BAM CEO Talks in Insightful Podcast About Learning From Major Investment "Mistake"
Barratt Asset Management CEO, Ivan Barratt, recently sat down with Joe Fairless for an interesting one-on-one podcast about how even a mistake in real estate investing can be a positive down the road. You can find the podcast in its entirety here on Joe Fairless.com for the Best Ever Show. If you don't have time to listen to the whole podcast, we hit the high notes with some of Ivan's take-aways, so hopefully you can learn from what he calls one of the “biggest mistakes” in his impressive career.
Ivan recounts that the “big mistake” initially seemed like a big score. On what he remembered as something like his third acquisition, he purchased what looked like a good deal: a 30-unit property for around $600,000 that had been listed for some time at the higher price of $1.1 million. It was clear to Ivan that the area was soon to redevelop and the property could be a good investment based on location. He recounts assuming that he'd use about $100K set aside for renovations and take the rest needed for renovations from cash flow. That, Ivan noted, was a “cardinal sin” of real estate investing.
Ivan recounts that the problems began fairly immediately. In his enthusiasm and impatience to get to the next big deal, he'd neglected his normal due diligence with this one, leading to major problems once he began to rehab the property. The HVAC systems were in bad shape, the plumbing wasn't much better, but the worst factor of all was the actual tenants. Ivan learned that counting on cash flow didn't work when you couldn't count on the residents to come through with it. He ended up having to lower the rent to try and entice new residents; however, the lower rent didn't do much to improve the caliber of renters. Meanwhile, debt was stacking up in what he called the “maintenance/repair death spiral.”
Ivan had also trusted an inexperienced contractor who couldn't execute and didn't have a solid team in place to see the project through.
The area did redevelop, just at a slower pace than expected. Ivan convinced a lender to go for a redevelopment loan to get the property into the shape he'd envisioned all along. The bad tenants were shown the door, paving the way for a better group of residents at the property. Ivan refinanced the property with Freddie Mac, and as of this year is in negotiations with a buyer who'll assume the Freddie debt in place. Although the deal could have ruined Ivan and his then-young property management company, the property is now sitting pretty as a testament to both hard work and some hard lessons.
The Hard-Learned Lessons
While Ivan refers to this as the deal that could have ruined him, and spoke of “sleepless nights” he's also aware of being lucky to have learned on a 30-unit deal rather than a 300-unit deal. Ivan recommends due diligence as well as being disciplined, so as not to miss warning signs in a deal. He also notes the importance of having proper backing and having a good team in place. These days, his executive team includes a Director of Property Management as well as a Director of Maintenance and Construction, who report to the COO. The property management company is self-sustaining, he notes; this means they can manage the average 200-deal search it takes to find the one deal. To manage the stress of the industry, Ivan says working out definitely helps and so does faith – for him, it's faith in God that the deal he learned on was only a 30-unit property and he took away valuable lessons that have shaped his success.