July 2, 2018

JF1399: From Single Family To 180 Unit Multifamily with Mario Ortiz

Mario just wanted to escape the “rat race” by buying single family homes. When he got to about 10 houses, Mario was really overwhelmed. He started looking into commercial real estate and funding, and worked his way up to buying a 180 unit that has tripled in value.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Mario Ortiz Real Estate Background:

  • Engineer in the oil industry for 28 years
  • Started investing in SFR to get out of the “rat race” but was overwhelmed after 10 homes
  • Moved up to a 17 unit, then a 90 unit, then a 180 unit in 2015 that tripled in value
  • Say hi to him at mortiz9991ATyahoo.com
  • Based in Friendswood, Texas
  • Best Ever Book: Never Split the Difference

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Mario Ortiz. How are you doing, Mario?

Mario Ortiz: I’m doing great, Joe. Thank you for having me.

Joe Fairless: I’m glad you’re doing great, and it’s my pleasure. A little bit about Mario – he has been an engineer in the oil industry for 28 years. He started investing in single-family rentals to get out of the rat race, but was overwhelmed after ten homes. Moved up to a 17-unit, then a 90-unit, then a 180-unit in 2015. They have tripled in value since then. Based in Friendswood, Texas, near Houston. With that being said, Mario, will you give the Best Ever listeners a little bit more about your background and your current focus?

Mario Ortiz: Sure. Like you mentioned, I’m a mechanical engineer in the oil industry. I’m 50 years old, I graduated from UT El Paso (shout-out to the miners out there) and decided that the best course at the time was to get into the oil industry. I got into it, and like every other industry, it fluctuates, it goes up and down, and there was a point in my life where I thought I was gonna lose my job, so I decided to find an alternate income source to replace my income, and that’s how I got into real estate.

Joe Fairless: So you first started out investing in single-family homes… How many did you purchase?

Mario Ortiz: I started obviously with the first one, and I didn’t know anything about real estate at the time. I bought a house that was on the MLS, I paid full price, 109k for it. I rented it right away, I didn’t have to do anything to it because it was ready to go. I was scared to death with that first one.

Once I got into it I realized, look, there’s really not a whole lot to this. I bought another one down the street a few months later. As you know, Joe, once you start getting into it, you start finding other opportunities. A gentleman that had three houses out in North [unintelligible [00:02:53].11] offered me three houses that he was trying to get out of, so I bought those three. Then I bought a couple in Texas City, which is another town South of here; I bought one in Dallas, and before I knew it, I had ten houses throughout the Houston area. That’s kind of where I stopped, at ten.

Joe Fairless: At ten, okay. A couple questions on the single-family homes. One, the guy who had three houses that you bought the package from, how did you get connected with him?

Mario Ortiz: [unintelligible [00:03:23].19] I didn’t know anything… I was trying to find out how to get financing for bigger complexes… Bigger being — I found a 10-unit and I was trying to get that. So I got in the Yellow Pages back then (2004-2005, somewhere in that range) and found a banker in the Yellow Pages, I called him up and I had a meeting with him. I went over there with my brand new child and my wife. I sat down across him, told him what I wanted to do, and he says “Look, I’ve got a guy…” So he introduced me to the person that was trying to get rid of the three houses, and he financed it. It was like a [unintelligible [00:03:58].10] So that got me through a few financing issues, as well.

Joe Fairless: You got to ten homes, and a lot of investors continue to do more single-family homes, and there’s a limit with conventional financing – you know this – up to ten homes, but then you can package those into a commercial loan and then you’ll be able to start over, and I got refreshed on that from a recent interview I did… So why did you go into larger stuff and not stick to what had been working?

Mario Ortiz: It had more to do with the logistics of things. All this time I have a full-time job as an engineer/project manager (pretty demanding), and then I had a young family… At the time I had two kids. Then I started where one was vacant out in Kingwood, another one over here in Texas City had a bad toilet, and I was doing all the maintenance… So it became very demanding, running around everywhere. It was more of that. And by then, the oil market started to turn and it was lucrative, things were going good, so I actually started to divest of the houses because of the complexity of trying to manage that many houses, maintain a job and the fatherly duties I had.

So I started to sell some just because I was so busy with all that, and I said “Look, this isn’t for me; it’s just too much work.” My objective was to get 20 or 30 houses and maintain a job, but at 10 the wheels were starting to come off. I just couldn’t handle it, so I stopped at ten.

Joe Fairless: Well, as an engineer – and it sounds like you also do some project management in your role, right?

Mario Ortiz: Yes.

Joe Fairless: Okay. I know you thought of the option of hiring a company to do it, so why didn’t you do that? Because that seems like it would solve the challenge that you had with doing all the maintenance and handling all the logistics?

Mario Ortiz: One of the things that kind of drove me was that I – like everybody, probably – feel like I’m very resourceful, that nobody can do it better than I can (it’s probably a flaw of mine). That kind of attitude really drove me to stay with it, but I think, Joe, what’s important is that more so I just got burnt out. If you combine all those things that I was doing, I really thought that this was not gonna work and I was more interested in just kind of doing something different. The oil industry was doing good, and that’s when I just decided to stop. At that point I was ready to just sell everything, just because of the frustration.

Joe Fairless: So what did you do?

Mario Ortiz: So I started selling them. I sold those three up there and I made a pretty good profit. I got down to about six, and things settled down. There seemed to be a sweet spot, and everything was a lot closer, the six were around here… And then I went a couple of years and I got a little bored. This was around 2008(ish) when the implosion happened, and I started getting the bug again, just kind of hanging around the house, playing golf a little bit here and there… I got a little bored, I’m a little restless, so I started–

Joe Fairless: In 2008 you got bored?

Mario Ortiz: Around there, yeah.

Joe Fairless: Was your job okay at that point?

Mario Ortiz: Yeah, the job was fine. Everything was fine from that perspective. It was more of the daily grind, it was just kind of going through the motions. So I started looking at LoopNet again and I found a 17-unit apartment complex out in Lamar, TX, another town South of here, that was for sale by owner. I had a little bit of money in the bank from the sales that I had done, and the guy was going to owner finance.

When I started to the guy, he was giving me really attractive terms. I went and looked at the property. It was decent; it needed a new roof, it needed some siding, but it was okay… Not the greatest thing in the world. So I started looking, and then when I thought we had a deal, he invited me over to his bank to sign the paperwork. When I showed up, the president of the bank and two other gentlemen were there. I sat down and I said “Look, I’m here to purchase a property. I have a deal with this gentleman”, and apparently, this guy wasn’t being really forthcoming; he had been kind of not telling me that I was gonna be fourth in line.

The bank had financed that to these two gentlemen; those two gentlemen had financed it to this guy, and this guy was gonna finance it to me… So they were pretty upset that this guy was doing this under-handedly… But once I talked to them – you know, I had a little bit of money, they saw my credentials, I was a project manager for an oil company – they really wanted to get rid of this guy… So they came up with a deal where they cut out everybody, and I dealt directly with the bank, and they actually gave me a price cut, with the understanding that I had to invest some money into the roof and do some siding work. So I had to put some earnest money away in an account, so that I could make those repairs.

It wasn’t the greatest deal in the world, but what it did is it introduced me to this banker. To this day I’m still using this guy. We had a great relationship. That started it, and I built a reputation with him of doing things… So that kind of kicked off my multifamily. The attractiveness to me was that it was all in one place, collect rent in one location, all the repairs – I’d go on a Saturday morning with my toolbox… I still was doing it myself. I had an on-site manager, but her job was simply to collect rent and to show units when there were vacancies. But other than that, I did the credit check, I filled out the leases, I kept track of all the maintenance – all that stuff I did, along still with my full-time job. That’s kind of how I got into multifamily.

Joe Fairless: Wow. Did the gentleman who originally was going to give you the seller financing get the same profits that he was anticipating in the revised deal where you worked directly with the bank?

Mario Ortiz: No. As it turned out, this guy was in trouble with the other investors. He hadn’t been paying taxes, so they threatened him with — I don’t know what they did; he had other businesses going… So at the end of the day I never saw that guy again. It’s like they took him out back and did something with him. But I ended up paying less, so my guess is that he got less, because when I saw the taxes that he owed — and I hadn’t seen any of this; I’m new to the game, I didn’t know what I was doing… When I saw what he owed for taxes, and the money that he owed the bank and all that other stuff, I’d have a hard time understanding if he walked away with anything at all.

Joe Fairless: And how did you hear about that 17-unit?

Mario Ortiz: I found it on LoopNet, just looking. This was back when LoopNet was fairly new… I say fairly new, I don’t know how long it had been there, but it was new to me, and it was back in 2008, something in that range.

Joe Fairless: So then you got a 90-unit. How did you go from the 17 to the 90?

Mario Ortiz: So I operated that for a little while, and I did very well. Back in that timeframe there was a hurricane… I believe it was Hurricane Katrina that hit Louisiana, and a lot of the people from Louisiana came to Houston, just this place. With that came very low vacancies, very high rents, and a lot of Section 8 vouchers and a lot of assistance from FEMA. So that really generated a lot of income and I was able to fill it with really good people, and getting really high prices.

At the same time, the bubble had busted and you could still see a lot of people in bankruptcy. This particular one was in receivership, the one in Texas City. It just so happened that it was almost across the street from the bank that I borrowed the money for the other. But at this point I have no money; I’m out of cash, because I put it all in this thing… So I first went to my bank and said, “Look, are you okay if I put this thing on LoopNet and I finance it to somebody else?” They were fine with that, so I did that, and I quickly got a guy to commit to buy this thing.

I didn’t make a whole lot of money. I probably made 75k from the deal, but it released some money, and I also dipped into my 401K to pull money out, and I made an offer (full price) for this 90-unit apartment complex, and using the same bank. They endorsed it. They underwrote it, they said “Yeah, we’re good”, and I’ve made a full price offer, and I got it. Now, when I say a full price offer, in retrospect right now, the prices [unintelligible [00:12:21].22] gave it to me. I think it was like 14k a door for 90 units. That was back in 2011, when things were really depressed.

It took a long time to get it because it was in receivership, and there was a lot of court order and arraignments and all kind of stuff. A big mess. But anyway, at the end of the day I ended up with that thing. At that point, that was when I started hiring people. I hired a manager, but because of my reluctance to pay a lot and my lack of understanding of how apartments work, I ended up getting a person that had no experience in apartment complexes, but she did have experience in storage units, in rental units.

So she came over, and between her and I — I was still at my full-time job, she was there, and the maintenance guy, and then I would go after work every night and we’d stay there, we’d try to figure things out, we’d strategize… We had to get rid of a lot of people, but for some reason it felt like we never lost money. I started making money from day one. She was very successful, she was very persistent, and it turned out to be a very good manager. She was [unintelligible [00:13:32].18] she knew how to save money, and we made that thing work.

About 18 months later, that thing that we bought for 1.2 million, somebody approached me and I got an offer for a million dollars more than I had paid.

Joe Fairless: And what did you tell them?

Mario Ortiz: Well, I’d never had a million dollars, Joe, and it was hard to say no.

Joe Fairless: [laughs]

Mario Ortiz: There’s something about that million dollar figure that really made me chase that thing, so I went ahead and sold it, and I put it in a 1031 exchange. I didn’t know much about it… The lady who was managing that, she was not the greatest at it either. I went and looked, I couldn’t find anything. By then, prices were all elevated. I mean, in retrospect now, they were still great deals, but at the time I was thinking that they were really high… So that drove me to go look in Dallas, Texas and in Fort Worth.

I found a deal out there. It was 180 units for – I believe at the time they wanted $20,000/door, or something crazy like that. I lost that 1031 exchange because I wanted a better deal; I had that mentality that I always wanted to give an offer lower than what they were asking for… And I lost that deal. Somebody paid 3.1, I offered 2.8, and I lost my 1031. I paid the taxes.

The joy of having the million dollars in the bank lasted for about two days. [laughter] I found that operating the complex, the joy of the wheeling and dealing, the challenge of making something better than it was was more valuable to me than having the money in the bank. There was something about that challenge.

But prices were going up and I just couldn’t find anything. Also, I had a little bit of money, more than I had ever had in the bank, so my wife and I traveled a little bit. I think I even bought a Porsche at the time, and played some more golf…

Joe Fairless: A high roller!

Mario Ortiz: A little bit… Yeah, we kind of got into that. And it was fun. But again, after a couple years, I got bored again. I get bored quickly, as you can tell. By then I had three children, the job was doing good, so I started asking around again; Dallas wasn’t what it is today, so I started looking… And in about 2014 I reached out to a broker out there, and he told me that the people who had beat me on the 180-unit complex were trying to sell it. He couldn’t get the listing, but he was trying… He says, “As soon as I get it, I’ll let you know.” I looked on LoopNet, and sure enough, there they were, selling that same complex, but now they wanted 3.6. They’d bought it for 3.1. So I went over there and found that they were financially in trouble…

Joe Fairless: How did you find that out?

Mario Ortiz: I went and talked to them and I could just tell. I flew down there. The car count — you could see that the parking lot’s empty; talking to the manager… Just talking to them, they were trying to sell the place. The problem at that point was that it was very difficult to find money, especially for non-performing assets. I didn’t know anything about syndication, I didn’t know anything about partnerships, I just wanted to do it myself because that’s all I knew to that point.

So I tied it up in a contract and I just couldn’t find the financing and I lost it, and I kept going back and forth trying to find financing. It took me about a year and a half, and then they were also facing some bankruptcy issues; they went to court a couple times trying to fight it off, so I knew they were desperate to get rid of it, I just couldn’t find financing, especially the way it was performing.

I reached out to my banker here and he didn’t want anything to do with anything that was outside of Houston… But finally, after about a year, I finally went to his office, I kidnapped the president, put him on an airplane, flew him over to Dallas, showed him the asset, and once he looked at the asset, he goes “Holy crap, this is worth that, or more”, so he financed it.

Joe Fairless: Where is it in Dallas?

Mario Ortiz: This is in Fort Worth. It’s right outside 820 and I-30.

Joe Fairless: Okay, yeah. North Arlington, east Fort Worth…

Mario Ortiz: East Fort Worth, yeah. It’s not the greatest area in the world… And that was part of the challenges that they were having. It’s a rough area, and they just didn’t know how to manage it. These folks, they owned hotels, so they were trying to treat it as a hotel. If people showed up with money, they took it; no checking, no nothing, and that’s why they got in trouble.

Anyway, so I finally got it. I did a lot of due diligence. I probably overlooked some things that I should have caught…

Joe Fairless: Like what?

Mario Ortiz: They were claiming a certain amount of collections, but what they were doing is they were actually putting their own money into it to make it seem like they were collecting money, but in reality they were just taking money from their bank account and putting it in there to make it seem like they were collecting money.

The telltale was that their deposits were round numbers. I don’t know, maybe I’m doing it wrong when I do my deposits; I probably do them daily in the first five days… I never make a deposit with three zeroes behind it. It’s always some odd number in there. I should have seen that, but I kind of ignored it, and I was in love with the property.

People have asked me, “Would you have still done it if you knew?” I think so… But obviously no, it’s easy to say that, right?

But anyway, so I went ahead… And there were some maintenance issues, and I didn’t understand the amount of – how do I say this…? I’ll just say it – the amount of criminals, if you will, of non-desirables, or whatever you call the people that were there… But we took it over, and this lady that had been working for me in Texas City – obviously, she was out of a job for a couple years… She went into the security and she was doing that. When I called her up and said “Would you be willing to move to Dallas?” she was like “You had me at  hey.” She was ready to go, because she loves the business also. So she moved out to Dallas to become the manager out there.

I was expecting a turnover of about 30%(ish), you know… I was expecting some turnover. I was not expecting 70%, 75%… But we ended up over the course of two years getting rid of about 70% to 80% of the people that were there. It was just brutal. And as you know, when you get into these things — every time somebody leaves, you’ve gotta invest a lot of money to get these units fixed. My restoration cost, or whatever I was gonna put into this property all went into getting rid of people and updating the units they were in just to stay afloat.

It was very challenging. When I first got it, I was probably losing $20,000/month because I was putting so much money back into it. I was actually calculating how long it would take me to run out of money, and asking brokers how long it would take to close on a deal like this, so that I could time it, so that when I ran out of money I would be selling it. It was very, very scary. All my life savings were in that thing. Of course, I had a young family, and I’m thinking “Man, what am I doing?” All my relatives, people that are not in real estate were looking at me and telling me that I was crazy for doing this. All those pressures that other people put on you just don’t help at all.

Since I had a full-time job, I wasn’t around other real estate people. I was involved in the oil industry, around engineers and other people that are career-oriented, so I didn’t have that structure, that support group to tell me “Hey, you’re doing great. Do this, try that.” I didn’t have that, so it was all just consuming the information of the people around me. So from that perspective, they weren’t the right people to be around.

Anyway, we got through that, and slowly we started turning it around. It was very challenging, but we finally got it turned around. We started making money I would say probably in the end of 2016, something like that. That’s when I stopped losing money.

Somewhere along the line I started hearing rumors that people were selling their properties pretty expensive, even the ones across the street. I think I paid 20k/door, and I started hearing that people were selling it for 40k/door. I was like “There’s no way…” I was too busy running the place, I didn’t have time to be looking…

In the process of wondering whether I was gonna lose my shirt on this thing, I called a broker and I said “Hey, how much is my property worth?” He came back and he said “Look, you could probably get six million for it.” I was thinking, “Okay, six million… I paid 3.6, and with what I’ve lost, I could make a couple million. Not bad.” Then I kept saying “No, I don’t wanna list it. I think I can make it”, and then something happened. Close to the end of 2016 I started getting unsolicited calls from people, making me offers. We just pooled offers. I knew I was onto something when somebody called [unintelligible [00:22:08].12] we were driving there. I put it on speaker, and the guy said “Hey, I have an offer from a person that’s willing to pay you eight million dollars.” I just looked at my wife, we looked at each other, and we were like “Wow, this is now life-changing.”

Joe Fairless: [laughs]

Mario Ortiz: Don’t get me wrong, a million dollars is a lot of money, but you can’t retire on a million dollars, especially when you have a young family, you’ve still gotta worry about college and all that… But now you’re talking about five million dollars. That’s gonna be a different story, right?

So I said, “Okay, I’ll get back to you.” I was so excited. I said “Man, we’ve just made five million bucks.” But then I reflected back to the feeling that I got when I’d sold that other property, two days after I had that money in the bank. There was a feeling of emptiness, like “Wow, now what do I do with the money? The money is now in the bank, not doing anything.” So I’m sitting there, and I’m back to my regular job, or whatever that looks like. And Joe, I resisted. I resisted and I said “No, I don’t want it.” And man, the broker was so upset, because he thought he had me. He says “You’re never gonna get anything more than this. You’re already at an 8-cap, and the market can’t [unintelligible [00:23:14].29] You should sell…” Anyway, on and on.

So then another offer came, and another offer. Before I knew it, I had an offer for almost 11 million dollars. Then I said, “Okay, I’m gonna do this. I’m gonna sell. 11 million dollars is a long way from three.” I then started thinking about doing a 1031 exchange. I had to take that money and do something with it, otherwise I’m gonna get killed with taxes.

Well, I went out looking for something, and lo and behold, obviously, everything else went up, so I can’t do anything with the money. I’m gonna go sell this thing, get the money, and then go buy something I don’t want, and end up in a worse situation than I’m at… So I started considering the whole refi situation, and the benefits, and the advantages of refinancing, and I listened to your show a lot; that’s when I discovered you guys… And how people would just never sell. Some people have that philosophy – just keep buying stuff.

So at the end of the day I decided to keep the place and to refi, and to take that avenue instead, and take my time with finding a property and not have the pressure of the 1031 limitations.

Joe Fairless: And how much money did you get in your bank account after the refi?

Mario Ortiz: So I’m not there yet, but I am days away from closing, and I’m gonna end up with four million.

Joe Fairless: Sweet. And then you’re gonna be investing that into a new deal, or are you going to buy another fancy car?

Mario Ortiz: No, no, no… That’d be a hell of a fancy car, wouldn’t it?

Joe Fairless: Yeah, you could buy a couple.

Mario Ortiz: [laughs] Yeah… No, no. I’ve been looking at different asset classes as well, so…

Joe Fairless: What did they value the property at?

Mario Ortiz: Eleven million.

Joe Fairless: Eleven, got it. What is your best real estate investing advice ever?

Mario Ortiz: Well, I suggest that you don’t have to hit a home run, but you’ve just gotta get started. Getting motivated, getting out of the couch and start looking for an investment is probably the best advice I can give.

Joe Fairless: What management company did you use on that 180-unit?

Mario Ortiz: We’re using a company called City Gate.

Joe Fairless: I’m familiar with City Gate. They do our properties, too.

Mario Ortiz: Oh, wonderful.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Mario Ortiz: Yes.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:25:30].21] to [00:26:12].20]

Joe Fairless: Best ever book you’ve read?

Mario Ortiz: I would say Never Split the Difference.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?

Mario Ortiz: That we haven’t talked about… I refinanced that 90-unit right before I sold it, so that was a bunch of money that I spent that wasn’t necessary.

Joe Fairless: What’s the best ever way you like to give back?

Mario Ortiz: I do a lot of mentoring. Now that I’m into this business, people come to me and I jump at every opportunity that I can to help people out to get started; I’ve helped a few people flip houses and get into investing.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing or get in touch with you?

Mario Ortiz: If anybody wants to get a hold of me, I’m not selling anything, I don’t have any products, I just have my e-mail: mortiz9991@yahoo.com.

Joe Fairless: Quite an impressive path that you have taken, from your single-family homes – the first, $109,000, retail price, as you say, to then the 17-unit from LoopNet, where you made (I think you said) 75k or so… That’s a lot of money, but not relative to what we’re about to talk about – the 90-unit, and then pocketing the million dollars, and then leveraging that into the 180-unit. Purchase price – what was that, 3.6 or was that 3?

Mario Ortiz: It was 3.65, I believe.

Joe Fairless: Okay, 3.65 purchase price. You could have got it for 3, so shame on you. You totally messed this deal up — no, I’m kidding.

Mario Ortiz: Absolutely.

Joe Fairless: 3.65 purchase price, and… When did you buy that?

Mario Ortiz: I bought that September 14th of 2015.

Joe Fairless: 2015, 3.65 purchase price, and appraised recently for 11 million dollars, and now you’re getting 4 million buckaroos in the bank account from the refinance, and you’re going at it again, looking at different things… So thanks again for being on the show. Inspirational story. I’m really, really grateful you were on the show. I hope you have a best ever day, and we’ll talk to you soon.

Mario Ortiz: Thank you, Joe.

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