Eric Barvin (03:18):

I think there could be capital movement. I don’t think we’re going to have the single family problem we had in 2008 where there’s a tremendous under-supply of single family housing. In addition, most single-family mortgages are fixed rate loans and those homeowners aren’t going to be impacted by the increase in rates that we’re seeing today.

Robert Leonard (03:38):

On the more commercial side of things?

Eric Barvin (03:41):

Yeah. On the commercial side, there’s still liquidity in the system. Back in my Capmark days, you could not get a loan. Today, you can still get loan. Now, the interest rate’s higher. But the question, the real overall question, is how long will interest rates be higher? And is this new normal? So people got used to low rates and values definitely went up due to low rates. So the question will be, is this temporary? Is this permanent? And then I think you have to wait to see how values readjust.

Eric Barvin (04:07):

Our focus is on multifamily real estate specifically. And the case for multifamily is very strong in terms of renter demographics and demand. From a national perspective, the 2020s are set to be the decade for multifamily because you have two of the largest demographic populations, the Millennials and the Gen Z population, both becoming renters in this decade. And so demand throughout the decade, at least in the high demand markets, should be consistent. And as wages increase, if wages do increase with inflation, the rents, in theory, should come along with those wages. And in theory, coming out of this or in the future, when the market kind of stabilizes, values will be higher. Now in the interim, they may be lower, but you look three, four, five years out from now, I think revenues will continue to grow.

Robert Leonard (05:02):

Back then, you were just out of school. So I’m guessing you didn’t have much experience or capital to start. How did you get start with your real estate investing firm in the depths of the great recession?

Eric Barvin (05:12):

Yeah, so I had very little experience and very little money of any … I probably had no money. I was fortunate to have this kind of knowledge of how to finance apartment communities. That was kind of a skillset that I had learned at Capmark. And I ended up getting laid off in June of 2009. Capmark went bankrupt. And a fortunate thing for me, at least, everyone in the office got a job at a competing mortgage banking firm. And I was the youngest guy and they said, “Eric, you’re not very good analyst. We’re going to let you go.”

Eric Barvin (05:42):

I was unemployed. It was a tough time. My dad, who’s unfortunately passed away, but at the time was also unemployed, had got laid off after working for a company for over 20 years. And I was trying to figure out what to do with my life. And I figured that this was the time to do something. I didn’t know much about real estate finance at the time. Had a friend who was also unemployed, who tried to partner with me, and we started looking at projects together. We found a piece of property that we took to an investor. The investor declined to do it. And my friend went to go build senior housing. And so I was on my own again.

Eric Barvin (06:16):

And then I started looking at small apartment communities, like eight units, 10 units. And I was having trouble making the numbers work now that I had learned how to get what my target should be on cash flow and things like that. And I was very fortunate that while I was doing that, I had reached out to someone I tried to get a job with when I was in college that acquired about 7,000 units from 2004 to 2007 and was having a lot of difficulty in 2009. And we met up and told him that I was going to go my own, that I was going to start my own company. And he said that I should really focus on larger properties because that’s where the stress is and that’s where the nonrecourse loans are. And I said, “I don’t have any money.” And he said, “If you could raise a half a million dollars, I think you could buy a 200-unit property.”

Eric Barvin (06:57):

At that time. I kind of shifted my focus to look at larger properties, one, because not … just because of the size, but you have more opportunity with scale. The values go up. There. There’s a lot more opportunity. Then secondly, the operations are easier because you can hire a third party. You don’t have to be as involved as you do on a small property, where you’re really the one who’s signing up, responding to rent requests, and maintenance, and things like that. So I ended up focusing on large-scale multifamily. Toured a lot of properties. Didn’t have a lot of success. Had a lot of pitfalls along the way.

Eric Barvin (07:27):

And then after about six or seven more months, I got a call back on an offer that I made for a property in Baytown. It was a foreclosure. Wells Fargo was the lender. The loan was, I think, 3.6 million. The property had sold previously at maybe $5.6 or $6 million, and I offered $1.35 million. It was a low offer, but there was no financing contingency. I learned along the way about making offers and kind of the touch points for a seller. And so financing contingencies is always going to be a touchpoint for a seller, and so I didn’t offer one, but I gave myself six months to close. They took another offer. They couldn’t get financing. And they called me back for about a month and said, “We’ll take your offer.”

Eric Barvin (08:13):

One of the mistakes that ended up working nicely for me is that I said, “Well, it’s been a month and the new price is 1.2 million that I’d offer.” And they took it. And that was the start of my real estate career, was a 150-unit property in Baytown, Texas. And I was fortunate I was able to get a loan to buy it from Frost Bank. There’s a well known bank in Texas. And a friend of mine was a banker there who got me the loan for about $955,000. And did a rehab, and so raised another half a million dollars. I got a loan from my grandparents for a hundred thousand dollars and then raised the rest. And that was the first deal I ever did. It was about 50% occupied, but it turned out to be a great deal and the only deal I’ve ever done where the cash on cash in the first year was a hundred percent. Operating the property, we were able to distribute back to half million dollars through cash flow. So it was a very, very good deal.

Robert Leonard (09:03):

How did you raise that capital? Not only with your experience, but also just given the times that it was?

Eric Barvin (09:09):

Just went around and talked to people. Friends. Parents. I’m Jewish, and so I went to shul and talked to people at shul. Just went around and kind of explained what I was doing, why I was doing it, where I saw an opportunity. And it was kind of, I don’t want to say it was a no brainer. Looking back, it was a no brainer. But people trusted me. You can’t tell on the Zoom call. I’m six-foot-seven, and I’ve always come across as, I guess, as a trustworthy person. I’m ethical, hold my reputation very, very highly and take a lot of responsibility for actions around me. I think that people saw that and said, “Look, if we’re going to trust anybody, we’ll trust Eric.” And so it wasn’t a lot of people, but I didn’t need a lot of money. I only needed $400,000.

Robert Leonard (09:49):

And what did you end up doing with that deal? How long did you hold it? Did you sell it? Do you own it today? What does that look like?

Eric Barvin (09:55):

I sold it after three years. I thought I was getting an amazing … We ran it for maybe 8,000 a door or something. I sold it for 36,000 a door. I thought it was like, this is the home run of the century. At least, I don’t know what it’s worth today with rates moving, but at least six months ago, it was probably worth a 100,000 a door. So I don’t know if that was the right move. But as I was growing and kind of evolving, we did a lot of distress acquisitions and rehabs in, say, from 2010 to 2013, and then late 2013 transition to kind of Class B properties. Slightly higher end demographic, much better locations, nicer properties.

Eric Barvin (10:33):

And the first big Class B property I bought was an 810-unit property in Houston. And I needed to … It was 18 million of equity. My biggest equity raise prior to that was about $3 million. And I was speaking to an investor, a mentor of mine, and he said, “Well, I think you could do it, but you’d have to invest 10% of the equity yourself.” And so in order to get that 10%, I had to sell this property. And so I sold it and was able to … It’s kind of this amazing story where the timing wasn’t great. I had to go hard on my earnings money. Prior to this, the buyer of this Baytown property going hard on their earnings money, and I needed the money to buy the next deal. But it all worked out for the best. And thank God.

Robert Leonard (11:19):

Yeah. I often ask people if they regret selling some of their properties. And it’s interesting because those properties a lot of times went on to do really well, but then they say, “Well, that property has done well, but what about what I did with that money?” And so it sounds like that deal probably would’ve been great for you if you held it for a while, but it’s not necessarily … That’s not the right way to look at it. It’s, what did you sell? Or what did you get? What money did you get from that and what did you turn that into? It’s kind of the better way to look at it, like you said.

Eric Barvin (11:43):

I think so. The property, the first property in Baytown, even though the value has gone up, it’s not special real estate. It’s not a great location. There’s nothing special about it. And so what we’re trying to find is kind of unique real estate that stands the test of time. And the property that we bought is the property we could … I mean, we’re the third owner. It was built in the seventies. We’re the third owner ever of it. But we’ve owned it for 10 years now. We could continue owning it for another 10 years. It’s a great property. It fits the demand very well. Rents continue to grow there. It’s been a great investment.

Eric Barvin (12:17):

With scale, you get higher returns. If you look at that project, the multiple is not going to be … We’re not going to 6X the price. I mean, we paid 60,000 a unit for that apartment community. And today, it’s probably worth … Three months ago, it was worth 150,000 a unit. Today, maybe 120,000 a unit. But when you take that increase and you multiply it by 810 units, it’s a lot bigger number than when you take the increase on 158 units, if that makes sense.

Robert Leonard (12:45):

Part of the reason that people are a bit concerned about the real estate markets right now are because of rising interest rates and inflation. Talk to us a bit about what you’re seeing in the debt markets and your thoughts on rising interest rates overall.

Eric Barvin (12:59):

One thought is there’s a portion of loans out there that are fixed trade loans. Like, we have a loan that’s 2.6% that matures in 2030. That’s fine. Like, you don’t have to worry about that. That’s not going to go anywhere. Where you do have some concern on refinances, or where you either have an adjustable rate mortgage, and your cap, right? So when you get an adjusted rate mortgage, you can cap the rate either at a fixed amount, 2%, or 2.5 or 3%. Now, maybe even higher. Or you can cap it on the yield curve, which is typically how we’ve done it, with different tools and whatnot. Those caps are going to expire. Two years from now, I think, our first cap starts to expire. Well, it depends what rates will be then because we will have to refinance. And when you refinance at a much higher interest rate, unless you can get that revenue growth to offset it, you may not get the same valuation and have trouble refinancing. So I think there’s an area of concern there or potential concern in the future.

Eric Barvin (13:58):

Right now, I’ll tell you, because of where interest rates are, we’re solving to a higher return in place than we would’ve been with lower rates. Just today, we were looking at a property … We had investment committee on a property in Dallas, and the return on cost was, say, 4.2% in year two. And I made the case that it can’t be 4.2%. It needs to be about 5.2%, and so we need to adjust our price downwards about 15 million, which is roughly, say, 12 or 13% of the purchase price, to get to a point where if we are stuck or if we remain with these kind of higher interest rates, that we’ll be happy with that investment. I do think that values in the short term at least will come down.

Robert Leonard (14:43):

And are you saying the return on cost has to be 5.2% because you’re expecting … or you need that to be higher than the interest rate you’re getting on your debt?

Eric Barvin (14:50):

Well, we want it to be higher. Yes, correct. There’s some room for catch up, right? Because it’s not a snapshot in time. We are buying properties that we think will have continued rent growth and make up for that increasing rate. But we want a path towards being above the interest rate for sure. Apartments are a good vehicle for inflation because you can adjust the rents. The rents are adjusted on the lease renewals, which typically every 12 months, and you’re adjusting rents weekly. I mean, some rents adjust daily depending on demand and whatnot. And so you do have a little bit more ability and a part you have a lot more ability and apartments to adjust rents than you do in, say, a retail center, office building, or an industrial part where typically those leases are much longer term and you’re stuck. I mean, if you’re getting 2% bumps on your renewal of your office lease and inflation causes a 6% cost increase, it is what it is. You’re going to be behind.

Robert Leonard (15:45):

Yeah, your margins are getting squeezed for sure. Sounds like you’re still buying deals. What kind of changes are you making, whether it be in terms of actions, like what are you changing on your actions, or maybe just philosophy towards your investment approach right now, given the market that we’re in?

Eric Barvin (16:01):

I would say that we’re changing our philosophy. Our philosophy has consistently been to buy, build apartment communities that stand the test of time and improve the communities that they serve. We’re looking for those kind of properties. In terms of value for them, there’s a term that I use called positive leverage. Typically, or at least in the past five years, when you buy an apartment and the cap rate is, say, 3.5% and you finance it at 2.8%, you have positive leverage, right? There’s a spread between your debt cost and your in-place return.

Eric Barvin (16:33):

Well, now that interest rates have risen so quickly, you have negative leverage. Your cap is say 4.2 and your debt cost is 5.6. That’s a problem. That’s not healthy. Unless you have this kind of a value add plan or a lease sub plan to stabilize the property to get you closer to your debt cost, you’re going to be behind the curve quite some time and your cash on cash is going to be impacted by that. We are buying a property now in San Antonio. It’s a very, very well located property, and there is positive leverage. It’s a low cap rate, say, close to 3.7%. But the debt is a loan assumption, so the debt is fixed at 3.2% for 35 years. We look at that as somewhat irreplaceable real estate and the ability to get positive leverage going in, amortize the debt, and provide cash flow.

Eric Barvin (17:31):

And I’ll tell you today, we’re looking at this property in Dallas. And I said to our team, the cash on cash is lower than the property we’re buying in San Antonio, and the property in San Antonio is amortizing the loan. It’s not interest home. So that’s part of the other reason why we kind of made the decision that we have to really drop the price, because if you’re not going to amortize the loan on top of it, you need to get a higher cash on cash number. When it’s interest home.

Robert Leonard (17:53):

We talked a bit about the acquisitions. I want to talk a bit about disposition. What is your disposition strategy? How do you decide if a property in your portfolio should be disposed of?

Eric Barvin (18:05):

We spend a lot of time. We have a lot of tools to focus on data metrics, things like job growth, population growth, who the tenants are, who the prospects are in terms of their education, upward mobility, rent-to-income ratio, things like that. And we sell properties when they don’t fit, we don’t see the future for them being totally different than the present. Sometimes it’s when the values are maximized. But in general, we do want to retain properties that are going to improve over time and that are in what we consider not irreplaceable locations, but very, very strong locations with barriers to entry. It’s hard in Texas. I will tell you that development is very rampant, so it’s definitely a hard place to find barriers to entry.

Eric Barvin (18:46):

We also look at kind of upcoming CapEx. We sold a couple properties last year. We’re selling two properties right now. And on the two we’re selling now, the CapEx needs have been substantial. And I think people don’t often realize that with older properties that the fundamentals of the property, the plumbing, the foundations, the gas lines, they start to break, the roofs, and they take a lot of capital to maintain them. Those kind of properties where we say, look, we don’t want to put in the additional capital. We’ll let someone else take on that. That’s we decide to sell it.

Robert Leonard (19:18):

Would you not get the return on the sale price if you were to undertake those projects?

Eric Barvin (19:22):

We don’t necessarily think so.

Robert Leonard (19:25):

And that’s obviously why you’re selling them and let somebody else kind of take care of them.

Eric Barvin (19:29):

Correct.

Robert Leonard (19:29):

One of the bullet points in your pitch to come on. The show that stood out to me is where you said that there is value in investing in top frothy markets. I don’t usually hear value and frothy markets in the same sentence. And most investors I talk to are looking for deals and bargains outside of the most expensive invest markets. Explain to us what you mean by there being value in investing in top frothy markets, and also how you identify that value.

Eric Barvin (19:55):

So I think the term frothy markets is … We look at it as a job growth market, the Austins of the world, the DFWs of the world, where there’s corporate relocations, where there’s tremendous job growth. Our focus is on kind of a specific renter profile. And our general belief is that the return, the investment, the collateral that you’re investing in with a multifamily community is tied to the renter that you’re renting to.

Eric Barvin (20:21):

So, for instance, we own property in Austin. I think 20% of the people work at Facebook or something like that. Google, there’s all the tech companies out of there. And that return should, in theory, be lower than if the majority of our property worked at Walmart. Not to say that Walmart’s not great, but just to say it’s a different renter with a different potential upside for future income growth. When we look at markets, obviously there’s this supply-demand factor to it. But we look at these markets as great places to invest because you’re going to ride the upward mobility of that demographic.

Eric Barvin (20:58):

The second thing that we focus on is the liquidity of the market property in Austin can be sold. A property in DFW can be sold. You may not like the price, but it can always be sold. When you go into secondary, tertiary markets, those markets … And the reason it can always be sold is because the capital buying those properties is institutional. It’s pension funds. They always are buying, and they always have more capital for multifamily, especially the kind of multifamily that we’re doing, the Class A, kind of well-located stuff. As you go to secondary, tertiary markets, there’s not as many buyers for that product, which is why the returns are slightly higher. Secondly, it’s a market that’s driven by very few corporate, very few employers. So if there’s something that happens to one of those employers, it can have a tremendous impact on that market in a positive or negative way.

Eric Barvin (21:46):

And then the other thing to think about is that the capital flow into those markets is from individual investors. If a situation like right now happens and the treasuries go up and people don’t need to go buy multifamily to get cash flow, well, then there may not be that many investors that want to go to those tertiary, secondary markets, or even lenders that want to lend in those markets, and the values there can collapse. And we’ve seen it collapse in my career. Whereas the values kind of in major markets and good locations, you’re always going to be financeable and there’s always demand.

Robert Leonard (22:18):

What do you think are the top three what you call frothy markets that you see in the US today?

Eric Barvin (22:23):

You know, look, Austin’s still a incredibly frothy market in terms of values. It’s cooling of now, I would say, with the rise interest rates and the impact of these tech firms, kind of the values kind of declining, but still very expensive on an in-place basis. As it relates to other markets, look, the historical frothy markets are always going to be the San Franciscos of the world, LA, San Diego, New York, anywhere where it’s hard to build. Boston. These markets are trading at very, very low cap rates. And the reason that they always trade very low cap rates is because it’s impossible to build. You’ll take a decade to get an apartment property entitled and lots and lots of investment upfront. Those properties trade at a low cap rate, probably the lowest in the country, because of those barriers to entry.

Eric Barvin (23:16):

Now, it’s more of a political question, is that right or wrong? In Texas, you can kind of build what you want. It’s very easy to build, but it’s created a lot more housing. It’s created a lot more affordable, kind of rentable market rehousing. But when you go into those markets, they don’t have that. They’re tremendously under-supplied in housing, which causes rents to rise. But it’s not organic. It’s kind of this manufactured market. It depends how you think about that. Also, those markets often have low property taxes. And as you look at an income state, like in Texas, we have high property taxes, and so I’d say somewhere between 20 to 30% of your expenses could be in property taxes, whereas in California, the valuations could be much higher because the property taxes.

Eric Barvin (24:03):

Now, the risk in that is that they change. They pass a bill, which they’ve tried to pass in the past, to increase commercial property taxes and bring them up to kind of more modern day times, which would impact the value significantly in those markets, which is why they haven’t been able to pass it.

Robert Leonard (24:17):

I tend to be out of luck, I guess. I’ve been involved with a lot of states that have high property taxes. I live in New Hampshire. We have very high property tax. I invest out of state in Texas and all of my properties have very high property tax. I’m like, man, what is with me and going to these high property tax markets? But yeah, Texas is definitely up there for taxes. Do you sacrifice some return on your properties because of these markets that you’re going into for maybe a little bit ease of management, quality of tenants, kind of headaches, things like that? Are you making a trade off there?

Eric Barvin (24:49):

I don’t know if I call it sacrifice or return. I’d call it different levels of risk. We’ve done everything. We’ve bought distressed. We’ve done tons of value added, value added like 5,000, 6000 units. We’ve done a lot of that. And there’s always risk of execution. We don’t use a lot of leverage, and to enhance returns, people do use a lot of leverage. And so I don’t think it’s an ease, or I think it’s … We’re trying to find the best opportunities for us for long-term appreciation. We’re not trying to maximize a value for over a two- year period or three-year period. Some people like to do that and you can get high IRR numbers. As you mentioned, you pay a lot of taxes. But you know, I think the beauty of real estate is consistent cash flow over time. And that’s been our focus, is to own well-located properties that cash flow over time. And I think over a long duration, you’ll see that the returns kind of average out.

Robert Leonard (25:42):

When you say you’re not using a lot of leverage, give me a ballpark of what that looks like. Are you 60% loan to value? 70%? 50%? What does that look like?

Eric Barvin (25:52):

So the property we’re buying now in San Antonio is 48%. We’ll use up to 70%. It depends on the project, right? So we’ll use more leverage when there’s a story to increase the revenue quickly. So, for instance, we used 70% leverage on a property we bought last year that was 50% occupied, that was in lease up. So there’s a case to be made that, look, you’re not going to get the full value today, but there’s a case to be made that within six months, basically I think even before six months, it was a hundred percent occupied, and you can go and start to look for refinance options. And so in those kind of situations, we’ll use a little higher leverage, but typically it’s probably between 65 and 55. In that range.

Robert Leonard (26:34):

Your initial outreach email also said that you have an ability to find value in properties when others may not see it, which offers the company an advantage in a competitive industry. How do you find value in properties that other people are missing?

Eric Barvin (26:49):

I think it’s by being a local operator. So we’re vertically integrated. We have property management in-house. We’re in DFW, San Antonio, Houston, and moving into Austin also, taking over property management there in the future. And by having eyes and ears on the ground, team members always in those markets, we can really invest in the process before we make an offer to really understand the rent comps, really understand the demand for that property.

Eric Barvin (27:16):

There’s sometimes also repositioning that others just don’t see. We bought a property in downtown San Antonio years ago that had very, very low rents. It was a market rate deal, but the rents were very low. It was old. It was a old, rundown property on, I mean, seven or eight acres in downtown San Antonio. And we looked at it. We saw that there’s the lowest rents in the market. There were two other properties that were built before 1980, and they were loft apartments renting for about 1300, 1400 a month, and ours were renting for 400. And so we were able to come in there, improve the property, and increase the rents very substantially, meet the demand. And I don’t think a lot of people saw that.

Robert Leonard (27:57):

Also back in … You mentioned you’re doing Class A properties now. Yeah. That transition happened back in 2018. You guys were doing C-Class properties back then. First, for those listening, who aren’t familiar with the different class types, break down the different classes of properties and then explain to us why you made this transition.

Eric Barvin (28:15):

A Class A property is a new property, a high quality building in a great market, great location. There’s good [inaudible 00:28:23]. There’s a strong renter demographic. Typically, that renter is paying somewhere between 15 and 25% of their income. They’re college-educated, working probably corporate America or an upwardly mobile job. A Class B property is a little older, maybe built in the early 2000s, or 90s, late 80s. Typically, these are seen as value add investments where people are going to modernize those properties through renovations and kind of close that gap between the A and B properties.

Eric Barvin (28:48):

And in Class C properties, those are at least 20, 30 years old. They have more … sorry, excuse me. Maybe 40, 50 years old, they have more kind of structural issues, right? So they may not have washer dryer connections. The ceilings might be eight feet instead of 10 feet. The renter’s blue collar, not college educated, probably paying 30 to 40% of their income in rent. And so we decided in 2018, I decided personally that I was not the best acquisition person. Not that I wasn’t good at it, but there were people out there that were better than me. And I brought on Susan Paul, who was our head of acquisitions, and she’s acquired 35,000 units in her career. She’s very well known in the brokerage communities. She’s very sophisticated.

Eric Barvin (29:33):

And in that process, we looked at our portfolio and we saw that we were over concentrated in Class C properties, especially in Houston. And her advice was to diversify and focus on these Class A properties. And we really looked at what our properties were worth at the time, which we were selling properties in the low three cap range in what we could buy properties for at that moment. And so that’s when we made the transition to the Class A business.

Robert Leonard (29:57):

Did you decide to sell off all those Class C properties and just go to Class A? Or did you keep them for that diversification piece?

Eric Barvin (30:04):

So we sold off all the Class C, except for that one I mentioned in downtown San Antonio, which eventually will be torn down and re-developed, either by us or by someone else.

Robert Leonard (30:15):

How are you managing the properties? Do you have a property management company that you outsource it to? Have you started your own property management company that’s kind of a separate entity? Do you do it within your own firm? What does that look like?

Eric Barvin (30:26):

So we manage our own properties. Started the property management in house two years ago. It was a very rough ride, learning the business and finding strong team members. It’s definitely the hardest thing I think in our business, is finding good people. And we’ve got a lot better at it. Today we manage the vast majority of our properties. There’s a couple that we still don’t, but the vast majority we do. We have a very, very strong team. We have a great head of construction. We have a great head of property management, COO, who kind of oversees that business marketing department. So we have built a very robust team to manage our own properties at a very high level. And I think we’ll continue to manage our own properties at a very high level.

Eric Barvin (31:08):

Part of the reason or the motivation was because we want to be able to touch the resident. We want to be able to impact the resident. And we do that through screening. So we do that through screening our own people, making sure that we’re hiring good people, making sure that they’re trained, and giving the best service that they can, create the best living experience for our residents. That’s the goal. And it’s hard to get that result with a third party property management firm.

Robert Leonard (31:32):

Given that you’re in Class A now, does that change how you feel about the current condition? I’ve heard kind of different opinions on whether people want to be in Class A during kind of recessionary times, or if people would prefer to be in maybe a Class B in Class C. I’ve heard both arguments. So I’m curious to hear if you would prefer to be in the class that you’re in now or in a little bit lower class when it came to kind of the environment that we’re in now?

Eric Barvin (31:56):

We would absolutely love to rather be in Class A. That’s part of the reason why we got in Class A in the first place. If you think about it, the ongoing capital needs are more predictable, I would say. Secondly, the demographic of our renter is paying a set of properties below 10 to 15% typically of their income and rent. They’re also working in upwardly mobile positions. Like, even we saw it during COVID, that’s a good example, is in the Class C apartments, people got laid off and they couldn’t pay their rent. In the Class A apartments, people got laid off, they continued to pay their rent and they got another job. I think that the rising rates is something that’s going to impact all real estate or all assets with leverage. And as I mentioned before, our belief is that the collateral apartment community is the renter profile, and so we would want to invest in the highest quality renter profile we can find.

Robert Leonard (32:50):

What I hear as the argument kind of for the other side is kind of this class compression, where basically people in Class A might not be able to afford the Class A anymore in a recessionary time. They’ll go to Class B. Class B will go to C, and so on and so forth. And that kind of leaves Class A with a much smaller pool of people who can actually afford that level of quality and that type of property. Do you see it differently than that?

Eric Barvin (33:12):

Yes, I see differently. Because the Class A people can always just lower their rent and Class B people can always just lower their rent. So I think that those properties will stay more full than a Class C property will. So like when I was starting my career, the Class A properties were not 50 or 60% occupied. The Class C properties were. And the reason they were was because the renters just left. They left. They weren’t there. They either moved in with their relatives, they doubled up, they moved, or maybe they went to the Class B properties, because the Class B properties lowered their rents. I kind of see it absolutely the opposite. But that’s why I do what I do and that’s probably why someone does what they do.

Robert Leonard (33:49):

Yeah. I don’t think there’s a right or wrong. I think that I like to bring the different perspectives to everybody listening to the show. One week I’ll have a guest on that says one thing. Then the next week, I’ll bring a guest on that says something completely opposite. And that’s not to … I tell the listeners all the time, it’s not to confuse people. It’s so that you can hear both sides of the argument and then decide whatever makes most sense to you. One of the kind of strategies is to speak to you more and then you can kind of go do it with your own portfolio as you wish. So I like to hear both perspectives for sure.

Eric Barvin (34:14):

I think that’s a great way to host, and absolutely to share. Because real estate’s a broad business and there’s not one way to do things. There’s a lot of ways to be successful in the space.

Robert Leonard (34:28):

Now, one of the other most common pieces of advice that experienced real estate investors give new investors is to not use any of your money. None of your own money, at least, or as little as possible, by leveraging OPM or other people’s money. And I know you personally invest significantly in many of your deals at Barvin. Walk us through your thought process there.

Eric Barvin (34:47):

I believe … We raised capital from high net worth investors, RIAs, family offices that want to see that skin in the game. I’ve been fortunate from when I started my career to have built a lot of wealth and have the liquidity to continue to invest at a very meaningful level, somewhere between … usually it’s between a million, $4 million per project. It gives comfort to our investors. And I like the cash flow and I like the depreciation and I like the exposure to the investments. We wouldn’t be making them if we don’t like them.

Eric Barvin (35:16):

And so I’ve always looked at our business as an extension of my own portfolio. The idea that, yes, I have enough wealth to maybe buy one large apartment complex myself or a community myself, but I can’t buy 10. If I can bring investors to come along with me, then I can kind of grow and take advantage of the opportunity in front of us as opposed to kind of putting all my assets in a single building. That’s part of my rationale.

Eric Barvin (35:40):

We do use other people’s money. I mean, we do have a lot of investors. Our structure, like I mentioned, is kind of project by project, so investors decide when they want to invest. But it’s something they’ve always looked for in our deals. And I think if I did, I’ve never sent them a project that we weren’t putting a very meaningful amount of money into. But I’m sure we get a lot of questions. It’s often the first question we get when speaking with investors, is how much am I actually putting in?

Robert Leonard (36:04):

And how do you think … I’m sure you don’t put all your capital into the deals, but how do you think about diversification from your own investments? I mean, you have this firm. You’re investing in the deals. You probably get … I don’t know your exact situation, but I’m sure you get probably a salary from it. You have a lot of things tied to this kind of one business. How do you think about diversification with your own capital and while still satisfying kind of that requirement of investors to put your own capital in too?

Eric Barvin (36:28):

Our business takes a lot of liquidity. You need liquidity to take down land for development sites. You need liquidity for pre-development costs. You need liquidity for guarantees on loans. Co-investments on my wealth or … My focus is really in cash in real estate. When the real estate goes down, I use my cash to buy more real estate. That’s kind of the simple … I have invested in the past. And venture capital, I have a one venture capital investment. I have a good friend of mine who’s doing a climate venture fund. I’ve done crypto in the past. I’ve kind of dabbled in these very different kind of things, but meaningful amounts of money are kept in cash and real estate.

Robert Leonard (37:06):

Part of your business model with Barvin is a direct investment structure, and you say that it adds 200 basis points in alpha relative to other capital allocators. Talk to us a bit more about what the direct investment structure is, how it works, and how it’s different from other real estate funds.

Eric Barvin (37:23):

Yes. So the first thing is that we’re not a fund. We are project … deal by deal, project by project. And when we get an opportunity, like I mentioned, this San Antonio opportunity, we’ll put together an offering memorandum. We’ll put together a webinar. We have a database of people who’ve expressed some interest in seeing our projects. And we have obviously in that database, a subset that is invested in our projects. We’ve got a lot of existing repeat investors. The vast majority are repeat investors. And we will send that webinar along with the offering memorandum out to first repeat investors for about 72 hours. And then after that, we’ll send it to the entire database. And so by doing that, we eliminate the allocator fees and promotes. People who invest in our projects are investing directly in a specific asset and their ownership is tied to that asset.

Eric Barvin (38:13):

The most common way or the traditional way for a high net worth investor to invest in real estate at our scale, institutional high quality multifamily, is typically through their financial advisor. So their financial advisors taking their money. They’re putting them into a private read. They’re putting them into a private equity fund. And there’s a lot of fees in that process, and it really waters down the return. We did a study with a real estate consulting company, RCLCO, comparing our fee structure to the capital allocator fee structure, where the individual gives their money to the financial advisor, who gives their money to the private equity fund, the private equity fund finds a group like ours to do the deal, and group that’s doing the deal has fees and promote structure. The private equity fund has a fee and a promote structure. The financial advisor has a commission. There’s about a at least a 200 basis point spread on the net return.

Eric Barvin (39:07):

At a conference in Los Angeles, one of the speakers is a big value add apartment person, and he was saying that to get an 11 to an investor, their gross return has to be about a 14 and a half. And I’ll tell you, for us to get an 11, our gross return has to be like 11.75. It’s a much, much, much tighter fee structure and a better promote from the investors. And that’s part of the idea, is like, we’re putting investors in high quality real estate in great locations without having to take the risks to get the exact same return that they’re going to get in much more risky assets.

Robert Leonard (39:43):

Yeah. When you break it down with those middle men, I mean, I think it’s pretty clear to see that structure has major flaws.

Eric Barvin (39:50):

That’s how the vast majority of real estate is done.

Robert Leonard (39:53):

Interesting. A lot of the people I feel like I talk to are kind of more similar to your structure, just given kind of what I do here on the podcast, but I could definitely see the financial advisor approach as well. What do you guys require for a minimum investment on your deals?

Eric Barvin (40:07):

Our typical minimum investment’s $100,000. You have to be a high net worth accredited investor. And that’s it. We want alignment. We want to have a call, make sure that you understand the project, make sure that you’re aligned with the timeframe for the whole period. As I mentioned, a lot of our projects are longer term. We want to make sure that someone doesn’t need the money back within the duration of the hold period. But if they do, we can always get them out. That hasn’t been a problem in the past. There’s been very few that need to get out. And when they do, we get them out. It’s not a problem.

Robert Leonard (40:37):

Who do you generally set your whole period as?

Eric Barvin (40:39):

Seven to 10 years.

Robert Leonard (40:42):

Okay. So that’s what I hear is pretty standard. I’m seeing five to seven, seven to 10 is pretty common from people that I speak with. I’m curious now, given where we are, when it comes to business and real estate investing, what keeps you awake at night?

Eric Barvin (40:55):

I have four kids. A lot keeps me actually awake at night. I think understanding the macro economy is where I spend a lot of time. Understanding how rates impact values. Understanding how financing options can change. Understanding locations improving or declining. I don’t know if you saw yesterday, Caterpillar said that they’re going to relocate their headquarters to Dallas, and that’s a major boom for job creation in Dallas.

Eric Barvin (41:21):

I’d say that my worry, or one of my biggest worries, is kind of what we were seeing now. I’ve owned this one property. I mentioned earlier, the 810-unit property, since 2013. And the loan matures in November 2013. And we signed a fixed rate loan at the wrong time. Our rate is like five and a half percent and I’ve been kind of watching all these 2.5% Loans, 3% loans go by, saying, “Ah, I missed my opportunity.” My biggest risk, my biggest concern is waking up in 2023 and the rate’s being 5 or 6 or 7%. And so that seems to be happening. I mean, unfortunately, we have a very low leverage loan there. That’s not a problem.

Eric Barvin (41:58):

But look, it’s not a great thing for real estate values, for cash distributions. But the market will stabilize a little bit once we kind of get through this period. And personally, I do think the rates will start to come back down the long term. If the goal of the Fed is to have 2% inflation, then the long term rates should be around 3%. Now, if they change their goal, they say the goal is 3% inflation, then maybe it’s 4%. Just getting an understanding of where their goals are for the long term, inflation rates I think will correlate a little bit to kind of understanding where debt is. And that’s probably what worries me most.

Robert Leonard (42:36):

Why couldn’t you refinance that debt between 2013 and now? Did it have a prepaid penalty?

Eric Barvin (42:43):

Prepaid penalty, yeah. Loan defeasance. So basically the way a fixed rate loan works is that you’re fixing that rate at a certain percentage, let’s say 5% as an example. And that 5% rate is going to be your rate whether rates go up or go down. If you want to get out of that loan, then you have to replace that 5% return that those borrowers or the lenders were getting, if treasuries are, whatever, 60 basis points, 70 basis points, well, it’s going to take a lot of treasuries and be very expensive to get out of a loan, if that makes sense. And so it was a number that was in the five plus million dollar range for the prepaid penalty. And for better worse, we decided not to do it.

Robert Leonard (43:24):

So it was just kind of a piece of that loan. Because you could get a similar loan like that just without the prepayment penalty, and then you would’ve been able to refinance out later with no issues.

Eric Barvin (43:34):

Correct. So we could have gotten a shorter term loan. We would’ve had a maturity, instead of in 10 years, at three years or five years or seven. Or a floating rate loan, after the first year, typically is prepayable at 1%. But then your loan is floating. And so when something like this occurs, your rate is going to increase. Unless you have a cap, and depending on where that cap is. There’s a lot of benefits to floating rate debt. This is obviously not the best time for it, but there are a lot of benefits to floating rate debt because of that prepayment flexibility. And in my career, been in the business now for 13 years, we’ve paid probably at least $5 million, maybe more collectively, in prepaid penalties when we sell properties. Fixed rate loans have costs as well if you want to get out early.

Robert Leonard (44:21):

What has been the most valuable piece of advice you’ve ever received? It could be about business or life.

Eric Barvin (44:27):

I think the most valuable piece of advice in business is patience. There’s so much desire to grow, personnel wise, real estate wise, just in general, there’s a propensity people will always want to grow. And our focus has always been slowing down a little bit and getting better, and investing in not just the physical growth of assets, but also the growth of individuals and the team members, and making sure that we’re doing things the right way, we’re doing things in a repeatable fashion, in a scalable fashion.

Eric Barvin (45:00):

I would say also on the deal front, patience is very important. There’s got to be six or seven, maybe even 10 deals, 10 properties, where we were not the highest offer. We did not get awarded the property. And another, something happened and another offer fell out of contract, they couldn’t close, there was an issue with the PSA. It came back to us and we ended up buying it. It’s just about having … it’s a combination of patience and conviction, conviction in your understanding of value, conviction in your thought process, and the patience to not kind of just go to where the market is to say, “Okay, well, the broker says I need to be here. I’m going to be here.” It’s, stay where you’re at and it could come back. Those are my two things.

Robert Leonard (45:41):

As we wrap up the show, I want to give a chance for you, Eric, to tell the audience where the best place is to find you, learn a bit more about what you’re doing, and connect with you.

Eric Barvin (45:49):

I appreciate that, Robert. So our website’s barvin.com. It’s my last name. You can definitely see what we’re doing in terms of acquisitions, development, property management, who’s on our team. You can also go to the website invest.org and .com if you want to learn more about investing with us, or you can email investors@barvin.com and we can set up a call either with myself or head of our IRK account to talk to you about what we do and get you on our list.

Eric Barvin (46:19):

And like I said before, the beauty of our model is that we are adding people to our database. And so if people want to be in our database, we’re more than happy to have them. They’re going to see our deal flow and there’s never pressure on our end for investors to participate. We don’t pressure investors to invest with us. We actually are oversubscribed consistently. The deals that we do, the average equity check is probably 30 million per project. And the last deal we did, we raised the capital in six days. The deal before that was like a week and a half. We can raise large amounts of capital very quickly from repeat investors. And we see this as an opportunity for those to participate in great projects.

Eric Barvin (46:59):

And one final kind of tidbit that I’ll … why we haven’t changed this, that I’ll kind of just share. My dad passed away in 2016. He was very sick. And I have a cousin who’s in Dallas who’s a big doctor. Didn’t necessarily relate to what my dad’s illness was, but anyway, he’s a big doctor. And as soon as my dad was sick, he heard through the grapevine and he flew down to Houston for like three days. And he was with my dad, he was talking to the doctors, and he was incredibly helpful in understanding the illness. And I said to him, “I don’t know how I’m ever going to repay you. I mean, this has been amazing.” No one in my immediate family has any medical experience, and so we were very grateful to have him there.

Eric Barvin (47:41):

And he said, “Eric, you’ve allowed me to invest in your projects. You’ve made me so much money investing in multifamily real estate. I would’ve never had this opportunity or known about these projects if it wasn’t for you.” And so I kind of took that to heart. Like, there’s so many people out there that are just going through their financial advisor or are just going through what someone else tells them to do. And we want to give this opportunity to more individuals that have the interest in doing it. Because I think, just like it’s created long term wealth for myself, I think it will create long term wealth for them as well.

Robert Leonard (48:15):

Well, Eric, I’m sorry to hear about your father, but I appreciate you taking your time to join me here on the show. And I’ll be sure to put links to all your different resources in the show notes below for anybody that’s interested in checking them out and connecting with you. Eric, thanks so much for joining me.

Eric Barvin (48:30):

Thank you, Robert. Really appreciate you having me on today.

Robert Leonard (48:33):

All right guys, that’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (48:39):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.