205: Growing and Scaling Your Real Estate Investing Business

SHOW NOTES FOR EPISODE 205: GROWING AND SCALING YOUR REAL ESTATE INVESTING BUSINESS

Discouraged by huge student loan debt, an unfulfilling job and a girlfriend that wouldn’t marry him, Ivan Barratt got re-motivated and started a real estate business in a spare bedroom of his house.  Fast forward six years… Today, Ivan owns 1,800 units, manages 2,200 units, has 54 employees and is not slowing down.  In today’s episode, Ivan shares his success secrets for growing and scaling a successful real estate investing business.

What You Will Learn

• What is a great way to take a lot of risks off the table?
• What is FHA?
• What are the qualifiers for an FHA or HUD asset?
• How to accomplish FHA financing?
• How to close in a timely manner with HUD financed property in a short-cycle escrow?
• How to scale your real estate holdings using the BRRRR method?
• How can 85% leverage financing help your cash flow?
• Why human capital is a critical aspect of REI growth?
• What are the benefits of financing with government sponsored entities versus traditional banks?

About Our Guest

Ivan Barratt

Ivan Barratt is a multifamily owner, manager and syndicator who specializes in Agency and FHA financed projects.  Since 2014, Ivan has raised over 24 million in equity, acquired over 1,800 units and grown Barratt Asset Management (BAM) to a best in class management firm.  Today, Ivan Barratt focuses most of his time on equity finance, acquisitions, firm strategy and human capital.  Currently, his companies manage well over 100 million in assets comprising over 2,200 units.

More About Ivan

• Ivan considers himself lucky having a father who is an attorney who owned a handful of real estate properties
• His father taught Ivan and his brother about real estate as they worked on his dad’s properties during summers
• Did manual labor, mowing yards, pulling weeds, helping in landscaping, mostly outside of the properties
• Developed a disdain for manual labor and served to motivate Ivan to pursue higher education
• However, it dawned on him that if he was on the other side of real estate that it would be a pretty easy job where you sit around all day as cash flow comes in
• He got into Indiana University’s real estate program within their business school where he learned the foundation of finance, development, valuation, and real estate law
• Upon graduation, his dad helped him to “house hack” a duplex, where he rented one side and tenants in the other.  His dad matched his down payment
• Worked with a real estate developer for 8 years, got his MBA and learned some new aspects of real estate
• He got infatuated with speculation and flipping, with the philosophy “if you build it you sold it”
• But with $100,000 in debt, a bunch of failed projects and a girlfriend he was trying to convince to marry him, he was pretty depressed
• Picked up and read Rich Dad Poor Dad (his dad gave it to him years before), got re-motivated
• Realizing that Cash flow is how he had gotten into real estate in the first place, he picked himself up, hit the reset button in his life, and start climbing back.

Starting His Own Real Estate Business

• Decided to start his own property management company in a spare bedroom in his house
• Started buying small multifamily rental properties (2-4 units)  and distressed properties in 2010
• On his way to becoming a cowboy with a big hat and no cattle
• Sought out extremely distressed properties in good locations, financed with hard money, and implemented what BiggerPockets calls the BRRRR Strategy (Buy, Renovate, Rent out, Refinance and Repeat strategy) and scaled it from there
• As he improved properties, he would refinance, take money out and buy more
• Today, he is seeking larger multifamily units, 200-300 units

His Markets

• Ivan’s properties are all over the state of Indiana, in the city if Indianapolis and other tertiary cities
• Focus more on the workforce as his renters
• No student housing
• His first out-of-state project was in Ohio and he’s continuing in “landlord friendly” states like Ohio, Kentucky, Tennessee, as he scales up
• Primarily, he buys and holds properties
• Is selling smaller assets to continue to buy larger projects between 200- 300 units.
• Finds properties mostly through brokers, off-market deals because of successful HUD financing projects

Financing

• From there, he started buying apartment complexes(15 – 35 units) and started doing what he called “syndication light”
• Started taking on one or more partners to get into larger assets
• Ivan is a fan of good debt and has excellent mortgages
• Currently, Ivan looks for deals where he can use financing by government sponsored entities, such as Fannie Mae, Freddie Mac, and FHA.
  • Allows him and his partners to get meaningfully better terms versus traditional banks.
  • Allows them to take a lot of future risks off the table (meaning, most banks will only lock in interest rates only for 5-7 years very similar to an ARM Mortgage).
  • Fannie Mae, Freddie Mac, and FHA also have multifamily lending arms that do apartment loans wherein he can lock in rates for 10, 12 and even 35 years.
  • After the first 5 or 10 years, you can still refinance or sell with no penalty.
  • But if you don’t want to sell or it’s a bad time to sell, you are not forced to roll over that debt like you would with an adjustable rate mortgage (ARM) or a balloon payment that the banks adhere to.
• Have a good relationship with the 7 largest HUD originators / servicers who owns banks in the nation with good programs at their disposal that allows clients to run a little faster and play a little bigger
• Use bridge loan through loan originators and services that are HUD standard upfront and with a reputation of servicing HUD debts for 25 years to resolve the issue of short cycle escrow to close in a timely manner because they spend 3 -5 months getting the HUD approval in place

FHA and HUD Financing

• FHA & HUD have the best financing available
• However, you have a lot of paperwork, compliance. and hoops you have to jump through to get one
• HUD finances all asset classes – A, B, C and D. This is a great way to take a lot of risks off the table.
• They are 85% leverage on the purchase and renovation of the properties, so if you are doing a value add, you can leverage the renovation .
• It’s a 35-year fixed note which means it’s a 35 year amortization which will help your cash flow, and it’s also fixed for the entire 35 year if you hold it that long.
• FHA typically is running from 75 to 100 basis point even below Fannie Mae and Freddie Mac even.  Right now, they are in the low fours.  Banks are maybe 50 – 75 basis points above that.
• To pull off an FHA financing
  • Takes a big team (accountants, attorneys, etc.) to accomplish because of the tons of compliance, before and after you get the money
  • Only makes sense to finance over 80 – 100 units, large enough deals, to spread the costs out over of a big team
• FHA & HUD qualifiers and or requirements include:
  • Balance sheet of the sponsorship group
  • Mostly non-recourse
  • It takes a big team to pull off FHA and HUD financing including legal team, but no attorneys on staff
  • He has 3 accountants on board because of the ongoing compliance
    • Need to turn in financials on a monthly basis to their HUD servicer
    • Audited every year
    • Agencies monitor and inspect the quality of the asset and you are scored on your asset physically from a deferred maintenance stand point
    • They make sure you are compliant,  providing safe, clean and up to code housing, ADA compliant
  • They require guarantees from sponsors
  • Property management company has to be approved to manage a HUD financed property (his PM firm qualifies)
• He usually gets a temporary “bridge loan” up front because of the time cycle required to get the loans in place
• His bank is used to this because they have been originating HUD debt for 25 years – His bank is the 7th largest HUD originator in the nation
• HUD approval is time consuming and takes 3 – 5 months to get in place.

The Indiana Market

• Becoming more competitive
• Have to look at 200 deals to find 1
• Got 3 out of 6 they were bidding for
• Most deals are off-market and come through referrals

Biggest Mistake

• Mortal sin in multifamily is to do little by little renovation out of cash flow.
• Paying too much to get a bigger deal and when he did his 2^nd bigger deal, a 30 unit POS – very distressed property – 60s vintage – in what he perceived as an up and coming area
• He spent almost 4 years (around year 2013 – 2016) digging out of that hole
• He bought early, paid too much for it because he wanted to get into a bigger deal
• Thought it could be turned around with a little bit of money, and that the rest of the renovations could be done out of cash flow – The Mortal Sin of Multifamily!
• Got into debt spiral of maintenance, repairs, bad tenants and collections
• Fast forward a couple years later…
  • Maxed out business credit cards to keep it going
  • Floated some of the expenses through his management company as long as he could
  • Since it is in a good location, he was able to get a new development loan, pay off all the old debt, threw all tenants out, started over, new windows, new HVAC, new kitchens, new landscaping and was able to raise rents dramatically
  • During re-hab, went month-to-month with leases that had clause for 30-day notice to cancel lease
  • Went from an area where local rents were $400 for a 2-bedroom to $800, which is still at an affordable end for an up and coming area with different level of residents
  • Got 90-day track record of 90% occupancy to qualify to get it refinanced under a Freddie Mac Small Balance program for almost twice what he had into it
• To be able to get a refinance at Freddie Mac Small Balance program
• Reboot the property and get the 90 day track record to get it up and running with 90% occupancy rate sufficient to refinance he loan
• Did a month to month leases, with the right to cancel with 30 day notice, to time it up to renovate the project within one year and get it leased up again

Biggest Success

• Finding a partner three years ago
  • His partner is exactly his opposite
    • Ivan is high-level, entrepreneur, “head in the clouds,” running full-speed ahead, 100% optimism
    • His partner Adam looks at what can go wrong, nose to the grindstone, detail-oriented, COO of Barratt Asset Management.
• Together, they are much stronger and were able to bend their growth curve during the last 3 years
• Adam was a multifamily broker on a 2-person team.  Toured some properties together.  Kinda rough around the edges but very smart, mind like a steal trap, knew every deal
• Went out to lunch one day.  Ivan was sharing about his business and that he was looking for some operational help
• Adam initially came in as a “sweat equity” partner on  all their acquisitions but, over time, Adam realized he was a strong operator
• Adam ended up headed up their property management company and operations
• Ivan focuses on financing and strategic vision – how to go from $100 to 200 million

Advice to Audience

• Education is important but so is action
• If you don’t have a lot of time on your hands and are looking for more solid, passive yield on some funds that you have already accumulated, you can invest passively and partner with someone through syndication and be a sponsor.  Better yields that stock market
• If you have time, learn how you can use real estate to solve problems (help people out of distressed properties or bad financial situations, etc.)
  • Renovating small multifamily properties
  • Buy and hold
• Every market has opportunities for those who are willing to cease them
• Real Money is made by solving problems, go out and identify opportunities in your market, there are always opportunities that can see them

Growing Human Capital – An Important Aspect in REI

• When he was scaling his company, he was managing 70 units of other people’s properties
• If he could go back in time, he would have hired people sooner
• At certain times in his growth, he took out a line of credit to acquire top talents in area that he needed it to be able to get the revenue to justify human capital acquisition
• How to make themselves difference – What do you bring to the game?
  • Pay people really well and tend to get better people to stick around longer and do a better job.
  • Help people to be more effective in their job by providing them with great technology and tools
  • Great communication, culture, maintain family atmosphere
  • Treat maintenance people like gold (they are a huge part what make this things go)

Property Management

• Bad property management can screw up a great deal and great property management can turn a bad deal around (it’s really where the rubber meets the road)
• Property Management is a game of pennies.  It is a tight margin
• Property Management is the machine that makes everything work
• His chief aim and mandate with his property management business is not to generate a lot of profit, but it is the critical machine that  helps runs the wealth accumulation bucket
• It allows him to hire some talent, it allows him to stay disciplined on deals – he doesn’t have to sell a deal or refinance the project, or buy that next project in order to meet payroll
• Provides third party property management to 70 units clients as he was scaling his own company
• Approved to manage HUD-financed properties and achieved it the hard way through learning by doing

Where He Sees His Business in the Future

• His goal is to manage 20,000 units as a multifamily asset management firm
• To grow 2 companies out of the asset management firm – property management and financial services
• Grow investors from 80 LP investors and develop into larger stewards of others’ capital

Rap-It-Up

• Favorite book: Emerging Real Estate Markets by Dave Lindahl
• Favorite business book: If You’re Not First, You’re Last by Grant Cardone
• Most valuable web site for success (other than your own): Audible.com
• Favorite app: ProsperWorks and Evernote
• Favorite quote: “The impediment to action advances action. What stands in the way becomes the way.”  by Marcus Aurelius, Roman Emperor
• If you had to start all over, knowing what you know, and you only had $1,000 cash, what would you do to launch your real estate investing business?  Look for deal (small multifamily project) and take it to hard money lender.  Use the $1,000 as a down on the deal.  Keep finding deals and use other people’s money.  And because he’s a broker, he would offer consulting services to stabilize cash flow again.

How to Reach Ivan

• BarrattAssetManagement.com
• Phone #317-672-2625

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