February 19, 2024

JF3455: Navigating Challenges and Embracing Patience ft. Gino Barbaro




Gino Barbaro discusses multifamily investing, emphasizing patience, learning from mistakes, and focusing on "buy right, finance right, manage right." He advises on navigating market challenges and the importance of transparency with investors.

Gino Barbaro | Real Estate Background

  • Co-Founder of Jake & Gino
  • Based in: Knoxville, TN
  • Portfolio: 1,800+ units, $280 Mil AUM
  • Say hi to him at: 
  • Best Ever Book: The 7 Habits of Highly Effective People by Stephen Covey
  • Best Advice: "Focus on long term goals."


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Ash Patel (00:01.334)
Hello, best ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Gino Barbaro. Gino is joining us from Knoxville, Tennessee. He is the co-founder of Jake and Gino, a vertically integrated multifamily real estate company that focuses on assets within their buy right criteria. Gino's portfolio consists of $280 million of assets under management. You really need no introduction.

Gino is a returning guest on the best ever podcast. If you Google Joe Fairless and Gino Barbaro, his episodes will pop up. Gino, welcome back. How are you doing today?

Gino (00:41.347)
Good, great. How ya doing, brother?

Ash Patel (00:44.046)
Very well, man. Good to talk to you again. You know, you know, today, let's focus on the current climate. Things are not all that rosy for a lot of multifamily professionals, investors, a lot of stories about pause, preps, a lot of people sitting on the sidelines waiting for the dust to settle. What are you seeing in your world?

Gino (01:07.207)
Ash, I always like to say that there was life before Jake and life after Jake. And life before Jake, before I met Jake, I had made some really, let's say unwise investments. I met a guy named Maserati Mike, I invested in his deal, and I made a lot of mistakes that people are making in this current climate. And if I was younger, I probably would be doing the mistakes that people are making right now.

I just learned from experience that when I met Jake in 2011, I want to focus on one asset class. I really want to get really good at it. And we selected multifamily. It took us 18 months to find the first deal. It didn't happen overnight. But then when we did, it's like, what do we do to become successful? For us, it was the three pillars. It's the buy right, the finance right, and the manage right. Now I had made mistakes on all of my deals on those three pillars. I violated all of them practically on every deal that I made before Jake.

But once Jake and I partnered up, it's like, Jake, I'm done with doing bad deals. So for me, no deal is better than a bad deal. And over the last couple of years, 2021, 2022, we weren't on the sidelines completely, but we were doing smaller deals, a 25 unit, a 30 unit, a 40 unit. We bought a 22 unit portfolio that had a 12 unit, a 6 and a 4. We just sold the 6 unit and the 4 unit in the last two months. We doubled our money. But it's one of those things where I didn't want to go in and force the hand. And I think that's what a lot of people were doing the last couple of years.

Ash Patel (02:36.398)
Wait a minute, all these people that say stick to your buy box, stick to what you know, be hyper focused on something. You guys are buying 10, 20 unit properties?

Gino (02:47.363)
Well, we are and that was 2021, that was 2022. That's what the defense was giving us. I wasn't buying, in our market of Knoxville, it was so hot, it was so competitive. My idea of buying a stabilized deal on bridge debt just didn't make sense. I mean, it was 24 months to 36 months, 195 units. We can't reposition it that quickly during COVID and we knew rates were gonna go up sooner or later. So our finance box is long-term fixed rate financing.

And what happened in 2023, the deals came back. We did three deals last year. We did 132 units. We did 105 units. And in December of this past year, we closed on a 96 unit. So just having that patience and being able to say, it'll be OK. Because when you're not buying deals, Ash, there are other things that you could be doing in multifamily. You can be raising money. You can be talking to investors. You can be building your brand.

Oh, what about operations? You can be working on your business. We have 1800 units, so all of a sudden, our income is increasing year over year, 20%. Why? Because if you're not doing deals, there's other things you can be focusing on in this business.

Ash Patel (03:54.71)
What about pivoting to other asset classes, you know, going from multifamily to self-storage, mobile home parks, RV parks? Some people are pivoting. Some people are like, stick to what you know. What are your thoughts?

Gino (04:09.431)
That is a very difficult question. And that is a very personal question. If your BHAG is to be the Chick-fil-A of apartments and you decide to go into RV parks, well then what happens? All of a sudden, the operations is different. The management is different. The focus is different. I don't think there's a right or wrong answer. It really comes down to what a person's goals are and what they're trying to aspire to. We had the opportunity to go into RV parks. I thought it was a great niche back in 2020, 2021, 2022, but our goal wasn't just to chase yield.

We want to build an enduring organization. We want to buy three to 400 really good units per year that are producing $250 to $300 in profit per unit. Will we accomplish that if we go from multifamily and then we see a shiny object and go, oh, mobile home park, great idea, but that's a different asset to manage. And oh, RV park here. I don't know what the answer is.

It was just for us when we read the book Small Giants by Bo Berlingham. You should read the book. If you haven't read the book, it's an amazing book because it really talks about what you want, I guess, for your business, for your life. We want it to be the small giants, this small little company that had culture, that had core values, that had a mission statement, that had purpose. And we didn't want to outgrow our infrastructure. And a lot of people in the last several years have really outgrown their infrastructure and gone into different lanes.

Now, if you've been doing something for 10 or 15 years and you're a master at it, go at it, jump from one to another, but if you've been doing multifamily for a couple of years and you haven't found success and you think you're gonna jump to RV parks and find success there, I don't know if that's true. I think become a master of one, give yourself the ability to do that, and then obviously if you want to pivot, there's nothing wrong with it, but just give yourself some time.

Ash Patel (05:54.478)
Would you encourage people to get into multifamily today?

Gino (05:58.447)
I would encourage people to get into the multifamily whenever. We got in back in 2011. I think people have short memories. When I got in, it was like there were deals on loop net. Nobody wanted these deals. There was no capital. Everyone was running to the exits and Jake and Gino were going through because Jake and Gino didn't know any better. I was just hungry. I was desirous. And now if you say to anybody, hey, would you have started multifamily, if you had the ability to start back in 2020 or 2019, would you have?

Yes, not one person would have said no, they would not have started. And I think right now, we're on the precipice of another opportunity for these next 24 months. We've seen deals where they're seller financing. Debt is harder to come by. There are people in the business that are doing capital calls. They can't raise for another deal because they're having problems with these deals. And I think you can always buy real estate. You can't always sell real estate, but you can always buy it. And if you're mentally prepared to be able to sit down, educate yourself, don't look at it as a side hustle. It may be a side hustle, but if you treat this as a business and you focus on yourself, if you focus for the next five years and do what I did for five years, suck it up, put in the hard work, you will be rewarded.

Ash Patel (07:16.923)
Gino, a lot of multifamily investors, the LPs, the passive investors have had to deal with cash calls, deals that are underwater. They're a little bit jaded. What would you say to those multifamily LPs?

And I'm sure you get those people, right? Hey, I'm in XYZ deal and they just pause distributions. Why would I invest in yours?

Gino (07:40.079)
It's another one of those. Ash, but that's part of life, isn't it? You can look at it one of two ways. It's a problem. But what's the opportunity from that problem? Maybe the LP should have learned the business. Maybe they should have said, how do you buy right, finance right, and manage right? You can go ahead and blame the sponsors all you want, but in some instances, when insurance doubles, when rates go up dramatically, they look at that and they can't really pivot it, and all of a sudden, the LPs are stuck holding the bag.

What I would say is learn from that opportunity. What did you do wrong? What went wrong with that deal? So the next time you're presented an opportunity, you'll know how to vet that sponsor. You'll know how to vet their business plan. Was it the right market? Was it the right business plan? Was it the right hold period? Was it the right debt?

Was it the right exit strategy? These are a lot of things that LPs may not even know what I'm talking about, and that's why they're losing money, because if they had known all of this stuff, they would look at the deal and say, that deal doesn't fit with me, it doesn't align with me. But if they pause distributions, just give it time. Let the operators work through it. I think that's at the very least. When distributions are paused, you'll see the great operators who are having trouble, they'll just rise to the top. They'll put in the effort, they'll put in the work. They'll communicate.

They'll be transparent. That's what you want from your operators to say, hey, we're having rough times right now, but a lot of other people are, and this is how we're gonna fix it. And that's what I would say to LPs, reach out to those sponsors, those groups, tell me how we're gonna fix this problem.

Ash Patel (09:08.43)
All right, look, you guys have a lot to blame. You created this problem because for so many years, so many years, these LPs got great returns, right? And they didn't have to do any legwork. They went out of one investment back into the next one. And here's your 20 plus percent IRRs. And now all of a sudden the returns are much lower and the deals are paused. So if you are an LP and look, I love what you're saying about give the syndicators time to correct, make sure they're transparent, but not all syndicators are being transparent and not all of them will correct. So As an LP that is in a pause distribution, what questions should they ask?

Gino (09:54.255)
Hmm. Well, I would ask what's the next 24 months going to look like? When are we going to start distributions again? Why did we pause distributions? What's going on? And every quarter we have, we have one syndication left, Ash. We're selling it out. Last syndication that we own. Every quarter, we have a webinar with our, with our group of investors. We go over income, we go over expenses for the three months. We go over what our capex is for the, for the quarter.

We go over what vacant rented is vacant unrented. We go over our delinquencies on the property. We really discuss at a deep level what's going on with the property. That's what I want LPs to go on to do is what are the trailing three months? Let's talk about the trailing three months and what are we actually predicting or projecting going forward? What does that look like? I think that's what you really need to really discuss. And then obviously what's going on with the debt, with the financing.

If there is a bridge debt involved, what's going on? Is that going to reset? Are we actually going to go into foreclosure? What's going on with that? But these syndicators should have been communicating over the last six to 12 months. I'll give you a perfect example. When COVID hit, everyone thought the world was going to end. And what we did as operators with our investors is we were doing daily collections. And because we were scared out of our minds, everyone forgets in March and April, are we going to collect rents?

So we started tracking collections daily, and we started having weekly calls on Zoom where we'd say, anyone that wants to jump on, you can jump on, we'll discuss the deal. I think that's what you're looking for in an operator. And I hope that as a limited partner, when you're vetting out an operator, you hope that they've gone full cycle. But unfortunately, there's some really big names in the business that have gone full cycle multiple times and still have come across issues. So if you're out there and you're an LP, go out there and ask, what's going on? Let me see the numbers of what the last six months has looked like and what are we projecting for the next six months?

Because you don't want to put bad money and good money with bad money. You wanna see what the end goal, what that looks like, what their exit plan is for the deal.

Ash Patel (11:59.27)
Yeah, so there are two sets of investors, the ones, sorry, of operators, the ones that are truly transparent and are sharing the good news and the bad. And the others that, you know, man, I can get through this, you know, rates will come down. I can get through this. Um, I love what you're doing with essentially letting your investors into your board meetings. Right. That's, that's pretty cool. We might implement that. I really like that.

Um, now, uh, throwing good money after bad, Gino, when you have a cash call, you have an opportunity to either put money in or you're getting liquidated. My advice to most people not knowing many of the details is be very cautious about throwing good money after bad. Right. Have you seen any situations in where a cash call has saved a deal or where a cash call was even successful in raising the cash?

Gino (12:50.655)
I can't personally say that I have, but if you have full faith and confidence with your operator and he's done everything I've said and they've laid out a plan and they're like, you know, Gino, we need to raise an additional million five because we need to replace these roofs. We need to put some work into HVAC. We need to get this property up the snuff because we're going to be able to sell. We need to weather the storm.

We underestimated our capex budget, which is pretty bad to begin with, but that does happen because all of a sudden insurance doubled and they can show a path forward, then I would do it. But if it's a syndicator that's done one or two deals and they haven't really gone full cycle, they don't have the experience, I don't know if I throw good against bad. But if they have a track record and they've performed for me for a couple of market cycles, I obviously would take that into consideration.

Ash Patel (13:38.218)
Yeah, really, I think you're right. Let's see how they carry themselves. Have they always been transparent or are they just coming out of the woodwork now because they need a cash call, right? Yeah, if you've, yeah, that's great advice. Yeah.

Gino (13:51.271)
Ash, can I just mention one thing? I mean, anyone who's considering raising capital, just remember, it's a fiduciary responsibility. You are taking somebody's hard earned money and you're investing their hard earned money. To me, I think you have to treat that with the utmost respect. You are their financial steward. You're taking their money and you're trying to grow it. Now things happen, but at the very end of the day, as we like to say, they're trusting you with the money.

And that's why it's been very difficult these last couple of years to find really good deals that pencil out. And if you violate one of those three pillars and a deal goes bad, you have nobody to blame but yourself. That's why for us, it has been challenging in 2021 and 2022, even for ourselves. Because if it's my capital, it's still, we have our employees investing in our deals, Ash. We have our maintenance tech. If they've worked for us for two years or more, they're investing with us dollar for dollar.

So I mean, I'm taking hard earned maintenance techs money who may make 50 or $60,000 a year. They're earning, they're putting 10 or 15 grand into the deal. We've got to make sure that's a good deal. I don't want to lose money for him as well as not losing money for Jake or losing my money for myself. And I absolutely don't want to work for free. This business is too hard not to make money, okay?

Ash Patel (15:08.758)
Yeah, man, that resonates a lot. And what's funny is yesterday, my LinkedIn post, I posted that people, yeah, people need to stop putting OPM on t-shirts and hats and bragging, you know, wow, you know, where'd you get the money to buy this property? Oh, I used OPM. Like, you know, like it's nothing. Right. How about, you know, I have the trust of investors who put their hard earned money into this deal.

And it's my job to make sure I do everything I can to help grow that money. Th look, man, I want to slap people when I, uh, see that term tossed around. Oh, I just used OPM. Get the hell out of here. Yeah. That pisses me off.

Gino (15:49.711)
Uh-huh. And then Ash, the other thing is, you're putting your own money in the deal as well. I mean, when we had syndications, we had our own skin in the game as well. So it's not just putting investors' capital, we have our own capital as well. You know, when you have skin in the game, it changes everything. So when you're saying to yourself, should I do this deal? Well, I don't really care about the investors' money, but at least if nothing else, care about your money. Does it make sense for you? And if it makes sense for you, and you're willing to risk your capital, then go ahead, raise OPM as you'd like to say.

Ash Patel (16:19.526)
Gino, the arrow is no longer going up into the right and the world's not as rosy as it was a few years ago. Are you doing anything differently in terms of IRRs, distributions? Are you taking bigger reserves? Are you raising more capital? Are you anticipating rates going higher? What are you doing on future deals?

Gino (16:41.699)
Whew, that's a big ass question, Ash. I mean, let me think about that for a second because it's one of those things where we've really refined what we call our buy right criteria. We're looking for assets that are a little bit newer. I don't want the 1960s assets with clay plumbing and aluminum wiring and old roofs because there are a lot of work. They're really priced high still in this market. So our buy right criteria has been really refined. We're trying to buy in areas that have a better median income, $50,000 plus in our Knoxville market.

We're looking at townhomes, two-bedroom, one-and-a-half bath townhomes. We love those kinds of unit mixes. We're really getting focused on that. And as far as, I'm trying to think as far as CapEx, we're doing what we call loan to cost on a lot of these deals. We're going with community banks and credit unions on the front end a lot of times, and we're getting 80% of that loan proceed built into the loan, the rehab proceeds.

So we're able to leverage that, and then we're able to hold for 12 to 18 months, and then from there, we'll be able to refinance out. But it's important that you raise enough capital and have a conservative budget. Make sure that your budgets are really conservative. And if you're going to do the work, do the work and don't get caught in the model that we had three years ago, or you're going to buy an asset that's a hundred units, fix up 30 or 40 and say material value head and try to flip to the next person.

Those days of sale, that ship is sale. That was part of the market cycle four or five years ago. The part of the market cycle right now is valuation through operation, not just renovation. Now's the time to find deals that have something wrong materially with them in their operations. That's where you're gonna find the value in the deal. So that's the deals we're looking for. And believe it or not, that 1% rule.

We like the 1% rule. If you can buy a deal with the 1%, if it's 100,000 a unit, and you can generate $1,000 a month in rent, I mean, post renovation, that deal looks really good to us on paper right now. If you're able to buy that at current interest rates, I think rates are gonna drop in the future. I mean, you saw the 10-year treasury drop like a rock. Now it's bounced back up. But I think long-term, we'll have to be honest with ourselves, there's an election coming up. They're not gonna raise rates for an election.

They're not gonna kill the economy, they're going to tamper the economy down. That's my opinion. I mean, it happened in November of 2022 when rates should have really been pushed up a lot sooner, but they didn't do that because they didn't want to destroy the economy. And then all of a sudden in their infinite wisdom, let's just shock the economy by raising rates at the most rapid rate in history. So to me, are they going to go back up? I don't think they're going to go up. I think they're going to have to really put some umph into this economy because the lowest amount of homes sold since 1995, think about that for a second.

That's painful.

Ash Patel (19:27.99)
Would you do an interest only loan today that's a variable rate?

Gino (19:32.291)
I would not. That's just us. You know, there's risk in that because I can be wrong. Rates may go up. I don't wanna do that. I'd rather, like I say, go to a community bank or credit union, get a five-year term. You know, with these institutions, credit unions, we just did it two-year interest only. And it gives me the ability to have that five-year runway to be able to reposition that asset.

Ash Patel (19:56.394)
And the difference is, Gino, when you go to a smaller bank and you do the two years interest only, that's a fixed rate, right? Yes. And you're doing full recourse on those loans.

Gino (20:07.415)
We're doing requests. Absolutely. Yes, that may be part of the issue when you're syndicating a deal. But for us, we found that it really works for us because I don't want to get into this bridge debt. Your scene was going out with the arbors of the world. You got in at 3%. Okay, it's non-RECORs. Great. Now it's nine. You're going to lose it anyway. So what non-RECORs, go do it all alone with your business. And I understand you don't want your investors to take on that risk.

But now, maybe now's the time to revisit the bridge debt idea because we don't have these shutdowns like we did. See, the problem with having a bridge, no one remembers, in 2021, you couldn't buy windows. It was taking you eight months to get supplies. It was taking you months to get labor. It was taking you months to turn units. And that was part of the problem, that it was prolonging all the work. Now, if you're an experienced group, you've got the business plan.

You get 100 units, you know that you can execute 100 units. We bought that property in March of last year, 132 units. We're sitting in the end of January right now, 112 of those 132 units have been repositioned. They're all on new leases. We have the ability to do that because we've got the team, we've got the infrastructure. We can make that happen within less than two years. But if you can't and you're just praying to yourself, wow, I may not be able to do that. There's two ways you go broke in real estate, two ways.

You either run out of time or you run out of capital. And we've discussed both of those on this show.

Ash Patel (21:38.01)
Yeah, but you know, 2021, 2020, the supply chain was an anomaly. But the playbook on multifamily real estate was find an asset, raise the money, bridge debt. Rents are going to go up. Cap rates are going down and everybody wins. Right. Too many people just got caught. Too many inexperienced syndicators came into the game and they were driving down or sorry, driving up the prices on all these properties that you guys are competing on.

And now they're getting slaughtered, right? So.

Gino (22:09.611)
Yes, Ash, let me make two points. Number one, it's not the syndicator's fault. It's really the Fed's fault for keeping rates at 0% and making money so cheap when you have private equity entering the space. That's really what ended up happening. And number two, multifamily is a business. It's not buy right, finance right. It's buy right, finance right, and manage right. These are like, I have six children. Every one of my children I've raised. I haven't abandoned them and left them on the side of the road.

You need to buy these assets and treat them as a business, implement systems and processes. And unfortunately, they've been riding the wave of flipping. They've been flipping, single multifamily flipping. At the end of the day, if you can buy right and sit tight and hold some of these assets for the long term, that's when you create this massive wealth. And that's when you have the respect of multifamily being an actual business.

Ash Patel (22:59.43)
Yeah, but it is the syndicator's fault, man. I met a girl who six months from leaving her W-2 took some course and raised $10 million for some syndication, right? And I'm thinking, oh my God, like, you just took somebody, all these people's money, and you're banking on everything going well. And I can't imagine that went well because that was just exactly a year ago.

Gino (23:26.231)
So Ash, the interesting thing is, what happens if she had taken some money and started with a 20 unit or a 30 unit? Instead of going in and buying, because the allure of Instagram and the allure of 10X and the allure of go big or go home, in reality, it doesn't work too well, especially if you've been doing it, you're just starting out, it's okay to start small. We started with a 25 unit little crack den. It was me, Jake, and my brother. There was three of us on a 25 unit deal. Three months later, we bought a 36 unit deal.

We didn't start with these massively large properties. We worked our way into these properties. And I think if you have a little bit of patience, you can get to the $10 million raise-in with no problem. But if you're starting on a $10 million raise-in, you don't know the business, there's a lot of risk. That's not gonna end well. It just isn't gonna end well.

Ash Patel (24:11.378)
Yeah. And there's blame on the LPs part as well. Right. Why, why are you giving somebody that much money that doesn't have the track record? Right. Yeah, they didn't cut their teeth, but again, LPs have been very spoiled over the last 10 years. Right. But Gino back to that. Are you tempering expectations from LPs going forward? Are you reducing their returns knowing that there's all these insecurities out there?

Gino (24:40.227)
We're being really selective at our deals. That's what we're doing. And if the deal isn't gonna meet our criteria, you know, from a repositioning standpoint, we're not even gonna buy the deal. So we're only buying quality deals. All the deals that we had mentioned, these last three deals, if I tell you the price points, you won't believe me. I mean, the deal we bought in January, March of last year, we paid 75 a door. I mean, for a two bedroom community in Knoxville, it's gonna be worth 140 to 150 a door. 

Once it's completely repositioned, the deal we bought in July at 105 a door, in place rents were 800, but repositioned rents at 14 to 1500. So you're seeing the price points from what we're buying toward what we're going to. And we bought this deal in December was a light tech deal. It was a 96 unit deal that was coming off light tech. There's eight units left on that program. The remainder of those are going to market. They're going to market as we speak. They're going to 1400 bucks. So the price points that we're buying them at, there's really a little bit of downside risk. And we're at the point where we don't have to force deals. I think that's what everyone should take away from this podcast if nothing else, don't force the deals. The deals will come to you.

Ash Patel (25:45.93)
What is LITECH?

Gino (25:47.688)
light, low income housing tax credits, I'm sorry.

Ash Patel (25:51.862)
Got it. That's OK. And so how big is your team? You're not the education team, but the real estate syndication team.

Gino (26:01.535)
We have, well, we're vertically integrated. So our property management company has got about 85 full-time team members. And you know, we've grown. We've grown from Jake cutting the grass and I'm gonna do this, I'm gonna do that, to over 80 full-time team members. It's taken a decade, 10 years, and it's been slow and methodical. And one of the reasons why Jake says we wanna be the Chick-fil-A, it's not only the superior customer service, but it's the discipline and the dedication not to outgrow the infrastructure.

I mean, Chick-fil-A has been around for what, 40, 45 years and they opened their first store up in the Northeast back in 2015. So they didn't go out and buy 10,000 units of multifamily in the first couple of years of operation. They were starting small, they were learning systems and as they learned their systems, they continued to grow. So for us, 80 to 85 team members on the property management and on the education side, there's about 10 team members.

Ash Patel (26:49.078)
What about, so when you say property management, does that include acquisitions, it's well everything, right? Investor relations, all of that. Okay, so look, as an investor, should I be fearful that you've got to feed 85 mounds and you've built this big team? You have to turn and burn deals to get, keep that machine moving and get all these paychecks out the door.

Gino (27:13.091)
Remember, we don't have that many syndications left. We've only got one syndication left. The majority of this stuff is deals that we own ourselves personally, me, Jake, and Mike. We've been fortunate enough that we use syndication middle of our career. We've sold out of those, crystallized the equity, and started buying deals for ourselves. So that's the difference between that. But what I would say is if you have that, you just need to look at, you need to look at the operations of these teams.

I mean, you're looking at, when you're looking at a multifamily, you're looking at property management side. So if we have a property management company, then we have an asset management. And, you know, looking at distributions when we buy these assets at these price points, they have to make sense. You know, we're making money on every single one of these deals and we're sending out pulses every week. So for us, we've been buying these at real good price points. We don't really sell Ash. That's the difference between us and a lot of other syndicators. We'll refi the deal. We'll return the money back to investors or to ourselves and continue along on the deal.

Ash Patel (28:09.034)
Well, for these syndicators that grew very large, very quickly, should investors be skeptical? Because again, they've got this big team of people, right? And the money's got to come from somewhere and they got to turn and burn deals for that money.

Gino (28:23.275)
Yes. And that's why they're turning and burning deals. And I think that that's the issue. You just need to be, that's a great question, Ash. When you are a limited partner, you're going into a syndication with operators, ask the operator, hmm, who's your property management company? Oh, you're hiring this property management company, vet that property management company. Who's on your acquisitions team? Who's on your due diligence team?

Who is on your dispositions team, who's on your underwriting team. Find out how many people, how many team members they have to feed. That's great. You want them to be lean and mean. I mean, how many people are asset managing? Because you have an asset management component. Then you have an investor relations component. If you see that they're bloated, then like to your point, well, where's this happening? And then you have to have your goals aligned with the syndication company. You may want your money back in two or three years. That's what a lot of investors want. I don't know why.

It just drives me nuts, but they want their money back quick. And hey, that works really well. Syndication companies got to churn and burn. They're selling every two or three years. I'm getting my money back. And in the syndication's mind, they're like, this is great because every two to three years, I'm making profit on the back end. I'm putting the money in another deal. I'm getting more fees. Just be aware of that kind of model where it's like rinse, repeat, sell, put money back. And by the time you know it, it's like a mutual fund. It's like, well, how much money did I really make?

Once I bring in the capital gains and once I bring in fees, am I really, really making money? The syndicator's making money, that's for sure, but am I as an investor making money?

Ash Patel (29:53.726)
You know, over the weekend, my analyst and I, who's also my nephew, we're sitting at our computers next to each other. And about the same time we see this email come in from a huge syndicator. And I think on the third or fourth page, there was a slide that said, this is the best time to do interest only loans because rates are going down and this kid's only been doing this for a year and he's like, Oh my God, like, what is this real life? Like how?

How is this happening, man? So to me, that's a red flag, right? Anybody who tells you, yeah, rates are going down. Do this deal with us. Man, that, that was shocking to see.

Gino (30:31.617)
Well, is it shocking to see? I think it's interesting. That's it. That's it. That's a challenging. If he knows that rates are going down, can I ask him who's going to get elected for president? Because I'd love to know that one too. Because if he's got that crystal ball, I want to see that crystal ball. That's not called investing. That's called speculating. Let's let's separate the two. If you're going to tell me something as an absolute, then what's your plan if rates do go up? Oh, then think of that.

Great, you're telling me they're not gonna go down, but if they do go up, what's your contingency plan? That's what I would ask that group. And if they don't have an answer, then you obviously, that's how you steer away from that conversation.

Ash Patel (31:11.294)
Yeah, that's the perfect you're right. That's the perfect question to ask. Hey, that's great, man. And you know what? I hope rates go down too, but you're right. Do you know, ask them, okay, what if they go up a half point? What's, what does this do to the deal? Oh no, they won't. All right. Guess what? See you later. Yeah. Gino, do your investors like you guys doing full recourse loans on deals?

Gino (31:21.523)
Yes. They won't. Ciao. Check mark. Never talk to that person again.

Gino (31:37.687)
Our employees, they do. I mean, that's how we're doing it right now. But like I said, our price points, we're buying these things at such great price points and we're turning them quickly enough that within 18 months, we're going from community or credit right to agency. So we're able to do that. And it's one of those things where as you become larger and you're a larger syndicator, you have more reach. Maybe you have less investors to deal with, you go from people, if you're raising, let's say, six million, maybe you find two or three investors that are willing to say, hey, I'm willing to do recourse on this thing, because I know you guys, I know your track record, I've been in a couple of your deals.

This may not work with somebody who's, you know, starting out in the syndication space early on, but later on, and then you're gonna say to them, hey, full recourse, we're taking a lot of the risk as well, we're signing on the debt, there's not gonna be as much recourse for you guys, because the majority is gonna be on our team, you can structure it that way as well, but I think, it's really a deal by deal basis and sponsor by sponsor basis.

Ash Patel (32:37.202)
Yeah, but on your deals, if you're doing full recourse, your LPs don't sign on the loan. They're not on the hook for anything. The reason I brought this up is on a recent raise, this question came up a lot. All of our deals have always been full recourse because there's no bank, there's no big banks, there's no secondary markets for doing value add, non-residential commercial. With your loans, they're essentially commoditized.

There's a secondary market that they can trade on. But these investors really like the fact that it's us, the managing partners that are signing personally on the loan. If the deal goes south, I can say, all right, bank, you can have this one. And investor, sorry, we'll get you on the next one. Like we don't have that luxury, right? Our, our, our livelihood or all of our assets are on the line on this. Um, but you mentioned that you can go to agency debt in 18 months.

What's the benefit of doing that?

Gino (33:37.623)
Well, once you go from the fall, going from recourse, then that goes to the non-recourse component. It gets off our balance sheet as well. So we can continue to buy deals, number one. Number two, the terms are so much better. Agency will bring you to 30-year amortizations. You probably can get another three, four, five years of interest only on the deal. You're gonna, it used to be that agency had better competitive lower rates. Not so much the case right now. We did an agency loan in August of last year.

We had 140 unit scattered site. And what we did on that property was rates had just dropped. We did a 55% loan to value agency loan on this thing. And it had a 5.2% interest rate, 10 year term, all IO. And people may be saying, why would you do 55%? Well, right now, we're gonna, our intention is to hold this asset for the next 10 years. It's in a great location, 55%, very little risk, 10 years of interest only, we love all those components.

And I think the rate was 5.2%. So anything around the 5% mark, it works really well. That thing is in a cash flow for us. It's gonna be a beautiful asset for the next 10 years. So for us getting it off of getting it off of community or recourse going to non recourse and getting those terms for us worked really well. And the reason why we got such a low rate was that LTV dropped from 65 or 70. We were willing to take only 55% because we had a lot of equity in that deal. We didn't wanna cash out, you know, 75 or 80, we want to keep enough equity in there where the things and continue to cash flow really nicely as well.

Ash Patel (35:11.806)
Thank you for answering that and clearing that up. Are the smaller regional local banks harder to deal with in agency?

Gino (35:19.931)
Agencies gotten to be really challenging over the last 18 months because they know there's a lot of scrutiny going on in these deals. They're really looking at the operators right now. They want more LTV. They want a lot of docs and where they've been burned and where a lot of operators have been burned is buying these properties that are older, not enough capex. So they're requiring a lot of these people to buy these assets to have enough reserves, which you had just been talking about. Now, the community banks is very interesting.

Two or three years ago, credit unions weren't that much of a big deal in multifamily. It's because community banks were great. But when rates shot up and all of a sudden, everyone's taking their money out of these community banks and going to the treasuries, community banks are having to go to the Fed funds and borrow their rate from Fed funds. So their interest rates weren't as competitive. And the credit union, which is not a bank, right? They're not there to make a profit. They're there to serve their members.

They come in with these attractive rates. Their terms are like a half a point lower. They're willing to go to 25-year AMs. Some of them are even 30-year AMs, two years of interest only. They've become very competitive in the multifamily space to be able to run the right deals.

Ash Patel (36:28.126)
Yeah, that's great. So we've always used them, right? Do you have to shop multiple small banks or do they all have the appetite for multifamily right now?

Gino (36:37.223)
You, that is a great question. You really need to go out and you really need to Google community banks and you really need to wanna speak to the decision makers, but you wanna see some banks like land, some banks love single family portfolios, some banks specialize in multifamily. Find the banks that specialize in whatever niche you're in and try to find as many as possible. The one of the first lessons that I learned in multifamily investing with Jake is everything in real estate is negotiable.

So, when a bank gives you a term sheet, you look at the term sheet and go, can you do any better? This is what I got. And they will negotiate for your business. What they're looking for is they're looking for demand deposits. They're looking for your accounts, your savings accounts, and your checking accounts. If you can bring that over to them and sweeten the pot for them, put them up against each other. And then when you do find one, like we found Mountain Commerce in Knoxville, we love that bank. We've been using them for the last 10 years. That's what you said, is it easy to work with? Our community bank is so easy to work with.

They underwrite deals, they know our appetite, they know our risk tolerance, we'll send them a deal over. They pretty much approve it right on the spot practically. And it's just easy to work with them. But you need to go out and find multiple sources, whether that's credit unions, community banks, and ask them the offers. When I got into the business, a 25 year Ann was practically unheard of from the community bank until we started asking.

And lo and behold, once you start asking enough, interest only from a community bank, that didn't happen 10 or 15, it just didn't. Then all of a sudden you start asking and the market comes into play where Freddie comes in, all of a sudden credit unions come in and they start offering different terms, the community banks have to sharpen their pencil. So to answer your question, offer and go out and seek multiple bids on your finance.

Ash Patel (38:20.422)
Yeah. And you know, you've heard the term a lot. Real estate is a people business. That's what community banks are, man. You build relationships with the loan officer, the president, everybody in there and all the decision makers are usually under one roof, which is great. And once you build that relationship, you know, when I submit deals to our bank, it's literally here's a contract we want to close in 45 days. Cool. It's you know, they don't need to underwrite everything meticulously every time, right? They know your track record.

There's the two caveats to watch out for. One is a lot of these smaller banks have a legal lending limit. So they can only lend so much money to one person. Make sure you find a bank that has a high enough.

Gino (39:00.035)
Yes. Great point. I love that, because that's what happened to us. At one point, we got tapped out from Out in Commerce because we're too risky for them right now. All of a sudden, their exposure with Jake and Gino's like, time out, guys. There's a little too much loans here. And it's like, oh, we gotta go out? So when we roll these loans out from community, going to agency, it's going off their balance sheet as well. So we're able to replenish and do more funds from the community bank. That's a great point, Ash.

Ash Patel (39:25.322)
Yeah, and the last one is just that a lot of them will have a geographic limit, right? They may only do it in state, in certain counties, or for an experienced operator, someone that they have a relationship with, they will do out of state deals for that person. But you've got to find that out too, because if you do deals all over, you might need to find community banks all over, or find the right one that is willing to lend in those areas that you invest in.

Yeah, listen, man, hey, great talking to you again. This is these are just fun, great conversations. I know your time is very valuable. So thank you so much for taking the time out and just having a great conversation with us.

Gino (40:06.855)
Ash, anytime you want me to come on, I will come on and banter about real estate because not all syndicators and not all real estate investors are screwing up. There's so many people that are doing so many amazing things in this space. And we really should not lose sight of that because, you know, as you say, the media, we always like to focus on stuff that's going bad. There's a lot of really great people doing great things in this business right now. So anytime you wanna talk about real estate, you hit me up and I'll be here for you, brother.

Ash Patel (40:36.306)
I think we just get it on the calendar for a couple months from now. Let's just do it again. Do you know again? Thank you so much and best ever listeners. Thank you for joining us. If you enjoyed this podcast, please leave us a five star review. Share this episode with someone you think can benefit from it. Also follow, subscribe and have a best ever day.

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