Housing Expert: Everything You’ve Been Told About Real Estate Is WRONG! | Ken McElroy

Ken McElroy begins by dismantling common misconceptions about money, especially in real estate. According to him, many people believe they need a large amount of money to invest, but the real approach is about finding valuable assets with room for improvement and then sourcing the necessary funds, whether through debt or equity. He emphasizes that owning a significant amount of debt isn't something to fear. In his case, he manages about $1 billion in debt associated with tens of thousands of apartment units and sees debt as a useful tool rather than a liability.

McElroy explains that the key to wealth accumulation isn't avoiding debt, but managing it strategically. He describes himself as a "cash flow guy," prioritizing consistent income generated by his properties over paper equity or market value fluctuations. His tenants essentially pay off the debt through rent, making it a self-sustaining cycle. This mindset allows him to grow an extensive portfolio without the emotional burden many associate with large debts.

Cap Rates and Market Volatility

Cap rates and their effect on property values are a major topic during the conversation. Ken points out that when cap rates rise, property values inevitably fall, sometimes by hundreds of millions in his portfolio's case. He uses the example of cap rates increasing from 4% to 5%, which can cause value to drop by 20% or more.

Despite these large swings on paper, McElroy remains unfazed. He explains that much of the equity lost is "fake equity" if it hasn't been realized through cash flow. For him, gritty, long-term cash flow stability trumps short-term valuation shifts. This philosophy shields him from panic selling during downturns as he views real estate from a cash flow perspective rather than speculative capital gains.

Cash Flow vs. Capital Gains

Ken strongly advocates for focusing on cash flow instead of chasing appreciation. He warns against selling properties simply because market prices dip, especially if the rental income remains strong. The stability of recurring revenue gives him peace of mind compared to the volatility of stocks or paper assets.

Selling and investing in index funds, he suggests, doesn't align with his approach, as index funds come with market unpredictability and lack controlling factors. He prefers properties where he can influence operational and financial aspects, such as occupancy and rents, which enhances predictability and lowers risk. This hands-on management creates a more reliable and controllable income stream than paper investments.

Real Estate Syndication Challenges

Discussing syndication, Ken McElroy highlights recent troubles in the industry where inexperienced marketers have raised money without sufficient property management knowledge, leading to collapsed deals, capital calls, and unhappy investors. He distinguishes between professional real estate investors—those who understand operations and property management—and mere "money raisers" or marketers.

His success, he says, comes from solid property management and disciplined underwriting, not just raising capital. He notes that many syndicators overpay for deals and fail to secure fixed-rate debt, exposing their assets to interest rate risks. Ken stresses the importance of transparency and managing operations effectively, which protects investors and sustains long-term gains.

Supply and Demand in Multifamily Housing

Ken explains the current dynamics in the multifamily housing market, especially around construction and supply. Post-pandemic interest rate spikes and aggressive Federal Reserve actions dramatically increased costs for construction loans, which in turn slowed new developments dramatically. However, he notes that projects started before this rate hike are coming onto the market today, causing an unprecedented glut of rental units.

This oversupply has created advantages for renters with concessions like free months of rent becoming common. But Ken predicts that new construction permits will drop sharply in the near future, leading to a supply shortage in later years that will re-ignite rent growth. The market remains cyclical and somewhat predictable if investors pay attention to these supply-demand nuances.

Differences Between Multifamily, Single Family, and Office Real Estate

Ken draws a clear line between multifamily apartments, single-family homes, and office spaces. The multifamily residential sector is his specialty and is currently facing unique market pressures tied to construction loan rates and demand cycles. He acknowledges that single-family housing developments, particularly with major homebuilders, face different challenges, such as needing to increase volume, offering rate buy-downs, or free upgrades to entice buyers despite high prices.

Regarding office real estate, Ken sold off his holdings after the pandemic. He views office space as a market in flux due to work-from-home trends and oversupply of high-priced Class A spaces. While office remains important, its future remains uncertain compared to the relative stability of rental housing.

Property Management Philosophy

Ken's approach to property management is pragmatic and centered on long-term occupancy rather than maximizing rent at all costs. He prefers to keep rents slightly below market to maintain high occupancy, minimizing turnover expenses, vacancy losses, and marketing costs. He sees turnover as a significant drain on cash flow since long-term tenants reduce recurring expenses associated with tenant turnover.

He also shares real examples, such as a tenant who stayed for 15 years with below-market rent, which turned out more profitable when considering vacancy costs avoided. Management is about balancing rent income with the costs and unpredictability associated with constantly seeking new renters.

Ethical Debates on Real Estate Ownership

Addressing the criticism that it's unethical for corporations or wealthy individuals to own large amounts of real estate, Ken questions who else should own it. He recognizes the sentiment that housing is a human right but argues private ownership is necessary due to government's historic failures in effectively providing affordable housing on scale.

Ken also observes that institutional buyers often develop whole communities or multifamily complexes that otherwise wouldn't exist, enabling more housing supply. He emphasizes the misunderstood role of big investors who operate at scale and serve investor clients rather than actively competing with individual homebuyers in local markets.

Home Prices, Renters, and Affordability

Ken does not believe current home prices are sustainable in many markets and expects corrections where supply exceeds demand. Nevertheless, he doesn't foresee drastic home price declines soon as many mortgages have been refinanced at low rates, keeping owners in place. The rental market has ballooned as more individuals are priced out of home ownership, driving strong demand for rental units.

He advises many people would be better off renting today rather than buying due to high prices and costs of homeownership, including taxes, maintenance, and capital expenditures. He acknowledges the rising median age of homebuyers is problematic, signaling affordability issues. Ultimately, Ken expects rental housing demand to remain strong until a sizable affordability solution emerges.

HOA Issues and Inefficiencies

During the discussion of real estate management, Ken and the hosts share frustrations with Homeowners Associations (HOAs). They highlight major pain points such as lack of transparency, poor communication, and inefficient spending on amenities like leased exercise equipment or excessive holiday decorations. The anecdote about unpaid fees due to miscommunication shows how HOA management can cause unneeded stress and financial penalties for homeowners.

Ken criticizes how many HOAs are poorly run by volunteers with little expertise and how deferred maintenance often results in surprise large assessments. Despite being nonprofit organizations, HOAs sometimes operate like inefficient bureaucracies with suboptimal budgeting and spending, creating complications for owners beyond just monthly dues.

Benefits and Drawbacks of 50-Year Mortgages

Ken explains that 50-year mortgages are available in some countries and have pros and cons. The main advantage is lowering monthly payments, which could improve affordability. However, longer terms mean carrying debt over extended periods and delaying full home equity, which carries its own risks.

He emphasizes that mortgages historically evolved from short-term loans to the standard 30-year product during the Great Depression, driven by the need to reduce defaults and foreclosures. Although 50-year mortgages could help more people get into homes, Ken is cautious about indebtedness being prolonged, favoring stable, manageable debt levels that align with inflation expectations.

The Importance of Personal Development and Legacy

Ken believes that investing in oneself is the best investment possible. He attributes much of his success to continuous learning through books, events, and mentorship. Staying ahead of trends in markets, finance, technology, and personal growth has empowered him to make informed decisions and avoid common pitfalls.

Additionally, Ken discusses building a legacy through family involvement and philanthropy while transitioning his business to the next generation. He has reached a point where he doesn't need to keep acquiring wealth but focuses on preserving and passing it on responsibly. This mindset brings balance between financial ambition and quality of life priorities.

Money, Happiness, and Time

A recurring theme is Ken's view that money itself does not buy happiness but rather buys freedom—specifically, freedom of time. He prioritizes time with family and personal fulfillment over accumulating endless wealth. Instead of equating net worth with life satisfaction, he prefers having the freedom to do what matters most.

He acknowledges the complications wealth can bring, including increased mental and physical health challenges due to stress or ego. Ultimately, Ken champions a belief system and mindset that foster predictability, control, and well-being, with money acting as a tool to facilitate meaningful life experiences rather than an end in itself.