Cash flow can be generated in real estate with no tax, making it the best kind of investment. By looking at the potential of the property in ten years, improvements can be made to increase cash flow, cap rate, income and rate of return for investors. Ken McElroy, author of The ABCs Of Real Estate Investment, has always had a soft spot for home ownership. When people build homes, this equates to mortgage interest because the owners build equity on that home. Ken McElroy shares tips on getting your financial settings in real estate on track and staying on that course by simply starting small and in a neighborhood that you know.
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This is Part 2 of my interview with Ken McElroy, Rich Dad Advisor. He’s a great guy, smart, full of wisdom, extremely successful. If you haven’t listened to the first episode with me and Ken, just listen to that episode. It’s number 95. We’re going to continue with Part 2 of my interview with Ken McElroy.

If you missed our last episode, be sure to listen to Ken McElroy on The Economy, Finding Deals, Real Estate Myths, Property Management, and Achieving Goals Part 1.

Enjoy the show!

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Ken McElroy on The Economy, Finding Deals, Real Estate Myths, Property Management, and Achieving Goals Part 2
You and I both look at job growth and population growth at a macro level when it comes to analyzing markets. Obviously, you probably do the same thing I do. I look at neighborhoods after that. That’s my next step. Regarding neighborhoods, do you have a neighborhood preference? Did you have to modify the types of neighborhoods that you’re looking at in order to find deals because of the cap rate compression and lowered inventories?

I take a little bit of a different view on this. What happens a lot of times with real estate investors is that they tend to go look for really good deals with low down payments. That’s not a bad thing. Usually, that’s on the outside of town. They’re trying to minimize their down payment. I completely understand that, but I do the opposite. I’m trying to find rental demand in affluent areas, so I’m going to be paying more.

For the most part, we like to stick to B, B+ type neighborhoods, maybe A- at least the way we categorize them. I see so many investors making the mistake, in my opinion, of investing in C and D type neighborhoods where we’re looking at $40,000, $50,000, maybe $60,000 properties. Call it per door, per unit, however you want to look at it. If it’s an apartment building, you’d still say it’s a $40,000 apartment. The challenge there, in my opinion, is you’re dealing with a tenant class and a demographic that is far more challenging. By putting less down in order to “save money” on your down payment is actually a huge mistake because you’re buying yourself headaches down the road. Is that how you feel about this?

Home Ownership: You can never manage your way out of a bad neighborhood. It just is never going to happen.

What I found is that while you might pay less, you’re going to have a lot more management problems. Honestly, not always. I’m a big fan of low-income housing. I think it’s needed and it’s necessary and it could be managed really, really well. I always try to say to people, “You can never manage your way out of a bad neighborhood. It just is never going to happen.” I met with the mayor of Phoenix and they had ten properties that they had targeted as bad landlords. I went and looked at them because I said, “Let me go take a look at them. Maybe we can buy them all and turn them all around and do some cash.” They have what’s called a private-public partnership op...