Barrett Linburg is the founder of Savoy Equity Partners, a real estate private equity firm focused on developing and renovating multifamily properties throughout the Sun Belt states. In this episode, Barrett discusses the benefits of properly using the opportunity zone tax structure and what gave him the confidence to dive into ground-up development.
Barrett Linburg | Real Estate Background
- Founder of Savoy Equity Partners
- 915 ground-up development units (10 projects)
- 503 ’50s/’60s renovation units (16 projects)
- Based in: Dallas, TX
- Say hi to him at:
- Best Ever Book: The New Kings of New York by Adam Piore
- Greatest Lesson: Continue to do a lot of reps. Keep looking at deals and practice underwriting so you can keep a pulse on the market.
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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 today with Barrett Linburg. Barrett is joining us from Dallas, Texas. He's the founder of Savoy Equity Partners, a real estate private equity firm focused on developing and renovating multifamily throughout the Sunbelt states, primarily using opportunity zone tax structures. They currently have 10 ground up development projects totaling 915 units, with the first units being delivered very close to the airing of this episode. They also have 16 projects of 1950s and 1960s construction apartments totaling 503 units. Barrett, can you give us a little bit more info about your background and what you're currently focused on?
Barrett Linburg: Sure. Well, background can go back a long way... But I've been in the real estate business since 2005, right after I graduated college, started as a commercial mortgage broker, bought my first property in 2012, which was an eight unit property here in Dallas. I fixed it up, bought it with -- my wife and my mother in law was the equity. So bought it, fixed it up, leased it up, and stabilized it and sold it in 366 days. So that was really a quick full-cycle deal and proof of concept. We made some mistakes along the way, surely, but it quickly showed us, number one, that we enjoyed doing it, number two, that it could be very profitable, and number three, that we wanted to do more of it. So from there, we bought a 13-unit building...
Slocomb Reed: Barrett, hold on... This is the first time in over 200 episodes that I'm interrupting a guest during their introduction of themselves... But I have to pull something out of that first story. Now, you started as a commercial mortgage broker. Kudos to you; also, that gave you some particular insight into this industry. But did you say that on your very first deal, first of all, not only was it an eight-unit fixer upper, but also you had an equity partner in your mother-in-law who brought the money for the deal?
Barrett Linburg: [laughs] That's right.
Slocomb Reed: So Barrett Lindbergh's first deal is a local eight-unit that needs to be renovated, and he brought in an equity partner. Did you use any of your own capital as well?
Barrett Linburg: Yeah. The backstory is my wife was gifted a house when we got married. Her grandmother had bought her a house that was free and clear. So we refinanced the house, and that was our half of the equity. So after some conversation - luckily, my wife believes in me wholeheartedly, so we agreed I'd learned enough about the real estate business at that point; her family had been in the real estate business, so we took that leap together. We were half of the equity. My mother in law, her mom was the other half of the equity, and we went and we did it together. And really, I had something to do with it. I found the deal, financed the deal, but my wife was the construction manager and property manager, and did a bunch of the heavy lifting as well. So it's a neat story.
Slocomb Reed: That's awesome. Let me let you get back to your introduction. You were saying a 12-unit was next.
Barrett Linburg: Sure. Then we did a 13-unit building that wasn't too far away, and the story was very similar. Rolled the equity from the eight-unit deal into the 13-unit, and then my parents decided they would join us. They didn't join the first one, but they joined the next one. So that one had three investors - my wife and I, my mother-in-law and my parents, and it was a very similar scope: renovation, lease-up, and then we sold it. I think that one took 13 months, instead of 366 days. So every deal we did -- and then we did 65 units, then 116, and we just kept growing.
Every deal we did grew a little bit in size, a little bit in complexity... But it was really the same formula. We were doing local deals, neighborhoods that we understood pretty well, and we would do some level of value-add, repositioning, re-leasing, and then we would either refinance them or sell them. And there wasn't a whole lot more to it. As we grew, as we did bigger deals, we generally needed more money, and we were making more money as the deals grew, so we would invest a little bit more... But we also grew our investor base, so our friends and family circle got a little wider, and sometimes people were referred to us, so they came in... But even then, it wasn't a whole bunch of people that were investing with us, and that was just fine with us. We liked it a whole lot better when it was the best man at my wedding and things like that joining us.
So then the next progression in what we did is Dallas was getting hotter. We weren't the only ones that had figured out that value-add real estate in Dallas was a good thing to be doing. So as we underwrote new deals, it got harder and harder to make them pencil. But we were used to these big returns, so we said, "Well, how do we continue making great returns, but feel safe about starting these deals in the first place, so we're not losing all the money that we made over the past 4, 5, 6, 7 years?" So that's when we started going into these more esoteric structures. So we learned about historic tax credits, we learned about fractured condo deconversion. We started doing bigger gut renovations of deals, and pioneering into new neighborhoods, and things like that. And eventually, fast-forward to 2020, we learned the opportunity zone tax structure. That's the first structure that's really scaled for us.
Historic tax credits - there's not many old buildings in Dallas, so we couldn't do a lot of those. Fractured condo deconversion - it worked really well, and it's a complicated structure, but it's hard to find good projects, so we couldn't do a lot of those. But once we did our first opportunity zone deal, we realized, number one, it works really well. Number two, there's a lot of people who have tax problems and wanted to invest with us. And number three, it does scale. So the opportunity zones are plentiful, and the projects that we can find are also plentiful. And we really hit the gas pedal and have been going hard the past couple of years. So that's kind of how we got over the past 10 years our investment from an eight-unit to now working on more than 1000 units. That's how we got here.
Slocomb Reed: Barrett, there were a couple of things in there that I want to highlight. First, you've been in the game longer than I have. But I've been in the game long enough to have recognized in myself and my investor friends and clients that feeling -- I'm not in Dallas, I'm in Cincinnati, Ohio, but that feeling that as 2016 turned into '17, '18, more people were investing, cap rates were compressing, cashflows were compressing, and a lot of us were thinking the market was topping out. Of course, hindsight being what it is, we know that that's not what happened.
To summarize, Barrett, it sounds like as you were experiencing that in Dallas during those similar years, that we can now look back on and realize we had a lot of runway left before what is happening currently in 2023. Looking back, if I can summarize what I just heard you say, it is that you recognized that in order to continue achieving the returns that you had grown accustomed to with your first few deals, as the market brought in more buyer demand, you had to find ways to niche down into products that other people wouldn't either have the understanding of, or the capacity for. And you didn't say directly, I don't think that that led you to ground up development, but clearly it has, and also the opportunity zone tax structure, which adds a layer of complexity while also adding profitability to your deals. Is that fair?
Barrett Linburg: Yes, that is fair. And I think ground up development specifically is partially because of opportunity zones, partially because of where the market led us. And I'll give you a specific example. In 2020 or 2021 I went and I got a BOV, a broker's opinion of value. So I asked a broker that I trust to say, "If I were to sell this today, what would it be worth?" And this was on a 26-unit class C deal with a boiler and chiller built in the 1960s. And he said, "If you were to sell this today, it would be worth $175,000 a unit", which in Dallas is a really big number for a class C 1960s deal. And I think per square foot, it was $280 per square foot for this building. And that was an enormous number. I don't usually get surprised by numbers, because I'm actively in the market, but that one really shocked me.
Slocomb Reed: When was this?
Barrett Linburg: This was in I think 2021...
Slocomb Reed: Gotcha.
Barrett Linburg: ...or really near the top. But at the same time, I'd started talking to some developers about partnering, maybe building some stuff in the neighborhood that we were doing some stuff in... And a light bulb went off and I said, "Hang on a second... I can build a brand new product, all in for the same amount per square foot that I can sell for five blocks away." And we're talking about 60-year-old chiller boiler stuff, versus 2022 construction stuff. And yeah, that was a lightbulb moment, where you say "Something is wrong with this market." So that was a catalyst for going into new development, but also within the opportunity zone tax structure, new development can make a whole lot of sense. So it was a combination of both of those things.
Slocomb Reed: Barrett, I want to get to the opportunity zone tax structure in a moment, but first, not everyone who says "I could build apartments for less than that" actually means it and goes and does that. So there's a combination of some knowledge of the cost of construction that you had to have already. And for the last few years - I just said in the bio that you're delivering your first units out of this development starting in 2021, or '22, right around the time that this episode airs. So the biggest struggle is probably not even controlling timelines nowadays, as much as it is controlling costs, especially labor costs, with construction. So I want to ask two questions. The first is "What gave you the confidence to dive into new construction in the way that a lot of us have thought of doing?" And how is it that you've been able to control costs in this crazy inflationary environment we've been experiencing for the last two years?
Barrett Linburg: Sure. Part of what I mentioned earlier is that one of the things that we've started doing over the years to kind of drive returns that we felt were above market is that we were doing gut renovations of 1950s and '60s buildings. And we're continuing to do that today. So my business partner is a guy named Seth Bay, and he runs a management company called India Property Management. And on these deals that we've been doing, we've been self-performing as the GC on these 1950s and '60s deals. So we would go in and it used to be 40,000 a unit, and then it was 50,000 a unit, now it's 60,000 a unit, is the cost to gut-renovate one of these old buildings. And by gut-renovate I mean foundation work, and roof work, and we'll reframe inside the units to modernize the floor plan, we add a washer/dryer, all new mechanical, electric, plumbing, soup to nuts... It's a new building inside of an old shell.
So we've been doing that for a long time, and self-performing. We have a lot of crews - electric, plumbing, framing, that truthfully only work for us, we keep them so busy. So we already had that before we ever thought about developing. And we were used to spending a whole lot of money every year. So when we thought about developing, there were a couple of things that we considered. Number one, do we want to do this on our own? And we quickly came to the conclusion that although we could, we didn't want to. Because to take investor money, we wanted to feel like we were at 100% in control of the project. So we went out and we found people that we could bring in to the general partnership, that had a ton of experience building ground up. That way, we wouldn't be trying to do something with other people's money for the first time and potentially hit a landmine.
So we found two guys who have built thousands of units between them, and we're partnering with them on our ground up projects. And that's been very successful for us so far. And number two, we've hired general contractors, third party GCs that are handling the construction. However, we are using our base of subcontractors to self-perform a handful of those trades. So our electrician, our plumber, our flooring, our drywall, some of the really big-ticket items, we were able to look at the GCs bids and say, "Hey, we can beat that, we can beat that, we can beat that. Let's put our crews in there." And that brings our cost of construction down.
And we have internal crews as far as logistics to get appliances and toilets and light fixtures and all that stuff, so we were also able to price-check the GC on all that stuff as well. So it really allowed us to have this certainty about timing and cost for development that a lot of other first-time groups might not have had.
Slocomb Reed: Why did you decide to work with other general contractors, even when you were bringing almost all of your own subs?
Barrett Linburg: I think primarily it was because we just had never done a full roundup project before. The dollar amounts were bigger, the way that the backend accounting is set up is different... There's a few nuances to it, so we said, "Listen, we're going to hire a third party for this first project. We're going to watch very carefully how everything's done, and we're going to see if in the future this is something that we want to continue to use a third party for, or if we're ready to do it in-house." And to be honest, I think in the future it's likely something that we do in-house; whether that's on our next deal, or three, four or five deals away, I don't know. But likely we do bring that in-house at a future point.
Slocomb Reed: What I'm hearing is that there was an expertise that you weren't confident that you had already, so you went and found the people with that expertise, hire them specific to that expertise, and now that you've had the opportunity to watch them work, gain knowledge and experience from working with them, you're likely to bring that expertise in-house.
Barrett Linburg: Yep, you nailed it. And I think it's important especially when it's not all our money, or mostly not our money, to be self-aware enough to say "Even though it's going to cost money, we need to bring those people in, because it's going to make the project more successful."
Slocomb Reed: That makes a lot of sense. Barrett, I've been down the opportunity zone rabbit hole a few times now personally, and a couple of times on this podcast; generally speaking, and not remembering all of the details from those conversations years ago now, my understanding is still that the real benefit of the opportunity zone tax structures is for people who have realized capital gains outside of real estate, that can redeploy their gains into real estate, and over time have the tax burden of those gains alleviated, because they're investing in an opportunity zone through the appropriate structure. Assuming I'm right here, Barrett, can you put some meat on those bones and explain further why this is so advantageous to you all? And if I'm just flat wrong, told me that too, please.
Barrett Linburg: No, you did a great job of explaining at the very highest level. So let me add quite a bit to it.
Slocomb Reed: Please, yes.
Barrett Linburg: Number one, the opportunity zone tax structure is beneficial for anyone who has had any type of capital gain, and that can be a short or a long-term gain. So someone who flipped a stock and made money in one day, or someone who had held real estate for five years as an LP, and then it was sold, and not sold in a 1031 exchange, and they got a big capital gain as a result of that. So no matter how the capital gain comes, short or long-term, that gain is now eligible for opportunity zone investing. Opportunity zone investing is tax-advantaged for two big reasons. Number one, if you make it an investment into an opportunity zone fund, then you don't owe the taxes the next April; you owe those taxes in April of 2027. So you get a deferral of the tax due...
Slocomb Reed: A four-year deferral.
Barrett Linburg: Well, it's a calendar date, so it's actually April of 2027. So the sooner you make the investment, the longer the deferral is.
Slocomb Reed: Gotcha.
Barrett Linburg: And that's an interest-free loan from the government, so that's great, especially when interest rates are so high. The bigger tax reason to invest in an opportunity zone is that if you hold the investment in an opportunity zone fund for 10 years or more, then when you sell, you get to step up to market value. Now, that's a technical term; the only other time the IRS gives you the opportunity to step up to market value is when you die. So it's a very big deal.
Now, there's two benefits that come from stepping up to market value. Number one, you do not pay capital gains tax when you sell. That's a big one. Number two - and real estate guys, we know about this, but you do not have to recapture depreciation when you sell. So that's a very big deal as well. Because within an opportunity zone fund, we go develop a new apartment project, it becomes worth a lot more money, and then we sell it in 10 years - that's great; we don't pay capital gains tax on that gain. But even - not more importantly, but maybe as important, we can mostly depreciate that building over a 10 or 15-year hold period, we can use those depreciation losses to offset income that we have over the 10 or 15 years, and in a normal deal, you have to recapture that at a 25% rate when you sell, but in the OZ structure you do not. So you get this nice little tax credit, essentially, that doesn't exist any other way. So that's very beneficial.
The other big thing about the OZ structure that most people don't understand is say you develop this apartment building, and then after year two, or three, or four, the apartment building is worth a lot more than you invested into it, and you can do a cash-out refinance. Well, that's great. Well, now you have a couple different options. Number one, you could just distribute that money to yourself. And just like any other cash-out refinance, that's not a taxable event. However, if you leave the money in your opportunity zone fund, and you go do another deal - well, then that next deal you're also not going to pay capital gains on that when you sell it, and you're also never going to have to recapture depreciation on that next deal. So it's like the BRRRR method is supercharged by the opportunity zone tax structure, and it's really quite phenomenal when you model it out. That's a rabbit hole that I doubt anyone's taken you down before, Slocomb, but it's very interesting when you go through it mentally, or even when you put it into an Excel model.
Slocomb Reed: Just a quick point of clarification - you cash-out refi a property that you are holding within an opportunity zone fund, you leave the capital in the fund; are you required to continue investing that newly refinance out capital in other opportunities zones?
Barrett Linburg: So you're not required to put that money back into an opportunity zone deal. You could distribute it to yourself. However, if you wanted to invest it and get the opportunity zone tax benefits on the next deal - yes, you would have to build or renovate a project that is in and opportunity zone.
Slocomb Reed: Barrett, I asked my question incorrectly, but you still answered it correctly. Thank you. Last question here, understanding that you're delivering your first new construction units here presently... Is the targeted hold period 10 years and one day, is the targeted hold period forever, or is it something in between? And why.
Barrett Linburg: Well, let me step back. The opportunity zone program sunsets you in 2047. So an opportunity zone investor could theoretically hold until then, and take the market step up in value in 2047. That being said, Savoy Equity Partners deals, we tell our investors that we plan to hold between 10 and 15 years, and we will look for an exit point at 10 years in a day, and if we feel like the market is really good, then we'll probably pull the trigger. But if the market feels like it does today, then we're probably going to wait to sell. So we'll just kind of feel that out, and five years is certainly a long enough window to find an exit window.
Slocomb Reed: That makes a lot of sense. Are you ready for the best ever lightning round?
Barrett Linburg: Sure, go ahead.
Slocomb Reed: What is the best ever book that you've recently read?
Barrett Linburg: Just finished "The New Kings in New York." It's a great book with a lot of exciting stories. You learn what to do, what not to do, how markets can crush you... I think it's a good one.
Slocomb Reed: Who's the author?
Barrett Linburg: I don't remember. It's a lightning round.
Slocomb Reed: That's a good answer. What is your best ever way to give back?
Barrett Linburg: I've got two daughters; I have an eight-year-old and a six-month-old. So volunteering with their school, helping with adventure princesses... I've been limited to giving back that way recently.
Slocomb Reed: I understand the feeling. Barrett, thus far in your real estate investing, what is the biggest mistake you've made and the best ever lesson that resulted from it?
Barrett Linburg: It was early on... Well, I didn't say a 31-unit deal, but somewhere in there there was a 31-unit deal. And we totally just screwed up on figuring out what the scope of work should have been, and also budgeting for that scope of work. So essentially, it was a renovation deal, we got in there, started doing the work, and then realized that we needed to do a whole lot more work than we originally expected. So that taught us two things. Number one, instead of just putting lipstick on a pig, doing a little bit of work, we needed to usually plan on these 1960s buildings to do a full gut renovation. And number two, if you're going to do a full gut renovation, you need to have the money to do a full gut renovation. On that project we didn't have it either, and that is one of two capital calls that we've ever had to do. The other one had to do with an insurance loss. Luckily, on that deal for me the equity was my parents, my mother-in-law, my best man, and one other group, so it was a pretty easy conversation. But it was still a big mistake, and a reason that we make sure to budget correctly, and over-capitalize the deals as far as the contingency and things like that, ever since that deal that was in 2014.
Slocomb Reed: On that note, Barrett, what is your best ever advice?
Barrett Linburg: I think it depends the audience that we're talking to. People who are just beginning, and also people who are very seasoned in business reach out. But I think in times like these, when there's a big gap between buyers and sellers, when volume of sales is down very significantly, I think what I'm personally doing is continuing to do a lot of reps. So looking at every deal; listed, unlisted, anything that crosses my desk, I'm underwriting it. And the reason for doing that is because it helps you keep your finger on the pulse of the market, and figure out where people are willing to transact, how people are looking at deals... And the only way you're going to know when the market has reached an inflection point is by constantly underwriting and doing deals. And it's also good to just keep your memory sharp, and keep your underwriting skills sharp. So that would be my best advice for the current environment, is just continue underwriting, continue modeling deals, and that will allow you to keep your finger on the pulse and keep your mind sharp for when the market has turned enough to transact significantly.
Slocomb Reed: Last question - where can people get in touch with you?
Barrett Linburg: Sure. I'm easy to find on Twitter, and LinkedIn, and also on our website, which is SavoyEquityPartners.com.
Slocomb Reed: Those links are in the show notes. Barrett, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a best ever day.
Barrett Linburg: Thanks so much, Slocomb.
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