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Is this a ZILLOW CRASH or a Housing Crash?

Zillow has stopped buying. What does this mean for the company? And is this part of a bigger trend for the housing market? Join Ken McElroy and Danille in a discussion about Zillow’s decision to stop buying and what it means for the rest of the economy.

Danille:
Hello, and welcome to the Ken McElroy’s show. I’m your host and Neil here with Ken.

Ken McElroy:
Hey guys, what’s happening?

Danille:
So how is everyone today? I already noticed people already talking about our topic.

Ken McElroy:
Yeah, welcome Monday one day. Yeah.

Danille:
And if it’s the Zillow crash or the market crash, but before we get into that,

Ken McElroy:
Yeah. We’re going to definitely have some ideas around that topic. And I know a lot of you do too, so can’t wait to hear what you have to say.

Danille:
Definitely. And, um, so for those that joined my webinar slash training last week, that was awesome.

Ken McElroy:
I know!

Danille:
You know, it’s funny. I thought it was going to be like 15, 20 minutes and it was over an hour.

Ken McElroy:
Yeah. Well, by the way, guys, as you know, she definitely knows what she’s talking about, but she was super prepared a lot more than I typically am. So she’s, she’s the, A-student between us. We average a B, for sure.

Danille:
But no, thank you for joining on. We’re actually going to be doing a, another webinar next month with someone he specializes in wholesaling properties.

Ken McElroy:
Yeah. Yeah. We’ve gotten some requests around that. So it, you know, it’s a, it’s a business that a lot of people make a lot of money.

Danille:
The cool part about wholesaling is you can start with having no money. And we know a lot of people that have done this.

Ken McElroy:
That’s how most people start. Yeah.

Danille:
We all started wholesaling.

Ken McElroy:
We all started with no money. Right.

Danille:
So wholesaling’s awesome. So it’s at KenMcelroy.com/Webinar. I’ll be hosting, but um, somebody else will be presenting. So he’s going to be the expert. I’m just the host, but it’s going to be a great, great, uh, training for those of you. And it’s free for those of you that want to get started in wholesaling. Um, KenMcElroy.com/webinar to sign up

Ken McElroy:
And it is Q and a. So you come with your questions. Definitely. That’s kind of the whole point.

Danille:
Exactly. To learn and to ask questions. So this weekend we had a fun weekend.

Ken McElroy:
I know my hands, almost my hand is up. I guys looking, I ripped, open my hand. I get my stitches out today.

Danille:
Those that didn’t know, we didn’t join us last week. Can fill up a unmoving escalator and he cut his hand.

Ken McElroy:
Yeah. So right. I did. I fell forward into an escalator that wasn’t moving. Yep. Don’t ask no drinks were involved.

Danille:
No.

Ken McElroy:
Why would that George gamma behind me and I don’t know, Robert Kiyosaki behind me and George Gaiman in front of me. George went to the ER, like whatever.

Danille:
Well, Robert almost passed out with the blood, but uh, so that was, but then this, this weekend though, we did some Halloween parties. That was super

Ken McElroy:
Yeah. Cardinal game Thursday. They lost car. Yeah. That was a good game. Uh, yeah. We’re Cardinal fans. Of course. Even though I’m from Seattle and you from Ohio.

Danille:
I’m a Pittsburgh fan, but I cheer for the Cardinals cause I live here. But

Ken McElroy:
Ah, yeah, that was a good game. We went with friends that were Packers fans and uh, we had to listen to them all the way

Danille:
Disappointing ending. But um, but then the Halloween parties

Ken McElroy:
Were fun. We went to…

Danille:
You were supposed to be squid games, but your costume…

Ken McElroy:
Didn’t come, sitting off shore long beach with everybody else’s stuff.

Danille:
As we talked to last week about supply chain issues can firsthand experience.

Ken McElroy:
First world problems, by the way. Yeah. Ordering a Halloween costume that didn’t show up. So I improvised.

Danille:
And I was Harley Quinn and we were a matching couple costume.

Ken McElroy:
Somebody else had to point that out. He said, oh, you guys are good matching couple costumer. Oh, that’s right.

Danille:
And it wasn’t Marvel DC. I forget. But the kids were telling us yesterday. But um…

Danille:
Let’s jump in. Well, first we have to start with our real estate investing master course tip of the week. And our tip of the week that comes straight from our master course, which is available on KenMcElroy.com is before you buy a property, you need to determine its net operating income. So that should be whenever you guys ask us, should we buy in Houston? What do you think of the Miami market? It all comes down to the net operating income. Does it cashflow? Does it not cashflow?

Ken McElroy:
Yeah. It’s an important thing. Like people, they want a quick answer, but really, and by the way, the starting NetApp party income is, is, uh, is literally exactly what the property is operating at today. So whatever the seller has right now today, whatever the property generates today, that’s the number. And then the, the magic of course becomes on what can you bring that to? So that’s when we buy properties, we’re trying to increase that net operating income, that net operating income number. And that’s what creates value.

Danille:
Definitely. Definitely. And a lot of people on here, we’re talking about wholesaling, they’re saying, you know, they wholesale and I invite you guys to join the webinar. Anyways. I mean, this guy is an expert and he can answer any questions for you. You’re probably going to learn something and you know, those of you that want to get started in wholesaling.

Ken McElroy:
Yeah. If you guys want to get in the game and you don’t have to have money, it’s a great way to learn. And of course, eventually you want to use your own and even raise money through syndication. It’s a step. That’s all it is.

Danille:
Yep. And before we start hit the lake button, okay. I noticed 17 of you did it before we even got on. I appreciate that. The rest of you hit the like button, the link button. I’m a little feisty today. I can see that. Um, okay. So today we are talking about what is going on with Zillow.

Ken McElroy:
Yeah. I, I’ve done a fair amount of research on this and you have to, we, we, uh, we had, uh, uh, we’d be remiss in not mentioning Misty. A friend Misty sent us some stuff on this as well. We, we got a lot of stuff from you guys on this. Thank you, Misty. Well, we felt like it was going to be a good topic for us. And um, so yeah, let’s jump in on that. So why don’t you do a summary of just for those that don’t know what’s happening? So basically

Danille:
Zillow is fire sealing their houses. So Zillow went through this whole spree where they were a bunch of houses paying over, asking price for a bunch of houses. And now they’re fire sailing all their houses in the Phoenix, Houston and Atlanta areas, which is predominantly where they buy it. Um, they’re losing money on about two thirds of the houses and 93% of the houses in Phoenix are selling at a loss,

Ken McElroy:
But let’s back up

Danille:
Well, but it sounds,

Ken McElroy:
Yeah, but Zillow duped everyone at first, they said, okay, give us all your data and advertise and put all your stuff up on here. And then they started competing against everybody, right? Like, so that’s, so for me, I think this is awesome because this is like the big guy, uh, the big guys at this point with the managed money. They’re, they’re, uh, they’re clearly showing one of their hands, which is, we don’t know yet, but, uh, we’re going to talk about it in more, but either they, they definitely overpaid, which, um, a small, local little speed boat investor’s not going to do when they did

Danille:
It to flip. So like I know,

Ken McElroy:
I know, I know. And there is a way to do that and we’re going to get into that more, but I think it’s, it’s actually a serves them. Right? Yeah. That’s all I have to say about that. I mean, you know, they basically, and they’re using their own data. I think it looks to me like to potentially manipulate the markets a little.

Danille:
Well, what was interesting from what I read was that they essentially were overpaying for a house, but then adjusting the Zestimate. Yeah.

Ken McElroy:
And this is my boy. Would that be nice to be able to say some people would call that self-dealing but essentially that’s what it, that’s what it is. Insider trading, whatever you want to call it, they buy it. Then they adjust their own price. So, um, that’s a market mover and, and serves them right, by the way. And they’re losing money in a lot of markets, not every market is, are they’re selling at a loss by the way. So you can’t just say Zillow’s doing this, but what’s, what is the truth? Is there, there’s definitely plenty of markets that they’re taking losses.

Danille:
What it’s important to point out though, even though this makes a great headline, they’re not selling it that much of a loss, so they’re not fire sailing the houses that are like, you know, like 20% off, essentially. I think the average was about 10 grand that they were losing per house. Um, which is a lot of, I mean, that adds up. It’s a lot of money, but it’s not like monumentally,

Ken McElroy:
You know, guys, this is, this is started. Uh, it’s not like just didn’t start this week, but, uh, it’s not over and don’t forget, there has to be buyers of those houses. Right. So in order for the whole thing to, to the full circle, there has to be an exit. So, uh, so there’s lots of reasons why we’re going to get into that in a minute. Yeah.

Danille:
And you know, so they’re blaming it on, uh, uh, labor shortage, which in some ways it could possibly be. Cause if they’re trying to flip these homes and they can’t get people in to flip them in a timely manner, that could be a small part of the

Ken McElroy:
Right. So here’s the thing. And we talk about this a lot on came back.com. This is the clearest example of I’m going to buy it and it’s going to go up next week. And that is a bad strategy. And so what’s really cool about it is they’re there. Um, you know, one of the biggest buyers is, is actually showing their hand right now. And so, so this is why we continue to talk about cash flow, passive income. This is, this is literally a, I hope it’s goes up, uh, next week or a month later, or a year later

Danille:
We bought these homes. The market was accelerating up and the market’s still going up, but a lot slower of a pace. And sometimes it’s kind of leveling out and there, you know, when they adjust in the flip and then the additional cost for all of this stuff to flip, I mean the labor or the

Ken McElroy:
There’s hold times, trust me. And, you know, don’t forget, like we don’t know whether or not they finance these or whether using a line of credit, you know, and either way, it’s the same thing. They’re there, they’re using somebody else’s money to buy these. Uh, the other thing that could be happening is they might have, they might be short on cash going into this, this last quarter. Now, I don’t know. I mean, when I say short on cash, I mean, operationally, I’m not talking about access to lines and other money and raising extra capital, I’m talking about operationally. And so we’re going back to the basics here, but when a company has more expenses than income, that means that operationally they’re negative. And so what happens sometimes is they start to sell off assets or in, I think of a manufacturing company, they might self inventory or, you know, whatever it is. So this, these moves are, uh, so the, these properties could be considered inventory and uses of cash. So they sit on their balance sheet as an asset. They’re not cash flowing and they’re not income producing. Right.

Danille:
Well, you know, Colby we’ll have to look more into this, but he’s saying BlackRock owns a major portion of Zillow. So that would be interesting if that’s true, I’ll have to look into

Ken McElroy:
Yeah, yeah. That doesn’t surprise me. You know, BlackRock is, uh, they, they try to buy my company as, as some of you guys know and, and they’re, they’re, they have their hands in a lot of stuff, including real estate. And by the way, in 2008, uh, this happened that Zillow wasn’t around, but in 2008, a lot of homes went back to the banks, 8, 9, 10. And you know, you know, the stories been w w you know, it’s all over the internet. Just go, look, if you guys are, are kind of new to the industry. And what happened was big, big groups, uh, private equity and institutional equity were buying from the banks. They were buying what they would call their toxic assets very different during that time. Because by this time they had already made it all the way back to the bank. So there, they were actually dealing with the bank themselves. They weren’t actually doing it on the open market. Like they are now the so, but they made a lot of money back in 2008, nine and 10. So they were buying tens of thousands of homes back then, as you would. And then they sold them off of the problem, which back then is the same problem that Zillow has now. And that is property management, local labor carrying costs. This, you know, real estate is a business guys. It’s not a stock.

Danille:
Right. Well, that’s another thing, right? So like Zillow kind of got into a space they maybe didn’t know enough about. And they thought, oh, we’ll just come in. We’ll flip the property, we’ll sell it for more. But there’s property taxes, there’s HOA, there’s maintenance, there’s all these,

Ken McElroy:
And there’s carrying costs on the money, Ryan. And not to mention the fact that we ha we don’t know the, the, the real numbers, but it’s a use of cash. So, so when you, when you’re buying all these houses, you’re using cash for other things, and it’s sitting in, in these assets. And so there, somebody at the corporate level, one that they’re like, they maybe they really do, because whatever is spearing about is, is this, you know, is the market tipping and do they know something that we don’t know? That’s really

Danille:
Right. That’s everyone, thanks to Zilla know something that we don’t know. Essentially.

Ken McElroy:
I don’t agree with that. Yeah. I don’t think they’re that smart. I mean, they, I just don’t know, listen there, why are they different than somebody else that’s in the local market? Or, you know, I know they have data, but you guys are looking at the data. And so, and yes, maybe they have some extra data that, that, that isn’t as transparent, but so does realtor.com, so does open door. So, so are some of these other buyers and those other I buyers are not displaying the same behavior. I think it’s a use of cash and a labor issue. And, uh, and, um, you know, kind of a mismanagement of the whole thing.

Danille:
Right. I would agree with you. I think that they got, you know, in both their skis and they just were,

Ken McElroy:
I wouldn’t do it. Like if I, if I was running Cylo and, and we, we, um, and, and I was looking at the cash and let’s say, operationally, who knows, you know, how does how’s Zillow really doing financially? That’s really what people should be looking at

Danille:
Is where are they making their money?

Ken McElroy:
They’re on a massive growth spurt right now. And they were throwing everything at the wall. And so, yes, yes. And so all of those things, as you, you have to look at those and say, okay, is it working or is it not working now? They might be which, which is what we’re going to kind of talk about too. Don’t forget. We just had the eviction moratorium. I know the forbearance piece got extended. Right. We’re going to talk about that. And, and, and, um, so, but at the end of the day, things are kind of normalizing. And then now people have to pay their mortgages and people are starting to foreclose yeah.

Danille:
Or sell

Ken McElroy:
Or sell. And so we’re starting to see that. And whenever you have an increase of supply, then very well could see a flattening or declining in prices.

Danille:
And I’m Matt from YouTube says, um, people forget that market cycles.

Ken McElroy:
Yeah. I know everything. Doesn’t just go up. It is amazing to me. I mean, if you’re, if, if you got into real estate 10 years ago, you think this is the way it is. Trust me, it is not

Danille:
Well in risk. Ardo said, Ricardo said something interesting. He said he has a pending deal, but he starting to doubt it because of all this. But as long as it’s cash flowing, I mean, this is why we preach cashflow and not flipping. I know you can make money from flipping. Some of you make money from flipping, but you really are kind of betting that nothing’s going to happen with the market in between you getting the house flipped and sold.

Ken McElroy:
This is the age old issue guys, fast money versus long-term passive income. That’s really what this is about capital gains versus cash flow. That’s what this is about. Zillow was all about a capital gain strategy buys, low sell high period. And then now they’re realizing that maybe they’re not going to see that high, or maybe their operational costs are so much that they have to, they have to exit, or maybe they just need cash operationally. So think of, um, during, when the pandemic hit, the rental car industry got decimated. What you’re experiencing right now is the rental car folks like enterprise budget, Hertz, they sold off their inventory to get cash. That’s what they did. And that’s why rental cars right now are so tough because now we have a car supply issue and they can’t get more, but, you know, um, so think of that. It’s a supply demand issue. And so, you know, we have, uh, we have this issue right now where I think that that Zillow needed the cash and they probably screwed up their whole business model around their

Danille:
Yeah, definitely. And I also think, you know, there are, people are asking him, why didn’t they sell it for, you know, the value and why they sell it for loss? Cause they have, they need it off their books. I mean, cause if they’re financing this, especially if it’s a higher interest financing every month that thinks that’s there, it just loses money. And so for them to try to get it off their books quicker, I mean, if they’re only losing like 10 grand, I mean that could be, you know, a big portion of their interest payment for a market.

Ken McElroy:
The words guys, something’s going on over there, like maybe there’s another round of funding coming. There’s something happening. Maybe they got to do their quarterly earnings and you, you know, and one of the things that you have to have is a lot of cash and you have to show profit, obviously as you start to raise capital and grow as a company, all those things have to align. And if you used a bunch of your cash to buy a bunch of real estate, it’s sitting there as an, as a, um, uh, as an asset, but it’s not liquid. And, and so they’re turning it into liquidity. They probably take it some short-term losses on some of them, but if you aggregate it all, they might be okay. They might just say, might be saying, I’m going to get out of the business because if their

Danille:
Son, they said in Atlanta, it’s like, what? 63% said a loss. So they’re still making money on a third of them. And yeah.

Ken McElroy:
And Phoenix are there. It’s actually higher. But in other markets they’re actually making money, but they’re definitely exiting. And what it’s doing of course is flooding the market a little bit. In addition to that, you’re going to start to see, I think some of these for parents, um, folks, uh, they’re going to start to have to pay. And as some of these lenders say, it’s time, it’s time to pay. So all of that is going to hit. That’s going to create additional supply. And what additional supply does is it, it messes with the pricing because you know, what we just experienced is not normal, you know, days on the market, multiple bids higher than listing price is not normal. That’s not healthy. Right. And, and so it’s, it’s irrational, exuberance as they call it, you know, it’s, it’s the herd mentality. And it’s interesting to me that Zillow got caught up in it. And now they’re, they’ve had to show their hand.

Danille:
Yeah. German said, Zillow buying process was just flat out idiotic. There you go.

Ken McElroy:
Right. Like you guys think like, oh, this company is so sophisticated. They’re so big. They’re not any smarter than you guys. I’m telling you right now. They’re not there. Uh, the, the, the, the, the executive team at Dillard, it was so disconnected with what’s happening in Phoenix. Trust me, they, you know, they’re relying on somebody somewhere and somebody got paid and compensated for buying all those houses in Phoenix, as an example in Atlanta. And, and, um, you know, who knows if they’re still there, but the point is, um, it didn’t work.

Danille:
Yeah. Actually I’m one of our YouTube followers just said that Zillow bought his house from $15,000 over value. And now it’s, you know, uh, back to his original listing price that they’re selling it for. So they bought it for more

Ken McElroy:
Good. So you saw the issue. I think you’re going to have think about that as they dump all these houses. Do we know the final number? Has anybody,

Danille:
It wasn’t as high as you think it was also like in Phoenix, it was like 250 homes as of the other day. So it’s not thousands it’s but it is a decent,

Ken McElroy:
Well, it is nationally though. Yeah. So, but what’s, what’s interesting to me is, you know, all of those have to have buyers. And now the difference is, is, uh, who’s going to buy those now. Could it be another institution? Absolutely. Maybe it is. Or it might be individuals that now have to go qualify and get loans and all that kind of stuff at the same time. Um, I think, I think that, um, uh, you know, I think, I, I don’t think this is the end of this, so

Danille:
No, definitely. We’ll definitely keep following this. And you know, some furry said something interesting and YouTube, he said he has been a flipper and he looks at all the properties that he flipped and he wished he was a buy and hold. Now he regrets that.

Ken McElroy:
Yeah. Yeah. It’s listen, guys. I totally get it. Hope start with wholesaling then flipping, you know, if you guys are coming out of, you know, something, you don’t have a lot of cash and you’re just trying to fund your lifestyle. I get that. But then you gotta switch to get disciplined. You have to do that because at the end of the day, reoccurring revenue is what Zillow doesn’t have. This is what their problem is. It’s not, if, if those properties cash flowed, they would not be selling them, but they’re relying on them being higher than what they bought them for and what we don’t know, or all the extra costs that are sitting in there. I, in the articles, I read some of these homes, they didn’t even touch,

Danille:
You know, a lot of them, yeah.

Ken McElroy:
A lot of homes they didn’t even touch. So they basically bought them. They just sat and then they relisted them,

Danille:
Which we know how hard it is to get labors guys.

Ken McElroy:
Like, yeah. I mean, you guys know, like, even as managers, we are as a firm, we have a heck of a time. I mean, you know, my son bought a home, he moved in it, uh, two months ago, he still doesn’t have his appliances. Uh, you know, he has appliances in there, but they’re 25 years old or whatever. So, and you know, so these are things, these supply chain issues are real, but, but somebody should’ve thought that through.

Danille:
Yeah, yeah, yeah. This wasn’t like a shocker. We all know that. So Michael Shane said something interesting. He’d let he said, I’d like to listen to Zillow’s earnings call.

Ken McElroy:
There you go. Yep. That’s exactly right. That’s where you need to be because they have to show that guys. And so that’s really where your head needs to be. There’s some short-term cash issue happening. And, um, you think about how much money they’re basically getting there. They’re creating some liquidity. And so it’s going to be interesting to see what the next move I keep your eye on Zillow because, um, either they’re having real problems, which I doubt because they’re pretty heavily funded and BlackRock’s involved, but, or they’re repositioning for something else that they’re going to do. And then this will all make sense.

Danille:
It just felt like they got in over their head maybe.

Ken McElroy:
Yeah. And maybe they’re just in the wrong business and this is good for the market guys. We don’t want you guys. I, you know, one of the things that we get in our channels, we get people saying, oh, all these big groups are coming in. You don’t want a company. That’s, that’s a wall street finance coming in and competing SU right. I mean, that’s actually, let’s, don’t forget. They’re part of the problem. They’re part of the reason that these prices went up. Right. You know, not the problem, but they’re certainly part of the problem when you have that many people bidding and you have somebody like Zillow, that that is, um, let’s say you’re the seller of your house. You got Zillow. And then you got me, where are you going to go? Right.

Danille:
Well, they can pay 10 grand more, no problem for you. It might be.

Ken McElroy:
And I’m like, wow, I got to get financed. I got to this. I got to that. Well, who are you going to? You know, of course, you’re going to sell the Zeller. You don’t care money’s money. So now you’re starting to see there. The repercussion of that.

Danille:
Definitely. And we’re going to talk about if we see a market crash coming here in a second, but first make sure you slam the like button really helpful to us. Secondly, we are doing a webinar. I actually don’t know the date, but it’s going to be later in November on wholesaling. So go ahead and sign up. Ken mcelroy.com/home

Ken McElroy:
Sale

Danille:
And macra.com/webinar.

Ken McElroy:
And we’ll stick the date on here for you guys.

Danille:
Definitely. So do we see this whole Zillow thing? Are they predicting a real estate crash? Should we think that that’s right around the corner or No, I think Zillow has a problem. Now I do. I think the market is on very unsteady ground right now. However, I don’t think it has anything to do with Zillow.

Ken McElroy:
You have to go back to the original fundamentals again. So when people want to talk about a market crash, they want like the U S market to crash or, you know, but really what you have to look at is there are definitely markets that were already trending down before the Zillow news already. There are people moving out of cities and towns right now, as we speak based on a number of things from governmental policies to, to businesses, closing to safety issues, to weather issues, to retirement issues, to a work from home issues or whatever they are. So all that stuff’s happening. Okay. So you have to take a look at each town organically, like, like right now, North Carolina is on fire. Florida’s on fire. Texas is on fire, generally. Not all the entire state. Of course there are areas in Texas that aren’t, but, but, uh, you have to look at what’s going on independently and then you have to take a look at, um, how this is going to impact, uh, over the longterm or the short-term. So one of the things I don’t particularly think that Phoenix, as an example, it’s just a market that we’re in right now is going to be impacted by this CILO stuff. Right. It’s going to get absorbed. And there’s still a lot of people moving here right now because you know what? You can buy a nice home here for 300 grand. It’s

Danille:
Getting harder, but it’s

Ken McElroy:
Harder, but you, can’t not in Scottsdale. Right. But definitely in Phoenix and Mesa and some of the surrounding areas Peoria. So this is a very affordable area. And so you have to be looking at those kinds of things. Yes.

Danille:
So, and you know, Scott just mentioned for Barron’s loosening the market. So something that’s interesting that we actually kind of miss, we just looked at this morning is that they pushed for Barron’s out another six months. Didn’t really make many headlines, but they did.

Ken McElroy:
Yep. I know. So, you know, so what that means guys, is that if people are behind that, that they now can kick that can down the road even more, that actually could be a problem if the market does turn. So there’s a bunch of things, you know, let’s go up a little higher to the 30,000 foot. We still have massive unemployment and labor issues. So we have a lot of people out of work that don’t want to work for whatever reason, right. Even I’m trying to, we’re trying to find multiple positions. We have 38 open positions at our company right now.

Danille:
Right. And

Ken McElroy:
So, you know, it all, all over the map, so all over, you know, different states and the corporate office, and I’m talking about accounting and, you know, some assistant and, you know, we have, we have, we have new positions and investor relations, all that kind of stuff. It’s hard. And, and w our wages we’ve had to, we’ve had to go out with higher and higher wages. And, and, um, and we, haven’t had a lot of applicants, which has been really interesting. And, and we are one of the top by, uh, six years, eight years in a row, the, uh, Arizona Republic, uh, said we are one of the top employers in the state. We have a great culture, all that kind of stuff. I’m not trying to brag. What I’m trying to say is that we historically, I’ve never had it. We’ve had more people trying to work for us than not.

Ken McElroy:
And, uh, so it’s always been pretty easy for us now. It’s been really, really difficult. We just hired a full time person, full time as a recruiter employee, you know, to go out and recruit the point is this, there’s all these other bigger factors happening. And, and I think that with that, and the supply chain issues, um, you know, you, you, you need to take a look at what’s going on from a supply. Yes, people are moving around and, and what’s really happening. And I think that we have some big affordability issues coming. Definitely, you know, things are going up guys. And, and, uh, there was an article in the wash post last week that the average, uh, per month is $179. I think it was just Google. It it’s $179 per person on the average higher than it was, uh, even a year ago. So what, that’s a lot of money. That’s a, you know, that’s almost a cup, that’s a couple of grand, right? Um, that, that all of a sudden it’s gone. I mean that that’s $2,000 more to live on the average. And I know you can get into the weeds here and, and, you know, assassinate me for, you know, little things here and there, but the point is things are going up. And I think, I think that things are gonna slow down for the housing, um, know,

Danille:
Well, you know, they’re not extending the, um, you know, they always say that they’re extending the forbearance so people can keep their homes. Cause that sounds really nice, but they’re extending the forbearance because they know it’s going to be a disaster because there’s a lot of people that are behind on their mortgages. And they’re hoping that in six months, maybe this’ll turn around, maybe they’ll extended again. And that’s why it’s so hard on this channel to predict when the crash will be, because when the government keeps doing things like extending for barons, it’s almost like prolonging the inevitable.

Ken McElroy:
You know, one of the things that if you look at history, one of the things that the government uses to control inflation is interest, interest rates. So typically when inflation is rampant, then they can adjust and flip in interest rates. And so, but right now they can’t adjust them down anymore. Right. Right. So the problem that they have is that interest rates are at all time, lows and inflation is apparently not transitory. Like everybody keeps saying that it is exactly, I don’t know about you, but it doesn’t feel transitory.

Danille:
No, no, George Gavin just did a video that inflation’s permanent.

Ken McElroy:
So, but the, the point is, is I think that if one of the things to watch is as, as you know, the government has to make a decision, do they let things run on the inflation side or do they manipulate the interest rates to, to, to, to calm it down, right. If they do that, and this is the point, then what will happen is that’ll put a screeching halt on purchases because, um, for cars, for houses, because the cost of debt, the, uh, gets higher and the mortgage payment or your car payment goes up and all of a sudden at the same time when things are already going up, that’s actually what the Fed’s most concerned about right now.

Danille:
Yep. Definitely. And Michael Shane, uh, said that there is a call for Zillow at 5:00 PM Eastern time today.

Ken McElroy:
I would jump on that call guys. Yeah. Yeah. Who knows it, you know, it’ll be a spin. It will be the spin doctors for sure. Right. Cause there’s a lot of this. This is a very interesting PR move for those guys. They have to do this because I don’t, I’d be interested in, I haven’t even looked. I wonder what their share prices are. If any of you guys know you should put that on here. I’d love to know w you know, what’s the, what happened to the valuation because there’s a lot of speculation. This is no different than, um, you know, there doesn’t appear to be a market crash. So why, why is a company like this exiting all their real estate? That’s really the million dollar question.

Danille:
Exactly. And that’ll help you understand that. Um, so we’re going to move into our premium questions, make sure you guys sign up for premium com macra.com forward slash premium. You can try seven days for free with the code on the screen. And, um, you get to ask kind of question and we make sure to answer all of our premium questions.

Ken McElroy:
Those are fun. I appreciate the questions that you guys are sending in. We’re growing by premium every week. It’s excited actually. And we have a lot of cool stuff happening. We got our advisors kick it off. So we, we, we have a tax advisor, which you guys have met with Eric Freeman. We have a legal advisor with Maurizio reveled, uh, and his videos are coming out. And so you guys are going to start to see a lot more on both the free and the premium side and, uh, and be able to ask them questions. So I’m excited about the whole,

Danille:
Definitely. So Ken macro.com forward slash premium to try out your free seven days. So first question comes from Kevin, what is your morning routine to get your day started?

Ken McElroy:
That’s a good one. So might surprise some of you. The very first thing I do is I get up and I drink a big glass of water with lemon. Now I know this is getting minute, but it’s truth. Then I, I, I take some athletic greens and athletic greens. I’m not obviously a spokesperson for athletic greens, but, uh, I’ve done some research on that. And, um, and that gives me all my vitamins and all that kind of stuff. Then I go stretch and then I meditate. So that’s the first thing I do. I don’t get on my phone. I don’t jump on the computer. Then after all that, um, you know, then I kind of ease into my day and I’ll, by the way, all that takes, you know, maybe a half hour to 45 minutes at the most. Um, then it, um, typically if, uh, I, I usually try not to do too much in the mornings, although recently I have been, but our typical routine is hitting the gym. Uh, we leave around seven 30 and, uh, get back to the house by 9, 9, 15. And then I kind of start my day each and every day. And then it’s pretty much packed most, most of the days. Um, so that’s, that’s pretty much it, usually the gym, at least three days, maybe four, but I’m a big believer that you just got to move, right? Yeah. Yeah,

Danille:
Definitely. So our next question comes from Nick. He said, would you buy a a hundred year old home as a rental property? That conditions seems okay.

Ken McElroy:
I had, I had one. So it’s a rental though. No, but I could have, they told me that for iron man, I could have rented it for 25 grand for the week. Uh, it was right on the water and it was running like quarterly and idol. Um, you know, the age of the home is, uh, obviously has a lot to do with the, with the maintenance, but it’s the location. So in my particular case, it was built in 1905 and everybody loved this location. Obviously people did even over a hundred years ago. So now inside of the house, different issue, you know, I had the galvanized pipes and, you know, the old tube and knob wiring and all that kind of stuff, which I had to do and redo. But, uh, for me, uh, I didn’t feel like, um, it was a bad investment at all. I made a, I netted over 2 million more. Did sell it for more.

Danille:
It wasn’t a

Ken McElroy:
Rental. Yeah, it wasn’t, but it could have been, this is my point. And I, um, but again, back to location. So I, I think the age, uh, if you’re, if, if you’re struggling with the age, it has to do only with the operational costs. So if the operational costs of maintaining the house at the age that it’s in, uh, outweigh the cashflow, then, then I would probably pass. But the location is everything because I would rather have an old house in a great location than a brand new house in a bad location. For sure. So

Danille:
A lot of people are asking about the job openings for MC company. You can just go to the MC company website and you can probably find them there. Yeah.

Ken McElroy:
Www.mc companies.com and, um, and just, uh, send those, thank you, by the way. And, and, or by Facebook, or how were you getting them before?

Danille:
They’re just emailing them directly to my email. Okay.

Ken McElroy:
Yeah. So, yup.

Danille:
Okay. So our premium question comes from DJing. He asked when you invest as a limited partner, do you hold title in a single member, LLC for the best asset protection?

Ken McElroy:
Great question. So, um, just the traditional structure, first of all, there’s a GP, which is typically the person put together a deal. And then the LPs, which are the money, uh, and they come together into one partnership and, um, that’s called a general partnership where the LPs or limited partners and the GP is a general partner. So, so, um, to answer your question, when it comes to asset protection, one of the greatest obviously is Garrett Sutton who talks a lot about asset protection. And so what happens is when you invest in your name, let’s say you invest in six deals in your individual name. And then God forbid, you, you run a red light, you hit somebody and they get hurt and they Sue you. So now what they can do is they go after all six of your investments because they’re in your name.

Ken McElroy:
And so the whole point of putting anything in your name, um, is not necessarily good. You, what you want is that extra asset protection layer. So it doesn’t matter if it’s an LP or it’s your own home or whatever it is. You know, people are going to Sue you your individual name. So for me, I don’t have anything in my name, not one thing. And so what happens is, uh, if that ever happens, then people Sue you, but then they Sue the, the, the LLC, right? And that’s your asset protection. Now they can still, what’s called Pierce the corporate veil. They can still get through that, but instead of just suing you personally and having access to all your assets, imagine having six different LLCs for those six different investments, they would have to Sue all of those in order to get to them. So it’s an asset protection play. And, um, uh, I think that, uh, for more information on that, you should go to Garrett Sutton. He’s got a, uh, uh, PR actually he’s got a book out, uh, re rich advisor book called protect your assets.

Danille:
Um, German said that banks are throwing blind forbearance at homeowners. Uh, this is on YouTube by the way. Um, but German has to remember as well that all this money does have to be paid back.

Ken McElroy:
Yeah, yeah, you’re right. That is happening. It’s been happening for a while, as we all know. And, uh, don’t forget. They still own it. Yeah,

Danille:
Definitely still out. Okay. So Joe, from premium, when it comes to infinite returns, what’s your timeline for achieving an infinite return and do you or your investors, um, what, what’s the expectation of the infinite return on a new project as well as evaluate

Ken McElroy:
Really, really good question. Insightful question. So, first of all, for those of you guys don’t know an infinite return means if I take a hundred grand from somebody and I give it back to them in a certain period of time and still own the asset, then they’ve gotten their return of capital back. That’s an infinite return. So they actually own the asset with no investment. Uh, so, so with every single deal, that’s what we try to accomplish. But what’s what happens in, in say 8, 9, 10, 11, 12 timeframe. It was a lot easier to do. So, uh, you know, we were doing that in three years, four years now with the rising prices, it’s a lot harder. And so it might, it’s pushing the timelines out for the infinite return, but the point is, that’s what our goal is always. So as I raise capital from investors, my entire goal is to give it back to them.

Ken McElroy:
And that should be yours. Your goal is to give them back their original equity now and continue to hold the asset. So you want the asset to cash flow, but then you also want to increase the value. So there’s two kinds of equity. As we talk about a lot, one is market equity, which means kind of what Zillow does. Zillow says, I’m going to buy something. And I hope that it goes up or they manipulate their website or their estimate or whatever. It’s called, whatever it’s called and the, and they make it go up themselves. But the market’s smart. It’s going to do what it does. That’s that’s the market to is forced equity and forced equity means that you actually have a plan. You actually like you think of buying a vacant building and putting a tenant in it. What you’ve done is you’ve increased the value of that property because it now comes with a tenant that actually has cashflow.

Ken McElroy:
So a million dollar property, as an example, might be worth two with, with when it’s full of tenants and it’s actually paying. So, so when you have that, then you go back and you do a cash out refinance. So you use debt twice, you use debt to buy it. Then you use debt to replace out the debt and the original investment from the first investment. So that is the point. And, um, so it’s really difficult to say how long it takes, because each asset is very, very different. I’m doing a video today on how I did it on a billboard.

Danille:
Yeah. Well, that’d be a real laced prevalent on weaker. Yeah.

Ken McElroy:
Yeah. But, but the point is, is that, you know, on that one, it took a few years. So, uh, but not every asset is, is the same.

Danille:
Definitely. Um, Matt, you had asked about a trust versus an LLC. It’s best to talk about it to your, um, your tax accountant, because we don’t want to get too much into the details on this because that’s not really our focus.

Ken McElroy:
No, but I will, I’ll just touch on that. So I have trusts and LLCs both.

Danille:
Okay. Well, he would just say, you know, to clarify, he said to put the, put it in the trust and then assign it to an LLC.

Ken McElroy:
Yeah. So we’re getting into kind of a state planning. So, uh, the trust means that you don’t own it. That’s what a trust does. So I have a trust and when I move stuff to my trust, that means I’m no longer the owner of the, of the asset, right. Under an LLC, you actually still own it. So, um, but, um, it, it, you know, we’re getting into some complexities around estate planning, but the entire purpose of a trust is to move stuff into there and let it grow in the trust. But it essentially means like, so I, I do a lot of estate planning every year. Guys. We, you know, you can, right now before Biden, we can move up to $11 million a year into a trust. And I’ve been doing that. So that money is sitting over here in a trust. And I cannot even be the trustee, which is because that way the IRS can come back and say, well, you just move your stuff, but now you’re the trustee of your own trust. That’s not really a true trust. So you gotta be careful around trust, but trusts are very, very good tax planning tools.

Danille:
So first name, last name is saying that they have several units rented way below market. Are there any laws or rules for increasing rent closer to market rents in Arizona? No.

Ken McElroy:
Yeah, yeah. Yeah. Th th this is, uh, uh, it’s a borderline ethical issue. I, in my opinion, you know, you, you know, we, we, Ross and I, my partner, we, we, we have a lot of senior properties, so we have four or five senior properties. So I say senior properties, I mean, two to 300 unit properties. We’ve made a conscious decision, not to really Jack the rants on those, because a lot of those seniors aren’t fixed incomes. So, you know, but the, there is nothing that says that you can’t raise your, your rents to market. And, and so you got to take a look at, um, the whole scenario. Even you have rents below market. Yeah.

Danille:
Yeah.

Ken McElroy:
But you, but you have tenants to pay and they’re, they’re good. And they’ve been there a while. I had a tenant for nine years at one of my assets, and I always had him a few hundred dollars under market, and I never cared because he fixed up, he did stop and it was a win-win and I would talk to him about it and say, Hey, you know, his name was Bruce. I said, Bruce, like, you know, yeah, yeah, yeah. Ken will, I appreciate you working with me. And he just, he took care of the place, took care of the yard to girl, you know? So, uh, it’s just, but the answer to answer your question directly, there is nothing that says that you can’t raise it to market

Danille:
And some free I’m good. A lot of people are asking is now a good time to buy and some free kind of summed it up. He said, anytime is a good time to buy. As long as the numbers

Ken McElroy:
Work long as the math works.

Danille:
So Scott has a good question from premium. He said, he’s exhausted his own startup funds, but friends and family keep offering to invest with him. He’s thinking of accepting, but he’s a little bit nervous. Should he get a syndication attorney involved? And should he accept their money as a loan or as an investment?

Ken McElroy:
Whew, that’s a good one. Um, well there’s a bunch of stuff here, Scott. The first one is, um, you better be right on this one.

Danille:
You gotta be

Ken McElroy:
Pretty sure if you want Christmas presents, man, you gotta be invited for Thanksgiving. Uh, this is a touchy one. Uh, but a very, very, very good question because as you start taking on other people’s money, uh, things do change when it’s your own. It’s a little less stress. Uh, and so I belong. I used to belong to three country clubs. It was a little excessive. I dropped two of them. Now I just have the one, but I have friends that would go to those country clubs. And they raised a bunch of money all the time. And you know what, they would go there or they play golf and the guys are always like, how’s my best for Jada. I’m like, listen, I don’t want anybody to know what I’m doing. I want to go there and relax. So I never raised money that way, but this is no different. So what happens is there are, as you stated, there are deals that, um, that go bad and, um, and you just need to be prepared for that

Danille:
Deals that go bad. But sometimes you have investors that are like, oh my gosh, something happened. I need my money. You know, that kind of thing.

Ken McElroy:
Yeah. Like life happened. So, so, uh, the answer was, do, do I do it as an investment or do it as a loan? They’re very, very different. So, um, if you do it as a, you don’t really need to do it as a loan because there’s a lot of hard money out there. That’ll give you all kinds of cash right now for real estate at, you know, call it six, seven, eight, 9%. Um, you know, it’s probably better off as an investment in getting a lower, um, you know, cause it it’s again, it’s cost to capital. Um, you know, and, and so, uh, and also if the, if the thing does really well, you want them to benefit the, the issue becomes the transparency and, and, uh, and, and, and being able to sit down with somebody which I’ve had to do in my life, sit down with friends and family and say, listen, this did not go the way that I thought it was going to go.

Ken McElroy:
Uh, back in the early two thousands I had, I had had that conversation. I still remember that conversation. So it’s a, it’s a judgment call. And, uh, so I appreciate the question. And, and also if you are going to syndicate, um, yes, you have to have the proper documents. I, as you guys know, Maricio, we’re old is going to be one of our advisors. He’s already done five videos. Those are coming out. He’s a great guy to, that’s called a PPM, a private placement, memorandum, all those kinds of things. And you want to make sure that they’re accredited.

Danille:
Definitely. Um, and just so you know, you’re getting involved in their finances and that’s always a little bit complicated, so keep it in mind. So John from premium has a good question. He said he wants to market investors to buy a single family house. And what kind of interest rates should he pay? The investors he’s hearing four to percent, but how do you decide a fair rate?

Ken McElroy:
Four to 10? I would say yes. Yeah, I’m joking. Um, you know, um, it’s all negotiable. So there are plenty of groups out there that will finance you for eight, nine, 10%. Like they’re all over the place. It’s a super competitive business. If you can find money for less than, you know, great, I would definitely do that, but it, it really has mostly to do with the cost of capital. So debt and equity are the exact same thing. They’re just called something different in their price, different it’s, they don’t my money in my wallet and her money in her wallet is the exact same money. Um, and I can lend it out in the form of debt, or I can give it to somebody in the form of equity, or I can give it to somebody as a loan, you know, and in the form of, of debt securitize against the property. There’s lots of things I can do, but it’s all about the cost of the money.

Danille:
Definitely. And Mr. Wright, um, on our last question has an interesting approach. He said, ask your family how they’ll feel if they lose money, if they get uneasy, don’t do it.

Ken McElroy:
Yeah. That’s a really, really good point. It’s I I’ve intentionally not had my family involved in my own stuff. Yeah. You know, and yeah. Yeah. I, I don’t want to complicate it. And so it’s just easier

Danille:
Ulu from premium wants to know other than a lower rate. Are there any first, uh, are there any other perks for first time home buyers

Ken McElroy:
That I don’t know? Um, I’m sure there are. I know that there’s all kinds of programs coming out right now to incentivize, uh, you know, affordable housing and there’s programs. And I think they’re kind of city and county and state driven, but the answer is, I know they’re out there, but I just don’t know all of them. Definitely.

Danille:
Um, okay. So our last question is from Shobha, I hope I’m pronouncing that right on premium. They said that they have a few single family rental properties in Fort Lauderdale that has almost doubled in value since they bought them in 2013, they want to sell them and reinvest the profits into a multifamily syndication. But they’re a little confused on what to do.

Ken McElroy:
I wouldn’t do it. Okay. And that’s what I do. Like I’m a multi-family syndicator, but I think you should re cash out. Refinance put just enough debt on there, hold those assets, do not, um, your, you know, unless you can perfectly 10 31 into that 10 31 exchange as you guys means that, um, uh, you know, uh, you can roll all those profits into, um, into something tax-free if they even take 10 31, here’s the thing. If you’re going to do it, make sure that you, the asset picked first don’t sell and then have the, the, the gun against your head on trying to place the money. That’s the biggest issue people have is. And if you just sell, you’re going to have depreciation recapture, you’re gonna have capital gains. And the issue as you pointed out is going to be what, what to do next. Now I’m sure this is driven by, even though you didn’t say day-to-day management stuff, you know, um, and, um, you know, just like you have, right, you have a number of rentals and sometimes you’re like, oh my gosh, I got, I think one week you got three HOA letters in one week on three different assets.

Ken McElroy:
So, you know, it happens, but if you’ve doubled the amount, um, I think personally, you guys should hold on to those and scoop some of the equity and make sure that it still is profitable and use some of that for a syndication. I would start slow. In other words, I wouldn’t sell all that, put all your eggs in one basket and go to a multi, uh, uh, into a syndication. What I would do is I would just get like, say a hundred grand out of there and then give that to somebody else. It, that way you still have your assets, uh, that way it’s called velocity of money. You’re actually harvesting the money that the properties have already produced. You still own the assets. So you get all the tax benefits, hopefully they’re all rented and you saw the cashflow and you’ve taken some of that money and stuck it into a syndication.

Ken McElroy:
And that, you know, what syndication and who and the fees and all that stuff is a whole different topic. But, um, uh, that’s what I would do. I would hold the assets and scoop a little bit and, and invest a little bit, not very much when people invest with us, some of them have a lot of money. They give me a hundred grand, almost always at first. I want to see what this guy’s all about. We want to see what this property is all about. We want to see what this company is all about. And then the next investment could be 500 to a million, let’s say, so, you know, test it first don’t cash out and then dump it all. That’s not a good strategy.

Danille:
Scott S is saying that too. He said, I have a guy who did, I know a guy who did that. He sold it first, and now he can’t find a property that meets the exchange criteria. And he’s panicking because you only have like six months or something.

Ken McElroy:
Yes. You have 90 days to, um, identify and six months to close. So it’s it’s you don’t want that pressure. Trust me. Um, you don’t. And so there are, this is odd, but we we’ve had situations where Ross and I have decided to sell something. Let’s say we, as the seller have a clause that we can actually delay the closing as a seller, which is not very common, but it’s all about saving tax. So we want, until we find and identify something, the hardest part is finding a deal. You guys, as you know, especially in today’s market. So if you have something that’s doubled, um, I would be careful,

Danille:
Definitely. Well, that wraps up the show for today. Make sure you guys tune into our webinar. It’s going to be on wholesaling, kind of macro ray.com forward slash webinar. Um, we provide really great information for free, great way to get started. If you don’t have any money, also make sure you like and subscribe to our channel. We do these lives every single Monday at 11 o’clock Arizona time. And we’ll see you guys next week.

Ken McElroy:
These guys as always great questions today, watch Zillow.

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Ken McElroy has lived and breathed real estate for his entire adult life, learning from the ground up. He shares his insights and experiences on his podcast, “Real Estate Strategies with Ken McElroy,” and on his wildly popular YouTube channel. Ken is passionate about educating others so that they too can experience financial freedom through real estate investing.
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