Book Review: “The Advanced Guide to Real Estate Investing” by Ken McElroy

The 10 advantages of real estate investment:
1. Cash flow, 2. Control (unlike stocks which you lose control to the company officers), 3. Appreciation, 4. Leverage and Other People’s Money (OPM), 5. Depreciation, 6. Refinance, 7. Asset protection, 8. 1031 exchange, 9. Hedge against inflation, and 10. Physical asset.

Why multifamily apartment?
1. Cash flow (commercial leases last many years). You can quickly increase of the value of an acquisition by increasing its net operating income and sound management principles.
2. Demand: upcoming wave of renters from baby boomers, echo boomers, and immigrant.
3. Affordability
4. Business cycles: not affected by business cycles like rising interest rate.
5. Maintenance: less than Commercial properties. On-site technicians can be supported. Refinancing to take some equity out. 1031 exchange.

Two real-world examples were given by author: 1 was a construction play: buying an existing property with an adjacent empty lot to be built up. The other one was an operations play: increase revenue and reduce expenses, then refinance to take original investment out.

The author then debunked the myths:
Myth #1: You need a lot of money. No, you just need a good deal. With each successful deal you will have more and more investors beating down your door to place money with you and your investments.
Myth #2: You have to start small. Large apartments are secured by the assets themselves because their values are based on performance and cap rate, where as small family home rentals require cash assets and its appreciation depends heavily on the neighborhood.
Myth #3: You need midas touch. No magic, just know how and common sense.
Myth #4: You have to know somebody. “In investing, it’s all about what you know because what you know will determine who you know. In order to find a good deal, you need to know how to spot one.
Myth #5: You have to be a seasoned negotiator. “If you have a “hard-sell” a deal, then it probably isn’t a good deal.

Key indicators for success:
The market: 1. Cycles: buy at low point. 2. Population and employment growth. 3. Supply and demand (construction vs. absorption). 4. Barriers to growth: a. submarkets that are fully built out or developed, b. government-protected land, c. city boundaries, d. zoning changes, e. natural formations such as mountain ranges or bodies of water. 5. Urban renewal: an effort to reestablish cities’ downtown areas as thriving civic centers where people live, work and play. Where the urban renewal is just beginning, there are huge opportunities.

The next 10 markets to watch: (this list may be obsolete)
1. Seattle, 2. San Francisco, 3. Los Angeles Metropolitan Area, 4. Las Vegas, 5. Austin, 6. Denver, 7.Tucson, 8. Phoenix, 9. Boise, 10. Albuquerque. Do you own research. Level 1: at home. Level 2: travel to your proposed market and meet with area experts. Level 3: Speak with trusted business partners and discuss your findings with them.

The Purchase Process
1. Offer: verify the income, expenses, net operating income, calculate the value, loan payment and your rate of return.
2. The Purchase and Sale Agreement (PSA)
3. Due Diligence
4. The List: leasing information and policies, financial and operating reports, income and expense items, studies, legal and construction documentation, exterior inspections, interior inspections.

Equity and Financing: Assume or obtain a new loan.

Assembling Your Multifamily Team:
1. Property manager, 2. Lawyer, 3. Accountant, 4. Mortgage Broker, 5. Commercial Broker, 6. Insurance Broker, 7. Contractors, 8. Appraisers, 9. Architect, 10. Tax Consultant, 11. Environmental Consultants, 12. Engineer.

To Infinity and Beyond: Author’s call to action.
1. Keep good records, 2. Limit your liability, 3. The sky is the limit!

As an small-apartment owner, this book gives me a new perspective to think “big.” There are definitely many advantages to own/operate as a share of large apartments. The author made a very good, convincing case. His two examples really hit home for me. But I wonder how hard it is to look for “good” deals when there are so many of the same class of people like Ken Mcelroy scouting the field for the next big deal. Gotta to keep my eyes open.