Ken McElroy Doesn't Do Apartments At This Point!

[Jason Merchey]

In a 2018 video, Ken McElroy said he doesn't do apartment investing anymore. Talked about how it is too hard to make them work with the low cap rates, and instead he builds from the ground up. He's obviously a big name in the field so I gulped, because I heard from Ashcroft/Joe Fairless about a deal in WInter Park, FL that seemed so solid I pulled the trigger last month. My first-ever multifamily investment. 

Of course, Praxis is good, too. And I like 4 Mile Capital, and someone said something positive about Three Pillars. Neil Bawa certainly seems to know what he is doing. Ryan McKenna is all over deals these days. 

I'm just wondering if ya'll feel that Ken is mistaken, or being gimmicky. I mean, Joe F. says he has done this 27 times, and I haven't heard that Praxis is getting out of the game. I'm trying to use multifamily passive investing to build wealth and be my heavy hitter. I get that a lot of syndicators are in this space, and that cap rates are quite low. But a value-add investment not being able to "work", gosh I just doubt that Joe Fairless would be able to be convinced of that. 

Then again, sometimes a vehicle with a lot of inertia can't slow down if it wanted to. Perhaps that is why Rod Khleif lost $50,000,000 in SFDs in 2008; the idea of throwing in the towel just didn't occur to him.

[Brian Burke]

Originally posted by @Jason Merchey:

In a 2018 video, Ken McElroy said he doesn't do apartment investing anymore. Talked about how it is too hard to make them work with the low cap rates, and instead he builds from the ground up.  

To say that you don't invest in apartments, but build apartments from the ground up is a bit of a red herring.  Make no mistake, building apartments from the ground up is not only investing in apartments, it is doing so with a strategy carrying one of the highest risk profiles.

If prices fall (which means a reversal of the cap rates that are being faulted for making investing unattractive), developers would suffer just as bad as owners of existing buildings, and perhaps worse.

But Ken is selling investments in developments, so it is his job to articulate his reasons why his strategy is better.  I sell investments in multifamily value-add syndication investments, so it would be my job to market those by pointing out the availability of multifamily investments below replacement cost in the marketplace, and rising construction costs which make development less attractive.  But I suck at marketing, so I'll say that the truth is that there is room for both strategies and there is nothing wrong with either of them.

Developers and their investors are willing to accept higher risks to chase higher returns.  Value-add operators and their investors are willing to accept lower returns in exchange for lower risk.  In my observation, these are often two different investors.  We did a several-million dollar development fund last year and it oversubscribed in 30 hours.  But by and large, the investors subscribing to it were a different set of folks than typically invest in our acquisition vehicles.  So, to each their own--and no matter what the strategy, it works--until it doesn't.