In the real estate business, the more you learn about dealing with unknowns, the more you learn about strategies and skills. With this, you can then build your own real estate empire. In this episode, host, Jason Bible, provides tricks and strategies into building your wealth in the marketplace as you face the seemingly scary unknown head on. He also discusses some of his personal deals—from package property deals to doing Airbnbs—and provides tricks on how to them in similar scenarios.
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Motivation Monday: The Market Is Huge And Handling Unknowns
Package Property Deals
We’re going to talk about two things. We’re going to talk about the marketplace and handling the scary unknown. It’s not all that scary. Let’s talk about the marketplace a little bit. We closed a fantastic deal. We bought it right. We bought a package of properties. We’re going to sell a portion of those properties and we’re going to be able to pay off the acquisition. Let me explain what that looks like. We’ve got nine units. It’s a mix of some small apartments and some small single-family houses. We’re going to sell off those single-family houses and essentially pay off the entirety of the purchase of that portfolio. We’re going to have to do some rehab.
These assets, and I use the term assets very lightly in this context, but these properties are in rough shape. They need a lot of work. The duplex, the triplex and one of the single-families are probably close to $175,000 to $200,000, somewhere around there. We’re going to be into these things for $225,000 to $250,000 maybe all in and they will rent for about $1,100 a door. I’ve got a duplex, triplex and then a single-family house in the back. I hadn’t had Rob run the numbers yet, but we’re flirting with the idea of maybe Airbnb-ing the single-family house. We’d have the duplex bringing in $2,200 a month. We’d have the triplex bring in $3,300 a month. I don’t know what that Airbnb would bring in, maybe $2,000 to 2,500. If not, it will bring in $1,100 a month.
You’ve got $6,600 a month gross income on an asset that we’re all in at about $225,000 to $250,000. That is not a bad day of real estate. It’s about $80,000 a year in gross cash on a $250,000 acquisition. You’re probably going to make net cash of about $60,000 a year on $250,000. When you do a lot of real estate volume, you get a deal like this once or twice a year maybe. About once a year, you get one of these deals and it’s a home run killer deal or at least I thought so. Rob and I are sitting there looking at some numbers and looking at the deal and I’m like, “I wonder if there’s a couple more of these deals out there.” Let me tell you the rest of the story before we get to that. When you sit down and figure out what it’s worth once it’s all fixed up, it’s worth about $1.2 million to $1.3 million. We made $60,000 a year in net cash and we’ve added $1 million in net worth to our portfolio. Granted, you can’t spend the net worth, we’re not going to sell it and then buy Lambo the next day and pay taxes.To be proficient in any marketplace, you must have the right tools and the expertise to be able to find deals. Click To Tweet
We bought these things and makes us about $60,000 a year once they’re all stabilized. It will take us about six to nine months to stabilize these assets, get them rehab, get tenants in there, all that sort of stuff. It’s not a bad week. Do we do that every week? No, but I’m sure trying. I get on MLS and I start tooling around. I start looking at what the marketplace is providing. MLS here in Houston is called the Houston Area Realtors, HAR. Go to HAR and you can see all of the properties that are listed by real estate agents. Whenever I talk about the marketplace and I talk about those things that are in the public marketplace, typically HAR is that place. Houses do get listed on Zillow and Craigslist and all these other random websites but HAR or MLS is the big boy. It’s the one where 95% of properties are going to be listed. These are what I call properties that are on market. They’re on the public marketplace. Think of MLS or HAR as logging in and looking at your stock portfolio. What’s on the S&P? What’s on the Dow? It’s a public listing for these things.
I started goofing around on HAR for a couple of minutes. I’ve got a lunch appointment moved an hour later. I was like, “I’ll just get on HAR for 30 to 45 minutes and make a couple of phone calls. I’m in my office off a park row there and I have a projector that projects onto one of the walls in my office. The reason I do that, it makes legal documents easy to read. A lot of my meetings are meetings with a couple of other people and I don’t want them all huddled around my laptop so we have this projector. If you’re ever in Rob’s office for meetings, he’s got a 60-inch LCD screen that he uses. I’m sitting there and I’m driving around in HAR and I find two more deals. It’s very similar to the deals that we did. I’m so old school. I didn’t even email a link. I just took a picture on my phone and texted it to our Mr. Texas Real Estate agents. I said, “If we don’t buy this one, somebody else in our group should.”
Then I found a third property, took a picture of it, dropped it into our Mr. Texas Real Estate Mastermind group. I said, “Somebody needs to buy this one.” Sure enough within five seconds, somebody texts back, “I’ll take it.” I said, “We’ll hook up with one of our agents and we’ll get it written up and we’ll get you to closing.” When people tell me like, “Jason, there are no deals out there.” I’m like, “There are deals everywhere. They’re all over the place.” You may not have the skillset to recognize that there are deals out there, but they’re out there. Technically, if you look at the deal that we did, it’s not only, “A no money out of pocket deal,” but if we were to refinance it for what the thing’s actually worth, a lender would give me $50,000 cash at closing once it stabilized.
Most lenders will give you about 75% of the after-repaired-value. The ARV on this particular property is $1.3 million. That’s $975,000, if we’re in it for $250,000, it’s $725,000. They would give us $725,000 at closing. I am pretty sure that’s the best small apartment, single-family real estate deal I’ve ever heard of. We’re buying an asset and taking $725,000 at closing. It’s not going to cashflow as much because it’s going to have about a $975,000 loan on it. If you all are following us long enough, one of the things that Rob and I are fans of is paid off real estate. There is nothing more attractive in this world than free and clear real estate.
People ask me all the time, “When is the next crash? What are you going to do?” My response is, “I have no idea when the next crash is, but it isn’t coming anytime soon. That’s for sure.” Economic data came out. This economy is absolutely on fire. They’re talking about lowering interest rates again. It’s a race to the bottom for interest rates. Germany now has negative yields. If people hold those bonds to maturity, they will lose money. That’s Germany. We’re not talking about Spain or Greece, which is broke. We’re talking about Germany, an economic superpower in the EU, and they have negative interest rates for their bonds. It’s absolutely insane. Real estate is going to get more expensive. The question is why? People have got to put their money somewhere. The stock market is going to continue to climb. Is there going to be a crash? At some point, I suppose, although no one’s been able to tell me what’s going to cause the crash other than, “The prices are getting too high, there’s going to be a crash.” That’s not how it works. There’s no magical Wall Street deity or real estate deity that says, “Prices are too high, time for a crash.” It’s not how it works, but the money’s all got to go somewhere.
We’re putting our money into real estate and our intent is to get as much of this stuff paid off as fast as possible. Why? Because it’s hard to lose free and clear real estate. You can only lose it a couple of ways. Taxes and a catastrophic loss when it’s not insured. That’s the only way to lose it. Technically, you could lose it if you’ve got an HOA, but that’s still pretty tough. Free and clear real estate is hard to screw up from a risk management standpoint. It’s not a no-risk. It’s not a bond. It’s still real estate, it’s still got some risk in there but where people get run over is when they leverage, re-leverage and take more money out of portfolio. When the market changes, they get hammered by the debt.
We did this great deal and I start looking on MLS, which is our marketplace, HAR. I’m going around looking for more deals and I find three in the span of fifteen minutes. I send them out to our agents. Two of which I believe we got a contract. One was interesting. It’s two duplexes. The listing doesn’t list that it’s two duplexes, but it’s a duplex. The owner owns another duplex. I can’t remember what the price is, $100,000 something. I remember asking our agents, “Could someone go take a look at this while I’m on vacation? Let’s see if we want to buy it.” My agent sent me a note back, “They want $190,000.” I’m like, “That didn’t make any sense.” This thing needs a ton of work.
I see it pop up again and I sent a note back to my agent, “What’s going on with this deal?” She said, “They want to sell it with this other one down the street for $190,000.” I’m like, “$190,000 for both?” She said, “Yes.” I’m like, “Can we buy it? Let’s go ahead and put that one under contract. That sounds like a deal to me.” I think we’re going to end up contracting that. She said, “They’re holding off for $190,000.” “What do you mean they’re holding off for $190,000, for what?” “For this one and the other one.” “Can we take them both?” I think one rents for $1,000 a door, it’s $2,000 a month. The other one, I didn’t get a good chance to look at the comps but knowing that area, let’s call it $700 a month. We’re at $3,400 a month. They both need rehab, but let’s say we’re all in for $250,000 and you’re bringing in $3,400 a month in gross cash. I’ll do that deal. I sent her a note and said, “Let’s contract that one.”
I found another one which was interesting. It’s another one of these deals where it’s multiple units, a couple of little single-family houses. I said, “Let’s buy that one too.” It’s literally on MLS for fifteen minutes. Some of these things have been on the market for 100 days plus. I’ll go to a networking event. “Jason, there are no deals out there. It’s so hard to find deals.” I’m like, “Maybe you’re working with the wrong team because I’m finding them every single day.” Rob hosted the Landlord Workshop. I think there were five or seven people there and two of them were going to buy houses. As they were having this conversation, Rob hooked them up with our agents on the Mr. Texas Real Estate Team and they’re going to buy two houses.
In being proficient in any marketplace, you’ve got to have the right tool set and the expertise to be able to find deals that make sense for you and your family. If you don’t have those two things and you can’t apply them in your marketplace, it’s hard to be successful. This is one of the reasons why we started doing Airbnb. One of the things that we found is that houses in Houston, Texas are appreciating so fast that landlords eventually will not cashflow. What does that mean? That means their taxes, insurance, HOA, gets so high that they are unable to produce any real profit on a monthly basis. What do you do? I’ll give you a great example of this. We’ve got a property like this out in Katy. It’s a great deal. We’re all in for $110,000. It appraises to over $170,000, but it only rents for $1,350 a month. What do you do? You do Airbnb, make a little bit more cashflow. It’s going to take a little bit more work.Allow the marketplace to appreciate your asset such that it allows you to pay off other assets. Click To Tweet
Here’s the real trick in this marketplace, holding on to these properties for as long as you can. That $170,000 house is appreciating at about 10% a year. Every month I hold that property, it creates over $1,000 in equity for me every single month. This year alone, it will produce $17,000 in equity. For me, as long as it cashflows enough to put a little bit of money in my pocket, I am perfectly fine with that deal. I’m all in $110,000. That house in a few short years will be worth $225,000 or $250,000. When that day comes and it will, I will sell that house even though it’s on a 30-year fixed rate mortgage, I’ll probably only pay the balance down to $105,000. I’ll be in it for $250,000. After closing costs and everything else, I’ll probably have about $140,000 payday. I’m going to take that $140,000 and I’m going to apply it to the principal in one of my small apartments and I’m going to pay it off.
That’s the real trick into building wealth in this marketplace. It’s holding onto these assets for as long as you can and then paying off a portion of your portfolio. Allow the marketplace to appreciate your asset such that it allows you to pay off other assets. One question I’ll get is, “Jason, when that house is worth $250,000, why don’t you do a cash-out refi and then apply the proceeds towards your other deal, the other portion of your portfolio?” That’s a great question.
The challenge is that house will probably only rent at that time for $1,500 to $1,700 a month. It won’t cashflow for you. It will probably be to a first-time home buyer. I’d rather sell it and then take the proceeds and then pay off another portion of my portfolio. One of the real neat things right now is you could buy a duplex and two single-family houses. That duplex will bring $300 to $400 a month in cashflow per door. Those two single-family assets will make you a couple of $100 a month. In three, four, five years, sell those single-family houses and pay off the duplex. One of the things that’s fascinating to watch is that we’re not building any more multifamily. The city of Houston is not. Investors are not building these giant Class A apartments, although there’s a big one going up in Katy. People are moving here every single day and they’ve got to find a place to live. I suspect, in the small multifamily markets, that small multifamily, two units, four units, triplexes, quads, ten units here, seventeen units there. They’re typically in and around little neighborhoods. They’re the alternative to living in the neighborhood and we’re seeing rents in those neighborhoods skyrocket.
My goal was I’d like to buy 25 more rental properties. I’m doing a Facebook Live from the 24 doors we bought for Airbnb in Surfside. I’m going to do a driving tour on Facebook live. Go to the Texas Real Estate Radio Network Facebook page, set your notifications to on, whenever you go live. I will be doing a tour, driving around the truck showing you the assets that we’ve contracted, the ones that we’ve bought, the ones that are already rehabbed and are being rented via Airbnb. We start buying down there just after the first of the year. It’s not bad. Some of them we have under contract, but they have not closed. The other ones are in the middle of rehab and some are being rented.
Our first Airbnb down there, as soon as it hit the market, it was rented on the weekends through Labor Day. It’s already off to the races. We have a large house in Dickinson, which is a six-bed house. According to Rob, our break-even is at 30% occupancy for the suites. Those are already rented for a good portion of the month of August. I think that property was on the market for 24 or 48 hours before we had already covered our monthly expenses. This Airbnb thing works. It doesn’t work everywhere just like rental properties don’t work everywhere or flipping a house doesn’t work everywhere, but it does work.Free and clear real estate is hard to screw up from a risk management standpoint. Click To Tweet
I got an email from a buddy of mine. We were talking about the marketplace and we’ve got three houses in East of Downtown, EaDo, that we are wholesaling, that were a part of that package that we bought. He said, “Jason, why don’t you flip those houses yourself?” I said, “I am totally okay with this for the rest of my life, never flipping another house.” If I don’t do that for the rest of my life, I am totally okay with that. I said, “I do not have the tolerance for house flipping anymore.” I sold a company that flipped over 100 houses a year. I have no interest in flipping a single-family house for the rest of my life. Maybe something comes up in the future and I gained that interest again, but I absolutely have no interest in doing it. Let’s say you take a $500,000 house. You ought to make about $100,000 flipping that asset. Once it’s all said and done, between the acquisition, the marketing costs to acquire that asset, the time that you own it, the amount of labor you put into it. If you got a higher quality general contractor and they rehab the house for you, it’s still your time that is in that deal. It’s not a passive pursuit by any means. Airbnb is a lot more passive than flipping and wholesaling real estate is, and then the tax treatment is completely different.
Once you get kicked into what they call dealer status, now you’re paying more in taxes. When you’re flipping a house and someone says, “I made $100,000 on a house,” that’s true. When you add in your time to acquire the deal, the amount of time that you put into the deal and then how much you pay in taxes, you can easily divide that $100,000 by 50%, 60%, 70% in some cases. You made $100,000, but when you came down to it, you made about $50,000. That’s still a pretty decent payday. It’s nothing to sneeze at. However, you’re buying $500,000 houses and there’s some risk there that is not present in the lower-tiered assets.
I’ll give you a great example of this. We found in four of our properties down in Surfside that we had to address a roof, flashing and soffit issue. While we were doing that, we decided to go ahead and start the rehab on these four assets. It’s going to cost us about $50,000 for all four, redoing the inside, we’re putting new roofs on them. They’re a little teeny house. I had someone tell me, “How can you do a full rehab on a 900-square-foot house, everything for under $50,000?” I said, “We are good at finding the best deal possible.”
Our roof guy down in Surfside, charges $11,000 for four roofs. When you get into the tier-one counties, which are those counties that are on the coast, you have to have some special stuff done to the roof. There are multiple inspections to ensure that it meets the hurricane windstorm code. We have four roofs done for $11,000. Rob is fantastic at the rehab side maximizing every dollar. When you have these unknowns that pop up from time to time, they’ll give you a little hickey, but they’re not going to take down your portfolio. They’re not going to crush your day. We’re going to spend $50,000. The funny thing is that once we spend this, these assets are going to be worth more and they’re going to rent for more, whether via Airbnb or as a long-term rental. In the end, it’s going to work out.
The Unknowns Of Real Estate
Let’s talk a little bit more about these unknowns. What are the other unknowns out there? If your property catches on fire, but you got insurance for that. It could flood but you have insurance for that as well. Most of the unknowns out there in real estate, you can mitigate the risk in a handful of ways and insurance is certainly one of those. The other way to do it is make sure you’ve got a team of competent professionals around you. What does that look like? Not paying too much for real estate, which is a risk is mitigated by bringing in an appraiser. Buying a house that may have some structural issues, hire an inspector. There are a whole host of professionals out there that will help you mitigate the risks to as little as possible.
For those of you who have got some fear out there of buying real estate long-term, holding on to real estate to building wealth. One of the most fascinating things about buy and hold real estate, whether it’s small apartments, Airbnb, single-family rental properties or apartment complexes, as long as you’re in a good marketplace in Houston, actually any marketplace over 100,000 people is a pretty good marketplace in Texas because the whole state is continuing to grow. If you hold onto it long enough, it will appreciate out of any mistakes that were made. I know a lot of people that are stuck with flooded houses right now from Harvey. By year three, people will talk about Harvey as if it happened many years ago. You’ll begin to see those neighborhoods continue to appreciate but right now, it’s a little rough for some investors. I’m not talking about the landlords. I’m talking about flippers. If those flippers can hold onto those houses for another year or so, they’re going to be okay. Maybe the best thing to do is take the loss on it and sell it.
Those of you who are buy and hold landlords, as long as it cashflows, it almost doesn’t matter what you pay for these things. I get these appraisals and they are so funny from time to time. We had somebody in our group that use the Mr. Texas Real Estate Team to buy a duplex. He bought it for $110,000. It’s about retail-ready. It needed a little bit of work. He bought the property. It’s rented at $1,800 a month. He’s making net probably close to $1,000 a month on $110,000 asset. That’s a pretty sweet little deal. It appraised at $110,000. The reason it’s appraised at $110,000 is because it was already ready. It was nice. It just needed some minor updates.
A lot of times, appraisers, especially if you’re buying something with a retail mortgage, you’re not doing a double close where you’re buying it with a short-term loan and then refinancing that loan into a long-term permanent loan. A lot of times those properties, they will appraise at what they’re being purchased for. Why that is, I don’t know. It would be probably be good if we can get Michelle on here and she could explain the logic behind that. There are a lot of deals out there that you may get an appraisal back and then you look at the cashflow and you’re like, “Who cares what this thing appraises for? Look at the amount of cash it’s bringing in.”
There are two types of real risk out there. The thing that has me less worried about the next market crash is I don’t see rents going down anytime soon. Nobody talks about rents. That’s why I think it’s so fascinating. Everyone’s talking about the entry price to get into real estate has gone up and it goes up every year. The entry price to real estate increases daily but so does of a lease, so does the cashflow. Everyone is so worried in real estate about the affordability of the box, but I never hear anything about how much it’s renting for, how much cash it’s producing. No one’s talking about a rental market crash even though rent rates have been up for ten years. Everyone’s talking about, “Those houses in Katy that used to sell for $130,000 are now selling for $200,000. That’s not going to be worth $200,000 in a couple of years, there will be a big crash.” “What about their rents?” “They’ll probably rent for more in a crash.” You’re like, “If I bought it five years ago and it cashflows and it’s going to crash five years from now and the rents are going to continue to increase, why does it matter what I paid for the thing? Why does it matter what the appraisal is?”
I know these commercial developers and commercial property owners think the same thing. Does it matter what it appraises for? Their appraisals are vastly different than what they are in single-family because they’re based off income and cashflow and net operating income and cap rates. You can survive some market turmoil when your properties are cashflowing and you’ve got long-term financing in place. One of the reasons that we are attracted to the small multifamily market in particular, those assets worth about $6 million or less, is that you can get 30-year financing and fully amortized.As long as you've got enough cashflow from the leasing activities, you're not going to lose a property. Click To Tweet
You can have a real estate crash right in the middle of your 30-year note. As long as you’ve got enough cashflow from the leasing activities, you’re not going to lose that property. If you look at market changes, market swings, recessions and crashes, you’ll find that lease rates typically increase rapidly after those recessions and crashes pretty quickly. About six to twelve months afterwards, people are running around, “What going on in the market? The market’s going to crash.” You need to be buying real estate now so you can produce cash now, and even more cash to the crash, and then buy more real estate after the crash.
Here’s where I think the biggest fallacy takes place and it’s someone trying to mitigate the unknown. That is, “I’m not going to get in real estate until the next crash.” When do you think that’s going to happen? This is true about Wall Street. Capital market recessions happen every seven to ten years. Real estate recessions are every 20 to 25 years. If you don’t believe me, just google, “Real estate crashes up.” They happen about every 20 to 25 years, real recessions, real crashes. Here in Houston, we experienced a little bit in ‘08. The one before that was during the oil crisis in the ‘70s. On savings alone, which is the early ‘80s, we’ll have these little regional things when hurricane Ike blows into town or Harvey blows into town, but we’re in and out of that in six, eight months.
In fact, it puts a huge strain on rental inventory. You’ve got more people looking for rentals. I encourage you to study that part of the market. If you are not investing because you believe there’s this huge crash coming and you’re going to get all this real estate on sale. You’re not the only investor that has that thought. I have been pleasantly surprised at the houses below $250,000 that were impacted by the storm, how fast they’ve recovered. In some cases, inside of six months. Don’t wait for the next crash because you’re going to miss a huge opportunity between now and then.
If you are interested in joining us in our mastermind, sit down and pow wow as a group to share best practices. We’ve got a number of our friends that are going to be there as well to share some of the things that they’re doing in their businesses to help you grow yours. It’s a peer-to-peer sharing group. If you’re an individual or a couple that makes $100,000 to $150,000 a year, plus you’ve got a pretty good credit score and you’re interested in getting into real estate, this is the group for you. I wish we could take everybody, but if you’re broke and you’re trying to figure real estate out, this is not the group for you. This is for people who are ready to expose their personal net worth to real estate. You got to have a little bit of money. You got to have a decent job and a pretty good FICO score in order to do that.
If you are interested in joining us in that event, you can send a text message to (281) 401-9008. Just type in the text message “mastermind” and we will get back to you. This is an event that we host four times a year. The membership is for an entire year and we do all kinds of cool stuff throughout the year. We hold dinners, we do a monthly call, Rob and I sit down and go over your goals and all that other stuff. Send a text message there and we will get you all the information you need and get you all signed up. If you are interested in signing up for our email list, you can stay abreast of all the cool things that we’re doing. Send a text message to (281) 401-9008. Send us a text with your email and we’ll get you signed up on those email lists. I want to thank everybody. Hopefully, I’d given you some great information regarding what’s going on in the market place and how you’ll manage the unknown the downside, the what-ifs. You can keep yourself up at night about all the what-ifs or you could plan a couple of things and manage it as it comes. Thanks for reading.