3 Investment Strategies For Multifamily | How To with Gino Barbaro

[00:00:00] If you have a long-term exit strategy, but you're getting short-term debt, now why are you buying a value-add strategy in that part of the market cycle and what does it look like? And flip out, which is the second strategy, flipping the multifamily property.

[00:00:36] My name is Gino Barbaro, one of the co-founders of Jake and Gino, and in this how-to video, we're going to be discussing three strategies when investing in multifamily properties. Now, we're not only going to be focusing on the strategies, but more importantly, when to utilize those strategies.

[00:00:55] They may seem obvious to you, but where I see most investors, especially new investors, making mistakes is they try to employ this strategy at this certain part of the market cycle, and then, uh-oh, doesn't work. The strategy may have been right, but the timing or the part of the market cycle was probably wrong.

[00:01:19] Now, let's start out by what we define in Wheel of Our Profits and at Jake and Gino as the three pillars of real estate. Let's set this up before you even start investing, before you start figuring out what we call the buy-write criteria, because you need a buy-write criteria to figure out the strategies. The different strategies will have different types of criteria when you're buying assets, so it's important. But what are the three pillars of real estate? The first one is market cycle.

[00:01:47] The second one is debt. And the third one is exit strategy. Now, let's put those all together. The concepts are all out there, right? We've just bundled them all together. And now, why have we done that? Because when you're looking at an asset, you're looking at what part of the market cycle it's in. Okay. This is what I'm buying in this part of the market cycle. Is it a buyer's market cycle? Is it a seller's market cycle?

[00:02:17] Now, I've done a video on the fourth cycles of the market. Go back and watch that. I don't want to dive into that. Not 100% important here. Let's get back into the market cycle. Now, let's get into the second part, which is debt. Now, market cycle is important because you're going to be buying certain assets in the market cycle. What type of debt are you getting? Is it short-term debt? Long-term debt? Community bank? Credit union? Agency?

[00:02:45] Whatever type of debt you're getting, you have to understand what's your exit strategy. If you don't know your exit strategy, or if you have a long-term exit strategy, but you're getting short-term debt, it's not going to work. You're going to fail. So you need to know all three of those components. Where you're buying in the part of the market cycle, what type of exit strategy do you have, and what is your debt?

[00:03:07] When Jake and I first started back in 2011, the market cycle back then was screaming buyer's market cycle. Why was it a buyer's market cycle? We were just, believe it or not, in 2011, we were actually exiting the recession. Although most people would say you're nuts by saying that, but the data actually shows that the recession really lasted mid-2010. It was already over, but we're still in that recession area. The second part would be recovery.

[00:03:37] Then it would be expansion. Then it's hyper supply. Those are the forward market cycles. I lied to you. There you go. Instead of going to watch the video, those are them right there. But listen, we're still in recession, it felt like. So in that part of the market cycle, what kind of assets are you buying? The first strategy. The first strategy. Here's the first strategy. Value add. Now, why are you buying a value add strategy in that part of the market cycle and what does it look like? Well, Jake and I didn't know what we didn't know. We were just trying to buy the best deal for the best price.

[00:04:06] But now, knowing better, and now I want you going forward to figure out what part of the market cycle your property is in. Because every market has different areas of where they are in the market cycle. You may be in Dallas right now, which is in a hyper supply. They've got so many assets coming on board. Or you may be in a market like, I don't know, just pick another market, Kansas City. That may be an expansion right now. Or you may be in a market that is in recession. It's just slowing down. So understanding that.

[00:04:35] So in 2011, we go out, we buy this very first asset. Our thought process is, wow, we're getting it for a great price. But a value add property, which is the first strategy, usually has a lot of deferred maintenance. Well, not always, but it has inefficiencies. It has either low income or higher expenses or a combination of both. So you're trying to add value to the property, either through renovation and or through operation. That's what the goal is.

[00:05:04] You're trying to fix this property up by increasing the net operating income of the property. That's the value add. Back then, a lot of these properties we were buying were really older assets at great prices. We're able to fix them up, add value. And then obviously part of that strategy of buying is refinancing the equity out. Really important to understand that with the value add strategy. When do you buy these?

[00:05:28] Now, the biggest mistake that investors have made over the last two or three years, they were buying the value add strategy in markets that were really expensive. So they were buying C properties, properties 30 years old and older at four caps, thinking that they'd be able to push the value up and flip out, which is the second strategy, flipping the multifamily property, which is a good strategy when you're doing it in the right part of the market cycle.

[00:05:53] Right now, it's a very difficult time to be fixing and flipping multifamilies. Everyone's talking about the holder, the longer term, longer term hold period. So understanding that will allow you not to look at these older assets, because right now, if you're looking at old assets in these markets, be careful of buying them at really high prices or low cap rates, thinking you're going to fix them up and to flip them out. An old asset is an old asset.

[00:06:23] It has a lot of deferred maintenance, old roofs, old plumbing, old wiring, old mechanicals. These things all take a lot of capital to fix. Now, if you're buying them at the right price in the right part of the market cycle, you can spend the capital needed to refurbish and to replenish and to revitalize this asset. That's what Jake and I did from 2013 all the way up to probably 2018 and 2019.

[00:06:53] In 2020, when COVID hit, we started looking at assets that were a little bit newer because all of a sudden those 1970s dropped to become four and five caps. Well, why am I going to buy a 1970s C property for a five cap when I can buy a 1998 B property for a four and a half or five, right around the same price point, believe it or not. It started not to make sense. That's where we are in the market cycle. So that's why I keep harping on it, understanding.

[00:07:21] And then all of a sudden, when you're employing these strategies of the value add or flipping, knowing what your criteria is. Now, if you want to learn more about investing in multifamily, just email me, gino at jakeandgino.com. I'll send you out a free PDF copy of Wheelbar profits. It talks about the three-step framework that we're talking about in this video. You know, not only the three pillars of real estate, but we're talking right now about buy right, finance right, and manage right. Understanding your buy right criteria.

[00:07:49] Something that I should have mentioned also, it depends upon your experience, the amount of capital you have, and what your goals are. If you're just starting out like Jake and I did, your number one goal in investing is to create equity. And once you have that equity, you repurpose the equity to buy more assets. You can't make money unless you have ownership in an asset. That's the reality. Now, how are you doing it?

[00:08:19] You can syndicate, raise capital on deals, then exit that because syndication is a great model for flipping multifamily. That's basically what it is. Almost every syndicator goes out, buys a property, gets an acquisition fee, but doesn't get cash flow because most of that goes to the investors. And after a couple of years, three, four, five years, they exit it out. They've created the equity. Now, hopefully, they get that equity. It's crystallized on their end, and they go out and invest that equity into another deal.

[00:08:47] So if you're just starting out, that's probably what you should be doing, creating equity. If you're buying a deal on owner financing, you're sort of creating equity there, right? It's not yours. You're controlling the property with that debt. Now, if you're able to employ the value-add strategy, add value to the property, refinance everybody out. The second note, the first note, get a new mortgage and get some money back into your pocket. You've just created equity.

[00:09:13] So if you're starting out, I think you have to start putting assets on what we call a conveyor belt. Start getting those assets on there. Start letting those assets matriculate. Start letting those assets create equity. Pulling the equity out, repurposing the equity into the next asset. Now, if you're a little bit more experienced, all of a sudden, hey, now, this is the third strategy that you should start thinking about as you're building your monthly family portfolio. We're going to take a quick timeout, and I'm going to jump into the third strategy right after the break.

[00:09:43] And we are back. The third strategy, which everyone thinks is the only way to invest in real estate, the buy and hold. And the irony is, Jake and I love this strategy. And we thought we bought properties and we held them forever. And we're actually on a weekly huddle this week on Monday morning, and we're going through our numbers, our KPIs.

[00:10:09] And Jake says to me, Gino, you know, we've transacted on over 2,500 units. We currently own 1,873 right now. That means we've sold a little over 600 units. Actually, it took me by surprise for a second. I'm like, I didn't know we had that many sales.

[00:10:25] And the reason why we sold, right, because buying and holding, in theory, is great, especially if you're more mature, if you have a more mature portfolio, if you can actually hold it for longer term, if you don't have investors, if they're not expecting their capital back. Great strategy. And Jake and I, early on, bought these assets with no other investors. It was just us and a partner. We were able to hold these things long term.

[00:10:47] We bought good assets that were well maintained in good markets that had good potential, good equity. We refinanced the properties, and we held them long term. It's great if you can do that. But sometimes when you've gotten the asset, and we bought a couple of assets, you know, why do we sell? A couple of the assets we bought, we bought them at really good price points. We saw where we were in the market cycle, and we're like, you know what?

[00:11:14] We're not going to get a better price for this property if we hold it for another five years or seven years. We are not going to be able to make enough cash flow for the next 10 years if we sell it today. That was another metric. And then another one on one of these properties was we didn't like the market that property was in. So we changed our favorability on the market. We exited Kentucky. We said to ourselves, it's too far from our other properties. It's harder to manage these assets.

[00:11:41] So at some points, you can say to yourself, I'm going to be agnostic. I need to look at the strategy. I need to look at the deal. I need to look at the market. I need to look at the amount of equity that I have. And I need to look at the market cycle. These are all things that you need to take into consideration. Now, I will tell you, value-add strategies and fixing and flipping multifamily properties will get you the cash. You're going to need some of that equity.

[00:12:07] But I've interviewed hundreds of investors and two mistakes that they commonly say that they make, them, all the other investors. And I would even say myself. And I think if you're listening to this, if you're going to be honest with yourself, two of the biggest mistakes that people say they make. They didn't buy enough and they didn't hold. They sold too soon. Sam Freshman wrote a book on syndication. It's not a little. It's a really thick red book.

[00:12:37] Look up his name, Sam Freshman. He's probably in his 90s. I'm not sure if he's still alive. We interviewed him several years ago. He's been in syndication, raising capital, owning properties. He's funny because some of his investors, grandkids now own the assets that he has. It's incredible to think. And yet he said two of his biggest mistakes, selling too soon and not buying enough. So for us, the buy and hold strategy is great.

[00:13:05] We still own our very first property from 2013, a little 25-unit property. It's gone through several transformations. We've refinanced that property twice. We're probably coming up on another refinance in the next, I think, three years. The debt's coming due in three years. We're probably going to refinance out a bunch of that equity. It's continuing to pay us. So the buy and hold is an amazing strategy if you have the capital to do it and you have the foundation to do it.

[00:13:33] And you can always employ the value-added strategy to fix the property up, to refinance that equity out. If you're in syndication, I beg with you, I plead with you, think about refinancing some of your properties when you're syndicating. Now, I know you're not going to get a ton of capital back, but the ownership of that asset, when you own the property and five or six years later, you're going to see the amount of value and how much those rents have gone up.

[00:13:59] That property we bought in 2013, those rents were $300 in 2013. We're in 2025 right now. Those rents are over $1,100 plus all the other fees. They've Florexed the rents. The values on that property have gone up dramatically. Where on that 25-unit property, last month's draws, profit per unit, cash in our pocket was $9,000 on that one property.

[00:14:25] Now, it's taken 12 years, but even after year three and year four, most people would have exited that property. When we bought it for $25,000 a unit, all of a sudden you're saying to yourself, $60,000, $70,000 a unit, I've almost more than doubled my money, I'm going to exit that. But there's so much power in buying and holding it, but you have to be very, I think, when you look at it, you have to be very selective with what you're holding. This is a great asset. Now, I'm not going to say it's easy to manage,

[00:14:52] but it's a great little community in a great part of the market. It's continuing to grow. Rents are continuing to grow. Jobs are growing. Why would we sell this asset? Unless Jay comes to me one day and says, Gino, I've got an opportunity. We don't have the capital because we don't raise capital anymore. We're internally funding our deals, but I've got this deal. Let's think about selling this property. Then you're saying to yourself, okay, I'm going to sell this property, but I'm putting it into another opportunity.

[00:15:23] That's when I would say to yourself, okay, you're buying and holding, but you're selling that property, rolling it into another deal. What I want you to take away from this lesson, more than anything, is when you're buying and you're trying to create a strategy for investing in multifamily, take into consideration the market cycle, your exit strategy, what your goals are. It's important to think about what you're trying to accomplish. Is it all about retirement for the future?

[00:15:51] So you're going to buy properties that really don't care about cash flow. You're really worrying about getting capital appreciation in the long term. Are you going to try to get out of your job? So you look focusing more on cash flow. These questions need to be answered. And more importantly, where are you with your financial foundation? Do you need to create equity today to repurpose that equity? So think about the value add strategy. Think about fixing and flipping multifamily properties. And lastly, buy and hold for the long term.

[00:16:21] I want to thank you for spending part of your day with me here today. I know how important your time is, how precious it is. You could be elsewhere learning about real estate. And I want to thank you for spending part of it with me here today. I will see you on next week's How To. Thanks, everyone. Thanks for tuning in. If you enjoyed today's video, be sure to like and subscribe so you'll never miss another episode.