Listen to the podcast here:
What Is The Real Cost Of Real Estate with Robert Orfino
Ever Wonder What The Real Costs Of Running A Real Estate Business Are?
I got to hang out with a ton of folks. One of the tips I gave was the real hard-core, high-level networking starts at about 9:00 right when the rest of the place clears out and there’s that bar that’s outside. A couple of people grabbed me at the end of the night. I could tell they were newer folks and they said, “You’re right. These people have 500 houses over here.” I said, “I know.”
The problem is we keep saying it. It’s never going to empty out.
That’s true. People keep staying around, kick them out. I think they close at 11:00. We left right as they were kicking everybody out. Everybody went to dinner afterward. I went back to the house. Dr. Mark Sauer was there to talk about Texas and the Texas economy, national economy.
Buy everything in Texas. Don’t worry about the rest of the country.
Stop watching the news. Buy everything you get your hands on. We had a column this morning. That’s the cliff notes version of the presentation. When I walked in, it was completely silent in there and I’ve given presentations for an hour-and-a-half at that event before. It’s tough because that back bar area you can hear everything on the stage. I’ve got this weird hearing thing where it drives me crazy with that background noise. I walk in and I’m traipsing across the back bar area there and I realized, “It’s quiet in here.” Everybody’s looking at me as I’m trying to get over to the outdoor patio area. One of my favorite mottos these days is, “If you think real estate is expensive, wait because it is going to get more expensive.” The replacement cost is going through the roof and that is not going to come down any time soon. It may even get worse with the trade issue with China and all that stuff. It is not getting cheaper to build houses, not getting cheaper to build apartment complexes, office spaces and all that stuff. It is becoming more and more expensive. It’s more costly to procure those or to build those assets.
The $4 Wendy’s meals are now $5.Never hesitate to ask when you're going to need some support. Click To Tweet
I didn’t know that. Is that a commercial?
It’s up 25%. We talked about the wet blanket party. We were talking to people about a lot of mistakes you can make when folks do not succeed. We are going to talk about numbers. Let’s start because we have a lot of numbers to go over. If anyone is following at home, break out the calculator. If not, we’ll try and give you rough numbers. We do this for our marketing class, for people that want to build acquisition. I tell folks here in Texas, you’re going to need $3,500 a month in direct marketing. Let’s say let’s go out twelve months on that. That’s going to be $40,000 a month.
Let’s talk about marketing. We’re talking about 65%, 70% deals. Everyone’s looking for the 70% ARV deals so there can be no money out of pocket. I’ll tell you how you do that. You got to spend a lot of money on marketing. That’s how that works.
To get one, you’re going to probably dump in probably about $18,000 before you see that first one.
It’s going to be $3,500 to $5,000 a month. People always ask me, “What am I spending my money on?” Pay-per-click, postcards, job boards, yellow ladders, guys that do the sign. The marketing cost is the marketing cost and that’s what it’s going to cost to get a deal. If you can do it cheaper than that, you go build a house-buying company that buys $500 a year. The reality is $3,500 to $5,000 per buy. It’s probably a good way to say that.
$4,000 for the purchase to make the math easy. For the first few months, you are sitting at $24,000 in active marketing. You’re going to need some support, let’s say PATLive. We’re not plugging them. I’ve never used them. It’s $300 a month. The cheapest one is $300 or $350, something like that.
Maybe there’s one for $1.50 a month. That’s a live answering service.
We do the live answering service because a lot of people that are looking to sell their house will hang up when they get a message because they don’t know that you’re real. They think you’re phishing. You want to have a live voice in whether it’s yourself, you, your wife, PATLive, someone else with these other companies. In that first few months, you’re going to be spending $3,000 on that. You definitely need a website. You got to get Carrot. You can get Carrot for about $1,000. We’re in $4,000 and you’re going to need business card door hangers. Every time you go out to an appointment, you look in that neighborhood. If there’s something beat up, go hang your little door hanger out there. We’ll call that another $500. We’re at a $4,500 in back up and then how much gas and tolls and all the other stuff you’re going to put in. Let’s put in $500 a month for that. You’re sitting at around $7,500 in operational costs before you get to the act of marketing.
Let’s make a distinction here. You’re starting a real estate business. This is not a, “I’m going to be a network marketing guy. Here are my business cards. I’m going to introduce my friends to the new shake I have been drinking.” This is a real estate business that needs a marketing plan and a people plan, a capital plan and all those things that you’ve got to put together in order to be successful in this business. It requires capital, some skills, expertise and a time to do it. Starting a business is $10,000 in.
For the costs of the first few months, it’s $24,000 and $7,500. That’s $32,000. If you’re starting your wholesale business, you need access to $32,000. That’ll get it going. Can you do it cheaper? Yeah, but you’re not targeting one a month. Can I do it would one equity? You answered yes, I was about to say no. It is hard.
You can do it, but it is not easy.
I know two people in California who did it and they are wildly successful. The lack of capital was another hurdle for them. They were going to be successful whether they had the $60,000 to start their business or nothing. One of my greatest students, Blanca, she’s fantastic. I don’t want to tell her story. She’s got the call center. All the girls out there are calling every day. They make about 1,500 phone calls a day cold calling. My buddy Octavius, he’s a good guy out there and he came out from Washington DC and slept in his car. He was getting a foreclosure list. He would drive to Phoenix from LA to get a deal. He’d drive up to Yukon County to get a deal. He hustled. He knew he was going to be successful. This wasn’t going to be the thing that stopped them, but the people that come into it are looking for, “I’m going to do a little wholesaling and make $10,000 a month.” I’m like, “Do you have $60,000 because that’s what it’s going to take?”Do not expect to have everything you need and want in your life. Click To Tweet
When we started our house flipping business, we started with $40,000. We made $500,000 on our first seven deals, but we knew what we were doing. We knew well what we were doing.
You tell the story where you were coming down the wire.
We spent a few months before we got our first deal. I distinctly remember we had spent $20,000 in postcards. Do you know how many postcards you get? You get about 40,000 postcards. We’d spent $20,000 and we finally contracted our first deal. We made $95,000. It was a flip. We went right into the flipping side. Our first wholesale deal made $47,000.
If you’re a wholesaler, you’re going to need about $40,000 to keep your business going for those first few months. As those deals come in, do you pay yourself back? No, you have to reinvest. I’d say those first two deals you want to probably put 50% of those deals back into your business. Pay down a little credit card. Take your wife, your girl, your husband, your friend, your son, your daughter out to a nice dinner, then get your butt back to work.
We used to joke when I used to do the real estate seminar thing, we’d say, “We closed our first deal. We made $100,000.” We immediately went out and bought Lambos and started bragging on Facebook. Everyone’s laughing like, “We put it all right back into marketing.” We put it all back to the marketing side. We doubled our marketing budget effectively every quarter for the first year and then I increased it about 20% to 25% every quarter thereafter we got to about $100,000 a month.
The thing that lasts and needs to be said in all this is that the entrepreneur with a steady spouse or partner is going to be more successful. You got to pump in $40,000 for the first six months and you have to survive. You have to live. You better have a sugar mama who’s taking care of all your bills, paying the mortgage, the car payments and all that stuff. If you don’t, you fail. That’s what happens. We see it over and over. People come with this desperate mentality and they want a wholesale and make $10,000 in. It is not happening.
When I went full time, we planned for no checks for 36 months. Breakeven on most businesses is about 36 months. That’s what a lot of real estate investors don’t realize. They’re starting a real estate business and they’re saying, “Why am I not making $200,000 a year?” I’m like, “Most businesses break even in 36 months.” The success we had was pretty wild there for the first handful of years and how quickly it grew.
I’m here in Houston less than a year, I’m buying properties. I’m doing a flip and we’ve had three wholesale deals come through our team and I’m broke. Is it going to be this way always? No. Does next month make things a lot better? I had a February that sucked wind. I had to cover that February and $20,000 went out fast. I’m in year one here. I’m not expecting to have my Lambo yet, nor will I ever. I’m not expecting to have everything I need and want in my life. I’m going through those first few years. That covers these acquisitions and I would say if you’re a flipper, you can probably do $12,000 a year in smart marketing to acquire three flips. If you’re flipping, you still need the overhead, you still need the $7,000 website PATLive and all that good stuff because now you’re working with private lenders and everyone answers the phone. You got to put $15,000 in the field. Your acquisitions part of flipping is going to be $22,000. There is everything else. You need gap money.
Let’s talk about what gap money is.
We’ve had a couple of hard money guys and some finance guys who want to come on the show and want to do the Facebook Live. We’ll do that, we’ll bring them on here, but it’s not going to be an easy interview for them because I want to know why they’re charging $650 in the appraisal. I want to know why it’s $650 in Appraisal Nation, who they use, charges $450. If it’s that’s a profit center, then I will take that as an answer, but I don’t want to be told that that’s how much the appraisal is because I know it’s not. You are all welcome to come on. We’re going to have a little fun.
I’ll tell you another one. I don’t want to bash all the money guys, but flood certs are the same way and they mark everything up. They make a little piece here, a little piece there.
That is perfectly fine, but everyone should know that. You know my business. Let’s do the number close with me. We need about $22,000 in the acquisition and business startup and you need gap funding. Hard money lenders, even though they say they’re going to give you 100%, it’s not 100%. You still need your closing fees and you’ll still need your points. You still need a lot of it. There’s one guy in town who has been talking about a true 100% deal and 50% out for the contractor. We’ll try and grab him to vet that out. For the most part, if you’re doing a $300,000 flip and your numbers are working out right, you’re buying for $150, you’re putting $60,000 in 2%, 10% 70% ARV deal, you’re probably going to need about $20,000 to close that. Maybe a little bit more. If it’s a 75% deal, then you’re going to need your $20,000 plus $15,000 because 5% of $300,000 is $15,000. You’re going to need about let’s say $35,000 to close it. If you’re off the FortuneBuilders bus and they’re teaching you how to go above $70,000 but working on profit and all of those wacky numbers they do, you’re going to need $35,000 to get that deal done. You got to find someone to lend that or you’ve got to do it yourself. A lot of beginners who can’t afford the $35,000 backpack, they take it out of their own money.If you think real estate is expensive now, just wait because it's only going to get more and more expensive. Click To Tweet
Let’s back up because I want to make sure we get all the numbers. That’s $35,000 to write the check you are closing. That doesn’t include the reserves they’re going to require. They’re probably going to require at least 50% of the rehab in reserves. One flip turns into a six-figure business quick.
What a lot of people do is I’ll go out and find joint venture partners. They put up $75,000 at least show the bank account and a lot of those same folks are doing it over and over. You go out there and you get a JV partner. You need $22,000. You need at least $50,000. You’re at $75,000 to get your first one done and you still have to live.
You need $75,000 to flip a $300,000 house that you better be making about $60,000 on that house. Where I see people goof up and I hear this all the time, they go, “Jason, I got to have a deal. I got to get started.” What scares me to death is when I hear, “I don’t even care if I make money. I just want to get the experience.” I will give you the experience. I’ll give you all the experience you want. In the back of my mind I am saying, “You’re about to lose a lot of money. You’re about to lose a whole lot.” You’re about to get the experience. Randy Pausch says, “Experience is what you get when you don’t get what you want.” We are going to put that feather in my cap. I got experience there. Jim Rohn used to say, “Isn’t that fascinating? Isn’t that interesting?” You are $75,000 in and you’re hopefully making $60,000 on that $300,000 house. Most flippers don’t. They probably make about $20,000.
The national gross was something around $39,000. That was gross. It’s tough. Wholesaling and flipping are resource-intensive.
Wholesaling is the hardest thing to do in real estate and flipping is probably a close second. We looked at some deals and we’re going to lose a lot of money. We have not gotten into a lot of Texas stuff. That was one thing a couple of folks grabbed me about. They were asking, “When are you going to start talking about Texas stuff?”
There’s never a better example of how communication is 93% body language and tone than, “Do what?” When you say those words to me for the first time, I understand exactly what you’re trying to say to me. I will repeat myself, but the words mean nothing to me. I got 93% of that. I understand it.
The look on the face says all, “What do I do with this house?” What was your number for wholesaling? Get started in wholesaling.
You needed $32,000 for the first few months.
A wholesaler needs about $32,000. You needed about $75,000 for your first flip. The next question is, how does the buy and hold thing work? How do rental properties work? What’s the number that you need for a rental property?
That is the final rental property we’re looking at. Typically, we’re buying stuff between $100,000 and $150,000. ARV, after repair value, the retail value is $100,000 to $150,000. We’re buying them cheap below 80% of the market value. In that scenario, you’d want about 20% equity in. We want a net $300 a door. You would be spending between $20,000 and $25,000 on that house for closing, down payments and all that stuff.
That $20,000 to $25,000 in a relatively short amount of time, you’re making $300 to $500 a month in cashflow right out of the gate.
Based on our numbers, that may not be a Fannie Mae mortgage. You may have to get an investor mortgage with interest only and all that other stuff and then roll it out, which is what we do in big game hunting. We would teach people to buy on short-term financing and then roll down into long-term financing once you’ve stabilized because the bankers are more interested in the stabilized property than an unstabilized property. It makes a lot of sense. That still costs about $25,000. You need a few months reserve. You probably need about $7,000 in the bank, so $32,000.Communication is 93% body language. Click To Tweet
You’ve got a rental property. It’s making you money. It probably has a little bit of equity in there, $15,000 to $20,000 in equity.
About a year, you should be able to refi and pull your money out. Six months and one day is the shortest time to pull money out.
Cashouts at six months and one day which isn’t bad. There are some non-Fannie Mae products out there. A lot of people are saying, “Fannie Mae, Freddie Mac. What is that?” If you live in a house with a 30-year mortgage that is what you’ve got. You’ve got that government-backed Fannie Mae, Freddie Mac loan. $25,000 plus another 2% to 3% in reserves, that’s probably the number that you need.
That lines up and the best way to get qualified for those long-term mortgages is with a W2 job. This is why we keep saying don’t quit your job. That guru who keeps telling you about quitting your job is a knucklehead. They do not understand what you have here in Houston. I would tell you that if you have that W2 job and you have $25,000, go buy a rental. If you have $40,000, go buy a duplex. If you can figure out a way to do a duplex a year for the next several years, you’ll have financial freedom. At least you’ll have the options.
We’re pulling down almost $1,000 net on every duplex we take down. $700 to $1,000 a month in cash net profit, we shouldn’t cashflow. We calculate all the non-cash charges to that deal. It is almost $700. I have four that are close to $1,000 a month. That’s for doing one deal. That’s not bad.
You’re about to write a $3,500 EMD for three units with cashflow about a little over $1,000.
We’re buying it for $120,000, something like that. It needs a lot of work. I got sent a bunch of deals.
Please keep sending them. I’ll be looking at all of them. We have a wholesale liaison now. He’s an analyzer. He looks at it. He knows exactly which one of our buyers want it if not us. I’ll tell you if you’re wholesaling, getting a little more technical. We are always going to put and/or assignee on there because our capital moves fast. There are some units we can’t buy because of bad timing. We have about 40 people in our circle that we trust and we know are doing deals. We would absolutely refer to you that that buyer. We have someone who liaisons with wholesalers and he’ll make you always put in and/or assignee because it may not come to us, it may come to our group. When you send deals to Jason and me, it’s also coming to us but it’s also coming to our group. We have some individuals in our group who says, “I need a duplex.” “One came up. I know you need it but I’ve got nine properties. You need one. I’m going to go ahead. My friend John from California is going to buy this one.”
It all comes across in our WhatsApp texts. Somebody sends a text, he’s like, “I saw it. There are 100 messages in there.” I’m like, “What is going on?” This guy needs a duplex. This guy needs a flip. All that back and forth between the wholesalers and us and all that. Keep sending the deals our way.
We appreciate that and any lenders we’d love to talk too as well.
Glenn dropped a comment on YouTube, our Facebook feed or one of them. He said, “The numbers are spot on but most need something like a roof or a furnace. It is not unusual for us to drop $10,000 a year on a duplex to get them to show well.”
I will give you my numbers here. First of all, everyone should go and buy the Fast Track app. I don’t know if they have gone to the monthly model yet and that is coming out to be much affordable. When someone tells me, “I am on a property. I don’t know how much repairs are.” I will say, “What is the square footage?” If it is an apartment, I think for $10 a square foot, I can do on that apartment. If it is a house that is sea level, about $18. B-level is $20, $25. A Level could be wherever. A B-level house I know I can do it for about $25 a square foot and make it feel good. There are a couple of other things I have to look at. I will tell them, “Stand outside. Look at the roof. Is it saggy or is it nice, stiff and nice even lines?” They’re like, “It’s a little saggy.” I’m like, “Is it ripped up a little bit?” They’re like, “Yes, it’s ripped up a little.” It’s the roof. Go take a picture of the electric panel. Go run around the back, take a picture of the electric panel. If it says Federal Electric, we’re dead. Look at the HVAC. Is it rusting? Look inside the HVAC, is there black oil in there?
Everybody runs around the condenser and says, “What’s the date on it?” If you can’t find the date, it’s a million years old.
I’ll tell them to look at the hot water heater. There’s an ANSI number. That number is a two-year factor. ANSI stamps it every two years. That unit is going to be either within a year of that number. At this point, if it’s 2010, I’d probably say replace the hot water heater. Look at the pipes. What does that mean? If they’re plastic, they’re good. If they’re copper, that’s okay. If they’re rusting, we have a problem. That’s going to be galvanized. We’ve got to change out the pipes. Is it wavy? Walking downhill, as you walk, do we have foundation issues or structural issues?
In some places, look at the windows, but not so much. I’m going to look at the roof. I’m going to look at the HVAC system. I am going to look at the hot water heater. I’m going to look at the piping and look at the electrical panel. I’m going to look at the structure and then maybe windows because those are your big tickets. I can still do $25 a square foot plus the roof, plus the HVAC, plus the hot water heater. That’s my numbers. The contractor hates me because he’s saying, “You didn’t put in the cleanup.” We are close. I’m at $38,000. You’re at $39,600. We’re good enough. That’s how I do that fast. I can come in and out of the house and be within 10% to 15% within a few minutes.
I will tell you the Fast Track app is absolutely phenomenal. We used to teach a class on how you estimate and we had this hour-long, hour-and-a-half long PowerPoint. People are saying, “Jason, how do you estimate a rehab?” I’m like, “Do you have a smartphone?” Open up your inferior Google Play Store and it’s in there or the superior Apple App Store and let’s pull it out of there.
Let’s talk a little about gurus. My good friend Alton Jones is a guru. He says, “You’re going to pay for the education one way or another.” Our joke is when we’re on stage together he literally paid $250,000 to gurus. He knows them all. He went to every class. He bought the apps. He says, “I’ve never lost money on a deal.” I believe him. He personally has probably never lost money on a deal. I say, “I’ve lost about $250,000 on all my deals.” Education is the same. The cost is the same. We are beating up the guru platform and that sales model, but there is knowledge out there you have to get. Some of these guys are good. Some of them are flash in the pans. Every guru has got to start somewhere but the guy who gets a little bit of one year of success as a wholesale, all of a sudden he’s a wholesale guru. He’s making bird dogs paying for him. I’d run away from that model. If I got to pay you to be a bird dog, I’d run away from that model.
A bird dog finds lead sources.
They’re not door knocking, hanging up bandit signs and all that stuff. I have a good idea that the sign should read, “Andre wants to buy your home.” It’s Sam, Sally and Michael. It’s, “Martha wants to buy your home.” They’re all made by the same printer. I want to meet Martha. I’m calling that number and I get PATLive. I’m like, “Where’s Martha? I want to know who Martha is. Can I meet Martha? Can I meet her for coffee?”
We would put her all our marketing Pat because they would call, “Is this Pat?” You don’t know if it’s a man or a lady. That is inside the three-ring binder in the backpack.
I will say that gurus have their place. We said that. When you have $1 million problems and you can pay $100,000 to get it solved, you do it. If you don’t know your problems yet, then it’s not a point in time to spend $25,000. I would say beyond that forget the gurus. Peer-to-peer mastermind model is significant. It is superior. You’ve got to be in the right room. I’ve been to masterminds where I’m saying, “I’m not a florist. I’m not selling bedazzled stuff. This is not the room for me.”
It’s a, “Mastermind.” It’s a bunch of new investors. This isn’t going to help anybody.
I was in Kent Clothier’s mastermind. I was like in the original board room. Originally, when it started, he had real estate one and a marketing one. He said, “Robert, why don’t you sign up for real estate one?” I was like, “No, I want to go to the marketing one.” That cost me $15,000, but I can trace that I spent $15,000 and I made $84,000 within 30 days. I’m an implementer. We make a good team because you’re a visionary and I’m in implementation. I implement. I’m coachable. He built out this little cheap Craigslist funnel and we did it to the T and we got $84,000 in business in our construction company in 30 days. There are people in there who are high like Marc Anthony and I know people don’t know who that is. He’s the guy behind a lot of the stage crafting folks. He was in that room and obviously Kent was in that room. Big guys from Arizona. It was a powerful room and I felt lucky to be there.
Even more so, I was clearly the dumbest guy in the room. That’s what you want to be. You want to join a peer-to-peer or mastermind and be the dumbest guy in the room. That is my model. Every day I wake up and I am at a clean slate. I know nothing. Teach me something. That’s what we do. I would go with the mastermind over the straight guru stuff, but you got to get in the business. You can’t join a mastermind if you don’t do anything. You got to be doing it because it’s an active peer-to-peer sharing.
We went through wholesalers. You’re going to need about $32,000 for a few months of marketing and getting your business started. For flippers, it’s a minimum of $75,000. I’d be more comfortable with $100,000 or access to that as a second or a private loan. You have to be careful. A lot of hard money lenders won’t take a second on the property. For buying and holding $25,000 to $40,000 gets you there. If you’ve got double that, then let’s go do two duplexes. You’ve got four doors producing rent.
This always comes down to choice. If I’ve got $100,000 sitting in the checking account, the wife and I got $100,000 sitting in the checking account. We got her a little IRA and we both got good jobs and they say, “Jason, we want to get into flipping.” I’m like, “What are you trying to do?” They’re like, “We’d like some investment income.” Maybe I ought to buy some rentals and maybe do some Airbnb or I would look at something else other than flipping and wholesaling.
We talked about gurus and they’re not all bad. Be careful. If you are about to drop $25,000 and you don’t know if this is the right deal, text me (281) 401-9008 and I’ll say, “I’ve never heard of them,” “Stay away,” or “Good guy.” I will simply tell you my opinion. We know almost all of them and some of them around these road shows, people that come to Dallas, Houston, Boston, LA and Vegas. You need regional guys who understand that marketplace a little bit better. We’re happy to do that.
I want to thank you for reading. Thanks so much for the feedback. We enjoy the feedback. Feel free to send us an email. Let us know how we can improve the show. Let us know you’re reading. Share this stuff with your friends.