To start this Flashback Friday episode, Jason Hartman shares news items from Yahoo Finance, Money Talks News, and New York Times. Afterward, he is joined by Ken McElroy, the Real Estate Adviser of Robert Kiyosaki and Principal and Co-Partner of MC Company. They talk about real estate investing, inflation, and the effect of today’s economy on the rental markets. They also share information about micro and macro markets and the importance of watching the dollar, mortgage rates, and inflation.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:12
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. here’s your host, Jason Hartman with the complete solution for real estate Date investors.
Jason Hartman 1:02
Welcome to the creating wealth show. This is Jason Hartman your host. 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, Gary mentioned them when I met with him in St. Louis, and I know you like Ken McElroy. So here he is for you. We had the show originally posted in the members section, but decided to bring it out and publish it with many requests. It has 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. A couple of things here a couple of interesting news items that I thought would 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 of this article for years now. I’ve definitely We’ve 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 package 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 is 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. While 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 or reason article on this topic in the New York Times provides plenty of circumstantial evidence. For example, chicken of the sea tuna now comes in five ounce cans. As opposed to the traditional six ounce containers, Doritos, Fritos, and Tostitos, reduce the quantity of chips in their bags, by 20%. Tropicana recently dropped the size of their orange juice carton, from 64 to 59 ounces. Now, you know, folks, that one’s kind of interesting because 64 ounces is exactly half a gallon, a gallon is 128 ounces. 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. And this goes premium saltines and honey made grams 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.
Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday.
Jason Hartman 5:04
Okay, Diana olek, from CNBC had an interesting commentary lately and 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 generic 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 luxurious periods in the US economy. But there is some hope and housing a few positive readings and 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 dare say is a spark, albeit not a fire. They are also managing to Trump. What particularly opposing reading in home prices comes from the number crunchers that 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, I 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 funds 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 kind of listen to this folks playing on the surging rental market for now playing on the surging rental market for now getting the bargains, but not expecting any big quote flipping unquote 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 the wonderful thing. Last thing before we get to Ken Manuel, a couple last things I got one more little newsletter tidbit I want to share with you but I appreciate it all the comments I got from the last show I did with rain. Andy, where we talked about Wall Street and the abject complete scam that it is, but also the fact 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 and you know, 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 some here and there that are very, very applicable to us and this is one of them. So in the newsletter goes on to say skyrocketing student loan debt will delay homeownership student loan debt now totals 860 $5 billion folks, that’s almost a trillion dollars worth it. To remember 860 $5 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 it all I gotta tell you, if you’re thinking of sending your kids to college or an expensive college, I hate to say this because I’m I am 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 you’ve just got to 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. It’s called the college conspiracy, and it just talks about it. How college tuitions have just gone through the roof. And largely This is due to the government financing college education. 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, you know, I feel like maybe I kind of missed out by not finishing college, etc, etc. And I say, look, if it were 1980 or 1985, or 1990, I would definitely say yes, in that era, and before that, absolutely finished 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 and I’m not sure I’m as much of 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 you know, she was toward 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 is 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, and making learning a lifelong process that they’re there. No one has to twist their arm to do that they’re interested in and engaged in. And you know, I’ll be the first to admit, most people aren’t like that. Okay, 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 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 life long 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 you fall on 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 10 years or whatever the 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 through 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 I’m in the US.
You can, you can you can get a second chance. Again, I’ve never done that. I’ve never needed to thank God but you Always there if 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 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%. Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday. 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 or 25 to 29 year olds. is at its lowest level since 1999. And homeownership for 30 to 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 don’t want 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 in 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. There were just a slight increase 33 point 9 million renter households. But look at this from 2005 to 2010 3.8 million additional renter households bringing the number up to 37 point 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 you know, 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 point 8 million renter households. It says all of these analysis contributes to our belief that the lion’s share of the housing sector demand will ended 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 as investors, folks, it couldn’t be brighter. Because as long as we’re buying in the right markets, we’re we’re buying below the cost of replacement construction. And if we’re able to finance were even more fortunate, because think about it. If you take out a mortgage today, you’re not going to make the last payment on that mortgage into 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 overcome as more people fall on hard times as more people get foreclosed on, as more people cycled back from the homeownership market into the rental market, what is 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 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, 6 million new homeowners saying that that was a conservative number. We think that rate could be as high as 25 million new renters. So six years, 6 million new renters. Hey, that would be a phenomenal opportunity for us investors.
Jason Hartman 19:56
But what if, what if we get 25 million new renters Can you Imagine the upward pressure that we’ll put on rental prices and the upward pressure it will put on commodities prices on construction materials. I mean, my gosh, can you imagine the price of lumber of wallboard 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. Okay, 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. You know 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 plan 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 Jason hartman.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 are heavily discounted meet the Masters ticket prices. So Jason Arbon comm register for that, and also take a look at some of the phenomenal properties we have in the property section. We’ve been doing a booming business in so many markets now Atlanta is hot. St. Louis is hot. Dallas is hot. Phoenix two, 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 for 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 Chicago land 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.
Announcer 22:44
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Jason Hartman 23:01
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 multifamily 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. It’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 23:48
Jason, how are you? Thank you for the nice introduction.
Jason Hartman 23:51
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 24:26
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, 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 was I picked up the the issue of Money Magazine at the at the time and it was it basically was covered. In 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 as because I think a lot of people read read some of these things and, and, you know, it just adds to the hoody utrust category, it just pissed me off. And I just started to break it down. And you know, I happened to be writing a book at the time and I put it in the book, and I use that what I did is I actually went to Money Magazine, and I told him I was interested in advertising. And I had him send me the 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 total somewhere over $3 million for that issue. And I I’m not a conspiracy guy, but I was just frustrating that it was all slanted towards stocks because I felt like that, you know, that’s who they’re claiming it was.
Jason Hartman 26:00
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 going to do it for you. Wall Street is nothing more than a distribution system for mediocre to lousy assets. In my opinion. There’s there’s really only two ways to do it can 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 10 advantages and maybe, maybe you can share just a couple of those great 10 advantages of, of income property, and especially multifamily apartments with our listeners today?
Ken McElroy 27:02
Well, as you can imagine the world was in a little bit different spot. My first book I wrote was in oh four. And just to give you a little background, I’ve been buying real estate and vanishing real estate really since since I was in college or university. And I happen to be out raising capital, just like so many of us do, will 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, you 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 this stuff that I had. So we were aligned in that way when we were introduced by a mutual friend, and I had not planned on even writing a book. And it’s my English teacher would probably also say, I just, it was never something that I thought I would do, but when I did, I realized I had all this stuff in me from the things I had learned. mistakes I had made. And I what I what I realized is, you know, I had this crazy, really neat opportunity to be able 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 in Nevada and Arizona and California, and I got to understand how to run them I got to understand, you know, that you have to increase the income and you have to reduce the expenses and, you know, have to have 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 can afford it and cashflow very much but it cash flow. And then I just started getting bigger properties. I got to a duplex and then a four Plex and an eight Plex and then I know eventually now we buy these ones. large projects. And so the advantages that I have learned really Jason from the beginning is of change, I realized that the you know, especially now with $1 kind of dropping and inflation pending, if I can, I never understood the power of leverage, you know, so let’s say 567 years ago, when I initially I thought it was just all about real estate and cash flow and I realized now that’s how powerful a vehicle This is to hedge inflation and, and, and you know, what, what’s better than than buying something and having a tenant paying off for you. You know what I mean.
Jason Hartman 29:37
Oh, yeah, nothing, nothing’s better but also the fact that you pay you pay or I should say your tenant repays your debt in depreciated dollars. So that’s that’s a phenomenal opportunity there and that I think really can 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 in it in a did but you in real dollars, it’s kind of debatable how much it did, but the debt was just destroyed by inflation. And that’s, that’s just the phenomenal hidden thing that most people just don’t get.
Ken McElroy 30:10
It’s true. And, you know, when when I first started buying properties, you know, management is so important and you know, and making sure the income goes up and the expenses are in line and, and all that is so, so incredibly important that I started raising equity and, you know, and making sure that my investors capital was preserved and, and that people, you know, that had their confidence in us, you know, we’re getting returns and cash flow back out because ultimately, that’s, that’s why you do this, and that’s why you raise equity, you know, for the for those purposes. And I, I think why Robert and I were aligned is because, you know, he’s always been a cash flow guy, always and, as opposed to capital gains guy and I’ve never, I’ve never really felt comfortable with trying to say, I’m going to buy something at you know, one Price and hopefully it goes up, but I could 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 really timing and luck. And so I always, I always felt like if the man if I could manage something really well and keep it full and it and cashflow based on that, and then that was much more controllable way to make my investors money. And so that’s kind of the philosophy, you know, that we’ve adopted at our company, you know, for the last 15 years.
Jason Hartman 31:30
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 that’s luck. I mean, you just can’t rely on capital gains. And I see so many people out there can who are constantly chasing the end of the rainbow waiting for their ship to come in the 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 it’s the ongoing result of just good sound investments that produce income, right?
Ken McElroy 32:01
Yeah and not to mention the fact that now i’m i’m i’ve been in the business long enough that I actually talent that whole retirement philosophy area you know i i know person after person after person that you know goes in they get that brass ring at the end of it whatever they sold you know their retirement ages and but if they don’t have any kind of purpose or any kind of something that drives them day to day today they kind of wither on the vine anyway. And so for me, this is a lifelong lesson you know, I’m in the I’m investing people’s money, I’m trying to learn markets. You know, I’m studying demographics and movements of interest rates and and the euro and the dollar and all that stuff that are related and inflation and all that stuff is very fascinating. And you know, and I, for whatever reason, I never do it in school. I didn’t get it then but now I do and now I’m handling other people’s money than my own money and managing nobody assets. It’s important. I think that you stay on top of these things and watch them as they continue to change.
Jason Hartman 33:07
Sure. Yeah, 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 33:29
Yeah, you know, it’s funny that you’re talking about that. Now, of course, rental housing, 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. And you know, you always see the signs. If you lived here, you’d be home by now you know, and you know, Rent when you can buy and all that stuff. Well, that’s normal. And that’s going to happen again. And, you know, each time it swings the other way, it favors rentals. And right now, Jason, you know, we’re starting to see, you know, 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 to 63. The the year over year average has been 66. And whatever happens, it’s gonna 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 that I think we all have to keep in mind and it’s going to be different in each individual sub market. And every, you know, demographic, or as you mentioned, are going to drive this one of the things that happens in the Gen Y set. vector is these kids because they don’t have they will. 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 the 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 workforce, and they’ll move into rental housing, so we 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, you know, as those mortgages get reset, or as they lose their houses and they decide that they’re just so far underwater, you know, 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, you can rent for much lower. So now when I talk about real housing, I’m not talking about apartments. I’m talking about houses. I’m talking about condos. I’m talking about townhomes. I’m talking about everything, really. So we really are having this huge resurgence back into the realm market. And if there really is no end in sight, for probably three or four years, you know, just to eat up some of the some of the supply. And, you know, it’s it’s very, very exciting times, if you own property, and you’re in on the landlord side of the equation.
Jason Hartman 36:36
Yeah, no question about it. All of those, 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 going to find a way to get out of it. They’re going to short sale, they’re going to try loan modification. That’s pretty, pretty difficult to do most of the time, but they’re going to 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 always kind of wondered that, but they’re going to go out and they’re going to recycle into the rental market. And they’re, they’re just going to be another customer for us landlords, aren’t they?
Ken McElroy 37:19
They are and I’ll tell you what, Jason you know, we 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 at all our projects. And I’m telling you, and I of course been in the business a long time and I’ve been very involved in multiple organizations and all have to do with multifamily as an investment or rental housing of some sort and, 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 anytime soon because of financing.
Jason Hartman 38:11
Right and then the building is almost completely put I mean there’s hardly any building going on at all. So yeah. You’re you’re absolutely right. I mean it’s a phenomenal time to be moving into the real estate investment landlording side of the business the the dairy farmer side as Robert Kiyosaki puts it, not the not the cattle rancher Where were you planning to flip but where Yeah, you buy and hold good properties and melt them like a dairy farmer milk. So cow.
Jason Hartman 38:37
What are some of the reasons that you like apartments so much, versus office buildings or retail properties? I just never was very interested in those properties. I think they’re incredibly complex, incredibly capital intensive and management, intensive. Housing, housing, housing. If he asked me, I think you agree, what are your thoughts?
Ken McElroy 38:57
That’s a great question. I have very, very good trends in all those sectors. And one of the things that I like about apartments is, 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 there are tougher to manage it without a staff. So you know, like everyone at some point I got the call the move out, and I needed to paint the unit or the, you know, the toilet that was overflowing or the tenant next door and all that stuff. So I feel that 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 after actually have those phone calls come in because it kind of getting handled right then like if somebody has an issue, you know, on a maintenance side, you know, they go down to the office and it’s there. Somebody They’re, 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 into the larger projects with respect to the, the, the comparison between residential or office or industrial etc. I personally like the fact that housing I just felt like it was such a basic staple, and retail and office was was not as necessary as as apartment. So, you know, to me, it just seemed like it, it satisfied more of the masses, like from a retail standpoint, you are always subject to the actual planet in a particular space, whether it’s a pet store, a flower store, a tuck shop or whatever, you know, you were always kind of reliant on the independent skills or the location of that particular person how they could run their place and was apartments were, it was priced right. It was a great location. It was clean and And it was managed well and there was great customer service, then you know, I could kind of manipulate control my own income, you know, by occupancy and you know, putting really good staff in there. And so for me, it was, again just really a lot closer to being able to control the financial outcome of the asset.
Jason Hartman 41:20
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 a 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 can where you can get that good on site management, usually our property will support it with about 70 units.
Ken McElroy 41:40
Yeah, that’s about right. I think you know, you can with a 70 unit property you can actually have two people and you know, depending on the the rents and the expenses and where it is and all that but generally 70 unit property will support to people and I think that you know, again, if you Have a vacancy and you have somebody there, you’re not, you know, you’re not placing an ad and you’re not driving over there and meeting somebody, and you actually have somebody physically there that can, you know, so so sometimes the vacancy gap and all the maintenance issues and the customer service issues, all that gets tightened up, and, you know, what’s all boils down to resident retention and, and, you know, we try to keep our residents, our tenants for the long term, and we have entire programs based around resident retention, to try to keep people there and keep them happy. And because generally people move from rental to rental, especially today. And if we’re if they’re moving out, I want to know why and what you know, what did we do, right, or what did we do wrong? And, you know, that’s, that’s, that’s part of the whole business piece. 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 to houses.
Jason Hartman 42:58
Housing is a requirement. It’s a it’s a basic human need food, clothing and shelter. Can I look at like the macro trend of it too. You mentioned some of the micro trends and I’m sure you 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 property, outsource shopping to some extent to the internet. And what do you have you 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 in 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 got to do as an employer when you put people together in an office space. And you can really see you know, why why companies are doing that and all of this lessons 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 44:13
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 you know, the wave, everybody’s buying this, especially this season, they’re buying off Amazon, they’re getting things delivered, you know, they’re not going out and battling and, you know, like they were and and all that translate it translates into less retail and protect particularly less office. And, yeah, I don’t know where all that’s going to go but but what I do know is, from a demographic standpoint, you know, we have this big demand right now with renters, from the things we mentioned before, and we don’t have the supply off that and we just As a country, we need 250,000 units delivered annually just to keep up with demand and population growth. And we’ve been delivering, you know, 5075 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 that you know, 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 45:34
No question. That’s the next question I wanted. 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 45:46
Yeah, it is you know, you really really got to be careful and you know, as I travel around with Robert and we’re now raising money in Canada and and in, you know, South America and Mexico and and You know, we’re investing people’s money from 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, you know, 3040 grand in certain areas or a $500. You know, home in Detroit, those
Jason Hartman 46:16
Those are no happy. those just today
Ken McElroy 46:18
They are. You know, and so, you know, from the outside looking in, I totally get it.
Jason Hartman 46:23
It seems like a great deal. It seems it’s like a free house. Why wouldn’t you take it? But, but responsibility comes with that, doesn’t it?
Ken McElroy 46:30
Yeah, it’s true. So I, you know, what we do is the same thing that you do is, you know, we take a real macro view of where are the jobs, where’s the population? What areas are overbuilt? What areas are undersupplied? What, what’s happening with employers, where are they moving? And that’s all part of real estate and if you can be ahead of that curve and and try to buy in areas for example we bought this year I bought 1500 apartments in San Antonio alone. And the reason I bought there is because their largest employer for San Antonio is healthcare. And I believe based on you know, what we talked about a little bit ago with this demographic is these baby boomers and we haven’t really talked about a lot about these folks they’re going to be looking for, I think, places where they can afford to live and have health care and and climates that are nice and San Antonio jumps right out of, you know, and all the Texas markets for that particular reason. So, so we bought in the area around the Texas Medical Center and USA insurance and, you know, kind of in the northeast and North Central northeast section of San Antonio for that extreme for that very, very reason. We don’t want to buy properties that that aren’t going to have tenants.
Jason Hartman 47:54
Let me take a brief pause. We’ll be back in just a minute.
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Jason Hartman 48:46
Well, you generally like Arizona and Texas quite a bit, don’t you? You know, I I completely know what you mean. When you look at Michigan. I mean, Michigan is a disaster in a half the population is decreasing. Detroit, the population has 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. But I mean, am I right in saying really Arizona, Texas are your two main interest?
Ken McElroy 49:19
Well, we’re actually tracking a walk Seattle, Portland, Salt Lake City, all the major markets in Texas, you know, we like obviously Southern California and in some areas of Northern California.
Jason Hartman 49:33
Now, let me ask you about that if I can. You said obviously Southern California’s if I should take that for granted? Sure. 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 companies obviously doing great there but their basis is so low, the Irvine company. They got that land from nothing forever ago, but everybody else See the prices you have to pay in me in Southern California compared to the rents you get? I mean, I know the market is tight. I know that I know that apartments are the occupancy is high, but they’re expensive to buy. What are your thoughts?
Ken McElroy 50:12
There’s no question. I mean, all everything that you said is correct. And my good friend is the president of Irvine company. And so I understand where they came from, and how all that worked. And and, you know, and that was a, you know, that was years and years and years in the making. But the, what I mean by Southern California, and even parts of northern California is, you know, again, I’m looking at population and employment growth just purely because of the area. And one of the things that, 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 50:53
Right, and that’s pretty much because of government and environmentalists and idiots 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 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 manufacturer, 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 they did a project in Missouri. And they did it in four days. They built the whole thing. And they did one in in Northern California, like the Napa area in the wine country area took four years, because they had their 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 51:57
Yeah, but I tell you, you bring up a great point. I have a very good friend that has 40,000 Mini storage units and 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 of Phoenix, stadium here where the Cardinals play and he said, Well, what do you think about that area? And and we were talking it through and you know, his demographics and what he looks at are so far different than mine. And he said, you know, I’d rather be in the middle of a neighborhood with, you know, these these kinds of demographics and this household income and, 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 successful. And I think, ultimately, that’s what we’re talking about here is it’s not, it’s not just go out and try something somewhere, there’s so much more to it, you know, because if you can’t feel it, it’s not gonna work.
Jason Hartman 53:12
And I think that’s a very key thing that you just mentioned. Can 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 is 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 53:41
People see things differently. And the custom home builder looks at something one way the single family production guy and other way the condo guy and other way, you know, the apartment guy, the retail guy, you know, then you got high end, custom low end custom, I mean, everybody, everything’s just a little bit different, you know, and I think the key to this Businesses is understanding your particular niche. You know, what we do is, is just apartments and and everything that drives it is employment population growth and, and trends.
Jason Hartman 54:13
Yeah. Well, any other things that you want to mention in terms of the next top 10 markets or employment trends or anything like that? I mean, that’s obviously a great topic, and everybody wants to know the future. Yeah.
Ken McElroy 54:25
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. Mm hmm. Yeah. You know, Richard and I are friends. I’ve read his books. I think he’s phenomenal. You know, 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’s, you know, he taught me a lot about trade imbalance and all the things and, and again, that’s part of the reason why I like to travel around with Robert because I meet Some of these folks who just add a little bit to, you know what I thought I knew, and just kind of fine tunes at all. And, and 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, you know, we have to print all this money to pay our bills, essentially. And I do believe that that’s going to translate into inflation. And why that’s important is because if you’re saving money in the bank, which is what everybody’s been doing, because they’ve been putting a lot of money in the bank, then that money is going to 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 accounts can be worthless. 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, you know, 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. And you know, so what I’ve been doing in my asset classes I’ve been buying as many apartments as I can, and I’ve been putting fixed rate debt on so any I don’t have any floating loans, and I don’t have any recourse loans which means that all my all my loans are non recourse, which means I don’t personally guarantee anything. So the the rates that we’ve been locking at have been like 4.3 4.4 4.5 10 year money. And you know, at some point, if rates go up, which they’re projected to do at some point, and the rates are six or seven, let’s say which they’ve been in the past, all of a sudden, my assets become very important to, you know, future investors, because I’m going to have my properties are assumable. So people can people can step into my issues, they can buy my property with a four and a half percent loan on and all sudden that that’s a few million dollars with the value to the next guy.
Jason Hartman 57:09
Oh. No question about it people should look at that like a bond almost can think about it when you have a bond and it’s paying a certain rate of return, I mean 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 that 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, 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 you win, really two ways already. But then there’s a third way because what you really own when you own single family homes or apartment buildings or for plexes 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 you know, are involved in building the the house or the apartment building all those materials, those tend to hedge very well against inflation, don’t they?
Ken McElroy 58:36
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 is going to grow? I think, I think university education always grows in recessions. Always because, you know, if kids kids are still in school, and they’re still jobs, that you know, they they keep going to school.
Jason Hartman 59:00
Might as well stay in school. Get a master’s degree.
Ken McElroy 59:02
Yeah, I know, I know. It’s crazy, but it’s true. You know, in health care and you know, there’s some math, you know, anything related to pharmaceuticals or medical. So if you just follow, you know, the very, very step back from everything and you say, okay, what’s happening? We have, uh, you know, we have a new group coming in the gen y’s and we have a, you know, the baby boomers kind of moving out and you just know that, you know, those, those, those two groups have certain trends happening to them, and just follow it and just try to be in front of it. That’s all I’m trying to do energy being another one, I think, you know, which is why I like Dallas, Texas, you know, the oil and gas and natural gas and wind and, you know, they’re very progressive and you know, we’re in Houston. We’re in Austin. We’re in we’re in St. San Antonio, we’re in Fort Worth. So I’m in all those markets. And in each one’s different. completely different.
Jason Hartman 59:56
Yeah, yeah, they sure are. They sure are. Well, Ken. This has been fast Fascinating. Anything else? Yeah, 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 is the, the holy grail of income property, assembling a great management team, anything like that any of those?
Ken McElroy 1:00:20
Yeah. Well, I 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 this, these low interest rates. So I think I think you’re gonna have a one year timeframe to, you know, while 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 at using leverage because you know, these rates are so low, and you can borrow it at such cheap dollars right now. And you know, my latest book The Sleeping Giant, which is about entrepreneurship. And creating businesses. I know you and I spoke about this a little bit, Jason, I really believe that, that, you know, the normal job, you know, if you have that nine to five job, it’s gonna be very, very difficult for people to keep up with inflation, and it’s going to be very, very difficult to keep up with their savings eroded from from the dollar. And they’re gonna have to have some kind of supplemental stream of income. And 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 1:01:32
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 put inflation on your side because it’s common. And can you mention inflation being such a big concern? Everybody I have on the show, I asked them this question, and nobody knows the answer. Of course, it’s a prediction, but how much inflation and when any, 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 1:02:04
Well, again, it’s all come, you know, I’m gonna have a very similar answer, I guess, from some of the other guests. But I think that the reported inflation that we wouldn’t getting, and what really is happening is different. So in other words, you know, we’ve been reporting, let’s just say for I think it’s actually been, you know, upwards of eight You know, there’s all kinds of websites that you know, kind of support that based on the basket of goods that you know, that they that they use, but essentially I had an opportunity to talk to some some people you know, that you know, invest at a very, very high level and and you know, more on the economist side of things, and here’s why they say we don’t have inflation yet. He said the first stage of of a recession, people start to save, so all the money that’s in circulation in the economy, all the money that’s Put in all that stuff is actually in people’s bank accounts. And if you’ll 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 1:03:14
Right. You used to get a toaster.
Ken McElroy 1:03:15
Yeah, right. Now they’re charging you. So there’s there’s a lot of money in the system. And though you We won’t actually see inflation yet, until people start to feel comfortable and start to feel like there’s some stability on the employment, you know, on the employment side of things, and the economy’s kind of settled, settled out a little bit. And so once they, once they start to feel that tastes, and then they’re going to 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 is 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 it’ll be interesting to see What they report but my guess is going to be between six and 8%.
Jason Hartman 1:04:04
Yeah. And so the consumer price index obviously totally understates it. Anybody that looks at shadow stats calm or just looks at their bills, you know, they go to the grocery store, pay utility bills, they realize inflation is much higher than that. So we all know that that’s that’s a bogus measure, no question about it. But But when that Genie when that inflation Genie gets out of the bottle can, it’s hard to put it, put it back in and contain it. Everybody’s got to 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 1:04:39
Sure. It’s Ken McElroy comm so it’s ke n. MC el roi.com.
Jason Hartman 1:04:46
All right. 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 1:04:52
Thanks, Jason. Great chatting with you appreciate being on your show.
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