Jun 7, 2022
Want to know how you can build a recession-resistant passive cash flow?
Brandon Cobb, CEO of HBG Capital, joins us to discuss how they are helping investors earn passive income through affordable new construction housing for first-time buyers.
From flipping houses, Brandon and his team pivoted to developing land and found their niche in government-friendly areas. He talks about the opportunities in this undersupplied but in-demand real estate product and offers advice on how to mitigate risks in the space.
[00:01 - 05:51] Building Affordable New Construction for First-Time Home Buyers
- Brandon on being unemployed to becoming a real estate investor
- How he invested in himself
- Putting investors’ capital in recession-resistant real estate
- Affordable does not mean low-income housing
[05:52 - 17:50] Getting Into Ground-up Development
- Their experience in flipping houses vs doing new construction
- Partnering with people who know what they are doing
- How Brandon and his team find riches in niches
- Collaborating with the local government
- What they do to mitigate risks
- Looking for deeply discounted deals
- Managing in-house
- Being insulated from market volatility
- Doing compartmentalized funds for investors
[17:51 - 20:27] Closing Segment
- Reach out to Brandon!
- Links Below
- Final Words
Tweetable Quotes
“The country has a huge problem. The most undersupplied, highest-demand real estate product in the country right now is affordable homes for first-time home buyers. Nobody can find something that's affordable to move into.” - Brandon Cobb
“We do everything in-house. What that does is it aligns the builders' initiatives with the investors, right?” - Brandon Cobb
“When there is a market contraction, the need to live is still there. People still need housing.” - Brandon Cobb
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Connect with Brandon through his LinkedIn and Instagram. Visit the HBG Capital website and their educational resources including their FREE e-book, Recession-Resistant Passive Income. Check out their Linktr.ee page, too!
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Brandon Cobb: What happens is people, consumers transition from those more luxurious, more expensive living arrangements into more affordable living arrangements, but they don't want to be in the war zones, right? They want affordability, but they don't want to get shot. That's where we want to be. We want to be in those product types that are affordable to first-time home buyers because that gives us a level of insulation.
[00:00:20] Brandon Cobb: Now there's a couple of other things, kind of, you know, our market specifically, you know, why do we feel it's insulated. Well, one, it's more affordable compared to the rest of the country.
[00:00:40] Sam Wilson: Brandon Cobb is a CEO at HBG Capital and an expert real estate consultant and investor. He's here to share some actionable advice about using real estate investing as a way to create passive income. Brandon welcome to the show.
[00:00:53] Brandon Cobb: Sam, I appreciate you having me. Love the energy, man.
[00:00:55] Sam Wilson: Hey, man, pleasure's all mine. Three questions. I ask every guest who comes to the show: in 90 seconds or less, where did you start? Where are you now? And how did you get there?
[00:01:03] Brandon Cobb: So medical device sales rep turned real estate developer. If you asked me seven years ago that I'd be building houses, I would look at you like you had six heads. Never expected myself to jump into real estate, but found myself unemployed. Got sat down one Friday at Starbucks, fired.
[00:01:19] Brandon Cobb: And I'll kind of save you the story from there to here now, what do we do? And now, well, you know, when you've got some discretionary income, you're looking to invest it and grow it, but inflation is crazy and there's 20 different investment vehicles out there and you're wanting something that's designed to be insulated against market volatility.
[00:01:36] Brandon Cobb: What we do is we put investors' capital into recession-resistant real estate, designed to be insulated against the market volatility for them to get passive income straight to their bank. That's two and the three what's the third one, my ADHD kicked now.
[00:01:50] Sam Wilson: You're good. Where did you start? Where are you now? How did you get there?
[00:01:53] Brandon Cobb: How did we get there? Well, it's been a long journey, so got fired from my job, started wholesaling, flipping houses, and basically took all the profits the first three years and dumped it back into coaching, mentorship, mastermind programs, rooms with people smarter than me. And that's what I would contribute to growing as fast as we did, just constant reinvestment in myself, and maybe we can touch base on that and do a little deep dive for your audience if you want to.
[00:02:21] Sam Wilson: Absolutely. I do have one question though. They took you out to Starbucks, they bought you coffee to fire you? That's a step up, man. Most people don't get that.
[00:02:29] Brandon Cobb: He actually didn't buy me coffee there. That's just where he wanted to meet on Friday at four o'clock.
[00:02:35] Sam Wilson: Oh, that's brutal. I was hoping for at least a cup of coffee out of the deal. It would have been nice. Tell me this though. I mean, what was the jump? Like, how did you end up saying, all right, got fired. And then how did you say, okay, real estate. What was the delay there? How did you end up picking it? Talk to me about that.
[00:02:51] Brandon Cobb: I'll be honest. I was, I had like a motivational blog I was working on. I'm a big Tony Robbins fan, always have been. I was working on a course to help people break into medical device sales 'cause I was, you know, people were like, what are you good at? What do you do? And I'm like, well, heck I got into here. I've had a lot of people reach out to me. Maybe there's an opportunity here. Read a ton of books over the years. Real estate investing was one of them. And so I was doing all these different things and went to a bunch of different meetups and ended up meeting a guy who would, you know, become a mentor for a little bit.
[00:03:21] Brandon Cobb: And he's my partner to this day. But that was the first thing that took off. And so when I was, when I learned, okay, wow, this is the first thing that's got the ability to produce income for me. I just cut all the other things off. And focus strictly on that. And that's why decided on real estate.
[00:03:36] Sam Wilson: That's awesome. Today, you guys are building affordable new construction for first-time home buyers. Is that right?
[00:03:43] Brandon Cobb: Yeah, that's correct.
[00:03:44] Sam Wilson: You've gone from wholesaling all the way to, are you going to be building brand new communities? Are you building just ground up whole neighborhoods at a time?
[00:03:51] Brandon Cobb: Yeah, we are doing that. And you know, I've struggled to come up with a word for what we do because when I use the word affordable, people think it's section eight or low-income government housing. Like that is not what we're focused on at all right now. The country has a huge problem. The most undersupplied, highest demand real estate product in the country right now is affordable homes for first-time home buyers, right? Nobody can find something that's affordable to move into. And so that's what we focused on here in middle Tennessee is delivering those products aimed towards first-time home buyers.
[00:04:21] Sam Wilson: What does affordable mean? I mean, is there a dollar, you know, you're here in middle Tennessee, is there a dollar amount that you say, okay, we can build it for X. Somebody can afford a payment of Y. When you say affordable, can you give some color to that?
[00:04:34] Brandon Cobb: Yeah. Typically with a first-time home buyer family, you know, combined incomes are right about six figures, maybe a little bit less. And so they're able to afford 400,000 and less. That's kind of our bread and butter.
[00:04:45] Brandon Cobb: Now we've got a small portion of our portfolio that does go above that. But while we consider it, you know, recession-resistant still, even though it might not fall in the word affordable, is our cost basis is really low. In other words, we've got like eight homes that are, we'll probably sell them for 700 grand, but our cost basis is like $380,000.
[00:05:03] Brandon Cobb: Then there's a huge runway that those prices can hit. And so we would consider that recession-resistant if they can take almost a 50% hit.
[00:05:11] Sam Wilson: Okay, cool. So 400,000 bucks or less. If you have a dual-income family making roughly, you know, a hundred grand a year between the two of them, that then becomes affordable housing. Are there programs or things that you guys are working with that you're putting all these people into? Are they using the first-time FHA home buyers plan? What's that look like?
[00:05:29] Brandon Cobb: Yeah. So that's those driving the market are these, these FHA loans, these first-time home buyers. I mean, that is the largest portion of the market that is buying homes.
[00:05:38] Brandon Cobb: As far as programs, we've partnered with some local mortgage brokers that do that. You know, we don't do that in-house. We can make the necessary introductions to the people that they need to know, but that's not something that we're outfitted to do for people.
[00:05:51] Sam Wilson: Right. Right. Tell me about, I mean, the iterations of your business, how did you end up getting into development? I mean, again, medical device sales now developer, like that's, that's a lot of different kind of steps along the way. Why did you pick development versus, you know, doing what a lot of other people, you know, buying existing stock, things like that? Talk to us about that.
[00:06:11] Brandon Cobb: Blue oceans. Anybody that's flipping houses right now. We're wholesaling. You're probably going on 10 appointments to close one deal. You're probably seeing a lot of stupid grain, new money coming in, buying stuff. That's outpricing you. You're probably filling your margins, get squeezed. Gosh, when we went from flipping houses, we were making, you know, 30, 40 grand a house on a 250, maybe $285,000 home.
[00:06:36] Brandon Cobb: Four years ago, it was probably making 30, 35 grand on a 350 to $380,000, Right? Same profit margin, much more expensive home that squeezes your margin. When you're starting to get doing 8%, 10% margin deals, like that's just an interest, in my opinion. You know, that market takes a hit in that four or five, six months period, you know, that's that's concerning. So we had accidentally done some new construction projects, probably seven or eight over a few years while we were flipping houses. And, you know, you show up, it's a tornado-damaged home, or, you know, halfway burned down and we're like, well, we can buy this for less than what the land's worth.
[00:07:13] Brandon Cobb: It's kind of give this a shot. And the light bulb went off one day where we had this one home that we were doing new construction on this one home. That was just our problem child is a full gut rehab. And we built that fire-damaged home faster than we rehabbed the full gut rehab. And we made like three times more money on the new build than we did flipping that home.
[00:07:35] Brandon Cobb: And we said, wait a minute, we did a tactical pause and said, there's something here. What if we just scrapped all the house flipping, shut off all the marketing and just shut down that whole division of the business and just focused on self-generation and going after the sellers that have a lot of land. What would that look like?
[00:07:54] Brandon Cobb: And so that's exactly what we did. So we pivoted, we probably reduced overhead by like 25%. I mean, we, we were doing like 30, $5,000 a month in marketing. Shut all that down, pivoted to just do a new construction. And when we did, we went literally almost overnight from having more money than we could find deals for to now we have way more deals than we'll ever be able to finance. So the pivot, Achilles heel of the business right now is just capital, is getting that caught up to the rest of the business.
[00:08:23] Sam Wilson: Right. Yeah. So tell me about that. I mean, you said you going after sellers with land. There's a lot of moving parts there. Can you kind of break down how your business is implemented when you find somebody with the land? How do you know you can get utilities there? How do you know you can get it entitled? How do you know, I mean, that seems like a really a niche skill set to develop.
[00:08:42] Sam Wilson: Yeah, it is, there's a learning curve, but the way to offset any big task is just partnering with people that know what they're doing, right? I mean, that's all there is to it. And when we weren't completely green to new construction when we started, right? We'd done seven or eight projects. So we had a taste for the utilities and putting stuff in.
[00:08:59] Brandon Cobb: So we kind of knew what we were doing, but you know, doing a bigger land development project, like putting 36 townhomes in, you know, definitely different. But, luckily, we had the right partners in the right people to kind of guide us along the way. So. They said that there's riches in the niches, right? So we really niched down whereas, you know, a wholesaler flipper's probably sending, you know, 40,000 mailers out so they can ask a T lists and kind of doing the spray and pray method. We boil things down to a very niched, target list of people that we knew we could help. And over the years, we had paid our dues. We learned we'd failed. We've made a lot of mistakes, but that knowledge enabled us to understand how we needed to entitle the land, what due diligence we needed to do, right? So the cool thing about middle Tennessee is it's very government-friendly. In other words, the government's not shutting things down when the big buyers come, and two, they want the density. So it's not like California, where it takes two years to get things permanent. So everything we put under contract, we don't buy until we have either a final plot approved or before we've got a permit.
[00:09:58] Brandon Cobb: So that reduces the risk of making a bad investment. So when we boiled down and realized we need to be going after people that own a lot of land and cultivating relationships with those people, that's what we did. And so, as we closed on these deals over time, we built these relationships with people that had a lot of this land.
[00:10:15] Brandon Cobb: And so now we just get referrals generated to us. So we have a $0 marketing spend, and again, we've got more people throwing deals at us, then we'll be able to buy.
[00:10:23] Sam Wilson: How do you find land in an area where they want density? Like, it seems like those two are kind of like, obviously, the city expands at a certain pace and it'll catch itself up, but is there, like, are you on the fringes going okay.
[00:10:36] Sam Wilson: You know, as this expands that we want to be right in front of that by a certain, like, it just seems like that's, I don't know, a nebulous way of defining what it is that, that you want.
[00:10:45] Brandon Cobb: Here's what we did. We went to all the tertiary markets kind of around Davidson County, Davidson County's the core county in Nashville.
[00:10:53] Brandon Cobb: And we knew we wanted to be there 'cause COVID just created this huge migration to these, these surrounding counties. And that was where the opportunity was. And we went and we got meetings with the district Councilman. We met with the mayors, we met with the building commissioners and we brought a map and we said, Hey, we want to work with you. Where do you want density? Where would you support rezones? Where do you want to see houses? What are your needs? Do you need, do you need condos? Do you need single-family homes? What types of homes do you need? And when we have those conversations, one, their eyes popped up. They're like, wow, no one's ever come to us and asked us this.
[00:11:28] Brandon Cobb: And so we literally took a map and like, you know, we're sitting down with the, you know, the mayor of a little suburb in Nashville. And she's like, you know, this is what we need. This is where we need it. And we just reverse engineer. That's where we went. So we went to the areas where the city wanted to see density.
[00:11:45] Brandon Cobb: And then we just got laser-focused. We were looking for those areas with road frontage, with access to sewer, or, you know, the city will give you all the sewer maps and the water maps and all that stuff. And we started cultivating those relationships and we started bringing them deals in those areas. And they're like, you actually did what we asked you to do?
[00:12:02] Brandon Cobb: This is pretty cool. Then they became very interested in working with us. And so now we actually work for X deals. So that's what we did. We just went to the horse's mouth and said, what do you want? And went and gave it to them.
[00:12:12] Sam Wilson: Right. That's really, really smart. Again, you know, like, like you said, meeting with the mayor and everybody else, like, that's just the step that nobody's taking.
[00:12:21] Sam Wilson: All right. That is, at least, not many people are doing that most of the time. There's, that's a very adversarial type of deal where it's like, Hey, I want to build X, Y, Z project. And they're like, no, you can't build XYZ project. And then it becomes just a, like an adversarial versus a collaborative relationship.
[00:12:37] Brandon Cobb: Yeah, and it's not, you know, it might be tougher to get access to, to the mayor of like Davidson County, you know, 900,000 residents. But again, we're talking about the tertiary, the suburbs, they will meet with you. You can walk in almost same day, catch them during lunch or something. They want to meet with you because they want the tax dollars. They want the revenue. And so it was a lot easier.
[00:12:57] Sam Wilson: Yeah, absolutely. Tell me, tell me about the risks involved in what you guys are doing. There were, in 2007, 2008 saw a lot of builders, saw a lot of people just go completely belly up. What do you guys see is the runway for your business? What are some risks associated with it? How are you mitigating those?
[00:13:14] Brandon Cobb: Yeah. Great question. So I'll explain what the risks first and then what we're doing to mitigate the risks. So obvious risks upfront is going to be the price of the home, right? If the price is at home, take a nosedive, then that's an obvious risk to the sales price of the homes.
[00:13:28] Brandon Cobb: How do we mitigate that? We buy these very deep discounting deals. So most of our deals are underwritten in a 66, 67% loan to value. We look for 20, 25% gross margins. In other words, I'm talking about after all the hard and soft costs or taking care of, we should be able to take a 25% hit and still be completely fine.
[00:13:49] Brandon Cobb: Now, one other thing that we're doing to mitigate it is we manage everything in-house. So we're not relying on another builder to build the homes for us. Like a lot of investors, we're not relying on someone to find the deals for us. We do everything in-house. What that does is it aligns the builders' initiatives with the investors, right?
[00:14:06] Brandon Cobb: So there's an alignment there and we're building them a lot quicker. Then a builder normally would. So, typically, all of our spec we're in and out in 10 months or less. So, you know, the market, you know, what are the odds the market's going to take a 25% hit in that time period, you know, couldn't it? Yeah, anything's possible. Likely? Probably not.
[00:14:24] Brandon Cobb: And then again, it also comes back to our niche. When there is a market contraction, the need to live is still there. People still need housing. What happens is, is people, consumers transition from those more luxurious, more expensive living arrangements into more affordable living arrangements, but they don't want to be in the war zones, right? They want affordability, but they don't want to get shot. That's where we want to be. We want to be in those product types that are affordable to first-time home buyers, because that gives us a level of insulation. Now there's a couple other things, kind of, you know, our market specifically, you know, why do we feel it's insulated well, one, it's more affordable compared to the rest of the country, right?
[00:15:01] Brandon Cobb: So people just flock to those more affordable areas kind of what I just illustrated. The second is man, Tennessee. Huge migration after COVID we didn't shut everything down. Like California, New York people were moving their businesses here in droves. And not just because of the government but because of the tax initiatives too.
[00:15:19] Brandon Cobb: So there's no income taxes, just like. People love that and moving their businesses here in droves. So we have a high growth city. We manage everything in-house and we're in a product type that's insulated against market volatility.
[00:15:31] Sam Wilson: Yeah. I love, I love all the thoughts on that. The other thing that people may not know, I guess, regionally, you know, I'm very familiar with middle Tennessee, obviously, I'm from Tennessee, but or live here in Tennessee, not originally from it. I wish I were, but either way it is the, is it the housing stock is just old. I mean, there is an aging housing stock that is just it's fading out. We're seeing it here in Memphis where it's like, gosh, I mean, you know, 80 to hundred-year-old homes, that's an 80 to a hundred-year-old home.
[00:15:56] Sam Wilson: We need new housing stock coming online. And so I think that's the other thing when you're having that increased demand and also this, this kind of just aging out of stock. I mean, there's, there's places now in Memphis where you just it's time to tear it down, especially in middle Tennessee, that story is there, there as well.
[00:16:11] Sam Wilson: So I think, you know, you've got yet further tailwinds to what you guys are doing. How are investors getting involved with your business? I mean, it sounds like a pretty fast process here. You know, if it's a 10-month turn, are you guys developing a fund and they come in and invest in the fund and that way they have, you know, just evergreen exposure to what it is you guys are doing or what's that, how does that work for you?
[00:16:32] Brandon Cobb: Yeah. Great question. So we do have a fund, so investors can invest in the fund. They get to see the projects before you invest in them. So, you know, typically we work with accredited and both non-accredited investors, couple of more steps with the non-accredited investors, but they can go to our website. hbgcapital.net.
[00:16:48] Brandon Cobb: That's Harry, Bob, Gary capital.net. They can sign up for an introductory call. That's the first step. There's a ton of free educational stuff we put on there. That kind of explains what we do. We've got an ebook, Recession-Resistant Passive Income, kind of explains what our investing piece is. So that'd be a great place to start.
[00:17:05] Brandon Cobb: If you think it's a fit after you've seen some of the contents, schedule a call with us, we'd love to get to know you. But that's what we're doing is we're, we're funneling money into the fund. They get to see the products that we're going to put out beforehand and, you know, a lot of our investors are local, so it's kind of cool being able to drive them around and actually showing them the projects.
[00:17:21] Sam Wilson: Right, right. Yeah. So they get in the fund. I'm just really just curious, cause this is different than a lot of the guests that come on the show where it's a syndication. Hey, we know it's a five-year plan when somebody puts the money into the fund. How long are they in that fund? And what's a typical return profile look like, or what are you shooting for? I'm just really curious the kind of mechanics of how your fund works, because it's different than a lot of things we hear about.
[00:17:42] Brandon Cobb: Yeah, so we compartmentalize everything, right? So syndications we've done syndications before for some nuance deals, but everything is compartmentalized.
[00:17:51] Brandon Cobb: So all the money goes into the fund, right. Or a syndication opportunity, but it's kind of it's separated. So when it goes in, it's spoken for, we invest capital and just specific deals. And then once that's done, it's done, right? If we raise any more money, it's going to go into another set of deals. So we structure it where 100% of all the returns or the distributions flow to the investors until they get the return of capital back and the return on.
[00:18:17] Brandon Cobb: And then our firm will profit on the remaining. Usually the first 30% of the homes itself, all the investors are completely paid off. And then our firm profits then remaining 70% of the home. That's how we got it structured.
[00:18:27] Sam Wilson: Got it. So when somebody gets in the fund, you might have a development of say, you know, 20 townhomes or whatever it is. I'm just making stuff up here. You're like, okay. This is what we're raising for, this 20 townhome. It goes in the fund and it gets deployed. And then that's the end of that. It's, it's like syndication-esque, but in a fund model.
[00:18:42] Brandon Cobb: Yep. That's basically it. If it's a development deal, usually we say that's a 24-month turnaround. We'll raise money for phase one. Once phase one is done, that's all the horizontal work, roads, infrastructure, all that stuff. Usually six to eight months. And then we'll raise for phase two, which is the vertical. Once you do the vertical, we're usually in and out within 12 months.
[00:19:01] Sam Wilson: Wow. Wow. Really cool. Brandon, thanks for taking the time today to breakdown your business, what it is you guys are doing and how you're doing it, and just really how you see runway in your space.
[00:19:10] Sam Wilson: And then, you know, how yeah, just how you're putting deals together. And of course, the tactical tip of going and meeting, especially in these smaller tertiary markets, meeting with your local government. I mean, that's a, that's absolutely brilliant. I love it. I love the way you guys are taking stuff down and provide excellent returns for your investors.
[00:19:25] Sam Wilson: I know you gave this already, but just one more time to make sure we capture it here at the end. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
[00:19:33] Brandon Cobb: Yeah. So you can go to our website. hbgcapital.net. That's Harry, Bob, Gary, capital.net. I'm all over social media, Google Brandon Cobb HBG Capital, like corn on the cob.
[00:19:44] Brandon Cobb: I'm all over. We post content every single day. Everything we do is all-around value add. So we really try to educate people on what we do and not just what we do, but you know how we can help them, putting out a bunch of content that's designed to help them get to where they want to go. So follow us, like us, love us, would love to hear from you.
[00:19:58] Sam Wilson: Thanks, Brandon. Appreciate your time today.
[00:20:00] Brandon Cobb: Thanks, Sam. Appreciate it.