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Ivan Barratt: [00:00:00] Stakeholders and projects are asking the management company how are you achieving the customer centric mentality in your in your management culture
Patrick Antrim: [00:00:09] That’s Ivan Barratt. He’s a multifamily owner and syndicator who specializes in FHA and agency finance multifamily projects since 2015, Ivan has raised nearly 30 million in equity acquired over 2000 units and has grown BAM – his company and firm to a best in class management [00:00:30] company. Today, Ivan focuses his time on equity finance, acquisitions, and company strategy. Currently his companies managed well over 150 million in assets just north of 3000 units.
Patrick Antrim: [00:01:44] All [00:01:30] right so Ivan I want to learn a little bit more about how your investment journey began. Can you tell us a little bit about that?
Ivan Barratt: [00:01:54] Sure. Patrick first and foremost thank you for having me on the show. It’s an honor to be here and speak to your audience [00:02:00] and I’m excited to have a conversation with you. For me I am lucky at a very early age. I got a taste for real estate. My father is an attorney. Owned a couple of dozen rental properties growing up I had an uncle that owned a couple of small apartment complexes and another uncle who even though he didn’t graduate sophomore year of high school let alone my school managed to grow a business and [00:02:30] has known a lot of commercial real estate as well. So by the time I got to college I thought Gosh why would anybody want to get a real job. Why wouldn’t you just own lots and lots of apartments and just watched the the proverbial rent checks roll in. Right?
Ivan Barratt: [00:02:46] Well turns out as you know Patrick is it is a real job. But but I do enjoy it out of the gate I worked for a developer for about eight years and as a [00:03:00] small boutique shop here in Indianapolis. And so I was able to wear a lot of different hats learn a lot of different aspects of real estate investment and management and also see from a front row seat to the Great Recession the Great Crash which actually ended up being probably one of the top three gifts in my life.
Patrick Antrim: [00:03:25] Right.
Ivan Barratt: [00:03:28] We’re learning that at a young age [00:03:30] and that’s really what allowed me to sort of hit the reset button so to speak on how I wanted to approach real estate. And that’s when I started my own company in my spare bedroom in 2010 doing it all myself because I knew that if I could just get momentum and learn how to scale and grow and and fail small that when it got to the big stuff that I would be [00:04:00] well equipped to succeed. So I said I started it in 2010 in my spare bedroom doing whatever I could get my hands on. And fast forward to today or we’re approaching 150 million in assets under management. The bulk of our our portfolio are syndicated deals and by that simply my partner and I have found the opportunities raised the capital up of the stack [00:04:30] debt and equity acquired these apartment communities and executed our business plan.
Patrick Antrim: [00:04:36] There’s just a lot of people right now that’s excited about multifamily and there’s also a lot of people jumping in the game that in some cases perhaps they might think well we can operate better than this company or that company or perhaps we can just get this done. It seems pretty simple. What are some early lessons that you earn you learn. I guess going through the process as you began your investment career.
Ivan Barratt: [00:05:01] Oh [00:05:00] sure and I’m glad I learned them early. And on smaller projects but I learned lack of discipline can really really hurt deals performance. I learned a lot about as you know apartment communities are not just larger extensions of single family or one to four family homes which I’ve sort of arrogantly thought early my career when I moved from [00:05:30] two and four family units to start started buying small apartment complexes. You know I thought oh gosh 30 units in one location sixty units in one location should be just like managing a duplex with just more units in one spot. And it will all be great. Right. And so really got hit in the face and learned the hard way about resident relations pest control between units.
Ivan Barratt: [00:05:57] All the little things when you’ve got more people living [00:06:00] in a confined space of course the financing. I notice very quickly that the shelf life of an apartment lead someone who who hits a Web site is looking to rent something is about half that of a fruit fly.
Ivan Barratt: [00:06:17] That was that was a game a game or eye opening experience for me learning some of those things the hard way. But that’s what I knew would happen by taking risk [00:06:30] starting small failing small that I would take those lessons and remember them as we got into larger assets site managed communities that we that we go after today.
Patrick Antrim: [00:06:42] Yeah you’re looking at real estate and all the yields that come through it but you don’t realize you’re building a sales organization.
Ivan Barratt: [00:06:49] Correct. Yeah I’m currently running a business right now.
Patrick Antrim: [00:06:52] True story. And you know that innovation is changing I mean what do you think the customer where is the customer [00:07:00] journey going? I mean do you see that changing much? I know that applies to different assets.
Ivan Barratt: [00:07:05] But it certainly does it certainly does. However I think overall a lot more aspects of multifamily will mirror hospitality. And I think the resident experience the customer service approach because everything is so so [00:07:30] much more transparent now.
Ivan Barratt: [00:07:32] I sort of laugh when I run across relationships where folks are still looking at it from a landlord tenant mentality and now you’re much more customer centric residence intracet that it’s ever been. And I don’t see that going away anytime soon. I’m one of the owners that excited for a market correction because the market is so hot and everything is going so [00:08:00] well. But one thing that will be mission critical when that day happens not if when is nailing that customer centric resident first piece of the business because they’ll be stiffer competition to attract those residents here community.
Patrick Antrim: [00:08:19] Right and you’re an owner and you’re thinking about these things because you’re obviously you know raising the capital and having those conversations. But are the lenders having that conversation are they still just looking at the real estate [00:08:30] and the expenses and are they looking at positioning and minimizing risk through through initiatives like that?
Ivan Barratt: [00:08:38] I don’t see it on the debt side. We talk a lot about it about it from a risk management standpoint but not not from the lenders yet. You might argue or one might argue that HUDs a little bit more sensitive to that sort of thing. But but overall I think I think for the underlying debt and probably just being a product of the fact that they’re in the first [00:09:00] lien position and if the proverbial you know what hits the fan and most care in most areas they can get their capital back. I think they’re probably the last to wake up to this trend. But gosh just the other day one of my all of my my limited partners my equity investors asked me about are our tenant retention program how we how we handle residents get togethers and events to [00:09:30] promote more community feel. And it doesn’t happen often but it’s starting to occur more where folks that are that are stakeholders in projects are asking hey is is the management company how are you achieving a customer centric mentality in your in your management culture. I can sit here with you Patrick can talk about it all day but if we don’t executed at the property level it’s really just hot air.
Patrick Antrim: [00:09:57] Right. And I know we have conversations [00:10:00] with developers and operators that are in markets where the customers requesting it. It’s not even about you know innovating the business. Just to differentiate and to get business new residents and such. And so you look at you know come outside the industry like transportation or even retail and now even pharmacy I mean you’re looking at big companies that were in great positions looking strong and thought you know they had their market share and they you know [00:10:30] they were too big to fail all that kind of stuff. And you’re looking at what like an Amazon or even like the Uber did detect transportation companies and now with you know Jeff Bezos with Amazon and Warren Buffett getting together on pharmacy. You’re looking at that customer experience. You know really explosion happening with that innovation there to try and make sure that there’s no slack in that process and there’s no frustration in time you’re going to improve that customer experience [00:11:00] there’s some really great things happening and the reason I ask you is because you know we also have market operators that might not it might not be there a priority maybe it’s their priority. How do you create a renting experience that you know is of today’s technology in today’s world. And does that play into your approach when you’re looking at performers. The obvious value ads are you know your your [00:11:30] flooring your kitchens and your improvements that drive rents have done that for for times. But do you look further and beyond just traditional value stuff.
Ivan Barratt: [00:11:40] Well so if you keep this between you and me. So I’m a huge proponent of technology in in the sense that it’s a great tool and if you can find those great tools for your [00:12:00] people that make their lives easier make them more efficient allow them to to deliver a better experience and that’s what we need to see. So for me as the CEO early on I was really good at finding those sorts of things.
Ivan Barratt: [00:12:15] Now I have to leverage the brainpower of everyone at every level of the company and we actually have a contest with prize money this year for who can find that next great catalyst of technology not necessarily [00:12:30] resident experience but just anything within the organization at any level that can be an inflection point of of change for the better whether it be our culture how we operate how we communicate with each other for us in 2014 we were one of the first management companies to incorporate slack internally.
Ivan Barratt: [00:12:55] So we virtually eliminated internal e-mail and we’ve really flattened [00:13:00] our leadership structure as such to where we’re all communicating in real time now there are some downsides because the advantages you can communicate in real time that can also be a disadvantage if everybody feels like they’re in an all day meeting. However it’s been a game changer for us in the way we do things and how managers and peers at all levels communicate and share information and help each other. So we’re looking [00:13:30] for something that changes that again. And I think so. I think it will be on the on the resident experience side. We’re still picking sort of a wait and see approach on IoT the Internet of Things and really looking for some platform to sort of become head and shoulders above the other two. Google and Amazon and Apple and everything else who’s going to talk to who and what’s going to what’s going to work cross operating [00:14:00] systems. I think there’s still a lot of play there and maybe that’s just because it at 40 years old I’m thinking VHS and Betamax right.
Patrick Antrim: [00:14:11] Right.
Ivan Barratt: [00:14:12] And so I know I don’t want to necessarily hitch our wagon to the wrong technology.
Ivan Barratt: [00:14:18] However there are some things right now we’re looking at on the resident experience especially when it comes to reporting issues on how they’re handled in real time the responsiveness of it whether it’s Sunday [00:14:30] at 9:00 a.m. or Monday at 9:00 a.m. we’re going to be testing some maintenance related technology and servicing solutions on some of our projects or communities as a pilot project and I’m at this point I’m not ready to speak to specifically to it but I’m cautiously optimistic.
Patrick Antrim: [00:14:51] Yeah that’s great. And so you know as you approach all these things. Tell me more about your team because you did mention that you’re at a scale [00:15:00] point now where you’re focusing on you know growing and being strategic about the business.
Patrick Antrim: [00:15:04] Tell me a little bit more about how your team approaches daily operations because we talked early on about the operators being effective through management and it’s all about execution. So tell me tell me more about your team and how you guys manage.
Ivan Barratt: [00:15:23] What’s really been a catalyst for growth for us without failure [00:15:30] at the margin. And what I mean by that is being able to grow quickly but still execute. It’s really been empowering the right people. And so it’s been more of my greatest challenges personally with is transitioning from that. Do it yourself founder entrepreneur that they can do it at least in his own mind everything better than anyone to shipping and saying okay if I’m really going to grow this thing I have [00:16:00] to let little bad things happen. Meaning I have to let people make their own mistakes from their own decisions and learn right. And I have to I have to put people in positions of responsibility but not just in title but in reality. So hiring decisions firing decisions. Operational changes. All these things have to be handed to other [00:16:30] folks on the team.
Ivan Barratt: [00:16:31] And so what I’ve done and I suspect most of the audience is in the same boat is we have site managed projects communities and then we’ve got the mothership we’ve got headquarters we’ve got where you’ve got Asset Management, Accounting, Compliance, construction maintenance management, and obviously of course senior management overseeing property level managers.
Ivan Barratt: [00:16:55] So what we’ve done here is we’ve given those folks at the top a lot [00:17:00] of leeway in their decision making and how they do things. We’ve got our directions we’ve got our our boundaries our bumpers if you will. But as far as who they put underneath them how they manage those folks the policies they’re putting in place we’re really pushing on them to make those decisions themselves and figure it out and not get in the way of that and that’s cost me a lot of money and [00:17:30] it’s cost me some sleepless nights and it’s creating some headaches.
Ivan Barratt: [00:17:33] But this beautiful thing has happened is that these folks are becoming great leaders of their own and they’re they’re developing projects they’re coming up with great ideas to cultivate our culture their dealing with crisis without skipping a beat. I don’t think we’d have that if if we didn’t allow them to fail in their own in their own [00:18:00] right sometimes. And so what I still have to remind myself is if my executives can make 10 decisions a day and be right on seven or eight of them we’re going to win big.
Patrick Antrim: [00:18:15] You spent a lot of time early in your career. You mentioned we’re kind of rolling up his sleeves learning all aspects of the business and it might not be for you but for many the maintenance the service side of the business [00:18:30] seems to be a challenge you know to find the right people either the just the demand of new construction in the area that type of thing or perhaps getting people excited to work in the apartment industry maybe they see it as something that they don’t see it as an investment vehicle. But you know sounds like to me that’s your family invested in you early getting you into the mix and it allowed you to sort of come into this approach thinking like an owner already [00:19:00] through the management operations and so are you training or do you lead either by the development of your own culture with your executive team and even or your entire team with that sort of owner’s mindset or how do you get that naturally in an organization?
Ivan Barratt: [00:19:18] It doesn’t come easy it doesn’t come easy and hiring retention major hurdles right now. Got a low low employment low unemployment [00:19:30] economy lots of construction going on. Everything’s firing on all cylinders which can make it difficult to to find great people.
Ivan Barratt: [00:19:41] So again between you and me I learned this little secret sauce that I’ve asked you not share. Pay people well give, them great benefits, and you get better people that typically do a better job and stick around longer. And [00:20:00] that’s really been the cornerstone of it. Beyond that I got to give a lot of credit to my maintenance and construction. Excuse me, my director of maintenance and construction management. Finding him. I feel more lucky than smart. We just happened to connect and I knew I needed to make a change. We had a great conversation I told him my vision for the company and recognize [00:20:30] very early on in this that the maintenance team should be treated like gold. They should be cultivated and they should be empowered. I think oftentimes I’ve seen in other companies they’re sort of an afterthought. Maybe that’s finally changing now out of necessity but that’s one thing we’ve gotten right in in that very little credit of mine is I was lucky [00:21:00] to find the right person that was the perfect mix of blue and white collar and a great leader and was able to basically reset the entire organization from a a maintenance and construction standpoint and build out the team in his and his vision. And we’ve supported him in doing that. And what’s occurred is we’ve been able to acquire or attract I should say and retain great great guys in it that are a dying breed.
Patrick Antrim: [00:21:31] People [00:21:30] want to work on winning teams. It’s sounds like some great things.
Ivan Barratt: [00:21:35] Well and some of it’s simple you know we we’ve got to just about as many holidays as a bank or government agency. We try to be on the forefront of benefits and options for our folks. And we have company outings. I’m lucky I’m in Indianapolis so we had a great outing at the track this year. Gosh just about everybody drove in to [00:22:00] be at the Indy 500 for a day and hang out in one of the suites there doing those little things to build that culture is maybe not always going to be the answer. But I think it helps people pause when somebody comes along says Hey I’ll pay 50 cents more an hour to come work for me you know.
Patrick Antrim: [00:22:22] And as a CEO, you know we can get trapped you know focused on the transaction relationships of the Investor [00:22:30] Relations you’re raising capital. Sometimes you know the nature of the growth. You know we’re transactionally focused on transactions but you know it’s important to stop and share that vision because like you said right. I mean they go somewhere else. But as a maintenance professional with the kind of work you do it seems to me that you’re training them how to be investors. I mean do the repositioning the property right right before them if they pay attention. [00:23:00] Do you do any coaching in terms of helping people become investors themselves or is that just sort of you know of their own intuition for that?
Ivan Barratt: [00:23:11] Well again more credit to the executive team because they do a fantastic job of educating their staff on why we look at certain things the way we look at and whether it comes from cap ex projects maintenance and [00:23:30] repairs why we’re doing the things we’re doing right because if we’re not delivering to the investor this whole thing doesn’t doesn’t last very long.
Patrick Antrim: [00:23:39] Right. Right. And so.
Ivan Barratt: [00:23:41] So trying to get a little bit of that down at the granule granular level is certainly mission critical as well don’t have any employees to become investors yet but I hope that that changes somewhere down the road.
Patrick Antrim: [00:23:54] Right. All right so let me ask you how do you really look at a deal. What is [00:24:00] the ideal perfect acquisition look like for you if that’s the case what has to be true?
Ivan Barratt: [00:24:07] Sure. So for us you know we were were chasing that rental band here in the Midwest call it $600 to about $1,200 dollars a month in rent. We’re really focused on high end of C middle to low end of the workforce housing. We look at it as a private equity play.
Ivan Barratt: [00:24:28] And what I mean by [00:24:30] that is that we look at every deal like it’s a business and we are in the business of acquiring reasonably well run businesses already.
Ivan Barratt: [00:24:42] So we’re looking for light value add taking advantage of some perhaps some management efficiencies running it a little bit more effectively to help the NOI. But at this point in the cycle we question a [00:25:00] true value add project being that if it’s not working and it needs you know it’s suffering and it needs a lot of problem solved at this point in the cycle. Could it be something more intrinsically broken that it’s not fixable?
Patrick Antrim: [00:25:18] With the demand for rentals. A lot has to go wrong for stuff to go wrong.
Ivan Barratt: [00:25:25] Right
Patrick Antrim: [00:25:26] I imagine as we move forward any [00:25:30] kind of correction really isn’t going to come from really over leveraging these projects I imagine because it seems to me that the lenders have been pretty cautious about things. I mean you have some deep experience in that you want to expand on that at all?
Ivan Barratt: [00:25:49] Yes. So just to cap off the last question we’re looking for real strong income out of the gate where we can deliver anywhere from a 6 to [00:26:00] 10 percent cash yield or cash on cash return out of the gate depending on how it’s financed. And we were pretty specific on on the market variables that we would like to see a high score in as far as financing. I think probably one of the potential black swans out there is just maturity risk and what I mean by that is operators that are primarily using [00:26:30] bank financing might run up to a point where the capital markets froze up. They have to roll over the debt. They took short term five year commercial loans and they’re only able to roll over that debt forced to sell. So there are a couple of the other operators down the street. And that’s when you might see some pricing softness for us and a lot of the players in this space agency debt is about the short term debt we want. So short of getting some bridge financing [00:27:00] for some specific projects. We’re typically looking at agency loans with 10 to 15 year maturities and we’re also using quite a bit of HUD FHA financed project stacks of capital stacks because we like mitigating risk and we like taking that maturity risk almost completely off the table interest rate risk at that point locked for 35 years. You’re essentially taking your interest [00:27:30] rate risk to virtually zero as well. And that that’s firmly implanted in my DNA because again having a front row seat to the Great Recession I saw a lot of developers and operators lose perfectly good assets
Ivan Barratt: [00:27:49] Lose businesses and sometimes marriages and families were lost to because of that maturity risk right.
Ivan Barratt: [00:27:58] And so my [00:28:00] goal was and is and frankly always will be. How do I grow a business. How do I grow a team a culture a management machine. That will do better in a recession. Not worse.
Patrick Antrim: [00:28:19] Right. And it helps to operate from strength I imagine
Ivan Barratt: [00:28:22] Absolutely, absolutely and without the management piece of it. Like a lot of developers [00:28:30] out there that are merchant builders you know unfortunately they’ve got to keep doing deals better keep building things and selling assets in order to meet payroll obligations in order to keep those people. A management company. If I do zero more deals this year, we don’t miss payroll and we don’t fire anybody. It wasn’t the year we wanted it to be but we will survive to the next year.
Patrick Antrim: [00:28:55] Right.
Ivan Barratt: [00:28:55] Because we have that we have that setup.
Patrick Antrim: [00:28:59] And that gives you [00:29:00] an opportunity to tell that story to the equity partner correct that you know it’s best service sometimes you provide is saying no to a deal.
Ivan Barratt: [00:29:10] We trumpet that a lot. We’ve got a lot of equity right now a lot of capital relationships. Of course we’re always looking for more but our equity is continuing to ask you to say wins the next opportunity. And the answer hasn’t changed is what we think we’ll do this this year. However, if we don’t get to use a baseball analogy [00:29:30] we have a very tight strike zone and if we don’t get our pitch we will sit there and let the ball go by 200 400 times because the maintenance of that discipline the strict adherence to the acquisition criteria may not be sexy in today’s market. But it’s what every large owner operator has it done. If you if you look [00:30:00] at across the market all the big ones that have been through multiple business cycles have similar strategies.
Patrick Antrim: [00:30:07] Right. Do you do any third party management or is it just management of your own assets that you acquire?
Ivan Barratt: [00:30:14] No we do. We do. We we’ve started to grow that again for a long time. Third party management was always larger than that than the deal that we acquired ourselves. And we knew we were able to go in a little bit of an acquisition tear we got some great deals in our pipeline have grown [00:30:30] significantly on the ownership side. If I were to draw an arbitrary rule we’d like to continue to be about 50/50 fee manager 2 to owner as we as we expand.
Patrick Antrim: [00:30:44] Yeah. And how do you if you know you’re looking at pitching to the client but having that discussion about a third party client relationship what does that conversation look like and [00:31:00] how do you as a company differentiate yourself amongst all the options that are available today? Without giving the the secret sauce.
Ivan Barratt: [00:31:12] Hahaha. Theres not a lot of secret sauce to it.
Ivan Barratt: [00:31:13] Well you know there’s not a lot of secret sauce to it. We just we just work harder. We work really hard at our culture and our people and our in our way of doing things so oftentimes I think in this environment we’re a little bit more on the expensive side and that’s okay and so [00:31:30] we get a lot of people that calling us from management services that go nowhere because they are either looking for the cheapest operator or they want they want the biggest one. So for us right now you know I think we’re a Goldilocks operator and that we’re not so small that we don’t know what we’re doing and can’t execute or don’t have the right technology but we’re not so big to where if you’re a new client you’re just a number and we don’t care if or go at this point where were our [00:32:00] clients are very important to us. The other thing is I’m lucky in that being an owner and having an owner mentality makes me a better fee manager right and I’ve pair that with my management company doesn’t have a high profit margin motive. My goal is as a management company is to grow a fantastic machine. A [00:32:30] fantastic culture. Don’t get me wrong it is a company pays me and my partner well and we pay our people well but we spend a lot of money on technology there’s just not a lot left after that. But what that allows us to do is it allows us to fill our own long term wealth goal aspirations right.
Patrick Antrim: [00:32:51] Right.
Ivan Barratt: [00:32:53] By acquiring assets, managing them extremely well, to [00:33:00] where my financial freedom, my family’s financial freedom, my future is intact, and the management company is the critical piece to keep that all going. Sure I can eek out another five or 10 percent profit margin if we started really being focused on costs and pennies. I’d much rather grow just a great company that does a great job and watch my my [00:33:30] assets perform well over time.
Patrick Antrim: [00:33:32] Right. So a lot a lot of people individual investors are looking at different opportunities in multifamily right now some of these coming from funds many different portfolios across different locations different yields or things like that. And what are you what do you say to somebody as they evaluate that process as becoming that passive investor. That would probably come in as your investor what should they be asking of groups [00:34:00] as they take care of their real estate?
Ivan Barratt: [00:34:04] Wow. I write about that a lot. One of my little life hacks that I try to pass on to passive investors that ask that question I get it a lot.
Ivan Barratt: [00:34:17] I think one of the best things you can do before putting your money in anything is underwrite 100 opportunities look at a hundred different funds or 100 different private placements. Read the offering [00:34:30] memorandum and you will get through osmosis and repetition. This visceral gut reaction some people call it a fingertip feel for what a good deal looks like. And as an investor you’ll start to recognize more importantly what’s not in the offering memorandum. An attorney friend of mine used to always say it’s not what’s in a contract. Any fool can read a contract. It’s [00:35:00] what’s missing from the contract. And I think that if you look at enough of these opportunities you’ll get a better idea of what it what a good opportunity looks like. Also I think your show probably does so well is that is your attention to risk management. You know right now everything is doing well but there is potentially a lot of issues on the horizon with industrial with office with retail and with several [00:35:30] sectors of apartments. I have I would have a hard time recommending anybody get into a class A new development right now but I know there’s operators out there that are doing a great job. So I would just say that a lot of caution should be taken because most of those deals your your returns are predicated on predicting what’s going to happen in three years after lease construction lease up and in a sale.
Patrick Antrim: [00:35:59] Right. Right. [00:36:00] And then whatever comes along because when you’re an A property probably in an urban area right or it’s in a well I guess it could be anywhere but you do have that supply risk.
Ivan Barratt: [00:36:16] Yeah, I’d say I’d say get references, call those references. Don’t just you know look at a couple of blurbs, get their track record, make sure they align with your deals.
Ivan Barratt: [00:36:28] We turn a lot of capital down. We’ve [00:36:30] got some great conversations with some funds but a lot of funds right now are looking to do three to five year exits. And I haven’t really seen a whole lot of deals that match up well to a 3 to 5 year exit because again you’re you’re essentially having to take some sort of short term financing that has a lot of interest rate risk to it versus a longer term 10 plus year hold. You know with real estate if you can stretch out that maturity and you can hold long [00:37:00] term you can you can write out just about any economic storm.
Patrick Antrim: [00:37:03] Right. And I mean is that three to five years fee driven? Depending how those those deals are structured.
Ivan Barratt: [00:37:11] Yeah. Absolutely.
Ivan Barratt: [00:37:14] I think people should be less focused on IRR right now and more focused on cash flow.
Ivan Barratt: [00:37:19] I think investors should be more focused on a flight to quality and then higher return asset class or location? [00:37:30]
Patrick Antrim: [00:37:30] Yes,yes.
Ivan Barratt: [00:37:33] We would be hard pressed to do a C asset right now unless I was in A location. So we like the B properties and I think I think investors and sponsors or developers that are chasing cap rates right now are going to lose because if you if you’re drawing a line in the sand and saying oh I need in a cap and it’s got to be this cash flow cash return you’re going to be looking at some very poor quality assets and you’re probably missing [00:38:00] something anyway.
Ivan Barratt: [00:38:02] So I’d I’d much rather put put capital to work at a slightly lower return in this environment. But in an asset that I know has virtually zero downside risk. So for example I’m closing today excuse me tomorrow or the next day on a 2004 built product I called an A minus B plus path of growth location checks all the boxes were assuming underlying [00:38:30] HUD debt and rents are about half of what Class A plus plus suburban urban assets are renting for. And so our capital stack. We’re putting a little bit more leverage in there with them some really great mezzanine financing through the through our partnership. And that deal I would make a strong argument that there’s virtually [00:39:00] zero risk now of course there’s no guarantees. I could never say something is 100 percent guaranteed. There’s always risks but to buy that sort of asset right now in a class that we’re in in one of the best suburb suburban areas of Indianapolis by going in cash on cash is going to be 7 percent. Right. And two years ago I might have said it needs to be a 9 but I’d much rather I’d much rather be working at 7 or 8 percent for [00:39:30] very low downside for very little downside potential.
Patrick Antrim: [00:39:36] And it’s important to have alignment with those investors right?
Ivan Barratt: [00:39:41] Not everybody wants that. I get calls all the time folks a one two, three, four year, turnaround and they want to make you know 20 plus percent IRR and some of those deals are going to still pan out. But I think at some point just beyond the horizon where we were we can predict [00:40:00] a lot of those projects are going to go poof at least from an equity standpoint. The banks will be ok. The banks will get out mostly whole. But the equity will evaporate.
Patrick Antrim: [00:40:10] Right. Right. Well anytime you rush a process it’s never good for it.
Ivan Barratt: [00:40:16] And there seems to be a lot of that going on right now. Patrick.
Patrick Antrim: [00:40:19] What do you see as an investment company if you look at your operation as as a manufacturing company? [00:40:30] like what are the raw materials that are necessary going in. If that be the alignment of the investor objectives, right capital structures, all of these things. It’s because we’re in the smartest time you can be with smart people doing these things and the process like your manufacturing process. What has to happen for it to come out ideal in the business?
Patrick Antrim: [00:41:00] Yeah [00:41:00] that’s a great question. I love the manufacturing analogy because you’re right a lot of little parts have to go in in just the right combination to.
Ivan Barratt: [00:41:24] Yes for us or for our manufacturing or for you know we’re almost a little bit defensive in what we [00:41:30] buy right now we want to we want patient capital we want well heeled capital to where we’re only 10 or 15 percent of their portfolio. Accredited investors. Yes, but we also want them to have a certain level of experience and education typically. And we want them to be in it for the long haul, and we’re we’re out there pairing that with deals that we’ll likely do better in a correction. But at the same [00:42:00] time if rents go flat and expenses continue to rise. You know 2 3 percent a year we’re not going to make the returns we wanted to but we’re still going to deliver a return.
Patrick Antrim: [00:42:10] Right.
Ivan Barratt: [00:42:12] And that’s really what we want. I think humans often fail to fully understand downside risk. Right. That old adage of You know worst case scenario typically ends up being a lot a lot worse [00:42:30] than somebody thought it was going to be. And I can speak to that in my development days working for another developer when everything fell off a cliff. You know we thought the worst correction our business will be cut in half and it got cut to zero. I mean everything just fell off a cliff. And and seeing that that trauma again was one of the greatest gifts I’ve been given right. And I’m afraid it maybe [00:43:00] didn’t answer your question.
Patrick Antrim: [00:43:01] No no no. I mean there are details that go through that but I was just curious and you gave me those key points as key materials. I mean it’s interesting you’re real careful about who has the opportunity to work with you.
Ivan Barratt: [00:43:16] Yes. So yes of the way you said it there. I think that that helps me particularly this in that. And I hope your audience hears this too. The world is a wash in money. Capital is everywhere. [00:43:30] Money is sloshing around the every economy all over the globe looking for a good home. So you would be silly or very shortsighted not to not to be very honest and forthright with the types of deals you do with your potential new partners. Right. Because if it’s not a fit for them. So what. There’s plenty of other capital that does that does align perfectly with your mission.
Patrick Antrim: [00:43:59] Right. [00:44:00] Yeah absolutely. So let’s let’s talk about market now and what markets are you operating in now?
Ivan Barratt: [00:44:08] We’re all over the state of Indiana Indianapolis and then several tertiary cities around the Indianapolis solar system. We’re in Evansville Indiana which is the very southern end of Indiana more in the Louisville [00:44:30] southern Indiana solar system. We acquired our first out of state deal in Ohio earlier this year we’re underwriting more projects in Ohio getting close on some things in Kentucky and we are looking for ways to efficiently and effectively continue to hub and spoke out from there. We certainly are more attracted to those tertiary [00:45:00] markets right now. That might be passed over by your larger institutional capital that’s getting pushed out of say coastal markets by global capital. Love college towns with big university hospital systems seats of government. We’re not renting to the students who were renting to the employment the workforce that that that lives in those in those cities [00:45:30] are deal in Ohio is between Cincinnati and Dayton and we like that area.
Ivan Barratt: [00:45:37] And we’re continuing to look for basically business friendly climate, diverse employment, great transportation, infrastructure and we get pretty picky on schools.
Ivan Barratt: [00:45:53] In workforce housing, we want to be the community where the single parent households are [00:46:00] are coming to us not running the other direction. So for instance we don’t have currently any workforce housing in Indianapolis Public Schools. There are still just too much turmoil there and there’s not there’s a few great ones now and then the rest are not so great. So we certainly like those those suburban school districts more.
Ivan Barratt: [00:46:26] We want to we want to be in desirable locations. Being [00:46:30] near malls and being near retail doesn’t frighten me. I think a lot of retail is going to look very different in the next decade or two. But it’s still good real estate intrinsically.
Patrick Antrim: [00:46:46] You’re not afraid of those tertiary markets. Why? I mean obviously the larger institutional groups are looking for certain population and you know just their model like you mentioned before like I’ve got their investment criteria and are sticking [00:47:00] to it because it says it in their investment criteria. I mean are we are they sticking to old ways or are you seeing things change? I mean even with we talked on another podcast about the autonomous driving vehicle I mean the way that we look at market surveys and radius is I mean that’s just why have we done it that way. Well somebody did it you know years back but the world is changing. And so there’s things that are happening in the world around us.
Ivan Barratt: [00:47:26] And so you said a couple of things there. First [00:47:30] thing, you know tertiary markets. You’ve got an economic mote in that it’s very difficult if not economically impossible to acquire in title zone build new product. And if it does come online it’s going to be way more expensive price per pound than what I’m renting for or buying existing products in that tertiary city.
Ivan Barratt: [00:47:57] So for me and for my development days [00:48:00] barriers to entry is always a high box on my my checklist. What are the barriers to entry for competition. And if they do enter what’s my value proposition? Namely what am I charging for rent versus where they’re at and do I have enough spread there?
Ivan Barratt: [00:48:18] And I love what you said about you know doing the radials and how how dad did it or granddad did it. You know there’s going to continue to be a lot of disruption in this market and there’s going to [00:48:30] be a lot of cruise ships that they can’t necessarily change direction. And then you’ve got you’ve got us and other operators like us and we’re on wave runners and speedboats and we’re pivoting we’re pivoting whenever we need to where we’re looking at some ways of evaluating markets. There are some some some guys I know that are really talented in the consulting space for governments, for entrepreneurs, for real estate companies. And together [00:49:00] we’re looking at some really ways of seeing things. I’ll give you one anecdote. Like you said if you put a point on a map and you do a radial. You’re going to get one set of economic data. But what if what if the property is right on the wrong side of the zip code. Right. Right. It’s on the wrong side of the railroad track and you’re pulling all you’re pulling all this information from from the you know from the nice neighborhood pulling up your data or conversely the property [00:49:30] is well located but the radial is being pulled down from the other side of the railroad tracks right. And I’m acquiring a project in McCordsville Indianapolis excuse me McCordsville Indiana population 15,000 people but it is a small moon orbiting Saturn in the [00:50:00] Indianapolis Carmel MSA and there is growth occurring all around it. And three major hospital systems within ten minutes major highway with tons of service related jobs and in medical industrial there’s there’s education financial services all kinds of employment great phenomenal metrics right. But if you were looking at it through a telescope [00:50:30] and you just pulled up census data you’d say oh this market is way too small. So I guess is it just all a long winded way of saying that the way we look at the world really has to has to change versus how we used to look at it. If you’re going to find value.
Patrick Antrim: [00:50:49] Right. Right.
Ivan Barratt: [00:50:50] Because it’s not easy to find value you right now as you know I know.
Patrick Antrim: [00:50:53] Yes.
Patrick Antrim: [00:50:54] And it helps to be able to create it once you have it. But those are some really wonderful things to share. And [00:51:00] look, we appreciate you sharing the time with us today. We’re coming up on the end of our segment here. But I wanted to give you an opportunity to talk about anything you want to leave our listeners with or any kind of final thoughts.
Ivan Barratt: [00:51:14] Oh it’s been really fun day on this show. I like diving into the details and we got to do it more here with you than I usually get to do. Anybody has any questions in the space or anybody wants to talk I’m very accessible. 317-762-2625. [00:51:30] That goes to my assistant and she’ll put you on my on my schedule and I’d love to chat about any of this subject matter just your listeners will have to remember to tell me when to shut up because I can go on all day about this stuff.
Ivan Barratt: [00:51:50] Thank you again Patrick. It’s been really fun Having a chat. Thank you for listening. We hope you enjoyed the Multifamily leadership podcast [00:52:00] for show notes and other resources. Visit multifamily leadership.com.
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Patrick Antrim is the Founder of Multifamily Leadership, LLC, a thought leadership platform providing streaming content around technology, innovation, and leadership. He also produces two of the highest level events in the Multifamily Apartment industry. The Multifamily Leadership brand is preparing Multifamily Leaders for the FUTURE. They honor the Best Places to Work in Multifamily®️ at our annual leadership Innovation summit.
Patrick Antrim July 7, 2018
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