This interview with Matt rocks. He’s a real estate investor super-star and took the time to share profound insights into how we can make money in the new economy.
Matt advises private equity groups who have raised more than $1 billion to buy distressed multi-family assets. He has bought and sold numerous properties since the 1990’s. And he has authored 3 bestselling books on real estate investing.
In this interview you will hear Matt explain what has changed in real estate investing, the economy, and financing, and how to embrace the changes so you’ll be successful.
Transcription by SpeechPad
Damon: All right. Well, I’d like to welcome my guest here today, Matthew Martinez, and I’m really excited for this interview with you, Matthew. You’re the first person, first real estate investor that I’ve interviewed that has also published books. In fact, you have a new book coming out. Did it already release, or is it coming out shortly?
Matthew: Yeah. It was just released, just published about two weeks ago.
Damon: Okay. Published two weeks ago.
Matthew: At the beginning of the year.
Damon: Beginning of the year, excellent. So it’s called, “How to Make Money in Real Estate in the New Economy.” I was doing a search on Amazon looking at books that are recently published or coming out about real estate and investing, and this one really stuck out to me because it was like, wow, we definitely are in a new economy and things have changed. And so, how can we make money in that economy I thought was a really compelling title.
So, Matthew, maybe to get started, what I wanted to do is ask you right out of the gate, so a lot of people are scared about real estate right now. But you’re doing a lot of things in real estate. You’ve been doing things in real estate for quite a long time. Why aren’t you scared?
Matthew: Well, the reason why, and it’s difficult to be a contrarian. For your audience if you’ve never heard that word, a contrarian is someone who does something that other people aren’t doing. You know, they’re going against the grain. More money can be made as a contrarian than certainly can be made if you’re following the herd.
In fact, most people who follow the herd lose money, and most really savvy investors that have been investing for decades and built substantial net worth tend to be contrarians. By that I mean, when everyone is selling, you should be buying. When everyone is buying, you should be selling. And right now, everyone’s selling and everyone’s scared and everyone feels as if the sky is falling. And this is actually the best time to be generating wealth, to be buying properties, to be creating your portfolio or to be expanding your portfolio.
Certainly the people that I know, the people who have been in business, been in the real estate business for the last 30 or 40 years and have been successful and have weathered good markets and bad markets, they are all hands on deck looking for properties, in buying mode because they know eventually the market will rebound and things will get better and the sky won’t completely crater. They can get really good properties at very reasonable cap rates with a lot of upside.
Damon: So the essence of what you’re saying is that because the masses are selling right now and they’re afraid, that provides an opportunity for those people who say, you know, hey obviously prices are probably lower at this point in time. Things are going to get better. Now would be the time to get into it.
Matthew: Absolutely. Absolutely. And we probably haven’t seen a market like this offering so many opportunities to acquire properties, investment income producing properties, we haven’t seen a market like this in probably certainly since the RTC days. So that’s going back, what, 20 years or so.
Damon: About 20 years, yeah exactly. What are the types of deals that you’re doing right now?
Matthew: Our focus is primarily multifamily and retail. So we get involved with shopping centers and apartment buildings. That’s our main focus. We’ve got two farm areas in Boston for multifamily and then retail in southern Florida.
Damon: And you mentioned farm areas? I know in the book, you published a book a couple of years ago called, “Investing in Apartments,” if I remember correctly.
Matthew: “Investing in Apartment Buildings,” that’s correct.
Damon: “Investing in Apartment Buildings,” and I mentioned to you in the pre-interview that I actually was getting ready to do a 270 unit multifamily deal, and I went to Barnes & Noble to go see if there was a book that could give me some additional information on how to do this sort of thing. I saw your book, and that’s the one I picked out. I read it. It was great, really helpful. And so, in that book I remember you mentioned farm areas. You mentioned farm areas in your new book, “How to Make Money in Real Estate in the New Economy.” What do you mean by farm areas?
Matthew: Actually, so “How to Make Money in Real Estate in the New Economy,” that’s my third book. My first book was published about seven years ago, and incredibly it continues to sell probably a couple hundred copies a month. It’s “2 Years to a Million in Real Estate.” In all three of my books I talk about farm areas, and any time I’m being interviewed by individuals like yourself or the more traditional media, I always take the opportunity to talk about farm areas, because it’s probably one of the most commonly asked questions I have from investors.
Should I go? I live in L.A., and I see that there’s some really good cap rate deals on income producing properties in Phoenix. Should I go there or I live in Chicago and I want to buy at an 11 percent cap rate. That’s my threshold, and I see there are deals in Houston. Should I go there?
Farm areas are areas in which you know intimately well. It’s where you work. It’s where you play. It’s where you call home. They’re areas that for some reason or another you know what the difference is between Main and Main, and Main and Jefferson. You know the values of properties. You know what you can get in terms of rent, whether it’s an apartment building or a shopping center or an office building or industrial property or a hotel or whatever it might be. You know what the good areas are. You know what the bad areas are.
The reason why I talk about it in all of my books and I talk to the press about it is because not a lot of people talk about it. In fact, most books that I’ve read, a lot of books that I’ve read on the topic of real estate say, you know, you should go after the best deals no matter where they are in the continental United States. That’s fine if you’re a big private equity firm. And that’s fine if you’ve got a $100 million of properties under your belt, and you can establish property management companies to manage your assets wherever you buy them. But it’s not a good idea. It’s definitely not a good idea if you’re a small investor, you’re a novice investor, you’re a first time investor, and you’re planning to have any success in this business early on.
If you’re buying properties that you can’t see and touch and feel and drive by on a regular basis, I think it’s very difficult to be an absentee landlord and have success, especially in the early days. And so, that’s what I mean by farm areas. It’s farm areas where you can get to on a regular basis. You can see your properties. You can manage your properties. And more importantly, you know the areas inside and out, like the back of your hand.
I think that’s very important, certainly in the early days, that you stick to a very specific farm area. That might be your town. It might be your city. It might be a certain few blocks. Whatever it is, it’s the area that you know best.
Damon: To add to that, as a buyer of properties here in Houston where I am, I’ve seen so many properties that have been up for sale by people who are out of town owners who got into real estate. They saw a couple of years ago, wow, Houston’s a great place to invest and they did it remotely. They didn’t understand the local market, so they didn’t know if they were buying for the right price or not. They couldn’t manage it very well because they were remote, and now these properties are coming up on the market as an opportunity for me as an investor. But unfortunately for the investor that purchased it earlier, and it wasn’t in their farm area, it didn’t work out for them, I think, in large part because it wasn’t exactly what you’re saying, it wasn’t in their farm area. It wasn’t something that they understood the local things about it.
Matthew: Correct. Correct. Just having that knowledge of the differences between neighborhoods, the differences between streets, the market rental rates, the local economics, the business climate. What’s going on in certain areas is so critical, and you really can’t get that.
I have an example I share in the book. If you’re looking to buy a property in Kansas City and you’re from Boston and you fly out to Kansas City for an extended weekend and you stay in a local hotel and you talk to local investors, and you kick the tires around the shop. Let’s say, you’re buying an apartment building. You talk to some tenants. You talk to some vendors, and then you start to feel comfortable. Okay, well, I can make a substantial investment in this area.
But what you don’t know is that the local employer, who employs 5,000 people down the street, they’re relocating to Seattle, or that the property that you’re looking to buy historically has had a horrific track record in the community and has been prone to drug addicts and drug sales and prostitution and everything else. Those type of things you’ll know if you’re local. If you’re just flying in for an extended weekend and you’re making a major investment on a property based on three or four days or even a week, it’s very difficult to make good decisions, good sound decisions if you don’t know the local community and you don’t know the history of properties in the area.
Damon: Yeah. Excellent. Excellent advice. Now, there’s a quote in your book I really like. Let me read it to you. It’s real short. You said, “Times have changed. Financing has changed. Real estate has changed. Therefore, your strategy for investing must change.” Can you expand on that a little bit?
Matthew: Yeah, absolutely. So, back in the heyday, let’s say 2000 through say even 2006, during the bubble, people were buying income producing properties based on proformas. So not what the property was generating today but what they expected it to be generating tomorrow, so higher rent, lower vacancy levels, just better times, right? Always better times.
Next year everything is going to be better than this year, and the subsequent year is even going to be better. On top of that, they were buying with a lot of leverage because they felt as if, well, you know, banks were lending on 90, 95, even 100 percent LTVs. Why not take all the money because the property is going to be worth more tomorrow?
Well, that’s no longer the case, and we know that. Buying on proformas is something of the past. You buy on current, existing, in place, net operating income based on the rent that you’re getting today, based on what vacancy levels you expect for next year. That might not be better. It might be worse. So, you need to have realistic projections, first of all, right, when you’re running your numbers.
Matthew: The other thing is that leverage. Leverage has killed so many people. The days of 100 percent loans and no equity in the deal, that’s something of the past. All of the investors that I know, including myself, we put money down and we’re conservative investors even during the boom and continue to pay off mortgages. You didn’t get yourself into any exotic loans that would get you into trouble in the future, and those people who are more conservative in their financing are actually doing well and continue to buy right now.
I encourage anyone who’s a buyer, just either getting into the game or they’re already in the game and they want to expand their portfolios, continue to pay down your mortgages. You’re going to see that once those mortgages are paid off, those properties will cash flow tremendously. That’s when you really unlock the potential of a property is when you no longer have to deal with debt service. Eventually, if you’re prudent with your financing, you pay those mortgages down and maybe you pay them in advance, you’re going to see a tremendous return.
And so, the new economy is a new time. It’s new financing parameters. You’re going to have to come to the table with 20 or 30 percent down as opposed to nothing or 5 percent down or, in some cases, 20 percent down even during the boom. You’re going to have to come to the market, come to the closing table with more money.
In addition to that, you’re going to have to be reasonable with regards to your proformas on your properties, what it’ll generate next year and the following year. When you create a business plan for your property prior to purchasing it, you’re going to have to be realistic with how much NOI that property can produce, based on the rental economics for your local area and based on what’s going on in the current market.
It’s certainly a different time that we’re investing. It’s not as easy as before, but also the beauty about it is that there’s a lot less competition, right? So people are selling because they’re desperate. Lots of short sale opportunities exist because people overpaid and overlevered, so you might be able to get a good deal from the bank and/or from the owner.
They’re tougher times. But in more challenging times like today, there’s more opportunity to buy and provide value to a property and increase that NOI over a period of time. And just to finish this out, a lot of people were investing during the boom and doing sort of these quick flips. They buy an apartment building or they buy a house or they buy an office building or shopping center, and they quickly throw some lipstick on a pig and then sell it for a substantial gain.
Well, you know, that’s really not occurring any more, so you have to have longer term thinking in the new economy. It’s not going to be 12 months, and you make a million dollars. It’s going to be three, four, five years and, maybe, you make that. But you have to just go in being cognizant of market conditions, being cognizant of the fact that it’s not a quick flip, that it’s longer term strategies with more money down.
Damon: Excellent. And you mentioned something that reminded me of probably my favorite quote in your book, and I think you mentioned this in your other books, too. You said, “You make money when you buy.” And that, to me, it’s just a very short statement, but it’s so profound when you’re investing in real estate. And what you’re saying, and I hope you can elaborate on that some, is why is so important to have that approach of going into your investing thinking I make money when I buy the property.
Matthew: Absolutely. To have a lot of success in real estate investing, you’ve got to spend a lot of time on the buy side. You’ve got to make sure that you’re getting the best possible price because if you’ve overpay, that can certainly kill you and kill the deal. But if you get a really good deal and you get the absolute bottom price that you can get based on the market conditions and your ability to negotiate, then that’s really going to make a difference in the long run because that debt service is, for the most part, your biggest expense. If you can get that down, if you can get that purchase price down and, therefore, reduce your debt service, it goes right to your bottom line. The more profitable you are or more profitable the property is, the less distress you’re going to have through the good times and through the bad times. So, that’s why I always emphasize the buy side. You’ve got to do your due diligence. You’ve got to know what value is. You’ve got to understand your rents and your local market and all of those things.
If you really know your area and you know your market and you perform a thorough due diligence, you’ll be able to determine what value is, and if you know what value is, then you’ll be able to determine what is a good price for those properties that you acquire. So, I always emphasize the buy side. You make your money there, or you lose your shirt there. So, don’t rush into any deals. Know what the property is worth and spend time in determining what that sweet spot is in terms of what you’re willing to pay for it.
Damon: Excellent. You mentioned with proformas that you don’t use proforma estimates. It sounds like that ties into what you were just saying, that you’ve got to do your own due diligence.
Matthew: Right. Right. Well, you know, you certainly don’t use the proformas of the brokers, if there’s a broker involved in the deal, or the proformas of the property owners. You want to use your own proforma. You want to have a business plan before you get into any property. So, you want to know at what number can you get into the property, what those costs are going to be in year one, and then proforma that out for a couple of years.
At least, you’ve thought about how the property will perform and you’ve established some goals. But more often than not, the broker’s proformas or the owner’s proformas, they’re way out of line with reality. So you want to make sure that when you get those numbers that you don’t wholeheartedly agree with them and that you question them and you question those numbers. Then you create your own proforma, based on numbers that you believe are how the property will perform.
Damon: That makes sense. What about people with no money, because in the new economy you talked about how it’s harder to get financing, and most people that are involved in this understand that the credit market has changed.
Damon: So where a few years ago you could go get a loan with nothing down or five percent down, what can somebody do that doesn’t have enough capital or money to get started? How could they get started?
Matthew: That’s an excellent question. I’m sure a lot of individuals in your audience are asking the same question. Well, you know, it’s certainly more difficult now. In the new economy, you do need to come to the table, the closing table, with some of your own cash. If you don’t have it yourself, then you’ve got to borrow it from friends. You’ve got to, maybe, find an equity investor who’s interested in you putting in the sweat and them putting in the cash.
Maybe you find the perfect property. Then, you market it to all your friends and family and raise the capital that way. Maybe you get owner financing. Maybe find a property where the owner has got a lot of equity in the property and doesn’t necessarily want the cash now but wants to give a loan out to you while you technically own and run the property. And there’s some type of balloon payment in the future.
You just have to be more creative these days, and I have a chapter dedicated in my new book, “How to Make Money in Real Estate in the New Economy.” It’s dedicated to sort of just that, where it’s Chapter 20, creating a cash cow in order to buy real estate.
And I give a couple examples of people who wanted to get in the real estate business, but they didn’t have the money. So, they created another business that eventually generated the cash. So they took that cash to invest it in real estate. Although their initial business provided them with a good revenue stream, the real estate really provided them with a passive income stream that allowed them to retire at an early age.
And so, my message to anyone who doesn’t necessarily have the cash on hand, that doesn’t have a multimillion dollar trust fund from their parents is that in this new economy you do have to have some money. But it doesn’t mean that you can’t go to friends and family, that you can’t go to colleagues that you know who want to invest in real estate but might not have the expertise or the time to do it and they might team or partner with you to do this. Or you look ideally for property to assume which the owners will perhaps consider a joint venture with you, or they’ll consider a loan in which it’s owner financed.
So my message to you is that you just have to be more creative in this market. The opportunities exist. You might not have the money, but you’ve got to find the money to get into these deals. This is certainly the time to buy.
Damon: Yeah, and I remember reading that in your book. You give some really good ideas on how to raise that capital or cash, or the cash cow is what you refer to it. So anybody listening that wants some ideas on that, definitely pick up the book and get a look at those ideas. It’s really good.
I have another question. What I’m wondering, is there an example of somebody you know who’s been successful in the new economy? Now, you’ve been successful in it. But you probably know people who have been successful that you can kind of outline, you know, here’s this person. Here’s the story of what they did so that it can help our listeners visualize maybe what they could do as well.
Matthew: Right. Right. All right. In the book, I probably have, I don’t know, maybe 20 or more interviews of people.
Damon: Like case studies.
Matthew: Case studies, yeah, case studies of people who . . . basically, what I did with each one is I talk about what they did during the boom, what they did when the market “collapsed,” and then what they did afterwards. I have lots of examples sprinkled throughout the book that encompass interviews with people outside of my own empirical experiences that I share with everyone so that they can relate to them, everything from the office markets, the residential markets, the multifamily markets, the retail, all commercial properties.
But maybe one of the most important messages I have here is in Chapter 7. I talk about reinventing yourself in the new economy. And whether this is something that you do periodically or it’s something that you’re forced to do because of a market collapse, whatever you were doing in the past during the boom, it’s probably not going to work now, right? It’s just not going to work.
Matthew: What you have to do is you have to recognize that. You have to recognize the shift in the market, and you have to reinvent yourself in some way. For instance, for me I was buying multifamily apartment buildings back a decade ago in Boston, and then I was buying them in the Midwest, large apartment complexes. And then I came down to Miami seven years ago or so, six years ago, and I tried to do the same thing. I tried to buy apartment buildings, just basically duplicate the success I had up north down in Florida.
I started looking in 2005, and that was obviously the apex of the boom. I couldn’t find anything. I looked at over 200 properties for two years, couldn’t find a thing because the numbers just didn’t pencil out.
Damon: And you were really doing your homework to look at that many properties and make sure you knew what you were doing.
Matthew: Well, absolutely. That goes back to farm areas. You’ve just got to know your area inside and out, and you just can’t spend a weekend trying to figure out a new market and then buying based on limited knowledge. So I knew I’d have to see a lot of properties. Anyway, I spent two years just not doing any deals.
For a guy that was doing lots and lots of deals, I couldn’t do anything for two years, and I became very frustrated. So we kind of changed our philosophy and the business model, and we started focusing, instead of multifamily, we started focusing on retail. We developed into a very successful company on the retail front down here in Miami, doing a lot of brokerage deals and then working with private equity firms and buying distressed properties in southern Florida.
So that’s my own example of shifting gears, reinventing ourself, realizing that what we had done in the past wasn’t going to work now, and then doing something completely new.
Let me give you an example of someone else. For instance, there’s a gentleman that I talk about in the book. He’s a man in his 60s who grew up in France, came to Boston, came to the United States when he was 19 years old and dirt poor. He didn’t have a dime in his pocket, and he worked and worked and worked. He worked three jobs. Eventually after a couple of years being in the States, he ended up buying a building on Newberry Street, which is a very fashionable retail district in Boston. After that he bought another property and another property and another property.
Meanwhile, he was just working a lot of jobs and living very parsimoniously, socking away the money, and then paying off his mortgages as early as he could. His rule was, you know, I’ll only buy a property with 50 percent LTV. So if he bought a property for a million dollars, he had to have $500,000 in cash to put down, and that’s been his goal today.
He’s got all his properties paid off. He doesn’t owe a dime on any of them right now. His goal was to retire by the age of 50. He was able to do that by the age of 40, and today he continues to look at deals and buy properties with the same mentality, which is even if it’s a good deal, I’ll only put 50 percent down. And he’s continuing to buy, both retail and multifamily and doing extremely well. He said to me this is one of the best times to be buying, certainly one of the best times to be buying in a very, very long time.
It hasn’t been a good time to buy certainly since 2000, and prices just . . . you had a compressed cap rate environment, and prices were escalating dramatically. And he realized that there was going to be a bubble, so he hasn’t bought anything during the boom, and now he’s back in the market buying.
Damon: Right. And that’s such an inspirational story because what I get from that is that regardless of what the market’s doing, you can be conservative and follow the correct principles that really last throughout good markets and bad markets. And then you’re going to be safe and protected. So where he’s making sure he doesn’t overleverage, he’s been able to pay off the mortgages on a lot of his properties so he’s in a great position of cash on the cash flow.
What I’m hoping that people hear when they listen to this interview in my audience is that stick to the conservative principles of real estate investing and you’re going to be fine. And then the other message that I’m hearing you say is that this is a wonderful time to get going on your real estate investing.
Matthew: Absolutely. I have no doubt that two, three, or four years from now that cap rates will be compressed even further, and prices will certainly go up. In fact, when you look at the markets in general, and I break down in my book, I break down different market segments. I talk about specifically office. I talk specifically about residential. I talk specifically about multifamily and retail.
The first market that’s going to rebound, and it’s rebounding already, is multifamily and for a multitude of reasons. I think it’s going to be one of the best runs we’re going to see in multifamily. When I say multifamily, I’m talking about apartment buildings. We’re going to have a great seven year run. Landlords will be in control. Rents will go up. Concessions will go down. Vacancies will go down. It’s going to be a very nice run for the next seven years. I’m very bullish on multifamily.
So if you’re looking at market segments and you’re trying to time this thing as best you can, I would be getting into multifamily with both feet in. And there are a number of reasons for that. First and foremost, the population of the United States continues to grow. You’ve got positive immigration. Second of all, people who lost their homes to foreclosure, what options do they have now?
Damon: They’re looking for apartments and rentals now.
Matthew: You’ve got the children of the baby boomers which is 80 million strong. This Generation Y. They’re either going into college or they’re graduating from college. That’s a lot of people who will be renting apartments over the next 10 to 15 years.
And then, you have the lack of supply. There really hasn’t been anything being built in the U.S. in terms of new apartment buildings over the last two years. It’s going to take another couple of years to get new products off the ground. So you’ve got limited supply. You’ve got strong demand. It’s going to be a very good time to be in the multifamily market.
You’ve got the Latino market, which is growing by leaps and bounds here in the United States. They tend to be renters for multiple generations. You’ve got people who, perhaps, they were renters. In the boom they were renters. Then, they decided to buy. They can no longer buy because it’s taking too much money to do that, and the credit markets are so restrictive that they’re unable to get those loans. So that’s impeded the progress of many people who wanted to buy and sort of kept them in the rental pool.
Eventually, the economy will improve. We’re seeing signs of that. 2011, 2012, 2013 should be better years, and the economy should grow. GDP should grow, and eventually the jobless recovery should be a job full recovery over time. But for all those reasons that I have mentioned, multifamily is certainly the place to be over the next seven years.
Damon: That’s a wonderful perspective, and I appreciate your sharing that. Let me end the interview with reading one more quote from your book, and the reason I like this quote is it’s just so optimistic and I think powerful in its message.
You said, “Every successful person I know has one trait in common. Each is utterly consumed by positive thinking, and they all are supremely optimistic individuals. They take absolutely nothing for granted. They don’t assume that the world owes them great wealth, fame or success. Life is not fair, so they set their expectations accordingly.” Your thoughts on that.
Matthew: It’s funny that you mentioned that. That’s actually one of my favorite parts of the book, and it’s at the end of the book. I think it’s Chapter 22, Economic Recovery or it’s in the Conclusion. I think it’s in the Conclusion. You know, it took me a year to write this book, and I was thinking about how do I end this book. What’s the best way to end it? Should I be talking about certain real estate strategy? Should I be ending it with a story from the front lines? Should I be ending it with an interesting quote?
I really decided, you know what, people need to understand what it’s going to take to be successful in this field, and it’s not easy and it’s not for everyone. But for those of you who, maybe, you want to leave your 9 to 5 day job, you want to create a passive income stream for yourself, you want more flexibility to spend with friends and family, you want a better life for yourself, real estate is certainly the best way I know of doing that. Creating a passive income stream so that it frees you from the shackles of a 9 to 5 job that you may or may not like, or it complements what you’re currently doing, so you have additional income. But with that comes a great deal of patience and perseverance that’s required to see things through.
It’s not the Internet boom any more. You can’t make money overnight. You need to be patient, and you need to persevere during the tough times, especially when you’re learning the industry. And so, nothing comes easy is my message. You need to fight hard for everything that you want in life. Although you might look across the street and you might see your neighbor as being very successful, well, I’m sure it hasn’t come easy for them as well. They have their own story to tell.
No matter what you do, any great accomplishment in life requires a lot of hard work, and that’s how I wanted to end the book. I’m glad that that message resonated with you.
Damon: Yeah, it really did. I think you made a really good choice on how you ended the book there. And so, in summary, I just want to say thank you, Matthew, for taking the time to talk to me about your thoughts and perspectives on investing in this new economy. You’ve been very successful at what you’ve done. I think you have a lot to offer people. Definitely, I encourage everybody listening to pick up a copy of the book, “How to Make Money in Real Estate in the New Economy.” Do you have any last words that you’d like to share with people?
Matthew: Sure. If anyone’s interested in learning more about me or contacting me after they’ve read the book, I certainly try to field all the e-mails that are sent to me, questions about what they’re doing or just if they want to comment on the book. They can reach me via my website, MatthewAMartinez.com. So that’s MatthewAMartinez.com and just go the Contact Us page to send a note to me.
Damon: Excellent. Excellent, Matthew. Thank you again so much. It was so great meeting with you and getting to know you.
Matthew: Thank you.
Damon: I appreciate that.
Damon: All right. Take care.