Is free real estate really free? In this four-segment episode, Jason Bible and Robert Orfino will help you understand what free real estate really is, including commitment and time levels. They specifically discuss the three parameters on how much time it takes to get the real estate to become free, as well as the resources that you will need to bring to the table. Listen to this part-by-part discussion as Jason and Robert talk about how buying more houses, joint ventures, outsmarting hard money loan offers, and equity participation mortgage can all lead to free real estate.
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Free Real Estate, Free And Clear With Co-Host Robert Orfino
We’re going to be talking about free real estate. That doesn’t necessarily come with a Lambo or a yacht or bikini-clad women or Speedo-clad men. It takes time, but we want to get into it so you understand what we’re doing. We keep talking about free real estate and others out there are talking about free real estate. We want to understand what it means, what commitment level, and what time level and again if you’re putting any funds in. We’re going to talk about that. I spent my day going through another property here in Houston. It’s another apartment we’re flipping. That’s exciting to get that stuff going.
We figured out a little hot water heater issue on our Airbnbs. Here’s a little tip for you. On these newer showers, the cartridges that are inside the hot and the cold dial, there are three settings. They’re all anti-scald. They can’t get super-hot. They get to about 110 degrees, but inside there’s a dial that will set to low, medium and high. A lot of times, the plumbers are leaving them at low. When we do the Airbnb stuff, we get a complaint from our guests that there’s no hot water. We go in and we just cranked the cartridge up a little bit in hot water. We were ready to drop another $1,000 on a hot water heater. We said, “Before we do that, let’s just look at the cartridge.” We brought a plumber in. He was in and out of here in less than an hour. He fixed all our showers and we’re rock and rolling. There’s a little tidbit for you if you’re doing your flipping, fixing, doing some buying, holding and doing your Airbnbs.
We’re going to be talking about the three parameters of free real estate. How much time does it take to get the real estate to become free? Let’s take a step back. We’re going to classify the real estate. What does it mean when we say this type is free and clear? Is it free? Is it just free from you or is it debt and you’re not putting any money in? We’ll define what that free looks like. Two, is it free from the beginning? Does it take a little time to become free? If it does take a little time, what are the resources you’re going to typically need to bring to the table?
We go over this all the time. Every single show, we let people know that real estate takes resources. You can get properties under contract for very little money and sometimes no money. That’s the wholesaling part of it. To be able to move forward on that property and take it down, it would be tough. You’d have to find some amazing lenders that would able to take that property down. When we say free, we’re going to talk to you about free and clear, no debt, no personal debt and that type of thing.
We do say there are resources. Even if you’re doing the cheapest form of wholesaling, meaning zero marketing dollars, in my mind, that would be cold door knocking. Walking in your neighborhood, looking at overgrown grass, chipped paint on the trim, broken windows in a house, garages that look beat up and go knocking on the door and asking if you can buy the house. That still takes resources and the number one resource there is time. You’ve got to understand that with wholesaling, even though you can enter this real estate world with very little money, you’re still going to have a lot of time. As a beginner, you’re going to be looking at least 100 hours a month to get that first contract. It may take two or three months.
You can be putting in 300 hours before you get your first contract. That average contract’s going to be about $7,500. You’re going to put 100 hours in and make $2,500, it’s $25 an hour. That’s not a bad gig. If you’re smart, you’re going to run it like a business, you’re going to track your miles and have that deduction. You get track of your contracts and the forms. You may be down about $20 an hour. It’s not bad. In wholesaling, you can make about $20 an hour, but you have to be consistent. I’m saying at least 100 hours a month.
At the beginning of it, you’re going to be knocking on doors. You’re going to be figuring all this stuff out. It may take you 300 hours to get your first door. Your first door is going to be $7,500. It’s about $20 an hour, after all, said and done. That’s not the free real estate we’re talking about. We’re talking about the other types of free real estate. We’re going to go through and break down each segment here. To tip you off here, we’re going to be talking about joint ventures.
We’re going to be talking about apartments and syndication. We’re going to be talking about refis. We’re going to be talking about actual free and clear real estate. We’ve got four segments to go over some free real estate and how we’re doing it, how we see other people doing it. You understand and you can make some better decisions when you’re in those REIA rooms or when you’re talking to some investors who are trying to get you to work with them what’s going to be going on. What are you working on?
Free real estate is the name of the game. We’ve got our Houston Marketing Council meeting. We had our meeting about all the stuff that we’ve got going on and looking at how many doors we bought and all that other stuff. We’ll do a show about it. We’re going to do a year review webinar. Chris sent me a note that he’s getting blown up by that seller, he’s like, “Help me with this lady, she’s calling me every hour.” We’re buying a 90-house package and the seller wants to have a conversation with the lender. That’s what I’m working on. I’m looking at doing a year-end review of the family stuff. My wife and I have sole and separate property here in the State of Texas. How do we build her portfolio? How do we build mine? We’ll talk about that in a future show. Here in Texas is a community property state. How do you protect the family, different spouses’ assets to certain types of risks and that thing?
We’re going to talk about free and clear real estate, the sexiest thing on the planet. I can guarantee you, you go to every single real estate seminar for the rest of your life, no one will ever talk about this. They’ll talk about, “You’ve got to leverage up. You’ve got to take the equity out. You’ve got to leverage up to the next thing and just keep buying and get more debt.” I’m like, “That doesn’t make any sense.” This is a Dave Ramsey strategy here. There are a couple of ways to do it, but the easiest way to do it is let’s say you need $12,000 a month in income to retire. The easiest way to do that is to go out and buy about 25 houses.
Over the course of a couple of years, you go out and you buy 25 doors. You allow the market to appreciate those houses. It will appreciate 5%, 6% and 7% a year. It’s pretty standard down here. You sell half of those doors and you take the proceeds of those sales to pay off the other doors. If you’ve got 25 doors, you probably sell fifteen of them and you end up with ten free and clear properties. Because they don’t have a mortgage on them, they’ll probably bring in about $12,000 a month.One of the things you recognize when you buy packages of houses is that there's equity in those houses. Click To Tweet
Even after you’re paying your property manager, tax, insurance, sewer and water. That’s the way to do it. The secret of our Mastermind is getting these people to buy as much as they can buy, let it cashflow so we’re not losing any money. At the end of it, sell half or sell 40% or 60% or whatever you need to go out and free up the other part and then have that part. That’s it, you’re done. What’s not sexy about it is it takes 5 to 7 years. Don’t come to us if you need $10,000 in the next month. That’s not it. We can’t teach you how to wholesale and make $100,000 in the next 60 days. Someone else’s room might, but not us. We can’t do it.
We’re teaching people to, “I’ve got a good job. I’ve got good credit. I’ve got cash to deploy.” Go buy 5 or 6 doors a year, three duplexes. You’re going to need $90,000 to get that done. Year two, go buy six more. Maybe now you’re going to partner with someone. In year three, you’re going to be able to cash out, refi those, get some more going and you just roll until you’ve got double what you need. Sell half and pay off the other half. It’s such a beautiful strategy for those of us that understand that this takes time and money. If you don’t understand that, then this is not for you. We apologize for everyone who’s been told something different. We also accelerate that sometimes.
There is a way to accelerate that.
For the Millennial that needs instant gratification, there is a way to do it. I remember I was in my pool and you were talking. When you started running through it and brainstorming, I was like, “Look at every MLS listing and let’s go find those.” Why don’t you go ahead and explain that?
This probably started a few years ago when we’re buying all this real estate and I realized, “I am tired of paying for this stuff.” One of the things you recognize when you buy packages of houses is that there’s equity in those houses. This was the question we had to ask ourselves, is it possible to buy a package of houses and through the acquisition process, be able to retain a certain number of houses free and clear? We were able to do this when I had my previous company, but we ultimately sell the houses because we’ve got to do the next fund, the next project. Let’s say you’ve got ten houses that have 30% equity in them. Let’s say they are $100,000 houses. There are ten of these things. It’s $30,000 a house, that’s $300,000. Is it possible to buy ten of them, but you keep one free and clear or possibly two free and clear and sell the rest of them? The answer is absolutely. That’s a little strategy we’ve been running because I got tired of paying for real estate and it’s working well.
The big players were about to buy 90 single-family homes and our goal is to sell 81 of them to keep nine free and clear. We’re doing a ton of work, but we’re going to get nine free and clear properties that will cashflow probably $1,200 a property. There are three of us in it, so each of us gets three. That’s $3,600 a month that we’re going to get free and clear. That’s a lot of work. At the end of the year, hopefully we’ve gotten everything done, put it out there and people get paid along the way. If we’re buying 90, we’re keeping 10% of it, three each for the three partners. That’s a homerun.
Let’s call them $150,000 each. We just added $450,000 to our net worth. We added $3,600 a month in cashflow on one transaction. That’s not bad at all. What’s sexy is you can take the 2 or 3 houses at $500,000 each with equity and you could refinance them if you want, take the money out, cash or collateral. The other thing you can do is you can use them as collateral for a line of credit and some other things. The money starts getting cheap at that point because they’ve got this $500,000 here. You can probably get a line of credit for.
Technically, we’re not putting a note on that. We’re just using it as collateral so that we can use $400,000 whenever we want to. You start getting a little more sophisticated and start getting into college when we’re talking about cross-collateralization on properties and doing things in real estate. That’s our hope with this 90-unit package is that at the end of it, we all have three. If we do things well, we all might have four. We can put $600,000 equity into our net worth and be able to make almost $5,000 a month.
The way I like to classify free real estate using this method is you’re all in with at least 70% equity. Not like 30% equity but 70%. Our EaDo deals are great examples where we’re probably going to have about 30% debt on it. We probably have $300,000, $325,000 and it’s worth over $1 million. The other nice thing is it cashflows so much that you could put it on a 5, 10, 15-year mortgage, knock that thing out and no problem.
While we’re building, all we’re doing is keeping that strategy. We know it’s a 5 or 7-year run. We shouldn’t be thinking about taking that cashflow and doing anything other than paying down existing notes or buying more properties with it. This isn’t a trip to The Bahamas. This isn’t, “I can buy a new car or I can redo the kitchen.” No, focus on this. “We’re getting an extra $15,000 a month. That’s great.” Every three months, go buy another property. If you can keep that focus, you can accelerate this whole process and get done in about 3.5 to 4 years.
Everybody wants free real estate, free millions of dollars. The technique we’re going to talk about is the refinance, refi, the cash-out, getting some cash.
You go ahead and describe the premise of it.
You buy a property and you’re going to have to put some money into the deal. A lot of people say, “If I buy it deep enough, I won’t have to bring any money to closing.” That happens but it’s not the norm. You’ve got to put some skin in the game. It could be $10,000, $20,000, $30,000. Let’s call it $20,000. You put $20,000 into the deal. After about a year or depending on how fast your market appreciates, you can refinance that property and take that $20,000 cash out of the deal. You technically have free real estate. You have a loan that covered 100% of your costs to purchase it, to rehab it, all the closing costs and all that other stuff. That’s one way of doing free real estate. It’s a great way to do free real estate. Most markets in Texas, particularly Dallas, Fort Worth, outside of San Antonio and in Houston, we’re seeing 12 to 18 months where you can take 100% of your money out of the deal.
Which is that we get to the theory versus practice part. Here’s one of those lies that the loan officer will tell you. The loan officer will tell you, “After six months and one day, we can do a cash-out refi.” You hear that all the time. The reality is I don’t know very many people who get all their money back at six months and one day especially in Houston where we have dramatic swings based on the seasons. There’s not enough comp data. We talked about the underwriter. The role of the underwriter is not to give you the money. The underwriter role is to protect the assets of the lending institution. The easiest way to protect the assets of the lending institution is not to let them out.
With only six months of new comps, if you’re in a rural market, forget it, it’s never going to happen. If you’re in Cyprus and you bought it in August and you’re trying to refi it out in February, it is no good. There are not enough comps. What happens to do that cash-out refi is eighteen months. You can push it at twelve or you can do a rate and term, which is fine, just get it into short-term. We’ve done some of those strategies where we’re done with the flip. We cannot get the cash-out refi so let’s just go ahead and put it into another short-term two-year loan. Pay another point or two on it and at the end of those two years then we have the appreciation and you can pull it out. Remember, everything we’re doing is based on appreciation where 70% of what we do. That lie that is told, let’s break that down. Is it true in six months and one day, you can go for a cash-out refi? Yes, that’s true. However, telling someone that they can get their money out in six months and one day may not be the truth. That’s where that whole integrity issue pops up.
Do you know where I’ve seen it happen the most? If someone goes into a deal, they’re going into the deal with a hard money loan. They buy the property and the appraisal comes in so low it doesn’t even make sense. When they go to refinance, the appraisal’s just gotten a little bit higher and then they’re able to pull their cash out. The appraisal didn’t make sense on the frontend.The easiest way to protect the assets of a lending institution is to not let them out. Click To Tweet
Could you write your own second on a property?
You absolutely can do that.
That would be the better way to do the cash-out refi because you’d have two notes.
I’ll tell you an even better way to do it because you could technically go and start another company, lend to yourself 100% and then refinance 100% out. All you’re doing is a rate and term refi. I hope everybody just caught that. We talked about doing this about a few years ago. You’ve got $1 million cash over here in some company. Your wife has got this company over here. She’s going to lend to you through KO Lending Institution to go buy a deal. You’ve got this deal and she’s going to give you 100% of the closing cost, the rehab and the acquisition. You’re not doing a cash-out refi, you’re doing a rate and term refi. You go to Fannie Mae and say, “I’ve got this loan from KO Lending and we need to finance this out into a long-term, 30-year fixed-rate mortgage or an interest-only or whatever.” It doesn’t matter. There’s no cash-out. They just pay off the loan and replace it with a new loan.
My point is on a hard money loan when you have to bring that money to the table, you’re still bringing 10% of the acquisition. You’re bringing at least $10,000 and another $10,000 and crap. What if I wrote a second to that? It’s like, “We’re going to do rate and term. Here are the two loans we need to pay as long as it’s under that 70 or 65.” That’s much easier. That’s a much smarter way to go.
The way to do it though, if you’ve got the bucks to do it, the number would be $125,000 time six because you can do about one a month. You’re at $750,000. If you parked $750,000 over here in a lending company, and that company has lent you at very favorable rates, 4% or 5%. You’re financing costs would be almost zero.
I’m saying for someone who doesn’t have $750,000, we’re going to write $30,000 on this deal we’re doing right now. Why wouldn’t we write it as a second? When we refi it out, they’ll take care of both loans. What’s typically happening is the underwriter only wants to take care of what is due. They don’t want to ever give you money back in a cash-out refi. It’s very rare. That’s a much easier way to do it. We just solved an issue, so it’s free real estate. Jason, in this segment, let’s talk about joint ventures. It’s probably the most common thing that is out there and that is a low level. It’s always talked about at the REIA clubs. What are your thoughts on a joint venture?
I like joint ventures over partnerships because as long as they’re pretty well-defined, the difference is the joint venture has a terminus. There’s a point at which it ends. We all agree with what that endpoint is, whereas the partnership is a little bit more open. It depends on what you’re JV-ing for. In my past life, when we were flipping all those houses, joint ventures didn’t make a lot of sense because it’s transaction-based. You’re buying a house. You’re out of it in less than twelve months and you’re making $30,000, $40,000, $50,000 or whatever the number is. In longer-term stuff, it makes a lot more sense. Even then, maybe it doesn’t. I’ve got some private money that we’re doing equity participation mortgages where they took down the entire deal. They get a little bit of equity, plus they get a monthly check. A good way to put it is it depends on what they’re bringing to the table and what you need to get done in the deal. I’m not opposed to a joint venture.
That joint venture in the shape of equity participation is one of the core financing strategies for big game hunting, which is part of our mastermind. That’s how we said to people, “Go out and find someone.” Because if you buy it and fix it at that low entry point, we’re looking at a duplex, 17% cash-on-cash, 1.4 DSCR. It’s going to come out to $70,000 a unit with maybe up to $1,100 per unit. These are beautiful, a big lot, lots of parking. That’s a good deal. There’s $31,000 is needed to take it down. If we need $31,000 to take it down, what do we have to do? We’ve got to go out and find someone who’s going to help us with the $31,000.
The way we do it in big game hunting is saying, “We’re going to start an LLC and you’re right into the LLC. You’re basically going to own the property. I’m working for you for the first 3 to 5 years. At the end of those five years, we have an exit strategy. Once you get all your money back, you get a taste of the equity, you’ve been getting paid over every single month.” Here comes me and I’ll take over the property at 3 or 5 or we liquidate it and we take our equity out. As a core for big game hunting, that doesn’t make a lot of sense. I have 4 or 5 of those that absolutely worked. I can’t do these with strangers. It’s complicated. You need someone who you’ve got to build those relationships.
In that scenario where you’re either doing it inside the LLC or you take all the notes, they’re all in your name, you own the house. I’m just a junior partner with an option to flip it out in three years. Those returns for those people were between 13% and 18% annually, which is fantastic for a little $31,000 investment. “I only have $25,000.” Let’s go, we do have a deal. We don’t do a lot of that anymore. We’re on the bigger stuff. Once in a while this duplex drops in our lap and I’m like, “I’m going to make a few phone calls a day and see if I can’t get $35,000. Let’s do this.” At the end of it, in three years, the average will be 18%, 15% on this JV.
That’s based on historical track records. It’s a good deal. This is an absolute way for you to do it. I didn’t put any money into the deal. Technically, I own real estate and I have no money. It’s free real estate. We have the resources that we put in, found it, had to put the time in and got a managed contractor, totally freaking out. There are always going to be unknowns. I’m prepared to put money out of my pocket because one of the things I say is, “If we’re coming in, you’re never going to give me any more money. I’ll have reserves and I’ll be able to do anything that stuff.”
That’s how we have historically done our JVs but we don’t do them with strangers. This is why we have the Private Lender Summit and we have all these events. We start networking, working with people and building a relationship. Only then once the relationship is solid, do we move into that category. I’ve got probably 5 or 6 people I can call for that. Two or three of them own IRA companies. The other one is a lawyer and the other one is an accountant for Exxon. These are the relationships you have to build to get that done. That’s how typically JV-ing is someone brings the money, someone brings the property. If you’re doing the hustle in the muscle, you’re finding the deal and you’re going to make sure it transitions into something positive, then someone else has got the money.
That’s how JV deals worked. Someone does the hustle, someone’s got the muscle and you’ve got someone that brings in the money. The hustle, the muscle and the money are how I described JV deals. That would give you free real estate. If you’re smart at the end of it, you’ve got the option to buy them out. We typically do, “Somewhere between years 3 and 5, if I qualify for the refi, I’m going to refi you out,” or at year five, we simply place it on the market, whatever the market is. We sell it and we take our earnings. That’s the end date you’re talking about for the JV. We don’t write any of this stuff up. This all goes through a lawyer.In joint ventures, someone’s got the hustle and muscle and someone that actually brings the money. Click To Tweet
You don’t go on to google up joint venture contract or PDF?
No, we don’t do that. We are able to work with local attorneys who understand the process and we feel good. It’s patent tight. We’re feeling good about that. There are tons of these deals out there. I don’t think people should be afraid to start looking at some of the stuff once they’ve started building a relationship with lenders or people that have got the resources to do it. JVs are a great way to do it. That’s one of those free real estate ways. How many JVs have you gotten into?
It’s a handful.
Those are long-term holds?
They’re not a joint venture. It’s an equity participation mortgage. I’ve not done any JVs.
The equity participation mortgage is a little bit different. It’s not a second. They’re on the mortgage. Can you explain how you did it?
His IRA is a lienholder, just like any other bank. The principal balance plus whatever interest is owed. I make monthly payments to them. If we close in the middle of the month, it’s some prorated interest there. There’s a little equity kicker at the end and that is, we agreed that the property when we bought it was $130,000. Let’s say we sell it for $200,000 and he gets 10% of the net equity. It’s $70,000 and he makes another $7,000.
There’s only one lien holder on that. On the joint venture, it would still be a first lien, but it wouldn’t be the person I’m joint venturing with but it could be. Those work out all the time, especially in this market. Houston is the best part of the country to buy and hold because of the appreciation.
It greatly limits their liability too because in a joint venture, you both can be liable for all kinds of stuff that happens in the property. In the equity participation note, there’s no liability to the bank. They’re acting as the bank and they’ve got that equity part. The other big advantage for them too is it is easy to put in an IRA. These JVs, water can get muddy quickly on a joint venture depending on how you structure it.
That’s why we’ve got to have a relationship. We’ve got to have all that good stuff.
It’s easy to show the IRS like this is the equity participation mortgage. It’s no big deal.