Sarah Larbi: Chris Shebib is a real estate investor, realtor and former contractor. He's going to talk about the benefits of the hybrid investing strategy and success in a market with volatility. Chris is the founder, managing director of Blue Orchard Property Group. He's also the podcast host of The Hidden Upside. Guys, write this down if you like podcasts, the Hidden Upside.. Chris, welcome.
Chris Shebib: Just to give you a bit of context, we're gonna talk and I'll articulate this in terms of altitude. We're gonna talk at about 30,000 feet tonight. So if ground zero is zero to 10,000 feet, which is like time management, energy management, vision is 60,000 feet, we're gonna talk at about 30,000 feet. And what I mean by that is we're gonna get into some strategy but we're gonna keep it pretty macro.
The idea is to give some context in terms of the landscape that we're in right now, and what we can do to maximize the road forward for ourselves. Okay. I'll get us started with a quote here. The road of life is paved with flat squirrels who couldn't make a decision. I've actually used this quote with this group in the past, and the reason why I chose to use it again is cause I think it's so relevant when you compare the market from January to the market to today, there's pitfalls in either one, right?
The hype of January. It was so intense that it freaked people out and made them scared. The decline of today is also creating challenges, the interest rates, the threat of recession. All of these things can create challenges. The landscape changes. I've said this before too, that everything in the world is in a constant state of adaptation.
We should be no different. The market is changing and we should adapt to it. And this quote is a really good reminder that, what do we do over and over again? We want to gather information, assess that information, take action and course correct along the way. We don't wanna get caught in any sort of fear and paralysis because that's never a good thing.
Another guiding principle. Every day is a good day to make a good deal, right? And no day is a good day to make a bad deal, but I've done the analysis around the correction of 89. I've lived through three other corrections, this pullback included. Don't get caught wasting time because you can waste five years or more very easily.
Just being nervous. Is the market finished going down? Is it going back up too fast? Is it gonna go up and then back down? You can waste five years of your time and we don't have that many as investors. So if we can continue to make good deals, is that a good thing for us, obviously, yes.
We want to keep doing that. So a little bit about myself. I've been investing since 92 in the US and Canada. I've done most of the strategies out there. Today I focus exclusively on BRRRR and BRRRR with more future potential. So I do apartment buildings and I do residential.
Residential is singles to doubles and triples, meaning second suites and now ADUs. So that's a bit in that back. Okay. On the next slide, I'll see it here in a second. So what do I focus on today? Blue Orchard Property Group is my company. We're investor focused realtors that help investors with the best information possible to make, to build the most wealth over time.
We've got an eight step proprietary process to help investors understand what market, what strategy. There's a whole process to go through to get you on the right track as fast as you. As Sarah mentioned, thank you for that Sarah. I have a podcast. The Hidden Upside would be awesome if you check that out, subscribe to that.
We've got a new one dropping tomorrow that is phenomenal. With Jillian Irving. Anybody who knows she was outstanding in brilliant investments. So I do multifamily investments. I've partnered with Dalia and Rachel. We are in full swing right now in acquisition mode and lots of exciting stuff is coming.
A little bit of context. What are the characteristics of a good investment? The fundamentals again, in times of fray and change. Let's reorient. Let's realign with the fundamentals. So we want security. Obviously we want to protect our investments. We want to maximize our ROI, , and this one's important and not everybody thinks about this one.
I wanna maximize my control. Why do I wanna do that in any project? Whether it's big or small, enterprise doesn't matter. I spent a lot of years in technology as well. Same thing there. Any project you wanna identify, what variables are inside your control and which ones are outside your control.
The ones outside your control, you gotta keep your eye on those twice as much as the ones inside your control. And so when I look at any project investments, in this case, I want to identify at least at a macro level how many of these variables are outside of my control. Is it purely based on appreciation?
Can I rent this property? Can I add a second suite? Can I add an adu? All of those things are examples of control that I love to have inside my grasp so that when the market changes, I still have the ability to control a bunch of variables and mitigate the risk around those changes. Okay. So let's talk about the context.
There'll be two parts to this. We'll talk about the context that we're in right now, and then we'll talk about the Blue Orchard Hybrid ADU strategy. Okay. Which is a name on a strategy that I'll outline for you. Again, investing is simple, but it's not easy. This is a very straightforward model, but it's based on data that I don't think everybody's.
First we've got immigration projections. As you can see, 2023, 2024, 2025. The numbers keep going up. This has been going on for a while and it's continuing as we move forward. That's really important for us, right? What's the number one thing for us investors? We need customers, right? If the demand goes away, that's the number one thing that I would be concerned about, but there's no signs of that, right?
In fact, demand keeps going up. Now let's look at the density mandate. What is the province doing as demand goes up and there's not enough supply? The province, going back 10 years ago now, 2012, bill one 40 gets passed. That is essentially a second suite. Fast forward to 2019.
Bill 108, essentially, and again, there's lots of details in here. Essentially that's ADUs, SDUs okay. Fast forward to February of 2022, a provincial task force is formed to try and address the housing crisis, right? So what are we watching here? We're watching, is there a housing crisis and what is the province doing to try and address that?
Really good information for us as we plot the next five, 10 years for ourselves as investors. So let's look at the task force. First of all, the task force was formed. That's very telling all on its own. Second of all, what are they saying? Urges, more housing density, less time consulting the public.
1.5 million new homes needed in the next 10 years. Increased density in neighborhoods zoned exclusively for single family homes. Limit the time spent consulting the public on housing developments. This is when I saw that come out. I'm like, okay. More density and more allowance for us to be able to move like we want to as investors to accommodate that density.
Fast forward in the last couple of weeks, provincial legislation has made more homes built faster. Essentially Ontario announces sweeping housing changes that allow three units on one property. Now, there's some details to be worked out here in terms of what they mean cause it's early.
There's also details to be realized in terms of what it means for the municipalities as boots on the ground investors, what will it mean? We have yet to determine that. But what's clear is that the trend of the province responding to demand and density is not changing. They keep recognizing it and they keep making strides to try and make it easier for us.
Does everybody understand why the second suites were so good? There's a bunch of reasons. One of the reasons, though, is that they waived the development fees for that second. So if I built another unit, I'd have to pay development fees. When I insert it and retrofit it into the existing home, I don't have to pay that.
They're announcing that same kind of concept in this latest legislation, right? They're gonna make it easier, one and cheaper two. So that's really good for us as investors, as we look at the next five, 10 years. So do recent market changes change anything in the long term.
CMHC 22 million housing units needed by 2030 to solve the affordability crisis, right? So just more data to suggest supply and demand is in a really good spot for us. So interest rates don't address supply and demand. There's a triangulation between the price of an investment property, the cost of that investment, property, interest rates in this case, and the gross rent, right?
The three of those things just triangulate off each other. Lots of details, but when you distill it down, that's the fundamentals of this. So all that happened is that the interest rates went up, the cost, and so the price went down, the rents. Increasing but not enough to significantly change the investment.
These things, again, they just triangulate off each other. The interest rates, they're a detail, they're very important for us, but they don't change the fundamentals of the supply and demand in the area. Again, part of what we're doing here is trying to cut through all the noise and get to the bottom line so that we can formulate strategies.
Long term looks as strong as it always, that's a statement that I'll make based on my own personal opinion based on some of the data that I just showed you and some of the macro plan that I'll walk you through in a few minutes. But when supply and demand is as favorable as it is and they're allowing for more density, cheaper, and easier, that, again, the long term looks very similar to me as it did in the last 10 years, as it will in the next 10 years, and everyone needs to decide, is this a buying opportunity .
You should talk to other investors who've been doing this for a while. There's no shortage of investors who started in oh eight and oh nine and look back, and they'll tell you flat out. Everybody told me I was crazy when I did that because things were pulling back. The US was really getting hit. But it was a scary time, a time of change just like we're in right now.
Looking back, they say that was the best. I was buying deals and that correction did not last forever. It was a bump in the road. And those deals over the next 10 years, they rode that upwave changed everything for them, I'm not going to tell you, nor I can't, nor would I, if even if I could, whether or not you should move, but I wanna share information with you from other investors, like I just said, but also around the supply and demand and the fundamentals that haven't changed so that you can decide is this a bad time and I should stop?
Or is it the best time ever? It can be. It depends how you look at it. All right, so let's look at a proven template for success the last 10 years. In the next 10 years. So how many here are familiar with the BRRRR model? Very good. Okay. So buy, reno, refi, and rent. It's obviously got a ton of power in. I do this in apartment buildings. The details of how I force value are very different from second suites.
The BRRRR model is huge. I mentioned in the beginning there's not much in the investing world that I do that doesn't have bur and doesn't have multiple waves of future potential because I want that control, right? I want the upside of getting that money back, and I want the control of the many waves of the future.
All right, so we'll build on this BRRRR model, if you would, Paul. Okay, so just real macro again, we're flying at 30,000 feet here. Last 10 years were characterized in the residential investing world and the BRRRR largely by second suites, right? And so why was that? Second suites are a very predictable, repeatable, scalable model for running BRRRRs.
It's not the only way to do a BRRRR but it's very, again, scalable, repeatable, and predictable. Now when we look forward to the next 10 years, SDUs and ADUs are just the second suites of 10 years ago, right? They're another wave of being allowed to put in more density, more apartments on one property, and that's huge for us to recognize.
That's a really important data point to know that's happening right now. More than that, and this is what we'll do here. We'll look back at second suites over the last 10 years, how did they behave? How can we extrapolate from that so that we can now ride the next 10 years and ADUs and that legislation I just showed you in order to build as much wealth as possible, right?
Let's look at the characteristics. So over time, we got a chart here from 2014 to 2022. This is fundamental to plotting the course over the next 10 years, there's an undeniable trend, okay? So you look at inventory, cash flow, and the BRRRR refinance power. You go back to 2013 and 2014, there was lots of inventory and these properties were everywhere.
Those sixties bungalows with the ceiling height that you wanted in the parking, they were all over the place and you could sag 'em for really cheap, by the way too, and you could probably buy those properties. It was getting tighter, but it was still possible. You could buy those properties on the cash flow rate of the gate, even if you didn't convert it, if you converted it now, your cash flow was very strong.
The BRRRR refi, what am I referring to when I talk about that? Everybody knows what a perfect BRRRR is? A show of hands. Anybody? Does anybody know? Okay, the perfect, so a perfect BRRRR is essentially, again, very macro. You buy a property, single family home, you put in your Reno and your down payment.
You force up the value by putting in the second suite. Now you refi and if the delta between the purchase and the ARV is big enough, you're gonna run a perfect BRRRR. That means I get all my down payment and all my rental back in my pocket to go do another one. And I get a cash flowing property that builds wealth for me over the next 5, 10, 15 years.
That's a perfect BRRRR. And in the beginning of the phase, perfect BRRRRs were far more viable. They weren't grand slams. You couldn't get 'em every time, but they were way easier. Now, this is important. The trend over time is that the refinance power, the power of the BRRRR, how much money am I gonna get back?
Decreased over time. Why? Because more and more investors became aware of what Burr was. More and more investors became aware of what second suites were, why they're so powerful, and the prices were going up. So more and more investors had to do that. You needed two rents under one roof, and you could no longer buy a single family home and rent it out.
That's why demand went up. Inventory got tougher and tougher to find the refi. It never really got so bad that we couldn't get all our rental money back, but instead of getting all of our down payment, we'd start to get less and less over time. And on top of that, cash flow got tighter.
That's really important. Now, conversely, predictability went up. And so what do I mean by that? In the beginning of the second suite, Predictability was low. It was low in terms of the ARV especially. Because appraisers didn't know how to appraise them. It was new. And so I had appraisers come in and there'd be like an $80,000 delta between one appraisal and the next.
They didn't know that legal was worth 24% 20% more in the market than illegal duplexes. They didn't know those things, so we started to build appraisal packages to be able to give the appraiser. We had a 97% success rate with that appraisal packaging. We still use it today, but that's some of what you have to do if you're an early adopter into these things.
Now the appraisers didn't know what to do and the lenders also didn't have a checkbox sometimes for this. As time went on, they got very good at it. It was easy to go to a lender, buy a single family home, reno. It refi it six months later, and they didn't bat an eye at it. In the beginning, not so much at all.
It was very tough. So that's really important for. Just one more Paul. So what can we learn? Inventory, cash flow, and the power of the refi. All decrease over time. Predictability increases, right? So it got easier and easier. The ARV was almost a sure thing, right? You do one in 2021 or 2022, especially in a primary market like Barry Hamilton, Oshawa, primaries, like that.
There's tons of comps out there for the finished product. And your ARVs almost it's not guaranteed. Nothing is, but it was easy to get. So that's really important, again, as we look forward. So what ADU atop adoption approaches are there for us? So again, having covered that spectrum, we know we could be an early adopter, we could start ADUs right now, and there's a bunch of pros to doing that.
Again, inventory's easier, cash flows better. The BRRRR refi if you're able to get the lender to recognize the rents and the building, then the refi can be very, Okay, but predictability not as good. Two, we could be a late adopter, right? Just buying a second suite in 2020, for example, or 2021, you're, you're 9, 8, 9 years into it, and so you're not gonna get that same kind of early adopter advantage.
Option three, why not do both? And that's what we're here to talk about is this hybrid model of, you don't have to wait, you don't have to be cutting edge and start right away, and you don't also don't have to wait until way down the road to get that predictability. You can blend the two worlds and put the control in your court, decide when you want to do it with a very simple approach.
What is this model? Phase one, buy properties that you know you can duplex. Buy those today and duplex them. Refi. Pull out all your rental, some of your down payment if you can, and sit on your cash flow. Cash flowing property. Phase two. Let that sit for three to four years and build its wealth.
Mortgage pay down market appreciation, cash flow, same triangulation of wealth that we've been looking at for years and years. Let that sit there and do its thing for three to four years Phase 3. Refi that duplex in order to fund all or part of the ADU implementation. So what is this model built on?
It's built on the idea that we're gonna buy duplex properties, single family homes that we know we can convert into second suites, but we're gonna buy them on bigger plots of land. Why am I gonna do that? Because I like the control of being able to put the ADU in whenever I want to. I like that the land has a ton of value.
Let me just walk you through these. Rewind 8 years ago, 8, 9 years ago. And think about what if you knew what was going to happen, what if you knew how it was gonna play out over the next eight, nine years, what would that do to the model that you, let me say it like this. What would that do to the clarity and focus that you implemented over those 8 years?
Because we can pretty much assess that the next 8 years of ADU and density are gonna be very similar. So let's look at that. What if you rewind the years and you buy single family homes that you know could be converted to second suites on large lots? Eight years ago. Again, primary markets, lots of them out there.
You could buy them for about 250 each, if you can imagine that. So 250, they would cash on day one. Again, it's tight at that point, but you can still do it. They cash flow on day one and then you hold on to them for the next eight years cause you know what's gonna happen, right? So just the simplest model in the world, you hang onto it for eight years today, you'll go out and you refi it and you go and you build the second suite and you put the ADU.
Let's just run that. I buy for 250. Today's value is around 700 In these primary markets, my refried profit after I, new mortgage minus old mortgage equals, my profit is gonna be around 385, give or take. That is enough to fund my second suite and my ADU. And now I've got a property that's refied at a market value of 700, but I've got now three properties on it, so it's worth at least a million to 1.2.
I'm gonna cash flow at 2200 of a month. Now just take that and let's say we did five of those. And I'm gonna point out a couple of things in this recipe, five properties is not an ego portfolio. Five properties is quite low, but look at what it's gonna buy you. If you could know what was gonna happen.
Look what this will do for you. Let's say we have five of these, right? 2200 a month times five. You're gonna have about 11,000 in cash flow per month. . Not only that, but you've only refied them for 700 each, and they're worth 1 to 1.2.
There's about 500 in net worth in each one of those five properties. So now you're sitting on a portfolio. The simplest strategy in the world, you've got five properties sitting there, 15 doors total. You've got 2.5 million in net worth, and 11,000 in cash. By a show of hands, who would be compelled by those numbers.
Is that meaningful for anybody here? Yeah and that's the thing. This is not an Eagle portfolio. We're not talking about a hundred, 200 doors. Not that there's anything wrong with that. You can do that. That's, and I do a bunch of that, but if you look at. What we're building here, it doesn't need to be an ego portfolio, and it doesn't need to be complex.
It can be very simple. The power of looking back and seeing this with clarity is now saying if second suites are you know if 80, sorry, if 80 years today are the second suites of 8, 10 years ago, could I then do that over the next eight years and land in a very similar situation? The numbers are different.
The concept is gonna be very similar. So why not leverage and learn from this info? All right. So the text is a little small on this first one. So what are the benefits of this model? Less capital upfront. Because I can buy this single family home today and I can put up the capital to do just the second suite and I don't have to do both.
I could if I wanted to, and again, there's some benefits to doing that, but let's say we follow this model we just went through and we only do the second suite. That's less capital for me today. I refi my cash flow. I can wait until the process is well established. So what do I mean by the process?
The process of putting in ADUs, right? So if you're an early adopter, I mentioned some of the volatility or some of the variables are less known when you're an early adopter, and ADUs are very much that even the major markets around the GTA, they're not all in the same state. Barry is an early adopter.
Oshawa hasn't even rolled it out yet. Again, there's advantages we can take as investors. The beauty of this is not one size fits all. You could be an early adopter and bury and do this hybrid model. You could be a really early adopter in Oshawa where people aren't really looking for bigger plots of land cause they haven't thought this through yet.
You could pick up those properties. Now you're assuming a little bit more risk when you do that because Oshawa hasn't rolled out its policy yet, so you don't know exactly what that'll look like. You buy bigger plots of land, extrapolate from Berry, extrapolate from other markets, we can pretty well predict what it is that we're looking for in terms of this signature.
We wait until the process is more well established, let's say in three, four years, whatever that is, we can roll out the ADU implementation on our terms now, right? And pick the timing and the risk profile that matches us in terms of when we wanna roll this out. We lock up land. Now it is cheaper, which is what I just mentioned.
Lastly, We can have the duplex investment in part or in full fund. The reno of the ADU less capital outta pocket again. Okay, so let's look at what this looks like. So these are, sorry, these are examples of second suites over the last few years in different markets. There's a bunch of them here.
If we just burned through those, the good thing about. Many of these are built on larger plots of land, and the ADU will be, again, an option to implement to have a second wave of future opportunity. A second wave of BRRRR. Right now let's look at some of these properties that I'm talking about that are duplex on larger plots of land.
There's four examples here. This property, we're looking at the roof as an aerial view. Obviously that property got its legal cert for a duplex two months ago, I think. And look at the size of the plot of land on that thing. It's like a farm. So an ADU potential on that thing. If you go by the 10% rule, you could have a large ADU, lots of space, lots of living space in the backyard for both parties, right?
This investor is a client doing exactly what we're talking about, bought the property, duplexed, it had a good BRRRR cash flow now he's sitting on that big plot of land waiting for when he wants to do the ADU. Perfect. Next one, same thing. Different shape of lot, not quite as big, but a huge flat, really nice backyard.
It's looking great. It's got good parking, so we'll be able to not just accommodate the second suite, but also the ADU parking down the road. And again, we're not always just watching for the minimum for what the city wants. We're looking for practicality as well. So we're looking through two lenses as we look at things like parking and backyard usage.
Two more examples here. Again, they're all following the same recipe. All of these have been duplex now and they're all waiting for that, third phase of refining the duplex in order to fund the ADU, right? So a pretty good model. Now let's look at the financials of these. So what I did and for anybody who's interested and this is a little bit about how I run my own business I'm a little bit analytical by nature, and so I build financial models for these things, not just for one property, but I'll build it out for the portfolio growth of the five and tie everything together.
The reason being is I've never been super comfortable with just doing it and it'll. I'm always open to that, but I wanna prove it for myself. So I built these models out. If anybody's interested in seeing the model behind BRRRRs I'm gonna finish building that out and publish that. If you want, check the postcards on your table.
There's a URL in there. blueorchardpropertygroup.com/reite. Go there, sign up and you'll get notification from when I published that full model. Okay, so what I did so far is I mapped out what about a turnkey that doesn't have ADU? What does that look like over the next 9, 10 years? Versus what about a BRRRR with no ADU versus the hybrid model?
And then I'm looking at several metrics related to those three different investments to establish what is the actual upside of this model that we're talking about. Okay, so 39% more The BRRRR with the ADU refi has a much larger profit margin on a projected basis. Over the 9, 10 year timeframe, 39% more, less out of pocket expense.
My ADU implementation costs roughly four times less. Okay. Less capital. That's good. More profit cash flow. This is conservative cash flow for these ADUs, cause there's a lot of variables that we have inside our control as we govern. What LTV do we wanna refi to? How much cash flow am I actually looking for?
How much capital am I comfortable leaving in the building? All those are variables that we can manipulate once we get our appraisal. That is so three times more cash flow, even on a conservative basis. And then lastly, what's my time to get full capital payback? So let's say I have 150 in the building, or 200, whatever that is, to get my second suite done and the refis done, and I have 150 or 200 left in the building.
That's fine. When am I gonna get that back in future refis With the hybrid model, I'm gonna get it back roughly two times faster in four to five years. Using that model. On this projection basis, I can get all my capital back, but more than. On the next one, sorry, Paul. On the next one, I can also get more profit on top of that, so I'm not just getting my capital back.
I'm getting another 90,000 on top of that. Okay, so these are the things we wanna look at. This model is not complex, right? The concept of this is very straightforward. It's leveraging what we know is going on with supply and demand. It's leveraging the trend that we know already played out with second suites, and will almost certainly have a really high degree of probability play out for ADU.
That's all we're doing here and we're manipulating some of the variables so that we can put the most control on our court. Govern how much capital outta pocket, how much wealth are we gonna build, and what's our portfolio look like in 9, 10 years? Okay, so to me, the most important slide.
I repeated it here at the end. It's the most important. Because if you believe that ADUs are the second suites of 8, 9 years ago then look at how you can position yourself going forward. Again, this is very compelling. 11,000 in cash flow, 2.5 million in net worth with the simplest model in the world.
Five properties, 15 doors, really not splitting the atom. And that's the key, right? You don't have to build something complex and convoluted in order to build income replacement or legacy wealth. You just don't have to. All right. So as always, there's four critical pillars for success, education and info.
We covered a bunch of that tonight already. Clarity, if you subscribe to the information that was just shared with you, that might give you the clarity for where you want to go, which will feed into the focus that you have over the next 5, 10 years. Everybody in this room has probably got some entrepreneurial nature.
That's why we're here. We're willing to take a different path to get a different outcome that has a huge upside potential to it, but it's got some risks. We're all inherently more susceptible to shiny thing syndrome, so be very careful. Focus for us is more important than anybody, I think. And lastly, mindset.
This is the single biggest variable there is and the sneakiest I would say, cause there's, there's many tiers to where fear comes from, how it can block you, especially in the market we're in today. So something to watch out for. All right guys. Thank you very much.
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