RES 261 | Improving Economic Outlook

 

If you want to be a serious investor, improving your economic outlook the right way can be easy with the right resources. Whitney Sewell interviews Ivan Barratt, the owner of Barratt Asset Management, about economic and infrastructure improvement. Ivan shares his opinions on how his outlook has changed as far as the markets he is investing such as the Midwest. With the understanding that the real estate market is risky and that recession is unpredictable, Ivan discusses how he protects himself and his investments from such risks and shows you how you can model your own business, too, so you will do better in the downturn.

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Improving Your Economic Outlook In Real Estate Investment with Ivan Barratt

Our guest is Ivan Barratt. Thanks for being on the show again, Ivan.

Whitney, it’s always good to join you. I’m happy to be here and I’ve been looking forward to doing this with you and seeing it on my calendar. I’m always excited to talk to you.

I appreciate your time. I know you’re very busy and I know your calendar is probably very full like mine. The audience has probably heard of you before. I hope they have. They should have heard you on show WS 166. I’ve learned more about you and your team and some of your background there. A little bit about multifamily owner syndicator who specializes in FHA and agency finance projects. He has raised since 2015 nearly $60 million in equity and it’s over $65 million now. He acquired over 2,500 units and grown Barratt Asset Management, also known as BAM, to invest in class vertically integrated asset and property management firm. His companies manage over $200 million in assets comprising nearly 3,500 units. Ivan, thanks again. From your experience and your expertise in this industry, I wanted to cover the economic outlook and let’s dive in a little bit on what that looks like and your thoughts.

I’d love to. A fair warning, if I get going down a rabbit hole too deep, don’t be afraid to pull me back out whenever you want to cut me off. I like talking about this stuff. I do a fair amount of economic research. I consider myself a wannabe economics nerd. I tend to look at what’s going on behind the scenes and what’s happening at a global level before I drill down to the hyperlocal level that matters when it comes to buying apartments or any type of real estate.

Before you get going there, tell us where you do your research. How do we find this information that you’re going to tell us about?

It’s not that easy. I read a lot of books on different opinions. If I got done with reading a book about the sky has fallen and America is going to print itself into oblivion. I then turn around and I read an argument taking the other side that America’s going to have another great 100 years of economic prosperity. I usually look for the middle area there where the truth is on a daily basis.

You’re careful not to read one-sided information.

You can watch Fox News all day or watch something else all day. I don’t watch news outlets. I don’t watch the talking heads. I read business news. I like to read global news and then I pay attention a lot to what’s going on from an economic improvement and infrastructure improvement in my own backyard. I watch interest rates pretty closely. Monetary policy at the central bank level to name a few things that I like to keep an eye on.

In the business of income property, what's going on in the world and how it impacts interest rates are keenly important to keep an eye on. Click To Tweet

Economic and infrastructure, can you elaborate on that because somebody’s reading like, “What in the world is he talking about?”

The people usually wonder what I’m talking about when I start getting into this stuff. At the local level, I like to keep up to date on economically what’s happening with jobs, companies moving in or out. In infrastructure like airports, roads, especially highways, any new projects that are local, regional or state governments are proposing and/or starting. For instance, we’re buying a deal in Southern Indiana and there’s a brand new federal highway that’s been under construction in that area that’s about to cross the Ohio River. That’s a hyperlocal example of a major infrastructure improvement that speaks well for the long-term prosperity of a given market. We look at what retailers are doing. If Chick-fil-A is moving in across the street, that’s a good thing. If Costco is moving in across the street, that’s the really good thing. All these real estates have very hyperlocal but at the same time, you got to pay attention to global and national trends. In our business of income property, what’s going on in the world and how it impacts interest rates, which can impact so many factors in real estate, is keenly important to keep an eye on.

You’ve mentioned interest rates a couple of times. How do you know what they are?

I simply use the Bloomberg app and look at bond rates. Most of my loans are going to be somehow tied to the ten-year US Treasury which is a bond. That interest rate sets policy and that’s where a lot of spreads are tied to when it comes to financing Fannie, Freddie and HUD loans. For example, at the end of 2018, interest rates started creeping up quite a bit. The ten-year got up to 3.23. We watch everything down to three spaces to the right of the decimal. It gets pretty granular. That comes crashing back down where I looked at it again it was 2.08. Interest rates have come down 127 basis points almost, which is good for refinancing and good for long-term debt.

It can also make it tough to find a good deal because there are lots of money out there chasing good income. The world is swimming in money. It’s flooded with money. Every major economy, all the big G7, G20 countries are all essentially easing, which is a fancy way of saying they’re stimulating their economies by printing money. You’ve got all this money out there that’s chasing yield. What that means is you’ve got all these dollars, people want to make a return on that money. It’s flooding into different asset classes including multifamily, which in some ways is a benefit but in some ways makes it tougher as well.

That’s a lot of great information right there. Not only are you looking at the local market you’re looking to invest in, but you’re looking at the global economy, what’s happening with these specific countries, maybe larger countries or maybe not larger ones, but what is happening globally. Tell us how does that affect how active or how aggressive your team is looking for deals?

My thesis is that interest rates can’t rise all that much in the near term for many factors. Interest rates will continue to stay low. What that does for me is if I can find good opportunities in this market to create or to manufacture a spread between what somebody can get by putting their money in a ten-year bond and what they can get with me by taking some risks. If I can keep that spread where I need it to attract investors, then in some ways there’s an unlimited amount of capital at my disposal. The problem with that is I’m not the only guy that knows that and I’m not the only syndicator or deal sponsor in town. While money is cheap and capital is cheap and plentiful, it also creates these bubble-type scenarios where lots of players are willing to take a lower return, which equates to a higher price that I’m willing to take. In order to find a deal, I have to kiss a lot of toads. I have to look at a lot of assets to find one that I can fit into my acquisition criteria box, which is a pretty tight box to fit into. Oftentimes in this market, I’m getting blown out on price sometimes by millions of dollars.

People are outbidding you because they’re willing to take less on the management side or in fees whatever that may be. They’re willing to take less.

RES 261 | Improving Economic Outlook

Improving Economic Outlook: Nobody knows how long or short the recession is going to be, how cold or mild it is going to be, but it always comes.

 

They’re willing to take less return. A great example is there are a lot of syndicators that in my opinion are paying way too much for C-plus, B-minus value-add assets. So much so the price translates to maybe 15% or 16% IRR if everything goes according to plan. I don’t think that’s a big enough return to take that risk. I have to find other ways of getting deals because of the value of taking the risk and not only getting the asset but executing on a value-add strategy, which may in a normal market be 20% IRR net to my investors, now it’s a 15% IRR. You and I have talked about this. It’s why we go after larger and nicer assets with less downside is because we can lock in that 15% return on investment without taking that value-add risk some of the newer operators are attempting to take.

How has your outlook changed as far as the markets you’re looking in specifically or has it changed?

We’re pretty lucky here in the Midwest. We certainly haven’t seen the booms that some of the other areas of the country have. We also haven’t seen the major bust. For example, Indianapolis, my home-base, it had one to 4% rent growth annually for the last 30 years. Only two times in that 30-year period was it essentially zero. We are lucky to be here and that plays very well into our thesis of buying into these markets that are steady, tortoise versus hare type rent growth, which over time still carries a lot of value but also greatly reduces the number of risks to the asset underperforming.

Tortoise versus hare rent growth, but it’s not as risky.

In my opinion, you’re not going to see the big pops but you’re also not going to see the bust either. There are a lot of boom and bust markets out there that could already be busting. We don’t know.

Some people were very vocal about, “Hold all your money, save all your money, don’t buy any real estate.” What’s your take about that?

There’s a saying out there that the general fights the last war and most generals that fight the last war end up losing the next one. What’s going on is you got people that are speculators. Robert Kiyosaki called them capital gains versus cashflow. They’re not buying on cashflow. They’re waiting to buy it on a discount and sell it for more than what they have in it. The problem is that the next crash very likely won’t be like 2008. That crash was by many accounts an 80 or 90-year super cycle event that hadn’t happened since the Great Depression. Those types of crashes don’t come along very often. The guy trying to sell you gold, ammunition or a prepper starter kit, once you to think the next crash is going to be worse than the last one, that’s probably not the case. History shows that and the economy shows that.

If you’re sitting on the sidelines waiting for some big corrections so that you can buy assets on the cheap, you’re likely going to be waiting a lot longer than you think. Most of that goes back to how much money out there is looking for assets. You can read several different studies on this but by some estimates, there’s $1 trillion of cash sitting on the sidelines looking for a place to be parked. Some estimates say it’s $200 billion just allocated for real estate deals that are on the sidelines looking for a home. Apple has got hundreds of millions of dollars in cash sitting on its balance sheet, maybe billions. You get the point.

If people knew when recessions would hit, there will be a lot of wealthy people out there. Click To Tweet

There’s a lot of money sitting out there. When there’s a lot of money looking to get in the market, that floor of prices is set pretty close to where we’re at. As things roll-over a little bit, investors start stepping in and buying those assets, which have a very low floor. Whereas in 2008, a much deeper long-term cycle where you had complete capital markets freeze up, there were no buyers to step in and buy assets. Now you’ve got tons of buyers waiting to step in and buy assets. By definition, it’s very difficult for you to get much of a discount on those deals.

Are you projecting a specific time or something? I hear a lot of people say 2020. This is up in the air but are you projecting a specific time for a downturn or is it we’re playing our model? We know it’s safe. We know we’re buying good assets. These are the ways we’re protecting ourselves. If it happens, it happens.

When anybody tells me that the recession is going to be at a given time down the road, I immediately discount everything they’re saying. There is no crystal ball. If people knew when recessions would hit, there would be a lot of wealthy people out there. If I knew when corrections were going to happen, we’d be doing this with me sitting on a beach in Thailand. There’s no way to predict that. Humans by default are terrible at predicting the future because we only look at past events. Nassim Taleb, one of my favorite authors, he’s shown us that you can’t see what you don’t know is coming. For us, we look to figure out how not to be the turkey. What I mean by that is the turkey has got a great life. They’re fed, housed, got shelter, very relaxed and very happy until it’s Thanksgiving Day.

Our model is how do we not be the turkey? For us, the reason why we’re not doing retail, office, industrial and all this new construction that people are getting into, it’s simply because of the risk on the maturity of the debt. Multifamily gives me one of the most superior debt product menus of any asset class in all of the real estate. Meaning I can go out and I can lock in my interest rate for ten, twelve, fifteen, in the case of HUD, 35 years if I want. You can’t do that in anything else. By default or by definition in any other asset class outside of multifamily, you are beholden to bank debt, which maybe you can get seven-year maturity, maybe ten if you pay a big interest rate increase for it.

The same goes with real estate operators. The day you close on your bank loan, you’re in technical default if the bank decides you are. I’ve got a front row seat to that in the crash and I vowed to not be in that position ever. A lot of good assets go to the auction block because it couldn’t roll-over the debt. Fannie Mae, Freddie Mac, HUD and FHA, they don’t have those shareholders “What have you done for me this quarter” mandates that banks do. We essentially stay away from bank debt and lock in that interest rate and push out that maturity risk way into the future, which greatly reduces the risk of capital in a given deal.

How are you protecting yourself when it happens or a little more in depth as far as the deal itself?

It comes down to the asset. We’re pretty keen on Midwestern markets like you and I talked about. We liked a lot of diversified employment. We’re pretty snobby on school districts. We want all these aspects and then the rental band, which here in the Midwest we’re $800 to maybe $1,200 a month. In the standards now, if you work at Starbucks, you can rent it from us. If you’re a single-parent household, you want to get your child into a good school district, you don’t want to take on the burden of owning a house and be a debt slave to somebody else, maybe you’ve got an aging parent as well, I present a pretty affordable option. We’re not low-income but we certainly stay away from luxury or more in that middle of the market.

Our assertion is that in a recession, we’ve got enough of a value proposition to where people are moving out of luxury and they’re moving into our units. We’re pretty set on being a company and doing deals that could do better in a recession. We can’t predict when it’s coming but you and I both know winter always comes. There’s a seasonality to it. Nobody knows how long or short it’s going to be, how cold or mild it is going to be but it always comes. It’s the season of life. Game of Thrones did not coin that phrase. That’s been around a long time. Winter is coming. If we can model our business to perhaps do better in the winter time, then we’re going to have a lot of fun.

RES 261 | Improving Economic Outlook

Unleashing the Second American Century: Four Forces for Economic Dominance

Can you elaborate on that? How to model our business so we’ll do better in the downturn.

I don’t think you have a long enough time here for that. There’s no secret sauce to it but we reduced some ability to get cash out. We reduced some of the upsides by putting in long-term debt as quick as we can and that’s a big part of it. It’s not easy but we focus on workforce housing. Some of you out there are putting in granite tops, stainless steel appliances and you’re trying to compete with A’s, you’re going to get whacked some point. I look for areas where we can raise rents but I don’t want to compete with the luxury guys. I’ve never put in a granite countertop anywhere. We watched and stayed in the cohort. We want to stay in the market segments that we want to be in and we stick to our knitting. As an entrepreneur, I have to wear blinders a lot and avoid shiny objects and squirrel syndrome. If I can stay disciplined and do that. That’s a lot of the battle.

Are there any special ways you’re stress testing deals as you’re underwriting to make sure that if something does happen in the next couple of years, that we’re going to be fine?

We’re stress testing debt coverage. We run occupancy sensitivity and cap rates sensitivity. We look at what the return on investment is. If cap rates go up, if occupancy goes down, we can go out there and get debt at 125 coverage. Most of our deals, we’re looking for that debt coverage ratio to be north of 150 just to have more padding in the deal.

I like that a lot — the debt coverage ratio of 1.5.

What I’m doing right now, the average debt coverage ratio on a seven-year hold is 1.8.

Are there any other ways that you stress tests that maybe we wouldn’t think of? Any other like, “Okay, it’s got to do this.” Anything at all that says, “This is not going to be our deal because it didn’t do this.”

Nothing comes to mind off the top of my head.

Humans by default are terrible at predicting the future because we only look at past events. Click To Tweet

I would like to know a little more about how you are educating yourself so much. I know you mentioned a couple of things though, a couple of ways. Are there any good books that help us to understand how that works better than maybe we already do?

I put them all on my Instagram. I stacked them up and took a picture of them. I would stress if you want to be at this a long time, start reading financial history. Some of my favorite ones, it’s a pretty deep rabbit hole and it’s a little conspiratorial at the end but The Creature from Jekyll Island, which is all about the history and formation of Fed. That’s a great book. Robert Kiyosaki has got one called Fake, which I think is a redo on a book called Conspiracy of the Rich that he wrote several years ago, which I’m in the back of that book. Antifragile by the Nassim Taleb is a great book. It’s all about things that benefit from the chaos. Nomi Prins, her book called Collusion. It’s all about what central banks across the globe are doing to keep the party going. She’s got a pretty damning conclusion about them, but I think they’re doing a good job.

There are a lot of good books out there. You got to take it all with a grain of salt because most of those books are trying to sell you something. They’re trying to get you to buy gold or they’re trying to get you to think a certain way. There’s another great book out there called Unleashing the Second American Century. It’s all about the forces in the United States that will propel us for another 100 years of growth. It got some pretty good evidence in there. The United States for all the damning rhetoric we get is in a pretty good position. We got a lot of resources. We got plenty of water. A lot of people want to live here. We have a strong military and we get to hit the reset button on our government every four years. We’ve got a lot of good things going for us. A lot of bumps in the road, sure, but are we going to crater or break apart anytime soon? I don’t think so. Rome is a republic for 500 years and then it was a declining empire for another 500 years. If Rome can go 1,000 years back then, we can surpass that timeframe with modern society.

Is there anything else you’d like to leave the audience with as far as the economic outlook?

Read a lot from a lot of different sources and please do not turn on CNBC, Fox News, MSNBC or CNN if you want to understand what’s going on at the highest levels of power. There are some great books on that subject and you can learn about where fiat currency comes from, how it’s made, central banks, what their policies are, and how this whole economic machine works. Ray Dalio is another great guy to read and understand. He’s got another book Principles for Navigating Big Debt Crises. He’s got some good stuff on the economy. He’s got a great YouTube video that’s maybe 30 minutes long on how the economy works. There are tons of good information out there. What stops most people is they look at it from a pretty shallow perspective. People need to take the time to do a deep dive in subject matter that affects their business.

This had been a fabulous show. There are lots of great information. I appreciate you sharing it with me and the audience. Tell them how they can get in touch with you.

I got a website, Ivan Barratt Education. That’s for the high net worth investor that wants to learn more about me, my team and our thesis. IvanBarratt.com is another site and then our corporate site, which has got our portfolio, our track record and all the assets we manage. That’s BarrattAssetManagement.com. You can get a hold of me at (317) 762-2625.

Not many people put their number out. I hope you will call Ivan. Thanks again, Ivan and I hope that our audience will reach out to you. I hope you will also reach out to me at LifeBridgeCapital.com. Also join us on the Facebook group, The Real Estate Syndication Show. We will talk to each of you soon.

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About Ivan Barratt

RES 261 | Improving Economic OutlookIvan Barratt is a multifamily unit owner and syndicator who specializes in FHA and Agency-financed projects.

Since 2015, Ivan Barratt has raised nearly $60 million in equity, acquired over 2,500 units and grown Barratt Asset Management (BAM) to a best-in-class; vertically integrated, asset and property management firm.

Today, Ivan focuses his time on equity finance, acquisitions and company strategy. Currently, his companies manage well over $200 million in assets, comprising nearly 3,500 units.

 

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