Note: To follow is Part 2 of a radio show interview conducted by Peter L. Mosca, host of Income Property Investment Talk dot com, with Frank McKinney, author of "Burst This! Frank McKinney's Bubble-Proof Real Estate Strategies," and, during his 25-year career, not only survived but thrived by taking a contrarian approach and making his own markets. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/031710. To see part I of this interview, plesase click here]

Mosca: You mention in your book "it's a right that must be earned responsibly. It's not an entitlement." You also go on to further state that the starter home is a big part of that American dream and it's a big part of keeping this blue chip investment moving forward.

McKinney: Nobody wants to rent the American dream. That's not what we're here for. Income property is wonderful and obviously in many places in the country holding onto income property because people need a place to live and are afraid to buy and have lost their homes or what have you, that's a great investment, but I'm not going to speak to that today. I'm going to speak to the fact that nobody, if you are ready and I do say that you need to be responsibly ready to own the American dream; nobody if they are ready wants to rent it. So, why not provide that ability to, if you are in the business or thinking about getting into the business, to provide that to your clients, your customers. If you are not in the business and you just want to buy your own first time single family home, your own home right now, do you think that you are ever going to see a tax credit like that that's out there today? You will not see 5% interest rates. I remember when the market was humming back in the late '90s, early 2000 and interest rates were just below 9%, 9 to 10%. That was considered pretty good and now we are half that. Think of the entire stimulus that's out there and as the economy starts to improve that's going to be removed. Also, think about the accountability the banks are going to be held to because they have been recipients of that stimulus, and they must get that money to work. They also must purge their books of all this real estate owned, all the foreclosed properties. Once those are gone, you're not going to have an opportunity commercial, residential, industrial, or otherwise to buy like you can buy today.

Mosca: This leads nicely to a section in Chapter 2 you title "Take off the Rose Colored Glasses and Plant a Rose Garden." One of the things you talk about is a risk continuum. Do you want to talk a little bit about that risk continuum and what that means for the investor?

McKinney: It's not just the investor. It's life. The risk continuum is a very simple exercise. You take a piece of paper and you draw a straight line on it. On the right hand side you put a hash mark and it says "daredevil" and on the other end you put a "phobic." Hold that up next to your face in the mirror and ask yourself the question, "where do you fall?" In all likelihood, where you fall in business as far as taking risk will be where you fall in life. There's no bifurcation there. What I am encouraging you to do in that very first section of the book is to exercise that risk threshold like a muscle. It will become stronger like a muscle, eventually it will become stronger and it will be able to withstand greater pressure. In my career, I didn't start by making $25 million spec homes. I started by building $49,000 or renovating $49,000 crack houses and turning them into really nice houses on the block when I got done with them and selling them to people who wanted to own the American dream. Slowly but surely, exercising that risk threshold to where I am today, I know no other way. I have a full head of hair; I get a full 8 hours of sleep at night because I have chosen to very slowly exercise that risk threshold like a muscle. You can't do that though until you take that risk continuum, you put a hash mark on that line somewhere where you think you fall. Take it to somebody you love, who you trust and say am I telling the truth to myself? Am I more like the phobic who is afraid to get out of bed in the morning because the ground is too cold or am I more like the daredevil who has no real regard for his or her life? We need to exercise that risk threshold like a muscle. Eventually it does become stronger and able to withstand greater pressure.

Mosca: This leads us to something that you note in your book, the terms "capitulation" and "irrational exuberance." Can you talk a little bit about that and how it plays into the mindset of who you are and your risk tolerance levels? McKinney: It's too bad that we don't spend enough time in the center of the road. It's either "capitulation" which is defined by throwing in the towel, the white towel splattered with your own blood. I give up. I'll have nothing to do with this. I'm going back to work at a company. I'm not going to take any risk anymore. I've shed enough blood. On the very far other end is the "irrational exuberance" which is my uncle's sister's nephew made $50,000 by flipping a condo in San Diego four years ago and I should be able to do that. That's the heard mentality. That's the mentality that got us into a lot of trouble when it came to the creation of these esoteric mortgage products which basically said that the $300,000 home buyer were buying $600,000 homes that they had no business being in. That's all about irrational exuberance. The only people in this country that should be putting nothing down are the veterans who are entitled to a VA loan. When it comes to our credit cards or even our mortgages, this awakening that we have been through over the last two years, look at the savings in this country. It's up. It's been up for the last 7 months. The media spins that and says the consumer is dead. The consumer is not spending. I say that's good news. We had a negative savings rate for over 2 years in this country. How do you do that? How do you have a bank account that has a negative? There's only one way. That's to have credit card balances. That behavior had to stop and if you haven't stopped it personally, you need to stop it because you can't build credit worthiness by overextension. Then we get irresponsible debt and there is a chapter in the book that talks about debt being a four-letter word. I get into great detail about what debt did to us as consumers and what debt did to us as a country but how to responsibly manage debt, now we are talking about making money.

Mosca: Can you talk a little bit about creating your own market and how important that is especially in situations or in challenging markets like we are in today?

McKinney: It is true that we tend to use the TV to gain our financial literacy. That is sad. We tend to use the blame game. It's the mortgage company's fault, it's the hedge fund's fault, it's the government's fault for bursting our bubble, and it's none of those. Don't put the blame anywhere else. That chapter puts the blame or I should say puts the opportunity squarely on us. Bubbles are self-created. They truly are. If you follow the formula of what you pay for the opportunity plus your improvement costs should equal no more than and I say in any market, 65% of retail even if retail is a moving target, you will never create a bubble situation for yourself. That's a very short explanation to a long approach. You make money in real estate the day you buy it, not the day you sell it. We are going to have regrets in life. Right? We all have them, but let's regret what we did not what we didn't do. In this case, look at the crystal ball 5 years from now. You will regret not taking some form of investment action versus taking it. I can't say that with 100% certainty, but I bet 9 out of 10 people if they don't take the action will regret not doing so.

Mosca: Is it a good idea to go out and talk to peers, go out and learn from other investors on programs like this and various other ways to secure that information and do better in terms of your investing?

McKinney: When you look at the cover of the book "Burst This!" if you're the pessimist, if you are the one overcome by fear on a regular basis, you'll see what I am holding in my hand as a bubble. For those who see it as opportunity it is two things. It is a crystal ball that you can look into and predict with some certainty how your investments are going to turn out by using the knowledge that I share after 25 years being in the market in my book. It's also a protective force field. You can insulate your investments from the inherent cycles because they will present themselves again. They tend to come by the way about every 6 years is what I learned over the last 6 cycles. They present themselves. How long do they last? How long do we skip across the bottom? Now that we seem to be coming out the back end very slowly, it's almost like taking a rock and skipping it across a lake. We are going to be bouncing across the bottom here for a bit. Just like using our Microsoft analogy, you couldn't call that stock at $10.You are a fool to try to buy it at the absolute bottom, nobody can do that. You give up maybe 5% on the downside for 25% on the upside. That's where we are at right now. SO if you've got the intestinal fortitude to handle another 5% downturn, which I can't imagine there is a geographic region in this country that's going to see more than 5% property value depreciation, now is the time to get in.

Mosca: International investors have been coming into this country and investing in our real estate now for 12 to 18 months. That's a sign that says to me they see that we've hit that bottom, right?

McKinney: Yes, no doubt. It is currency driven but at the same time it's opportunity driven. There was a piece that 20/20 did on a house that we were building. I use it in our intro when I go to give talks. It's Martin Basheer interviewing me here in South Florida and he was talking about the bubble bursting. I don't put a date on that. It was 2006. So, eventually the media is going to be right and the bubble did for the most part did burst, but after that piece, it took 2 ½ years. Just like the media now says there are going to be more foreclosures, there are always more foreclosures. There are always going to be foreclosures. That's good. That's an opportunity for you to get out there and make a deal. It's not going to stop. Job loses, that's something we've got to keep our eyes on. That is starting to ebb. It's not turning around and we are not adding jobs but if you've waited for that you've waited too long. It does take some risk, some ability to believe through looking at that crystal ball that things are going to get better. We are not talking about going out and buying 100 properties here. I'm talking to the investor who wants to buy one and one right. Now is the time to go out and you have to have thick skin when it comes to making ridiculously low offers if you are on the buy side. I remember back when I got started, for every 40 offers I made, I got one because I learned when you make money, the day you buy not the day you sell. If I bought it right, I can withstand this little 5% correction if that's what we're going to have. I can withstand over-improving a little. I can withstand carrying the property a little bit longer. So, today you go out, you make that purchase, you improve it right if you are going to rent it fine, if you are going to sell it but boy oh boy I know we are beating this up but just don't miss these opportunities. I can't tell you that how many thousands of pages I researched in these 6 cycles, I've never seen days like today, these opportunistic times.

Mosca: How does one create a unique value proposition as an investor as it relates to marketing?

McKinney: We could spend a whole hour on marketing. If you buy it right, you can fix it up right, but if you can't sell it or rent it, you're dead. That's why that section of the book is the longest. About 50,000 people out of the 6.5 billion could afford what I do for a living. That's how infinitesimally small my market is. I better know something about how to market to those people. Two things I want to talk about. The first is what I refer to in the book as "the grade school compass approach to marketing promotion and sales." It's a very simple concept. You take that grade school compass, you stick it into your product, in this case your piece of real estate, right in the dead center, and you start to draw these ever widening circles designed like a black hole to draw your customers, your clients, your buyers in. The first circle, what do you do on site, on site, within the four corners of your property to market? I don't have time to get in to all of the applications. From on site, we move to event. What event driven marketing do you do? It's a bigger circle because it captures more people. Next is print. Print is not dead. What do you do in the form of print to market your property? It's an even wider circle because it draws in more people. Next circle is web, very important. What do you do for web advertising, Internet marketing, to draw your customers? By the way, if I had a dollar spent on marketing, I would spend it there. The last circle, which is the broadest, which has the most impactful reach, is media. Getting on 20/20 or I was on Oprah twice and we just did HGTV and the Travel Channel. Those were three things and it cost me nothing. Imagine the brand that we created and the buyers that we've driven based upon those appearances. So, in the grade school compass approach there are 135 different marketing initiatives, I know that sounds like a lot, that I touch on every single week, from the signs on my property to make sure they are the right size, they don't rust and they are reflective all the way on how do we get back on Oprah. If you don't pay hypertension to those details, you might do well buying and fixing it up but you are never going to move it. You're never going to create that personal brand. That's critical.

Mosca: Video is a powerful marketing tool today, isn't it?

McKinney: A quick story about video. For a $30 million spec home I built five years ago I did a professionally done video and put it on the website. A guy in New York took the tour and was so impressed he got on his gulfstream jet, flew down to see if the video was representative of what Frank really did in the house. He flew down on a Tuesday and he was sleeping there. Closed deal, no inspections on Friday. Now if that's not a powerful testimony for video. It is one of the most important marketing aspects one can undertake.

Mosca: What is the next killer app in real estate?

McKinney: We've heard in technology terms the killer app, so it is a new operating system from Microsoft. It's a new computer from Dell. It's a new microprocessor from Intel. People run out and what do they do? They buy the new technology and it still happens today, not as much as it did in the '90s but it still happens today. In real estate the last killer app literally killed the market. Didn't it? Those crazy mortgage products and we don't need to go in that again. It really had a detrimental killer application. When it comes to the greening of America residentially, industrially and commercially we are a little further along but residentially we are at what I call the National Anthem stage of the greening of America. We are not in the second inning or the fifth inning, we haven't even finished singing the National Anthem, that's how new and opportunistic this market is. I believe that so much that we just built the world's largest and the most expensive certified green home at $24.3 million on speculation. So, the same concept, the same mentality that takes you to Wal-Mart or to Home Depot to pay an extra dollar for a 6 pack of fluorescent lights versus your incandescent. That same mindset is transitioning home buying or even renting. Here's proof, the National Association of Realtors surveyed 2000 people, it might have been 1000, but anyway it was 1,000 or 2,000 people. They were on the sidelines and couldn't decide whether they were going to buy or not, they were afraid. They changed the question and said if it was built or renovated green, would you do so? 46% of the people not only responded with a positive answer yes I would but I would be willing to pay more. Of the millions of homes that are built or renovated and sold each year, there is such a small percentage that are certified green and here you've got this base, this buyer base that cannot have that impulse, that need to buy and live green satisfied. So if you are looking for the next killer app in real estate go and learn all you can from the United States Green Building Council. USGBC.org is the perminating certified agency. It's what we went through to have our house certified, actually our house is triple certified. That is a place where I think you can make a fortune.

Mosca: What is your golden nugget?

McKinney: The nugget would be on the business side, exercise your risk threshold, your tolerance for risk like a muscle. Eventually it will become stronger and able to withstand pressure. On the business of life side, there is a wonderful mantra regardless of your religious preference or even if you have one, there happens to be a passage from the Gospel of Luke, 12:48 says paraphrasing "To whom much is entrusted, much will be expected." Do you want to succeed in the business of life, God rewards responsible stewards and so each one of us listening has been blessed with the ability to succeed at some level, but those blessings were never meant for our sole benefit, they were meant to share with others who will likely not succeed at Peter's level or my level. So, we put that sentiment, that mantra into action. We started a charity back in 1998 called the Caring House Project Foundation. It has now built 11 self-sufficient villages in Haiti. This is before the earthquake. You could imagine our hearts breaking 2 months ago when the earthquake hit. We've been back two times since. I build a lot of big houses so we can provide a self-sustaining existence for the most desperately poor and homeless over in Haiti. Don't lose sight of your spiritual highest calling while you pursue your professional highest calling.

Published: April 29, 2010

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.