Join Jason Hartman and MC Company Principal and Co-Partner, as well as the Real Estate Adviser of Robert Kiyosaki, Ken McElroy, in this insightful discussion about real estate investing, inflation, and the effect of today’s economy on the rental markets. Both Ken and Jason learned the power of leverage to hedge against inflation, and in this episode, they share their combined knowledge with the listeners. Ken feels that investing in real estate and watching the dollar, mortgage rates, and inflation are lifelong endeavors and it’s important to stay on top of those things. He also shares why he prefers apartments over residential investments, expressing it allows greater control over the financial outcome of the asset.

Ken talks about the pent up demand of Gen Y’ers, who currently are forced to live at home due to scarcity of jobs, but who will eventually flow into the rental market if and when jobs are created and the economy begins to improve. Jason and Ken also share their similar knowledge regarding macro- and micro-markets, the importance of researching job markets, employment rates, population, schools, etc. “At the end of the day, it’s all about demographics,” Ken says.

Ken McElroy has over 20 years of experience in multifamily asset/property management, development, project/construction management, investment analysis, acquisitions and dispositions, business development, and client relations. With his years of experience and knowledge, Ken has a unique property management perspective. Ken authored the best-selling book, The ABCs of Real Estate Investing; The Advanced Guide to Real Estate Investing; The ABC’s of Property Management; and his most recent book, The Sleeping Giant. Ken, as the Real Estate Advisor to The Rich Dad Company, has also co-authored with Robert Kiyosaki several audio programs, including “How to Increase the Income from Your Real Estate Investments;” “How to Get Your Banker to Say ‘Yes!’;” and “How to Find and Keep Good Tenants.” Ken is a chapter contributor in the newly released The Real Book of Real Estate.

Ken is also a gifted speaker and has inspired audiences all over the world with appearances for several PBS specials and leading industry events. He hosts WS Radio’s weekly Entrepreneur Magazine’s Real Estate Radio program, interviewing experts in real estate, financial and legal arenas. Ken’s passion to educate others make these programs a favorite among listeners. Ken held several board positions, including President of Entrepreneurs’ Organization Arizona within Entrepreneurs’ Organization and Arizona’s Chapter of Entrepreneurs’ Organization, and is still an active member. He is active in the community and has served on advisory boards for Child Help and AZ Food Banks, where he conducted the largest food drive in the state of Arizona.

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ANNOUNCER: Welcome to Creating Wealth with Jason Hartman! During this program Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing: fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it! And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.

JASON HARTMAN: Welcome to the Creating Wealth Show! This is Jason Hartman, your host, and this is episode #236. So, we’ve got a great show for you today. We’ve got Ken McElroy; you probably know who that is, and one of our clients, Garry, mentioned him when I met with him in St. Louis. And I know you like Ken McElroy, so here he is for you. We had this show originally posted in the members section, but decided to bring it out and publish it with many requests as a fully published show. So, I think you’ll enjoy that today. And before we get to Ken, who is right here in my local Scottsdale area, in Scottsdale, Arizona—I’m actually meeting him for breakfast next week—and I think you’ll like his story about how he’s created a lot of wealth, and a lot of value, for himself and a lot of other people in his investments in apartment buildings. So we’ll get to that here in just a few minutes.

Couple of things here. Couple of interesting news items that I thought would tickle your fancy, before we get into it. One was a story from Yahoo Finance, and this has been going on, really, the subject in this article, for years now. I’ve definitely been noticing it for at least a good four, maybe five years. But it continues to happen, and it’s another way that we see that our dollar is being debased and debased and debased, and again, when following our plan, in terms of investing with long-term fixed rate debt, and investing in packaged commodities—in other words, the materials that go into construction of houses and apartments. You can put yourself in a very good position from all of this.

So anyway. The article, entitled: Looking For Inflation? It’s Hiding In Smaller Packaged Sizes. Good things may come in small packages, but they certainly aren’t good deals. Here’s how your favorite grocery store items are shrinking before your very eyes. And this article’s from Money Talks News. Len Penzo is the author. And it says, inflation—what inflation? The fact is, for those who are willing to look close enough, we’re actually being confronted by a serious bout of deflation. Well, not really. Hang on a second. At least when it comes to the size of containers sitting on supermarket shelves. With prices continuing to rise in the face of a depressed economic climate, manufacturers continue to find themselves caught in a classic dilemma: either raise prices and risk losing customers, or stave off price increase by shrinking the size of their packaging ever so slightly.

Anybody care to guess which option the company brass most often decides to take when faced with the need to make this kind of lose-lose decision? The evidence is all around you. Although I can’t prove it, I suspect the majority of manufacturers ultimately decide that a little deception is worth it if it means they can hold back the dreaded price increases. A recent article on this topic in the New York Times provides plenty of circumstantial evidence. For example, chicken of the sea tuna now comes in 5 oz cans, as opposed to the traditional 6 oz containers. Doritos, Fritos, and Tostitos reduced the quantity of chips in their bags by 20%. Tropicana recently dropped the size of their orange juice carton from 64 to 59 oz. Now you know, folks, that one’s kind of interesting. Because 64 oz is exactly half a gallon. A gallon is 128 oz. So, now they get all these odd package sizes. I mean, how confusing?

And then the last one he cites here just on this page—the article goes on and on, but I’ll just finish with this. Nabisco’s Premium Saltines and Honey Maid Grahams have new packaging with 15% fewer crackers. So, in case anyone doesn’t believe inflation is upon us, I highly encourage you to consider that article, and so many other examples all around us. But again, that’s good for us as investors, following the plan we outline on the Creating Wealth Show. Because we benefit dramatically from that.

Okay. Diana Olick from CNBC had an interesting commentary lately in one of her stories, and I’ll just share a little bit of it with you. She says, I’m not sure if it’s that usual New Year’s Eve optimism evoked by the general philosophy that the grass is always greener on the other side of the calendar year, or perhaps the emotional need to dig ourselves out of what has surely been one of the most lugubrious periods in the US economy, but there is some hope in housing. A few positive readings in home sales and housing stats recently, topped off by today’s 7.4% monthly jump in contracts to buy existing homes are fueling what I daresay is a spark, albeit not a fire. They’re also managing to trump what particularly opposing reading in home prices comes from the number crunchers at the S&P Case-Shiller this week. And you know, folks, as I’ve said so many times, the Case-Shiller Index—75% of the measly 5% of the market that they index—only 20 out of about 400 markets—about 5%. 75% of those markets aren’t worth considering. So again, it’s just—that’s so annoying, the way our news media works in this country, because it is just so darn deceiving. But you know what? Let’s be thankful they’re deceiving the masses, because that leaves more opportunity for the rest of us who are in the know, in the inner circle. That was my commentary, by the way, obviously.

She goes on to say, then there’s a big story in the Wall Street Journal of hedge funds putting their money back into housing, suggesting that while the numbers aren’t all there for a big win, these fund are usually ahead of big market shifts, so a housing surge must be on its way. Well, at least that’s what they must think, right? I’ve spoken to some of these hedge fund types as well, and they seem to be—now, listen to this, folks—playing on the surging rental market, for now. Playing on the surging rental market for now. Getting the bargains, but now expecting any big “flipping” returns soon. Bottom line, whether it’s due to even lower prices, historically low mortgage rates, falling inventory, and a better tone in the labor market, or a combination of all, the housing market is showing signs of stabilizing. So, that is pretty interesting, folks. There are some bright signs out there, but you know what? We don’t necessarily need bright signs to make money in this market, because there are so many ways to exploit the multi-dimensional nature of income property, and that is a wonderful thing.

Last thing, before we get to Ken—well, couple last things. I’ve got one more little newsletter tidbit I want to share with you, but I appreciated all the comments I got from the last show I did with Ranting Andy, where we talked about Wall Street and the abject, complete scam that it is. But also, that I did the introduction for that show, the monologue portion, on the airplane. Yes, the first time. I guess the Creating Wealth Show has now joined the Mile High Club, and there’s a first for everything. So, that was kind of odd, to do it on an airplane, but, you know, maybe we’ll do that again sometime soon.

But the last one, skyrocketing student loan debt will delay homeownership. And this is from John Burns Consulting. I’ve talked about him, we had him on the show. His newsletters have some great information. They’re really designed for the industry, for homebuilders. Not really applicable to us necessarily, or directly, but there are some here and there that are very, very applicable to us, and this is one of them. So, in the newsletter, it goes on to say, skyrocketing student loan debt will delay homeownership. Student loan debt now totals $865 billion. Folks, that’s almost a trillion dollars, with a ‘t,’ remember. $865 billion, which is greater than all credit card debt outstanding, as well as all other types of household debt, except for mortgages.

If you listen to my Holistic Survival Show at all, I gotta tell you. And if you’re thinking of sending your kids to college, or an expensive college, I hate to say this, because I’m a huge believer in education—I consider myself to be a very self-educated person, just interested in being a lifelong learner. I love to read, I love to go to seminars and listen to audio programs, and just, always learning—I consider that to be just a wonderfully enriching and stimulating lifelong endeavor, learning. But, college has become a bit of a rip off. You’ve just gotta admit. And the interesting thing about it, the conspiratorial side of this that I have discussed on the Holistic Survival Show—and if you want to know a little bit about it, there’s an interesting little mini-documentary, you can find it on YouTube, called The College Conspiracy, and it just talks about how college tuitions have just gone through the roof. And largely, this is due to the government financing college educations. And the scary part about it is that student loan debt is not dischargeable in bankruptcy. So it is a way to have economic slavery, or indentured servitude. So, that’s my take on the college thing.

One of my employees comes to me every once in a while and says, you know, I think I should go back to college, and all of this kind of stuff. And I feel like maybe I kind of missed out by not finishing college, etcetera, etcetera. And I say, look. If it were 1980 or 1985, or 1990, I would definitely say yes. In that era, and before that—absolutely finish college! But you know, nowadays, I don’t know. I think the economics have changed so much. And the job market has changed so much. I’m not sure I’m as much a believer in higher education as I used to be, especially at the prices. If it was reasonably priced—I mean, look. My mother went to—she graduated from Berkeley, and she was towards the top of her class, and when she did it, she worked her way through college. I mean, you really could do it back then, because college was reasonably priced in the old days, okay? But now, it has just become so outrageously expensive. Maybe instead of spending $200,000 to send your kid to college, maybe you should take that $200,000 and buy them a couple of little income properties! As long as they’re smart, and interested in learning, and being self-educated, and making learning a lifelong process that no one has to twist their arm to do—that they’re interested in and engaged in—and I’ll be the first to admit, most people aren’t like that. I feel fortunate that I’m like that, and I know all of our listeners are probably like that, but most people aren’t that way. But if you have a kid that is that way, just check out the College Conspiracy—that’s an interesting video. I had those people on the show, the creators of that, talking about it. And there’s a real case to consider some different options nowadays, in today’s economy.

But anyway, back to the article that I was talking about, about student loan debt. So, what’s interesting here—the connection here for us as investors, is that this is going to massively delay homeownership. So let me go on here a little bit, and I’ll talk to you about it. First of all, there’s a chart that looks at student loan default, and how default rates are rising. And again, not dischargeable in bankruptcy. So, why is that so significant? What do I mean when I keep saying that? That means that you can never get out of it. Student loan debt has to be repaid. It is a lifelong debt obligation, whereas one of the things America is very tolerant about, and I’d say it’s a good thing—it keeps our economy more vibrant than in many other countries—is, it’s very tolerant in this country about giving people a second chance. If you take a risk, or fall in hard times, you can declare bankruptcy. And you can start over. And granted, I know some people declare bankruptcy like it’s a business plan, and I personally know people who do that. I know famous people who do that. And many real estate gurus do that. And I don’t think that is an ethical thing to do—declare bankruptcy every seven years, or ten years, or whatever that rule is for it. Certainly not. But if someone genuinely needs to get a fresh start in life, that’s one of the great things that you can do in America, is you can start over. And a lot of these people that go though hard times, or make mistakes, they can do BK, and they can start fresh, and they become big successes the second time around, and contribute a whole lot to the economy, pay a lot of taxes, employ a lot of people. So, there’s definitely something to be said for the fact that in the US, you can get a second chance. Again, I’ve never done that; I’ve never needed to, thank God. But it’s always there if someone needs to. But not with student loan debt! That is not dischargeable.

So, going on here. Student loans are going to be yet another hurdle for the housing market to overcome. Now, the interesting thing about that, is when you say housing market—and this is my commentary—what do they mean by housing market? They mean the purchase market. But for landlords, this is actually very good for the rental market, and I’ll show you why in just a moment. That chart that I was talking about, about student loan default rates? In 2005, 4.6%. In 2009, 8.8%. So you can see how they have dramatically jumped over just a few short years. The article goes on to say, today’s 36.8% homeownership rate for 25-29 year olds is at its lowest level since 1999. And homeownership for 30-34 year olds is at its lowest rate in 17 years. Now, that—this is my commentary. That demographic is like the holy grail of housing demographic, okay? That is an extremely important part of the housing market, because that represents young people that are coming into their household formation years, their years where they’re setting up a household, getting married, and going into debt, and spending a lot of money, and stimulating the economy, okay?

So, the article, going on to say, the good news is that this pent-up demand will ultimately provide a much-needed boost to the housing sector. The bad news is that the boost is heavily skewed to the rental market. Did you hear that? The bad news is that this boost will be heavily skewed to the rental market, as it will take longer than ever for young people to qualify for a mortgage, especially if more and more graduates are hit with credit blemishes for unpaid student loan debt. So you know what, folks? That represents a whole bunch of new renters that we need to serve as investors, that we need to help, that we need to provide rental housing for.

Article goes on to say, to help struggling graduates, the Obama administration recently announced a program to help those with student debt reduce their payments down to 10% of their income. However, with student loans at 10% of income, how will these people be able to qualify for a home? Now, going on here, there’s one more chart. And this chart—if this chart doesn’t tell it, I don’t know what does. It’s a chart entitled “total renter households.” Total renter households. So, in 2000, there were 33 million renter households, according to this. In 2005, five years later, here were just a slight increase, 33.9 million renter households. But, look at this. from 2005 to 2010, 3.8 million additional renter households, bringing the number up to 37.7 million. Now, if you think that’s significant, watch what happens from 2010 to 2015, okay? Only three years from now, this number will have played out. And of course, it’s their projection, but we’re two years into it already, at 2012, right? They think that the number of renter households will increase by—get this—9.1 million. A 9.1 million increase. This is a dramatic increase, to 46.8 million renter households. It says, all of these analyses contributes to our belief that the lion’s share of the housing sector demand will end up in the rental market. Look at tremendous growth that we expect in rentals in comparison to the last decade. Wow.

Well, that’s what this show is about today, with Ken McElroy. And I tell you, the future for us an investors, folks—it couldn’t be brighter. Because as long as we’re buying in the right markets, where we’re buying below the cost of replacement or construction, and if we’re able to finance, we’re even more fortunate, because think about it. If you take out a mortgage today, you’re not gonna make the last payment on that mortgage until 2042. Three decades from now. 30 years from now. Can you imagine how much inflation there will be between now and then? Can you imagine how the world is going to change between now and then? Can you imagine the increases in population? Can you imagine the reduction in homeownership rates, as more people damage their credit? As more people have student loan debt to overcome? As more people fall on hard times? As more people get foreclosed on? As more people cycle back from the homeownership market into the rental market. What if Fannie Mae and Freddie Mac are put out of business, like they should be? What is that going to do to the renter population? Remember—approximately every 1% drop in the homeownership rate equals 1 million new renters.

And at our Meet the Masters event, I think it was three sessions ago, three Meet the Masters events ago, we did a presentation, six years, six million new homeowners, saying that that was a conservative number. We think the rate could be as high as 25 million new renters. So, six years, six million new renters—hey. That would be a phenomenal opportunity for us investors. But what if—what if—we get 25 million new renters? Can you imagine the upward pressure that’ll put on rental prices? And the upward pressure it will put on commodities prices, and construction materials? I mean, my gosh. Can you imagine the price of lumber? Or wall board? Of glass? Of steel? Of concrete? Of all the ingredients for a house? Of copper wire? Petroleum products? I mean, energy to build houses—it is unbelievable what that will do. And now we have the opportunity to buy at half the cost of these materials. We can get them for half price today, in many, many markets, we can get the land thrown in for free, we can finance them for 30 years—for three decades—at the lowest mortgage rates in about—give or take, with a few exceptions here and there, maybe—five decades. Unbelievable opportunity.

You want to hear more about that opportunity? Be sure you join us for our Meet the Masters event. We’ve been a little slow in planning this one, so, we will probably do that—and we just had another person sign up today—we will probably do that in mid-March, and we will announce the exact date real soon. And then we will probably do it again, our second one, a little bit earlier this year. And we’ll probably do that one in Southern California. Maybe in August, September. So you can just kind of have your calendar planned for that. Many, many people come to every Meet the Masters event, and we always appreciate seeing you again. If you haven’t been to this event, be sure to register. Go to www.jasonhartman.com. Tickets are heavily discounted for early birds, so take advantage of that. It’s kind of like buying your income properties for half the cost of construction. Our heavily discounted Meet the Masters ticket prices. So, www.jasonhartman.com, register for that.

And also, take a look at some of the phenomenal properties we have in the properties section. We’ve been doing a booming business in so many markets now. Atlanta is hot, St. Louis is hot, Dallas is hot, Phoenix, too—I mean, they’re all good. But just, business being quite strong now, and something you definitely want to take advantage of. It’s a great feeling, because nobody has to talk anybody into investing in income property nowadays. The people who are in the know—they know it’s a good deal. As long as you’re not doing it in expensive cities in California, or the northeast, or Chicagoland, or areas like that that just don’t make any sense. They really never did. So, that’s not what we’re talking about.

Okay! We will be back with Robert Kiyosaki Rich Dad author Ken McElroy here, to talk about his investment career, which is pretty darn amazing, and we’ll be back with that in just a moment.

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ANNOUNCER: Are you interested in a property outside of our network? Do you need a second opinion? No problem! Let Jason’s experts evaluate the deal. For more information, go to www.jasonhartman.com now.

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JASON HARTMAN: My pleasure to welcome Ken McElroy to the show! You’ve probably heard his name. He’s a very well known investor and author. He’s written four books now, three of them in the Rich Dad series with Robert Kiyosaki, and he is responsible for having purchased over $300 million in real estate, in just the past two years. But he’s got over 20 years of senior level experience in multi-family property management, development, construction, disposition, analysis, acquisitions, and business development. So, quite a resume. And you may have read Ken’s books. He’s a great speaker. He’s inspired audiences from around the world. He’s been on PBS. And just a whole bunch of things. Very widely known name. Probably doesn’t need much more of an introduction. But from Scottsdale, Arizona, Ken McElroy, how are you today?

KEN MCELROY: Jason, how are you? Thank you for the nice introduction.

JASON HARTMAN: Well, my pleasure. I’m a big fan. Been following your work for many years. And I was just giving myself a little refresher in preparation for our interview today, and in reading the ABCs of Real Estate Investing, and the Advanced Guide to Real Estate Investing—Ken, one of the things you talked about in there that I think is so appropriate is how you were reading Money Magazine a few years back, and how they compare stocks to income property. And just how misleading, really, the traditional media is out there. I’m not sure if you remember what you wrote, actually, because it was quite a few years back. But what are your thoughts on that?

KEN MCELROY: Yeah. Well, it’s a great question. I think, Jason, like you, and many people that I know and talk to, I think it’s all very confusing. You know? And I’m no different. I’ll walk up to a bookstore at the airport, or wherever, and I’ll grab a magazine that talks about something way different than I’m in, just because I want to learn a little bit about it. And that’s exactly what happened in this particular case. I was—I picked up the issue of Money Magazine at the time, and it was—it basically was comparing stocks and real estate, and of course I didn’t know what it was going to say, and I just read it on the plane. And I just, knowing both, I just really felt like it was really slanted, and I got a little bit angry, because I think a lot of people read some of these things, and you know, it just adds to the who do you trust category, and it just pissed me off. And I just—so I started to break it down, and I happened to be writing a book at the time. And I put it in the book. Then what I did is I actually went to Money Magazine, and I told them I was interested in advertising, and I had them send me the advertising rate card, and then I went back in and I looked and I counted up all the financial services ads in that particular magazine, and I think it totaled over $3 million for that issue. And I’m not a conspiracy guy, but it was just frustrating that it was all slanted towards stocks. Because I felt like that’s who their client was.

JASON HARTMAN: Right, right. Well, I think it’d be hard to say that $3 million wouldn’t influence any of us. It’s just really sad. I mean, fortunately, so many people in America, and around the world, are finally waking up to the fact that Wall Street isn’t gonna do it for you. Wall Street is nothing more than a distribution system for mediocre to lousy assets, in my opinion. There’s really only two ways to do it, Ken. You know, if people want to be financially free, they’ve got to invest in income property, and/or, they’ve got to have their own business. And even if they don’t have their own business as a primary source of income, I say they should at least have their own side business so they can get some additional tax deductions, if nothing else. But income property is the most tax-favored asset in America, bar none, with depreciation and so forth. It’s just phenomenal. Then you talk about the ten advantages, and maybe—maybe you can share just a couple of those great ten advantages of income property, and especially multi-family apartments, with our listeners today.

KEN MCELROY: Well, as you can imagine, the world was in a little bit of a different spot. My first book I wrote was in ’04, and just to give you a little background, I’ve been buying real estate and [unintelligible] real estate really since I was in college or university. And I happened to be out raising capital, just like so many of us do; they find something and they get educated. And I ran into Robert Kiyosaki, and I honestly did not know about Rich Dad Poor Dad. I did not know his philosophy or anything like that. But I did know that my tenants could pay off my mortgage, you know what I mean? On the stuff that I had. So we were aligned in that way when we were introduced by mutual friends. And I had not planned on even writing a book, and as my English teacher would probably also say. I just—it was never something that I thought I would do. But what I did, I realized, I had all this stuff in me from the things I had learned, and the mistakes I had made. And then what I realized is, I had this crazy really neat opportunity to manage for people for 10 years.

So, I had an opportunity to meet all these high net worth people that were buying all these properties all over, particularly up in the northwest and Nevada and Arizona and California. And I got to understand how to run them. I got to understand that you have to increase the income, and you have to reduce the expenses, and it has to cover its mortgage to be able to develop cash flow. And I built these phenomenal relationships during that period of time. And that was really the baseline for me to be able to go out and do it myself. So then, what I did was, I first bought a condo, a two bedroom, two bath condo that cash flowed. It didn’t cash flow very much, but it cash flowed. And then I just started getting bigger properties. I got a duplex, and then a fourplex, and then an eightplex, and then eventually, now we buy these large projects. And so, the advantages that I have learned, really, Jason, from the beginning, have changed. I realized that, especially now, with the dollar kind of dropping, and inflation pending, if I can—I never understood the power of leverage until say 5, 6, 7 years ago. I initially thought it was just all about real estate and cash flow. And I realize, now, how powerful a vehicle this is, the hedge inflation, and you know, what’s better than buying something and having a tenant pay it off for you? You know what I mean?

JASON HARTMAN: Yeah. Nothing’s better. But also the fact that you pay—or I should say, your tenant repays your debt in depreciated dollars. So that’s a phenomenal opportunity there. And that, I think really Ken, is the hidden wealth creator that made so many people so wealthy over the last couple of decades. Most people think that real estate went up in value, and it did, but in real dollars, it’s kind of debatable how much it did. But the debt was just destroyed by inflation, and that’s just the phenomenal hidden thing that most people just don’t get.

KEN MCELROY: It’s true. And you know, when I first started buying properties, you know, and management is so important. And you know, making sure the income goes up, and the expenses are in line, and all that is so, so incredibly important. And I started raising equity, you know, and making sure my investor’s capital was preserved, and that people, you know, that had their confidence in us, were getting returns in cash flow back out, because ultimately, that’s why you do this, and that’s why you raise equity, for those purposes. And I think why Robert and I were aligned is because he’s always been a cash flow guy. Always, and as opposed to a capital gains guy. And I’ve never really felt comfortable with trying to say, I’m gonna buy something at one price, and hopefully it goes up, and I can sell it at a higher price, and that’s how I’m gonna make it. To me, that’s just—a lot of it is just timing and luck. So I always felt like, if I can manage something really well, and keep it full, and it cash flowed based on that, then that was a much more controllable way to make my investors money. And so that’s kind of the philosophy that we’ve adopted at our company for the last 15 years.

JASON HARTMAN: Yeah, no question about it, cash flow is a pretty reliable thing. It’s not perfectly reliable. Nothing is. But it’s pretty reliable. But capital gains, that’s luck. I mean, you just can’t rely on capital gains. And I see so many people out there, Ken, who are constantly chasing the end of the rainbow, waiting for their ship to come in. Kind of the dreamers, they think it’s gonna be one big payoff. But it’s not really one big payoff, is it? It’s the ongoing result of just good, sound investments that produce income. Right?

KEN MCELROY: Yeah. And not to mention the fact that now I’m—now I’ve been in the business long enough. I actually challenge that whole retirement philosophy, period. I know person after person after person that goes and they get that brass ring at the end of the whatever they’re told their retirement age is. But if they don’t have any kind of purpose, or any kind of, something that drives them day to day to day, they kind of wither on the vine anyway. And so, for me, this is a lifelong lesson. I’m investing people’s money, I’m trying to learn markets, I’m studying demographics, and movements of interest rates, and the Euro, and the dollar, and all that stuff’s interrelated, and inflation, and all that stuff is very fascinating. And you know, for whatever reason, I never took to it in school. I didn’t get it then. But now I do, and now I’m handling other people’s money, and my own money, and managing these assets. It’s important, I think, that you stay on top of these things, and watch them as they continue to change.

JASON HARTMAN: Sure. Definitely is. The demographics right now are pretty exciting out there. We’ve got Generation Y—that’s the largest demographic cohort in American history, just slightly larger than the Baby Boomers by about 4 million—and a lot of them are living at home a lot longer than before. Part of that’s probably due to the economy. But, demographics are looking pretty good for rental housing now, aren’t they?

KEN MCELROY: Yeah. You know, it’s funny that you’re talking about that now. Of course, rental housing’s all I’ve been involved in really since I was in college. And I’ve watched the different cycles. And each time credit becomes really cheap, and rentals, or residential housing, or residential construction, gets really, really active, then it pulls people out of rentals. You always see the signs, if you lived here you could be home by now. And why rent when you can buy, and all that stuff. Well, that’s normal, and that’s gonna happen again, and each time it swings the other way, it favors rentals. And right now, Jason, we’re starting to see—under the Bush administration, the homeownership went all the way up to almost 69%, which is the highest it’s ever been. And it’s coming back down.

Right now I think it’s around 66, and they’re saying it could get as low as 64-63. The year over year average has been 66. And whatever happens, it’s gonna retract back. Well, every one point is a million renters that kind of get forced back into the rental housing. So, that’s an interesting statistic that I think we all have to keep in mind. And it’s gonna be different in each individual submarket, and every—demographics, as you mentioned, are going to drive this. One of the things that happens in the Gen Y sector is, these kids, because they don’t have—I mean, you know, and I know, the last thing you want to do is live at home, you know what I mean? And you know, but they don’t have any choice, at the moment. They don’t have any income, there’s no real jobs, even the kids coming out of college don’t have jobs.

So, they default back. Thank God they have that option to default back. But now, the highest number of kids living at home ever recorded—22 million—are sitting there. When and if we get jobs, those kids will come back into the work force, and they’ll move into rental housing. So you have that kind of pent up demand. Then you have, on the other side, you have all these folks that bought homes with zero down, or 10% down, and they have all these mortgage resets. Well, as those mortgages get reset, or as they lose their houses and they decide that they’re just so far underwater, they’re coming back into rental housing, a lot of them. Because why would you have a mortgage so significantly higher than a comparable house that you can rent for much lower? So, now when I talk about rental housing, I’m not talking about apartments. I’m talking about houses, I’m talking about condos, I’m talking about town homes, I’m talking about everything, really. So, we really are having this huge resurgence back into the rental market. And there really is no end in sight for probably three or four years. You know, just to eat up some of the supply, and it’s very, very exciting times, if you own property. And you’re on the landlord side of the equation.

JASON HARTMAN: Yeah. No question about it. All of those people will find a way to somehow, if they’re in a house that’s underwater, that the payment just doesn’t make sense anymore, they’re gonna find a way to get out of it. They’re gonna short sale, they’re gonna try loan modification; that’s pretty difficult to do most of the time. But they’re gonna get out of that property. And many of them have damaged their credit. And some of them have done it with strategic defaults, where they’ve been living in their house for a year for free, they saved up all that money. And maybe that’s the reason consumer spending was so good this holiday season, I don’t know. I always kind of wonder that. But they’re gonna go out, and they’re gonna recycle into the rental market. And they’re just gonna be another customer for us landlords, aren’t they?

KEN MCELROY: They are. And I’ll tell you what, Jason. We have 8000 units now, so I have well over 10,000 tenants, between Arizona and Texas. So, I’m really on the ground. I get to see the occupancy, the issues that happen day to day, the rentals, the move outs, day to day. All our projects. And I’m telling you, and I’ve of course been in the business a long time, and been very involved in multiple organizations that all have to do with multi-family as an investment, or rental housing of some sort. And my peers are all experiencing higher occupancy, higher income, and better credit from the renter. And I think that the only thing that’s going to offset that is additional supply. And that’s not coming any time soon, because of the financing.

JASON HARTMAN: Right, and building is almost completely caput. I mean, there’s hardly any building going on at all. So yeah, you’re absolutely right. It’s a phenomenal time to be moving into the real estate investment, landlording side of the business. The dairy farmer side, as Robert Kiyosaki puts it. Not the cattle rancher, where you’re planning to flip. But you buy and hold good properties, and milk them like a dairy farmer milks a cow. What are some of the reasons that you like apartments so much, versus office buildings and retail properties? I just never was very interested in those properties, and I think they’re incredibly complex, incredibly capital intensive, and management intensive. Housing, housing, housing, if you ask me. I think you agree. What are your thoughts?

KEN MCELROY: That’s a great question. I have some very good friends in all of those sectors, and one of the things that I like about apartments is—well, first of all, why I like the larger ones is, what I learned as managing the smaller properties, even though that’s where I got all my experience, and I would definitely recommend it to anybody, is that they’re tougher to manage without a staff. So, you know, like the other one, at some point I got the call, the move out, and I needed to paint the interior, the toilet was overflowing, or the tenant next door, all that stuff. So I dealt with all those calls. But once I got to—I realized that once you get to some of these larger projects, then it actually supports a staff. And it’s actually better from a customer service standpoint, number one. But it’s also better from my standpoint, where I don’t have to actually have those phone calls come in, because they kind of get handled right then.

Like if somebody has an issue on the maintenance side, they go down to the office and there’s somebody there. They’re handling it right then. And so those don’t always filter up to the office. And so that’s why we ended up going to the larger projects. With respect to the comparison between residential or office or industrial, etcetera, I personally like the fact that housing—I just felt like it was such a basic staple, and retail, and office, was not as necessary as apartments. So, to me, it just seemed like it satisfied more of the masses. Like, from a retail standpoint, you were always subject to the actual tenant in that particular space, whether it’s a pet store, a flower store, a tux shop, or whatever, you were always kind of reliant on the independent skills or the location of that particular personality that could run their place. And with apartments, where if it was priced right, and it was a great location, and it was clean, and it was managed well, and there was great customer service, then I could kind of manipulate and control my own income by occupancy and putting really good staff in there. So for me, it was again, just really a lot closer to being able to control the financial outcome of the asset.

JASON HARTMAN: And with apartments, one of the things I’m trying to do with my own portfolio, and I hope the listeners are too, is, you start with the single family homes, you move up, you move up, and you get more and more units, you do bigger projects. And isn’t it about 70 units and over, Ken, where you can get that good onsite management? Usually the property will support it with about 70 units?

KEN MCELROY: Yeah, that’s about right. I think you could, with a 70 unit property you can actually have two people. And you know, depending on the rents, and the expenses, and where it is, and all that. But generally, a 70 unit property will support two people. And I think that, again, if you have a vacancy, and you have somebody there, you’re not placing an ad, you’re not driving over there and meeting somebody. You actually have somebody physically there. So sometimes the vacancy gap, and the maintenance issues, and the customer service issues—all that’s gets tightened up. And you know, which all boils into resident retention, and we try to keep our residents, our tenants, for the long term. And we have entire programs based around resident retention to try and keep people there, and keep them happy. Because generally people move from rental to rental. Especially today. And if they’re moving out, I want to know why, and what did we do right, or what did we do wrong. And that’s part of the whole business piece.

JASON HARTMAN: Sure it is, yeah. And to your point where you’re talking about comparing these different sectors—you know, industrial property, retail property, office space, to apartment buildings or houses—housing is a requirement. It’s a basic human need. Food, clothing, and shelter. Can—I look at the macro trend of it, too. You mentioned some of the micro trends, and I’m sure you’ve thought of these. But they can outsource the manufacturing to China. They can outsource the call centers to India, lessening the need for office space. Or the Philippines. The factories go to China, lessening the need for industrial properties. Outsourced shopping, to some extent, to the Internet, and what do you have? You’ve got Fortune 1000 companies telling their employees to work out of the house. Because look at, from a company’s perspective, all the problems that just disappear when employees work virtually. They’re not at an office, so they’re not subject to office politics so much, or wasting time around the water cooler, or sexual harassment lawsuits, or OSHA requirements, or all these crazy things that you’ve gotta do as an employer when you put people together in an office space. And you can really see, you know, why companies are doing that! And all of this lessens the need for every other sector. Yet at the same time, it increases the need for housing, because our population is still increasing, even now with this economy in the United States, isn’t it?

KEN MCELROY: Yeah, you’re absolutely right. Those are all really, really good points. I—you know, I am very concerned about all those things you just said. And I know the way everybody’s buying, especially this season, they’re buying off of Amazon, they’re getting things delivered, they’re not going out and battling like they were, and all that translates into less retail, and particularly less office. And yeah, I don’t know where all that’s going to go. But what I do know is from a demographic standpoint, we have this big demand right now with renters from the things we mentioned before, and we don’t have the supply offset. And we, just as a country, we need 250,000 units delivered annually, just to keep up with demand and population growth. We’ve been delivering 50, 75, 100,000 units over the last three years. We’re significantly below supply. And that’s not even counting the people that are actually falling out, back into the rental market. So, it is really—I do want to be cautious about one thing though, Jason, and that is, not every market is treated the same.

JASON HARTMAN: No question. That’s the next question I wanted to cover. You know, you’ve got a chapter, the next top 10 markets to watch. And I couldn’t agree more that all real estate is local, isn’t it Ken?

KEN MCELROY: Yeah. It is. You know, you really, really gotta be careful. As I travel around with Robert and we’re now raising money in Canada, and in South America, and Mexico, and you know, we’re investing people’s money from all over the world. And it’s funny, because these people have all been duped in one case or another by buying single families for 30, 40 grand in certain areas, or a $500 home in Detroit.

JASON HARTMAN: Those are crappy. Those just don’t work.

KEN MCELROY: They are! And so, from the outside looking in, I totally get it.

JASON HARTMAN: It seems like a great deal! It’s like a free house! Why wouldn’t you take it? But responsibility comes with that, doesn’t it?

KEN MCELROY: Yeah, it’s true. So, what we do is the same thing that you do. We take a real macro view of where are the jobs, where’s the population, what areas are overbuilt, what areas are undersupplied, what’s happening with employers, where are they moving, and that’s all part of real estate. If you can be ahead of that curve, and try to buy in areas—for example, this year, I bought 1500 apartments in San Antonio alone. And the reason I bought there is because the largest employer for San Antonio is healthcare, and I believe, based on what we talked about a little bit ago with this demographic, is these Baby Boomers, and we haven’t really talked a lot about these folks—they’re going to be looking for, I think, places where they can afford to live, and have healthcare, in climates that are nice. And San Antonio jumps right out, and all the Texas markets, for that particular reason. So, we bought in the area around the Texas Medical Center, and USAA Insurance, and kind of in the northeast, north central, northeast section of San Antonio for that very very reason. We don’t want to buy properties that aren’t gonna have tenants.

JASON HARTMAN: Let me take a brief pause; we’ll be back in just a minute.

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JASON HARTMAN: Well, you generally like Arizona and Texas quite a bit, don’t you? You know, I completely know what you mean. When you look at Michigan—I mean, Michigan is a disaster and a half. The population is decreasing, Detroit, the population’s been cut in half in the last couple of decades. While everything else, practically, is growing. I mean, it’s completely opposite the trend. And big government, unions, have just pushed businesses out. They’ve just gotten rid of them. I mean, am I right in saying, really, Arizona and Texas are your two main interests?

KEN MCELROY: Well, we’re actually tracking Seattle, Portland, Salt Lake City, all the major markets in Texas, you know, we like obviously Southern California, and some areas of Northern California.

JASON HARTMAN: Now, let me ask you about that, if I can. You said, obviously Southern California, as if I should take that for granted.

KEN MCELROY: Sure.

JASON HARTMAN: That was interesting. See, I think California, almost the whole state, has a pretty difficult RV ratio, rent-to-value ratio, doesn’t it? I mean, it’s great, the Irvine Company’s obviously doing great there, but their basis is so low. The Irvine Company, they got that land for nothing, forever ago! But everybody else, the prices you have to pay in Southern California, compared to the rents you get—I mean, I know that market is tight. I know that. I know that apartments are, the occupancy’s high. But they’re expensive to buy. What are your thoughts?

KEN MCELROY: No question. Everything you said is correct. My good friend is the president of Irvine Company. And if I understand where they came from, and how that worked, and that was years and year and years in the making. But what I mean by Southern California and even parts of Northern California is, again, I’m looking at population and employment growth, just purely because of the area. And one of the things that I like about some of those particular markets is that in order to start something new—the ability to add supply in those markets is so, so difficult.

JASON HARTMAN: Right, and that’s pretty much because of government and environmentalists, and—it is. It’s very difficult to add supply. It’s interesting you bring that point up. I was talking with—and this was about a year ago, but I’ll just never forget, it’s one of those conversations I just won’t forget. It was a manufacturer of—we were looking at self-storage facilities. And so, they manufacture these self-storage facilities, which are basically like, you can assemble a self-storage facility in a week. If you have a piece of land, and it’s all approved, you can come out there and just put these buildings up. They’re all like modular, and they’re really easy to do. And he was saying that they did a project, I think it was in Missouri, and they did it in four days, they built the whole thing. And they did one in Northern California, like the Napa area, the wine country area—it took four years! Because they had to have environmental impact reports, studies, there was some little bug they had to worry about, and it’s just—this is why I can’t stand California. But I get where you’re coming from on the constrained supply.

KEN MCELROY: Yeah, but I tell you, you bring up a great point. I have a very good friend that has 40,000 mini storage units in Nevada. He’s the largest mini storage owner, self-storage owner, and I was just with him last week, actually, up in Las Vegas. We went to the ASU-Boise State game up there, and we were talking, and essentially, he said, you know, it’s funny. There’s a lot of people jumping into my business right now. But at the end of the day, it’s still all about demographics. And we were talking about a piece that over here in Arizona, which is directly across from the Arizona stadium, the Phoenix stadium here, where the Cardinals play. And he was saying, what do you think about that area, and we were talking in through, and his demographics, the ones he looks at, are so far different than mine. And he said, I’d rather be in the middle of a neighborhood with these kinds of demographics, and this household income. And so, the point is, he’s been in the business for 20 years. He has his particular model on things that are successful or not that successful, and I think ultimately, that’s what we’re talking about here. It’s not just go out and try something somewhere; there’s so much more to it. Because if you can’t fill it, it’s not gonna work!

JASON HARTMAN: And I think that’s a very key thing that you just mentioned, Ken. Everybody has their model. They have sort of the things they like. I mean, I’ve got a buddy, Chris, and he’s been investing for years. He’s done very well. But you know, his model, it’s just—I don’t know. I just don’t really agree with it that much! And he does well with his stuff. I do well with my stuff. And it’s just different. You can slice and dice different segments of the market, different specialties. There isn’t only one right way to do it. So yeah, no question about that.

KEN MCELROY: People see things differently. The custom home builder looks at something one way, the single family production guy another way, the condo guy another way. you know, the apartment guy, the retail guy, then you got high end custom, low end custom—everybody—everything’s just a little bit different, you know? And I think the key to this business is understanding your particular niche. What we do is, just apartments. And everything that drives it is employment, population growth, and trends.

JASON HARTMAN: Yeah. Well, any other things that you want to mention, in terms of the next top ten markets? Or employment trends, or anything like that? I mean, that’s obviously a great topic, and everybody wants to know the future.

KEN MCELROY: Yeah. Well, I think, actually, what I’m most concerned about is inflation. So, if you study—one of the guys that I saw that you had on your show was Richard Duncan. Richard and I are friends. I’ve read his books; I think he’s phenomenal. As you know, he was with the IMF, and he lives in Thailand, so he has a very objective view of what’s happening here. And he taught me a lot about trade imbalance, and all those things. And again, that’s part of the reason I like to travel around with Robert—because I meet some of these folks that add a little bit to what I thought I knew. And just kind of fine-tunes it all. So one of the things I’m most concerned about is the fact that we’re so underwater as a country, and we have to print all this money to pay our bills, essentially. And I do believe that that’s gonna translate into inflation. And what that’s important is because if you’re saving money in the bank, which is what everybody’s been doing—they’ve been putting a lot of money in the bank—then that money is gonna buy less later.

That’s what inflation does to it. So, I’m not advocating real estate, I’m not advocating gold or silver or anything else. But what I’m saying is, you need to understand that if inflation comes, the money that you have in your bank account is gonna be worth less. So, the thing to do is to get educated, and to figure out, what can I put that money into, that potentially is inflation hedged? In other words, what goes up with inflation? If you just Google that, you’ll be fine. You know what I mean? And just start to look for things. What should I put my money in that rises with inflation? And you know…and so, to me, Jason, I think that’s our biggest issue. You know, so what I’ve been doing in my asset class, is I’ve been buying as many apartments as I can, and I’ve been putting fixed rate debt on. So, I don’t have any floating loans, and I don’t have any recourse loans, which means that all my loans are non-recourse, which means I don’t personally guarantee anything. So, the rates that we’ve been locking at have been like 4.3, 4.4, 4.5, 10 year money. And at some point, if rates go up, which they’re projected to do at some point, and the rates are 6 or 7, let’s say, which they’ve been in the past, all of a sudden, my assets become very important to future investors, because I’m gonna have—my properties are assumable. So, people can step into my shoes. They can buy my property with a 4½% loan on it. All of a sudden, that’s a few million dollars worth of value to the next guy.

JASON HARTMAN: Oh, no question about it. People should look at that like a bond, almost, Ken. Think about it: when you have a bond, and it’s paying a certain rate of return, just always put oneself on the other side of the equation. If you buy a bond, and it pays x percent, and then the future bonds come out, and they pay a lower percentage, your bond has become more valuable! It’s the same with your income property! If the rates are higher, so the future landlord or investor needs to come along and pay a higher rate, then that mortgage, that debt you have, becomes an asset, and not a liability. And also, that’s usually in sync with an inflationary environment, where you pay the debt back—or, really, your tenants, because you outsource your debt with income property. Your tenants pay your debt back for you, in ever cheaper dollars. So, you win, really, two ways already. But then there’s the third way, because what you really own, when you own single family homes or apartment buildings or fourplexes, is you own a bunch of commodities! A bunch of construction materials! As long as they’re in low land value areas. Because those construction materials have always been a great hedge against inflation. Concrete, lumber, copper wire, petroleum products that are involved in building the house or the apartment building—all those materials, those tend to hedge very well against inflation, don’t they?

KEN MCELROY: You’re exactly right on. You know, and you asked me about the markets. What we’re studying is, which markets are progressive, and why. And so, what do I think’s gonna grow? I think university and education always grows in recessions. Always. Because if kids are still in school and there’s no jobs, they keep going to school.

JASON HARTMAN: Might as well stay in school, get a Master’s degree!

KEN MCELROY: I know! It’s crazy, but it’s true. And healthcare, and anything related to pharmaceuticals, or medical. So, if you just follow the very, very—you step back from everything, and you say, okay, what’s happening? We have a new group coming in, the Gen Ys, and we have the Baby Boomers kind of moving out, and you just know that those two groups have certain trends happening to them. And you just follow it, and you try to be in front of it. That’s all I’m trying to do. Energy being another one. Which is why I like Dallas, Texas—the oil and gas, natural gas, and wind—they’re very progressive. And we’re in Houston, we’re in Austin, we’re in San Antonio, we’re in Ft. Worth. So I’m in all those markets. And each one’s different. Completely different.

JASON HARTMAN: Yeah, they sure are, they sure are. Well, Ken, this has been fascinating. Anything else—I’m just looking at one of your books here, and they’re all great. But anything else you want to tell us, just to kind of start wrapping up here, about the purchase process, or equity and financing? I mean, obviously leverage is the holy grail of income property. Assembling a great management team, anything like that? Any of those?

KEN MCELROY: Sure. Well, I’ll tell you what. I think that we have about a year and a half to two year window to be able to take advantage of these low interest rates. So, I think you’re gonna have a one year time frame to, well, before the presidential election, to take advantage of borrowing. So whatever you’re doing, whether it’s business or real estate or whatever it is, I think you need to take a look at using leverage. Because these rates are so low, and you can borrow at such cheap dollars right now. And my latest book, The Sleeping Giant, which is about entrepreneurship and creating businesses—I know you and I spoke about this a little, Jason—I really believe that the normal jobs, if you have that 9-5 job, it’s gonna be very, very difficult for people to keep up with inflation. And it’s gonna be very, very difficult to keep up with their savings eroded from the dollar. And they’re gonna have to have some kind of supplemental stream of income. It’s like you said, part time, full time, real estate business, or something. They’re gonna have to do that, just to stay ahead.

JASON HARTMAN: They definitely are, they definitely are. And that’s good advice. To get oneself on the right side of the equation, as inflation hits, and put inflation on your side! Because it’s coming. And Ken, you mention inflation being such a big concern. Everybody I have on the show, I ask them this question, and nobody knows the answer of course. It’s a prediction. But, how much inflation, and when? Any thoughts? I mean, are we looking at 20% a year? 100% a year? Or is it just 15%, which is totally mild, historically? What do you think there?

KEN MCELROY: Well, again, it’s all—I’m gonna have a very simliar answer, I guess, from some of your other guests. But I think that the reported inflation that we’ve been getting, and what really is happening, is different. So, in other words, we’ve been reporting, let’s just say 4. I think it’s actually been upwards of 8. There’s all kinds of websites that kind of support that, based on the basket of goods that they use. But, essentially, I had an opportunity to talk to some people that invest at a very, very high level, and more on the economist side of things, and here’s why they say we don’t have inflation yet. They say, the first stage of a recession, people start to save. So, all the money that’s in circulation in the economy, all the money that’s been printed, and all that stuff, is actually in people’s bank accounts. And if you notice, that’s why banks are now saying they’re charging you to open an account, right? It’s the exact opposite of what it used to be.

JASON HARTMAN: Right, you used to get a toaster.

KEN MCELROY: Right. Now they’re charging you. So, there’s a lot of money in the system. And you won’t actually see inflation hit until people start to feel comfortable, and start to feel like there’s some stability on the employment side of things, and the economy’s kind of settled out a little bit. And so, once they start to feel that, Jason, then they’re gonna start spending again. And when that money starts to enter the system, that’s when we’ll start to see inflation. So in other words, the money’s out there, it’s parked, as you can see, if you look at savings rates. But when it starts to come back into the economy, we’ll start to see inflation hit. And at that point, I think it’s going to be fairly significant. It’ll be interesting to see what they report. But my guess is it’s gonna be between 6 and 8 percent.

JASON HARTMAN: Yeah. And, so, the Consumer Price Index, obviously, totally understates it. Anybody that looks at www.shadowstats.com, or just looks at their bills, you know—they go the grocery store, pay utility bills, they realize inflation is much higher than that. So, we all know that’s a bogus measure, no question about it. But when that inflation genie gets out of the bottle, Ken, it’s hard to put it back in and contain it. everybody’s gotta follow Ken’s advice, and position yourself for it, because it is coming, and to some extent it’s already here. Ken McElroy, give out your website again, if you would?

KEN MCELROY: Sure. It’s www.kenmcelroy.com.

JASON HARTMAN: Alright. Well Ken, thank you so much for joining us today. Great insights. Keep up the good work out there. And keep acquiring more units!

KEN MCELROY: Thanks, Jason. Great chatting with you. Appreciate being on your show.

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ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Platinum Properties Investor Network, Inc. exclusively.

Transcribed by David

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