1066: He Gets 25% Returns on His Flips by Being a “Real Estate Artist” With Frank McKinney
For the first five years of his career he never did a project worth more than $100k. Eventually he mastered his craft and moved on to $1,000,000 plus projects. If you are an investor, you’re going to want to take notes on this one. And what in the heck is a Mirco-Mansion? If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Frank McKinney Real Estate Background:
-Real Estate Artist, 5x Bestselling Author (in 4 genres)
-Built oceanfront spec homes valued in tens of millions of dollars, shattering records with each new project
-Started with a $50,000 fixer-upper home, and climbed all the way to a $50 million oceanfront mansion!
-Just completed his new project, Micro-Mansion
-Based in Del Ray Beach, Florida
-Say hi to him at www.frank-mckinney.com/
-Best Ever Book: Charlie and the Chocolate Factory
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Frank McKinney. How are you doing, my friend?
Frank McKinney: Coming to you today from my tree house office, Joe, overlooking the Atlantic Ocean in [unintelligible [00:02:39].25] Beach, Florida.
Joe Fairless: Well, that is a phenomenal perspective. I am coming from – let’s see – a two-story house in Cincinnati, Ohio, looking over a suburban neighborhood street. [laughter]
Frank McKinney: Hey listen, I’m a Midwestern at heart; I’m from a little town in Indiana called Carlisle, Indiana, so… It’s a long way from the corn field to the tree house.
Joe Fairless: [laughs] Well, a little bit about Frank, and then we’ll dive in and he’ll give us more details. He is a real estate artist, and he is gonna talk about what that is. He is a five times best-selling author and he built an oceanfront spec house valued in the tens of millions of dollars which shattered records, and shatters records on each new project. He just completed his new project, a micro-mansion – which seems like an oxymoron; we’ll have to learn more about that. He started with a $50,000 fixer-upper home and climbed all the way to a 50 million dollar oceanfront mansion. Holy cow, we’ve got a lot to talk about, a lot to learn from about you.
With that being said, Frank, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Frank McKinney: So I’m coming from Indiana with a 1.8 grade point average, having exited my fourth high-school in four years with a GPA of 1.8… I got a one-way plane ticket out of little Indiana, landed in South Florida in Palm Beach many years ago, and pursued at my professional highest calling. This was back in the days of Robbing Leech, and the lifestyles of the rich and famous probably before your time and many of your listeners; kind of like MTV Cribs nowadays – you get to look inside of the lifestyle of the rich and famous. In South Florida there were people living it; I was young, I was impressionable, and I learned… I was a maintenance worker, then I was a tennis pro (teaching tennis pro, not a touring tennis pro).
On the tennis court I learned from most of my students that their plan to riches and fame and fortune wasn’t through their 9-to-5; it was taking the money they had left over after paying bills, after using their discretionary income to live on, and investing in real estate. This was before there was any podcast; the word “podcast” didn’t even exist, there was no money down program. This was just learning from people on the tennis court, as I taught them a better forehand or backhand, “How did you get to live this lifestyle?” and the answer I heard over and over again was real estate.
I followed their advice, I bought my first fixer upper almost 30 years ago, flipped it (before there were any flip shows or anything) and I made $7,000. Fast-forward to today, we build oceanfront spec homes, which are big, very beautiful homes, built on the ocean, in Palm Beach, on speculation [unintelligible [00:05:16].10] I’m a real estate investor still. We’ve built 42 of them since 1992, with the average selling price of 14.4 million and 56 days on market. So whether it’s the best ever advice ever or not, I am a real estate investor, I make my money in real estate investing, as a real estate artist, and I love the business. You’re in the right business if you’re listening to this podcast.
Joe Fairless: You gave us so much to talk about… Let’s start with the term “real estate artist.” What does that mean?
Frank McKinney: This would be considered some of the best real estate advice I could give you – in the business of real estate you can classify yourself a flipper, a wholesaler, a retailer, a shortseller, a contractor, into storage units, on and on and on; there’s a ton of ways to make money in real estate. From that very first crack house that I did 30 years ago, I looked at that little 620 square foot, two-bedroom, one-bath house as a dilapidated piece of art, that I didn’t cut corners on. I replaces the roof, I put $20/yard carpets in instead of $10, I put three coats of paint on instead of two… I made it the nicest little crack house on the block, but it wasn’t a crack house when I was done, it was a beautiful house.
And you know what? I’ve taken that approach to now some of the most beautiful homes. If you go to my website, Frank-McKinney.com, you’ll see some of the most beautiful homes ever created. Three-dimensional art really, Joe, on the sun-drenched canvas known as the Atlantic Ocean.
So my advice to the real estate investors, to the buy and hold people, to the buy at value and sell people – anybody in this business, take an honest approach. What that really means is that if you were an artist and you went to a paint store to buy paint to paint a beautiful painting like Van Gogh, Renoir, Monet, would you cut corners on the paint that you bought? Would you buy the cheapest canvas, the cheapest brush? No, you’d have passion for what you did. And I’ll tell you, it served my brand extremely well taking that artist approach.
Joe Fairless: I suspect, although you let me know, that the higher-end you go, the more you’ll be compensated for taking the artist approach, versus on your $50,000 house you made $7,000, but you did three coats of paint instead of two etc. Is that one of the reasons why you continue to go up in price point and luxury, because you get compensated or rewarded better for taking that artistic approach?
Frank McKinney: There’s more zeroes in your profit, but there’s not more percentage margin. So I would push back to anybody who said “No, it’s a bottom line driven business, it’s a commodity driven business, it’s how much can flow through to my bottom line.” For the first five years in my career, Joe, I didn’t do a house worth more than 100k. I did hundreds of them and I did them really well; my margins increased from $7,000 on the first deal to where we were making 25k on a 100k sale. That’s a really good margin, that’s a 25% return. So if I build a ten million dollar house, I’m still basically making that same return, 2,5 million dollars, but it’s a couple more zeroes.
I implore you, or I encourage you, as a real estate investor, to take that artist approach from the very beginning. When I realized I got good at the craft of real estate — you know, Malcolm Gladwell in his book Blink says that to be an expert at anything in life you’ve gotta put in 10,000 hours. 10,000 is five years full-time, and I look back at my career to the first years; I didn’t do a house worth more than 100k. Guess what – I got good at the craft of real estate, so it was a natural progression. It wasn’t even any anxiety or fear, I just moved up the price point. As a matter of fact, I jumped from a $100,000 house to a 2,2 million dollar house. There was nothing in between. Since that 2,2 million dollar house — as I’ve said, we’ve done 42 of them with an average selling price of 14 million…
So it’s not for everybody, Joe, as far as taking the artist approach. I can’t sing, I can’t play an instrument, I can’t draw a stick figure, I can’t mold clay, but we’re all in this three-dimensional art business called housing, and I encourage you to take that approach.
Joe Fairless: I wanna throw out an example just to make a distinction, because I think you will agree with this, but I’m not sure; I wanna give you the example and hear what you have to say… So the problem could be that someone hears this and they’re like “Okay, I’m going to put gold-plated door knobs on my $40,000 fix and flip”, but that’s not what you’re saying, right?
Frank McKinney: No, let me [unintelligible [00:09:40].19] and assume that nobody listening to this call is an idiot, and that they wouldn’t do something like that.
Joe Fairless: [laughs] I like to use extreme examples just to make a point, though.
Frank McKinney: No, I understand. You’re making a very valid point, and this is what I probably should have said first… I’m a real estate artist, but what none of us wanna be is a starving artist. Of course, the real artists that are out there, starving artists with their angst, they may have their apparel and that little hat, and they’re kind of living in Seattle or whatever, starving — no, I’m a business man first, Joe. Believe me, I have a formula. Let’s get away from the artistry and let’s go to the formula, that is also — I wouldn’t say the best real estate advice, but good real estate advice. My formula is very simple – acquisition basis (what it cost to buy the opportunity) + improvement basis (what is cost to fix it up or build it; in my case, I do a lot from the ground up) should never equal more than 65% of retail.
Let’s use a 100k example. Acquisition could be 60k, fix-up could be 5k, you put it on the market for 100k, you have some negotiation, you have some closing costs, you run a little over budget, and you end up selling it for 90k. You’ve got 65k in it, and there’s your $25,000 margin.
But to get there, Joe, that same $100,000 example, in my early days, I wouldn’t ask 100k; I would ask 105k. I always made a new high in the market. That’s why we sold the most expensive spec house in the history of Palm Beach county. I’ve sold a spec house in 2006 for 50 million dollars. That was unheard of. So I am an advocate for — now, this is my approach; it’s not gonna be everybody’s. There are some that say “Buy low, sell low.” That’s not me. I buy low and I sell extremely high, and I’m able to do that, Joe, because I take that artist approach by putting a little bit more money, and guess who that satisfies? Two very important people – one, the buyers, of course; two, the appraisers. The appraisers come in and if my house is in a 100k neighborhood, my house would appraise at 105k. That extra $5,000 meant a whole lot, in that case. It’s 5%; if I’m building a ten million dollar house, that’s another half a million in my pocket… Because I’ve taken that approach for almost 30 years.
Joe Fairless: What are some ways – and you can use the examples of the 100k or the 50 million dollar, whichever one is fresh in your mind the most – that you take it above and beyond, so that you are reaching the market highs?
Frank McKinney: Okay, I know we only have 20 minutes, so what I’d like to do is give the macro answer, and I’ll send you to my book “Burst this!” for 165 pages of a lot [unintelligible [00:12:24].29] out of 400 for the micro answer. The macro answer is – and this is the best real estate advice ever…
Joe Fairless: Let me ask you the question, because I have lead-up music, and everything… So Frank, what is your best real estate investing advice ever?
Frank McKinney: [laughs] Okay, you as a real estate investor must tighten the experience your buyer or your renter has with their five senses to the state of subliminal euphoria. I’m gonna repeat that: heighten the experience your buyer or renter has with their five senses (sight, sound, smell, touch, taste) to the state of subliminal euphoria. They became intoxicated with the experience they have when they walk in the front door of your house.
I wish we had more than 20 minutes, I could go into a bunch of examples, but I touch on sight, when they walk up the driveway [unintelligible [00:13:18].22] sound coming from a room you can’t see where the speakers are, because they’re beyond the drywall. Touch – I make you take your shoes off when you walk in the bedroom because there’s $180/yard carpet in there imported from Holland that you don’t need a mattress to sleep in that room; I want you to feel that, because the bottom of your feet are the most sensitive parts of your body when it comes to receptors.
Taste – maybe in the $100,000 days it was Dorritos and Mountain Dew; I had something there for you to eat. Now it’s caviar and wine and chocolates and that kind of stuff.
Smell – back in the days it was cookies in the oven at 125 degrees instead 425, so you smell the cookies. Now you can buy scents online; lavender is the scent that evokes people into a buying or a renting mood.
So think about those five senses and go to my “Burst this!” book and I enumerate all the things that I do to touch the five senses that cause them to pay top dollar for my properties.
Joe Fairless: Very helpful, and even though you said you weren’t gonna give specifics, you did give some specifics, so I appreciate that. Let’s talk about that 50 million dollar spec house that you sold at a new market high, specifically with that example… Because we do have time to go into a case study. Tell us about that one and how you were able to take it to the new high.
Frank McKinney: Do you mind if I talk about this micro mansion in that context?
Joe Fairless: Yeah, sure.
Frank McKinney: Because I think it’s very current; it was just about a month ago. I’ve seen this tectonic shift in the ultra-wealthy buyers preferences. I have built bedrooms bigger than the house I just finished, and that is a truth. I built a 2,100 square foot bedroom; the house I just finished was 4,087 square feet, so 13 square feet smaller than a bedroom I built. So you have buyers over more houses and more places, and they’re staying in them less time, and they’re using less of them, so we took the opulence, the grandeur, the artistry, the beauty and shrunk it into a much smaller house.
When you walk up my driveway, the first thing you’ll see is a white porcelain driveway – a white, beautiful porcelain driveway. You’re coming from Chicago, you’re coming from Ohio, you’re coming from New York – you’re gonna see beautiful, lush, tropical foliage with coconuts hanging up the coconut trees. You walk by the front door — there’s three pools here. There’s a pool for your [unintelligible [00:15:38].26] You walk in the front door, I have kitchen countertops, Joe, that are the only countertops in the country made out of sea glass. If you were on the beach and you picked a piece of sea glass inside of your fingernail, well I’ve got thousands of those that were melted down, put into a mold and made into — if you go to my website, you can take a tour of the house; we’ve just posted it… Beautiful sea glass kitchen countertops.
There’s a sun deck floating between two pools. When you walk in the door, of course you’re gonna smell that beautiful lavender. Your sense are heightened to that point where right by my front door — at all my houses when I build them I have a contract with everything filled in but the buyer’s name. I put the full price in there, because I assume that’s what they’re gonna pay. That’s a very important lesson. Why? Because once you’ve intoxicated your buyer or renter with their five senses, what happens, Joe, is the impulse window opens. They’re buying on impulse. There is a need – for most people, they need shelter, but it’s turning that need to want (and in my case, desire) that once you’ve done that, you’ve gotta close them, and that’s why I have a contract by the front door.
Joe Fairless: I love that approach. Every best ever listener who’s a real estate agent is writing that down right now; I can hear them scribbling on their notepad.
Frank McKinney: Well, if you are an agent – again, my book “Burst This!”, Re/Max and Century 21 makes the marketing chapter (because it’s more for investors) required reading. It is the longest section in the book. You could overpay — now, let’s talk to the investor… You could overpay for the opportunity, you can over-improve – say your 65% is up to 75% – but if you know how to market, you could make up for a lot of sins. You’re gonna make up for a lot of mistakes.
I give all the tours of my houses; I list them, I believe in brokers – I have the same broker for 15 years – but I want you to have an experience when you come through here, or any of my houses. So read and absorb the 165 marketing initiatives that I touch on a weekly basis.
Joe Fairless: As far as the micro-mansion goes, what’s the square footage of that one? And is it just one, or is it multiple micro-mansions that you’ve built?
Frank McKinney: One is a prototype I just finished. It’s like a Tesla rolling off the assembly line for the first time, or an iPhone 1, right? There was a prototype at some point. So the one I’ve just finished is 4,087 square feet, and I went to school on it; I went to school of the people who have walked through here as buyers, million dollar real estate brokers, media that have come to the house… There’s 22 different feature articles; if you go to my website, you can read about what people said about the micro-mansion. I’ve absorbed all that, digested it, and we have designed and are building another one. This one not 3,5 million, this one will be 20-30 million, but only 800 square feet… So you do the math – that’s $5,000-$6,000/square foot. Nobody is getting that. There’s a couple condos in Miami that are scratching 3k, maybe 4k a square foot… But it’s not the money. The money isn’t the issue with these people. It’s the finishes, the artistry, the grandeur, the opulence in a smaller package.
So the short answer is I went to school on the first one, and we’re breaking ground on the second one probably by the time this podcast is playing.
Joe Fairless: A high-end property that you’ve built that was on the market the longest – what was the reason why it was on the market longer than the average compared to your other ones?
Frank McKinney: One reason I’m gonna give you is my fault, the other is the market’s fault, and I’m not one to lay blame anywhere else, but when our market crashed in South Florida in 2012 and hit the bottom, we lost 35% of our oceanfront values. It was catastrophic. So that property that I finished at the time was on the market for 14 months, right in the heart and the heat of that meltdown, so that didn’t help. B) I did get carried away with the artistry. I put in a glass water floor. When you walked in the front door of the house, you were walking on water. It was 20 feet by 30 feet, so 600 square foot [unintelligible [00:19:39].00] thicker than what you have at your drive-thru teller line, [unintelligible [00:19:45].24] 18 inches of water, lotus hand-painted garden motif on the bottom, bubbles running through it, fish down there… It was insane!
Now, it was cool, but I’m not building a museum; [unintelligible [00:20:01].29] This is a house where people had to live, and there are a number of people who look at my houses, Joe, that are a little older than you and me. They might in their 60s, their 70s, and I saw them walk across this glass floor and got vertigo, they got dizzy. Not everybody is used to walking on water. There was no death perception, so… There were certain things that I did in there that I did get a little carried away, that I learned and toned down.
Joe Fairless: So with the properties that you’ve bought and then sold as a developer, do you then invest those dollars into your own real estate portfolio?
Frank McKinney: Here’s my approach – I am not a buy and hold guy; I am a buy, add value and sell guy. I have nothing against the buy and hold person… So here’s the advice I got — it was funny, because it was from my dad, who wasn’t even in real estate; he was a banker. When I got into real estate – and I would say this is good real estate advice; maybe not the best, but it’s applicable – he said “Look, you don’t know what you’re gonna do in real estate.” I was in my early 20s. He said “You know what? Make a little money and then decide (I’m gonna use my words, not his) if you wanna be a wholesaler, a buy and holder, a flipper, a bank REO person, a contractor. You need a little money to decide, so enter the cash accumulation stage. Just buy a piece of property like you’re planning to sell it, make that $7,000, chart a few until you get to 100k, and then decide what you wanna do – buy and hold, what have you.”
And you know what, Joe? I never left the cash accumulation stage. I never left. I still continue to do what I was doing with those $50,000 houses – buy, renovate, sell. So when I do project, I’m not a big fan of a lot of debt – and this is good real estate advice, too. Debt is a four-letter word, folks. Look at what happened to Greece, look at what happened to Italy… It took down whole countries. It almost took down our country too, when the real estate market crash came. So be careful with debt, the four-letter word; know it’s a four-letter word.
Joe, I don’t over-leverage. I do put a lot of my own money into the projects, depending on how cheaply I can borrow money, and if you’re borrowing it prime now, you’re basically borrowing it free… At like 2%, or whatever it is. Now, that’s responsible debt. But if you’re getting the hard money loans and you get up towards 12%-15% and three points, watch out if you’re not able to turn the property.
Joe Fairless: On a typical project, what type of leverage do you have on it?
Frank McKinney: I tend to not go over — let’s use the 100k property as an example… I don’t wanna be more than 60%-65% leverage.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Frank McKinney: Sure.
Joe Fairless: Let’s do it. First, a quick word from our best ever partners.
Joe Fairless: Best ever book you’ve read?
Frank McKinney: Okay, best ever book I read is gonna be a part of your best real estate advice from a marketing perspective buy and absorb Charlie And The Chocolate Factory. [laughter] No, seriously! What Willy Wonka did to drive the desire to buy his chocolate – think of that as your real estate… Eccentricity, exclusivity, marketing genius… It is the best marketing book I’ve ever read. Charlie And The Chocolate Factory – you can read it in two hours.
Joe Fairless: Bravo! I love this approach, thank you for sharing that. One of my favorite responses… Perhaps my favorite response to that question.
Best ever deal you’ve done or built?
Frank McKinney: Probably flipping a piece of land that I planned to build — we were gonna be the first to build a nine-figure spec house… 135 million dollars. I spent a year in Italy. 72,000 square feet. I had my heart set on it, Joe, and I had somebody drive up and offer me 10 million dollars more just for the dirt that I paid for it, and I wasn’t gonna do it. I went and sought counsel from an 85-year-old advisor of mine that’s still living today, and he advised me to pick the bird in the hand. That was the best advice I had gotten, because had I not and listened to my ego and wanting to get to nine figures, I would have been doing that during the housing crash and I would have been talking to you from a dumpster today. [laughter] I would have been bankrupt. So that was my best deal ever – listening to reason, and then the profit… Obviously, it was a great flip, but I’m most proud of listening to good advice.
Joe Fairless: What’s a mistake you’ve made on a deal or a particular transaction you can think of?
Frank McKinney: Being too greedy, so the opposite of what I’ve just referenced. My very first oceanfront project — remember, I was up to $100,000, I was making 25k. I jumped to 2,2 million. I had one million dollars into that deal, I put it on the market for 2,2. I got a 1,8 million dollar offer, and within two weeks I got that offer. I thought I was god. I mean, “I’ll get the full price.” I thought “I can walk on water.” That was an $800,000 profit I walked away from. Long story short, the market crashed (a minor crash). I ended up selling that property for 1,3 million dollars seven months later, so… Foolish. The 1,8 [unintelligible [00:25:50].16] came back to hit me in the head like a baseball bat. Greedy, dumb, and I never swung for the fences again, Joe. I’m happy to take a single and move on.
Joe Fairless: What’s the best ever way you like to give back?
Frank McKinney: You saved that for last… That’s what my life’s all about now, it’s our Caring House Project Foundation. We build self-sufficient villages in the poorest country in the Western hemisphere, in Haiti. I’ve built 24 villages in 21 cities in 14 years. I’m transitioning eventually out of the real estate business; I’ve been over in Haiti, as I said, those 14 years. We have provided 10,616 desperately poor children and their families with housing, schooling, community centers, clinic work, doctors, renewable food, clean drinking water… Please, if you do nothing else, go to my website, Frank-McKinney.com, click on the Caring House Project link. That takes up half of my time, to run our charity building these self-sufficient villages.
Listen, regardless if you’re religious or not, or if you’re even having a preference, there’s a great life mantra that has to be a biblical passage that goes as such – Luke 12,48, look it up in the Bible: “To whom much is entrusted, much is expected.” I was entrusted with a lot, especially on the professional life’s calling side. Each one of you listening to this podcast has a professional highest calling, but what’s your spiritual life calling? Fortunately for me, I was able to put them together, dovetailing my professional highest calling, building houses for the rich, and building a bunch of smaller houses in Haiti for the poor.
Joe Fairless: And how can the Best Ever listeners get in touch with you or your company?
Frank McKinney: I don’t know if they wanna get in touch with me; I mean, I try to answer every bit of e-mail and stuff I get, but the best thing to do if you wanna be entertained and educated is just go to Frank-McKinney.com. You can take tours of the houses I referenced, the micro-mansion, the 15 million dollar house, you can read chapters, I’ve got five books and four in four genres; you can read those, you can see what our Caring House is doing in the Haiti… Right now we’re building our 24th village. Frank-McKinney.com.
Joe Fairless: Frank, thank you for being on the show. Thanks for talking about your experience and evolution as a real estate artist, why you call yourself a real estate artist and the approach that you take, which is seen throughout all the projects that you do… The macro level answer that you had on how to sell your property at the highest relative to the market, and that is to – and I’m gonna paraphrase – heighten the experience of the five senses to subliminal euphoria. You talked through some specific ways of doing that; you have that in your book, as well. Then also talking about the formulas that you use, the 25% margin being the goal, as well as acquisition basis + improvement basis should never equal more than 65% of retail.
Frank, thanks so much for being on the show. I hope you have a best ever day. I really enjoyed it, and we’ll talk to you soon.
Frank McKinney: Thanks, Joe.
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