at some point, it gets stabilized.

So there’s no cash flow on that kind of an asset in the first year, too. All right, that’s a wrap. Hopefully you’ve enjoyed this conversation with Ken McElroy. He’s probably the most authoritative view on commercial real estate that I know. That’s why I go to him. And so hopefully you’ve enjoyed this information. Now, he talked about how in 2008, he got a bunch of debt and made a bunch of investments and became a billionaire because of that.

And this is what I’m hoping to do. In this next downturn, I’m going to be working with Ken, and I have dry gunpowder ready, and you need to as well. So if you want to find out how you can get more access to capital hundreds of thousands of dollars, come hang out with me and my good friend Jack McCall. There’s a link down below. It’s a free event.

He’s going to explain how you can set up all these credit lines. You don’t have to use them, but they’re there if you need them. We’re going to talk about how to set that up, and then we’re going to answer all your questions live. Come hang out. There’s a link down below. Hope to see you there. But either way, even if you don’t come, make sure you’re ready for this opportunity.

It’s like Black Friday, except for you don’t have to wait in line all night. But the sale, the deals, they’re going to come, and you got to be ready to pounce when they come. So either way, come hang out with us or do it on your own. But whatever you do, don’t miss this opportunity. And that’s what I got. All right, let me know if you like this video.

Leave a comment down below. Let me know what your comments or questions are. Thumbs up if you like it, thumbs down if you don’t. That’s okay. That’s what I got. To your success. I’m out. .