July 31, 2022

JF2889: Hidden Perks of D-Class Value-Add Investing ft. Craig Berger

Craig Berger is the founder and CEO of Avid Realty Partners, which buys, owns, renovates, and eventually sells multifamily apartments along with other commercial realty assets. He is a GP of 1,149 units and is based in Manhattan, NY. In this episode, Craig shares about the struggles and wins of investing in what he refers to as class D- properties, his criteria for what makes a great deal, and the importance of diversifying your portfolio across asset classes and markets. 


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Craig Berger | Real Estate Background

  • Founder and CEO of Avid Realty Partners, which buys, owns, renovates, and eventually sells multifamily apartments along with other commercial realty assets.
  • Portfolio:
    • GP of 1,149 units
  • Based in: Manhattan, NY
  • Say hi to him at:
  • Best Ever Book: Building an Elite Organization by Don Wenner
  • Greatest lesson: There are no shortcuts to building a real estate platform. It requires persistence, an incredible amount of hard work along the way, strong risk management skills, robust decision analysis (including avoiding land mines), and the ability to scale processes and systems to reach new milestones.


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Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever show. I'm Slocomb Reed, and I'm here with Craig Berger. Craig is joining us from Manhattan. He's the founder and CEO of Avid Realty Partners, which focuses on value-add multifamily apartments, along with other commercial realty assets. Current portfolio is just over 1,100 units. Craig, can you tell us a little more about your background and what you're currently focused on?

Craig Berger: Sure. Thanks so much for having me on this great podcast. I've spent 12 years as a sale site equities analyst writing research and analyzing tech stocks, sort of writing market ups and downs, learning risk management on the Wall Street side of the house. And that was great, but I frankly got tired of spending my life writing research and judging other people and I wanted to do. I didn't know what I wanted to do, but I wanted to do something, and I figured real estate maybe gave me a 50/50 shot of survival on the other side, working for myself and growing a business, so I started buying apartments. Left my desk job in late 2014 and bought my first asset in mid-2015. We've bought right around 1,900 units. We've sold off a bunch and we've got about 1,100 in the portfolio today.

Slocomb Reed: Got you. Now, when you say you started buying apartments in 2015, a couple of things - did you start out raising capital, or did you start out owner-operator using your own capital or JV-ing with partners? And what markets were you focused on when you started?

Craig Berger: Great questions. Well, I think when you're starting out with limited experience, track record, and history, it's hard to get money from people, so you're pretty much using your own money or partnering with people, maybe--

Slocomb Reed: Totally. Yeah.

Craig Berger: ...friends and family, very close family, that maybe feel sorry for you. But we started buying what I would call maybe D-minus properties, at 15k and 20k a unit.

Slocomb Reed: Where was that?

Craig Berger: I grew up in St. Louis, Missouri and I started buying in the rougher locations in that market, where I have some personnel and boots-on-the-ground support that could help me run these deals. And we just sort of jumped in.

Slocomb Reed: Craig, I'm going to make an assumption here. I want you to tell me how right or wrong I am. A lot of people who start in D or D-minus areas at a distance - that's not what you're doing currently, right?

Craig Berger: I still own some of those assets, but I'm trying to get better problems.

Slocomb Reed: [laughs] Trying to get better problems. Gotcha. What kind of stuff are you buying now?

Craig Berger: Anywhere from '60s to '20-teens built assets, what I'd call B-minuses, up through A or A-minuses.

Slocomb Reed: Gotcha. So when you say D-minus for the stuff that you were starting to buy in St. Louis in 2015, are you talking about the age and condition of the building, or are you talking about the location, the tenant base, all of the above?

Craig Berger: Yeah, all of the above. And those are great questions, because in business people throw around Class A, Class B, Class C. To me, and to your point, it's about location, it's about demographics, it's about the age and quality of the asset. So you can have A, B, and C across any of those metrics. Maybe going in financial performance could be another one. But we bought, again, for 15k a door for my first asset, 95 units.

When my property manager quit three months after we bought the deal, because I wanted that person to do more work than they wanted to do, I had to drop what I was doing, fly into town and be the property manager myself, six or seven weeks, while we hired and cleaned up the property a little bit, and hired a full-time property manager. So when you start at the bottom, from scratch, you have to be willing to wear every hat in the business. There's 15 or 18 hats that I've worn, and humility is important, and rolling up your sleeves is important... And those are all things that I had to do to make that asset perform.

Slocomb Reed: I get that for sure, Craig. I'm an apartment owner-operator here in Cincinnati, Ohio. So all of the trashing of St. Louis that you want to do, I want to hear it. But as an apartment owner-operator, self-manager, 80 doors, I wear all the hats. So I get where you're coming from there. I wanted to pounce when you said D-minus... Let me get into that, Craig, and let me ask if your experience resonates with this or not. Speaking from my own experience, anything that would classify as D or D- in the Cincinnati area, I've avoided personally. I'm also a residential real estate agent, and I work with a lot of investors, I focus on investors and I work with a lot of non-local investors, and I've watched a lot of non-local investors and their buying patterns here in Cincinnati.

My experience has been that what attracts people to D submarkets or D areas or D properties within a market is that they are letting the spreadsheet do the investing for them. They're looking for the highest cash-on-cash return in the spreadsheet that they've built out themselves, and they find it with the lowest possible cost per door, not maybe recognizing the human element of real estate, and recognizing all of the issues that can come from buying properties that are priced that low. In 2015, even 15k a door was nothing... Unless St. Louis is just that much worse than Cincinnati. You tell me, Craig. [laughs]

Craig Berger: St. Louis has some great locations and some tougher locations.

Slocomb Reed: Sure.

Craig Berger: We've done well with those properties, because 15k a door is the new 45k or 50k a door. We've got some great residents in those properties. We've got our fair share of challenges as well, but I'm happy to do the important work of providing homes for people. Maybe they're less advantaged than us, or had less opportunities along the way.

Slocomb Reed: Of course. Absolutely.

Craig Berger: It's not the only properties I'm buying. I'm trying to buy nicer, easier-to-deal-with properties also, but we do a mix of A, B, and C demographics, we do a mix of A, B, and C locations. Sometimes there's more upward mobility in price on C units, sometimes it's the A's. But definitely, there are operational challenges associated with taking on what I'd call a D-minus property. And at the same time, I think it's-- I'm proud of the work we've done, and folks need a place to live. We've made them safer, more secure, more enjoyable, more comfortable, more livable, and enjoyed cash flow along the way, but it's not for everyone. I dove in, and you've got to be committed.

Slocomb Reed: Craig, I want to discuss other things, but I think you're in an acute position to add value to a lot of our listeners here, so I want to stay with those properties that you started with just for a moment longer, because it sounds like you have come through the experience of investing in those kinds of properties. Seven years later, you still own some of them, and it sounds like they're performing well; otherwise, you probably would've let go of them as you moved on to A and B markets and the position that you're in now where you're raising capital for value-add syndications.

Speaking to our Best Ever listeners who have bought based on the spreadsheet before, didn't necessarily realize that they were getting a D- minus property or a D-minus location, because they had not done really solid due diligence and were not investing in a market that they were from, like you, Craig, where they had some understanding of the area... They buy these assets because of the cost per door and what they see as the cash flow potential; not pulling any punches here - they buy it, they immediately get smacked in the mouth, with everything it takes to have success in a property like that. Can you tell us a little bit of the struggles that you had and how it is that you overcame them to make those quality places to live, that are also providing you with cash flow now, five and seven years later?

Craig Berger: Sure. Well, first of all, I think if you're buying those locations, you're not really going to get a good third-party manager to run those deals, so you have to be willing to self-manage. That has taught me an incredibly large amount of things about the multifamily business. You deal with people's lives, both employees and residents and community members, so we do have a dedicated full-time sort of what I'd call boots-on-the-ground asset manager in St. Louis to deal with those. We also try to hire the best property managers that we can to work in those markets and at those properties, probably pay maybe a little more than market to get someone who's better, more committed, and also, similarly, willing to roll up their sleeves, do some kind of employee profit share. If we do sell a property, we always try to save 25k to sort of bonus the staff. Nothing makes me happier than giving $12,000 or $15,000 of upside money to my property manager. Maybe it's not enough, I don't know, but it's something, hopefully meaningful. But yeah, we got to be on the ground. You've got to be there.

Like any project, don't under-capitalize these things. The value-add deals, you need 12, 15, 17 a door of capital day one for interior renovations, deferred maintenance, risk capital, management money, depending on what kind of condition it's in. If you need to change roofs and do other major work, it could be more than that. But I'm never going into any value-add deal with less than 15 or 18 a door of upgrade and renovation money, because that's how you get higher rents, make the building nicer and hopefully begin to cash flow.

Slocomb Reed: It sounds, Craig, like, if I were to summarize your advice, you have to stay hands-on, and expect to be an active operator. You live in New York City, and these properties are in St. Louis, but it's your staff managing them. It's not a third-party.

Question about that - it doesn't sound like this has been your experience, but as you scale in locations like that, are you still not able to attract quality property managers? I get it if you start with a four-family or a 10, 20-unit portfolio within one of those areas. I'm imagining some specific streets and intersections in Cincinnati right now, and imagining myself as a third-party manager. If you had 100 doors in one of those areas though, even if it was 100-unit property, are you still not seeing that you can attract quality property management?

Craig Berger: No, you can. Quality property management or third party... I think with rents low and in that location, even 100 units - yeah, you're going to want to do it yourself. That's just my opinion. The third-party managers that I know - they want to make $35, $40 per unit per month, and maybe a minimum of 7 grand a month of comp to do a property. And 7 grand a month on my 95 unit asset, that was my first asset, is 20% of revenues or whatever. It's just--

Slocomb Reed: At least when you started, right?

Craig Berger: Right, it's not happening. But you can find some great property managers. They might be local to the neighborhood. They might be local to that area, and have some personal ties and commitment to that.

Slocomb Reed: And these are people who become a part of your team, right, Craig?

Craig Berger: Absolutely. I love my staff, and treat them like gold, and anything they need from me, they get. We take care of each other, and occasionally when things don't go right, we have to pull the reigns a little bit. But yeah, we mostly manage through love and motivation and winning together as a team and feeling good about the amazing work we're doing. It's not that dissimilar from the third party management engagement tactics that I'm using on the higher-quality institutional assets as well, so a lot of crossover.

Break: [00:14:32] to [00:16:19]

Slocomb Reed: You have, since investing in those D submarkets, decided to move towards A, B, and C and not focus there. I will say, I do have some friends and acquaintances here in Cincinnati who focus on areas that have a lot of the issues that you're talking about, and they end up staying there because they put together the systems and the cash flow is tremendous when you can have success in those kinds of areas. I know people who stick with it. Are you still focused in St. Louis?

Craig Berger: We'll still buy some of those assets. I'm still looking in St. Louis. We're working to sell some of our earlier assets and roll them into other assets. It's always nice if you can buy bigger, better stuff with other people's money, but there's also something nice about buying something that you and your partners might just own amongst yourselves.

Slocomb Reed: Totally.

Craig Berger: So we'll do it both ways.

Slocomb Reed: Yeah, absolutely. So correct my assumptions where they're wrong, Craig. It sounds like you've expanded outside of investing in just the St. Louis market, and that you're now looking at A, B, and C class areas and properties, as well as D. Have you expanded outside of St. Louis? And what is it that you see that attracts you to various submarkets, A through D, on property age, condition and location and tenant base?

Craig Berger: We've bought four deals in Houston over the last four years, about 1,220 units give or take, including a big one in April, 400-unit deal in a great location. I'd call that an A-minus location and a B-plus or A-minus asset that we're maybe upgrading wrong. We're in contract to buy what I'd call an A deal in Baton Rouge, Louisiana. It's a great submarket. It's renters by choice, and a beautiful live/work/play asset. Going in five cap I think is attractive even in this environment. We've bought our first deal in Dallas. I love that market. It's highly competitive, but we want to own where the action's at, right? We want to own where people are moving to. So people are moving to Dallas and Austin and Phoenix and Vegas and Carolinas and Florida. We don't want to get pelotoned on Florida. Florida's gone parabolic, so that makes me a little nervous. But yeah, we're out looking at the fastest growth cities in the country, bigger markets, smaller markets, and trying to own there. And also, if we find a fantastic deal that's maybe not in a top growth market but still a nice market, then we'll buy it if it's a great deal.

Slocomb Reed: What counts as a great deal for you?

Craig Berger: What counts as a great deal? Our model is the great equalizer, and everything is sort of baked into the model. And if the model tells me the numbers work, then I believe it. But to your point, you have to own these things. You have to actually deal with them. So there's the whole reality of owning assets, right?

Slocomb Reed: Absolutely.

Craig Berger: What makes a great deal is a good going in basis, nice physical asset, good upward mobility in demographics or physical upgrade possibility, which can drive growth in top line; something that I might want to own for a long period of time, or can easily sell for a higher price down the road after we achieve our plan. Obviously, like I said earlier, better problems as I get older and bigger. Better problems is always better. I don't forget where I came from and the important work to be done for all sorts of folks up and down the spectrum, but we're growing an institutional platform, we're deploying other people's money, so buying nice, shiny, beautiful assets, and in fast-growth markets is just a easier way to deploy large amounts of money and deliver returns for family offices and institutional investors and the folks that are putting their money to work with us.

Slocomb Reed: For the capital that you're raising - institutional investors, family offices, et cetera - I keep coming back to the same thing, Craig... I've done about 70 or 80 interviews now with the Best Ever podcast. Talking specifically about multifamily apartment syndicators, a tendency that I'm seeing is that you have people who understand C class cash flow, you have people who understand A class premium quality, and you have people who are targeting B class to get some of both. You don't have a lot of people who are succeeding at a high level in all three, much less including D class. All of those submarkets and all of those tiers have their own issues, they have their own upside potential that's a little different. Do you see that your investors want different levels of return based on the different type of asset that they're investing in with you?

Craig Berger: I think all investors want as much return as they can get. I think that's sort of universal. Maybe it is somewhat unique that we invest up and down the spectrum, but that's because I started from scratch at the very bottom, with no resources, no track record, no training, and we've just been climbing the mountain. But I do think it's important as you're growing a large platform to be diversified. Sometimes A class has concessions and downward pressure on rents if things are horrible, where workforce may not have that same situation... Or sometimes it's vice versa, where A class rents are running, and C class folks are more stretched and rents aren't growing as much. So we want to have a diversified platform of asset types and locations. We're not only buying in Florida. We're not only buying in Texas or only buying in the Midwest. I'll even look at Southern California right now. Everybody hates Southern California. Nobodies have to buy in Southern California. So that's some place I want to look, because nobody else is looking right now, and California, for all its problems, is still a great place and it's still California, especially some municipalities more than others.

But we want to build a diversified business that can perform in up-down or sideways markets and I think that that means having a diversified base of locations, a diversified base of asset types. And as we scale and build this organization even further over time, we could look to buy more net lease assets and other product types beyond just multifamily. We could look to do new construction, because sometimes new construction has got 30 IRR returns and it's a three-cap world. A new construction is hitting it out of the park and buying existing assets for the same price per foot that you're building brand new. Doesn't make any sense. Sometimes construction makes sense. Right now, I think buying existing assets at 25 off from where they traded six months ago; it makes a lot of sense. So we're just trying to be diversified and grow a large platform and generate great risk-adjusted returns for our investors.

Slocomb Reed: Craig, when it comes to risk-adjusted returns, are you adjusting more heavily for risk in some asset classes than others?

Craig Berger: I think so. Our nicer, newer construction assets we're underwriting at a 4.80, 4.90 exit cap, maybe a little more now. Our '70s built deals were underwriting at a 5.50, 5.60 exit cap. So we're trying to bake in some of that spread on income and what people are willing to do. Some of that risk-adjusted return boils down to our fee structure where we have very limited fees and no catch up in our promote. So really, if we don't hurdle an eight IRR on any deal, me as a sponsor, I really don't make money. Yeah, I have an act fee and whatever, but it's not huge. I split it with partners, co-signers. So we have to hurdle and aid. If we're not making money for our investors, we're not making money for ourselves.

My interests are aligned with my investors. That's a big part of risk-adjusted. It's not having multilayered fee structures and promotes on promotes and catch-ups from zero to eight or zero to seven, the way a lot of other firms do. I guess that's part of risk-adjusted... But yeah, we're looking at price per foot on exit, price per door on exit, exit cap, and sensitivities on those metrics, and sensitivities on rent growth. And we want to buy the very best deals we can that make the very most financial sense for our investors, who are our partners and our bosses and the people that we live for.

Slocomb Reed: Awesome. Craig, are you ready for the Best Ever Lightning Round?

Craig Berger: Okay, let's do it.

Slocomb Reed: Excellent. What is the best ever book you've recently read?

Craig Berger: Ooh, I'm reading Building an Elite Organization by Don Wenner of DLP Real Estate. It's a phenomenal book. Don funded one of my deals recently. He's an amazing individual, built a huge business.

Slocomb Reed: He was a speaker at our last Best Ever Conference.

Craig Berger: He's a very impressive individual. I have a gratitude for having him in my life and we're going to do some exciting things together. Also, Jim Collins has written a lot of great business books, and I'm just wrapping up Good to Great and trying to bake that into our business processes and get our flywheel turning.

Slocomb Reed: What is your best ever way to give back?

Craig Berger: We need to do more of that. Getting this business started has been a lift for sure, but we start with our residents and doing great for them and providing safe, secure, comfortable, upgraded homes at a reasonable price. We try to do a bunch with our investors as well. And then we've been working to get deeper into some charitable causes. There's a few that we like. One that we're getting more active with is a job retraining and retooling initiative. It's called the Cara Collective, and they're basically helping folks learn trade skills and other job skills. If you were a checkout person for 20 years while your job's kind of going away, what do you do now? And Care Collective is one organization that I like and starting to get more active with that helps address that need.

Slocomb Reed: Craig, what is the biggest mistake you've made thus far in commercial real estate investing? And what's the best ever lesson that you've learned from that mistake?

Craig Berger: The biggest mistake I've made has probably been playing in my financial model too strictly. If the model says it's a 14 and I need a 15, and it's a nice asset in a good location, I got to learn to play in the gray area. That was sort of a hard lesson learned while things were going straight up for the last seven years, eight years. But similarly, that discipline around cost and price is paid, I hope, will someday save me from making large and costly mistake or from flushing myself down the toilet, which is easy to do in this business if you're not careful. I'm trying to make sure I don't have more than one loan due in any three or four-month period of time. So that there's some staggering of debt obligations out in the future, just trying to manage risk. My biggest mistake was not buying more fast enough while prices were melting up, but it's a long road. It's a marathon.

Slocomb Reed: On that note, this being a marathon, Craig, what is your best ever advice?

Craig Berger: Go out there. Chase your dreams. Do it. Do something meaningful. Find some great partners to work with and really pursue what it is that you want without fear. It's good to have some fear, but it's not good to be held back. And a 400-unit deal is probably less work than a 50 unit deal, even though I might get more competition from saying this. Just go out and build your business and chase after it.

Slocomb Reed: Awesome. And where can people get in touch with you?

Craig Berger: craig@avidrealtypartners.com is the best way to find me.

Slocomb Reed: Excellent. And the link to your email is in the show notes. Craig, thank you. Best Ever listeners, thank you as well for tuning in.


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