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School of Hard Knocks Podcast
Ken McElroy | From Property Manager to $2B Real Estate Mogul, Cash Flow, Tax Strategy and True Freedom
00:43:29
In this episode of the School of Hard Knocks Podcast, we sit down with Ken McEelroy, a real estate investor who manages over $2 billion in assets and runs a 300-person company in just 90 minutes a week. He shares how he went from property manager to o...
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- [00:00]
James
This is going to be a masterclass on real estate.
- [00:02]
Ken McElroy
Well, I'll try to help however I can.
- [00:03]
Josh
As someone who's managed over $2 billion worth of real estate, you definitely learned a thing or two about taxes.
- [00:09]
Ken McElroy
The reason why I like real estate is the bonus depreciation, the straight line depreciation, those kinds of things are huge because you can actually have huge write offs in that current year.
- [00:19]
Jack
You're 64 now. If you could get 10 years back, but you had to start over again, would you do it?
- [00:24]
Ken McElroy
I would be a millionaire easily in six months, without a doubt. There's no question in my mind.
- [00:29]
James
What would be those three steps to rebuild that billion dollar real estate empire? The blueprint right here?
- [00:33]
Ken McElroy
Sure. Well, the first thing I would do.
- [00:34]
Jack
Is what's the biggest life lesson that you say that you have learned outside of the business world?
- [00:39]
Ken McElroy
When people ask me, what's your definition of success? I always say when my son texts me, that's all that matters. Especially after you get to a certain point.
- [00:46]
James
Ken, if me and you died tomorrow and you had one more guiding principle to leave with the younger generation, what would that be? What's going on, everyone? And welcome back to the School of Hard Knocks podcast. I'm James, I'm here with Jack and Josh, and we have an incredible guest for you all today. We are out in Scottsdale, Arizona with the real estate mogul Ken McElroy. It's great to be here with you today, my friend.
- [01:11]
Ken McElroy
Thanks, man. Thank you very much.
- [01:13]
James
This is going to be a masterclass on real estate.
- [01:15]
Ken McElroy
Well, I'll try to help however I can.
- [01:16]
James
Let's make it happen. You know, for starters, how much real estate, Ken, do you own today?
- [01:21]
Ken McElroy
We own about 2 billion, 10,000 apartments, but we bought 3 billion. But we own 2 right now.
- [01:26]
James
Did young Ken ever think he was going to do that?
- [01:28]
Ken McElroy
Oh, my gosh, no. Of course.
- [01:29]
James
Why not?
- [01:31]
Ken McElroy
Well, I think like everybody, you grow up with a mindset and a bias, you know, based on what you're taught. And you got to punch through those things. And for me, it was a W2 job.
- [01:41]
James
Right. So I want you to take me back to when you were just simply a property manager. What was that exact moment that you realized that real estate was actually going to make you rich instead of other people? Right. You were the property manager making other people rich. What was that fundamental mindset, shift and turning point in your life that made you decide, I'm going to become the owner of these buildings, not just the manager.
- [02:00]
Ken McElroy
Well, my, my, my, my parents Taught me hard work, that I think that was really important. And so I took a job as an apartment manager while I was finished finishing up school, right? And I went to school on a wrestling scholarship. So I was trying to figure out what to do next. And I was, I moved into this property, I fixed it, I leased it up just like I, I would have, right? Because I grew up in construction. I did all the work myself. I was cleaning units, painting units, um, you know, I was renting units. I was doing everything. And, and about a few months later, after I, I stabilized it, I mean, it's pretty common sense. I was like, it's going to be easier if the place is full than vacant, right? I don't. It's less work and it's going to be easier if it's in good condition. So the owner comes in one day and he sits down. And by the way, I'm. I'm putting the money in the bank. So I'm watching the money grow and I'm sitting across and he's thanking me and, and he's talking to me about how I asked him questions just like you do. How much did you buy it for, how much debt you got, you know, all those kinds of things. And I calculated after he left how much it was worth, and it was worth a lot more after I, you know, improve the operations. And I was like, I am on the wrong side of the desk. And that was it for me. I was like, I need to be on that side of the desk. I don't know how I'm going to do it, but I'm going to do it.
- [03:16]
Josh
What did that first step into real estate? You've been a property manager for some time now, but what did that first step into real estate and investing in your own property look like?
- [03:26]
Ken McElroy
So what I did, the first step was actually in property management. I said, okay, what I really need to do is understand how properties work, how ownerships work, how syndications work, how the deals work. Because what happens in property management, in fee property management, is there's all kinds of people out there buying deals and they need good property managers. So it's, it's, there's, there's no shortage of clients. And so first I did that, and I did that for seven or eight years because by that time I had managed hundreds of different kinds of properties and hundreds of different kinds of locations. And you learn a lot because what happens is the ownership. They'll bring you things that don't, don't have any tenants or maybe they're full, or maybe they're half full, or maybe they have expense problems, or maybe they have tenant problems or whatever it is. But you kind of have to go through the grind, right? So I call that my real school, my school of hard knocks, I guess, for real. And then when I finally got through that, what happened is I started to be that guy that everyone would come to to turn around their buildings, which is awesome. And I just started to refine my skill over and over and over. And then when I got to the point where I said, okay, now I need to own these, I started to just look at life a little bit different. Why would I take something from somebody that's broken and fix it for them when I can do that for myself and for my investors? And so that's what I had to do as I moved to that next step.
- [04:50]
Josh
How did you kind of build that credibility early on? Because, you know, especially like that, for that first, you know, investment, even though you have some experience in property management, I'd imagine some of the investors are probably like, well, you've never owned a property yourself, so how did you kind of overcome that?
- [05:05]
Ken McElroy
Yeah, well, it's true. The first one was really, really hard. But, you know, it's interesting, like when you start to return, you know, when you take something broken and fix it, and then investors start to get checks, they're like, oh, this is good, right? This is what we're supposed to get. So it all has to do with those quarterly distributions. If the investors get in the quarterly distribution, they love you, right? If they don't, they don't like you. And so I just had this. I had a history of turning those projects around. And so when I would now see a deal, let's say, to buy, when I first got, I said, okay, I'm going to be on the buy side, I'm going to be on the ownership side. I was getting the term sheets that you do, or the owner, the broker packages, and you look at them and I'm like, okay, those rents are bullshit. Those expenses are bullshit. But here's what I can do with the asset. I can do this with it. I can fix it this way. And here, you know, so most of the things that I bought early on were things that either the seller or the brokers didn't actually even see. And I had the experience now of doing that over all those years. So. So when I actually got to the other side of the desk, I could see, I was like, okay, like, for example, I bought a whole bunch of small projects and as a tester, you know, single units, four units, duplexes, that kind of stuff. But then when I finally got that first big property, the 182 unit building, which by the way, I still own, so I still own the first building. About the first big building I bought, it was quite simple. What happened was the property was, was having a tough time renting the units upstairs. And the reason was, is because it was in a senior community. So, okay, seniors didn't like to walk up the stairs. So what do you do? Having been in the business, I increased all the pricing on the first floor. I didn't discount the upstairs. I increased supplies again on the first floor and therefore all of a sudden the second floor because it was priced differently. And all of a sudden I filled up the property and just that one little decision grew the value, grew the income and all that kind of stuff. And we still own that property today.
- [07:18]
Jack
You know, many of the entrepreneurs that we've interviewed on School of Hard Knocks, like they love risk and they love taking risks. And we always like to say, take the risk or lose the chance. In your career as a real estate investor and property management, all the ventures you've done, what would you say is the biggest risk that you've taken?
- [07:35]
Ken McElroy
Well, I think, I think the most risk is actually having a job. I mean, I really do like, like you have the least control and you know, also just investing in the stock market or, you know, some of the other things, I think those are risky because I want, I look at things as controllable or uncontrollable. That's it. So for me, I can control a property where I buy it, I can control what I pay, I can control the debt I put on it, I can control the tenant I can put in it, I can control the interest, I can mostly control the expenses. So I can almost control the cash flow now. The market is the market and that can change. But I can also control where I buy, which is if I'm buying a really good property in a market that's ascending, then I'm going to be good. If it's declining, I'm not going to be good. So, so, so I don't really look at real estate as risk because I don't put a lot of debt on them. I'd rather put more down payment on. I like cash flow and I have a philosophy of cash flow over capital gain. So I don't sell. That's the difference. I'm not trying to time anything. I know there's going to be markets that go down and up. And I don't want to have to be in that position where I have to sell when it's down. And so that's also why I don't use institutional money from Wall Street. I traditionally used high net worth, LPs or credit because you can actually, you can exit all kinds of ways. You can exit through sale, you can exit through refinance, you can exit through a recap. There's all kinds of things that you can do with the asset, but you really have to wait until the market's just right. And so sometimes when you're using an institution, they're like, it's time. We want our money back. And the market might be down. So. So there's a lot that you learn as you start to invest.
- [09:32]
James
One of the things that me and you were talking about earlier, outside, was that one of the most important decisions that you made was going about finding a mentor.
- [09:39]
Ken McElroy
Yes.
- [09:39]
James
And in particular, you know, our generation, anybody in business that are starting out in the industry, you find that person that's doing exactly what you want to do and learn everything that you can from them. Could you tell us the story about how you found your primary mentor in real estate and what you learned from them?
- [09:53]
Ken McElroy
Well, I think the one thing that I always think about is, you know, who are your teachers? I mean, just in life, right? Like, who are you listening to for health? Who are you listening to relationship advice? Who are you listening to for financial advice? You know, one time I made a. I made a couple mistakes on my taxes and with my attorney because they didn't own any real estate at all. I just, oh, you can do my taxes. Well, they didn't understand real estate, so I found that they did. They, you know, they weren't looking at everything they could have looked at. So. So part of it is just finding that right person. And what happened with me was I was actually in a meeting, a YPO meeting, and. And a guy was presenting on how he had done a business plan for his family, of all things. He had a. He had six kids. And he said, this is how my wife and I stay married, and this is how you. I stay connected with my kids. We actually. And he said, what happens is a lot of people do business plans on their business, but they don't do it on their life. And it really resonated with me. So I started to do that anyway, that relationship, in that meeting with that person, I realized that he was a huge real estate guy. And so I said, hey, Charlie, his Name was Charlie Dunlap. I said, would it be okay if I meet with you once a month? And I met with him once a month for 10 years for free. And I'll tell you, there were times where I go into that meeting, I kind of took it casually, almost for granted. And he slapped me upside of the head and said, listen, if you're going to take my time, you better come prepared. And so I always came extremely prepared with lots of questions. Not just financial, not just business, but, you know, to be well rounded.
- [11:35]
James
You just brought up a valuable lesson, though, at the beginning of that, which is that you had somebody that was kind of handling your finances. A CPA or an accountant.
- [11:43]
Ken McElroy
Yeah.
- [11:43]
James
That they didn't even understand the business that you were investing in.
- [11:46]
Ken McElroy
Correct.
- [11:47]
James
How important is that decision to be completely aligned with the teachers, the people that are managing your money?
- [11:52]
Ken McElroy
That's why I say, like, you know, if. If you're gonna take financial advice, you need to take it from somebody who's really done it. Like a real business owner that's exited for real. Not this BS that you see online. Right. Like somebody who's really exited. And you guys are right in the heart of that. Right. You meet these people every day. It's awesome. And so those are the people. And, and, and, you know, what happens is you. You quickly realize who are the best attorneys, who are the best CPAs not doing anything wrong. Before I got into this billboard business, I called my attorney. I said, do you have any experience in this? He says, I don't, but I know somebody who does. And I did the same thing with my cpa. And he said, I don't, but I know somebody in my firm that does. He has 220 people in his firm. And so, you know, so those are the kinds of things you got to do that's part of your diligence. You don't just do business and then go out and try to, you know, those aren't. It's like a property manager. You know, there are really, really, really good ones and, and. And ones that are okay and ones that are suck. And. And. And that's it.
- [12:58]
James
Can. Can we give them a secret real quick?
- [13:00]
Ken McElroy
Sure.
- [13:01]
James
Billboards.
- [13:02]
Ken McElroy
Ah, yes.
- [13:04]
James
Talk to me about your gosh. What? Talk to me about why the billboard business, why some of the richest people are investing in billboards right now.
- [13:10]
Josh
And I just want to talk.
- [13:11]
Ken McElroy
Say this as well.
- [13:12]
Josh
We've done. We've run a hard knock for four years, and never once have I ever heard someone mention the business about billboards. Have you guys?
- [13:19]
Ken McElroy
Cat's out of the bag, guys, I'm telling you. So, so I'll just tell you exactly what happened. So I ended up looking at a piece of property with a, a billboard on it, and it was two acres. And I actually, the billboard was only making five grand a year, but it was literally in the middle of this property on a main road in, in Phoenix. And so I called somebody and I said, hey, you know, do you know anything about billboards? He goes, well, there's a billboard management company, a billboard management company. I said, oh, okay, I'm going to call them. So I called them and I said, what could this sign do, right? And he said, oh, this sign should easily do, you know, two to $4,000 a month, you know, And I said, okay, it's in five grand a year, that's good. And, and so what I did was I only bought the land for like 250 grand or something. You know, it was just, just almost two acres. I, I moved the billboard and I put an easement around it. I rented it through this company and we were cash flowing probably 2 to 3,000 per month, I think. And some, some months were a little bit better, but, and then I ended up selling the land for 250. So I got the billboard for free. And, and so that was when I first started learning. So here I had this asset that I got for free and I was making two, three grand a month, which is not a ton, but I was now in the game. And then I did it again. I bought another one down by Bank One Ballpark in Arizona, right across from the stadium, literally right where the dimebags play. And it was a, what it's called the two sided billboard. It's called a static billboard. And I talked to the guy and he said you could probably convert that to digital. I go, what's that? And so he taught me how to do that. And so you have, now there's things you have to do and permits you have to get and there's zoning and all that kind of stuff because you can't just put up a digital billboard. But we ended up doing that. And so I ended up, I think I was into that whole deal at maybe a few hundred grand. And then we sold it to Clear Channel for a couple million bucks. And I was like, this is an interesting business and we got some big tax write offs too. And that was, that was it. So I started learning on my own. And, and then now I have a tax problem because I'm starting to exit some Real estate here and there's, and I needed a way to offset tax and so I decided to just embrace this billboard business. I created a whole company, a media company that's actually going to now embrace digital billboards across the United States. And we're rolling that out right now.
- [15:55]
Josh
For someone who's just now starting to make some money and as someone who's, you know, manages over $2 billion worth of real estate, you definitely learned a thing or two about taxes and tax mitigation throughout the years. For someone who's just now making, you know, their first million or $2 million, what's the easies that they can go about mitigating their taxes?
- [16:14]
Ken McElroy
Yeah, that's a great question. So I think, well, the first thing is I highly recommend that they focus on passive income too, right? So that they're not worrying about them where that money's coming from. But then, and then that makes a very big difference on where the income is coming from. But if it's primarily ordinary income, you know, obviously I'm a real estate guy, but real estate is one of the big reasons the cost segregations, the, the bonus appreciation, the straight line depreciation, those kinds of things are huge because you can actually have huge write offs in that current year. Right? Especially ones that have big value adds or capex or capital improvements or stuff like that. That's where I've done it. You know, there are also other ways, but primarily I've, I've been trying to, I've just stayed in the real estate lane and it, it's, it's done extremely well. Because the reason why I like real estate is I can buy it with other people's money and then I can, it, can I just sit and wait, right. Manage it really well and then you just put new debt on it and you're just harvesting the cash. So we have, we have real estate deals that I've owned for 10, 15 years and, and we've refinanced them three times and that's cash out, tax free because it's debt. So each time you refinance, it's, it's tax free because when they, when you sell something then there's tax, but if you don't sell it, there's not. So one of the things I'm doing with the billboards right now is I'm buying them all cash. All cash, no debt. Obviously they scream, you know, 10 to 20% cash on cash today. But I also have the opportunity to put debt on them later, which I still might do. Right. You know, so maybe after a while I'll, I'll put 10, $20 million of debt on there, tax free, cash out, refi. I could distribute it to the, you know, to myself, to my investors, or I could just double down, keep buying. So, but that's, that's the beauty of real estate. And that's, that's a great way to, to mitigate tax.
- [18:16]
James
You're a big advocate of buying real estate with other people's money. And you hear people say OPM all the time, just like you brought up right there. Could you paint that picture though, for us and for the people that are watching right now? What that process is actually like going to acquire other money from people to buy real estate?
- [18:30]
Ken McElroy
Yeah, it's a really good question. So here's the thing. People guard their money, which is awesome and they should, right? But the reality is if it's sitting in a bank account or a savings account, which is where a lot of people have money and you can show them where they can make more, then, then at least they pick, you pick their interest. And so I've, in my, in my history, you know, we, we've done hundreds and hundreds of deals and the ones that scream are the ones that are easy to understand. And they, it's, it's, it's like, okay, yeah, I get this, this is super simple. So let me give you an example. We bought a building in Houston, Texas, and years ago, the, the dike broke and it flooded this whole valley and it, it basically flooded all the first floor units of this apartment project and all the houses around. And so what happened? Insurance fixed everything. So. Insurance fixed everything. They spent almost $45 million to repair and renovate all the first floor units. So when I looked at the property, the downstairs were all renovated and they had really high rents and the upstairs weren't because they didn't have insurance money. So I was like, okay, so all I got to do is upgrade the upstairs and I can have the same rent as the downstairs. And so you make it that simple to show to an investor this is how we're going to force equity. And so it's, people think it's a sales job. It's not. You don't need sales skills. What you need is really, really good math and say, you know, this is the best question you can ask is how can I lose my, all my money? Where's the risks? And you know, but if it's so simple, like taking a vacant building, tying up a vacant building and having a resident or a Tenant in the wings before you close. That's a. People understand that. Right.
- [20:32]
Jack
You've worked on both sides of real estate as an investor and a property manager. And so for those that are real estate investors or wanting to get into real estate investing, what's the biggest thing that you've seen from the property management side the most investors overlook?
- [20:46]
Ken McElroy
Yeah. So here's the thing. What I see the biggest mistake is people overpay for properties. So I call it wholesale retail. So you want to buy for how it's running, period, but they never want to sell it for that way, they don't want to sell it with. This is where you can. This is where your rents can go. This is where your occupancy can go. This is where your. What your expenses should be. So you always want to buy it at wholesale and you want to manage it to retail. So the mistake I see is that they don't always know what to ask. They don't always know what to look for. And so it's, again, going back to that property manager, that operational experience that I had, it's money. Because I can. I can literally go toe to toe with brokers because they're just full of it. They're essentially just taking something and then trying to maximize the price, where I'm beating it all the way down to how it's running today. And that's the key. The other thing is I don't like to buy anything that's running well. That's. I'm. I'm the op. That's the opposite. Because why. There's nowhere to go. Right. If you're buying something that's, like, fully baked, like. Like, that's not what I want. Like, you know, and so. So I'm always looking for that chink, right? That chink in the armor, right?
- [22:02]
Jack
There's no. There's no opportunity on a building that is. Right. It's already perfect. And it's like, if you know exactly how it's running and it's not right. The ship's not running well, you can get it at a discount.
- [22:10]
Ken McElroy
Yeah, yeah. And my experience is, here's a cool part, here's a hack for some of your listeners. Just go follow around. Shitty property managers. Like, for real. Like, just go.
- [22:20]
James
They're everywhere.
- [22:21]
Ken McElroy
Like, you know, like, whoever, you know, pick a company that does a bad job and just go look at all their properties.
- [22:26]
Jack
How do you. How do you find one of those?
- [22:27]
Ken McElroy
Oh, my God.
- [22:27]
Josh
Everywhere.
- [22:28]
Ken McElroy
All you got to do is drive up and take a look, and you See, like, you know, old crappy cars and, you know, the paint, you know, the roofs and broken windows and, you know, all the stuff you guys know, you've been to enough stuff where you can tell, you know, what's managed well and what isn't. And same with a restaurant, right? You walk into a restaurant, oh, the service sucks, I'm never going back. It's the same. So it's the same with property management.
- [22:51]
Jack
You follow the, the shitty property manager around, you buy the building and then you fire them.
- [22:55]
Ken McElroy
Oh, I've done that before. Well, no, I buy the building and then I fire them.
- [22:58]
Jack
Yes. Oh, yeah, exactly.
- [22:59]
James
Yeah, yeah.
- [23:00]
Ken McElroy
But I want, you know, what you want is you want a property that's not running well. So, you know, there are people that are not doing a good job out there. So you want to go snag that building today and then fix it.
- [23:12]
Jack
Yeah, that's game.
- [23:14]
Josh
I'm just, I think a lot of people are probably curious about this is, you know, you've had all the success and, you know, you're managing over 2 billion units or $2 billion worth of units. What does your day to day look like as a CEO now these days? Like, what is your day to day?
- [23:27]
Ken McElroy
You guys are going to love this. Yeah. Oh, first of all, I don't have an office in my office, number one. I, I go there every once in a while. I, I, I, I'm now figuring out a way to run my entire business on, on 90 minutes a week. And, and that's it.
- [23:43]
Jack
So that's, that's insane, by the way.
- [23:44]
Ken McElroy
Yeah, no, it's taken a while, but that's where I am now. And, and obviously it's because I have 300 people and I've figured out how to set it up so that, you know, everybody's working for everybody. And I do, I do four meetings, full day meetings a year for planning and I, and I'm, and I'm on a Zoom for 90 minutes a week. I actually am on a, an investment committee call too, for another hour each week to look at deal flow. But that's it. I don't, I don't.
- [24:12]
James
You got the hell out of the way. You got the hell out of the way.
- [24:14]
Ken McElroy
Well, listen, here's the thing. You know, money, you know, money, money is actually for, it's to buy time. That's it. Money is actually for buying time. So you're buying your time back. That's it. So, you know, a lot of times people get into these jobs and they have to work for money. And I get that. But then they're just on this hamster wheel. For me, I always wanted the passive income first, and then, you know, for me, now I've got this cash coming in, so I can do whatever I want, and that's complete freedom. Right. And so when you get to that point where you have the money coming in, you can do whatever you want, then you actually have freedom. It doesn't make you happier. Instead, in fact, more things actually become more. It becomes more complicated. Right there.
- [25:07]
Josh
There's. I just want to say this. It just reminds me of this. This interaction we had early on in Hard Knocks. One of the first big interviews we kind of did was. Was Grant Cardone. And we're sitting down at his office, and he says, how many people are on your team? And at the time, probably like, you know, three people. And he's like, well, you got a problem. And he's like, 10 people, you still got a problem. 50 people, you still have a problem. If you have, you know, 300 people on your team, you don't have a problem anymore. It's someone else's problem to manage that. And it's just. It's just funny to see how, like, that was exactly what you said is you are buying that time back through, you know, the resources that you have, which is money.
- [25:44]
Ken McElroy
That's right. Yeah, he. He's right in that regard. You know, it's interesting. Once you start to scale, there's a lot more problems, and the road to 300 is pain. Like, trust me, it's paid.
- [25:54]
Jack
So I. I want to stay on that for a second. What would you say was the biggest challenge? Scaling the company to 300 people. People.
- [26:02]
Ken McElroy
Without a doubt. Yeah, without a doubt. They're the most important thing. And so here's what happens. Early on, I'm like, oh, I need an accountant. No problem. I'll find one dime a dozen. Wrong. You know what I mean? It just doesn't work, especially if they've.
- [26:18]
Jack
Never done your industry.
- [26:19]
Ken McElroy
Right. Yeah. And. And sometimes they're just not very good accountants. Right, Right. You know, and so. So you start to learn that not. Not everyone. Everybody interviews really well. It's like, you know, it's like that first date, right. You know, when you go out with a gal and then everything's there. Everybody's on their best behavior. That's how interviews are. Right. So then they get into the company, and then you're like, oh, right. So I. I think that the. The people is the biggest. Biggest thing people can make or Break you. And partnerships too. You want to get elevated. That's a great way to do it. You know, like what you were talking about with, you know, with your book coming out, right? That's a partnership, right? To elevate things, right. Those are really, really, really important. And you can do those. No matter what you had mentioned, you.
- [27:04]
Jack
Know, one thing that you've had building the company to 300 people is you built a great culture. And you know, some of that does, you know, come internally but also through the hiring process. So like, it's kind of a two part question, but like, how were you able to build a great culture? But then also like, how do you hire?
- [27:22]
Ken McElroy
You got to be careful. The people that are circulating around, there's a reason they're circulating around. Like most good people are working somewhere. Superstars don't leave typically unless there's something really broken somewhere in the company or, you know, or a merger. You know, there, there, there's a time, right? So when the economy dips down, that's the time to strike. When things are going like this, even average people are working. You know what I mean? So, so the best way to do it is to go find them, find the best you can in the industry and, and you know, just like anything else, right. You just can't rely on that process. Now we go through all the traditional things. Don't, don't get me wrong, you know, we have a number of people coming into the firm and you know, onboarding and the training programs and all that kind of stuff. We have all that in place. But the best key people are working and they always will be.
- [28:22]
James
Correct me if I'm wrong, you are not a big fan of keeping a lot of money in the bank.
- [28:25]
Ken McElroy
I like to keep it moving. I do have to have liquidity, however, so. So one of the interesting things about owning real estate and financing real estate is that the banks are always. I have to submit my financials to them every month. And so they're always looking at my liquidity, which is fine. That's part of the game. So I do actually have to have a bit of cash on hand. And, and also I think there's a time to have a lot more than others. But the other thing is, is I have a lot of reserves in on our different projects. So I know last I looked, we had like 20, $21 million of cash just sitting in different bank accounts for our properties, just in case. Right. For rainy day stuff. Right. So I think reserves are really, really, really important. I think having cash is really, really important because you just don't know when you're going to need it. And so, but it is a double edged sword because I don't love having it in the bank. But I do know that it's like an insurance policy in case something goes sideways, in case something doesn't go the way I thought it was going to go. I just don't want to be in any kind of a situation where I, I, I'm, my back's against the wall.
- [29:38]
James
So when you were starting out and investing in real estate, right. When you were starting to get aggressive, how much money would you say that you were kind of keeping in the bank at that time?
- [29:48]
Ken McElroy
Hardly any. In fact, the first deal I used all my money and well the second, by the second deal but, and by the way, these were two bedroom, two baths that I used my own savings when I was a property manager and then they barely cash flowed then of course that's actually why I learned because I'm like, I like this business because I'm getting tax savings, I'm getting cash flow and I'm also getting appreciation. And if I hold these long enough, I'm just going to continue to go like this. I'm going to have enough passive income to replace my expenses. And, and so that's how I started. The thing is, is not everyone has that kind of money, right. My sister did it very differently in five, you know, and she was a bookkeeper at a, at a medical clinic up in Washington, which was where I'm from. And over the years she bought five houses over a long period of time, I want to say probably 20 years, she bought five houses and by, by the time she retired they were somewhere between three and four million dollars because the tenants off, she just slowly, you know, managed one, had tenants go in and out, her and her husband went and did the maintenance and all. So it doesn't have, you don't have to like, you don't have to punch down and make this a huge business. Right. She does did this entirely as a bookkeeper. So there's lots of ways to skin it. The key is to buy something. I always invest in things that other people pay off. That's a really important point. Invest in things that other people pay off. And that's all she did. And then she also got the benefit of inflation, right? So inflation grew. The, the houses that she owned, the tenants paid off the debt and she, she, she liked not to have debt, which is fine. That's a different philosophy than me. She wanted to be debt free. And so the tenants paid them all off. And so by the time she retired, she had five houses all worth 5, 600, 700 grand each. And I mean, that's not a bad strategy.
- [31:42]
James
Yeah.
- [31:43]
Josh
How old are you today?
- [31:44]
Ken McElroy
64.
- [31:45]
Josh
And how old were you when you bought your first real estate property?
- [31:48]
Ken McElroy
I was, I was late in the game, so I was, I was in my mid-30s.
- [31:52]
Josh
And what is the hardest lesson you've had to learn throughout your real estate career?
- [31:56]
Ken McElroy
Hardest lesson is probably the people. Yeah, the people side of it is you, you know, just as I was trying to scale the disappointment or, or the fact that I didn't know how to manage them and you know, just that frustration because I know how to manage properties, you get to this point where you, you can do everything right. And then you go from 40 hours a week to 50 hours a week to 60 hours a week, to 80 hours a week or 90 hours a week and you, you're basically approaching burnout. Then you have to figure out, okay, this isn't going to work for me. I, I'm, there's it, you know, there's only so much I can do. And then you start to hire people and you don't know how. Right. So you bring people on and you delegate stuff and you move on. And then they're losing clients and this, you know, there's this whole thing. So that's probably one of the biggest things for me.
- [32:46]
Jack
So you're 64 now.
- [32:48]
Ken McElroy
Yeah.
- [32:48]
Jack
And I love asking this question. If you could go back, if you could get 10 years back, so you'd be 54, but you had to start over again at zero, would you do it?
- [33:01]
Ken McElroy
Oh, 100%. Yeah, yeah, yeah. Oh yeah. Because with the wisdom I have now, it would be, it'd be full on.
- [33:08]
James
What would be those three steps to rebuild that billion dollar real estate empire, what would you do? Give us the blueprint right here.
- [33:14]
Ken McElroy
Sure. Well, the first thing I would do is again, I would go find an asset that people want, number one. Right. And I would not screw around with small ones. Right. I would go find a shopping center, I go find an office building that's vacant or having a problem, and I would look at as many of as I could and I would look for a solution, whatever it is. It could be converting an office building to multifamily, it could be converting an office building to self storage, it could be whatever, it didn't really matter. But I would just go look at anything I could because now I've done all those Things, right? That's the first thing. And then within, if I found it, I would know and that would be, I would be so excited and immediately I would have it full with, with just putting it out. Especially now, guys, when, when I started I was, I was printing business plans and flying across the country or flying across the world, you know, raising capital in rooms, right? It's so much better now, right? You can hit a button, put stuff out online. People know you, they, they reach out to you. You can have a phone call, you can turn and burn really quickly. And so your time, your time's collapsed so much easier right now. So you know, I would, I would be a millionaire easily in six months. Without a doubt. Without a doubt. There's no question my mind, that's game.
- [34:32]
James
What I wanted to know is, and we talked about this a little bit earlier, you know, for people that are getting into the real estate business, some of those red flags that you look for that immediately raises you, that tells you I'm out of this deal.
- [34:43]
Ken McElroy
Yeah. Well, so we probably look at 100 deals a month and we buy 0 or 1 maybe. So this is my, this is what. So you, you have to have a really, you have to have your a buy box that is non negotiable. So for me what, what is that? That it has to as a story and it has to have forced equity. That's the first thing always, right? Has to be in a market that's accelerating. So and there's lots of ways to figure that out. Is, you know, is, is the market growing or contracting? Right. And there's a zillion ways to do that. Like to, to, to see which, which direction that going. You, you take a look at the, the number of units that are coming into the market. You know, because that's supply that's going to affect your operations. Then you scrub down, you know, obviously all the operating expenses and all of those things. If all those things don't work, including the school, the school, school district, the walkability score, all these things, right? The things that a renter thinks about, not the things the investor thinks about. Like what does the renter want? And you know, if all those boxes check, then it's a go. But then now you're bidding a bunch of, with a bunch of other people, right? And then, so then what I always have is I have a low medium and a maximum for every deal. So we come in low. Then if we get invest in final, we, we raise it to the middle part and then you start to get into the Deal points themselves. Most of the time, to get all the way through that net is a no, you know, because again, you have to stick to the fundamentals. And for me, it's always cash flow. So that's my biggest issue. So, so here's what happens with a lot. Most real estate investors, I would say the majority, they, they think real estate is a stock, but it's a, it's a business, it's not a stock. It takes people, it takes management, It's a, it's a full business, but they buy it, then they walk away, right? And they think, oh, this is going to be great. I'm going to manage, manage it from across the country. So, so what happens is, you know, you can't, you can't do that, right? You just can't. You have to make sure that whatever it is that, that you're buying is gonna, it's gonna check all the boxes that you say. And, and for me, it's always a cash flow issue. I want, if I'm gonna, let's say you're gonna give me some money. Let's say it's a million bucks and you're taking it out of a one month T bill, let's say, and the one month T bill is making you four. Well, you're gonna want more than four because there's more risk here. So I have to be able to provide that to you. And so cash flow is everything. The property's got a cash flow. And most investors invest on capital gain. In other words, they're trying to buy something for a million and sell it for a million five or million two or something or two million, let's say.
- [37:46]
Josh
I feel like real estate professionals have a mixed view on this, but do you think your home is an asset or a liability?
- [37:53]
Ken McElroy
Well, the technical response is it's the bank's asset because, you know, most, in other words, it really is the banks. Actually the collateral for their loan is with the bank. And the, you know, what Kiyosaki would say is if it, if it doesn't produce cash flow, then it's not right. So, but if you take a look at it, who's, whose balance sheet is it on? It's the banks. The banks. It's in the asset column for the bank, right? In yours, it's a liability. Technically if you, if you have a lot of debt on it right now, if it's paid off, a little different. But you know, so, so, and I'll give you, I'll give you an example. My mom, my Mom's in her 90s and she, she decided she wanted to move to an assisted living, right? And so the childhood home that I grew up in, she still has. And so she bought it for $10,700, by the way, in the 60s. And what's, what's interesting is at the same time, my dad bought this $10,000 insurance policy. So at the time, think about this. The insurance policy was worth the house. Okay. My mom's a hairdresser, right? Imagine that. Like that's how. Okay, so fast forward. My dad passes away. I had to dig into their estate. That was horrible in itself. But now I'm digging into my parents estate and I'm looking at this with my brother and my sister and I pull out the insurance policy. Guess how much it's worth. 10 grand. Okay. Guess how much the house is worth. 700 grand. Okay. So that just tells you what inflation can do. Now my mom again is a hairdresser. So my mom now wants to go to this assisted care facility. And we're like, my brother and sister, like, we should sell the house. She's got all this cash. I'm like, not a bad idea. Let's look at a couple alternatives. We could do a cash out refi fund. You know, maybe she wants to move back in the house. Or we can actually throw a renter in there which will pay for her assisted care. And that's the, that's the, the way we chose that as my mom didn't want to sell the house because it was emotional to her, right? So, so we were able to throw a renter in there. Pays completely for her living. Now that's an asset. Does that make sense? Because it cash flows. Her house is an asset that pays for her living. So that's, you know, that's, that's how I see it.
- [40:24]
Jack
What's the biggest life lesson that you say that you have learned outside of the business world?
- [40:29]
Ken McElroy
Kids around kids, relationships. I, I think what happens is, you know, when you're young, you have a different view of what success is. I think it's typically money, right? I, I would say you, you kind of go through what I call the earning years and you know, or the learning years first and then the earning years and then the returning years. So, you know what I see a lot of times is I see very wealthy people sacrifice family relationships and they step over the very people that love them, you know, for what? Like, you know, to make money. So, you know, and so at my age, I'm seeing that more, more, more, you Know, and so when people ask me, what's your definition of success? I always say when my son texts me, you know, and that's it. Because that's how I feel. Right? That's, that's all that, all, that's all that matters. Especially after you get to a certain point. Right. People say, well, that's easy for you to say, you're at this certain point. And that is actually true. But, but I know a lot of people that made a lot of money. Then they look around and there's no one around.
- [41:38]
James
Ken, we like to end these podcasts off with two questions for our guests.
- [41:41]
Ken McElroy
Yes, sir.
- [41:42]
James
So I'll start. And then Jack went us off and mine is that, you know, Ken, if me and you died tomorrow and you had one more guiding principle to leave with the younger generation, with everything you've learned in these last 64 years, what would that be?
- [41:53]
Ken McElroy
You know, your, your, your circle of friends is more important than your paycheck. Yeah.
- [41:58]
Jack
Who?
- [41:58]
Ken McElroy
You know, I always say environment is stronger than will always.
- [42:03]
Jack
And Ken, when it's all said and done, how do you want to be remembered?
- [42:08]
Ken McElroy
Well, I will be remembered through legacy of my company. I have a full time director of philanthropy right now we're doubling down on giving. Like, like crazy. It's so fun. I just got back doing a weekend with the Navy Seals. We just, we just did 300 grand for them, for their beyond the brotherhood and, and you know, just to help seals that are coming out of the of, of the military. So that's it, man. And also I have both my kids working for me, so I want to be a great example for them.
- [42:39]
James
I love that. Ken, you got beautiful advice and this was a beautiful episode. We appreciate you being here.
- [42:43]
Ken McElroy
Thank you, man.
- [42:44]
James
Thank you for everybody tuned in right now. Be sure to like and subscribe for amazing content we've got coming every week. Guys. We're bringing the biggest business owners in the world, just like Ken McElroy right here, just to deliver you guys the secrets on how to build wealth and become financially free. Ken, where can they find you on social media@kenmore.com www. Kenmore.com Ken McElroy on Instagram, all those.
- [43:05]
Ken McElroy
Instagram, YouTube, you name it. Perfect.
- [43:07]
James
We're going to be sure we're going to put the links down to Ken below as well as we're also going to put the link down to join the number one entrepreneur, community and network in the entire world. Guys, the three of us built the school of mentors into the number one entrepreneurship community. Where you guys get direct access to millionaires and billionaires every week on live calls, where you ask your questions to them and they give you the secrets, just like you're on this podcast. With that being said, we'll see you in the next episode.