Navigating Market Shifts in Real Estate Investing with Gino Barbaro - REIA 478

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here's your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. And thank you so much for being with us again today. We have a very interesting guest with us, and he is a returning guest. Gino Barbato is the co-founder of Jake and Gino, a multifamily investor, educator, and operator with over $350 million in assets under management. Their students have closed over 76,000 units, and have $5 billion in deal volume. So, Gino, I know you have a whole lot to share with us today. Welcome back to the show and take us into the show and just share with us some of your secrets for scaling multifamily investments to the degree that you have done.

Dr. Allen, thanks for having me on again. And the secrets, the secrets are hard work, making a lot of mistakes, and learning to pivot. I think learning to humble yourself and understanding that you will never truly be an expert in life. And when you think you're an expert, game over, because the market shifts and things start going in a different direction. And if you're the expert and all you see is tunnel vision and all your filters are telling you this, when in reality it may have shifted to that or to that, that I think that honestly is the secret to life. If you had to ask me about the secret to scaling or the secret to success in life is really to keep your nose to the grindstone, to work hard and just to be Like I said, just to be humble and to say, hey, there's a lot of things that I don't know. And the older I get, it's like, wow, I really know, I really know very little. As you get older, you say to yourself, man, there's a lot that I don't know here.

Yeah. Hard work and humility. Yeah. I like that, Gino. Well, we have seen, you just mentioned that market shift, and we have seen a lot of shifts in the market in the last, really the last couple of years. Interest rates, Escalated. Along with that, inflation escalated. Just prior to that was COVID. So what were some of the big surprises for you all?

Wow, that is a great question. I have the— I guess the fortune of living through the previous market cycle where a lot of investors didn't. And I saw what happened in 2008 with short-term debt. So that's why we are— our framework is buy right, manage right, and finance right. We don't want that short-term bridge debt that a lot of operators have had to use over the last couple of years. And bridge debt is great, it's a great tool when used properly, but a lot of operators were forcing deals and using bridge debt on stabilized assets. And, you know, who knew that the Fed was going to raise rates 11 times in a year and a half? No one knew that, but the odds were they were going to raise rates. And to make these deals work, a lot of these deals were forced. And if you go back into previous market cycles, you'll understand interest rate and market rate cycles. As, as you're getting long into, into an economy, they need to slow the economy down. Inflation was not transitory back in 2020. Anybody who knew better knew that that was just a way for them to say, hey, it's here, we're not going to deal with it yet. They dealt with it. Took them too long to deal with it. And when they dealt with it, it shocked the system and everyone was surprised. When you're selling used cars and you're making money on your used car, that's inflation. When lumber prices are up 80% and exit. It was inflation. So anyone who understood business and cycles knew that rates had to get, you know, pushed up. That's the job of the Federal Reserve, is to really control inflation. And if you understood that, you'd be saying to yourself, like a lot of our members, long-term fixed-rate financing. And deals may not pencil out that way, but it's okay because I always love to say no deal is better than a bad deal. Once again, I've got a lot of wisdom and a lot of experience. I don't want to do any bad deals, especially If I'm a steward or if I have investors, that's something that I have to be wary of.

Well, you went from almost nothing to 1,500 units in just a period of 50— I mean, of 5 years. How did you manage to do that?

In 2007, when my father passed away, I was in the restaurant business with him for years, and I had to question myself. Do I want to continue doing this restaurant? Is that my dream or is it his dream? I loved working with my dad ever since I was 7 years old. I'd been in the restaurant with him and, and I grew up, I went to college, and I ended up opening a restaurant with the family. And when '08 came, I read T. Harv Eker's book, The Secrets of the Millionaire Mind. And all of a sudden I understood and I realized that your fruits are in your roots. All of, of the success and all the achievements that you have are your fruits. Well, they're derived from very strong roots, from a very strong foundation, which I had very little. I had always said to myself over the last couple of years, I had life before Jake, meaning Jake, and life after Jake, meaning my business partner. Life before Jake was a limited passive investor or just a person investing in real estate with no map, no process. I didn't know. I didn't know due diligence. I didn't know underwriting. I didn't know a lot of the skills that you need to invest in real estate. After I read the book, I decided to invest in mentorship. I learned how to invest in multifamily. I met Jake in 2009. He was a pharmaceutical rep taking orders out of my restaurant and bringing them to doctors' offices and trying to sell pharmaceuticals through Italian food. And when he moved down to Knoxville, Tennessee in 2011, I said, Jake, I know this multifamily thing. Your boots on the ground. Let's start investing. So I had already a foundation beneath me from making all those mistakes. And in 2011, you may say it's lucky. Some people People may say, hey, you're crazy, but that was the opportune time, as it— I think it is right now, where the market was really in, in the doldrums. There was no financing, GDP was low, you couldn't raise capital. There were deals on LoopNet. It still took us 18 months to find that first deal, but after we bought that first deal, the second deal came 3 months later, and then 6 months after that, we got our third deal. And you can look back and say that was the time. But it's pretty easy to say that was the time everyone was running for the exits. Everyone was getting— was burned from the '08 recession. And if you fast forward to what's going on right now, if you're a limited partner, a passive investor in deals, you're getting capital calls. You may be having some foreclosures. There's going to be some pain going on, but there's also going to be a lot of opportunity. And for me, I think the key to us scaling our portfolio was really focusing on systems and focusing on what we call our core values. And what we call a cadence of accountability. You know, Dr. Allen, once you start looking at real estate and even multifamily, but any real estate niche, once you start looking at it as a business, everything changes. You're not just buying real estate. You're not just becoming a landlord. You're buying a cash flow generating revenue that has a future stream of revenue. And if you're looking at every single deal from that lens and you can apply basic principles and basic systems and you start managing it and you start adding key performance indicators into your systems and into your business, All of a sudden you can start to scale that business.

Well, good advice. You mentioned core values and cadence of accountability. Go into that a little bit more. What are your core values and what do you mean by cadence of accountability?

You know, when I had the restaurant for over 20 years, I only had one restaurant. I was the prototypical mom-and-pop, and that, believe it or not, worked from 1995 until about 2005, 2006. We made a really good upper middle class income, even with 3 families in a little 70-unit, 70-seat Italian restaurant in New York. We did great because there was less competition. There was no Grubhub, no food deliveries. People actually came in. They liked to sit down and eat. It was a different environment. And when I got into trouble with the restaurant, I couldn't scale. And I think this is my opinion. I had no core values there. I had no North Star. Every time there was a problem with an employee, I was blaming the employee. I was not the leader. I didn't have these core values where I could point to and say, this is what we stand for. This is what our mission is. When we started Jake and Gino, the first couple hundred units, we didn't have one either. And as we started to scale, We said to ourselves, well, there's something we need to do. We need to go out and find some coaching on how to scale an organization because we've never done that. We've never done anything like that before. And you're not born with those skills. So once again, we humbled ourselves, we invested a lot of money, and we understood the first thing is you need a mission statement and you need core values. And for us, it took us a few months to flush out our core values. We say it's people first, extreme ownership. Unwavering ethics, growth mindset, and make it happen. Now, that was for all of our entities. As that, at that point, we had an education company, we had a property management company, we had a syndication company where we had investors. So those core values, they permeated throughout the organization, and they're not a marketing piece to say, this is what I want my edu— my company to, you know, to portray. This is, you need to live those core values. You are going to hire and fire employees with those core values. You're gonna hire and fire vendors with those core values and, and even investors. If you're soliciting and you're taking money from investors, you want to be able to show them those are your core values that you're living by. But you also need to align with your investors with those core values. And for me, once we had those, it was a lot easier to build a culture within your organization. And you, you know, probably as well as anybody, your organization is only as good as the people that you employ. If you have great employees, you're able to scale. And how do you get great employees? By sharing your vision with them. And these core values for us were a great way to do that. And as far as the cadence of accountability, once again, thanks to Gino Wickman and to Scaling Up, Verne Harnish's group, understanding that your business life as well as your family life needs to have certain rhythms. And we call them a cadence of accountability, whether it's quarterly meetings. Yes, every quarter for 5 or 6 hours, we meet that one day and we plan our priorities for the next quarter. Every morning at 8:45, I am on a daily huddle with my team here at Jake and Gino, and we're going through our wins from yesterday. We're going through what we need to do today, and we have any stucks and challenges. We have weekly meetings with all of our team members. Jake has a weekly level 10 meeting, what Gino Wickman calls, with his property managers and with the maintenance techs. Having these touchpoints and these cadences of accountabilities has allowed us to scale, has allowed us to control, keep control, and to build culture. Within that organization that we have. When I had the restaurant, I didn't have a cadence of accountability. I didn't have core values. I didn't have any expectations set with my employees. And that's why I only had one restaurant, and that's why I had a job. I did not have a scalable business. Does that make sense?

Yeah. That makes perfect sense. And, you know, thank you for laying it out there in plain English and in an understandable format there. The core values that you talk about, can you give us some examples of how employing those core values changed your business? Because as you mentioned, there was a dramatic change in your business once you really set those core values. So can you give us some examples of how?

Yeah, I can give you 2 specific examples. We were doing a bus tour with our Jake and Gino students It was a little over 2 years ago, and we were visiting one of our properties, and Jake had called the landscaping company on a Wednesday, making sure they were going to cut the grass and make the property look great. Saturday morning comes, I'm on the bus with Jake. We get off the bus and my brother, he's turning red and he's pissed, and I don't really notice why. He gets out. They had not showed up. Well, why didn't they come? Why didn't they come and do the job that they were promised to do? Jake got on the call with them Monday, says, goodbye, see you later. You know, just did not take that nonsense. Whereas sometimes we may say, oh, they were busy or they didn't have time. We had a set plan. You made me look really bad in front of my education company. We talked about these core values and holding accountability. Now, that may be difficult during COVID I understand, but that's short-term pain for long-term gain. I, I really believe that. And that is the hardest thing as an entrepreneur to do is to see to yourself, wow, I may have to let somebody go. And in the short term, it's gonna be really challenging, but in the long term, it's gonna be for the benefit of the organization because you're gonna see your employees are gonna pick up and go, well, they're letting, they're letting that slide. Do they really live by their core values? And I think the other example would be just an employee coming in, an assistant manager saying, well, that's not my job. I don't, you know, mop the floors. Let's say for instance, well, if I can do it and you're telling me it's not your job, you're not a fit for us. So understanding that when you're, you know, interviewing people and laying those core values out and actually sharing with them your core values and saying, how have you lived your life or your previous job, did you exhibit any of these core values? It's really, really important. And I think for us trying to align ourselves with vendors, whether it's a property management company, whether it's an accountant, are my K-1s going to show up by March 15th? Whether it's a securities attorney, I need my PPM and my documents as soon as possible. You promised next week. I can't raise capital until I get them. Well, if they're late, great. What happens? Are you going to live by your core values and say, you know what, extreme ownership? You did not have extreme ownership. I need to look for somebody else. It's all about laying them out and setting expectations and being an adult and leading by those core values. Yeah.

And that is, I, that, that's challenging. And certainly without, without really laying those core values out, it, it's really, it could be very easy to just let that slide. I mean, like the example with the landscaper, I'm sure they'd been working with you for some time. You had a relationship with them and That's challenging to go, our relationship is over. You really let us down.

Being an entrepreneur, Dr. Allen, being an entrepreneur is challenging. It's a lonely road and you've got to make decisions. And everyone says, I want to be my own boss. Well, before you stop and you say that, make sure you talk to other entrepreneurs because it's not all you see on Instagram. It's not all yachts and Ferraris. There's a lot of difficult decisions you need to make. And there's a lot of people that are counting on you. And I can convey, you know, I can switch this over into the family. I'm a father of 6 kids. It's really difficult being a father of 6 kids, making mistakes, being transparent with them, saying you're sorry, setting boundaries, spending time with them. I mean, all of the things that you need to do as a leader of the household, they're challenging. Just put yourself in an entrepreneurial role where all of a sudden it's about making money and it's about advancing the organization. There are some really difficult challenges you need to make. And, and Jake made the call with the landscaping company. You know, for a couple of weeks, it was challenging out there. We went out, we put 3 more bids out, we found somebody else, and, you know, the rest is history. But those are some decisions that you're gonna make, and you need to make them not only for yourself but for your organization. And like I said, if you do have investors, you're fiduciary to them, so you need to make the best decisions for them as well.

Enlightened investors, if you haven't done so already, Be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Exactly. Because yeah, I mean, it just goes, it goes deep. I mean, it's, it is vertical and it is horizontal and every decision you make has consequences to it. And it's just challenging to keep all of that together. Well, you have a 3-step framework that you have employed. What is that framework?

The framework is used whether you're a passive investor or an active investor. And I've learned over the last 12 to 18 months That you can use it to buy businesses as well. You can use it to buy single-family homes. You can use it to buy RV parks. It's buy right, manage right, and finance right. I want you to picture a wheelbarrow. Jake one day is outside. He loves landscaping, he loves chainsaws, and he sees a wheelbarrow and it's tilted over and it comes to him, you know, investing is a 3-step framework. It's buy right and finance right. Those are the 2 back legs of the wheelbarrow. Once you've bought the deal, that's one leg right there. The finance rate's the other leg right there. They're both fixed.

Mm-hmm.

The wheel of the wheelbarrow is the manage rate. That's in constant motion. And that's what a lot of operators, that's what a lot of business owners don't focus on. They focus on the shiny object because it's really sexy to buy a deal and it's really sexy to finance a deal, but you need an operator. And I think if you're looking at a business, it's the same thing. Are you buying the business based on fundamentals, based on finances? Are you financing it? How creatively? SBA? Are you going to a bank? And then ultimately, are you driving the operations of the business? So if you can focus on those 3 pillars, I mean, I think you will dramatically decrease the risk in your assets. And like I had said previously, life before Jake, no framework, no map, no process. And life after Jake, once we bought a couple of deals, we saw that every deal that we bought If we could fit that criteria based on those 3 pillars and, you know, to, I guess, extrapolate it a little bit further, when you're looking at a deal specifically in real estate in this buy right framework, before I met Jake, everything to me was a deal. I'm going to look at multifamily, I'm going to look at 10 units, I'm going to look at 100 units. I'm going to look in several different markets. Your buy right criteria is what you're focusing on. And this is different for everybody. And this continues to change as the market cycle evolves. So for us, our buy right criteria right now We're focusing on within 3 hours of Knoxville, Tennessee, because we are vertically integrated. We like to manage our assets, so that's where we are. We like to look at median incomes of at least $50,000 or above. We like to buy townhomes, preferably with garages. We love that kind of unit mix— 2 bedrooms, 1.5 bath townhomes. We love assets or units that have washer and dryer hookups. Great amenity. We like brick. We like assets that are a little bit newer in this part of the market cycle, 1980s and newer. As you can see, I'm formulating this criteria. So when I put it together and I'm having conversations with brokers, well, they'll be like, oh, Gino's looking for that deal. I'm going to send them over that deal. And what it does to us, it keeps us focused on the assets. It doesn't make us look at other deals. It doesn't make us look at other opportunities. We're focusing on the opportunities that we're putting down in our buy right criteria. And unfortunately, it does change as the market cycle changes, because when Jake and I started buying deals deals back in 2011, the C properties, the value-add properties, those prices were ridiculously cheap. So we focused more on those assets. As the market cycle has gotten longer and it's gotten, you know, those C prices are getting a lot closer to the B prices, we're tending to look for the newer assets that have a lot less deferred maintenance. Pricing has gotten pretty similar now. In the next 12 to 18 months, I think those C properties are going to drop in price. So we'll continue to look at those, but it's always through the function of buying right, Having long-term fixed-rate financing and being able to employ manage-right principles.

Enlightened Investors, we're visiting today with Gino Barbato. So, Gino, tell us about Gino Barbato and your company and how it is we can find you.

JakeandGino.com. It's really interesting. I, for the last 7 years, have been focusing on active investors, active investors. I want to get, you know, people in the Jake and Gino community to do deals and teach this framework. And it dawned on me over the last 6 months, a lot of chatter from limited partners being frustrated with deals that are having capital calls, deals that are not working to their liking. So I decided over the last 2 months to create what I call Passive Investor Pro. I want to teach limited partners and passive investors to invest in real estate. And I think our company is uniquely positioned to do that for, for more than, you know, a couple of reasons. The first reason is Jake and I, we do not syndicate anymore. Our community syndicates. So if I'm going to teach somebody to invest passively, I don't have something to sell them. I'm not going to say to them, "Hey, by the way, invest in my fund." That's not what this whole you know passive investor program is about. To me, it's really about teaching the passive investor to invest intelligently. So when they're looking for deals, they can vet out the good general partners and invest in those deals. And the deals that don't work, hopefully those deals do not get any money funded, and the pricing drops. That's what I'm hoping. There comes there comes a little bit more of an equilibrium. them into the market. And the other reason why I'm doing it, Dr. Allen, is I started out as a passive investor in 2005, and I didn't even know that I was in a syndication. I didn't know how to underwrite a deal. I didn't know how to vet a sponsor. I didn't know what stress test was. Underwriting? I didn't even know what underwriting was. I knew nothing, and I lost a lot of money. And I could have blamed the general partner, the person who put me into the deal, and I did. But ultimately, it was my responsibility to say, I don't know what I did wrong. And that's what's really, I guess, got me motivated and inspired to create this program, because there's a lot of professionals out there who want to invest in real estate who don't have the time to, but they still want to participate in the, in the benefits. And there are great opportunities to passively invest with some great operators and some great sponsors out there. It just behooves passive investors to learn the framework. You need to learn the businesses if you're actively investing in it. Once you can understand that, and it doesn't take a lot of time or effort, but once you understand the framework and you understand how to look for these opportunities, And then you couple that with what you're trying to accomplish, what goals you're trying to achieve in real estate, and what returns you're trying to accomplish, and what markets you're trying to invest in. That will make it a lot less risky for you to start investing in real estate passively.

That is so full of wisdom and I know experience on your part. But yes, there are so many operators out there that share this idea of passive investing. And it's hyped, and a lot of people are going into it that don't have a clue as to what they're doing. There's a lot of other people who, because of all of this hype, could be going into real estate investing, but they see it as nothing but hype.

Yes.

And so, they stay out of it when they could be getting some really excellent returns by doing that. So, there's both sides of that coin that I see going on there. And so, I think it's great. What you're doing there in terms of the Passive Investor Pro. So if you're looking for education, go to Gino and Jake's. Gino, I'm curious, you and Jake were friends before you went into business with one another.

Mm-hmm.

When you did go into business with one another, neither one of you really had experience in terms of real estate investing, and yet you've come together and you formed a very long-term relationship, a dynamic relationship, a relationship that has transformed you, both of you as individuals. What's the dynamic in that relationship that made that work?

When we got together, we both wanted something better for our lives. That's the bottom line. And I think I was And, and I had a lot of respect for Jake because I saw how hard he worked. Our values aligned. And, you know, one of my mentors calls it values-based decision-making. We both wanted families. We both worked really hard. We were both committed. We were both committed to the long term. We both did not have shiny object syndrome. We're not investing in crypto. We're not investing in single-family homes. We're investing in multifamily. And with the respect that I had for Jake, I did not want to let him down. So I did whatever I possibly could. There's no excuses. I mean, when I need to fly up to Knoxville for a closing, December 18th of last year, it's on a Monday, the Monday before Christmas. I needed to fly up for the day to sign some documents. They needed some wet signatures. Did I want to go there? Absolutely not. It's like a week before I've But you know what? It's a 97-unit deal that's going to completely transform my children's future as well as mine. I'm going to get my ass on the plane, fly up there, still hem and haw, do the closing, and fly back the same night. If you're going to be in business with somebody, it's a marriage. It's a relationship. You can make all the excuses you want. You can either make money or you can make excuses. Choose whichever one. And I was sick and tired of not making money and working really hard. So why not work really hard? Don't make excuses and make money. And I think Jake views it the same way. He's feeding my family. I'm feeding his family. I am not letting him down. And we have a great conversation because we both like each other. We can hang out, have a couple of beers. I speak to him 4 or 5 times a day. We're underwriting deals all the time. We're talking about the properties. We're talking about the education. I was just up in his condo last week touring properties with the Jake and Gina community. I was staying at his house. You need to have that kind of relationship where you have respect amongst, amongst each other, and you need to really have a values alignment. And our values do align. And I'm going to say it one more time, you need to have to want to work hard and not to give up and be held accountable by your partner. If you can't do that and you don't see that in a relationship with somebody that you want to partner, then please pass on that partnership.

Well, one last question here, Gino. What are the 3 pillars Of real estate?

Email me, gino@jakeandgino.com. I'll send out the Creative Cash book. It dives into the 3 pillars. It dives into seller financing. But the 3 pillars— I want you to write this down— it's market cycle, it's debt, and it's exit strategy. And you have to couple that along with the 3 pillars that we talk about: buy right, manage right, and finance right. And Our coach Bill Hamm wrote the book, but all of these concepts were all around and he packaged this into something really beautiful. When you're looking at a deal, you're looking at the market cycle of the deal. You always look at your exit strategy of this deal. You just can't say to yourself, I'm going to buy and hold forever. That's not how commercial real estate works. We're fortunate that we can buy these deals for 10, 12 years. But what is your exit strategy if you're saying it's a short-term deal? Well, if it's a short-term deal and that's your exit strategy, well, then now you know what kind of debt you're going to get. And if all of that is comprised, the market cycle is important because if you're saying, I'm going to buy a multifamily and I'm going to flip it in the next 2 years, you're not doing that in this part of the market cycle. It's going to be a longer time hold. So understanding the market cycle and then coupling your exit strategy along with the market cycle and then understanding what type of debt you need to get for that specific deal, you want to look at every deal you're underwriting through that lens.

Well, I said that was my last question, but I have another question. You had mentioned bridge debt and bridge debt getting a lot of people into trouble currently. A big part of real estate investing is the ability to leverage, but leverage can certainly be overused. What are your parameters there in terms of leverage?

Great question. For us, when we started, we used recourse debt and people like, you're using recourse debt. I mean, I'm like, yeah, I don't have anything to lose. I didn't have anything to lose when I started, so take it. But I always knew that I would fulfill my obligations. So we started out with community banks and credit unions, and then from there we were able to refinance our properties from community and a credit union to agency, to Fannie and Freddie. We would get it onto non-recourse debt. Over the last couple of years, we've had to pivot back to community banks and credit unions. They're recourse debt, but they're a great alternative. They give us 5-year terms. Credit unions are loan-to-cost where we're able to put in the loan proceeds, the rehab proceeds into the loan proceeds. So if you're getting an 80% loan-to-cost, 80% of the loan rehab is in the loan itself. It's amazing. It's an amazing tool. And it also gives us a 5-year window. It gives us a much longer runway where we can refinance that property. We just recently, about a year ago, refinanced one of our portfolios. We did a 55% loan-to-value because rates were a little bit higher. We got a much better rate. We pulled out a little bit less equity than we wanted to, but a 10-year term, interest only. Very good. If the world goes to hell in a handbasket, we've got enough equity in that deal. We haven't straddled ourselves with a ton of debt. I think it behooves people, especially when they're starting out, be wary of leverage. It can work both ways. It's a great accelerant. And it can also be an amazing destroyer. So use it wisely.

Excellent advice. Gino, it's been wonderful having you. Wonderful, exciting time with you today. I love your energy and appreciate you being with us today. So thanks so much for being on our show.

Thanks, Dr. Allen. Appreciate it.

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