Ken McElroy has been in the real estate industry for 30+ years and has over $1 Billion in real estate assets. What makes someone successful in this industry? And what can you learn from his 30+ years of experience? Join Ken McElroy & Danille in a discussion about some PRO TIPS that you can learn before you even buy your first property.
Danille: Welcome to the Ken McElroy show. I'm your host, Danille. Ken McElroy: How are you guys today? We're just have some fun, uh, leading up to this, uh, a, uh, welcome, uh, hope you guys had a great weekend. Danille: Definitely, definitely. Um, so today's a master course tip of the week we always start with that is never getting adjustable rate mortgage. Uh, you definitely want to do something that's a set mortgage. Ken McElroy: Yeah. Before we jump off of that. So, so w what you guys need to pay attention to... I think when you're, when you're looking at mortgages or interest rates, they're the, you you'll always know what the bank wants by what they're offering you. So it's like, like when I used to live in Vegas, like you knew that their occupancy was low at $89 or $99 rooms, that those were like the teaser rates to get you to stay at some place, same thing with interest rates. So you're going to see these really attempting tempting offers. And so be careful because it'll look like a better deal, but it might be for one year or two years or something like that. So just be careful and think long-term. Danille: Definitely, definitely. So we have people from all over today, Cincinnati, Toronto, Europe, Turkey, they're just all over the world watching. Ken McElroy: Good. Good, good. Well, thank you. Shout out, shout out to everyone. I don't have no idea what time it is in Europe or Turkey. Um, nice to have you guys. Danille: So this weekend we basically just did nothing. Ken McElroy: Oh, well, that's not true. I did a lot. You did nothing. I also, I, I sold a home and I had all this really cool art, so I love, I like art. And, um, and so I had it all shipped down to Arizona and, um, and anyway, it was cool actually unpacking it all and kind of getting it ready to, uh, display again. And, uh, our home in Arizona. Yeah. It's looking good. Uh, took, took two days. Danille: Yep. And you're on day seven of your 10 day cleanse. Ken McElroy: Day eight. I'm on a detox. I, you guys might know I do two a year. Um, and I feel so much better. Yeah, Danille: Definitely. All right. Well, if you guys are watching, make sure you hit the like button and we always appreciate that as you know, and also, um, we're doing another free webinar on wholesaling. Um, so make sure you check that out. It is next week. Um, go ahead and sign up at KenMcElroy.com/webinar. It's a great, you know, wholesaling's great if you have no money and you're trying to get started, anybody, you know, you don't need money to do it. So it's a great way to get into real estate. Ken McElroy: It's a great, yep. Danille: Totally. So today we're going to be talking about lessons from a pro investor. Ken McElroy: So we started talking about this over the weekend. You know, we kind of narrowed it down to five lessons, you know, what are the top? There's a lot, obviously, but we've picked five and, and we're going to talk about those. And, and so, you know, some of these are hopefully not too foreign to you guys, and hopefully you adopt these because these are well thought through. These are things that we talked about literally over the whole weekend while we were figuring, you know, all are working on all the art stuff. And we came to these top five. So hopefully you enjoy them. Yes, Danille: Definitely. So the first one is a mistake that I kind of made, which was paying off my properties as I go. Ken McElroy: Yeah. So this is really common. So, you know, essentially, it's, this is all about debt as afraid of debt. Yes. As I understand this, you know, if you take a look at it, there's kinda, you know, there's good debt and there's bad debt. And of course, hopefully, you know, the difference. So, so good debt is debt. That's used that other people pay off for you and bad debt is debt that's used for like credit card debt or things, you know, where you're racking up debt and you're paying these 18 to 20, 22% interest rates. So those are the two kinds of debt. And unfortunately not all debt is treated the same or, and so that is kind of a bad word, I guess. And so like you like my parents, like my brother, like, you know, so many others that they don't like to be in debt, they have this stigma around debt. Ken McElroy: And I'll tell you guys, as we're moving into this next period, uh, the facts are the facts. You know, we have high inflation right now. Cash is a liability and debt is an asset right now because of inflation. So if you can fix that, then you're actually beating inflation. So, so I, it's hard to wrap your head around, but this is kind of the mistake. A lot of people use the, the whole point. If, if you think of, you know, I did a talk in Dallas about a month ago, actually with kiss hockey and, and, um, uh, George Gammon and Ron Paul was there and, uh, Simon black and, and a whole bunch of really, really smart people. And we talked about my talk was be the fed because, you know, right now the, you know, everywhere people are printing cash, adding cash to the, you know, to take care of everything. And we're not going to go down this rabbit hole and say, why the point is they are. So the countries states, they're all getting more in debt to take care of the people period. So, so be like that, you know, do what they're doing. Danille: Well, just as like a general example, I mean, I, you know, paid cash for my first two properties. And if I would've just put down, you know, the 20% down payment, Ken McElroy: I could have a much bigger right now you have three and you probably could have had five or six. Yep. That, yeah. So, you know, history is a tough lesson. I mean, it didn't turn out bad for me, but it could have been better. No. And the other thing is let's, don't discount the fact that you have a lot more cashflow. Yeah. So, you know, and that was your goal back then was to be financially free. But I think a lot of times people are the, you know, they, they, you, you need to look at debt as a tool, that's it? You know, there are times to use it in times not to use it. So I don't use debt obviously for buying, uh, anything that goes down in value. Right. Period. I don't use that for land. I've just pay for land. You don't want to be, there are things that I have, like the resort that I own in Sedona, there's no debt on it. Ken McElroy: And the reason I could put a lot of debt on the thing's worth a lot of money, uh, but I don't want to ever have, um, you know, I want the cashflow to be able to produce. So there's, there's choices that you can make around what you should have debt on and what you shouldn't. But the general rule is if your debt is covered with somebody else paying it, not you, not from your paycheck, you know, somebody else, then it's true. It's better. You know, a lot of people use debt to cover inventory. Let's say, let's say they're a manufacturing company and they have to take lines of credit that's debt, um, to pay that down, you know, while they're managing people that are paying them, that's different, that's using debt in your business. So there's a time to use debt. That can be your friend. Ken McElroy: And, um, and also, um, the other thing is we don't really talk about leverage here, but I don't, I don't advise having too much debt, too much leverage. So you want to have that. So, um, you know, like during the pandemic, when the pandemic hit Ross and I, we immediately started to take a look at our loan to value on all our assets and, and what our, what we call our breakeven know us. So our break even is simply expenses plus debt. So what is that number and how much revenue do I need to have to cover it? So generally we're in the low sixties. So that means that I only need to collect 60%. You know, I think it was 62 or 63% of all our income to cover our income, or I'm sorry, our expenses and our debt. So that's what we call our breakeven. Ken McElroy: Anything over that is obviously cashflow. So, so that's where you need to be thinking. So in your case, um, I would advise if you had, let's say long-term tenants in there and, um, and you do and have had, you know, maybe 50% that maybe 60% debt, but that's hundreds of thousands of dollars to you. So that's a lot of money that then you can now scoop and use. And especially if you fix at say two and a half or 3%, which is what the number is and use to go out and buy more stuff and, and hedge inflation because you're borrowing well right now, at least two points below inflation. Yes, definitely. So that's kind of the philosophy is, is not to just consider debt bad. Like I grew up that way. My parents would say, do not get in debt, pay off your debt, pay off your house. Ken McElroy: My parents paid off their house. And obviously long time ago, I remember as a, as a young kid when they were so happy when their, their home was paid off and they live debt free generally for the rest of their lives. Um, nothing wrong with that during the time. But gold was tied to the gold standard. Then guys in the seventies, Nixon took it off. The gold standard and currency became what's called a Fiat currency. And now that currency floats, they can add as much as they want it. It's not tied to gold anymore. So just go back and look in your history books and take a look at all this. It's fascinating. If you want to really freak out, just type in how much has the dollar devalued in the last 20 years, that's all you have to do is just Danille: Type it in last year, Ken McElroy: But just go back and look, it there's a, there's an actual visual I saw as a $1 bill and it just shows it going down like this. Um, so that's what we're trying to fight. You're not going to win the fight, but you can certainly manage to it. Danille: You know, I'm on YouTube, but Josh has a great question. And I actually get this question a lot. Um, after he saves he's a renter after he saves the 20%, should he buy a rental property or buy himself a primary residence, Ken McElroy: If you can do the house hack method, you know, so what you can, so I have a friend that just did this, is he young kid. I love this kid. Uh, you know, he's a musician and he's the lead singer of the span. And he's, you know, up in the quarter lane Spokane area. And I sat and had coffee with him and his mom and dad, uh, it was cool. And, um, you know, this was his issue. So he had saved a bunch of money doing his stuff, and he ended up finding a home and ended up and end up having a rental component to it, a separate entrance. So you have to be thoughtful around that. So it doesn't have to be an either or, and in my opinion, you should look at, and I have another, another young kid where my good friend's son, uh, is in the military. And, um, and so he was at, uh, uh, Fairfield, Fairfield, uh, air force base, I think, in, in, in the Spokane area. And, um, he did this, he bought a four bedroom home and rented three of the house, three of the rooms out to some of the guys, Danille: Well, listen, you don't really need a separate interest. Like even Josh, even if you buy a condo and it's a two bedroom, you could run the other bedroom out. Um, and another thing to consider is sometimes people have really, you have a really good deal on your rent. You know, if you're running from a landlord and they're not charging you very much, it might make sense to just buy something and rent it out. You know, it depends on your specific situation, Ken McElroy: But you do want to take advantage of, of the, um, using debt and, and, and where the market's heading because real estate prices are inflating as a result of what's happening right now. So, so, um, it doesn't have to be an either, or you can do both, you can buy a primary residence and rent out the piece. And the goal of course, is to figure out a way to cover that mortgage. Yeah. So if you're able to use your 20% and then rent that, you know, upstairs, above the garage, you know, back basement or whatever it is to cover, then now you've basically moved. Use your 20% you moved into the house, somebody else's paying for it. Yep. Danille: Michael brought up a good point. He says, you don't even need the 20% if you house hacks since you're going to live there. Ken McElroy: Yeah. Really great point. Yup. Danille: Um, so let's move on to the next thing that we've learned. Um, this was yours. You said you would engage a property manager before. Ken McElroy: Yeah. So now this might seem odd, but one of the things that actually is funny, I'll tell you two stories. The first one was, um, when some, while I was raising capital way back in the day it's 20 plus years ago, and my, my buddy said, Hey, this, this guy wrote this purple book called rich dad, poor dad. And, um, and, uh, you know, he just kind of retired and he lives in Phoenix and I'm like, well, introduce me. Cause I'm raising money for deals. I was doing. So obviously it was Kim and Robert, this is the very first meeting. So I grabbed one to rich up. I went to the store, grabbed Richard, poured it out and read it real quick. In the book, Robert says the most valuable person on your team as a property manager. And the first thing I said to him, when I sat down with him, this is a true story for lunch. Ken McElroy: I said, I've never seen anybody say that cause nobody really like understand w you know, the value of a property manager. And so, you know, and, and that was my very first thing I ever said to Robert and Kim, and we had a long chat about that, because that was my background. And so what would happen was, and I'll give you a really crazy, crazy story. Um, one of the, I used to do a lot of fee management back in the day, and there was a guy he had like a 30 unit building in San Diego. And he was literally on his boat. It was all paid off and he would go and collect the, you know, they had washer and dryers and stuff like that. And he was like sailing and enjoying himself and San Diego and all this stuff. And it was full. Ken McElroy: And the thing was a cash cow was like, awesome. And I don't know if it was all paid off. It was really paid down quite a bit. He, he owned it for a while and he'd bought it back when he was working a lot. So it's only 30 units, but it was San Diego. So prices were up. So some broker convinced him, you know, I don't know if you realize how much this thing's worth, but it's worth a lot. And back in the day, it might maybe, you know, let's call it $10 million or something. So the guy's like, oh, I can do this again. I can roll this. And so he, he, you put the building, uh, in escrow and actually sold it. And then he wanted to do a 10 31 exchange. And he found a property in Mesa, Arizona, which is where I, I, the area I'm from a lot, it was like 150 units. Ken McElroy: And, and, and to, to save on tax. And then the day before he closed, he called me as the property manager. Can you help? I'm like, of course I could help. So now he's done all of this by himself, you know, and not thinking about this. So, and so the very first thing was like, like, I don't know if you realize what you're buying, but what you're buying is something that's full of bad stuff. You know, it's got some real issues around occupancy. It's got some real issues around, uh, the tenants and it's got a lot of deferred maintenance. So, you know, I'm just letting you know, it's yes, it's significantly bigger. And, and so the story was is if he would engage us even two months earlier, that's it, I, we would have just went out and fed him that information for free, because as a property manager, you're getting that contract. Ken McElroy: And the last thing that you want to do is, is, is, um, you know, take on a building that, um, you know, is, is, has high occupancy, you know, low occupancy issues and high deferred maintenance and high capital, all that kind of stuff. That's the very last thing that you want to do. And, but he took that on. So he took this problem over and a property manager. If they're going to take something on, they're going to tell you the truth. They're going to say, Hey, I don't think that you're going to be able to get these high rents. I don't think you're, you know, this is an issue here. Let me take a look at your operating expenses. Let me take a look at your, your resident mix. Let me take a look at where your rents are set. And let me take a look at the vacancies. Ken McElroy: Let me take a look at the condition of the vacancies. And so you need to engage a property manager to verify both seller and broker information before you take it over. Um, and this, this turned out to be a disaster for this guy, because all of a sudden he was flying over to Arizona. The thing wasn't cash flowing because it had low occupancy and, and, um, Annie had a bunch of work to be done. And so he went from this basically sailing, uh, literally out in the San Diego bay to flying back and forth to Mesa, Arizona, trying to, uh, you know, try to fix this, you know, this issue. And eventually it got fixed, but a cost of a hundreds of thousands of dollars. It was a horrible, horrible mistake. Obviously he was, but you know who he's, he's at guess the property manager, right? The bearer of bad news. So he's not in his own actions. He's not at the broker. He's at the emails and the data that work that we're giving him. Right. So, you know, I'm like, dude, your, your anger is, is directed the wrong way. You need to be at yourself for the stupid decision that you made. And, and, um, you know, and so that is, um, a great story of, of utilizing a property manager early. And, um, and so I'm telling you guys, Danille: But what would somebody use a property manager Ken McElroy: For all of those things that I mentioned earlier. Right. So those, okay. Danille: Um, and then another good tip is to start with the exit of the money and work backwards. Ken McElroy: Yeah. So obviously you guys know that we're buying whole, right? So, um, this is not about selling the property. So, uh, I'll give you an example on the billboard, the billboard example that I use all the time, the, we, we bought a, uh, bought a piece of land with a billboard in the middle and the middle of right in the middle of the property. We moved to the billboard later and the, I wanted the billboard. I didn't really want the land. So I wanted the billboard because it was a monthly cashflow. Well, so my thought was, and the land was a very expensive, it's like 280 grand. So we bought the land, moved the billboard. It was like 20 grand to move the billboard. So now I'm into the thing for 300 grand. I put an easement around it that costs me another 15 or 20,000 in legal. Ken McElroy: So now I've got the land plus a billboard sitting over here with an easement around it. And so I, then I relist the land and, um, the land sold for 310 grand. So I'm almost, I almost got all my original capital back, but what I kept was the billboard that now produces, you know, anywhere from two to $4,000 a month in net revenue for free basically. And that's what I'm talking about. So, so when we invest, that's obviously a very small example and I did sell the land, but I sold the land for, um, not more than I might, my, I didn't have a capital gain issue. And so I basically put my money out, got it back, kept a billboard cashflows. And that is the plan. So if you're raising your money or you're using, um, if you're raising other people's money or using your money, the goal is always, how do I get my, my income back? Ken McElroy: How do I get my rent back? So I'm always thinking about infinite return, and I'm always thinking about passive income, those two things. So how do I get my money back tax-free and how do I continue to generate passive income? And then when I do that, you know, through, let's call it a cash out refinance, then I put that in new stuff. And so it's, you know, it's, it's what I call velocity of money. So you're, you're always trying to move your money. So I've had this question a few times, people have asked, why did you sell those 10 projects that we sold a couple of years ago? We sold, uh, for those you don't know, we sold a couple of hundred million dollars worth of stuff. And, um, what I don't often talk about is what we did with the proceeds, you know, so yes, we killed it. Ken McElroy: Right. You know, and, and so the whole idea was to move the money into assets that, uh, using a 10 31 into new assets that are now worth a lot more and producing a lot more. So, so as you're constantly mess around with your money and your investment, and maybe your, uh, investors' money, uh, which you obviously need to get their approvals on, but, um, it's always about how do you get that money back tax free? How do you keep the property, get that money back tax free and produce passive income. That's the entire goal here. And, um, and, and so, uh, it's not about selling the property and it's very, very different, and you have to learn this. It comes through experience. It's very different than a Flipper's mentality and, um, and a wholesaler. And, you know, those are great ways to learn, but I've seen certainly in the, in the late eighties, um, when I first got into the business in the nineties and the two thousands, uh, especially, uh, um, you know, 2007, 2008, at some point, flippers get burned because you rolled the money. Ken McElroy: Yeah. It's, you know, it's a great way to, it's a great way to be in the business. It is, you know, and there's nothing wrong with buying homes and selling them for more, nothing, but it's transactional. It's you have to do it again. You have to do it again to feed the beast. And what we're trying to, what we're trying to teach here is passive income. And it's a lot harder. It's a, it takes a lot more experience. It takes a lot more discipline, but once you get that, once you get that passive income to cover your monthly expenses, then you really truly do have your time back. And that's actually the issue here. We're trying to get our time back. And, um, you know, and it's also, once you, once you can cover whatever your monthly expenses are through passive income, which you did, um, there's a lot of freedom to this a lot. And then you can work as hard as you want, but you're always sitting over here knowing that this is always covered. You don't have to be transactional. You don't have to do a development deal. You don't have to do a syndicated deal just to cover, you know, the expenses and keep that, you know, that overhead burned that you, that all of us Danille: Definitely, definitely. Um, Christian had Ark. Yeah. Christian had something to say from YouTube. Um, she said, or he said that they're undocumented, but I have $150,000 cash in the bank. So what do you recommend for them to get alone? Do you have any suggestions for that? Ken McElroy: Uh, I don't understand the question, so they're not Danille: Illegal citizen. Oh. But they do have $150,000 cash. Ken McElroy: Oh, wow. Ah, boy, that's a touchy one. Um, well, here's the thing. There are, I know we have some foreign investors in our property deals and what we do is we make sure that they have a us entity that they invest through. So let's say a Canadian group or a group out of Mexico, which is the owners I'm bringing those two up is because those are the ones that come up the most. Um, they actually form a us entity or a us bank account, put the money in there and then that money transfers into our deals. So that's the way we do it internally because there are tax issues and things like that, the, that, um, um, you know, the government wants of course. And, um, and there's a bunch of reporting requirements and things like that, so. Danille: Okay. Very good to know. Well, the next thing that we recommend that you guys do is shop around for a loan rates. Ken McElroy: Very important. Yeah. So this is the fourth one. So I hear this a lot. Like, you know, people are like, yeah, well I just, I bank with Wells Fargo and that's where I got my home loan. You know, Danille: They keep it that simple. They don't look anywhere else. Yeah. Yeah. Ken McElroy: And you used to work at a bank, right. So why don't you talk about how, what banks, you know, banks are under a lot of, uh, you know, uh, they're motivated to, to place money, right. Danille: I think with banks, as you know, you, they already have customers coming in, so that makes it easier for them to attract business, right? Because you're already there, you bank with chase or whoever you bank with. And a lot of people just assume that all the making rates are the same and all the closing costs are the same and just everything's the same. And very rarely do people actually shop around for that. And just in my own experience, even when I worked at the bank, I really wasn't aware of other options other than a bank to get money from. Cause I wasn't in the position to, to do that. Um, but what you find is a lot of times the smaller loan companies are more flexible on their terms. They sometimes have better rates, they have different closing costs. Um, and you know, you have a lot more options than just your big bang. Ken McElroy: Yeah. So, so what happens is guys is, um, debt and equity and savings. You know, it's very competitive business. There's a lot of people trying to get your money somehow and loan you money through a credit card, through auto loans, through home loans. Uh, they're trying to get your, they're trying to get you to put money into insurance products or pensions or 401ks and bank accounts and savings rates and all that stuff. Okay. That's what the entire financial industry is for. And they're all after you. So just gotta think about that. It's extremely competitive. Now. What's really cool with the internet and not that it's new, but you can go on the internet and take a look. So I'll just give you an example. I've used this before, but my son was looking, uh, he's looking at buying another car and um, he just got out of college and, and um, and uh, so I said, why don't you go look online and take a look at the rates? Ken McElroy: And he's like, oh my God, they're all over the place. Now this is a car, not a home, but it's the same. It's competitive. It's it? Think of it like buying a car, think of it. How can you know? So when a dealer is that, well, the reason they offer those 0% or 1.9 or zero, a 2.9, or you know, how they scale them and all this kind of stuff is to keep you there and finance you to buy the car. And so they get, they get two bites of the apple, they sell you a car and they get money from placing the financing. It's the same. So, you know, so, so, so he went out and looked and he found that there was a, of all things, a credit union was offered this great, great rate. And I'm like, oh wow. And on used cars, which is, he's trying to buy a used car, which I highly recommend. Ken McElroy: And, and he, um, he, uh, he went over and he put a hundred dollars and opened a bank account with the credit union, just so that he was now a member because you have to be a member. And so now he uses that when he's out or used to that when he went out and was negotiating with these banks, because now he has his, again, he's walking in with, with his own information. And, and it was like a 1.9% 60 month, like credible rate. He was like, what'd you think of that? And so the point is this, when we go out and find deals like, like we do, as you guys know, even on a big, big, um, you know, on big projects, we get 6, 8, 9, 10 bids from different people trying to lend us money. It's hard to believe, but it's true. And you cannot believe the terms they're different on the loan to values. They're different on the spreads, which is the difference between ly bore. Um, they're, they're different on, um, you know, on the different hurdle rates on the prepayment rates. And of course, I'm talking about, uh, commercial, residential real estate now, but the, the, the, the loans are, um, they can widely vary. Danille: Well, it also on your smaller entities, they can use a little bit of common sense that banks can't use. So from my experience, working at the bank, it was very cookie cutter. You either fit the, you know, you fit in the box or you didn't fit in the box. And it didn't really matter common sense wise if you didn't fit in the box, Ken McElroy: You talking about, um, with the W2, Danille: Anything. So like, for example, you know, we had a guy where his house was worth $500,000. He was trying to refinance like 150 grand of it. It was paid off, but they wouldn't do it. Cause they, he had sold Strawn his property, like 30 years prior. And they said it made it farm property and they wouldn't do the loan when, you know, I mean, any bank would do any, so then he had to go to a credit union. The credit union would do the loan cause they, he had perfect credit doctor, you know, all the things. Right. Uh, and then also, yeah, with the W2, like I was trying to put down think a hundred grand on my first place and I needed like a $30,000 loan. And I actually couldn't get it from the bank because they said, no, cause I wasn't a W2, but I was putting down a hundred grand on $130,000 condo at the time. Um, but your smaller entities, your smaller credit unions, your smaller loan companies, you know, they can use a little common sense and say, well, if this girl does default, we basically are getting the place for the $30,000 loan. You know, but banks, it's just very cookie cutter. If you don't hit every, every block, then they're just going to deny you. Ken McElroy: Yeah. And by the way, I, you know, you guys are, if you're, if you're thinking that you're going to use your, let's say your bank, um, that's just lazy. Yeah. It literally is lazy. You know, it's the same issue with, I remember talking to, uh, mark Victor Hansen who wrote chicken soup of the soul. And by the way, this happened at, he had to, he got turned down by so many people. They didn't want the book, you know? And the same thing happens all the time. You gotta get used to a lot of nos. You got to get used to that. It's just the way it is. And you just gotta keep plowing ahead until you find the answer of yes. And you got to approach it from a standpoint where I'm shopping you around. I literally had a call this morning, right before I came on the show here today between two groups trying to get us, give us, uh, uh, $80 million in construction equity, by the way. Ken McElroy: And we have it started with a bigger number. And now it's down to the two and now I'm looking at my spreadsheet and I'm talking to the broker who's representing us. I'm like, okay. So looking at the spreadsheet, where do you think we have room to negotiate? Because now we're comparing the two together and that's the that's really fun. It's fun to negotiate these kinds of terms in these fees and, and all that stuff. And they're negotiable. That's what you guys need to understand. It's it's not like something they push across the table and say, you must do this. There's money is not treated equal out in the marketplace. And I found that a lot of times people have, sometimes they have a lot of money and sometimes they have not. And I'm talking about financial institutions. And so what they do is based on what they have coming in maybe, or, or what they've raised, let's say, or maybe deposits or whatever it might be, then that ha that then all of a sudden they have an incentive to lend more. Ken McElroy: And so they're always watching, think about banks or businesses too. So, you know, they're in the business of lend taking your money through savings and lending it to guys like me. That is how they make money. That's one way. So that is the system. The system is set up to where everyone gets, their paycheck, puts it into the bank. Then the bank, of course, that's a liability to the bank. I don't know. The bank's like, oh, we have too much savings. Savings cost me ax. Let's say 1%, which is obviously high, but let's just use 1%. They owe 1% to everyone that's given them money. So they have to go place it somewhere. That is the game. That's the system. So, you know, just know that no, that is expense to the bank. And so when a bank sitting on money or anybody I'm looking at these two groups today, one of them has 20 billion out right now and the other one had 45 billion or something. Ken McElroy: And their whole goal is to find good sponsors and give money to, and the sponsor, it's your job to negotiate the best deal you can on that money. And it's your job to have lots of choices. And it's not that hard. It's actually fun. You don't have to even go out. I was at a, I went to actually Wells Fargo the other day. And this guy came in, I was at the teller and he comes up and he was behind me. And he's like, I'm interested in a home loan. And they're like, oh, we don't do that here anymore. I look over there. There's like a, you know, like a dozen open spaces, you know, there's like no one in the bank. And they're like, we do all that online now. And, uh, and the guy said because of COVID. So I understand that in the pandemic and everything, but, uh, you don't even have to go to, uh, you know, banks don't even do that now and your local bank. So the point is shop around, get competitive, uh, and, uh, you know, and lock in fixed long-term Danille: And try and best. Do you know if it will hurt your credit if you shop around, um, by applying to multiple different places. And the truth is it does bring your credit just a little bit, not nothing significant, but a little bit. So yeah. You want to do a little research before you just apply? I wouldn't just apply. I would do a little research, make sure, you know, talk to somebody, make sure that they think that you could be qualified, find out what their rates are, you know, find out all the information. Don't just go applying everywhere. Ken McElroy: Yeah. By the way, I'm not talking about applying. I'm actually, I'm talking about getting their terms in their rates. Yeah. You know, that's what I'm talking about. You know, when I w when, when, um, you know, when, uh, when they, um, when you try to buy a car from a dealer, they have, they know what their rates are, you know, they're going to tell you, so, and then they're going to say, oh, it's based on your credit. And we'll say, okay, my credits acts. So what's my rate, you know? So, you know, it's all figured out, you don't have to apply, you don't have to fill out an application to get this information. Um, and so you're not, we're not actually running credit at this point. Right. Danille: So then the last tip we have from pro investors, and we've had a lot of questions on this today already, should I sell my house and just wait for the market to downturn? You know, all these different questions, whatever you buy, it has to catch. Ken McElroy: Yeah. And I talk a lot about this, you know, the difference between capital gains and cashflow in, when you have something that cash flows, you actually should be thinking, well, why, what am I going to do if I sell this, how am I going to, how's my money gonna make money? You know, cause now it's going to go sit in a bank so that it's going to lose money. We've already talked about. So, so when it cashflows, you're actually in a much stronger position. If you're sitting on a bunch of capital gain, then different issue. And that's why, you know, we talk about why I sold some of my stuff, but I always want to have both now obviously land doesn't cashflow, anything speculative doesn't necessarily cashflow ground up construction and all that stuff for a period of time, doesn't cashflow. And so if you're buying something and you're trying to assemble, or you're trying to do something that has, you know, one to two to three year timeframe where, or even less, that's different, that's more of a capital gain strategy. Ken McElroy: But like the billboard scenario that billboard did not cash flow. When I bought it, I think the sign was doing five grand a year or something. So it's inconsequential really. But my goal was different. It was placing the money, scooping, the, um, you know, uh, taking the billboard and then, and then, and then getting that money back. The issue I have is now I got that 300 grand back and I'm like, okay, what do I do with that next? Right. So that's the issue. The issue is if it would a cash cashflow, if I would have bought that deal and it, and, and I could, um, and I kept the billboard and the land is still cashflows. Cause I'm like doing two to four grand a month on that deal. So you're always looking at cashflow as in, in my opinion, it is the key to, to get new guys out of all this mess that we're in right now. Ken McElroy: Um, you know, it's true. We're seeing these big capital gains, the problem was selling. So we have, uh, we, uh, we have a property that we built Ross and I, uh, 20 15, 200 units or 192 units. And we, oh, uh, we built it. So we all like $24 million, let's say no. And, um, we, I can't remember what we built to four, but you know, somewhere in the 30 mid thirties at the time of the back in 2015, we got an unsolicited offer for 71 million, which is a lot. Right. So all of a sudden, you're, you're looking at, geez, that's close to 50 million in profit. So then I took that and I sent it out to five brokers and they all gave us what's called a BOV or broker's opinion of value. And guess what, those, those all came in over 90. So, so now, now we're looking at this, we've got $90 million, uh, for this 292 unit building in Phoenix. Ken McElroy: It's beautiful. And, uh, we all 24 million. So I sent it to my tax guy. And so it's like a $65 million think about that, like 65 million bucks to sell one project. And, um, um, Ross and I are like, what should we do? What should we do? And what we decided to do was, um, do a cash out refi. So I said, okay, let's go, let's get it. Appraisal. Let's go. So we called one of our lenders and said, you know, how much do you think you can scoop out here? Cause if I can scoop 30, 40 million bucks out of their tax free, then I can take that and roll it. But then I have to look at the stress test. So, you know, what's the new debt going to be against the current cashflow and all that kind of stuff. Cause, um, you know, we still have some room, believe it or not, even though it's worth, let's say 90 million, um, rents have gone up so fast in this area. Ken McElroy: We got some catching up to do and I didn't want to leave that for the, for the buyer. So, uh, the point is, is I'm always using the, the, the model is to use debt and harvest harvest harvest, harvest your equity through cash out refinance, fixed rate and, and keep those properties long-term, especially while we're going into this inflationary period and always make sure that that cash flows. So, um, obviously we're going to, I've done this multiple times guys. I have properties that I've owned for a long time and, um, I've, I've done a two and three cash out refinance on these properties. And I, I I've talked a lot about this, you know, but they always cashflow from the beginning always. So I use that, uh, one of the ones that, um, we own in Flagstaff, we bought for $20 million, which at the time in 2005 was like mind blowing for me. Ken McElroy: Um, and you know, now that thing's worth, you know, somewhere between probably I dunno, close to $70 million and we've refinanced it three times, you know, I started with 5 million down, $15 million loan, let's say, and then, you know, and then after four or five years, I, I was able to, uh, get a $20 million loan. Cause I grew the, uh, I grew the value and that's when I became infinite. So I paid off the first at 15 and I got my five back. And so now I have zero investment in that deal. And so cashflow, cashflow, cashflow. And so if I sell, let's say, and I'm sitting there with 30 or $40 million, then what, like, what are you, what do you do with that? You put it in the bank, you give it to a financial planner or wealth manager. Danille: I even think of that with your property. So if you're sitting on a house it's worth $300,000, that's the same way. So like a lot of you are asking, should you sell your house and wait till the crash, but if you sell your house and then you have, you know, a hundred grand, 150 grand, whatever you have in the bank, all that money is going to be doing is depreciating in value. And you don't know when the market is going to correct, or if it's going to correct in your area. So then basically now you're homeless, your rents have went up, your paying rent, your rent went up, it's eating into that profit that you got not to mention the tax you pay on it. Ken McElroy: So the issue is, is that you cash out, you pay tax, you pay a capital gains. Um, and then in addition to that, what do you do with the money right now? You're entering at a high, a high price point. So, you know, I get asked this question a lot. We're building a home, right? Uh, breaking ground next year on it, on a new home. And the first question everybody asks the very first one and the standard question that I always know somebody's gonna ask us. Oh, so you're going to sell this one every time. It's like, I go, I don't know yet. Like, I don't think so. I probably going to convert it into a rental or maybe an Airbnb. It's an amazing home. And you know, it's fully furnished. I'm not going to bring any of the furniture over. So I don't know. Ken McElroy: But the point is I, you know, it's an asset I have. And uh, and so why not just cashflow the heck out of it? I don't want to be in single family rentals personally, but it's my home. And again, I could sell it and get, you know, millions of dollars in cash and all that. But then, then again, I'm like, okay, now what do I do with that? I'd rather actually house the, my equity and use the, use the debt to cash out, cash out, cash out and harvest that money along the way. Um, and by the way, that's tax-free so it's, tax-free think about that. Like, we did a calculation on this money on the example I gave you the tax-free like Ross, Ross. And I were like, okay, so what was capital gain? And what's this and what are all the fees and all that kind of stuff. If we sold it, the net was actually close. You know, by the time we did a cash out refi and, and you know, in that, but, uh, tax-free because guys you're, it's, um, it's a cash out refi and you don't pay tax on debt, you owe it. So that's why it's, tax-free Danille: Definitely, definitely. And if you guys are watching, make sure you hit the like button. I would like to try to get it over a hundred. That is our goal. So hit that like button. Ken McElroy: Those are the five lessons. Hope you guys liked them. Um, we noodle over these, uh, all weekend Danille: And now we're going to move into our premium questions. But before we do that, don't forget to sign up for the wholesaling webinar. Wholesaling's a great way to get started, especially if you don't have any money down or you're a good sales person. So Ken macra.com forward slash webinar, it is next week. A lot of great information, the guy we have coming in to teach it, that's all he does. He's built his whole business around wholesaling. So you will learn a lot of great stuff and I'll be hosting it. So, all right. So our first premium question is actually coming from Nate. He's watching live on Facebook. He said, Hey guys, um, if I'm in an area that there's a lot of apartment development going on, how is that affecting the value of the surrounding? Ken McElroy: Yeah, good point. Yeah. Um, became, it can be negative. Let's just be honest. Uh, you know, they have this word called NIMBY, not in my backyard, you know, uh, you know, when you, when, when you're looking at a home purchase, let's say, uh, there's zoning, typically an overlay on a zoning map that says, this is a single family. This is commercial. This is multi-family, this is industrial as example. This is going to be a park. So it's all zoned in all, figure it out. So as you're buying, you need to make, take a look at the, you know, what's your properties adjacent to now, if they're class a really nice properties, because they're brand new, which they probably are because you can't build anything cheap today and land is expensive. Um, it might actually be a benefit. It's hard to say. It depends on the value of your home, but there are markets, um, that, you know, that, uh, where the homes are very expensive, like Plano, Texas, which I'm in or Scottsdale Arizona, which obviously I live in where if an apartment complex got built right next to us, you know, uh, a very expensive home then of course, I think you're right. Ken McElroy: Uh, but in some cases, if it's a, if it's an area like, like the, uh, Tempe, Arizona, uh, which is near Arizona state, you got a lot of homes that are built in the sixties and seventies there. Well, if a brand new apartment property is built right next to it, it probably helps it. Yeah. So it just depends on, on, on where it is, but Danille: Yep, definitely. And, uh, Matt, to answer your question, who's the wholesale guy we're bringing on. It's Matt Kemp from deal machine it's his whole business is wholesaling. So Matt camp. All right. So next question. Our next premium question comes from Kevin. He, this is a good one. I've heard that LLC is established in Wyoming, established the, have the best protections. Can I establish an LLC there for properties in another state? Ken McElroy: Okay, Kevin. So, um, this is a legal question, but I'm going to attempt to answer it. So, Danille: Uh, this is not legal advice. Yeah. Ken McElroy: W what are the things that, you know, go to Garrett Sutton, law.com. Um, and for this, the reason why we use Wyoming, believe it or not is because the filing fees are the cheapest in the country. So this has more to do with the expense side of it. So if you take a look at your, your, uh, you know, to, to maintain LLC correctly, there's annual fees that each state charges. And, um, I, I'm not going to just throw a number out, but I know California's like among the highest in New York are among the highest Wyoming is at least was one of the lowest, the LLC document itself actually is generated by an attorney. So, you know, the contents of what's in the LLC between the, the, uh, the, uh, the limited partners and the general partner, or, you know, um, or the managing partner and the, um, the limited, uh, let's see, uh, member managed, I'm trying to remember all I'm going, I've got all this stuff. Ken McElroy: GPLP, um, the, the, those, th that document that can sail from any state to state. So you can use the legal language from a document it's in, in Nevada, uh, in Wyoming or Arizona and Wyoming. So that's a little bit different, the operating agreement and the partnership structure and all that. That's a little bit different. Um, you know, and that's, um, uh, you got to dig deep into the operating agreement, which is really important by the way, guys, that's actually just something I thought of, if, if you just set up an LLC and you have a partnership that operating agreement is very important, guys, it talks about cash calls, and it talks about waterfalls, which is how the money comes out, uh, what those look like. It talks about the voting rights. And so there's some things that do come up and they've come up a lot in my company and my partnerships. So if you D if you've just set up an LLC, that next step of having a partnership agreement or an operating agreement is important. Danille: I do think there's a little stronger protection in Wyoming. Actually. I was actually just talking to Maricio about this this morning, and he's our, um, he's our advisor for the premium members. He's our attorney. Ken McElroy: Why don't we shoot them this question? Yeah, that'd Danille: Be great. We'll answer that. Okay. Ken McElroy: Yeah. So we, as you guys know, we brought on a couple advisors because of these kinds of questions that, you know, be careful, you know, when you asked me for legal advice. So that's why I brought a licensed attorney, a syndicated, uh, syndication attorney. Uh, he's actually a licensed, um, um, uh, Maricio Ronald, um, and Eric Freeman, uh, are for tax advice. So those are, this is a great question to send to them. And we'll, we'll what we'll do is we'll post this on our forum, which by the way, we're making live soon, December 1st. Danille: So Nick from premium wanted to know what is your suggestion. If you're looking to purchase a whole, like a five unit complex, but it only has three electric meters. So he said, it's very expensive to move that to five, but how do you work it if one person? Ken McElroy: Great question. Yeah. So this is a really ex uh, great question. Uh, first of all, I, what's interesting is there was only five, so I would wonder what, you know, what the history is, you know, cause normally, um, um, you know, you would have five, but, uh, or one, so three is interesting, but regardless of that, um, you might want to dig into that by the way. So, but, um, you're right. The last thing you don't need to do that. So when we buy a property, that's, let's just say it's master metered. Let's say there's a 300 unit building that's master meter, and this is what this master. So these would be properties that are built in the 60 seventies, eighties. And we would normally not buy these personally, but a master meter property means exactly what this means. It means that there's one meter that regulates all heat and air and all that stuff. Uh, what literally one electric meter for the whole project. This is the way it used to be. Uh, there also used to be master boilers and master chillers and all that kind of stuff. So hot water heat. So you, you, you guys, you hopefully you've run over, uh, projects that say, um, you know, electric, heat, water, all included. Danille: I've lived in one of those in college. It was, uh, it horrible actually, because, well, because I like my temperature around like 74 and it ran right around 68 and you really couldn't control the heat or the air. Ken McElroy: This is like, because the landlord is like that difference between 78 or 68 and 74 is a lot of money. So it's controlled by the landlord. So, but here's the way around it. There's a, uh, the industry started embracing this scheme called rubs resident utility billing. So, um, what you would do is you take the cost of the electric, whatever it is, let's just say it's a $500 a month and you divide it by five and when they rent it, you put it in the lease. You say your rent is X plus $100 in electric. So you make it part of, um, and then that way you don't have to break the electric meter up. Uh, essentially you just take whatever the meter is and you charge that back to the resident each and every month we do that with trash sewer, water electric. So, so we pass all utilities back and we don't actually care if they're individually metered. And so that's a great way to get around that and, and allocate that back. So you're still going to pay the expense. It's still gonna show up on your financial as an expense for electric, but you'll also have an offsetting income line item to cover it. Um, and also you want to set that up, uh, so that you're not making profit from it. So you just want to pass that cost through and just write it into the lease that way. Danille: Definitely. So next question is from Mia from premium. So she is wondering, should she refinance and pull cash out for her next purchase or she should, or should she do a hilar against one of her properties? So basically she's debating between a hilar and a cash out refi. Ken McElroy: Yeah. So I don't, it does the cost of the debt is what you look Danille: Well, he likes her usually I'm only 10 year and they're typically adjustable. Ken McElroy: So there you go. Yeah. So it depends on the terms of, of, of the, the money. Uh, and you know, if, if you have a, an opportunity to, um, do a hilar on something that you own, that's cash flowing, you might want to take a look at a refinance of sentimental Keylock. Yeah. But, um, it depends, you know, there's, uh, the, what we don't know are the terms and, and the interest rates and the leverage and all that kind of stuff. So I always tell people, just do what you're comfortable with and may, you know, if you have a property that's vacant all the time and you're having a heck of a time filling it, then you probably want to avoid it. Danille: Yeah. Well, and, and also, you know, you always say you don't want to be in adjustable rate debt right now because it's going to move now, if this is something that you're going to pay off in the next Ken McElroy: Well, yeah. So you did this, right? Didn't you do? I Danille: Use me, my HELOCs for my down payments. So I like to use my, HELOCs for, um, to put a down payment knowing though that I'm going to then refinance it into a loan. Ken McElroy: You did it for less than a year, right? Danille: Oh yeah. Just for a few months. Ken McElroy: Yeah. So, so what you did, if I remember as you put a HELOC on something to get the loan cash right away and be able to execute on something else, Danille: I was basically a cash Ken McElroy: Buyer, and then you move toward a refinance to pay off the HELOC. Correct. Danille: You just need to make sure that you'll be able to get that refinance because they definitely, it was a lot harder than I thought, and it did work out great, but it, you know, they are going to ask a lot of additional questions of you on this one. Yep. Ken McElroy: Yep. It's a good question though. Danille: Yes, definitely. Well, and then the bad part about the refi is now you're sitting on all this cash and you might not buy something right away. So now you're paying interest on money. That's just sitting in your account. Ken McElroy: That's too bad. So you got tax-free income and you're upset while Danille: You're paying. Ken McElroy: I'm just saying, what about the cap? What about a capital gain? Like that's actually worse actually not having a place where, you know, scooping all that equity and sitting on it. Fair fair. Danille: Um, okay. So destined from premium wants to know they have over 50% equity in their house. Um, so basically they want to know, should they sell their house now while they have equity in it or they, should they wait? And then, you know, home prices may drop. Ken McElroy: Yeah. I don't know where you live. I kind of set my house over here as something I don't mess around with. So first of all, I don't, you know, to do real estate deals to actually buy anything. You don't actually need your own money. Most people want their own money, but the truth is it's actually about the next deal. So if you want to you, if you want to, um, uh, well, first thing is I like 50% debt on home personally. Um, I don't like to push it much beyond that, but if you were to do that, then you would want a spot for that money. Right. So, so w so I built my house. I've actually had it for 15 years and I love it. But what I've done is I built it with like a 2.5% construction loan, which rolled into a perm. Ken McElroy: And then of course it went up in value. And so what I did was I just been harvesting, but I've always kept, um, I only owed like 800 grand on my house and I just keep a little bit on there and it's worth, you know, several million dollars. And I just kind of have that there. Um, I could pull a million bucks out of that, but I don't want to, you know, because then the question is, unless I need it, let's say, let's say hit the fan and I needed it. Then I would use the house for stuff, but, but I would never do it unless I could buy something that, um, you know, it was intentional. And because I have so much going on in my, um, in my business itself, I don't, but, uh, the, the, the issue would be what are you going to do with the money and why, you know, cause your payment's going to go on. Danille: Well, I think what people are trying to do is they're trying to sell their house cash out the equity and then rebuy the house or a different house when the market goes down. And I actually had friends that tried to do this back in probably around 16. So they bought their house at a really good deal in 2011, and then they sold it in 16 because they wanted to cash out on that money and then bank what they had. And they were going to wait for the market to go down well, so then they rented for four years and finally in 20, they had to buy another house and it was even higher. So they would have been so much better off just staying in the house that they were originally at, but they felt like they were at the height of the market. So when you guys are trying to sell your house now, because you think the market's peaking, which it may or may not be in your area. And then, you know, with the government intervention, you know, we keep thinking of the market's going to crack, but the government keeps interfering. So it might not crash for five more years. And then you're going to be screwed out of all that equity and also have to go buy in at a higher cost if you can afford to. Ken McElroy: Yeah. Th th here's one strategy though, that you could employ, and that is, and people have, are doing this right now. If you're in California and you're moving to Arizona, everything's a deal, you know, they're selling, you know, a million and a half, $2 million home, which is, you know, you can buy this amazing home in Arizona. So that's not a bad strategy if you're moving laterally over somewhere and you're getting more home for less than not a bad idea. But if you're trying to come into the, your existing sub market, then it might not be to your point, a good idea. So, but people are doing that right now as they relocate, uh, go to the rural areas and they're buying bigger land, you know, kind of getting out of the city based on w w what a lot of people have went through. So the migration is very interesting right now to, to watch, but if you're in the Northeast or California, let's say, or even Seattle area things are a bargain pretty much Danille: Definitely. And if you are downsizing, that's a good point. You know, that's great. If you have a big house and you're moving to a, you know, you move into a condo, then yeah. It's the right time to sell because you're going to cash out that money. Yeah. Ken McElroy: My sister did that. They had a big home, they raised their family in, and it's like a five bedroom home with a lot of land. And it was just her and her husband. And so she sold it like in the last six months and, uh, moved to a different area completely and bought just actually a much smaller home, but a lot of land and in an area with a nice view and all that. And it was a lot less. So, you know, so she got to put her some cash in her pocket and, uh, you know, obviously still has a home that she wants to, but I always, this is a general rule. I don't like to mess around with my primary residence. It's I don't use it as a bank, as a ATM. Yup. Danille: And Matt brought up a good point. He said, you know, even if you do and you wait and prices go down, you're probably going to have a higher interest rate, which might not make it. So Ken McElroy: Yeah, interest rates are, that is a factor too. Danille: So Scott from premium wanted to know he owns an 18 unit apartment complex, um, with a loan for 1.4, 4% with a 30 year payment. Well, the, we subject to change in three and a half years, I guess, is kind of long. Um, he spoke to the bank and they're willing to refi the loan at four and a half percent for 15 years. Would this be a good way to proceed? Uh, considering that we may have some future rate rate increases? Ken McElroy: Well, a lot of stuff in there, but, but, uh, I give me Danille: A recap before you, cause it was kinda like, no, I got it. Ken McElroy: Okay. So I think, um, first of all, 4% is not bad and I can't say it now. So there you go, 4% not bad. So if you can keep it at 4%, um, and that payment works and your cashflow and like Danille: Crazy, but it's only for three and a half years, three Ken McElroy: And a half years. No, that I would not. I thought, I thought you said 15 years. Danille: Nope. That's what he wants to move it to four and a half percent for 15 years. So basically up a half a percent to lock it up, Ken McElroy: I would shop around, um, I don't know, you know, we don't know where rates are going to be in three and a half years. And that's really your issue. Your issue is, is, uh, interest rate risk. So, um, shop around nobody, nobody cares. Um, you know, uh, where you get your money from, hopefully you don't care. It does not matter trust, Danille: But you definitely don't want to be in an adjustable three year alone. Ken McElroy: Oh no, you want to be fixed and hedge. You know, I think four is a little high for 18 units. So four and a half is certainly too high. Okay. The other thing you want to look at it or your points, you know, what are you paying for that? A lender is charging you maybe a point or two points or something like that. So that's all negotiable. I would go out. Uh, we w we kind of beat that, that lesson up earlier on, you know, shop, shop the loan around. Danille: Definitely. And Michael has a good point. He said, don't try to time the market. It's better to set aside some amount for buying opportunities. And I think that's great. You guys stopped trying to time the market. You're not flippers. You may win, but if you lose, you're probably going to lose pretty hard. Ken McElroy: It's happened to me guys, you know, but what saved me was cashflow period. It literally saved my butt in, uh, 2005 in Austin, Texas, and Austin, Texas is arguably one of the hottest markets in the country, but I bought there and all of a sudden the market went down and what saved me was a full property. Danille: Yep. Definitely. All right, guys. Well, that is going to wrap for today. Make sure you join the wholesale webinar at KenMcElroy.com/webinar. I will be hosting it. It will be very informative. It's free. Also hit the like button. Ken McElroy: Now we'd like to get to one 50, see if we can get 11 more people to do it. Thanks guys. I appreciate it as always. You're the best.