Episode 57: How Do Landlords Collect Rent During The Covid Crisis?

Announcer:

This is The WealthAbility® Show with Tom Wheelwright, way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility® Show, where we’re always discovering how to make way more money and pay way less taxes. This is Tom Wheelwright, your host, founder, and CEO of WealthAbility®.

 

Tom Wheelwright:

We hear a lot about tenants struggling to pay their rent. What we don’t hear a lot about is the landlords. How do you collect rent in a crisis when tenants are struggling? That’s the discussion we’re going to have today with my good friend and one of the top foremost real estate experts in the country, if not, in the world, Ken McElroy. Ken, welcome to the show and thank you for spending a few minutes with us today.

 

Ken McElroy:

What’s happening in Tom? How are you man?

 

Tom Wheelwright:

Doing great, thank you. I’m going to give a little bit of background. Kenny is a fellow Rich Dad Advisor, he’s the founder of MC Companies, he’s a bestselling author. He’s basically my competition on the bestselling author list of Rich Dad Advisors, of the ABCs of Real Estate Investing, ABCs of Property Management. A little more prolific writer than I am. Really, a tremendous voice in the real estate industry. Kenny, if you could just give us like 30 second background, I think people, most people on this call know you, but for the few who don’t, who are you?

 

Ken McElroy:

Thanks, Tom, I appreciate that. Well, I started buying real estate really just out of university. I bought a two bedroom, two bath condo, used my own money, and then I ran out of money. But it did cash flow, and this was way before I met you, and Robert Kiyosaki, and the Rich Dad Advisors and all of that. That was my first real estate investment.

 

Ken McElroy:

I was in property management so I was managing these properties for all these wealthy people, apartments, and commercial, and office and all that. I was like, “Man, this is a cool business because of… ” Primarily, Tom, what you do, and that is these guys are making all this money and they were paying very little tax. I felt like I was in the right seat at that time learning the operations.

 

Ken McElroy:

About 25 years ago, I decided to do it myself so I started buying bigger properties, and putting together partnerships and syndications and all of that. Fast forward, we’ve got a little over a billion dollars worth of real estate now. I’ve got self-storage, I’ve got office, we’ve got 8,000 apartments that we still own today. We just sold to 2,000 as you know, in 2019 at the top of the market.

 

Ken McElroy:

That’s all we did full-time. We build them, we buy them, we rent them. We have a management company, we were a general contractor, and we have about 250 employees, we’re based in Scottsdale. I get to travel on the road, and write books and talk to you. I’m a lucky guy.

 

Tom Wheelwright:

What could be better than that?

 

Ken McElroy:

Nothing.

 

Tom Wheelwright:

Okay. You’ve been through this dance before, right? Back in 2008, you had people struggling little different this time, I think, because this time around it seems like there’s more emphasis from the government on not paying rent. So what do you do? If you would, just share what you guys have done, because I know you’ve done an outstanding job. How do you keep people paying rent when they’re having a tough time feeding their families?

 

Ken McElroy:

Well, first of all, what I want to say is that this is an issue that is not… unlike 2008. The only difference is, is that this is a virus and that was a banking crisis, so the economic results were the same. We went through this in 2008, we’ve also been through it in 2001 after 9/11 which was shorter but it still happened. These are things that happen when you own property and you own business, business gets disrupted, period. This just happens to be a virus. We’ve been through this before.

 

Ken McElroy:

What we do not want to do, Tom, is kick people out, period. The people that we’ve rented to, they are good people. They have good careers, they’re paying their rent on time. We have 8,000 tenants, we have very, very low delinquencies, very. We hardly evict anyone on a month to month basis. It just doesn’t happen because you got to screen them correctly in the beginning. These are folks that enjoy living where they are, they want to rent and they have good jobs.

 

Ken McElroy:

What we do is we just take the approach where we’re super proactive and we contact all the tenants in March. We said, “Listen, obviously… ” Well, the first thing that we had to do, Tom, is we’re a central business because we’re housing. We had to wrap up in a two-week period with a hundred maintenance guys and a hundred leasing staff on how do you collect rent and lease apartments virtually, and then how do you do maintenance around some of this.

 

Ken McElroy:

We have some COVID patients that live in our properties, so we’ve been on the frontline for all this, of PPE stuff and everything that we’re doing there. That was a massive investment, we did all that in the first two weeks. Then it was just all about rent collection.

 

Ken McElroy:

Depending on the property, somewhere around 60 to 65% of the people came in and they just paid their rent. They owed what they owed, and their lease was what was, and they would come in. These are folks that either had savings, or they were working, or they weren’t working. It didn’t really matter, they just came in, no questions asked.

 

Ken McElroy:

The second tier was about 20 to 25% of the people came in and said, “Listen, we need some help.” This is what we’re offering. We said, “Listen, come on in.” Just like anything else. Let’s say somebody goes to the hospital and they have a 2,000 or $3,000 bill from the emergency room. They sit down and they say, “Listen, I can pay you over 10 months or whatever it is.” We do the same thing. We’re not collecting fees and we’re not charging late fees or anything like that. We’re just saying, “Come, let’s work with us. Let’s work together, we’ll figure this out.”

 

Ken McElroy:

Those two numbers together represented, depending on the property, somewhere between 80 and 90% of our residents. We felt pretty good. We were dealing with, let’s say 10 to 15%, and that was all. Those are the people that were actually, that everybody is talking about right now in the media. Those are people that basically are just not communicating for whatever reason. Now it might be that they’re not even there.

 

Ken McElroy:

You got to know as a landlord, we can’t just walk into somebody’s place, there’s regulations around that. We have to post notices and say, “Is this unit abandoned?” for example. From there, they come in or they don’t come in. If they don’t come in, you kind of have to assume that it is abandoned. What you do is you put the notice right over the lock, so the notice is either removed or isn’t removed. If it’s removed, it still might be abandoned because they might’ve went in and pulled all their stuff and moved out.

 

Ken McElroy:

But the point is, we’re just trying to get people to communicate with us, we don’t want to boot anybody out. So you fall into this very last bucket of people that either skipped out or haven’t communicated. For us, that’s been a very… 8,000 tenants, that’s like less than 300 people. That’s how we got down to this small number.

 

Ken McElroy:

Our exposure personally has been pretty low. The stimulus money that the government gave us, or the employees I should say, in our tenants was super helpful because a lot of those people use it to pay May rent. For us, it was just a process, just walking through it and managing the numbers.

 

Tom Wheelwright:

It sounds to me like this isn’t something that you were able to do just overnight. In other words, it sounds like you did a lot on the front end, so that when this crisis happened, that you had better tenants and you had a better relationship with the tenants. If you would, Ken, just talk for a little bit about how do you develop that relationship with tenants where it’s not just a vendor-buyer type of relationship, we’re really taking care of the place you live in and we care about the way you care about. How do you do that?

 

Ken McElroy:

That’s a great question. The first thing is putting the right person in there. Honestly, Tom, let’s say you sold your house and you said, “You know what, I’m going to move to San Diego for a year and see if I like it here.” You might rent something for a year, and you and Luanne might just enjoy the place and then maybe buy something.

 

Ken McElroy:

There’s people from all walks of life renting, especially in Scottsdale, and we’re in Dallas, Texas, and Austin and all these other markets, some of them are really, really nice. A lot of these renters are… it’s a choice, not necessarily a necessity. So the front end is who is your tenant base?

 

Ken McElroy:

I’ll tell you something funny that happened. I was looking at all the collections by project, and I was like, “Wow, why are these three, or four, or five projects at 99 and 100% collected in April 1st, it just seems bizarre.” They were like, “Oh, those are senior properties at Roscoe’s.”

 

Tom Wheelwright:

There you go.

 

Ken McElroy:

Look, the casinos are close, you know. I was laughing. Tenant makes us a lot to do, and that was the point. Tenant makes us a lot to do with this. Then we had properties in Oklahoma that had mostly service base in hospitality and hotels and things like that. Those people we’re in trouble. All these tenants and all these people that I have all these different scenarios. That’s the first thing.

 

Ken McElroy:

To answer the second part of your question, we call that resident retention. It’s top of mind. If you signed a lease June 1st, Tom, we are actually managing you for 12 months. Let’s say you sign a 12-month lease, we have what’s called touchpoints, and we were communicating with you, we’re asking you questions, we’re seeing if you need any maintenance in there.

 

Ken McElroy:

We’re saying, “Hey, we got this stuff going on.” Sometimes we’re dropping newspapers, and we’re doing pastries down at the clubhouses and things like that. We’re talking about it, we’re bringing fitness people. We were creating a community. That’s all part of resident retention. What we want is we want people when they get to the end of their lease to say, “This has been a good experience, we’re going to stay.”

 

Ken McElroy:

The way do that is not by phone, obviously by email, by social media. We try to get all their data. We know everything about… not everything, but we try to get to know everything about everyone so that we can keep them apprised of what we have going on. There’s a whole piece on resident retention which I don’t usually talk too much about, but it’s all about managing your turnover. That was already in place. We had these open lines of communication with the majority of our residents before this even happened.

 

Tom Wheelwright:

Right. You have established a culture there where people are used to hearing from you, they’re used to talking to you, this is not a new thing, and they don’t feel like if you’re talking to them about their rent that you’re out there to get them.

 

Ken McElroy:

Right. Right, and we’re not. Listen, they pay us, they’re our customer. Period. I’m trying to make their experience the best that it can be. That’s my job, it’s not the other way around. We’re not entitled. This is definitely the other way around. The residents are there. If they don’t pay us, then we don’t pay the mortgage, and we default on the mortgage and et cetera, et cetera, et cetera, and there’s no cashflow for our investors.

 

Ken McElroy:

We always take the position. Our motto in our company, if you take a look at MC Companies, it’s sharing the good life. That goes to our residents, our employees, and our investors. We believe that, and if we can create great cultures on site. There are so many things, Tom.

 

Ken McElroy:

We have contests in our properties, and one of them three years ago was an organic garden. We had each property, we gave them a bunch of money and we said, “Okay, we want you guys to do community gardens and let the residents plant, and pick, and do whatever they want in these gardens and we’ll fund it.” Those are the kinds of things that we do to try to keep these residents there.

 

Ken McElroy:

We have programs around their kids. We have programs around the elderly. We have programs around health. We have programs around the pools, et cetera, et cetera, et cetera, et cetera. That’s all a little different now, obviously. We had all that stuff in place.

 

Ken McElroy:

If we can reduce the turnover by just 1% even though it’s significantly more than that, that means we don’t have to lease that unit, that means we don’t have to turn that unit, that means we don’t have to clean that unit, that means we don’t have to spend money on the maintenance. It’s thousands of dollars to turn a unit.

 

Ken McElroy:

So what happens in a lot of the business, they rent something, and then they’re like, “Okay, great” and then they don’t communicate with them, and then they’re surprised when they move. We take a very proactive approach on all of our residents.

 

Tom Wheelwright:

I think you’re making a really good point here. Being the landlord is a business, it’s a business. We do talk about it as passive income, but if you’re going to manage it, if you’re going to run it, you are in business. These are your customers, and communicating with customers is everything when it comes to customers.

 

Ken McElroy:

Yeah. You do the same thing. I watch you, you do such a great job of educating your folks, and teaching, and communicating with them. I look at everyone who pays us as the gold, you know what I mean?

 

Tom Wheelwright:

Yup.

 

Ken McElroy:

Those are the residents. Eventually, it makes it to the investor’s pocket. A lot of people focus on the investors, and not to say that they shouldn’t be focused on because they should, but you got to balance it. It’s not about the investors, it’s not about the equity, it’s about the tenants. If you can create a great culture and keep the tenants there and… Also, these are people so humanitarian issue, period. It just is. We have to treat people with empathy, and we have to meet them at where they’re at. That’s it.

 

Tom Wheelwright:

I love that. Let’s shift gears just for a minute, Ken, and talk about the 300. Because for you it’s a small percentage, for some people, some landlords it’s a much bigger percentage. We do have these new rules under states, some States are not allowing any eviction, although I’m not sure if you evicted somebody who you’re going to get to replace them.

 

Tom Wheelwright:

That’s always been my question. I’m going, why would you evict somebody unless they’re a bad tenant, right? Just because they’re struggling financially doesn’t mean that they’re a bad tenant necessarily. What my question is, so how are you dealing with these new rules and regulations when it comes to not being able to evict, the CARES Act, where you’re federally backed and so you have to forbear on the rents. In compensation, you get to push your mortgage. How do you deal with all of that, Ken, in your company?

 

Ken McElroy:

Sure. We are dealing with it all. We have Freddie and Fannie on the majority of portfolio, but there’s a couple of things. One, we’re involved at a national level with the National Multi-Housing Council, the Urban Land Institute, and of course on a local level, the multi-housing and the Texas Apartment Association, et cetera. Everybody’s dealing with the same thing at the same time.

 

Ken McElroy:

There’s a tremendous amount of communication around all of this. Yes, it’s true that there’s a no eviction policy, for example, in place, but it doesn’t say that people don’t have to pay, and it doesn’t say that they’re not obligated based under the terms of the lease, period.

 

Ken McElroy:

So what we’ve done is, obviously, we’re going to follow that no eviction policy, but it doesn’t mean that we can’t start to be proactive on collecting the rent, and communicating with these people, and finding out where they are. There are very few amount of people, Tom, that are just saying, “Screw you. We don’t have to pay rent.” There’s a lot of misinformation out there. They believe that they don’t have to pay, it’s only four months.

 

Ken McElroy:

The truth is, as I told you in the beginning, we don’t really evict many people anyways. You’re right, you brought up a really interesting point. Why would we evict these people? Why would we have them move out? I go, “We’re not going to rent anyway right now.” We’re basically shut down on the rental side for 60, 90 days, I’d rather have a body in there, help them out. Even if they skip after 60 or 90 days and they owe us, I would rather actually do that for them and rather than have a vacancy. Back to the humanitarian and the empathy thing, but most people communicating with us. We’re following that.

 

Ken McElroy:

Then we have had on a number of instances, conversations with our lender around lenders, around forbearances. My partners you know very well, just texted me while we were talking said, “Hey, I just got off the phone with American bank. We got good news.” We’re constantly working on these forbearance things because as a landlord, as people don’t pay, we can’t pay. The CARES Act came out and protected the tenants first. When they got all their money in May and April, it helped us a lot, a lot of those people used that for rent. We don’t really see it as a big issue.

 

Tom Wheelwright:

That’s good to hear. One thing I’ve noticed as you’ve been talking, Ken, is that it appears to me that you treat this business as a relationship business both with your tenants, as well as with your lenders and with your investors. Would you just for a minute talk about how important the relationships are in being a landlord?

 

Ken McElroy:

Yeah. Well, it’s everything. Again, I think it all starts with the tenant. No tenants, no property. I’ve talked a lot about that, and I still believe that, I think that these tenants are the reason that we’re all in business and we need to provide the best thing that we can.

 

Ken McElroy:

On the lenders’ side, it’s a very different relationship. Ross and I… Well, for a couple of reasons. One, lenders lend to companies that have teams like yourself. This is why we say business is a team sport. Because we have a team of people and we’re dealing with the situation like we are, this is what lenders want to see. They’re like, “Hey, this is a company that’s being super proactive. It’s got all these initiatives going on.”

 

Ken McElroy:

We’re communicating with our lenders on all other stuff. What our collections have been, where our struggles are, et cetera, et cetera, et cetera. I’m fully transparent, Tom. I’m not burying my head in the sand and pretending like the people aren’t paying. We’re fully communicating.

 

Ken McElroy:

From there, depending on the lender or the bank, the truth is they’re very different, you know what I mean? Wells Fargo is different than American bank, and different than FirstBank, they’re all very different. Each one requires a different conversation, et cetera, et cetera, et cetera. Some of them want re-forecasting and re-budgeting, and we’re doing that. There’s all these scenarios that we have.

 

Ken McElroy:

On the investor side as you know, from getting our investor letters, we’ve been fully transparent. We decided to hold the first quarter distributions which was, honestly, it was painful for me to do because we actually had a great first quarter. I was like, “Well, okay. But, you got to remember where we were at the end of March.” We were like, “We don’t know, we don’t know whether we’re going to collect rent in April and May, and we haven’t seen June yet.” We’re going to do it just as reserve.

 

Ken McElroy:

The good news is, Tom, is that money is still on high ground, it’s still the investors’, it’s not mine, it’s the investor money. The majority of the investors were completely had understood. Honestly, it was less, I think it was five or six out of close to a thousand investors that we’re in disagreement. So we felt very good about that decision. I just worked through those issues with some of those people, and mostly there were other issues that they had.

 

Ken McElroy:

Now, here we are in April and May, after a majority of collections are done in April, of course. Now, we’re almost done through May, and we’ve done much better than we thought we’re going to do, plus we got our PPP money. That’s been a blessing because we’ve been able to use that for payroll. We’re going to land a lot softer than we thought we were going to. We’ll be able to now release some of that first quarter distributions soon as a result of, now that we’re through 60 days into this.

 

Ken McElroy:

For us, it’s just been, we’ve been trying to over-communicate. We communicate once a week to the investors as well, and we have a full-time person that basically handles any and all investor inquiries. That’s part of also the business. When you raise capital, you have responsibility on communication and transparency to the people that give you the money.

 

Tom Wheelwright:

Yeah, for sure. I find it, it’s interesting. I’m listening to you talk about holding that first quarter distribution. I’m very fortunate like you, I have a great partner, and like you have a partner who’s a very conservative when it comes to money because I’d spend it. We did basically the same thing in our company.

 

Tom Wheelwright:

We said, “Look, we’re not making distributions.” What I’m finding, and I’m interested in your thoughts on this is that the people who were well capitalized have weathered this just fine, because then they’re able to do… When you’re well capitalized, then you’re not worried about, “Okay, am I going to run out of money next week?” Instead, what you’re worrying about is, “Okay, how do I make money?” That’s a very different energy about making money versus protecting yourself and worrying about going out of business. Don’t you think?

 

Ken McElroy:

Oh my gosh, yes. It’s a really, really good point. Out of the hundreds and hundreds of emails that we sent out and letters to the investors, I knew literally it was… you can count them on one hand. I obviously know who these folks are, and they had their own thing going on, and I feel bad for them.

 

Ken McElroy:

But we’re not going to release a distribution just to help out their personal financial situation even though I wish that I could, because then I would have to do it for the rest of the folks, it’s not just to make a one off deal. I had a conversation with Robert yesterday as you know, he sends probably two or three YouTube videos to us a day, and Jackson calls us multiple times a day.

 

Ken McElroy:

I had a conversation with him last night for about an hour. He said, “For the rich it’s money, and for the wealth it’s time, it’s a big difference.” I said, “Where’d you learn that?” He said, “From [inaudible 00:26:00]. He said the rich measure their success in money, and the wealth measure their success in time.” You can see the difference, I think, in those two types of people.

 

Ken McElroy:

This is exactly why we teach at Rich Dad, is if you can figure out a way to generate enough passive income to be financially free and not have to rely on next week, next month income or commission, or paycheck, then you’re personally going to be in a good financial situation. You don’t have to have to dig into savings, even though I advocate that you have savings just to survive.

 

Tom Wheelwright:

No, I like that, I like that. Thank you, Ken. This has been absolutely perfect. If you could, what are like two or three things that you would suggest any landlords who might be struggling, any people who are thinking of, “should I be a landlord?” Any, any suggestions for them at this point?

 

Ken McElroy:

Well, first of all, there is no better time to be a landlord. I know that sounds contrarian. If you just think about it because I’m… I’m actually doing a video later today on where I think this is all going to end and where are we going to land by the end of 2020.

 

Ken McElroy:

I personally believe that we’re going to have 10 million people still unemployed, at least. We started off in February at 5.3, and I think this is a net [inaudible 00:27:37] so we’re going to be actually probably closer to 15 million people to get back to the 5.3 that we usually have. There’ll be a plus 10. Those people are going to be struggling a little bit.

 

Ken McElroy:

Now, it’s going to depend on the government, and the stimulus, and the money that is thrown around and all that kind of stuff, but that’s another topic in another time. We are moving to a nation of renters, that’s the point. Those people, they’re not going to be buying houses, they’re going to be doing a lot of things, but they’re probably not going to be buying houses if they don’t have any work.

 

Tom Wheelwright:

Good point.

 

Ken McElroy:

I believe that the best thing you could do is get really, really educated, and what I call don’t catch a falling knife. In other words, don’t jump in now because we haven’t seen the mortgage defaults. You’re going to have housing defaults, you’re going to have retail center defaults, you’re going to have apartment default, you’re going to have commercial office default, you’re going to have the regional malls default, all that stuff.

 

Ken McElroy:

The prediction is, is half the businesses in the malls aren’t going to reopen. I saw something yesterday on CNN, one economist said they expect 42%, this is a big number, that won’t return to work. If we just take a look at that, that’s close to 15 million people. Whatever the number is, we can debate on that all day long, but the point is it’s going to be big.

 

Ken McElroy:

We are heading into a nation of renting, but you want to be careful not to buy too soon, and that’s why I say “don’t catch falling knife.” If you own something right now, you have to figure out a way to get cash, and keep what you have, because it’s going to be gold later.

 

Ken McElroy:

You want to do anything and everything you can, and that could be through partner cash calls which I had to do on that resort I own. We did a partner cash call 45 days ago, we didn’t get any PPP money. We were mandated to close our restaurant and our resort. We had a bunch of employees, a lot of them actually, and no income. So we did a cash call. That was one way.

 

Ken McElroy:

Another way is to obviously apply for any kind of grants that you can find, and find ways for some kind of an assist, some kind of assistance financially. This is part of being a landlord, in my opinion, is to have reserves and to have liquidity for these kinds of events. I went through this in 2008, then it was a banking crisis, and the government funded the banks, but now it’s obviously a virus and the government is telling us we have to be close and so they’re funding the people.

 

Ken McElroy:

We’re going to get into a very inflationary time I think because in ’08, the money went to the banks, and it sat in the banks but nobody was borrowing because of exactly what I’m about to tell you, is that why would you borrow and buy something where prices are going down? That’s why we didn’t see inflation in 2008, is that prices were, they were deflating. Asset prices were deflating while the money was coming in in the economy at the same time.

 

Ken McElroy:

That’s why we’ve seen inflation recently, because as that money… A lot of those banks paid that money back so it was that TARP money. I do believe that we’re going to see inflation, and what you want to be in is hard assets, you want to be able to hedge inflation. If you can hold onto that and figure out a way to do that, work with your tenants, it might be a rough year for you.

 

Ken McElroy:

You want to do some discounts in rents, you want to do some one month frees on a 12-month leases. You want to work with these people. You want to do whatever you can to keep what I would consider the gold in the properties, in the retail centers, in the malls, whatever it is, and just do the best that you can and try to stop that revenue loss.

 

Tom Wheelwright:

I like it. Thank you. Ken, Ken McElroy, MC Companies. We know we can find you at mccompanies.com. Any place else we can find you, Ken? You seem to be all over the place.

 

Ken McElroy:

Yeah, I know, I know. Well I’ve been doing this, it’s been great. The one thing that’s been nice for me, Tom, is we’re doing all these Zoom calls, I’m doing it from my house, and I’m having time to do these videos up on YouTube. I just did a video, it had over 300,000 hits in less than a day.

 

Tom Wheelwright:

That’s awesome.

 

Ken McElroy:

Yeah. We’re doing videos on YouTube. I’ve got kenmcelroy.com where we have a bunch more stuff for real estate professionals, and investors, and things like that. I’m just trying to produce whatever I can based on all our teachings, Tom. I mean you and I have been doing this together, we’re just trying to educate.

 

Tom Wheelwright:

I appreciate that. The reality is, is that when we get more financial education like this, we’re always going to make way more money and pay way less tax. We’ll see you next time. Thanks everyone.

 

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