The rest of the year is going to be tough for real estate as unemployment is expected to rise as the economy undergoes a slowdown. There is not much to do but to brace ourselves for impact as this economic downturn inevitably affects the real estate market in a really bad way.
Real estate adviser and two-time bestselling author Ken McElroy joins Patrick Donohoe in the podcast to talk about recent market developments as the nation goes through an economic downturn caused by the COVID-19 pandemic. Ken sees a harsh reality ahead for real estate investors, especially those dealing with rental properties, commercial retail centers, and other specific spheres in real estate. He cautions investors from overleveraging in an increasingly uncertain market to avoid being caught in the imminent crash.
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Real Estate And The Market During COVID-19 With Ken McElroy
I know we’re in challenging times. I hope you are learning about ways to thrive. You’re going to learn something about this interview, especially if you are interested or invested in real estate. There is no one better than Ken McElroy to speak to what’s going on in this environment. Where are the opportunities, what to do and most importantly, what not to do? I hope you’ve enjoyed the last couple of episodes, the Richard Duncan ones. I know they were deep. Hopefully, that inspired you to learn more about monetary policy and its relevance given what’s going on and what’s likely to come based on the Fed’s inevitable involvement.
You’re going to see something that I’ve been seeing over the last couple of months, whether it’s Ray Dalio or Tony Robbins or other very influential and successful individuals who are taking the time to teach others and putting so much relevant information and content out there for free. If you go to KenMcElroy.com, there is so much there relevant to what’s going on that you have access for free. He has a free newsletter and email list. If you are involved in real estate, you’re definitely going to want to tune into his social media channels and listen to what he has to say.
He is living and breathing what’s going on and has contacts with some of the most amazing people, not just in Arizona and in the country but around the world. He also partners with Robert Kiyosaki. They’ve written some books together and he’s written his books. This guy is amazing, giving and focused on contribution. Tune in to what he has to say. It’s important especially if you are involved with real estate. Additionally, Ken does have a behind the wall platform specifically for more professional real estate investors. I was able to get some money off if you want to participate in that. It’s a few hundred dollars a year. Use the code Patrick.
If you are in professional real estate and own multiple properties or syndicated and raised money, this is the information you want to have. Kenny is the master. You are going to enjoy it. We have a lot more coming to you in the future days. One thing that I would encourage, though and I know this is time to focus and spend on personal development. The last couple of seasons that we’ve had all focused around the principles of entrepreneurship. I believe these are the times when the entrepreneur is getting ready to strike and find ways in which they can provide value to the world and it’s everywhere. Make sure you’re on our email list. There are a couple of opportunities coming.
Head over to the WealthStandard.com. We mentioned a variety of books throughout this episode. Thank you for your support. We’ve been getting lots of new subscribers to the YouTube channel as well as readership. Thank you so much for tuning in. I hope you enjoy this interview with my good friend, Ken McElroy who is a Rich Dad advisor. He is the principal at MC Companies. He has been a real estate investor for the better part of three decades. He has done over $1 billion in transactions. He’s written books and he’s focusing on boosting goodwill and doing that through mostly his social media channels as well as KenMcElroy.com. You are in for a treat. Please welcome my guest, Ken McElroy.
Kenny, it’s amazing to have you on. It’s been far too long. You’ve been doing incredible things online. It looks like you’re having a lot of fun doing it.
It’s been such a blessing. I’m full balls to the walls on real estate. I had been for years, buying, building, managing and all the things that come with that. I haven’t been able to do a lot of this because of that. We’re on lockdown and I’m like, “Let’s use this as an opportunity.” It’s been a great opportunity to dig and study, call lots of people and figure out what’s happening. I want to apply it to my own business, but I also teach what you and I love to do. It’s been a massive blessing. I hate what people are going through, but for me, it’s been a great blessing to be able to dig in and try to teach so that people don’t make some of the same mistakes.
It’s one of those times where when disruption happens, you learn many lessons and you find all sorts of opportunities. At the same time, it probably wasn’t what you were anticipating. In our conversations over the years, you were anticipating something. I don’t think anybody could have called what happened with the whole COVID-19 and everything shutting down.
Going back through the cycles, there have been a few staying in the 2000s. We had 9/11, which I went through. That was super small, but it did make a massive correction. There was the dot-com and then we had the run-on with cheap money. It’s been different, all of them. This is something different. It’s horrible what’s happening. For me, it was going to be something. I thought it was going to be corporate credit, personally. That’s being exposed right now but it happens to be this which is exposing corporate credit, which is now not being talked about. That was a big deal. This is different.
You can never tell. There are certain fundamentals and looking in the rear-view mirror, it’s always easy to identify similarities, but it’s about, what’s the windshield and what’s going to happen as a result? I still think we’re in the thick of it. That’s what’s always impressed me about you is that you don’t necessarily settle on a bias or an opinion. You have them. At the same time, you always question them. You realize that other people know certain things and have a different perspective. It sounds like you’ve been in the information-gathering mode to identify what’s going on, how are things going to be effective, and where are the opportunities? Maybe speak to that a little bit as far as some of the things you’ve been studying or now aware of, and what you’re seeing maybe as the fog that’s starting to disappear from the windshield.
What I love whenever I chat with you is I’m a psycho guy and you love economics. For me, you’ve got the recession, recovery, expansion, the hyper supply, and then you’ve got the recession and the recovery. It’s a big bell curve. I’m always trying to figure out what I’m missing. I’m decisive like you, but I always keep my mind open. I always want to know. Every time I see the mess up in my life, it’s what I don’t see. For me, in 2018, it’s tough to buy. People are overpaying for things, rents are growing like crazy, and it’s great. There are lots of money and lots of syndications. People are like, “Aren’t you in the market?” I’m like, “No. We’re going to focus on ops as you know we did.”
In 2019, it only kept getting crazy. My partner and I, Ross, I said, “We should sell. Look at how much these are worth. We’re going to make millions of dollars because cap rates are in the low fours and even less. We bought these things at 5, 6, 7. We should exit on a bunch of projects.” We sold right around $250 million worth of stuff in 2019 through the whole year. It took most of the year. I only say that because I didn’t know it was going to be at the peak. I didn’t know if we had 1, 2 or 3 years left. I didn’t know but I knew that I had made a lot of money. I knew that what we bought to what we paid to what we sold, that was a lot. I was trying to take care of our investors. Like anything, you’re not supposed to time everything, but I’m like, “Maybe we leave some meat on the ball for the next guy.” For me, when the fundamentals got out of whack, I said, “It doesn’t make sense to me. I can’t get equity and pay 6%, 7%, 8% and have cashflow of 2% or 3%.” I don’t want to be in that situation. That’s why we got out.
You’ve had several different cycles you’ve been through. There are a lot of investors that may not have exited in a timely manner. Based on your experiences of the past, I know in the past you’ve kept a lot of properties through down cycles. What would you say are some of the questions and concerns you’re getting from those that hear the birdies chirping, “You don’t have to pay rent and there are going to be laws where you can’t be evicted?” How do you usually respond to those concerns? Even though it’s early on in this, I still see the feedback we’re getting where the majority of concerns is, “Am I going to get my rent?” Is this something that now I’m going to be personally obligated to deal with?
We still have 8,000 tenants. We still own a lot of property. I have commercial and I have self-storage. We have a multifamily, mostly Class A and B. We have ground-up construction that we’re doing. We own a management. We have a construction company. I was at the office on Zoom calls with my leadership team on these exact issues so I can speak to them directly. First of all, as a company, we’re all plugged into the National Apartment Association and the National Multifamily Housing Council. There was a survey in April for 13.5 million apartments. Universally, everybody collected about 89%, which was pretty good. At the end of March, we weren’t sure. We did stress tests on all of our projects. There are only two major components that you’ve got to cover. One is your operating expenses and two is your debt. Those can be very different from property to property. Some can be principal interest. Some can have high property taxes and high expenses. Every property is very different. That’s where the management part came in. We were super cognizant about that. We knew what our minimum thresholds were for recollection. We thought that we were going to collect around 75%. We ended up collecting into the 90s. There was a whole team of people working on this.
Do you do anything differently?
We did a lot of things differently. It depends on where the property is. If it’s in an area that is pretty high-end healthcare, for example, no issues. If it was a senior property, no issues. If it was student property, trouble. If it’s anything that’s service-related or tourism-related, trouble. A lot of it depends on where it is and who’s in it. For us, this is where good property management comes in. If you filled your properties with good people that have good credit before, they’re going to come in and sit down with you and work with you. If you have it, then you’re going to be a little more exposed. As Warren Buffett says, “When the tide goes out, you see who’s swimming naked.”
For us, that was a big focus, running criminal credit and background checks on every single person, making sure they could pay. These are good people. They don’t want to be booted out. We don’t want to boot them out. We created our own internal program that we’re working with all of them individually. We have 8,000 people. The numbers were roughly about 60% paid. The others had all kinds of scenarios. It was a case by case. We did this in 2008. We said, “Your life has been interrupted a little bit. Let’s sit down and work this out. You don’t want to move out. We don’t want you to move out.” I’d rather have a good tenant with a good credit history in our place than not. I’d rather have them than a vacancy. I also knew now, it’s not going to rent much at the moment.
We went on damage control with our lenders. We went on damage control on our ops. We cut out all CapEx projects. We cut out all marketing. We hit every single line item, except the employees. We kept everybody. We said, “How can we run this building, not spend anything and then hunker down our cash?” That’s what we did. Even with all that, we’re quite concerned about May 1st. When you think about it, everything hit mid-March. People had already paid for March. They were only two weeks away or one week away from paying April rent and a lot of them were still working. That’s done. Now a lot of stimulus money came in, but we’ll see. May 1 is going to be a big test for this industry.
The main thing is communication. You took a proactive approach and communicated with tenants, acknowledging what was going on and then starting to identify opportunities as opposed to them trying to figure it out on their own.
In fact, we were talking about, “Give me the stats on April.” She said, “We have 100 some people paying rent that were on the payment plan. We had 26 people that we had to put abandonment notices on one project. On those people, twenty of them came in right away.” It’s a process of working with these people. Multifamily is going to be fine long-term because now we’re starting to get money. It’s going to take a big hit. I have lots of friends in the retail space. I’ve got these horror stories. I had one friend. He’s like, “I have fourteen tenants in this retail center and only two paid.” I was like, “Who are they?” He’s like, “Your wedding shop, water store, restaurant, bar and dry cleaner.” That is going to be one of the bigger issues in commercial retail. That’s going to start to show up here in the next 60 to 90 days.
The office space too because everyone was forced to work from home and be remote. They’ve figured it out. I’m assuming the success stories that exist are realizing, “I don’t have to pay to park. I don’t have to pay for snacks. I don’t have to pay for utilities where you can operate a little bit more thin as you come out of this.
That’s more of a long-term thing. I own some office buildings. We were able to get everybody to pay, but there are going to be reliant companies. Let’s say it’s got a franchise. They have 20, 30 franchises in town and they’re not making money. They’re not paying the franchise or the management company can’t pay the landlord. All those things are going to happen. Ultimately, people are going to rethink at the end of their leases. They’re going to go, “I don’t need this much space. It looks like we can operate remotely.” Not to mention the fact that retail was already on a shoestring.
Everybody’s direct-to-consumer now. You can order stuff from Walmart, Target, Home Depot or we all know Amazon. The new normal is to go on your computer while you’re sitting there eating breakfast and order whatever you need. It comes right to the door and it’s there at night. No longer do you have to drive down to the store, throw it on the back of your car and drive to the house and unload it. That’s the new normal. A lot of those businesses are done for good. That’s horrible. A lot of people are going to lose a lot of money.
My bit concern about all of these, you look back at all of these different things that have happened for unemployment. Most of the time, unemployment at the worst has been 1.9 to 2.2 billion people. We’re in the mid-twenties. We’re like 10x. Everybody would say, “It’s temporary. They’re all going to go back to work.” That’s not true. Whatever the number is, it was 22 million, but maybe 14 million, 15 million of those people will go back to work. We’re going to be left with massive unemployment. It’s going to take a long time to work itself out. Those are people that pay us rent. Those are the people that buy groceries. They go to restaurants and they do dry cleaning or they don’t do your dry cleaning, all those kinds of things. The economy is humming along and that is what everybody’s missing.Jobs and population movement drive real estate, and neither of those are happening right now. Click To Tweet
That demographic is still operating on a shoestring. This is probably a good transition. A lot of the stimulus that the government has proposed, CARES Act being one of them, which was part business, part individual. Do you see that’s made a difference in given confidence? Maybe add into the unemployment, specifically the federal unemployment who’s boosting the state unemployment, if that’s making a difference. Do you think the stimulus or government intervention has been making a difference?
I do. We got our PPP money for our own company. We needed it. We didn’t lay anybody off. We’re not considered as a central business because we’re housing. I have friends that haven’t gotten any. I have a good friend that owns a lot of gyms in town. He’s got 900 employees. He hasn’t received a nickel because he’s over 500 employees. These are real people with real businesses crashing. That’s on the business side only. On the renter side, they might own businesses. They might have jobs or whatever it might be. That unemployment, that stimulus money is super helpful for people. You never know what they’re going to do with it. That’s the truth.
Do you think there’s going to be more stimulus specifically relating to real estate? I know that there wasn’t anything announced, but from what you’re hearing, I know that the associations you belong to probably have lobbyists and influencers who are trying to push for certain provisions, especially if they start to mess around with eviction laws.
The thing is we’ve been all over the eviction stuff. I had a conversation with the governor who I’ve known twenty years back when he owned Cold Stone Creamery here in Arizona. We’ve been all over these things. On one hand, they’re saying, “You can’t boot anybody out.” By the way, we don’t want to. On the other hand, they’re saying, “You’ve got to pay your mortgage.” We’re saying, “If we can’t get the income, then we’re not going to do it here.” Our biggest concern is what the lenders are going to do. If they’re going to give us any forbearance. Right now, the forbearance programs aren’t that great. They let you bounce three months, but it’s due on a balloon in the fourth month. It needs to be tacked to the back of the loan and give everybody a little bit of room.
I’m most concerned with my buddies that are in those retail centers. They’re not going to be able to pay their mortgages. They’re going to have to go into default. The lenders have to move forward in defaulting them. The problem that we’re seeing is what does a lender do? If you’ve got a loan on a center, you want to work with the guy that owns the center or the partnership. The truth is they’ve got to take a look at the center too and go, “Which one of these businesses are going to make it and which ones are not?” It’s the same thing with the multifamily. I was playing golf in Arizona. Golf courses are essential, as you can imagine.
I was playing golf with a bunch of buddies in my business. I had one friend that had three properties in escrow. The buyer had wired $1.2 million to escrow and the agreement flowed that money all the way to the seller, which was his group. The lender said, “We’re not going to loan on these.” They said it happened on another deal where they had $500,000 up and then it happened to him where he at another deal where he had $500,000 up. What’s happening is anything that got valued in January, February, maybe early March, the lenders, if they haven’t locked rates. They haven’t given the full commitments. We see a little bit more risk here and we’re going to take a look. A lot of arguments are happening on deals that are in the works. That argument will be interesting. The lenders are changing their tune because they see more risks moving forward. Just like you would or I would, I don’t blame them.
I don’t either. I would say given the liquidity that existed, they kept doing their job. It put them in a predicament as well as the property owners. Let’s maybe transition away from the pessimistic side of things. There’s certainly enough there to be concerned about, but I look at your experience through 2008, 2009, 2010, as well as previous downturns in the economy, you anticipated then, you’re anticipating now. It doesn’t make sense to plant any seeds in winter. What are you looking for that would make you excited to get back in and start planting some seeds because Punxsutawney Phil poked his head up and saw his shadow?
First of all, people need to adjust their paradigms, their belief systems on what’s happening. I did a video on YouTube on this issue. I did these concentric circles and I called it lag. I said, “Here we are with COVID-19. The first circle is unemployment. The next circle is our loan default. The next circle is our bank REOs. The next circle is when you buy. These things, it’s like a balloon. When it inflates through this recession or before this recession, during this hyper supply. It slowly inflates and so you have to wait. You have to give it time to deflate. Those guys I was telling you about, they are in trouble. They’re going to fight like heck. They’re going to try to do cash calls. They’re going to use their cash reserves.
They’re going to try to hold things together as long as they can. That might be a month. It might be two years. All of this stuff has to unwind on its own. At the end of the day, it’s going to be the people who have the most cash reserves and what the banks are willing to do. If the guy is a 100% occupied and he’s got a center that’s 50% occupied, he’s still not going to make it. You have to wait. Once a bank gets something back, as you know and I know from personal experience, they don’t write it down right away. That will sit on their books for a while. They have to like, “What do I do?” It could take months for that to happen. We’re looking at a long period of time here.
What would you say especially for the amount of run-up that existed after 2008, 2009 when there was tremendous stimulus and interest rates were low? For those who have been through cycles, it’s easy to say, “If that’s what they’re doing, then asset prices are going to boom.” We’re at right now in that debt cycle. Do you see that things are going to get better soon? Do you think that they’re going to get worse? Do you think it’s going to be different this time around? Is it a cycle that goes back to the way it was? Is it a cycle that learns its lesson and then rebounds from the lesson?
What happens to every cycle is people don’t learn their lesson. What’s happening is, as we were talking about, I have nothing against all these syndicators that are going out and raising money and buying stuff. I hope they all did fine. The truth is I was bidding on those things. I know the numbers. I’m not going off on speculation. I was losing deals to people that had $1 million, $2 million, $3 million higher than I was willing to pay. I knew the underwriting, the numbers, the debt, and everything. Those people aren’t going to make it. They’re going to have a higher vacancy and flat rent growth. We’re going to start to see concessions and all those things are going to pop. Let’s not forget what drives real estate. It’s jobs and it’s population movement too, which is not happening at the moment. It’s jobs. If you’re in Florida, I don’t have to tell you that tourism in Florida, Southern California, and in some of those areas, they’re going to hit pretty hard.
If you’re in healthcare, you’re probably going to have a little softer scenario. You have to look at what industry. I have friends in student housing and they’re toast. I have two kids. They’re both at my house down the hall. I’m paying and I’m wiring money to the University of Arizona. They’re on Zoom calls in their bedrooms taking classes and they don’t know what they’re going to do forward. People are starting to look at that, education and college education. Is it worth it? All those different scenarios.
The student housing guys are getting nailed because they moved out. In a lot of cases, it was mandatory that they had to move out. They going to move back in. School is going to reopen. There are all these things that are going to happen. It’s fascinating. You have to watch. There will be massive opportunities in all of those areas. Things are going to come back. I don’t know about you, but are you going to take your family on a cruise ship in the next three years? That’s my point. I feel the same way. I know a lot of my friends feel the same way.
Those behaviors are going to change. All of a sudden, Miami hotels, the theme parks, all the things that you wouldn’t do when you were down there before, as part of that experience catching a cruise ship out of Miami is different. It’s gone and changed. It’s going to have a ripple effect. The people that work for all those different businesses, they don’t own homes there. They rent there. The restaurants and all that stuff, it’s propped up based on a lot of these things. Certain areas are going to do well. Interestingly, I was talking to a friend of mine. The Cleveland Clinic is nationally revered, even internationally revered. Cleveland is super strong. First of all, it was never in a bubble. At the same token, they got all these doctors and all this healthcare stuff going on there. I’m not advocating to buy in Cleveland. I’m saying that it’s interesting to me that you have some areas that are doing well and others that aren’t. You’ve got to pay attention to the jobs and population.
If you’re the syndicator, you raised money or you own and you didn’t liquidate and sell in 2019, and you’re in the middle of this, when do you not hang on, especially if this is your first go-round? I’m sure that’s a lesson that we’ve all learned. How long do you hold on to an employee? How long do you hold on to a property? How long do you hold on to an investment? When is the time to let things go? When is the time to maybe hold on?
There are a lot of scenarios that have to do with this question. Let’s talk about debt first. Let’s say you have an interest-only loan that now is going to have the principal part kick in, which is a scenario that could be happening too. They bought something a few years ago. That extra principal could be the difference between them going down. If I were them, I would be negotiating longer IO or Interest Only as an example. The debt has a lot to do with that question. When you get to the operating expenses because I’ve been through these before. The very first thing to get paid is the mortgage. The very second thing that gets paid typically is payroll. The third thing is property tax, insurance, and then everything else starts going into net 30, net 60, net 90, and net 120. You start to manage all and I’ve been through this.
What happens is, unfortunately, the maintenance, the advertising, the marketing, and all those kinds of things. Those are the last things to get paid because you’re trying to keep the lights on and all that stuff. At some point, some of that has to pop. You’ll get a lien. You can insure the property and then they let the lender know. All that stuff could take a long time. Generally, I’ve never known anybody that says, “I’m done.” It’s usually the lender that’s going, “We’ve got a problem here. We’re going to have to move this into some kind of foreclosure.” My guess is there’s going to be very few people that do it voluntarily and it will be done via the lender. Sometimes it might cash call their way through it. I have that resort I own. We’ve been shut down since March. Our burn rate is high. We’re getting killed and I’m just writing checks to keep it. Oddly enough, I don’t have debt on it. It’s operations. It’s everything else, but it’s still $100,000 a month, just to keep the thing with no revenue.
You need another priority of urgency essentially. What is the most important thing to pay first and then pay last?
What will immediately trigger you as a red flag is the non-payment of the mortgage. That’s usually the first thing that’s paid and everything else is a train wreck after that. Unfortunately, it’s going to happen.
Let’s do this. This has been helpful. We’re still in the thick of it. The dust is still settling. At the same time, you’re looking at certain things based on your comments about what to pay attention to, whether it’s employment, specifically jobs and how that’s flowing. You’re also looking at how things are going to land in the retail section and how travel and vacation are going to change. There is so much from even a psychological standpoint. People going out have to wear masks. Our governor in Utah came out and said, “We’re going to do a second wave, but now we want everybody to be wearing masks everywhere.” It’s interesting to see how things are going to adjust from a society perspective. You’re an investor or a syndicator or both. What are the top three things that you would not do? What are the top three things that you would do?
The first thing that I would not do is I would not buy. This is an interesting question. You have a big following and I have a big following. I get people too like, “I’m in the middle of this deal. Should I buy this or should I buy that?” I’m like, “No. I guess it’s not the time to buy. This is a time to step back and watch because there are a lot of risks. That’s the first thing. I also don’t think it’s a good time to over-leverage because a lot of people are trying to refinance. It’s a good time to possibly do a no cash-out refinance and get a lower rate if you can. I also think that going with a floating rate is probably fine for a while, as long as you don’t have that big penalty for any refinance.
We did this on an office building oddly enough. It has a 5% prepayment penalty. To get out of it, all we had to do is list it up a little bit more. For me, that was like, “It’s great.” It cost me $100,000 to get out of this loan. That’s good. It does not yield maintenance or any kind of a large prepayment. That’s another one. Be careful with that. I don’t think going with a floater is bad. Zions Bank out of Utah, I talked to them. I’m doing a 2.75 off their balance sheet. It’s a floater, but it’s the first ten years fixed. I’m like, “Great, I’ll do that.”
I know my first ten years are fixed, but I could refinance at year 7, 8, whatever if I want to move into a fixed. That’s another one. The other thing that I would be careful about as any self-management, that’s the third one. I know it costs money to have a management company, but this is the time when they show up. I’m telling you. A management company, especially a big one, they have relationships with the lenders. They have relationships with banks. They have relationships with vendors. They have relationships with all these people. They’re also working on your behalf so this is not the time to fire our management company and self-manage and try to save that little bit of money because there are all these hidden mistakes that could be made by doing that.
This is super helpful because you’re speaking from a lot of experience and you also network with many other investors. What are maybe the top three things that you would be doing?Human creativity shines during difficult, disruptive moments. Click To Tweet
The first thing I did, we said, “Let’s maximize our cash.” How can you maximize cash? The first thing we did was we stopped all CapEx. Anything that was in any way budgeted for 2020, we said, “It has to go through me.” No new floors. No new appliances. No new this, it has all go through me. Unless it’s emergency and health and safety. That was number one. Just that move alone is millions of dollars. The other one was no value adds. That does not exist right now. We’re not going to rent something for more in the coming months. No value adds at all. If you had a property that was based on a value-add strategy, stop. Let’s offer those at lower prices, which will be good. If you have somebody in a higher-priced unit, maybe you can move them to a less expensive unit and keep them as a tenant. That was another one.
The other thing that we did is we took a look at all the rest of our cash reserves, and then we did stress tests. We started to take a look at where we were on all the cash and all the projects. We ran those out based on a number of scenarios to see where we were. We knew specifically what would happen if we collected 90%, 80%, 70%, where we’re going to start to see. Those are the things that you can do right now. You can also prepare your partners for a cash call. You should be super proactive about that. I did that with my resort. I said, “This is what’s going to happen in the next 90 days. I’m going to need X amount of money from each of you to preserve this asset.” They all sent their money in. If that continues, then we have to do it again. If they don’t, then we’ve got to move into the operating agreement and start a dilution process to maintain the assets. That’s number one.
The other one is what we’re doing here. Learn, listen and study is the second thing I wrote down. This is the time where education is everything. They should be listening and learning. From Robert Kiyosaki alone, he probably sends me three YouTubes a day and unfortunately, they’re all like 40 minutes to an hour. Just from Robert, I got 2 or 3 hours of stuff to listen to. I have friends sending stuff around and it’s the greatest thing ever. Everybody has a different view. Read, watch and learn as much as you can. You can speak professionally to your lender, your investor, and your employees on your strategy because you have to have a strategy. This is the time when leadership shows up. A lot of times, people are going and blowing, and they’re not very good communicators. This is not the time to do that.
The third thing that we’ve done well is we worked with all of our tenants, all of our employees, and all of our lenders. I have a report every single day. I know every single day where my delinquency is and where my occupancy is on every single property that we have. I’ve never done that before. Usually, I look at that every other week. I glance at it. I focus on 1 or 2 buildings. I’m looking at this daily and we’re managing right down. That’s why I knew that we had 26 abandonment notices at one property because I was tracking that. We’ve never had to do that before.
I was on the phone with the asset manager and say, “What’s going on with these 26?” They said, “Twenty other people came in and talked to us, and now we’re working with them.” They have six left and we can’t evict them as you know, but that’s not the point. We’re trying to get them to the table so we can speak to them, talk to them, and work with them. We don’t want to evict them. This is why I’m saying the management is so important. I’ve got many years of property management and we’ve got all the bullets and all the guns. We’re putting everything out that we can. We’re using all the experience and all the skills that we can as a team to manage this. You cannot do it without somebody that knows what they’re doing.
That’s where I was going to go, Ken. One thing that I’ve realized from those that I respect and you’re part of it. When all of this stuff started to go down, there became this surge of goodwill where it’s those that had the experience, those that knew what was going on not specifically, but generally speaking started to share, teach and network. This is one of the best times to do that and share. I would say technology is at a point where there are many different networks out there that you can be a part of, associations that you can be a part of to share what’s working for you, but also share what’s not working.
The point is it’s sharing, giving, and putting that out there so that you don’t have to solve the problem on your own. You don’t have to make hard decisions by yourself. You can crowdsource that in a sense. What’s been impressive to me regarding what you’ve done over the last few months is you’re all over the internet, all over social media, and I’m like, “Does this guy have a camera crew following him around 24/7?” Maybe speak to some of the things you’re doing, not these types of interviews, but other things you’re doing to educate investors based on your experience and what difference that’s making?
I know one of the things we talked about is not trying to self-manage your property. I’ll tell you one story that blew me away. We belong locally in Arizona to the Arizona Multihousing Association. I was the Chairman of the board years ago and so is my partner, Lesley Brice, who’s also a partner of our company is the past chair. There was an email chain going around with all our competitors, all the major management companies. We were all on it. It was like 100 people. Everybody was posting, “This is what we’re doing on the delinquent. This is what we’re doing on occupancy. This is a challenge we’re having over here.”
What happened is everybody showed up. It was the most awesome thing to see because these are people that a lot of times, you’re going head to head with on a project or a deal or something and it was remarkable. That’s what I’m talking about. People are stepping up. I’ve been blessed. I’m on EOS, Entrepreneur Operating System. We rolled that out a couple of years ago. We can touch all of our properties and all of our employees immediately through the EOS system through cascading messages and all that stuff. We had all this and the systems set up already.
What happened was we all started to meet through Zoom. I had a Zoom call with the whole management team. We have our ops person there. We have our construction person, our head of maintenance, our COO, our head of marketing, our president on there. We have Ross on there and I am on there. We’re all talking about all the stuff that was happening to us individually. We’re working on them collectively as a team. It started with, “What are we going to do? How are we going to pay our mortgage?” Everybody’s on that call. Here’s the head of our marketing company. She runs our whole marketing team. I’m like, “I’m afraid that we’re not going to be able to pay for our mortgage.” She’s engaged, our COO is engaged. It all cascades down.
We had some properties like our senior properties that are paying 100% because they’re not working. A lot of them are not working and they get their assistance checks, no issues there. I didn’t think about that. We have other properties that are heavily in service. We were at 60% collected. We’re like, “What do we do here?” In a lot of ways, these things show up and because of the experience that we all have, we’re working on it collectively together and so is the industry. Being able to throw that out to the National Apartment Association and National Multifamily Housing Council and work on some stuff collectively, we get these best practices and things that are going on all over the place and we roll it right out.
When I’m speaking to our governor about something, trust me, I’m finding out from the Texas Apartment Association, Atlanta Apartment Association and The California Apartment Association. They’re handling things like rent control, homelessness and all that stuff. I’m bringing all that data in and sit down with Doug and say, “This is what’s happening.” When he asked me the question, “Does rent control work or what should I do here? What should I do there?” I know because I’ve done all my homework beforehand and that’s the power of being plugged in.
That’s also an important point because there are those in those positions of leadership that are not as informed. The connections that you have is one thing, but at the same time, a lot of that information, probably the majority of it came from others through this networking principle. This has been super helpful. Hopefully, everyone’s getting a lot a lot out of this episode. Maybe speak to ways in which the audience can be engaged with you. I know that you’re speaking to the large investors and syndicators, but you also have a lot of relevant information in content for the smaller investor, maybe the one that’s doing it themselves, and maybe doesn’t have partners or investors.
That’s what I did. I started taking all that stuff that we were doing as a company and then all the information that we’re getting from everybody. I started putting it on our website for free at KenMcElroy.com. You can look at our Plan To Pay, our PTP program, which is the exact form that we use for each tenant. It’s on my website for free. All these different things that we’re doing, I put up there for free because I don’t want people to lose their real estate. I don’t want people to go into default. I want people to make great decisions.
That’s why I’ve been doing all these videos. I go, “This is the time when people need this information. I’m going to start doing two videos a week,” which is not easy to do for me because of all these other things we’ve got going. When the PPP came out and the EIDL came out, I didn’t know what to do with it. I didn’t even know what it meant. I found a senior tax advisor, Eric is the guy that does 100 of our tax returns every year. I go, “Do you understand this?” He’s like, “Absolutely.” I go, “Would you do a podcast with me?” He’s like, “Absolutely.” We did that. That turned into a TV interview on Fox News because we interviewed Eric. I put it on the website for free because I want people to see fully transparent and authentic on exactly what we’re doing. These are the exact things we’re doing. This is the time to do that, to help people out.
This is the crucial time where emotion can get the best of you without good information and oftentimes emotions come from the lack of information. That’s evident in a lot of different respects. It will continue to be because this isn’t over. We’re in the thick of a very disruptive event. At the same time, this is life. Life’s not linear. It always throws curve balls at us. That’s the beauty of it because some of the greatest lessons come from that. What’s been impressive to me is the example you gave of all the different competitors that you have, all these big investors, property managers that came together.
These are the times where we have many tools to share. Capitalizing on that allows us to experience the humanity in people, but also get the answers to questions. You don’t have to guess. You don’t have to do it alone. You can use evidence and you can use the information of those that have tried it and have done it successfully. That’s where I’ve been impressed with your team and your group and how much marketing you’ve done against the investment of goodwill. Who knows how that’s going to pay off? You know as well as I do that it always does in some form.
Maybe it does pay off. Like you, we have 30,000, 40,000 people that get our newsletter every week. These are the questions they ask. Part of the KenMcElroy.com, I give everything away to charity. Books, tapes, everything I do goes to our foundation, which we have as well. I take the questions that people gave me on Facebook, Instagram or any of the LinkedIn stuff. We turn them into videos and we turn them into podcasts. We’re trying to deliver that to real people in real-time. That’s what we’ve been trying to do.
What are some of the books that you’re reading right now and finding relevant for the times?
The best part was there’s so much stuff. I go back to The Creature From Jekyll Island, which I know we’ve read many times. I read a book called The Paradigm Matrix, Collusion. Everybody’s got a different slap and a different viewpoint on things. Any of the Jim Rickard’s books, Currency Wars and all that stuff. We wanted to take this to the next level. I know you’re super comfortable talking about that stuff is how do you double the amount of money supply and not have massive inflation. What do we do? For me, I’m trying to be ahead of all that stuff. I’m trying to study trends.
Robert Kiyosaki and I were in Texas. We flew down there privately because we didn’t want to fly commercial. We went to a ranch and study trends, lag procession with Buckminster Fuller, we studied those things for a week. When you drop a pebble in a pond, you see the ripple effects that are called procession. This COVID-19 is creating processional effects. It’s creating processional effects in the restaurant, tourism, cruise ships, healthcare system, and all those kinds of things.
We’re trying to study those things. The real way to make lots of money, not that this is about making money, but you can, is to try to understand a trend. If you can understand a trend like you did on the cash out insurance. That was a trend and it still is. It was a great one. You built a nice career off of that. Those are trends. It’s the same thing with multifamily, retail, industrial, condos and everything else. They’re trends, all of them. Those are the books that I’ve been studying. Pour yourself into something. It’s a great time to be super confused and talk to as many people as you can.
Now is the time to gather information. You said something else that was profound, which is to listen to what’s being said and the person saying it. It’s also to ask questions. It’s not to take things at face value, but to find other perspectives. Oftentimes, the opposite perspective helps. You can weigh the perspective that you resonate with, but you have the opposite that helps refine it and maybe change it. That’s one of those trying to rub off the fog on the windshield.
I love what you said about bias. I don’t know if you realize what you said, but that’s it. I talk to people all the time and they have a paradigm of what’s going to happen. They have a belief system based on their belief system, based on maybe something that they read or something that they’ve learned from years ago or whatever. They’re stuck. The one thing that I’m always searching for is the truth. The truth is the truth. What happens for me is I put my own biases in front of the truth. I put my belief system in front of the truth. I start to believe my crap. That’s what kills people.Once you move your ego aside, the world opens up. Click To Tweet
If you could take a thought and you can make it a thing, stick it out here, look at it, observe it, it’s not necessarily yours, and you can analyze it, you can be objective with it, you’ll be a lot further along. What happens is I see it in people’s comments. They’re like, “That’s crap,” dislike or thumb down or whatever you want to call it. I love that stuff. They’re so close-minded. They don’t have to necessarily agree, but they should at least say, “Why? What about this? What about that? I’m thinking about this.”
Maybe they’re right but instead, they take this position about, “This is going to be a V. We’re going to hit bottom. Twenty-five million people are going to go back to work in a week.” That is not going to happen. That’s what they think. It was a long U. There’s the V versus the U. Everybody’s debating that. I don’t know the answer. What I do know is that the more I study and get out of my old way, then the better I’m going to be because the truth is going to be the truth. Whatever happens, it will happen no matter what I think, no matter what you think, no matter what anybody thinks, it’s going to roll out on its own magically. We have zero control over it. If you can back away from that and look at it for what it is, you’re going to be better off.
One of the greatest fears people have been magnified based on social media is the fear of being wrong, the fear of looking bad because you were wrong. That’s the thing. Everybody’s wrong. We have one perspective and that’s where it goes to what you were saying before. The smartest people are the ones that realize they don’t know anything. They operate like that even though they’re brilliant. Our friend, Andy Tanner, he’s totally like this and I know you are as well. There are many others that have so much wisdom, but yet they’re the last to say that they know anything or know what they’re talking about even though they do.
It’s the mindset of being open to other perspectives that either reinforce or potentially tweak the way in which they could see things. Plus life is always evolving. It’s changing and different things are happening. That could be the same pebble. It might be a rock. It might be a little leaf landing on the water creating a ripple effect, but it may not last that long. Who knows? At the same time, if you’re not open to seeing how something different is going to impact things going forward, it’s going to be hard to navigate those waters.
I got dinner with Robert Kiyosaki. I’ve been in hundreds and hundreds of meetings and dinners, lunches and breakfast with him and had hundreds of conversations with him but there’s one thing that he’s never done. That is he’s never ever told me what he thinks about something and 100% of the time, he wants to know what you know. He’s listening to you. He’s trying to figure out how to change his position. He’s not taking your position. He’s trying to change his position. If more people did that, instead of trying to talk over somebody while somebody else is talking, if they sat and listened to what somebody was saying intently and they were super aware, they could become super-objective and not so fixed, then they would learn more. I like to learn from other people. I don’t have to take on your position, but I can respect it. I would rather say, “That’s not how I see it. I see it this way.” I would rather have a conversation because you still might change my position.
That’s the part that frustrates me. It’s when people have fixed positions on things. Robert taught me that. I already know. He’s going to do the same thing you did, “What book do you read? Tell me about it. What did you learn from it?” I already know that’s the exact conversation he was going to have and he’s going to say that exact question. “Did you watch that video and what did you learn from it?” That’s what he’s going to say because he already sent me two videos. I haven’t seen either one yet because I’ve been working all day. I’ve got to watch it because I know he’s going to ask me that question.
I did the cardinal sin of podcasting with Richard Duncan where I’ve recorded almost two hours of a show. It was that intriguing about some of his thoughts about what’s going on and he has a new book that’s coming out as well. He has a completely different perspective than most economists. My mind opened up to many different ideas as far as how the monetary system works. He’s a brilliant guy.
If you look at Chris Martenson, Richard Duncan, Robert Kiyosaki, Mike Maloney, they all have different views. That’s what I love. I want to know what they see. I want my position changed because I’ve made many mistakes having a fixed position. You get killed by what you don’t see.
Your greatest fear is the opposite of what most people’s greatest fear is.
I get killed every single time just because I’m blind. I’m like, “What was the lesson there? What could I have seen better?” It’s always to ask better questions.
There are new things under the sun, but I don’t think there are many truths that are new under the sun. They manifest differently. I look at the events that are going on and there is so much good if you look for it. Yet most people are drawn to popular culture and opinion. Unfortunately, most of it is pessimistic and there’s truth in there. At the same time, there’s a lot of truths in some of the optimistic perspectives. They’re just a little bit harder to find. I look at this being one of the greatest lessons that society is going to learn in our generation. We’re less than a few months into it. That’s what’s crazy about it, how quickly it happened, how disruptive it is and will be. At the same time, it’s creative destruction. There’s so much creativity. That’s where humanity shines. It’s during these disruptive difficult moments.
It’s so true. The difference in hardship is between the ego or humility. The ego is super personal. It’s all looking at things out. It has highs. It has lows. It’s more of vertical growth, whereas humility is more of horizontal growth. It’s more about empathy. It’s more about leadership. It’s more of a big picture. The reason people have fixed positions or the reason that they react, they comment quickly and the reason they get defensive is all ego. If people can get that in check and start to look at it from the other person’s perspective, you don’t have to take it on and have empathy around that. You’ll learn a lot more. For me, when I first studied that book, Ego is the Enemy years ago, I had a lot of a-has in there. A lot of my belief system and a lot of things that I used to do were based on ego. Once you move that aside, the world opens up.
I love Ryan Holiday’s stuff. It shows the balance of perspective between ego and humility. It’s a profound concept. That’s a book that you can read a hundred times and still get something out of it.
I had no doubt that you had read that book.
Thank you for taking the time. There’s been so much value here. Maybe end with some of the best ways for the audience to follow you, learn from all the stuff that you’re putting out there. Is it KenMcElroy.com? Is that probably the best place?
Go to KenMcElroy.com and then you can go to our company, which is MCCompanies.com if you want to see what we’re doing there. I’ve been putting everything up on KenMcElroy.com. I’ve got podcasts and I’ve got videos and most of those are free. There’s some stuff behind the wall, but that’s for real estate investing and education. Anything that’s been happening now and anything that we’re doing as a company, I’m putting up there for free, forms and all that stuff. You don’t have to buy anything. Get on your email system, and then you have access to everything. Hopefully, it will help some people.
This was years and years ago, we were on a beach and I was like, “Ken, you need to do membership. You need to put videos up there. You need to put all this stuff you’ve ever done up there.” It’s so impressive to see what your team is doing and how much value that’s creating. Thank you for tuning in. Ken, do you have any final words?
All I would like to say is we’ve been here before. It’s a little different. This is a virus. It’s not a financial meltdown. It’s not planes hit in the World Trade Center. It’s not dot-com bust. The same fundamentals are going to happen. There’s nothing to be afraid of other than be safe around the health piece. Pay attention because this is the greatest time. People are getting wealthy if they make the right moves.
Kenny, thank you so much. We’ll have to do a follow-up in a few months to see where everything lands and what life looks like then.
- Ken McElroy
- Richard Duncan – past episode
- YouTube – The Wealth Standard channel
- MC Companies
- The Creature From Jekyll Island
- The Paradigm Matrix
- Currency Wars
- Ego is the Enemy
- National Apartment Association
- National Multifamily Housing Council
- Arizona Multihousing Association
- Texas Apartment Association
- Atlanta Apartment Association
- The California Apartment Association
About Ken McElroy
For over two decades, Ken McElroy has experienced great success in the real estate world–from investment analysis and property management to acquisitions and property development. With over $750 million investment dollars in real estate, Ken offers a unique perspective on how you will get the biggest return on your investments.
Ken is the author of the best-selling books The ABC’s of Real Estate Investing, The Advanced Guide to Real Estate Investing, The ABC’s of Property Management, and most recently his book on entrepreneurship: The Sleeping Giant, where he shares his real-life examples and ideology of how to be successful in business and in life. As the Real Estate Advisor to Robert Kiyosaki of The Rich Dad Company, Ken is also a chapter contributor in the newly released Rich Dad book, More Important Than Money: an Entrepreneur’s Team.
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