As cliché as it may sound, change is undoubtedly inevitable. In the real estate market space, your preferences on investments do change with time as you consider where you would make more profit in the long haul. Robert and Jason discuss why change is good as Jason recounts the time when a grown man actually told him, “I don’t know who you are anymore,” when he moved from investing in long-term single-family to small apartments and Airbnb. As they delve into some small apartments and Airbnb case studies, Robert and Jason reveal the biggest challenge in the small apartment space, the value of building a property management team, and the two variables that come into play before you jump into investing in Airbnbs.
Listen to the podcast here:
Changing, Small Apartments, And Airbnb Numbers with Guest Co-Host Robert Orfino
I want to talk about change because I had some interesting phone calls about change. I’ve changed, I know. I don’t want to turn this into a mindset show. I want to make sure we deliver you a lot of content. It was one of those things I had forgotten about because I’ve been in real estate so long now that it’s just part of me. I definitely remember when I first started and a lot of people were like, “You’re going to what? You’re going to go buy real estate? That’s so weird.” I had a conversation with a buddy of mine and he told me, “Your investing philosophy has changed so much. It was like this existential crisis like, “I didn’t really know who you are.” I’m like, “What are you talking about?”
I was looking at this from a subject matter perspective. I’m not doing buy and hold single-family. I’d rather do Airbnb or small apartments because the yields are so much better. I’m not even that big a fan of large apartments, unless you can get a smoking deal and that’s still pretty tough to do. I like the smaller apartments. There’s more disruption in that market. There’s the ability to get great deals. I like Airbnb for single-family houses or short-term rentals. I’m not the biggest fan of long-term rentals. I told this guy, “I don’t want to do buy and hold anymore.” He was like, “You’ve got to be kidding me.” He’s freaking out on the phone with me. “You don’t want to do buy and hold?
You can’t tell me you’re not doing buy and hold.” I said, “No, I’ve got a handful five, six, seven single-family little rentals. If I can’t convert them to Airbnb, I’m done.” The stuff I’m buying now, I’m doing all Airbnb or we’re doing long-term rentals in small apartment complexes. He was shocked. I thought this was a logical argument. That was the problem I was having. I’m like, “Do you want me to show you the number?” It wasn’t meant to be condescending, “I’ll show you the numbers, sure.” It seemed like a logical step to me, but it wasn’t logic. That was the problem.
We can cover the numbers on the single-family and small multifamily and Airbnb and large apartments. The disruption of people changing around you can be a hard thing for people to accept. I think that’s part of it. There are tons of books out there and a lot of smarter people have studied this stuff than you and I, but we don’t want change. We like to be comfortable. We like to know who you are. Who the guy I’ve spent the last five, ten years with and the guy I met a year ago, I want to make sure that it’s still the same person. When they come in and now they’re all of a sudden Bitcoin or multilevel marketing or something along those lines, we don’t like that. We have a tendency to mock that. One of our best friends comes in and says, “I’m a total believer now in Bitcoin and I’m going to do farming and all that other stuff.” We might have a tendency to mock that. The point is because it’s Dow changing, “What’s going on? Am I supposed to do that?”
This is maybe wishful thinking on my part. I always like to think, “Show me the numbers and maybe I’m interested in that.” You may get a little mocking at first. I’m not a Bitcoin guy. The technology is incredible but as currency, it’s ridiculous.
I’m not importing a lot of weeds, so I don’t need Bitcoin.
I’ll get the Bitcoin stuff out there. I have one friend who is crushing it. He’s doing really well. I don’t ever talk about it because I don’t want anybody to get their eyes off of what it is that they’re investing in like real estate. He’s one out of a gazillion people I know that is doing well. The reason he’s doing well is he has a very deep background on the tech side. He does part mining and he does these joint ventures and then he’s very good on the finance side, so he short stuffs and goes along. He can do that sort of stuff. For Joe Blow audience and Joe Six-Pack who is trying to put together some cashflow for retirement, this is not for you. This is so high level. That’s why I don’t even like talking about it.
It came off as another get rich quick money.
He’s not a get rich quick guy. He’s been wealthy for probably two decades. This is his fun thing. I never talk about it. We have talked about it many times, but I never talk about it in public because everyone is just like, “Jason, you’ve got to get into Bitcoin?” I’m like, “No, I don’t have that expertise. It’s too hard to learn that in the time in which it’s relevant,” which is a good point. Let’s go back to change. I think you’re right. The blowback I’m getting is I don’t understand what the big deal is. It’s just numbers to me.
If I’ve got a choice between short-term rentals and Airbnb or long-term rental or a flip or to wholesale, there are so many different things you can do with a single piece of real estate that for me, I look at the numbers and where I’m at in my investment cycle. That’s really important. That might be also the other frustration. I’m in a very different investment cycle than this individual is. That’s changed very rapidly. I always thought it was a numbers thing. Maybe I haven’t explained the numbers well enough. Maybe I screwed up and I haven’t explained the numbers well enough. I think they’re trying to vet me. “Why would you get an Airbnb?” “Let me show you the numbers.” “No, why would you get into Airbnb?”
I think what’s happening is we’re talking about making rational logical decisions in a space that’s personal and emotional. It’s not about you doing whatever investment you’re doing. It’s about my relationship with you. That relationship, his emotion, his feelings are resentments and good memories and all that other stuff. We look around at the people that we thought we knew and they’re changing. That is not logical and rational. No one’s going to sit there and say, “I want to still be friends with you, Jason. Show me the numbers.” That’s not happening.
What’s happening is, “Jason is out there and he’s doing something. I don’t know what he’s doing anymore.” They don’t know what you’re doing anymore. They’re right on that stage. What they don’t understand is that they’re applying their emotions to a business decision. It’s nothing personal. It’s business. What happens is they get into that space, they get into their head, they’re still around people that are doing Airbnb, are doing small apartments. That circle feeds on itself. You’re not in that circle anymore, so people are naturally a little bit hesitant to embrace what they thought they knew. I think it’s a personal thing more than numbers.
It’s interesting to me the change from long-term single-family rentals to Airbnb and small apartments. I am getting more pushback, flack noise than I did before I even got into real estate full-time. When I made that switch, I had a fantastic career, which I believe I can go back to it anytime. I loved what I did, I enjoyed the people I worked with. I did not enjoy the bureaucracy. I was not one of these guys that were like, “I worked at Corporate America and I was miserable. I was so much better than being an employee.” I’m not that guy. I loved what I did. I always wanted to own my own business.
When I left I thought, “My boss is going to be like, ‘What are you doing?’” I’m pretty close with my boss’ boss who’s my mentor. I talk about Bob from time to time. I was like, “He’s going to be like, ‘What are you doing?’” I wasn’t worried about my dad, I was always worried about mom. She’s like, “Are you crazy?” I called my parents and my mom’s like, “Go get that American dream,” and all the guys I’ve worked with. In fact I get invited to their Christmas party and I go every year. All of them are like, “Go get it.” It was encouraging. I totally didn’t expect that. When I made this change, the amount of incoming mortar fire has been crazy. I didn’t expect it at all. First, I didn’t think anybody would care.
It must be me, “He’s hanging around that Robert guy.”
I thought, “This would be no big deal. We’re going to do some Airbnb and we do some small apartments. What’s the big deal? We’re just doing a little bit different investing.” My first thought was, “Why would anybody care?” I get all this incoming. It didn’t hit me until I was having this conversation. I was like, “It’s the change. It never hit me.” We always get these inspirational quotes all through Facebook and there’s a butterfly sitting at lunch with the caterpillar. The butterfly says something to the effect of the caterpillar. It’s like, “We’re supposed to change.” I was like, “This is perfect. That’s exactly what’s going on here. It’s the change that everybody’s freaking out about it.”The disruption of people changing around you can be a hard thing for people to accept. Click To Tweet
Your wife comes home with a new haircut and a new hair color and you’re like, “What’s going on over here? Who are you?” It happens. People get uncomfortable around change and they’re supposed to. It’s a self-defense mechanism. We’re supposed to say the same. We’re not supposed to stretch.
We’re talking about change. I’m not one of these big like, “Let’s train people on mindset and what happens,” because I had never experienced that. I never experienced what I’ve experienced in the last few months where you start making some changes. For me, they’re business decisions. It’s not even like, “I’m tired of smoking barbecue on the weekend, so I’m going vegan.” It doesn’t seem crazy to me.
Everyone just freaked out when you said that. Everybody was like, “What? What’s going on in here?”
It’s not like I’m going vegan. I’m not buying a sports car. Actually, I’m following one right now on bringing a trailer. I’m trying to think what other monumental shifts you can have in your life. I don’t see it that as that big of a deal. It’s just that we’re going into a different asset class because the numbers make a lot of sense. Operationally, we can do it now because we understand those two businesses well. Let’s say you own Apple stock. Let’s say I’m going to trade Apple for Pinterest. If I’m sitting around a dinner party with a couple of buddies and go, “I’m thinking about selling my Apple shares for Pinterest.” Nobody’s going to go, “That’s not you. I don’t know who you are already.” Nobody cares. They’re like, “Can we talk about something else like Texas Tech or Basketball? Can we talk about the Rockets? What’s going on with Texas? What do the Astros do?” Nobody cares. When I came out and said, “I want to start doing multifamily because of these two reasons,” everybody started freaking out. I’m like, “I don’t understand. It seems like a business decision to me.”
Let’s talk about that small multifamily market that we’re into. We looked at 120-unit, but we passed on that. Most of the stuff is 8 to 40, 50. Some of the reasons are the acquisition part of it. We are finding that that product is typically a mom and pop product. It’s along the lines of acquiring a single-family residential because it’s still basically the same people. “My grandma owned this property and I don’t know how to run it. I’m living in Minnesota. I’m okay selling this unit.” We’re finding that, which makes it a pretty natural transition for us. We built out teams.
Here in Houston, we have sponsors and we’ve gotten to know these folks and our vendors are really good. We feel confident that we can buy 40 units here. Jerry run it for us. The same thing in the other places that we go to. We feel like we have a good team. We know good contractors. We know the contractor can come in. We have a pretty standard apartment flip. It’s about $11,000 a door. It makes it look B-level, so we’re happy about that. We could go C-level on it and be around $8,500 a door.
Just so the apartment guys that are reading are like, “That sounds that might be a little high.” We’re talking about everything, down to the sticks.
Our philosophy is we don’t want any capital expenditures over the first seven years. We’re going to replace and upgrade a lot of the building, including the sinks and the toilets and all that other stuff. In that space, we’re pretty comfortable. We have the personnel around us, we understand how to acquire those properties and there is a deluge of them. There are a lot of them.
There’s a bunch of them. They’re underperforming. I have to go pull the stats, but a significant portion of the housing stock in this country is actually in small apartments. Single-family is obviously the largest, but a lot of those things are in small apartments. The big challenge here in the small apartment space is that they’re scattered all throughout the city, a lot of these major metros. It’s not a situation in which there’s enough space where you could put a Class A. You’d have to buy up multiple parcels in some of these urban areas. It’s not going to happen. What we’re seeing and this is what I found when I started doing this, is that there is regional disruption in those sub-markets.
For example, there’s one market I identified. It’s got about 30 to 40 duplexes and it’s surrounded all by single-family. To date, we’ve already seen rents increase by almost 30%. I bought 10% of that stock. I’ve got four properties there. I own about 10% of the product in that little sub-market and we’re already up almost 30%. You’re not going to get that in big multifamily. It’s impossible. Unless they are well-undervalued, which in Houston, Texas, I don’t think you’re going to find a lot of classy products that is well-undervalued. Basically, if you could fog a mirror, you can run an apartment complex. Actually, a lot of it is over.
When you start looking at replacement costs, cost per door, revenue per door, that sort of thing, it gets much higher in these smaller units. They almost run like small single-family than they do a large apartment complex. That’s good and bad. The big apartment guys can’t operate in a space that small. They can’t yet until someone teaches them how to do it. Just like hedge funds. I made this prediction. I did a webinar. We had 60, 70 people on the webinar and I said, “This small apartment space is a very magical space right now because the hedge funds and the REITs will figure it out.” They do small apartments in California.
They take down duplex, fourplex and small units all the time.
They will figure it out in Texas. If they got into single-family and there are already REITs and hedge funds for 100 units and above, it’s naïve at best to believe that that’s not going to happen. It is absolutely going to happen. It’s absolutely going to happen in the Airbnb space. Someone had told me Hilton is already in the Airbnb space. You’re going to have branded single-family Airbnb product. In other words, you come to a town. There’s a conference and I could stay at a Hilton hotel or I could stay at a Hilton partnered or owned single-family property. When that kind of money moves into that space, it’s a big freaking deal. It is a big deal when somebody that big gets into that space. It is absolutely happening.
What do you do? Do you just keep retreating and stay the same? Or do you embrace it and change and say, “There might be some big dollars here that we have to take a look at?”
For you and me, it’s not that different from what we were doing before. It’s a little bit different process. It’s a little bit different operationally, but why fight it? I don’t get it. I don’t understand the fight the progress. If the world’s changing, let’s change along with it. That’s the only constant anyway. Let’s talk about the numbers I got. We’ve got some questions. I think we’re going to get to some of this stuff. Curtis says, “There’s a difference between changing and evolving.” I agree with that. The small change is one thing but the evolving, that’s scary. That’s like the spouse coming home with pink hair. You’re like, “What’s going on here?” Let’s talk about Airbnb. Do we want to do Airbnb or small apartments first?
Let’s do small apartments.People get uncomfortable around change, and they're supposed to. Click To Tweet
Let’s talk a little about small apartments. I could tell you the smallest I go to is duplexes. I like duplexes for some reason. I don’t know why.
We had an off-market on come over. It’s 1.8 DSCR.
Debt Service Coverage Ratio, let’s talk about what that means, 1.8. That means that it covers the debt by a factor of 180%. It’s probably a better way to put that.
If the debt is $1,000, you’re collecting $1,800.
You’re collecting a net if you will, $1,800. On that particular deal, you could almost have one side rented and it covers all of your expenses.
That is the hipster American dream right now. You can buy a three-unit or two-unit and have the other two or the other one pay for your rent. That is exactly what is being sold out in that marketplace to this next generation home buyers.
I think I’ll have Chris Funk on here. He’s a complete non-hipster. He’s a single guy. If I remember correctly, he’s usually lived in one of the units. He owns a whole bunch of stuff and he’s always lived in one of the units. He buys like an eight-unit, he lives in one now. His apartment, from what I understand, is pretty nice. It’s not like the standard. He’s like, “All these people are paying my mortgage and I’m single. I don’t have kids. I’ll live here. I don’t care.”
Just don’t let them know you’re the landlord. You’ve got to hide that fact. They’ll be knocking on your door at 2:00 in the morning.
I’ll grab Chris on here because he’s one I know that’s been pretty good at that. My wife and I, we were looking at moving before we decided to have kids. I almost bought a fourplex in U of H. It’s actually near U of H. It has two duplexes. It was fenced in and real nice. It was Class A at the time built, maybe it’s two or three years old. I thought, “Let’s just buy it. We’ll live on one side and we’ll have these three other units. It will pay for itself. It’s pretty sweet.” I don’t completely disagree with that strategy. If you’re in your mid-40s or 50s and you’ve got kids and all that, it doesn’t make a whole lot of sense.
There’s a strategy for that. You can buy a fixer-upper and you can add onto your house and when the kids are about to shift from grade school to junior high, then you can go buy another house. You can flip the house you’re living in. There’s a question that came up about how do you manage the scaling up of property management? For us, that’s a pretty easy answer. It’s a fixed cost. Once we know a fixed cost, then that’s the easy part. Knowing that the property management is $85 a door, $75 a door, whatever you negotiated, it makes it much easier for us to go ahead and put it into the pro forma and make our offers.
There are two ways that property management works for small apartments. The reason small apartments work now and they didn’t ten years ago is because in most major markets, there is at least one good single-family property manager. That used to not be the case ten years ago. With all the REITs and hedge funds and all these other guys who have gotten in this space, there are some really good. We have actually about four really good property management companies in Houston that weren’t here five years ago, seven years ago. The ones that were here were not that great. Glen Dixon’s group was probably the best one and now we’ve got all these other guys that have gotten in the space. We’ve got four or five really good property management companies. That’s a total anomaly.
In Jersey, there’s one. He goes 30 minutes North, 30 minutes South and 30 minutes West, that’s it. It’s like, “It’s too far from me, I don’t go that far.”
I will tell you, the hardest part of the small apartment business is property management. I won’t tell you where we’re at. We call it the hunting grounds. It’s in South Texas. We found a property manager who is fantastic. If we did not have that property manager, we would not be in that space. It would be financial suicide. If you can find a good property management company, typically a single-family property management company will manage up to about 50 units. The single-family property manager is not going to do your 100-unit apartment complex. There are class C property management companies, Class B, Class A that will manage those things for you. For us, we’ve hacked it in such a way that we know how to interview for property management companies, single-family that can handle multifamily.
We do most of the capital expenditure from the start.
We’re not buying these things and slap lipstick on the pig.
We prefer them vacant.If the world's changing, let's change along with it. That's the only constant anyway. Click To Tweet
I want them nasty and vacant and a big rehab because that way we can fix everything and it looks gorgeous, then they can move in. Our maintenance expenses are relatively low because we’ve gone in and fixed a lot of that stuff. Let’s talk about Airbnb. People keep asking the numbers, “How does it all work? What’s going on? There’s so much change in your life. Why aren’t you doing Airbnb?” Why don’t you go talk about some Airbnb numbers, Rob?
Your standard Airbnb for a single-family property, if it’s in the right location, is going to be at least a 5X multiplier. Meaning if my net net is $300 a door, which is what we shoot for in our personal portfolio.
Most rental properties, we’ll cash about $300 a month per door. That pretty sticks. You’ll hear a lot of single-family, a lot of real estate investors say, “We aim for $300, $400, $500 a door.” Let’s call it $300 a door on the low-end.
With an Airbnb, you’d be looking at about $1,500.
You get five times the return. It is a little bit more active. Although rental properties are not exactly mailbox money. I don’t have a course to sell you to tell you that it’s mailbox money because that’s not true either. It’s about five times the return. When somebody says to me, “Jason, I need to make about $10,000 a month in cashflow.” I’m like, “You could buy 33 single-family rentals and pray that nothing goes wrong or six to seven Airbnbs. Which do you think you could manage?” I can tell you that’s where Airbnb and single-family start to diverge. You go, “I’ll just give it to a property management company, my single-family.” You can but the problem is you still have to manage that single-family rental property. You’ve got to manage the manager. Imagine doing that with 33 houses or you could do six to seven Airbnbs. I’d rather manage six to seven Airbnbs than a portfolio of 40 single-family houses.
Now you’re managing multiple managers because the way we set it up, we have the cleaning staff, we have a handyman staff coming in to take care of the property. There’s a manager of all the other business parts of it. It’s a small business. It’s a side hustle, but the returns are significant.
They’re commensurate with the work I think. Maybe a little bit more.
That’s why we do it. I am not diversifying. I’m not de-investing my single-families. I’m leaving them in my portfolio. I’d still like to pick up another two or three and I also want to get five duplexes. Then I’ll feel very good with my fifteen or so personal properties and I’ll be good. That will throw off some minimum numbers that we could survive on and that’s great. It has been stretched and I’m broke. My money’s on the street. You’ve got to figure these things out. If I can get a few more doors and turn in a few more semi-passive or mostly passive rentals, it would be great. We’re about to jump into Airbnb for about sixteen beds. You count the beds because that’s the turnover. That’s going to be very profitable for us. It is a division. It’s a business.
We have some folks that we’ve lined up and interviewed and said, “This is what it’s going to look like. Here’s the checklist and this is what your week should look like. We have to gear that up. We have to step up.” The same thing why we’re doing small apartments. We have a team. Why are we jumping the Airbnb? We’re building a team. They’re going to be there. They’re going to know how to handle the flips. They’re going to know how to manage the cleaners. They’re going to know the handyman checklists, making sure the property is pristine. It’s the same thing like what we always do is we take care of a lot of the CapEx problems, the roof, the hot water, the air conditioning system, the appliances, all new or at least below 50% of life.
What’s so funny about this whole thing is whether you’re doing single-family rental properties or doing big apartments or you do an Airbnb or small apartments, you’re going to have to build a team anyway. The way I look at this is none of this is passive. We call it passive because that’s the jargon, if you will. It’s not really passive. Being a single-family landlord is not completely passive. You’re going to have to look at your investments from time to time. In fact, investing in the stock market is not passive. You’re supposed to be reading those documents they send you every year. You’re supposed to be looking at your stuff every month. Most of you don’t. That doesn’t mean it’s passive.
That means you’re falling down your duty of making sure you’re securing your financial nest egg. The way I look at it is I’m doing the work anyway. Where is it we can earn the highest return for the least amount of work? I imagine the folks that read this, they’re not adverse to the work. They’re just looking for that place where it’s like, “Where I could do pretty well and I can work and get the biggest bang for my work.” That’s what I think that most people are looking for.
I think Airbnb is a good place for a lot of different folks. I see it as a perfect semi-retirement business. “We’re retired and we’re setting up systems and we’re going to own three Airbnb properties and we’re going to rent them out and we’re going to make an extra $4,000 or $5,000 a month.” That’s perfect. It’s a great side gig. You could be a teacher and you have your Airbnb and you’ve got to take care of it. Some of the nights you’re coming home, doing some things like that. It works for professionals as long as you have a good management company involved. I don’t think a lot of folks are going to do what we’re doing where we’re jumping in and grabbing 100 beds because that’s tough. Now, I have to build this whole other business over here. One of the things I’m good at is setting up businesses. We’ve set up this business over here, we’ve got to work, we’ve got to build out the staff, we’ve got to go ahead and put all the checklists, all the process. Someone’s got to make sure that we keep the standard level up there.
Let’s compare numbers because somebody’s going to say, “I can go in and get 100-unit apartment complex.” I’m like, “Yes you can.” What is our net? I know all of our properties are a little bit different. What’s the net falls down to the bottom line per bed in Airbnb?
I think it’s about 358.
Let’s call it $300 a bed. $350 a bedtimes 100 beds. What’s that a month?
$35,000.The small changes is one thing, but the evolving, that's scary. Click To Tweet
I could tell you-you’re not getting anywhere close to that in any other real estate investment. If you get $35, $40 a month net net net from an apartment unit per door, you’re doing pretty good. We’re ten times that. Somebody had asked, “Jason, how do you minimize your vacancy? What is your vacancy rate?” That number includes our vacancy. Rob, why don’t you talk a little bit about vacancies and Airbnb and what we typically see?
First, let’s step back. When we look at a property and think, “Can this be a good Airbnb?” When we run our model, we run it on a 50% occupancy, “Will we break even at 50%?” If the answer’s yes, we move forward. If the answer’s no, then we don’t. You’ve got to break even. Our target for the properties is 65% occupancy. We’ll never on our pro-forma higher than 65%, even though this month we have one at 89% and another one hitting 68%. We will look at 65% and 50%. Here’s the hardest thing you’re going to figure out is scaling up and raising the capital. That is the throttle with Airbnb.
What are the other challenges with Airbnb? This is where it starts to get dynamic and confuse people. The rate you charge on Tuesday in the middle of April is going to be different than the rate that you charge on Tuesday in the middle of June.
It’s certainly different than Saturday in July.
People get really wrapped around the axle on vacancy. I’m like, “You’ve got to get out of your single-family or apartment, long-term rental mindset because our occupancy rates and our gross rev, our top line rev changes based off of supply and demand in that sub-market. Not to douse any water in somebody’s dreams to be an Airbnb titan, but you’ve got to remember that there are two variables at play here. One is a vacancy and one is the rate. Rudy had mentioned, “I bet being a Superhost matter.” It absolutely does. There’s a whole process in how we become a Superhost on Airbnb.
I don’t stay at anyone’s property unless they are a Superhost.
In any case, the occupancy rate is “important” but it’s not critical. Let’s say Super Bowl’s coming in town. Super Bowl’s in two weeks. Two weeks before the Super Bowl, everyone leaves on that Monday. What if your property’s vacant for two weeks after the Super Bowl? Who cares? That’s 50% occupancy, but the rates are through the roof. That’s the easiest way to answer that question. Thanks.