Transcript

Aaron Strauss

You’re listening to The Dealmakers’ Edge with A.Y. Strauss, diving deep into stories behind commercial real estate leaders.

Aaron Strauss 0:17 

Eric, thank you so much for joining; it’s great to have you on! You bring an awesome energy. Would you share with us that first initial kickoff – how you got going?

Eric Barvin  0:26 

Yes. When I graduated from college – I’m an idea guy, and I had this idea that international real estate was the way I wanted to go. I got my first job in Bangkok, Thailand; the job was not in real estate. It was in auto part manufacturing. But the goal was to figure out how do I get into real estate in Asia, and kind of live this James Bond life of international business. I got really sick; I was there for about six months and had to come back home. That was a huge growth experience for me. Part of that understanding was real estate’s a local business. You’ve got to really know the location. You’ve got to speak the language. It’s helpful to speak the language, which I don’t speak Thai.

You got to use the gifts that you’ve been given. I was like, I need to be in a situation where I can truly benefit from the relationships that I’ve made as a young adult, as a kid. So, I moved back to Houston. When I was in college, I had an internship at CB Richard Ellis in LA and a guy there named Jeff Pion, who’s a very prominent office leasing tenant rent broker, was my boss. He connected me with a guy who’s now passed away named Mike Hill, who is an industrial real estate broker. Mike was very generous to me, met with me; I had a resume, I was doing my best to get a job. And he said, “Look, Eric, I’m not hiring anyone. This is 2008. I’ll write you a letter of a recommendation, and I’ll give you my entire contact list. Whoever you want to talk to just email them.” I did that.

Because, the thing is, I didn’t study real estate, I didn’t know anything about real estate. I’m kind of a self-taught guy. I emailed and met with over 100 people on the list. And I asked everyone, “Hey, you know, I’m 22 years old, what would you do if you were in my shoes? Do you have a job?” I learned a lot about trying to see where I wanted to end up. I always wanted to be on the ownership side. Both my grandmothers, my mom, were in real estate, with much smaller stuff than what we do today. But, you know, this idea of having rental income, having someone else pay down your mortgage for you, always kind of resonated with me. And, so, in meeting with everyone, they all said, “Well, if you want to be on the ownership side, you need to learn finance.”

So, I started the process, or pivot of the process, to be an analyst at a mortgage banking firm. I got a couple of internships, and my first job, in October 2008 for Capmark Financial, it was called. Capmark went bankrupt in June 2009. I ended up getting laid off; at the same time, my dad, who worked for the same company for 20 years, got laid off the summer of 2008. It was like, “What do I do? Where do I go?” I remember going to my boss on the last day, saying, “Hey, I think I’m going to go and start my own company.” I remember him telling me, “Eric, that’s such a bad idea. You really shouldn’t do that.” I continued to apply for jobs and to try to get a job, but at the same time, you know, starting on my own and trying to figure out ways to buy real estate.

Aaron Strauss 3:33

Well, it was Armageddon at the time. What a great time to get in if you could make it work.

Eric Barvin  3:37 

Yeah, I mean, the first part of having a successful career is starting off with a win, right? So, the first thing I ever bought was, was a win. It was in Baytown, Texas; I bought it for $7,000 a unit for 158 units from Wells Fargo. I remember I had $500,000 of equity, so I got a loan from my grandparents for my co-investment for $100,000, and then I had to raise $400,000, We distributed all $500,000, or distributed all $500,000 back the first year, which is the best cash-on-cash return I’ve ever come across – 100%, without a refinance or anything like that.

Aaron Strauss

Not bad.

Eric Barvin 

We’ve invested hundreds and hundreds of millions of dollars of equity, and it’s all through high-net-worth investors who’ve referred us to other high-net-worth investors. I mean, it’s really been truly organic, which is awesome, you know, referrals, the best introduction you could ever get.

Aaron Strauss 4:27 

You’ve raised over $200 million of equity at this point.

Eric Barvin  4:30 

Definitely; I think higher now. We’re raising $60 million for two deals to close in December. So, we’ve already, in one week, got $40 million.

Aaron Strauss  4:39 

That’s great. Tell us about the investor base. I mean, we’ve talked a little about the high-net-worth investor base community and the lure of going more towards institutional capital as you get bigger and bigger, managing those investors for even with great returns. It’s still a lot of work. Have you been thinking about trying to trend institutional, maybe do some have a blend depending on the deal flow?

Eric Barvin  4:59

We like the high-net-worth investor base because I feel like it solves an unmet need. A lot of what we do today is mainly institutional quality acquisition – like class acquisitions or development in really well-located locations, you know, kind of renting to a higher end demographic – that the high-net-worth investor does not get that exposure. If you’re, you know, a high-net-worth person looking to invest in multifamily, you may have a friend who does multifamily, most likely they do value add, or you go to a financial advisor, and the financial advisor puts you into, you know, a Carlyle fund or Blackstone fund or KKR fund or whatever. Then, those groups come and find groups like ours to buy or build apartment communities.

What we provide investors is actually a way to kind of get institutional quality real estate with institutional quality operation, direct. So, you avoid all the layers of going through a KKR, going through Morgan Stanley, and you get it direct. It’s part of how we’ve been able to acquire these well-located projects because we’re not having to inflate IRR to compensate middlemen, if that makes sense.

Aaron Strauss 6:18 

Oh, well said. It’s a direct investment. We briefly touched on fundamentals. I know you focus on those high-quality institutional quality assets today, but, obviously, the market is insane. As far as cap rates and competition, especially in your markets today, I know you continue to find assets to buy, how are you looking at the fundamentals – the rent growth, the demographics? When somebody shows you a deal in the first 510 minutes, what are you initially thinking about?

Eric Barvin  6:46 

The first thing we look for is the location, right? So, who’s our resident? Where do they work? What’s going on in that area, in terms of, you know, corporate expansions, or obviously, supply of new multifamily? How does it compete with the existing stock or multifamily that’s there. We’re going to be the highest price, the lowest price, you know, where are we going to sit?

Replacement cost is a story. I mean, obviously, that doesn’t necessarily make you any money, but it is a good indicator, usually. We use a lot of data analytics. We identify where our renter base lives – which are renters 24 to 35, making somewhere between $80,000 and $150,000 a year, paying 15 to 20% of their income in rent. The college educated are really mobile. As we look at Houston, Austin, Dallas, San Antonio, Atlanta, we know exactly the locations that we want to be in. We know the supply/demand dynamics in each of those locations, and really know the properties in those locations that we want to own. It’s almost working backwards, you know, in terms of which deals hit the market, or trying to find off market. But a lot of stuff that we end up buying, you know, has to be marketed because it’s all through institutional sellers.

Aaron Strauss  8:01 

Well said; not every deal is a homerun. You’ve built a great career, you’re in a great asset class and a great market, but tell us about some of the struggles you’ve had. It always looks very glamorous –  people buying all these assets – but day-to-day, there’s a lot of heartache to make it happen. And maybe you could share a story or two of some things that didn’t go as well.

Eric Barvin  8:17 

When I started 2009, I told everyone, this is what I’m going to do. And then I proceeded to not buy anything for a year. You underwrite everything, When you start a business that sells ice cream every day, someone’s hopefully going to come in, buy your ice cream. When you’re making investments, you don’t want to make mistakes. It took me a year to find my first deal, and I would say that’s one of the hardest things, you know, emotionally. It really humbles you.

Two-thirds of the way through, I introduced a group that I knew in Houston to an equity provider, and they said, “Look, if they invest, we’ll pay you 1%.” It was a $6 million investment, and, so, I was relying on this $60,000 to kind of help me with the struggle, to keep moving on. When they got to closing, there was a discrepancy between them and the equity group on who would pay the $60,000. The equity group said we’re not going to pay – basically it turned out they gave me 2,000 bucks. It was really tough.

My mom said, “Eric, you know, I think I think you’ve given this a good shot, and I think you should, you know, do something else.” That, to me, was really hard, just sticking with it. So, everything else I’ve done since then is kind of fixable.

Aaron Strauss 9:34 

Yeah, anybody who’s run a business, owned a company, tried to build anything, they go through some real lows that no one sees, that only they know. I think what’s really important is, and it’s imbued in you, to have a great sense of humility. As even more and more successful portfolios and growing investors are happier; the markets obviously doing fantastic, but that humility, it seems to resonate.

Eric Barvin  9:55 

At the end of the day. I think there are a lot of groups that think of their customer base as their investors, which to me is totally wrong. Your customer is your resident. If you do a good job for your resident, you do a good job for your team members, your investors will be very happy. We spend a lot of time promoting community on the properties, but also within our company, We’re having a family picnic in a couple of weeks, where you have over 100 people coming. We’re really trying to build a company that can scale. It does tie back a little bit to the investors. Because I don’t have institutional investors who are telling me what to do – I have people who trust me, are investing alongside me – and they say, Eric, do what’s best. That allows for a little bit of a different management style, I would say, to the benefit, I think of our culture.

Aaron Strauss 10:42 

Really well said, and I can tell that’s what you’re living and breathing over there. I want to ask you about your edge, but the more I think about it, I think your edge is just the fact that you’re transparent. You have integrity, you have honor, you obviously have the intelligence, you’re thinking through investments and the business at scale.

Eric Barvin  10:57 

We use a lot of technology. We work with RCLCO on a lot of our data analytics for site selection and things like that. We use a lot of technology in the operation, as well – whether it’s, you know, bots for leasing or AI rents or purchase order processing. It’s all technology-driven and automated.

I think our biggest advantage really is our advisory board. That’s what gives us the edge. We have a phenomenal advisory board. One is a strategy guy, Gadi Kaufman is the head of RCLCO or the chairman of RCLCO; one is Steve LeBlanc, who’s really a financial whiz, he was the head of Summit residential and Texas Teachers. The others Randall Ell, who’s the former CEO of Steadfast and owns 30,000 units. And then Joe Murphy, who’s a long-term mentor and advisor of mine, very successful businessperson. I think having that group, right?

Because if you think about it, I don’t have partners. A lot of these businesses are family businesses, so there’s partnerships that are formed. There’s people to bounce ideas off of. Having the advisory board really allows us to work with people who are experts in their field, and then to hold us accountable. We may think, oh, we’re doing a great job, like I have property in Houston, 810-unit property bought for $60,000 a unit, and it’s worth over 120,000, times 810 units, a lot of money. And you know, you can get a little complacent and say I don’t have to worry anymore. But they say look, your economic occupancy is not where it needs to be, you should be pushing around to 12%; you’re pushing them 6%.  Really holding us accountable to create operational excellence within our organization. I think that direction is probably our biggest advantage.

Aaron Strauss 12:40 

I know tons of sponsors. And I think it’s rare for people to really have that level of advisory team around them. Kudos to you for thinking big picture and scale. I’m sure investors love to see that depth to the analysis, the team, and the thoughtfulness.

You’re a fiduciary for a lot of capital, you’ve got kids at home, you’ve got big goals and dreams that you’re executing on, you’ve already executed on a tremendous degree. When you get up and frame your day in the morning, what’s the headspace you’re in? What are the things you keep telling yourself every day as you drive forward?

Eric Barvin  13:12 

I’m a big believer that every day is progress. Even when things don’t go your way, there’s lessons to be learned that you can improve on. I meditate; and I noticed on days that I don’t meditate, I’m much more irritable. You know, sometimes it’s with my colleagues, sometimes with my kids or my wife. So that’s really important to me.

I also think that giving a communication channel to your direct reports is extraordinarily important. So, I have one-on-one meetings with all of my direct reports every week. It’s like a scheduled time; they kind of run the meeting. It’s for them; it’s not for me. A lot of the stuff that might get me irritated or might get them irritated with me can be flushed out because they know okay, well on Tuesday, I’m going to get an hour or 35 minutes there. And it doesn’t build up like it can build up. We do believe in candor here and holding each other accountable. I would say that’s my best way to manage it.

I also work out almost every day. I play basketball last night. They had me play a playoff game at 7:50 pm with the championship at 8:40 pm. The championships right after the playoff game?! Oh my god.

Aaron Strauss 14:21 

You’re still young.

Eric Barvin  14:23 

Trying to be fit and being active helps a lot with stress.

Aaron Strauss 14:30 

Is there anything else on your mind you’d want to share with our listeners out there? Perhaps somebody who’s getting started today? It’s obviously a wacky market, wacky time, hard to find deals. You know, what are you telling that person who’s in your shoes 12 years ago? You know, is coming to you for advice, saying you know, Eric, can we get coffee? I really want to be an owner, acquire real estate. I really want to build my own investment base.

Eric Barvin  14:55 

What we do today is obviously a little bit different than when I started. I feel very blessed that when I started, there was this opportunity to get into whatever small equity check deals that could make you a ton of money. I felt very fortunate as interest rates have changed and treasuries have gone down, we’ve altered our strategy to focus on more well-located assets with the belief that in an inflationary environment, our demographic is going to have their incomes and their wages increase at a faster rate.

I think what I would say, is, first and foremost, your former strategy, like what do you believe at your core, that is not just going to hold true today, but it’s something you want to stick with for 30 years or 20 year. Figure out that, write it down, have your colleagues or your friends attack it and say, is it a bad idea, beat it up, and then, you know, go and find either examples of projects, or partners, or investors that you can sell the strategy to.

We raise money on a project-by-project basis, so we already have the property before we’re raising capital. It’s not a fun model – which is how people like to direct investing in the lower fees – but I think that I would still advise people to do that.

For us, what we’ve learned in doing this so long is that location is really, really important. And, in a property, you have the potential to increase the value by what you can do to it. But there’s more potential to increase value based on what goes around your property. So, if your property’s in a bad location, or it’s in the middle of nowhere, and nothing’s ever going to come, you’re not even giving yourself a chance. And so, what I would say is, especially if you’re young, invest, get started, because you just don’t know where you’re going to be. If you’re in it for the long term, real estate does tend to work out pretty well. Even projects that were, you know, overpaid or weren’t great deals, they’ve all worked out pretty amazingly,

Aaron Strauss 16:56 

The whole conversation we’ve had has been terrific; you’ve been really candid. I could tell that that’s a real value in your culture, and it’s really come through her. What you’ve done is fantastic, and I think your story is compelling.  I want to thank you very much for your time. It’s been terrific, and hopefully we’ll be talking again real soon.

Aaron Strauss

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