Welcome to the real estate strategies podcast. I’m Ken McElroy, and I’m here to give you creative ideas on how you can get started or continue your journey in real estate. Each week, we will bring you inspiring and informative conversations with successful people and their path to obtaining or investing in real estate. Enjoy the episode.
Hey guys, welcome to the real estate strategies podcast with Ken McElroy. So the following questions are questions that we got through our social media channels. So every once in a while, you know, we have guests, but I think it’s always good to grab some questions from Facebook and LinkedIn and Instagram and all the different so and YouTube for sure. And we do look at those and we do like to use them on things like a podcast or even a video. So thank you and keep them coming. So this first question is from John, one of our premium members around mortgages and tennis dot Pang. So, John, thanks for this great question. How can you manage to stay afloat? If your tenants aren’t paying and you cannot evict them and you still own mortgage, this is the million dollar question. So here’s the thing guys. So as you guys know, we have about 10,000 tenants and the regulations have changed.
First. Trump said, Hey, you can’t evict anybody till October. And by the way, the courts were closed. Anyway, the second thing is now the CDC came out and extended that to the end of the year. And they made it for all tenants, not just ones that had government sponsored mortgages. And so as a landlord, it became very, very difficult for us because we had massive uncertainty on whether or not our tenants were going to pay or not. As you guys know, I did a few videos on cash is king. So what we did in March, because we didn’t know who was going to pay in April. We didn’t know who’s going to pay in may, June, July. Now, as you guys know, with the unemployment benefits going away at the end of July, we were very concerned about August and September rents, but here’s the reality of it.
The majority of our tenants are paying the majority. We put our tenants into three buckets, bucket. Number one are the tenants that are paying rent. And that is the overwhelming majority. Well, over 80%, the second bucket are the tenants that are coming in and they’re actually communicating with us and we put them on a PTP program or a promise to pay program, an actual real agreement that we have between the tenant and us. It’s modified from the actual lease. That part has gone very, very, very well because the last thing we want to do is boot anyone out. That’s the last thing we don’t want to kick. We don’t want to boot anyone out of the home because if we do, then it’s vacant. We’d rather have these people in there because we’ve screened everyone. We know exactly who they are, where work, what they made before they even moved in.
So the last thing we want to do is displace anybody while we’re all going through this massive life correction. And so the third one category, however, is the most difficult. They believe that they don’t have to pay and they’re not communicating with us. And that’s a lot of people. So those are the folks that everyone’s concerned about. And unfortunately, they’re the ones that are making all the noise and all the media is talking about. But the reality is in our portfolio, it’s a really small percentage of people while we were concerned in April, may, June, July, and August, the rents have come in and we had enough to pair mortgages. And as I said before, cash is king and we, he, as a company has put in gather massive reserves of cash in anticipation of renters, not paying so that if, and when they don’t, then we can pay the mortgage.
And we don’t go into technical default with the lender, even though there is an Avenue called forbearance that we could utilize with our lenders. We never wanted to get into that position. And we always wanted to pay our mortgages. So two things, one, we manage our tenants really tightly. We communicate with all of them, almost all of them are paying. And second, we had enough cash reserves where we never even got close to not paying a mortgage. So Cara asked this question and Carol is one of our premium members on Ken macra.com. And this is a question around cash is king, and I did a video on this. So Kara, thanks for this question in your newsletter a few months ago, you said cash is king, do you still feel that way? And why do you feel that way? Since so much of the cash is being printed, cash is king, because you know, you need cash to be able to cover your expenses.
You need cash to be able to cover your payroll. You need cash to be able to cover your mortgage, all of those things. So yes, I still feel like cash is king. Now the real, the real question behind this question is when is inflation hitting? That’s actually what they’re really asking and is cash trash. Cause that’s what a lot of people are concerned about. Well, the answer is yes, I do believe in the longterm. We’re going to have massive inflation because the money that’s going out to fund businesses and people it’s definitely necessary. It’s definitely helping, but here’s something that’s happening. People are actually saving because there’s a lot of uncertainty in their futures. So a lot of that money that people have gotten they’re actually hoarding right now. So if you look at savings rates, you’re going to see that there are all time highs and so cash in circulation when it actually is used to buy things, that’s, what’s going to create inflation.
And so I do believe that there’s going to be a massive lag. So for us, we’re holding on to cash right now so that we can cover our bills, cover our mortgages and make sure we make our payrolls. But in the long haul, I think this is a great question because I do believe that we’re going to have massive impact [inaudible] and this is exactly why the federal reserve just change their policy on the inflation rate recently, just last week. So be looking for inflation over the longterm, but I don’t think that you’re going to see it in the short term. So my suggestion, you, you is just have cast too. Get through this. Let’s reopen the economy, let’s get things going again and lets everything settle out and then be very careful on how much cash that you have. So this question on the housing market crash came in from miles and miles as a premium member with kid MACRA, council miles.
Thanks for this great question. I really like it. Here we go. If the housing market is going to crash, why does my realtor keep telling me home prices are up and we’ll keep going up over the next few years. So I really like this question. I personally don’t think most realtors are that informed as to what is happening in the economy. And I think that they work largely for commissions and they’re trying to sell you a house. And of course, they’re not going to tell you that something that you’re going to buy is going to go down later. I don’t know if they even have that in vocabulary. They’re always going to tell you it’s going to be going up. So, but real estate always goes up and always goes down. We know this, just look at the cycles over the history right now we have houses have that have risen in most cities to all time highs in some cities it’s not, but in most cities it is.
And right now we’re at over a $304,000 average home price. Now we haven’t seen that since 2008. The reason that I believe that housing prices are up is because of what I’ve already talked about. Numerous times inventory is the lowest it’s ever been since it was ever recorded. Right now there’s only 1.5 million homes on the market. Then there’s barely over three months of inventory in all markets across the country. So this inventory issue or lack of supply is what’s driving prices up, but here’s the thing to watch. And this is why I disagree with your realtor. I believe that everyone, because of the uncertainty did not list their homes. They’re hunkering down. There’s a lot of uncertainty in a lot of households all over the place, both with people that own homes and that are renters. And they’re all trying to figure out what they’re going to do next.
They’re all trying to figure out where they’re going to work. Whether they can pay their rent, whether they can pay their mortgage. In fact, there’s almost 9% delinquent mortgages, almost 4 million people are delinquent right now in their mortgages. So I believe that you’re going to have a massive amount of inventory in the next 12 to 18 months as the eviction policy burns off. And you’re going to have a lot of people moving around and trying to figure out what are they going to want to move next? So that’s going to add a lot of inventory to the market and what that excess inventory is going to do. It’s going to drive prices down and the demand is going to be lower because there’s going to be a lot of financial uncertainty. As we start to see these businesses go out. As we start to see a lot of businesses fail, we’re already seeing it.
We’re already seeing businesses file bankruptcy, big, big names, file bankruptcy. I think when the dust settles, then housing prices are going to be significantly. Lower. Banks are going to own a lot of real estate and there’s going to be a lot of listings and there’s going to be very few people chasing a lot of inventory. That’s why I think over the long haul that prices are going to drop. So this question came in from Tom, one of our premium firstname.lastname@example.org about what is MC companies doing for this downturn? What are some of the operational things that we’re doing? So, Tom, thanks for this great question. What is the MC companies, which is the company that Ross and I own doing right now to prepare for the downturn? So a few things. One is we talked a lot about cash. And so we told all of our investors that we were going to hold one quarter distribution.
And so while that was a tough decision, we have an entire quarter of distribution that we’re holding and we let everyone know this back in March. We said, we don’t know what we’re going to collect over the next four or five months. And so we held the first quarter, then we’re just now releasing the second quarter and we’re going to hold the third quarter while we see what the fourth is going to have in store for us. Cause we just don’t know. We don’t know whether or not our tenants are going to change their minds and not pay. And we don’t know if we’re going to have some mortgage issues or our bill paying issue. So that’s why we’re holding that money. And so again, cash is King, all of our investors, well over a thousand people, we’re all in favor of exactly that strategy because obviously none of them want us to default on the mortgage and for us to lose the property back to the lender.
So that’s the first thing. The second thing that we did is we, we rolled out a whole bunch of policies and procedures for our employees to make sure that they were all safe, obviously the PPE programs. And there’s a number of other things that we did for our staff. We want to make sure everyone’s safe around all of those things. The other, another thing that we did was I eliminated all marketing and all renovations and all cap backs or capital projects. So as an example, during all of this, the last thing we want to do is renovate an apartment and try to get $200 more per month. So each renovated apartment costs about 15 grand. And so we were doing hundreds of these all the time. For years, we’ve been doing a renovation value add type program. And so you could imagine it’s millions and millions and millions of dollars, but we felt like let’s, don’t do value ads.
Let’s, don’t be pushing rents right now during all this uncertainty. So we eliminated all the cap ex around renovations, but I also did it around everything else. So anything that was health and safety and anything at all, I said, we must do any capital work that was maybe optional, like painting a building or landscaping or a children’s player or a dog park or buying fitness equipment or buying new pool furniture, whatever it might be. All of those things had to go through me. And by the way, those that’s millions and millions of dollars that we spent every year to maintain these properties. So I stopped the renovations and I stopped all that cap ex instead of health and safety. In addition to that, because people weren’t moving around, we eliminated all our marketing costs and that saved us millions and millions of dollars because like every business we’re spending a bunch of money trying to attract new residents.
And so we’re always spending money on the internet and ads and things like that to try to get traffic to the properties so we could keep them full and lease. But during this pandemic people weren’t moving. And so we eliminated all our marketing and advertising and that saved millions of dollars. The last thing that we did is we tried to go virtual immediately and we did, by the end of April, we went virtual on rent collection on maintenance requests and on leasing. And we started to use chat bots and chatbots basically are the same kind of thing. When you call up, let’s say a Schwab or American express, they say, press this button for this, press, this button for that. And you basically could eliminate a lot of in person conversation and actually help the person on the other end align, get to where they need to go quicker.
And so we started doing all these chatbots and also virtual leasing. And we’re rolling that out right now and our occupancy, believe it or not is higher than when we started by 1% for when we started this in March, because of all these little programs that we’ve rolled out. However, our collections are lower, but our occupancy is higher than when the pandemic started, but our collections are lower because obviously people are going through a tough time and they can’t all pay. So those are just some of the things that we’re doing as a company. Great question. So keep those questions coming in. I hope these answers were helpful to you guys and thank you once again for full show notes, check out Ken mcelroy.com. If you enjoyed the episode, then jump on iTunes, subscribe and leave a five star review. Also, if you could check me out at Ken macaroni official on Instagram for daily real estate advice, see you next week.