Changes That Disrupt Your Business With Co-Host Robert Orfino

TRE 110 | Disrupt Your Business

 

It’s only natural that time and time again, there will be uncontrollable factors that seem to come out of nowhere that disrupt your business. The trick is learning to seek out any problem spots and iron out the deficiencies to keep the ship running. Jason Bible and guest co-host Robert Orfino look at the different factors that can disrupt your business in the field of real estate. You have to be careful not to let anything slip by. Heed Jason and Robert’s advice, and you should be able to glide past these problems without any issues at all.

Listen to the podcast here:

Changes That Disrupt Your Business With Co-Host Robert Orfino

I got this email from this wholesaler in Westbury. Let me explain Westbury for those of you who are not in Houston or even if you are in Houston and you’re new to real estate and you are like, “What’s going on in that marketplace?” It has flooded many times. There are probably some houses that are flooding in Westbury. The challenge there with the lakes of Westbury, which I’m apt to call it from time to time, is that it is within the shadow of the medical center. It is an amazing place to be. The problem is it floods every six minutes. It wasn’t until tropical storm Allison where they started having lots of floods. After Harvey and Imelda, and Imelda was the last storm which our hotel got flooded down in Surfside. After those storms, that market has been decimated. In that submarket, practically nothing is moving. If you see a lot of the purchases down there, they’re buying houses, tearing them down and building $1.2 million, $1.3 million to $1.5 million houses.

That is saying, is the market ready for us to scrape it?

It is.

I think you just do a garage on the first floor.

Here are the people that are buying a lot of these. Here’s what I’ve been doing. I’m watching this marketplace a lot and I’m like, “Can I grab a single-family house, one story over 4,000 square feet in the high twos, low threes?” That’s before rehab. I only wanted ones that were only flooded during Harvey, because if they’ve not flooded from anything else with exception to Harvey, that’s probably going to be a safe house. I’ve looked at a lot of houses in those neighborhoods in that marketplace. I look at what’s selling and what’s not. It is land value only. The folks that are buying those houses are a part of the Jewish community that’s down there. There’s a big community center down there.

They’re all buying and they’re tearing those houses down and building big beautiful houses on top of them. I got this one on Chimney Rock and they’re saying the ARV is $335,000 to $340,000. I’m like, “There’s no way.” I put a post up on Facebook and I said, “Who is still buying in Westbury? What’s going on? I’m thinking about maybe buying some stuff somewhere around there. Up and down Brays Bayou, North and South Brays Bayou, inside the loop, maybe some outside the loop for Airbnb.” I had this cascade of comments of folks saying things like, “Jason, it’s a crazy market down here.”

“It sounds like you’re in love with the house, Jason.” That was a great comment.

I’m like, “No, I’m trying to get some information here.” There were a bunch of investors that are like, “I’m holding on to ten in there. I did seventeen that I still have.” One guy was up to almost 25. There’s a fund we know that’s filed for bankruptcy. We know they have a bunch of houses there. Curtis and I did a Facebook Live and I pulled up the statistics of the neighborhood. You’re seeing days on the market increase and you’re seeing prices decrease, which tells they’ve gone through what I call the death cross. Days on market are continuing to increase and prices are decreasing, but they’ve not hit a floor yet. At some point, they’re going to hit a floor and it’s got to be at that lot value.

$180,000 or $190,000, what do you think?

I don’t know. It’s going to be $180,000, $190,000 somewhere around there. I’m looking at one and they’re asking $226,000. This is about 2,000 square feet and it is hard to do rehab for anything less than $80,000 out there because they need everything.

It’s a high-end neighborhood too.

They need sub-slab plumbing. They need to repipe, it’s electrical. A lot of times it’s HVAC and they need a roof. It goes to $80,000 on a 2,000 square foot house. It’s $40 a foot quick. You get these people like this wholesaler here who sent this thing out at $226,000. I’m in at $80,000. I’m in $306,000 and the ARV is $335,000 or $340,000. Those numbers don’t even make sense. It’s like, “Could I rent it?” Rent is $1,900 to $2,200. I can tell you that’s not going to work either. That’s the real challenge. This one is on Chimney Rock. That’s the main thoroughfare through that neighborhood. That deal is not even close to being a deal. What would you pay for something like this? I got to be deep in the hundies.

$150,000?

Make sure you get flood insurance. You're probably going to use it for three years. Click To Tweet

Maybe even deeper than that. If I could be all-in at $2,000 and some change, I might rent it. I wouldn’t flip it. I’d rent it.

We can watch appreciation go up over the next few years. Run out that lease and then clean it up and do it. We’ve got a couple of those.

This particular property says it didn’t flood, which most of the houses there don’t flood. The vast majority of them do not flood. The problem is that neighborhood has the stigma of, “It’s a flood house.” I predicted this years ago. I sent an email out where I said, “Even if your house didn’t flood and it was an area which is prone to flooding, that’s a negative impact on value.” There was all this nonsense. I was reading all these real estate experts who are saying, “If your house didn’t flood and it’s a flooded neighborhood, it’s going to be worth more.” No, it’s not. That negative impact becomes substantially larger the higher the price points a house.

Let’s be honest, women buy houses. Here you are, you’re out with your spouse and she goes, “We’re relocating to Houston and this neighborhood floods.” “This house didn’t flood, but the neighborhood floods.” The spouse says, “I don’t want any part of that nonsense. Let’s find a neighborhood that doesn’t.” I don’t even want my truck getting flooded. Nobody with real money wants to deal with any of that nonsense. They’re like, “We’ll go to Meyerland. We’ll go to West U.”

It is a conversation starter everywhere. “Where do you live?” “Up in Cyprus.” “Did it flood?” “Nope. The neighborhood next to me did.”

This is good Lakes of Westbury. Here’s what I can tell. As an investor, I am watching that market closely. Can you get in there and buy some stuff that you can rent? Make sure you’ve got flood insurance. You’re probably going to use it.

Hold it for three years, is that what you’re thinking?

You hold it for three years and you will probably be selling that for lot value. I have friends that still live there. Their houses didn’t flood, but a couple of them has gone through renovations. They moved out for six months. They got them rehab. The houses are beautiful. I told them, “Don’t be surprised if the next person that buys this is going to tear your house down.” They said, “That’s exactly what’s going to happen.” The people who are still there whose houses didn’t flood, 9 times out of 10, their neighbors are tearing down and then building brand new and doing a ground up. What do you do with properties like that? We sit there and watch them. I know if I hold onto that property long enough, the lot value will far exceed whatever I have into it. It’s a massive appreciation of the dirt. The Texas Medical Center is the largest medical center on the planet and it doesn’t stop growing. It gets bigger and bigger. It makes sense.

That is the purpose of a medical center, to keep growing. Medical centers and airports keep growing.

Traffic is only getting better around here. Nobody wants to sit there, and driving from Katy to the Medical Center takes an hour and a half. You want to be nice and close there in Westbury and it’s ten minutes to the office, at least to the parking garage then you can get into your building. In any case, we’re watching that market closely.

We had to relocate our studio back over to the Quest Trust building high atop. We are the crown jewel of the Quest Trust building at this point. We’re back on the third floor up there, 370 is the suite. We turned the conference room back into a studio until we get some more office space, which we may have an office building under contract here. We’ll see. I’m testing a couple of things out.

The office or the warehouse? The office, we’ve got to talk to them, right?

We’ve got to look at some office space.

It’s 76,000 square feet.

Depending on when we get the next building, we go ahead and take one of the other suites and turn that into the studio.

We can carve off 10,000 square feet for ourselves.

TRE 110 | Disrupt Your Business
Disrupt Your Business: Markets are continuing to increase and prices are decreasing, but they’ve not hit a floor yet.

 

I meant at the warehouse office.

No, I’m going to take that office building. I’m going to redo those exterior walls and all glass panels and have a studio that overlooks the street.

That one is under contract, allegedly. I always hear that it’s like, “It’s under contract.” I’m like, “Okay.” There’s a building we’re looking at that allegedly is under contract. The second floor is all glass and it overlooks I-10. We are looking at 76,000 square feet. We could lease that thing up.

We’re talking about disruptors in the marketplace. Do you know what’s interesting? Certainly, you and I had our opinions on what was going to happen after the flood. A lot of people all had their own opinions. I was basing it on Sandy and other people were basing it on other things. It sounds like almost nobody was right. No one that had any positive message was right.

That’s true.

The guy who said, “If you’re flooded, you’re boned. It’s over for the next 3 to 5 years,” was the guy who’s going to be correct.

With one exception, houses below the median home price.

That’s where we have been focusing.

The question is, “Jason, the houses below the median home price, why are they continuing to increase in value even though they’d been flooded?” It’s simple. Where else are you going to live? If you’re looking at houses below the median home price in Houston, which is about $250,000, you don’t have a lot of choices. Not for good. Not for areas that have an HOA, with a good school. You have no choices. Why do people keep moving back into Bear Creek? Simple, it’s great.

It’s a beautiful neighborhood.

Why do people keep moving into Meyerland? It’s simple, they’ve got to get into the Medical Center. At that price point, because it’s well above the median home price, they can be a little bit choosier. The folks below the median home price, under $250,000, you don’t have a choice.

We look at this marketplace. We know what our plan is and working on it. Once you start seeing the real data, in any 30-day period, there are probably only 60 real buyers in this marketplace at our level. There are some institutional people out there that we are starting to get introductions to. They’re buying a little bit higher. We have those conversations with the new westerns. We buy ugly houses. How much are you selling and what are you selling retail versus what are you selling to investors? It’s not a lot. This market is still, in my mind, is an easy market when it comes to buy and hold. The flipping is probably dead here unless you’re a contractor or a real estate broker.

I don’t see a lot of people buying. You’re not plucking flips off MLS.

Nope and I don’t see any wholesalers bring in real deals.

No. This thing is a joke.

You’ve got to do your own acquisition strategy. You have to do your marketing and then you’re going to get into that world. That has been known to eat companies alive.

What’s funny is you look at the numbers and it depends on where you’re flipping. You’ve got to stay below $500,000.

Where are we finding a house that the wholesaler brings to us at $250,000 that we put $80,000 into so we’re at $330,000 and we can sell at even $425,000? Where is that?

It is the higher-end areas in the burbs.

Cyprus?

It’s going to be those there. It’s going to be down Seabrook. It’s going to be Friendswood, Pearland, Katy. When I was doing all that stuff with Houston House Buyers, we had a guy that would buy rental properties on golf courses. He’s all in at $250,000, $300,000 and he’s renting them for $2,000, $2,200 a month. My partner would sit there and argue with this guy, like, “This isn’t a good deal.” He was like, “I pay cash. I buy 2 or 3 a year. What do you mean it’s not a good deal?” I’m like, “Why are you arguing with this guy? He’s got a couple of million dollars of free and clear real estate. Why do you sit there and argue this guy for twenty minutes? I’ve got other stuff to do. You keep going. There’s no reason we should be lecturing you on anything.”

If you're looking at houses below the median home price in Houston, you don't have a lot of choices. Click To Tweet

There are a lot of those guys out there that only buy 1 or 2. You get a deal like this Westbury deal. If I was already in Westbury renting those properties, would I buy that for 20% less? $200,000, $170,000, $180,000, bring my own crew in. Maybe my rehab is a little cheaper because it’s rent ready. I already own ten there. There’s a lot of that. There’s this weird area where landlords are getting pushed up in price point if they’ve been landlords for more than five years, but they don’t want to leave those areas they know well.

We do a lot of things. We have some good classes. If you’re interested in making this part of your investment strategies by buying rental properties, first Saturday of every month, we have a landlord workshop. Once a month we do a loan doc workshop. We have a real estate 101 foundations class. There’s a bunch of events we have that don’t cost $7,500. They’re insanely cheap, $17, $27, $97. If you want to check those out, go over our website, MrTxRE.com. Go ahead and check us out there and you’ll see our events. Usually, you buy a ticket on Eventbrite.

We were talking about cashflow. When you start to get into these higher-end properties, $200,000 $250,000 house, rent is for $1,900, $2,000 a month, your cash-on-cash will drop to about 8%, 9% but you’re still going to be appreciating 7% a year. If you’re $50,000 out of pocket on this one deal with 7% of your appreciation, 9% cash-on-cash return, your real return between annual appreciation and cashflow is 37% because of the leverage you’re using. When you get down to real estate, wealth is made as an appreciation. It’s not made in cashflow. It’s not made in the tax benefits. It’s not making the mortgage pay down. It’s made in appreciation always. This includes commercial. All the real wealth is made in appreciation always. No if, and, or buts. It’s always in appreciation.

When we get beyond the 1 to 4 units, there are a lot of different ways to measure that.

In 1 to 4 units, it’s, “What did the house next door sell for? Now, this is what mine should sell for.” As opposed to in commercial, where it’s, “How much free cash, aka profit or net operating income, that’s the commercial jargon if you will, net up?” If you want to sound cool, throw out the peace sign, “Net up. What’s the NOI?” I get around the finance people and they’re like, “How many bips on that one?” There are a couple of finance people I follow on Twitter, all the finance bros, they’ve got the shirt on with the slacks. It fits just right. They’ve got the little loafers going and talking on the phone. They’ve got the ugly stupid socks, “How many bips?”

They’re awesome.

“We’re going to crush some beers at UFC.”

I’m sure they drink themselves to sleep every night.

It’s that whole group. Let’s go back to this.

I see that guy pull up, I’m like, “I’m sure I can find a pint of vodka in this car right now.” I see that guy, I’m like, “There’s booze in this car right now. I’m almost certain there is.”

It’s the starter pack. The commercial real estate, mortgage guy, broker starter pack.

It’s usually a BMW 3.

That’s if he’s not doing good.

There’s a golf bag somewhere in there. Loose golf balls bouncing around the trunk.

Do you know what it is? It’s the old Crown Royal bag they use for the golf balls. It’s tied up in the bag and sloshing around in the trunk. We are not making any friends.

Please, send us your deals.

Send me what you’ve got. Let’s get you out of that 3 series. I was at an event and somebody lost a key for Mercedes and they get on a microphone, “Whose keys are these?” I said, “They already know it’s a Class C. Nobody wants it.” I was like, “Come on. Everybody cheer up, chill out. I get it. You wanted to get a Mercedes. Start with an AMG.”

TRE 110 | Disrupt Your Business
Disrupt Your Business: For people whose portfolios are too heavy with single-family properties, they have a lot of wealth but they don’t see the cash, and it becomes a struggle to gain liquidity.

 

One of the things we’re going to talk about in our mastermind is balancing a portfolio because there are people in our mastermind who are way too heavy with single-family. They have a lot of wealth but they’re not seeing any cash. That becomes a hurdle for them to create liquidity so that they can go out and buy more properties. There is a balance there. I built a little calculator that we’ll play with when we get there. There are probably 3 or 4 guys and families and couples in our mastermind. It’s time to rebalance some things.

It’s okay to sell stuff and go out and get some bigger stuff.

That’s the thing. These are just numbers. Don’t get emotional, “This is my first house, Robert. This is the first one I bought and I did the carpet myself.” It’s like, “We’re going to sell this thing right now.”

You’re on your deathbed and you go, “I wish I never sold my first rental property.” We used to say this when we were going to buy houses directly from homeowners, like, “We’re not taking the memories. You can keep those.” They’re not worth much to us anyway.

We can take a picture of all the height marks on the pantry door.

We’ll even give you the pantry door so you can store it in your garage. It’s not that big a deal. Sell the house.

As far as investments go, this is tried and true. It’s about 6,000 years of land ownership on earth.

Single-family real estate is the largest asset class in the world. It’s funny when you get around the commercial folks and they’re like, “You’re residential.” I’m like, “Uh-huh.” That’s why all of the biggest funds are all backing residential real estate in some form or fashion.

Warren Buffett, what a fool.

That guy doesn’t know what he’s talking about. “Jason, you need to get into apartments. You were having that conversation, weren’t you?” They were like, “We don’t do anything in single-family.” You’re like, “It’s too easy for us not to.” I was thinking about that. I had a little bit of idle time before the event and I’m like, “I had to open up hard and see if I can buy 2 or 3 houses.” It’s not like we don’t have enough houses already.

We’ve started adding some key people here. We’re trying to make sure that we were proof of concept and we did it. The numbers looked fantastic. We’ve got some holes in our business model that we’ve got to fix and repair, but we’ve got proof of concept. We’re adding some key individuals and Brian coming on to be able to answer questions, liaise on with these investors that are interested has been critical. We’ve got a couple of other key positions we’re going to fill here. I can only imagine that our profit will increase by about 20%, 25% once we take care of a couple of little things here, get it firing on all cylinders. Once we have that, then we have a model that works and then it’s not going to be the people who know Jason Bible and have already invested with him. It is going to be the people that are like, “All we hear about is you guys. What does the real fund look like?” That type of thing.

That’s the disruptor part. A lot of these people are not getting it.

They’re not. It’s okay. I’m not an arrogant guy. I’m a humble guy unless we’re talking Giants or Mets. I don’t know who our competition is.

We don’t have any.

I don’t know who they are. I know what other people do and I look at it and I said, “That’s a great business model. I don’t do that though.”

If we were even in the same space, the only guys would be the Class A folks. When I look at the level of data analytics we’ve got, how aggressive we are on buying stuff, those guys are at Class A. They’re buying towers, which tells me it’s only a matter of time.

When you get down to it, in real estate, wealth is made in appreciation. Click To Tweet

We’re talking about disruptors and all that stuff. We have a plan and we’re executing on our plan. We’re happy. We are smart enough to identify the deficiencies in our business. We act as quickly as possible on them. I’m not sure how many folks out there are able to do the analytics, both to the marketplace and internally. We’d love to have you on board. We have Brian, who is our investor liaison if you’re looking to invest with us. If you know us and have a personal relationship with us or you’ve invested before, then we can talk syndications. Otherwise, we can’t do that. We have to have an established relationship with you. We have to know. If you’re an accredited investor, then that shouldn’t be a problem to get you in there but that’s how the law works. On our fund, which is an accreditation for credit investors, it’s a 506(c). We can advertise and we can talk about it all day long. It’s a 9% preferred return to our Class A shares with a 10% equity split at the end. Our projections are somewhere between 13% and 15%. Would we like to outperform them? Yes, but we feel comfortable saying, “There’s a 13% exit here.”

That’s at 5% a year appreciation for the assets and the fund.

It’s not we’re buying them at.

If it’s at 7%, you’re going to be happy.

There are certain numbers that you can’t say. We’re saying 13% to 15% is our projection. That’s what we’re doing.

We wouldn’t be surprised if it’s more.

We have a PPM. We have an offering. We have all the addendums and everything. You’ve got to get it accredited first. We will pay for your accreditation. We use a third party. We pay for that. We don’t ask you to pay for that. There are little fees to get going on this thing. We did it completely backward. We bought all the properties first. We started and stabilized them. About 60% of them are stabilized and another 10% to 15% are coming online. The other 25% are some of the stuff that we’re acquiring, that we’re moving into stabilization. We’re buying the stuff.

As some of you know, Jason sold his company years ago. We used all Jason’s money to buy a whole bunch of houses. He’d like it back, please. That’s essentially what the fund does. It’s going to help pull some of the money out that Jason and his family put in as well as what we had put in from our other existence and the things that we’re doing. Once we have that capital back, we go out and buy more. We’ll probably stop this funded $25 million in properties. It’s probably fair. We can probably get it done. We then take a nice little 3, 5, 7-year ride and that thing doubles to $50 million.

Let’s talk about that a little bit. Internally, our fund has to cashflow about 20% over a three-year period.

We’re not going to turn away a 15% deal.

It’s got a lot of equity.

If we’ll start shooting 12% or below then we have to talk about, “Does this make sense?”

TRE 110 | Disrupt Your Business
Disrupt Your Business: The market increase has soared so much that taxes, insurance, and HOA eat away at the cashflow because leases are not keeping pace with values.

 

We dispose of the property once it is not cashflowing. Most people say, “It’s an underperforming asset.” No, that’s not typically what happens. The market increase has increased so much that taxes, insurance, HOA eat away at the cashflow because leases are not keeping pace with values. You get so much equity in these things, you go, “You’ve got to sell it.” A lot of our little stuff in Bear Creek, those are $200,000 houses. They rent for $1,350 a month. You’re into them for a $100,000, $110,000. We’ve got to sell them. They’ve doubled in value since we bought it. We need to sell them. Disperse the equity and go and buy some more. That’s how it works.

Once we get this thing popped and around $25 million, we can move on. That thing will be a monster.

We’ll keep doing commercial and all that other stuff.

I haven’t looked, but in our Airbnb, the stuff that you and I own along with some JV, the only place we did JV was with Airbnb. We might have one more coming up. I think we can get through it. We’re at $2.4 million in assets there, just in Airbnb. If they were rentals, they wouldn’t work.

There’s no way. They’re too high-end.

I did a whole video. The three worst words in Airbnb short-term rentals are November, January, and February. We’re having a good February. We are getting a lot of the Surfside stuff pre-booked. We don’t have much space left. It’s filling up quickly. Someone already grabbed the nice one in Raceway. Those three months are a little rough, but we’re seeing a good February. We think we’re going to have a fantastic year. Our play while cashflow will be great, we wanted to cover. The $225,000 house we bought in Surfside would be a $500,000 house in less than ten years. They are already building 4,000, 5,000 square front beachfront houses and putting $1 million price tag on them. It is happening. We’re good in that marketplace so I don’t think we need to pick up anything more. We can run it. It’s fine. Because it’s only our JV partners, we think we’ll probably double our money there in 4 or 5 years. That’s a great play down there. We’d have the syndication for our apartments, syndication for the warehouse, and maybe syndication for an office space. We’re going to do JV on the RV park if the paperwork ever comes in. That’s all we have going. We’re aggressive in year one. They’re like, “How’d you guys do it?” It’s like, “We took no money.” We weren’t looking to make our fortune in year one.

Everyone’s like, “I’ve got to make $1 million this year.” I’m like, “That’s not how this works.”

We kept putting everything back in and booking more and more of our times, webinars, meetups, weekend events. I did 42 events. It’s crazy but it worked. Those early adopters in this space who understand what we’re trying to do and want to have that conversation are now keeping Brian busy. You’ve got 28 responses off of one email and another 28, 22 are accredited investors.

We are smart enough to identify the deficiencies in our business and act on them as quickly as possible. Click To Tweet

I’ve got three more guys I’m going to send over to him.

Our plan is to work with investors and build out these portfolios and build out the funds and then watch. It will be exciting when our $50 million becomes $100 million and our $100 million becomes $200 million. That’s the stuff we’re working on. If you’re interested in any of that, text us at (281) 401-9008. You can text us fund. You can text mastermind, whatever you want to do. Do you want to work with us? Do you want to invest with us? Do you want to learn from us? We certainly are open. We don’t hide anything. We’re an open book here. Give us a shout. Text us at (281) 401-9008 or check out our website MrTxRE.com.

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