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Real Estate Investing: Secrets of the Main Street Millionaire

Posted March 15, 2008

"Real estate is simple to understand and easy to get into. It’s a fairly safe business, by and large, if you know what you’re doing. And it offers you the kind of returns that you might not want to take in the stock market because they are leveraged."  — Michael Masterson

This was taken from Smart Investing Market Insights interview with small-business guru Michael Masterson. Michael is the author of Ready, Fire, Aim and a best-selling series of books on creating and expanding businesses as well as the co-founder of "Main Street Millionaire" — a course preparing investors to be successful real estate entrepreneurs.

by Krista Das

Baltimore — (TFN): Krista Das: Few people know that you are a very successful real estate investor. How do you see this market developing in the next months and years?

Michael Masterson: I think it’s going to get worse before it gets better. Three or four years ago I predicted that the condo market would drop to about half the price levels at that time. They’re not there yet — there’s more room to go. It’s going to hit bottom who knows when, but I guess sometime in the next 6 to 12 months. I’ve been telling all my friends that are thinking about getting back in the market now to wait a bit longer.

There are a lot of vulture funds that have been set up to take advantage of this situation. They are are well-funded, and most of them are not yet buying properties. I think the reason is because there is a very substantial amount of instability that’s still in the markets that’s not just caused by all of the subprime troubles we’ve been hearing about but all the secondary tertiary businesses that are associated with real estate. The construction industry, the services industries, all that that surround real estate are going to be affected by this market and it’s going to make it more difficult.

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There are a lot of people that are still just hanging on, hoping that somehow the market is going to turn around. A lot of investors, buyers of not just condos but single-family homes and townhouses, have been holding on, trying to make payments. But there’s a real problem — really a triple threat. You’ve got rising inflation. Meanwhile, real estate prices are collapsing, and you have increased local taxes that are affecting people. You have increased property insurance, especially around the coastal areas, which have experienced the greatest inflation and these – and additional costs associated with maintaining these properties.

This is like a perfect wave against investors. I think you’re going to see a lot of people just giving up and getting out of the real estate market. And it’s going to continue for the next 6 to 12 months.

KD: Michael, back in the days of the savings and loan debacle and the Resolution Trust Company, around 1990 and 1991, real estate investors were able to pick up foreclosed properties for pennies on the dollar.  Do you see a similar opportunity shaping up right now?

MM: Absolutely. Foreclosures are available right now. The banks (and private investors) are still trying to hold out to get the best prices they can. Foreclosure properties right now are not being offered at price levels that I would be interested in. 

But I think in another 6 or 12 months, these prices are going to come way down. The banks don’t want to be landlords, and they’re going to start releasing properties. IThis will turn into a real opportunity for investors of all levels, from the vulture funds at the very top to small private investors.

KD: So what kinds of properties would you start looking at and at what point in time?

MM: It depends on your experience and your level of capital resources. I think all properties are going to become interesting. If you’re a beginning investor you could be looking at buying condominiums in complexes. 

Again, before you do that, you want to make sure that you’re not buying one unit in a property that itself is about to go into foreclosure. Single-family homes are good; or townhouses. My level of interest is more in apartment complexes of a certain size. You can start with four-plexes. You can go to units of 50 or 100, all the way up to there will be opportunities to buy. The big funds are going to be buying entire buildings. 

In the city of Miami there must be 50 brand-new, beautiful buildings that are sitting, waiting for vulture funds to come in and buy them out, sit on them for a while and then repopulate them. And when all this excess inventory is eaten up, these things will be good investments again. (Read on below…)

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KD: Now, your counterpart, Robert Kiyosaki, of Rich Dad, Poor Dad fame has based a large part of his strategy on real estate investing.  Do you think he may have to rewrite some of those books?

MM: Well, my strategy for wealth building was never focused primarily for real estate.  For me, real estate is the perfect second investment. It’s what everybody should do who has something – another way of making an income.

For one, it takes a while to generate income from real estate for an entrepreneur. Real estate properties don’t generally cash flow for two or three years at the very minimum. There are the occasionally properties you can find that are just so undervalued that you can get a positive cash flow immediately from them, but generally not.

For me, the perfect wealth-building scenario is to be an entrepreneur first, to have your own business, and then to invest the cash profits from that business in real estate investments on the side. Real estate is, by and large, simple to understand, easy to get into. It’s a fairly safe business, by and large, if you know what you’re doing. And it offers you the kind of returns that you might not want to take in the stock market because they are leveraged. 

Generally, you buy real estate with financing and that gives you a leverage of four or five to one on your money. So for those reasons then I think it’s the perfect second investment.

When I look at my own portfolio over the past 30 years as an entrepreneur and I see how my assets are allocated, I realize half of the wealth that I’ve developed has been from my real estate investments, not just from my businesses. My businesses produced 90 percent of my income, but my real estate created half of my assets, and that’s why I like real estate.

KD: Thank you for the interview.

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Posted by Krista Das · Filed Under Real Estate 

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