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Achieve Wealth Through Value Add Real Estate Investing Podcast

Mar 17, 2020

James: Hey audience and listeners, this is James Kandasamy from Achieve Wealth True Value Add Real Estate Investing Podcast. Today I'm happy to get Ivan Barratt into our show. Ivan is a multifamily owner-manager syndicator who specializes in large apartment complexes in the Midwest and he has been doing it since 2015 with over $18 million in equity, with more than 3000 units as the primary GP. And he has grown his company, which is Barratt Asset Management to be best in class two time inc 5,000 private equity and management firm. And he focuses a lot on equity, finance, acquisitions, and companies' strategies. So currently managing over 300 million in assets, comprised of almost 3,500 units. Hey Ivan, welcome to the show

Ivan: James, so good to see you, dude. I always love talking to you man. It's good to be on the show officially.

James: Absolutely. I know we postponed it a few times so this is going to be very, very valuable to me and to my listeners as well. And so, Ivan, let's get started. How did you get started, right? Let's quickly go through it. How did you get started and how did you end up with $300 million in assets under management?

Ivan: Yeah. You know, for me it all started with one duplex that I house-hacked back in 2000. I'd wanted to be in real estate my whole life. My dad is in real estate. He was an attorney, always owned rental properties on the side. A couple of entrepreneurial uncles on both sides of my family that owned apartments, gas stations, car washes, all kinds of businesses. So at a really early age, I wanted to be an entrepreneur and I wanted real estate because I thought, gosh, why would I want a real job when I could just go out on a lot of property and do whatever I want and watch the rent cheques just come in. So I went to school, went to college, went through business school, got a degree in real estate finance, got out, house-hacked a duplex.

For the first eight years, I worked for a mentor in mostly development, but also property asset management. All kinds of different jobs that I got to have that I got to where I working for this real estate developer. And most importantly, I got a front-row seat to the great financial crash in 2008 at a really young age, a huge gift. I learned. I wasn't as smart as I thought. I learned that I was doing real estate the wrong way and that's when I really started modeling multifamily companies. Because I'd always wanted to own apartments, but I also saw that in a downturn, those multifamily companies got bigger, they got stronger, they acquired more assets because of the way they were financed. And so that really was the impetus to get me started in my own pursuits.

Then I actually started in 2010 as a property management company first because I knew that if I could figure out the property management game and doing that for others, that when it was time to buy bigger deals for myself, I would have a higher likelihood of success of execution. So I started buying a few small deals at the same time, was managing for other clients. Anything I could get my hands on where I didn't have to carry a gun and I was doing everything. Started from the bottom, then started being able to buy larger apartment deals. And when I say large, I mean, my first apartment deal was six units and about 35 and a 30. Then I said I'd never do another small deal again and I bought 15 cause it was just too good to pass up.

And then from there, I started syndicating. I did my first syndication of 60 units and I bought 112 and all the while, still managing for other people as well. That was really how we grew the company in those early days. Once we got to onsite staff size properties, there was really no turning back, pretty addictive. Fast forward to today, we still do some management for others but we mostly manage our own assets now. And we are far and above are our biggest clients. And that's the shorter version of where I come from and how I got here.

James: Got it, got it. So is this 3,500 units, is it all you? I mean, your company or you guys do fee manager part of it or how does that?

Ivan: Yeah, so I own about 3000 units. We're down to about 500 units that we manage for others, it's not really a focus moving forward. We still have a few close partnerships that we like managing for. But really the way I've built and designed my company is not to be a profit center of property management, more to be an execution machine for my own wealth strategy. And so I think you and I've talked about this before, you know, on the property management side, I could be Scrooge and I could really be tight and I could probably make a 15% margin but instead, we focus those dollars into our culture, our people, growing leaders within the organization, having fun. Property management is not easy. You know, having great events and really trying to create this beautiful machine of people that want to come to work, want to do a good job, want to stick around a while and believe in what we're doing. We call it the band fam.

James: Awesome. Awesome. So let's go deep into the, you know, how you got started and it's just so interesting, right? I mean, you had that vision to start from property management first and then added assets, which is, you know, how like even like Ken McElroy started, right. He started being a property manager first.

Ivan: Ken McElroy was a huge influence in my career. Yeah. Huge influence. I read his book very early on and that was one of the key influences for starting my management company and figuring that out first.

James: Yeah. And I think he had mentioned it many times. I mean, for the audience who doesn't know who's Ken McElroy. He is one of the largest owners of multifamily in the US. I mean, he is an advisor to Robert Kiyosaki and he's a big guy, well-known guy, a well-respected guy in the multifamily industry. And he mentioned very clearly in his book, right? I mean, to get started, you probably want to work for someone or go work as a property manager. And I don't think so many people are following it because people think it's just buying assets and letting it ride through a, it's okay. But what did you learn from that experience? And starting from property management and going into as an owner as well.

Ivan: You know, this is 2011, 2012, I've got 70 units and I am everything. I'm the busboy, the cook, the maitre D. I'm the leasing agent. I'm the property manager. I'm the rent collector. I had a little bookkeeper that came in every other week cause I didn't want to screw that up. So I literally did everything first and learned to be efficient with it and also learn, you know, strengths and weaknesses and made a lot of mistakes. I've finally just decided early on that I knew I was gonna make a lot of mistakes and that was just part of it. I finally figured that out in my mid twenties, that being an entrepreneur is a lot about failing forward, making mistakes and learning from those mistakes and not quitting. It's not a calm, okay sort of method, but it's the backstory to a lot of successful entrepreneurs. So I just copied what those who had been there before me had done.

James: Got it. Got it. And I mentioned it in my book, I mean, across all commercial real estate, multifamily is a really, really good asset class but the hardest part in multifamily is property management, right? I mean, managing that 300 or 100 units income stream from different people is just the hardest. I mean, you'd rather buy an office, have three tenants, professional tenants and you're done.

Ivan: Yeah. Multifamily is the best asset class for return on investment on the planet until you move in the people.

James: Yeah. Until you move into the hard job of multifamily, which is basically the property management and, you know, you'll figure it out. You'll figure it out beginning in itself that, you know, property managers, I mean, you want to start from property management and going into asset management. I mean, you and I know that you really don't make money in property management. It's basically a time-consuming job.

Ivan: The most important one, but very, very time-consuming. The most important job,

James: Absolutely, the most important and we do it for control, right. For control of our value...

Ivan: Oh, absolutely. I couldn't imagine hiring a third-party manager for my own assets. It's just the way we do things and the amount of control we have, the ability to move pieces around. For instance, we had one property that was suffering a little bit. We were still trying to get the right management team in place. We took our best leasing agent in the entire company and we moved her across the state to do her thing at an asset that needed her assistance. And that's very easily done when you control the management side of it. If you're out there and you're just another number to a third-party company that's a far more difficult solution to get. They're not necessarily going to give you their best people or move around their best people.

James: Yeah. And I also think property management is the best way to make deals, numbers work in this market cycle, right? Where the market, it's not like appreciating like what it used to be in the past five years.

Ivan: You're giving away my best secrets, James.

James: I know.

Ivan: How we get our value-add picture to work is a big part of it is being able to manage these units efficiently and knowing exactly what it's going to cost to run them and finding inefficiencies and reducing expenses. It's one of the three legs on the stool right now for making deals, achieve target returns. No question.

James: Absolutely, absolutely. I think that's very important for...that's why we do vertical integration. Because deals at this stage of the market cycle, where everything is overpaid and people are bidding for high prices for everything and it's just so hard to do, you know, if you're doing it third-party.

Ivan: No question.

James: So, yeah, I mean, to be frank with you, in the last one month, I have like four guys, four friends who are syndicators, who never had a third party. I mean never had their own property management. They called me for a meeting. They say, Hey, how can we do our own property management company? And I asked why and they said, Oh, you know, all these guys are not good. All this third party, what I told you guys like two years ago, right? And I say, do not do it. But they say, no, we are going to do it. Right? So I mean, yeah, if the market is 150% and your property management is 70% capable, market is 150%, your property management company capabilities are mask off by the market. Right? But if it's the other way around, right now, I don't think the market's at 150% probably is 90 80% right? But now you know, everybody's getting undressed on how capable they are. Now, everybody's like scrambling to go and say, now they're seeing all the weaknesses of all the third-party property management companies. Right.

Ivan: Agreed.

James: Yeah, absolutely. Absolutely. So come back to deals that you buy in the Midwest. So is it you are in Midwest and is that why you buy in that market?

Ivan: Well, I'm lucky. I live in a place that's really great to invest in right now. Midwest, it's steady. The markets we look at have been growing on average 3% a year for 35 years. They don't boom, but they don't bust either. And so, we like a lot of these tertiary and secondary markets in the Midwest that have also successfully decoupled from the Roosevelt economies of old and have government education. Health care is big. There's some blooming in the tech space, R and D, there's some big insurance companies, financial services. So there are these markets like Indy is a great example that hasn't quite seen the boom that some other markets have, but they've just continued to steadily grow, which is really good on a five to seven-year hold period if you can find the right assets inside those markets.

James: Yeah. Midwest I mean, I'm not sure where I read it, but essentially the whole Midwest is very stable in terms of economy, right?

Ivan: Yeah, it really has become that way. And also in the B, B plus rental cohort, the percentage of rent income is still in the mid to high 20% range versus a lot of hotter markets where it's higher than that. So I would see that as a sign that there's still room to grow rents if you're good at picking growing submarkets within those markets.

James: Got it, got it. Yeah. If you're able to identify the submarkets within the market itself. 

Ivan: The submarket within the submarket, within the submarket, right?

James: Well that's what real estate is. 

Ivan: Hyperlocal. 

James: Hyperlocal. Yeah. And I'm sure you being local, you would be able to know a lot of areas on your own and then you'd be able to figure it out things. So what are the States are you investing right now in Midwest city?

Ivan: So far we're in Indiana, Ohio, Illinois, we've got lots of submarkets in these areas that we are targeting. And then from there, there are certainly other States we've got our eye on, here in the Midwest as well.

James: So, the deals that you are getting from this Midwest, is it through brokers or how are you guys, through relationships or how's that?

Ivan: At our our typical deal is going to be somewhere in the 30 to $40 million range and all those assets are controlled by the brokers. If you try to circumvent them and start going direct to sellers, they're really not going to keep you on their deal flow list. So we use the brokers to our advantage and we get a lot of off-market deal flow from our beloved brokers. We've closed a lot of transactions with them. They know we're a great company to do business with. We never retrade, we close quick. And so, we ended up being on the shortlist when they've got a seller that may be willing to transact but doesn't necessarily want to go full bore on market.

James: Got it, got it. So let's say today a broker sent you a deal, right? So what would you look for in that deal that may be attractive for you?

Ivan: Yeah, so we're looking for newer assets that are late 90s, early two 2000s. We'd like some stability because our fund dictates that the property can pay monthly cash flow to the LPs starting within 30 days of closing. And we liked that cashflow to be current to the preferred return of 7%. So it's got to have cashflow, day one. And then we still want to see some upside from value add, bringing in our management team, like you and I just spoke of, to manage it more efficiently, but also to make some improvements. If it's the mid-90s, it likely can stand some amenity upgrades and some cosmetic upgrades to the units. So we're looking for, for those two pieces. 

And then third, we want a market where the rent is still growing, jobs are coming in, it's a good school district, you've got population growth. So those three components. If those add up to a reasonable expectation of 15, 16, 17, 18% IRR on a five to seven-year hold, we'd like it. We underwrite it to attend. So, if we're holding it more than seven years, we want to do two and a half, three and a half X equity multiple net, or we really want to harvest every five years if we can.

James: So how do you determine the exit cap rate? I mean, I know you can't really determine the exit cap rate but in the Midwest States, how would you underwrite, what is the market cap rate plus how many...?

Ivan: Yeah, I know there's a lot of talk right now about exit caps and what makes sense. We always just provide a cap rate sensitivity analysis. So we show what it looks like if the cap rate goes up every 25 bips, we show what the return looks like. It's our suspicion that cap rates are maybe a little bit lower than they will be over the long run, but not as much as you'd think. The spread right now between the 10 year treasury, which is at 150 today (actually it's a little less than 150 thanks to the coronavirus) and say a cap rate on buying out of five and a half or six, you're talking about 500 basis points spread in some cases. 

In 2008 when the economy crashed, the spread between the 10 year and commercial cap rates was 50 75 basis points. So if you think about the spread between what you get for leaving your money in a 10 year bond and what you get for putting your money in multifamily is still very, very fast. So I don't see that spread going up unless interest rates go up a lot and there's a growing consensus that interest rates aren't going up anytime soon, the debt would just get too expensive. There are too much deflation and global slow down in the macro global economy to force rates up. They're actually continuing to have to ease and keep rates down. And so, I am certainly in the school of thought that we are going to look much more like Japan over the next decade. We're not going to have a lot of negative GDP but we're not going to have a lot of positive growth either. So rates will stay fairly low and there will be a demand for risk assets that offer a healthy spread above the 10 year.

So that being said, you know, I probably went down a rabbit hole, maybe a little too deep, but with that being said, you know, we're typically looking at 50 basis points on the exit at five years but we don't get too caught up into that. We never show our pie in the sky and projections to our investors. We never show what we think the maximum rent we're going to return is. For example, I just bought a 272 unit deal, a fantastic deal I'm excited about in the submarket called Greenfield, Indiana, it's inside the Indianapolis MSA, third fastest growing County in my state. And I just have been organically raising, for instance, closing $150 a door on renewal and I'm painting and carpeting.

James: That's awesome.

Ivan: So I'm not really worried about my exit cap on that deal. You know what I mean? The thing is if cap rates, this is the other reason why you and I get 10 year, 12 year agency debt is because if there's this point in time where cap rates spike, I'm not selling, I'm going to hold the property in cashflow. Just think about it, James. If cap rates are going up, it's because of inflation. Interest rates are going up to fight inflation. Agree?

James: Yep, absolutely. 

Ivan: Well, if inflation goes up, rents are going up too. And the best part about apartments is that we get to reset our rents every month and every year. And so if I don't have to sell at this little point in time and I can raise my rents and wait for things to stabilize and cash flow along the way, I shouldn't be as worried about an exit in a specific year. Where people should be worried about exit cap are these shorter terms bridge loan deals where they're banking on a big rent increase in a refi or a sale two years from now or three years from now. I think that's taking on a measure of risk that would be a little more than I'd be willing to buy it off. We locked in that agency debt early.

James: Yeah. Yeah. I've been doing my agency, all my deals has moved to agency, you know, for the past two years I've stopped doing bridge loans just because of the exact reason that you are talking about and yeah, I agree. Bridge loan do have some risks. Some people like it because they think they can flip it but you don't want to flip at the end of the age of the market now [21:51crosstalk] 

Ivan: It can also flip the other way on you.

James: Yeah, exactly. I mean, bridge loans and turning around huge deep value add needs a lot of skills and you are really banging on the market timing right now. There are a lot of factors to put in. I mean it's like a flipping a house, you're flipping an apartment. So is that how you started from the beginning itself, where you have trained your investors to focus on the cash flow of the deal? And a lot of my investors now, they want like annuity, just give me a cash flow. I don't really look at the pop the bag and it just give me an annuity because you know, six to 8% return cashflow is an awesome return. Right? And it can be much more awesome going down there.

Ivan: Yeah. So, how we work with our investors is first, we educate them on how we mitigate the downside. Why we do agency loans, why we lock in for a longer period of time and we plan to hold it. Why we're buying a little bit newer of an asset versus what we were buying in different stages of the market cycle. Then we look at the yields of the property and we look at with them, like you just said, look at this asset. If nothing else works, it's still going to yield seven, eight, 9%. And then we're looking at what's the potential upside down the road, in that order because people do want to see cash flow first and they don't want to lose money. And it's nice to be in a situation where if the stock market is down 30% or if it's 2008 2.0, we might not be selling anytime soon, but we're still going to be cash flowing. Whereas, other parts of their portfolio will be hammered.

James: Correct. At that time, that seven to 8% would reap some really, really good return. I mean, you are basically getting it now and you're just maintaining it throughout your market up or down cycle.

Ivan: And it's harder but that's why we look for deals that have that seven, eight, 9% cash flow very quickly. And we pay monthly on our distributions is because I like monthly cashflow. I know you do and investors you do.

James: Yeah. But is that how when you started like six units, 30 units, 35, is that how you were looking at the apartment? The perception of change.

Ivan: No. [24:17inaudible] 2010-2011. When I bought that property, it was bank-owned, REO so that those were heavy value add deals. So early on, I was learning how to reposition a property. Because that was the market cycle that we were in, the stage of the market cycle at that time. And so, I started off buying those, I bought some C properties and Bs and we're looking for more of those heavy value-add deals. And as the market changed, we changed with it.

James: Got it. That's very interesting. That's the part that I did. I did a lot of deep value-adds and you know, prove ourselves. I mean, deep value-add takes a lot of skills. I mean, even value-add takes a lot of skills or how fast the turnaround or how we manage a contractor, how you manage your finances, how do you manage your scope of work and the schedule itself. It's very complicated, right? I mean, a lot of people would have done it by skill. A lot of people could have done it just because the market appreciated, not to say because they did the job itself.

Ivan: I'm sure you are excited for those deep value-add deals to come back one day down the road. But today a deep value-add deal, we just underwrote one. There was a moderate value-add, maybe $15,000 a door and if everything went according to plan, we would make a 15 IRR.

James: Then what's the point of doing deep value-add? Right?

Ivan: What's the point? Right. Because I just bought a 1998 vintage deal. It's fully occupied. And I just told you I raised rents organically already and that's going to do a 17. And so, there's so much demand and there are so many buyers trying to crowd in and buy these so-called value-add deals that we've gone to a different strata within our space to find value. And then, when those value-add deals, get back up above a 20 IRR, I'll start taking another look at them.

James: Got it. Got it. Got it. So you have changed your strategy just because of the market cycle, and you think that is what the investors want, and you still get, I mean, a lot of investors who had even one, three, 4% return, right? So if you're able to give them like, you know, 15% IRR or 17% IRR, they would be ecstatic.

Ivan: Yeah, in my opinion, I've got to be mindful of the market and work within my marketplace. There's opportunities in every stage of the cycle. But you have to go right with the market, not against it.

James: Yeah. So how are you competing with big institutional players? Because they look for this 1990s, 2000, and they'd be able to look at the same deals that you are looking at. Right?

Ivan: Yeah. It's very hard. It's very hard. I'm very lucky that I started this several years ago. And that I've got a reputation and a track record with the biggest brokers in my region which are all national brokers. And we lose a lot, we lose a lot to big guys. I've just lost a deal yesterday for a deal, I loved it, at 41 million and some out-of-town buyers who've done it for 44 million so they can have it. A lot of times it's off-market. And then some of these submarkets that we're keenly interested in are off the radar of some of the bigger fish from out of town. And that's really how we're finding a lot of value. We know where the emerging markets are, the old Dave Lindahl approach, right? We know how to spot an emerging market and that's a key to getting that value. That's really, in my opinion, one of the only ways that you can get those returns up to where they need to be to continue to please your existing investors and attract new ones.

So let's go into details on how do you identify emerging market. Can you give like top three things that you look for to identify this as an emerging market?

Ivan: You know, there's a lot to it. I'm lucky that I'm in an area that I want to be in, but we're looking at infrastructure improvement is a big one. We're looking at population growth, job announcements. Have the developments. So example in Indianapolis, I know where the growth is going. I know where the good submarkets are that it'll be the big suburbs of tomorrow. Infrastructure is probably one of the biggest ones. For instance, we're buying in a market right now or they're building a brand new federal highway over the Ohio river that is going to bring more jobs and more commerce. Right?That's just a few of the nuggets

James: I think the local knowledge and the local connections, right? Just, just the local knowledge itself is just very powerful.

Ivan: Yeah. But it's not as hard as people think to find. I mean, if you're looking at the entire map of the United States and you're like, okay, I got to find an emerging market, that's going to be tough. But if you can start to focus in on an area and say, okay, what's like one rung out, where's the growth going? Where are the new big infrastructure projects planned? Where are the good schools out in those areas where people are moving to, where the housing starts, right? Housing brings commercial, commercial brings jobs and jobs bring multifamily.

James: Got it. Yeah, it's very interesting to see where is the path of progress and just go and target that where the big fish is not really looking at. 

Ivan: And then if you're buying below replacement costs and you're doing it right, you should have a rental range that gives you an economic moat between what a new construction project would have to deliver and would have to charge in rent. So if I'm in an area, like I told you about Greenfield and Indianapolis, I'm in that area and right now my target rental rents are maybe 1150, 1175 target rents after renovation. If I know in that market that somebody wants to come in next door and their rents have to be $1,400- 1,500 a month just to get a shovel in the ground then, I've got a decent defensive asset. So new supply, in many cases for me, isn't as dangerous. It's actually, it can be a good thing.

James: Got it. Got it. Yeah, that was my question because in 1990 2000 vintage, sometimes can be competing with a new supplier. 

Ivan: Yeah. You really got to make sure your Delta is three, four, five, $600, especially if you're buying A-minus like me. It used to be the difference between A-minus and A-plus was maybe $200 and now in a lot of markets, it's 500, 600, 700, maybe a thousand. And so, if you can figure out where to enter that market and have a large spread between you and new construction, you're much more insulated from A-plus concessions.

James: Yeah. Got it. Got it. So apart from getting good loans, because right now, the interest rates are pretty low, apart from the buy itself, you're probably buying at a certain price that you think you can hit the investor target. How do you do value-add? I mean, what do you look for in this 1990s, 2000 vintage that is common. What are the biggest value-adds that you see that is your favorite?

Ivan: Oh, that's none of your business.

James: Come on, man, reveal the secret. I have to work hard on 1980s, 1970 probably. I want to go to 1990. What are the things, apart from the price, apart from the loan?

Ivan: Well, listen, I'll give you a nugget.

James: Yeah, you can give a few.

Ivan: A lot of operators are spending way too much freaking money on unit improvements.

James: Okay.

Ivan: Okay. And so because we're vertically integrated because we're property managers and we know everything going on on the front lines, in the trenches, we know where we're going to get an ROI. We know that maybe granite countertops don't get us the ROI but really nice Formica does. We know that a yoga redoing a 90s fitness center with new equipment and a little yoga studio, it's going to get us a much better ROI than stainless steel appliances, for instance. So it's just knowing your market, it's knowing really the ROI on those improvements and how they impact rent and it's different everywhere you go. It's not like you can just take what I say, go do it anywhere. You have to know in that market what works.

James: So is it by doing market surveys where you look for, I mean, in terms of...?

Ivan: Well, remember we don't have to survey the market here because we are in the market. We manage the properties. We have leasing agents all over the Midwest that are giving us instant, realtime feedback, right?

James: Yeah. Yeah.

Ivan: But with that said, we shop our competition. So, because we control our management company and we're part of the apartment association, it's a very tight family in the apartment industry and we really hire from within most of the time because it's such a specialized job. And so, my team can call anybody on any apartment project anywhere in the Midwest and say, hey, it's Cat from Band. Can I shop you today? And they do the same to us and we all trade information on what's working and what's not. And that's really one of the really cool things about property managers, we help each other, right?

James: Yeah. Yeah, absolutely. Absolutely. I mean, it is a very small...

Ivan: No here is what we do: We shop ourselves, we secret shop ourselves. We're very upfront with our competition. When one leasing agents calling my competitor and saying, Hey, can we trade what's working, what's not? What are you guys renting for? But then we secret shop our own people and they get scored on how they do by outside sales consultants.

James: So, you talk about two things. One is the amenity where certain amenities are desirable, where you can raise rents because it's more desirable. The second thing you talk about is the efficiency within the pipeline of property management.

Ivan: Listen, nobody uses the gym but it still sells people on renting.

James: Yeah, I know. It's crazy, right? I mean, right now I'm being more cautious about what I spend on a gym because I know people may not use it. So I know there's a gym…

 Ivan: Yeah but it's the wow factor, James. Oh, you've got a yoga studio. Maybe I'll do yoga now. I've been meaning to do yoga. The year goes by, I never did any yoga but I rented from that guy, James.

James: And I see my property managers using the gym, not my residents. That's okay, you need everybody to be healthy. 

Ivan:  #culture.

James: So let's talk about amenities. How do you decide on which amenities are more attractive?

Ivan: It's all a functional market. And, again, it depends on what marketplace that we're talking about. So we're looking,  we will redo pool furniture. Bark park is an easy one to put in if it's not already there, we're typically redoing the gym. A lot of times we're redoing the clubhouse with new paint, new furniture, maybe a couple of computers. Again, things that sometimes we will never use, but just to give that wow factor when they come in to be able to close them on living there.

James: So do you increase, like, I mean, you'd be mentioned in the beginning, $100-150 per door just by adding amenities and better management, I guess.

Ivan: Yeah. It doesn't always work out that well and usually that 150 is coming from multiple areas. We're raising certain fees so maybe the owner hasn't raised pet fees or water fees since they bought the property. I get bad reviews on my website because we raised water fees to market, you know, but that's just part of it. It'll come from organic rent increases, which is where we're just raising the rent on turn. And then it comes from quick cosmetic improvements to the units, on turn as well. Paint, countertops maybe new cabinet hardware. We rarely ever take out the cabinets. Maybe new switch plates, maybe some new flooring in the kitchen and bath. Very light improvements.

James: So among the things that you mentioned just now, what do you think is the most valuable improvements that is the biggest bang for the buck that all your residents love?

Ivan: Yes.

James: Which one? You've mentioned like five or six, which ones?

Ivan: I've given you more nuggets that I should, man. I feel exposed to you. I feel like I got to tell you these things, but no, no. I'm like, keep this to myself. You know, it depends. Sometimes it's organic, right? We bought a couple assets where it was a big company. They own 5,000 units, but they still ran it like a mom and pop and they were like 20 years old and they never raised rents. If people don't move out, they don't renew them and increase them; we do. Another property, it was the amenity package that really started getting more income in other properties. So it's all those things and it's property by property, which one's going to move the needle the most. But typically you need all those components to get into that target rent. That 125, 150, 175, it's going to help you achieve your target returns over the whole period.

James: Got it. Got it. So yeah, that's very interesting. So let's go back to whatever you mentioned just now to the demand of the property, which are the residents. Do you think the residents in this 1990s vintage, 2000 year apartment residence is harder than class C, 1960, 1970 residence. How did you manage? Was it more maintenance?

Ivan: In some ways, it's less maintenance but in other ways, the tenants can also be the residents. We don't call them tenants anymore, James; the residents.

James: Yes, exactly.

Ivan: The residents can be more demanding, have higher expectations. See you've got to have the right people there that are used to managing that particular product with the income of the residents that live there. So yeah, some people would misunderstand and thinks that A-plus is easier because everything's new and shiny and oftentimes A-plus is extremely management intensive because of the expectations of the residents. So in some ways easier and in some ways not.

James: Yeah, someone told me, a regional manager told me that A or A-plus residents are much harder to manage because they have all this ego that they can pay. They expect a lot of things from the property management company and sometimes their delinquency can be high because they say, I can pay next week, you don't have to really come up...

Ivan: We find the collections are usually better.

James: Okay. Got it. Got it. So let's go to financing. So on top of agency debt you also do hard debt,  right? And why did you choose some of the deals to be under hard loans?

Ivan: It's a great way to take a ton of risk off the table. It's a 35-year amortization and it's full and meaning, you can hold that note for 35 years without having to refinance yourself. So you take a lot of risk off the table. The interest rates are somewhat lower, although Fannie and Freddie have gotten very competitive in the last couple of years. It allows you to get an 85% loan to value on after repair value, so you can finance a lot of improvements as well, which is great in some circumstances. So if you want to hold the deal a while, like 10 years or more, HUD can be a good alternative. It's also very compliance heavy. There are audits, there are physical audits of the property, so you really have to know what you're doing.

 We like it just simply for risk management. So we have several assets that are HUD. Big myth is that HUD means it's an income subsidized project and that's actually incorrect. HUD finances A, B, C, D assets. Their mandate is to help provide rental housing so it's available to a lot more people. A lot more assets than people may recognize. It's certainly not for everyone, but in certain circumstances, I think it's advantageous. We locked in our last HUD deal November of 2018, a $34 million deal. Locked in with HUD, our all in note rate is 313.

James: And I remember November 2008, the interest for agency debt was pretty high cause I did lock in some deals at that time and I think that was, I think, November, December is when it picked up and it came down again.

Ivan: Yeah, it was luck, we were able to catch the bottom of that treasury dip, which helped but it was still lower than the agency.

James:  I know HUD like a six months once distribution, where you can take out the money. How do you do distribution to your investors when you have that kind of limitation?

Ivan: That's one of the downsides of HUD. You can only distribute every six months. That's why we don't use it very often. It's a different investor profile. Some investors want to be defensive. They want to have their money in something and they want to have leverage but they want to have downside protection. So HUD works really well but it does not provide the same sort of cashflows that agency and Freddie do, which is why we typically use the agencies. For instance, I think I said earlier with our fund, it distributes monthly; I couldn't do that with HUD.

James: Got it. Got it. Hey, Ivan, let's go to a personal side of you, right? Why do you do what you do?

Ivan: You know, for me, multifamily and growing BAM as a business is a lot of fun. Because the bigger it gets, the more fun I get to have and it's a great business for designing the life I want and designing the business in a way that it's the life I want for myself, my wife, my family. And so I liked the wealth and the freedom with real estate. Yeah, that's the crux of it. James. I've got some big goals and being a good dad and a good husband and a good member of my community and leaving behind the legacy. And for me, owning real estate and owning a business to operate it, is the path.

James: Would you do this for another 20 years?

Ivan: You know, it's funny, I got to sit down with an older guy on the banking side of our business of multifamily. He took his bank public. I dunno what he's worth, but it's over half a billion dollars. He's probably approaching 70. And he says, Ivan, you don't stop; you just play the game at a higher level. And I can tell you he's having a lot of fun, has a lot of freedom, has a lot of time with the grandkids, travels wherever he wants for as long as he wants, with whomever he wants. So I don't see myself retiring in the traditional way, I want to continue to just play the game at a higher level.

James: Yeah, it is so fun to keep on improving things.

Ivan: Yeah. And I like to tell young entrepreneurs this and people that are newer to the business, if you're getting bigger and you're not having more fun, you're not doing it right and you need to refocus on your people and your process and so that you can scale it. Because none of us can just keep working harder. It's unsustainable.

James: Correct. Yeah. That's one of the challenges that we are having and we are trying to grow and you know, it's becoming harder to find that process and people especially to replace what we do. And we have set an expectation on how things should be done, but not everybody is gonna work like what we do.

Ivan: The first coach I hired four years ago, all we focused on was figuring out what my one thing is that if I spend most of my time on that, I will be successful and then finding the right people to do everything else. And then the hardest part is from a guy that started myself and did everything myself, the hardest part but the key is getting out of their way once you hire them.

James: That's really hard. And you're right, that is the hardest part.

Ivan: I think Tim Sarah(?) said it best. James, he wrote some articles about letting little bad things happen and that's key. Excuse me, I thought I was going to sneeze. Learning to let people make mistakes even when it costs you money and letting them learn and fail forward just like you had to do, it's very freeing. And when you have a management company and you've got fees coming in every month, it becomes a little bit easier to start to let those little bad things happen. Let people fail forward, let them learn and make sure they're not just coming to you for the answers all the time.

James: Got it. Got it. Yes. The art of delegation and managing people. So it's just so hard to master, right?

Ivan: Well, if you get the right people, there's far less management. You get the right people in the right seats. That's a big part of it.

James: Yes. Yes. I agree with you. Let me ask you one more thing. I mean, you started from six units to now, almost 3000 units. So I mean, you have gone through a lot of experiences. Tell me one proud moment that you can never forget that you were really, really proud of yourself. Where you think, Hmm this is something I will never forget in my life, what is that moment in your real estate career?

Ivan: Oh, so real estate category?

James: Yes. Something related to real estate. Real estate family, I mean, anybody, just a human interaction. What is that one moment where you think that, 'I'm very, very proud that I did this and I can never forget this until the day I die'?

Ivan: So it was one of our first bigger deals, it was only 89 units. I think I bought that one after I bought [48:53crosstalk] Yeah, I bought 112. I had already bought 112 units. And so I almost passed on this deal. It was only 89. I'm like, I don't want to do a deal that's only 89 units. And it was in kind of a rough area that we thought was maybe emerging. We kind of looked at each other or like my partner and me, like six months ago, this deal would have been huge for us, why are we turning our nose at this deal? We should do it. And we did the deal, we got it at a good price and people thought we were crazy. And it was a little bit difficult to raise the money.

And we bought it from a construction guy that had already done all the heavy lifting on the value. So people thought, right, what's left to do because this guy already improved it physically, but we had the suspicion that we could manage it better. And two years later, we sold it for almost $2 million more than we bought it for, ended up selling it at a two and a half X to our investors in two years, a little over two years. And that was my first like really big home run. And I remember thinking, gosh, we almost didn't even do this deal.

James: Yeah. So what did you guys do in that deal to make that much money since it's already done..?

Ivan: We got a much better manager in place. We got a really good maintenance guy in there and of course, we asset managed them and we were able to raise rents, we got occupancies up. We reworked the utility bill back to make more revenue there. So the cap rate on that one didn't compress all that much on the sale. It wasn't just like the market went up. We just got in there and turned around the NOI because this guy was really good at making all these physical improvements and he was a terrible manager. And so we got all that straightened out and a couple of years later, had a big win to show for it.

James: Awesome. Awesome. Yeah, I remember my third deal was like, everything's done, well, I was trying to find out what's wrong with this deal and it was a smaller deal from what I used to do, trying to really analyze what's wrong. Something is wrong but it ran in and out of contract like five times and the seller was really frustrated, so he wanted someone to close it so that's where I came in at that time. So Ivan, why don't you tell our listeners how to find you, how to get hold of you or your company?

Ivan: I'm all over the internet. The easiest way to find me and my team is probably Ivan B A R R A T T If you Google Ivan Barratt, you can find Barratt Asset Management. Ivan Barratt Education, which is a site I put together for accredited investors, but they all cross-pollinate. So you find one, you'll find them all. I'm all over LinkedIn. Okay. And then if you want to talk, 317 762 2625

James: Is that your cell?

Ivan: That is my scheduler to get you on the phone with me. 

James: That's going to be, I was surprised. It sounds like a cell phone, but it's not. Awesome, Ivan, thanks for coming over. Hope you enjoyed it.

Ivan: I had so much fun, man.  

James: I learned so much from you and I'm super happy to know you and thanks for coming in and add value.

Ivan: Yeah, I'm sorry to miss you in New Orleans. I can't make it. I'll see you at the next one, dude. I always enjoy our conversations and I gave my banker a ton of crap, thanks to you. I appreciate that.

James: Oh yeah, absolutely. I gave you that tip. 

Ivan: Oh, yeah.

James: All right, so thank you.