Here is the complete book summary of ABC of real estate investing by Ken McElroy in the simplest format so that you can understand the basic concept and learn how to invest like Ken, who is managing property with over 1 billion dollars.
Ken McElroy said many times in this book, Trust but always Verify the information you get.
- Trust, but always verify. Ken says, yes, trust that info, but before you take action, please verify them. That is what Trust and Verify mean.
In real estate investing, you will come across many info and news. But trusting and acting upon all those is not a way of a good investor.
ABC of Real Estate Investing by Ken McElroy Summary
Ken shares ten tips in this book ABC of real estate investing for every person who wants to build what he has built over time in the name of MC Companies with his partner.
MC Company manages total assets of 1 billion dollars, and recently Ken bought about $400 million worth of properties. All his ideas, tricks, and tips are shared in the book of ABC of real estate investing.
I would say one of the best books on real estate investment so far. So let’s begin the game.
Read also: Shift by Gary Keller Book Summary
Table of Contents
1. First, Identify the Market Trend Before Investing
If you heard from somewhere else, the government is planning to build a big highway near the road or a small overbridge to solve the huge traffic problem in the city. I am sure you have.
You analyzed the information and found that it’s true. So you started to buy land around the bridge. Most people do not know that yet. But you know how valuable this land may become in the next few years. You have an edge here by just knowing and verifying that hidden data.
You will buy it and start to develop properties. When the bridge is ready, you will sell those lands or the apartment units you have built there and make good money.
The demand will be very high, and properties will sell because the highway (the bridge) will attract people to live there as it offers easy transportation and ease of life. So the best way to identify a market trend is to find a real-life problem.
2. Verify The Demand and Supply of the Market
That may seem too tough to you. But worry not. I am here to help you out (I mean, the author Ken McElroy is here to help you)
Analyze the demand and supply to know how quickly it will happen by analyzing the surroundings and the local area. How to do that? Follow the below steps.
- If you see, there are a lot of vacancies in those nearby buildings that means the demand is not that good. People do not want to live there.
- Choose an area where people want to live, work or do business, where the demand is high than the supply of homes.
- In short, demand should be high, and supply should be low. That is the ideal place to invest.
- You can also look at the occupancy. High occupancy means high demand and low occupancy means low demand.
- Look for a housing market where the occupancy rate is above 90 percent. That means the market is promising, and people want to live there.
- Look for advertisements in that area. If you see a lot of street ads, then know the demand is not that high.
- They are promoting aggressively with heavy discounts to lure home buyers as their inventory is high.
- More advertisements mean low demand and fewer advertisements mean high demand.
But understand, in real estate, the market is everything. The property itself can not do anything for you unless you choose the right market for it. A good market is equal to good profit. That is the primary motto.
So look for these metrics after analyzing the trend in the real estate market and then look for employment growth, population growth, and the exact local area to invest.
3. Analyze Employment, Population, and the Location
Ken McElroy says in his book The ABC of real estate Investing that these metrics are the pillar of your real estate market research. Do them well, and you will succeed, or your investment will fail.
First, check the employment rate in that area by answering the following questions.
- What is the percentage of the young population employed?
- Where do they work, and in what company?
- Are those companies good and reputable?
- Their track record of employment rate over time.
- Product reviews. How good their products are.
If you have all the data with a positive sign, then that area is possibly a good investment. You do not want to invest in an area where the unemployment rate is way higher than 7 percent. They do not have that much money to buy your properties.
Then analyze the population growth. Look if more and more people are coming here to live in this city.
- If yes, why is that? What is attracting them?
- And will that attraction be genuine or just a temporary thing?
Make sure the attraction is genuine and long-lasting.
And lastly, the investment location.
- Where exactly do you want to invest?
I mean, I will invest between five miles of this area. That location is not a spot but a local area. Once again, the market area is more important than the property itself. Choose wisely and with proper real-time data.
4. Do Advanced Research on the Market
In this step, you will collect more data on that area by using these three levels of research that Ken says in the book ABC of real estate investing.
- Google the place and the surroundings. You will find new pieces of info, some new blogs that talk about the advantages and disadvantages of that local area, and some more trendy news that might affect your investment. Search it online.
- Talk to the people who live there. They will tell you some more insightful information that might help you to make a better decision.
- And lastly, after taking all this data from the internet, social media, and people in that area, verify them with your local real estate agent or ask more people the same questions and match the answers.
That way, you will follow this thumb rule of the author, Trust but Always Verify. Use the three levels of research before doing the mathematical part.
5. Calculate the Real-Time Value of the Property
Before you make an offer to the seller, calculate the net value that will be a good price for this property. You do not want to invest more money than what is desirable for it.
That is why you must verify these things before making the final offer. These apply only to multifamily properties (for small homes, all might not be necessary).
- Verify all the income in that building
- Verify all the expenses available
- Calculate the Net Operating Income (NOI) = Income – Expenses
- Look for the Cap Rate in the area (average 5 to 8 percent)
- Follow this formula, Property value = NOI/ Cap Rate
If your report says you should not pay more than $545,000 for this, and the seller is asking for $655,000, and he does not agree after a lot of renegotiation, then it’s best to level it and search for a new one.
Because leaving 100 good properties is always better than buying the wrong one.
- It is better to leave a good property than to buy the wrong one.
It is the 2nd most important quote I have learned from Ken McElroy’s book The ABC of real estate investing. It is deep and powerful.
6. Now, Create Your Personal Investment Checklist
Now it’s time to create an investment checklist. It is a list of practices you will do on each property that you want to buy. You have all those analytics metrics I shared with you, but these are the legal ones.
It will save you from many troubles if you check them well. So here are those.
- Do a file audit on the property: This audit includes a title review, property legal review, tax review, and mortgage review.
- Do a property interior and exterior audit and take a look at all the things the house has currently, the paint, water, tiles, and everything from the inside and outside.
- Do Government agency audits to check building codes, zoning codes, and other legal area codes that everyone must follow.
- Do a service agreement audit to recheck the contract or the agreement you and the buyer agreed upon.
- Do dooks and records audit: This audit will include all the data related to the property in the government directly.
In every property you buy, you must analyze all these metrics with all the other property analyses if you do not want any trouble. Now move to the due diligence, the final analysis you need to do.
7. Let’s Do Due Diligence on the Property
Look for a tiny market to buy properties, not a big one. Small tiny markets have more opportunities than big ones. There will be less competition, fewer people for sale, and a lot of the opposite for rehab.
Plus, small markets can grow exceptionally fast if something new is happening. But a big market is already big that can not expand more. That is why target those small markets that are not so popular in your neighborhood.
8. Negotiation with the Seller and Buy It
Now at this point, you have all the data you need. You know how much you can spend on this property to make a profit. You will show all those data to your seller and request him to see if for your offer price.
There is no guarantee that he will agree. But if your data is convincing and the seller is in need of money, he might agree. If he does not, then you can’t do anything. You have to look for another property.
9. Decide What to Do with the Property: Hold or Sell
I am assuming that the seller has agreed, but he wants a little more, like $12,000 more cash. You gave him that. Now plan what to do with it. Sell it or hold it for cash flow.
If your idea is to sell, create ads. If you want to hold it, hire a property manager and start managing that building like a business. Congratulation you have become an ultimate investor.
10. Direct Tips from the Author Ken McElroy
Now, I will share a few tips Ken shares in his book The ABC of real estate investing you must know.
- Know that seller’s price is irrelevant. He will always ask for more, but you have to find the real value of the building.
- When dealing with multifamily properties, analyze each unit separately.
- Do not get demotivated if the seller is not ready to sell for below market price. Wait, he will come to you.
These are practical life lessons that the author Ken McElroy has learned over time.
I highly recommend you to read the ABCs of real estate by Ken McElroy if you are serious about real estate investing. I have shared everything you need to understand the book and what it can contain.
For more details, read the full book. Thanks for reading this book summary. See you soon.
ABCs of Real Estate FAQs
Who should read ABC of real estate investing?
Those who is an absolute beginner and wants to learn the basics of real estate investing should read this book.
Who is Ken McElroy?
He is the co-founder of MC companies and a friend of Robert Kiyosaki whose company manages properties worth over 1 billion dollars.
What is the best advice from Ken McElroy?
Ken says, know that the seller’s price is irrelevant. He will always ask for more, but you have to find the real-time value of the property before buying.