Things change pretty regularly in the real estate business, as new trends dominate the marketplace each year. For the Southeast Texas market, flipping is essentially passé and buying and holding is becoming the most profitable trend. In this episode, Jason Bible and co-host Robert Orfino run the numbers to show why flipping does not work anymore. In the same thread, they also discuss why buying and holding properties is a great opportunity for enterprising players, especially those who do construction and maintenance.
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Buying And Holding Properties With Co-Host Robert Orfino
It’s been a while but we are back. Thank you all for staying connected with us. We appreciate that. You can always find us on our website, MrTxRE.com. For those of you who have forgotten, you can always text us at (281) 401-9008. We’re going to talk a little bit about the marketplace and about some of the things that we’re seeing. I’ll give you guys an update. It’s been an adventurous start. We have taken down a lot of properties already. We want to share that with you and make sure it works for your inner workings, where you are with your career.
The last time I spoke about this, I was pretty much dead on. I’ve adjusted a little bit. I still think, as far as buy and hold, Southeast Texas is a 4 out of 5 stars. I’m going to say we’re probably down to 2 out of 5 stars on the flipping. I don’t believe that it’s a good marketplace for flips. You have to work hard to find a real flip deal and that is causing people some consternation out there. It is absolutely a tough gig. We compile lots of data. We try and find the time to sit back and analyze it. We’re still missing some key employees from our business but we’re working on that.
For example, if you remember, we were on the morning show. We used to do a wholesaling, a little coffee hour for wholesalers. For those of you who don’t know wholesalers, this is the get rich quick. You can make money with no money down and all those advertisements you see in real estate. What they do is, they’ll go out there and they’ll either buy a list or they’ll door knock. They’ll ask people, “Do you want to sell your home?” They say, “Yes.” They say, “Can you sign the contract?” They sign the contract and then run to Jason and I and say, “Buy this contract for me.” We look at it and say, “That’s not a deal.” They have to go back to the owner and say, “Can we get a little bit lower? Can we do these things?” They earn every dime that they make, for sure.
We peaked in that group at about 56 people, which was great. There were some meetings that there were twenty plus people there. We’re sharing knowledge and there wasn’t a cost to it, just hang around. We did it on Thursday morning to separate those that were doing wholesaling. We’re available Monday through Friday to do this type of thing versus the people that were attending the classes on Tuesday, Wednesday and Thursday nights and Saturdays. We tried to separate those and it was good. There were some real wholesalers in there and some deals did come around. However, this is one of the things I had been saying for a long time, the wholesaling aspect of our business is transient. People move in and out of that career all day long.
This thing went on for six months. We had a WhatsApp group. We texted the WhatsApp group and we said, “Who’s still wholesaling?” It was shocking, 8 of the 56 responded and it’s 15%. Out of the eight, you could even disqualify two because they’re real estate agents. It’s a little bit different. Fifteen percent of that group remained. Eighty-five percent of the wholesalers were no longer wholesaling, in six months. If you’re in a room and there was a big joke, “Two claps, get out of that room as quickly as possible.” That’s my joke.
If you’re in that room where that carpetbagger is on stage and he’s selling that $997, $1,247, $1,497 package about the new, the greatest and the best way to find properties. It’s an acquisition strategy that you don’t need any money, that doesn’t require a lot of work and all that other stuff, 9 out of 10 people who buy that product fail. It looks like to us in the first six months. I don’t see that this marketplace is going to be great for flippers who are waiting around for wholesale deals to come to them. We said flipping is probably 2 out of 5 stars. It’s tough.
That being said, if you are somewhere in the processing change for real estate, then you can make some more money without necessarily relying on a 70% ARV deal to fall in your lap. What do I mean by that? What more and more we’re going to see and we’re already seeing with some of the people that we know, the real estate agent who flips houses. The loan processor at the hard money company flipping houses because they can double team that and get it at both ends. They can get money on the flip and they can get money for buying and selling the property.
If I’m an agent or a broker, then I can make 3% to 6%, sometimes even 9% on the in and the out of that deal. If I’m a hard money lender, I can get money cheap. Cheap access to capital, that saves me 3%, 4% there. If you happen to be both, you’re in good shape, or you’re a contractor. That’s what we’re going to see probably the most happening here, it’ll be guys who are contractors who have crews that are like, “I can take this and I don’t need to make a whole bunch of money on the flip. I’m happy with a 75%, 78% ARV deal.” For those of you who don’t know what ARV is, that’s After Repair Value. What we’re saying is retail price. I’m buying the house at 78% of the retail price, minus repairs. That contractor will succeed in this market where other people won’t.
We have a great event coming up here. We want to get you there. It’s our Mastermind preview. We have our mastermind coming up and we’ll talk more about that. I love to see you there. If you’re interested in the mastermind, as always, you can go to MrTxRE.com or you can go right ahead and give us a text at (281) 401-9008. We’re probably not going to pick up your phone call, but we will for sure respond to your texts.
We’re talking about the marketplace and where we think it’s going at. A couple of months back, I said it was 4 out of 5 stars for buy and hold. It was 3 out of 5 for flipping and I’ve downgraded the flipping number. Who the heck am I? This is Robert Orfino. We buy and hold a lot of properties. We do some flips. We do some wholesales. We do some lending. We do some borrowing. We do a lot of things that are in and out of the real estate business. If you want to get hold of us, you can check us out at our website, MrTxRE.com.If you’re a flipper who’s waiting for that wholesaler to deliver you that 70% deal, it’s probably not going to happen. Click To Tweet
I was talking about the wholesalers that are transient. If you’re a flipper, who’s waiting for that wholesaler to deliver you that 70% deal, it’s probably not going to happen. It’s probably time to start looking at bumping up your ARV, tightening up your systems, looking for cheaper capital. Maybe having someone in your family become a real estate agent so they can list the property, figuring out all these little things so you can squeeze the margins a little bit. It’s easy to stand on stage when this market is hot and heavy, 70% ARV and there’s a lot of deals everywhere. That was probably 2016, 2017 market. It got a little crazy with the flood and people got excited. We know that that didn’t pan out for a lot of people. There are still lots of properties on the market that were flooded and rehabbed. A lot of people had to take those properties back. A lot of people walked away from those properties. 2016, 2017 was two great years to flip. I don’t think 2020 is one of them.
If you’re a flipper and you’re waiting for that wholesaler, that’s probably not going to happen. What we’ll see is that pool and that bunch of people either expand out like, “I’m flipping in Beaumont. I’m flipping in San Antonio. I got some flips going on down in Victoria, Corpus.” Expand out because this market is no longer good for flippers. If that’s your business, you have to go where the business is, especially if your business model is waiting for wholesalers to bring you 70% ARV deals. I don’t think it happens anymore.
If you can squeeze your internal systems and you can make it so that, “I’m going to be able to run at 75%.” You then have an advantage in this marketplace. It’s probably a two and a half star market. There’ll be plenty of 75% to 78% ARV deals hanging out there that you can pick up from wholesalers. There’ll be presented as 70% ARV deals but they’re 78% and that’s okay. I’d also be careful about people who are trying to push deals on you where they’re also doing the hard money or the lending or they want to be the real estate agent on it. That’s notoriously bad information. When that real estate agent tries to get you to do the flip, be careful. Their business is the transaction of real estate, not construction. You’re going to have to check those numbers. Even though there are people who are in the industry, you still have to do your due diligence. It’s critical.
I like it when our agents say, “I have no idea how much construction is, but it’s this and it’s a good number.” Versus an agent who gets on Facebook and tells you, “That’s only going to be $15,000 and you can make $100,000,” which we know is not the case. Two stars out of five, if you’re flipping. I’m not excited to flip in this market. That being said, if we’re going to buy, fix and hold, that’s a completely different scenario. That scenario works well. That’s a great scenario. That’s why I’m saying this is a 4 out of 5 stars.
The people that are going to succeed over the next two years or so are going to be the contractors that also understand a real estate business. They can buy properties where they’re going to make their money on the construction side. They’re going to go to a lending company and they’re going to say, “This is the deal. This is what I have. Can we get this lined up?” “We can lend you. You’re going to have to put $10,000 down, but we can get this deal for you.” We see that it’s a $70,000 construction project. That contractor will go pick up four of those and have close to $300,000 worth of construction.
If he’s worth his salt, he’s going to run a 20% margin. He’ll make $60,000 on those projects. He’s going to make maybe 8% on the other ones. Let’s call them $1 million worth of retail property there. He’ll make another $80,000. That $80,000 and that $60,000 at $140,000 is good living here. He gets to keep his truck. He gets the buy a few toys. He gets to go out on the lake or down to the beach. He gets his coffee in the mornings. He got his Carhartt jacket on. He’s going to walk to his job with his coffee in his hand, no rush. He’s going to do four years. He’s going to make $160,000. If his wife is a real estate agent, that’s even better. She’s going do her thing but she’ll make another $70,000. These guys would be sitting at $250,000.
In this marketplace, Houston, Texas, this is the land of disposable income. Expenses are cheap here. This is a good affordable living. Mr. Contractor and Mrs. Real estate agent and they’re going to do fine. They always will. It’s the mom and pop who used to work at Exxon, who quit their job and are now coming over to do the jump on this game and they’re going to go on the Fortune Builder bus. They got their backpack and they’re ready to go. They’re going to stand up in front of the room, “I will buy anything at 70% ARV.” Half the room snickers because they don’t understand the markets already shifted, but the guy at the Fortune Builder seminar is persuasive. Those guys are going to have a tough haul. If they can make it through the next two years, coming out to 2022, the end of ‘22 to ‘23 then the marketplace will be good, then it’s going to be 3 out of 5 or 4 out of 5 for flipping.
We’re excited to have some of our influencers coming in, AC Ramos. You’re going to love George. He’s going to talk about Airbnb. AC does flips as well as wholesale. He’s got a massive wholesaling business. When you see his business, you realized, “I can’t. I shouldn’t be competing with this.” He’s that powerful of a guy. We’ll get to meet AC and George. I got two other guys who are waiting for commitment. We’re close. It’s going to be excited. We have some other influencers on here, people you can trust, people who are doing the business the way it will help you guys grow.
We’re talking about wholesalers and flippers in the marketplace. It’s going to be hard for wholesalers. It’s becoming more difficult for flippers. Here’s the reason why and my partner, Jason, absolutely destroys this data. He knows it and he’s a genius at it. Houses that were good flips, meaning the stuff we could pick up $150,000 to $180,000, put $60,000 in and then sell mid threes or higher have moved up. That $180,000 house is going to be worth $220,000, $225,000 over the next two years.
What will happen is, there’ll be more awareness in the marketplace for these homeowners, like, “Wait a minute. You want to buy my house for what? Are you kidding me? The house across the street sold for $225,000, $250,000.” You’re going to sit there as a wholesaler, as an owner of acquisitions and try to explain to them that, “That’s a new kitchen. That’s a new ceiling fan. It’s a new roof, new air conditioning.” It’ll fall on deaf ears.The thing about real estate is if you’re in it for the long haul, it’s dynamic, not static. Click To Tweet
As the marketplace becomes more aware of what their properties are worth, wholesalers don’t go up in the marketplace, they go down in the marketplace. Meaning, they don’t say, “Let’s go after the $1 million flips. Let me spend a big marketing campaign in River Oaks.” That’s not what they do. They’ll say, “You know what I’m seeing? I’ve seen a lot of traction at Second Ward, Aileaf, over here and over Third Ward, Fifth Ward, by the brewery.” They’ll go after those lower neighborhoods because they’re still going to find people that see their home not as an asset but as a liability.
When your house is worth $250,000, that’s an asset. When your house is worth $80,000 and $1,000 a month payment, that’s a liability. It is much easier to buy a liability than it is to buy an asset. The wholesalers will chase down and you’re going to start getting deals, but you as a flipper are going to look at it and say, “I can’t make money here. Where all those $150,000 houses used to bring to me that I could sell for $290,000. Where’d those go?” The $150,000 is now worth $200,000, $225,000 and you’ve been pushed out of that market.
The thing about real estate and you’ve got to understand this if you’re in it for the long haul, it’s dynamic, not static. Things change every month in real estate. Year over year trends happen. You have to look at them. Believing that they’ll always be a consistent flow of buy and hold properties like we’re going after is foolhardy. We don’t believe it. That’s why I partnered with Jason. The guy is a genius when it comes to his data. He can tell us where the trends are going to be. We look at this marketplace and say, “Buy, fix, and hold.” Not buy and hold.
We talked to a lot of the old people, the people who’ve been in this marketplace for a while, who’ve gone through some training. They’re some sort of barn animal or whatever. They come back to us and say, “I want a brick house, three bedrooms, two baths, two-car garage, built after 1978.” My question is, “What do you want to do with that?” “I want to buy and hold it.” Those numbers don’t work unless you come across a package like we have.
One of the things we’re doing, we’re going to go over to the Flying Saucer in Sugar Land and we’re going to show off about 35 properties that are left. We bought 51. We sold a bunch and we pulled some back. There are about 35. Some of those are brick-faced, three bedrooms, two baths, and a two-car garage. Here’s the issue. In ten years, that $180,000 property down in Fort Bend is going to become a $300,000 property, for sure. The rent will go from $1,500 up to $2,600, $2,800. You will cashflow for the next six years. You’ll see massive appreciation.
However, what people are having a hard time understanding, even on our Mastermind and we try and communicate this, if you’re looking at it from a static perspective. Meaning, what is it doing? It’s not the 1% rule. It’s 0.8%. It’s a little rough. You’re going to have to go back and look at the lease and you’re going to have to do some stabilization. It might be a little deferred maintenance but not a lot, but you’re buying it under that 1% rule. I don’t want to do that. I want to buy the 1% rule, but it’s a brick house, three bedrooms, two baths, two-car garages. This is a staple of this community. This thing’s going to cashflow. It’s going to increase value consistently, but I don’t want to the 0.8%, I want to pay 1%. That’s not an option.
If you do want the three-bedroom, two-bath, two-car garage brick house, and I recommend if you’re building out a portfolio, have at least three of those. Three is a smart strategy because you know the property is going to keep increasing in value. You know that you can get the rent to cashflow over the next five years. We also know that single-families don’t cashflow. You want to make sure that you’re covering your equity increase. You want to pay once, do a little work and then hopefully let the house pay for the equity increase over the next 5 to 7 years. Buying something from us at $120,000 that’s worth $180,000 that’s cashflowing, is a three-bedroom, two-bath, two-car garage brick house, that’s a good deal. “Robert, it’s only 0.8% of the 1% rule.” I get it, but you want a three-bedroom, two-bath, two-car garage brick house. I can show you a 1.2%. I bought one for 1.9%. It’s not a brick house. It’s not in a track development in Fort Bend County.
For us, our strategy is going to be, buy, fix and hold. There are still people in this marketplace who are trying to build out their portfolio but only want that three-bedroom, two-bath, two-car garage brick house and that is tough. You’re going to have to give on something or you’re going to get nothing because that 1% rule, three-bed, two-bath, two-car garage brick house in Fort Bend County is hard to come by. I’m not saying it’s impossible. We had a few on the list, they weren’t ready, but we know those properties will appreciate like heck. We know you can make the cashflow work. If you’re interested in hearing more about what we’re doing, (281) 401-9008. If you want to take a look at those of those properties, give us a shout. We’ll let you know. We have more tapes and tranches coming through our company. We think this will be a consistent thing for us.
We’re talking about the marketplace. We’re talking about what we’re doing mostly here in South East Texas. We look at Dallas and we think Dallas is a developed and mature marketplace. The same thing with Austin. Austin is an expensive and mature marketplace. We think San Antonio, probably a lot of opportunities out there. There are a lot of low price point houses out there that you’re going to be able to get some owner financing on. We don’t play that game, probably five years before we think about San Antonio unless something drastic happens. We are focusing on Baytown to Galveston down to Rosenberg and then Corpus Christi. We’re looking for buy and hold. Our strategy is to buy, fix and hold. This works for single-families, works for small multis, works for bigger multifamilies.
We’re not afraid to do the work. In fact, it’s better if we do the work. We’re not relying on galvanized pipes to hold up. We’re not relying on old federal electric boxes. We’re not relying on any of that stuff. We go in and we start clean, wipe the deck. Our strategy is to buy, fix and hold. We find a property that needs some maintenance, has an opportunity. We looked at one that we could have closed up a back room. It was three-quarters of the way built, an add-on. It stopped and we looked at it. It looked like it was code. We could close that up and build a little studio apartment right there. All of a sudden, we got a single-family with a spare apartment. That would take those numbers and put them dramatically higher. We’d go from a $1,200 a month rent to $1,800 a month rent. That’s attractive for us. We’re buying it around $100,000. We have to put $30,000 to $40,000 in and that works.If you’re a flipper in Southeast Texas, it’s probably time to consider going into buy and hold. Click To Tweet
We’re looking at a property, its three units. We’re going to buy it for about $100,000. It’s clean, probably no more than $10,000 in work. We’re in and out for $110,000. It should cashflow at $2,800. That’s a good deal. There’s some love we got to give and there are some things that are going to be problematic. They put a new roof on but they didn’t get a wind cert. We’re going to have to go back and figure out how that happens and do whatever we need to so that we can get the right insurance numbers. We’re looking at another triplex, it looks clean. It needs to be some interior work. That was a little more expensive. That’s a $210,000 with about $30,000 in. Even at $250,000, it’ll cashflow somewhere around $3,200, $3,400, makes the grade.
You have to be able to do the flips. Those of you who are going to be like, “I can’t flip anything.” Now is the time to get involved in our Mastermind or get a little more education somewhere else. Take what you’ve learned from flipping and move into building your portfolio. It’s critical to get ten rental properties. There’s an easy way to make $1 million in real estate. You can buy ten properties over the next two years and sit on them. After single-family properties, you’re not going to get a lot of cashflow. You may get a little bit, but most of the cash is going to maintain the asset. If there are small multifamily, then you’re going to see some cash off of that.
If you’re a flipper, now is the time to start moving into the buy and hold space. It’s a critical time, it’s important. You’re going to be able to start picking up some of these houses at 75%, 78% ARV. You’ll already have the crews. You already know what to do. You need to tweak a little bit what’s in your scope, but you’ll figure that out. You don’t have to worry about the profit. You’re going to worry about is how much do I need to bring or having to deal to do long-term financing? Meaning, 5, 7, 30-year financing.
If the deal is truly a 75% ARV deal, then you’re looking at less than $10,000 to hold the house. Even if you only net $100 a month, that’s still 12% cash-on-cash, not including the equity bump, not including the depreciation. I would say, it’s time to start looking at that. If you can find people to JV with you, so you don’t have to use that $10,000 that’s not yours, you can still make a little money on the construction, that’s good. That’s how you’ll get through these next two years. I don’t believe there is going to be a windfall of flip properties anytime soon with all things being equal. That being the case, it’s time to build your portfolio.
If these wholesalers are coming to you with 74%, 75%, 78% ARV deals, great, take them. If the rent is going to cover it, that’s the deal you want to do. That’s the deal you want. That’s what we’ve been looking at. People bring us deals all the time. We look at them and we’re like, “This will work.” How much do we have to bring? $15,000. What do we think the cash flow is? $250 a month, fantastic. That’s $3,000 a year on the cashflow for $15,000 out of pocket. That’s a magic number right there. That’s 20%. That’s the basis of our crowdfund.
We have a fund. We’re almost full. We’re a couple of weeks away from capping this round of capital raise. We’ve engaged a bunch of investors that are through the process. Some step over. We’re doing well in that fund. We’re almost through the final raise for this round and that’s essentially what our fund does. We look at properties that are making 15%, 20% cash-on-cash that are also appreciating. We want to hold them for a minimum of two years, avoid any short-term capital gains. We want to work that project.
If the property isn’t performing, then we’ll dump it. We’re going to look at that. If it’s performing consistently and the assets are growing, then we’re interested in building out that portfolio. We have close to $5 million in properties in the fund. We’ll probably be done at around $15 million, maybe $20 million. It depends on these packages that keep getting delivered to our doorstep. If you’re interested in investing in the fund, we’ll talk a little bit of that on the way back.
This is a good time to buy and hold, especially if you know construction. We know construction. We feel comfortable. It’s going to do well in this marketplace. For you, if you have that flipping background, it’s time to start thinking about buying and holding. If you could get three buy and holds to four flips a year, that’s a great margin. If you can get nine over the next three years, that’s all you need. The assets are going to be there. We love this market, buy and hold 4 out of 5 stars. That’s what we talked about. If you need to get ahold of us, text us at (281) 401-9008. We have a Mastermind coming up. We’ve got some stuff going on with properties that we’re disposing of. Make sure you check in with us.