In this article, I will share with you the complete book summary of the ABCs of real estate investing by Ken McElroy. One of the best real estate books I have read so far. Ken McElroy said many times in this book, Trust but always Verify.
- The best quote: Trust but always verify.
In real estate, you will come across many information and news. But trusting and acting upon all those is not a way of the ultimate investor. Ken says, yes, your trust that info, but before you take action, please verify them. That is what Trust and Verify mean.
Table of Contents
- The ABCs of Real Estate Investing by Ken McElroy – Complete Book Summary
- 1) Find the Market Trend
- 2) Identify the Demand and Supply
- 3) Employment, Population, and Location
- 4) The 3 Levels Of Research
- 5) Now Calculate the Exact Value of the Property
- 6) Create Your Investment Checklist
- 7) Unique Due Diligence Methods
- 8) Negotiate with the Seller
- 9) Decide What to Do: Hold or Sell
- 10) Some PRO tips from Ken McElroy
The ABCs of Real Estate Investing by Ken McElroy – Complete Book Summary
The author Ken McElroy shares ten tips for every person who wants to build what he has built over time. He and his partner founded the company MC Companies.
It has total assets of $1 billion, and recently Ken bought about $400 million worth of properties. All his ideas, tricks, and tips are shared in the ABCs of real estate investing. I would say one of the best books on real estate investment so far. So let’s begin the game.
1) Find the Market Trend
The best way to identify a market trend is to find a problem. For example, if you head from somewhere else, the government is planning to build a big highway there or a small overbridge to solve the huge traffic problem.
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 will become in the next five 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 high, and properties will sell because the highway (the bridge) will attract people to live there as it offers easy transportation.
2) Identify the Demand and Supply
But that’s not all. The trend is the first step in this process, as Ken says in his book the ABCs of real estate investing. Now you will analyze the demand and supply to know how quickly it will happen by analyzing the surroundings and the local area. Here is how.
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 a place 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
- Supply should be low
That is the ideal place to invest.
- High occupancy = High demand
- Low occupancy = Low demand
Look for a market where the occupancy rate is above 90%. That means the market is promising, and people want to live there.
- Look, the property can not do anything for you unless you choose the right market for it.
In real estate, the market is everything. A good market is equal to good profit. That is the primary motto.
Also, 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 = Low demand
- Fewer advertisements = High demand
So look for these metrics after analyzing the trend in the market and then look for employment growth, population growth, and the exact area to invest.
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3) Employment, Population, and Location
Ken McElroy says in his book the ABCs of real estate Investing that these metrics are the pillar of your market research. Do them well 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 generation employed?
- Where do they work, and in what company?
- Are those companies good and long-lasting?
- Their track record of employment over time.
- Product review, How good their products are.
If you have all the data with a positive sign, then that area is possibly a good investment. You don’t want to invest in an area, where the unemployment rate is way higher than 5%. 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 is 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 5 miles of this area. That location is not the exact spot but the local area. Once again, the market area is more important than the property itself. Choose wisely and with proper data.
4) The 3 Levels Of Research
In this step, you will collect more data on that area by using these three levels of research that Ken says in the ABCs of real estate investing.
- Google the place and the surroundings. You will find new pieces of information, some new blogs that talk about the pros and cons of that 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 and people in that area, verify them with your local agent or ask more people the same questions and match the answers.
That way, you will follow the thumb rule, Trust but Always Verify. Use the three levels of research before doing the mathematical part.
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5) Now Calculate the Exact Value of the Property
Before you make an offer to the seller, calculate the amount that will be a reasonable price for this property. You dont want to invest more than what is desirable for it. That is why you must verify these things before making the final offer. These apply only to big multifamily properties (for small homes, all might not be required).
- 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% – 8%)
- Follow this formula, Property value = NOI/ Cap Rate
If your analysis says you should not pay more than $540,000 for this, and the seller is asking for $650,000, and he does not agree after a lot of renegotiation, then it’s best to level that property. Because leaving 100 good properties is always better than buying the wrong one.
- It is better to leave a great investment property than to buy the wrong one.
It is the 2nd most important quote I have learned from Ken McElroy’s book the ABCs of real estate investing. It is deep and powerful.
6) Create Your 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: A file audit includes a title review, property legal review, tax review, and mortgage review.
- Do an Interior and Exterior audit: Have a look at all the things the house has currently, the paint, water, tiles, and everything from the inside and outside.
- Government agency audits: Check building codes, zoning codes, and other legal area codes that everyone must follow.
- The Service Agreement audit: Recheck the contract or the agreement you and the buyer agreed upon.
- Books and Records audit: It will include all the data related to the property in the government directly.
In every property you buy, you must analyze all these with all the other property analyses if you dont want any trouble. Now move to the due diligence method, the final analysis you need to do.
7) Unique Due Diligence Methods
Look for a small market to buy properties, not a big one. Small 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 if something new is happing. 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.
Read: SHIFT book summary by Gary Keller
8) Negotiate with the Seller
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 strong and 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: Hold or Sell
But I am assuming that the seller has agreed, but he wants a little more, like $10,000 more. You gave him that. Now you plan what to do with it. Sell it or hold it for rental income. If your idea is to sell, create ads that way. If you want to hold it, hire a property manager and start managing that building like a business.
10) Some PRO tips from Ken McElroy
Now I will share a few tips Ken shares in his book the ABCs 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 buildings, analyze each unit separately.
- Dont get demotivated if the seller is not ready to sell for below market price. Wait, he will come to you.
These are practice life lessons that the author Ken McElroy has learned over time.
I highly recommend you to read the ABCs of real estate investing 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.