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Today we have the pleasure of hosting Gino Barbaro, a seasoned real estate investor, entrepreneur, and bestselling author. Gino’s journey in the world of real estate has been nothing short of impressive, with a portfolio exceeding $100,000,000 in assets under management.
Gino is also the co-founder of Jake & Gino, a multifamily real estate education company, and he shared insights into their unique framework: Buy Right, Manage Right & Finance Right ™. In this episode, you will have the chance to delve into the strategies that have propelled his success in the multifamily real estate arena.
In this enlightening episode, Gino touched upon a variety of crucial topics that have been pivotal to his success in multifamily real estate. He shared his current market perspective, shedding light on the ever-evolving real estate landscape, and the opportunities he sees on the horizon.
He also delved into the core of his approach, the Buy Right, Manage Right & Finance Right ™ framework. He elaborated on the significance of acquiring properties at the right price, implementing effective management strategies to maximize cash flow and property value, and optimizing financing to enhance returns.
In This Episode
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The Buy Right, Manage Right & Finance Right ™ framework
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Effective management strategies to maximize cash flow and property value
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Current market perspective in multifamily real estate and opportunities and challenges in the current real estate landscape
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Importance of acquiring properties at the right price and mitigating risks
Welcome to another episode of Wealth Strategy Secrets, today we have the pleasure of hosting Gino Barbaro a seasoned real estate investor, entrepreneur, and bestselling author.
Gino’s journey in the world of real estate has been nothing short of impressive with a portfolio exceeding 100 million and assets under management.
Gino is also the co-founder of Jake and Gino a multi-family real estate education company and he shared insights into their unique framework of buy right, manage right, and finance right. In this episode, you’ll have the chance to delve into the strategies that have propelled his success and the multi-family real estate arena.
In this episode, we’ll discuss the buy right, manage right, and finance right framework effective management strategies to maximize cash flow and property value. We’ll also cover a current market perspective in multi-family real estate and opportunities and challenges in the current real estate landscape and finally, we’ll cover the importance of acquiring properties at the right price and mitigating risks without further ado.
Gino, welcome to the show.
Dave, thanks for having me as my friend. How are you doing?
Doing awesome today. I know the listeners will love the discussion, which we already started, going at it before in the green room. So looking forward to this. And for folks, who might not have heard of you or your background in your community. Can you share a little bit about your background? Do you know how it all started for you? How did you get in the game?
Well, Dave, before we started recording, we had the pre-podcast and this is the podcast, So it was a lot of jumping on and getting to know you. And one of my favorite topics, honestly, is money. I mean, my parents were both immigrants and I was raised at a young age to save. I mean, we liked talking about money, but money was scarce. It was more of like save for the rainy day. I got into the restaurant business because my dad owned the restaurant. I was eight years old going to work with him.
And I thought every eight-year-old went to work with their dad at the restaurant. So it was ingrained in me. One of the things that the restaurant taught me over the years, I opened up my place in 1994. I was 23 years old. I’ve been making payroll since 94. That’s a scary thought. But I’ve been doing it for a long time. And when we opened it up, it was phenomenal. I mean, back in the 90s, you could own a small business and make a phenomenal living. I think all of that changed in 2007, and 2008 with the Great Recession and also with technology.
Once all of a sudden, all these different apps come online, we have to start delivering food, we have this competition, things start changing, get expenses like healthcare and all this unemployment, and all these other expenses to start popping up. I say to myself, this is not sustainable. I can’t live on one stream of revenue. I had four kids at the time. I need to find something different. And for me, luckily, I had done a couple of bad real estate deals and I gravitated towards multifamily because my parents did do one thing right. They did have a few properties that they owned.
They own the restaurant where I was working and I was paying my mom rent and she had three apartments upstairs. I’m like, huh, it’s snowing this week. I’m not getting paid, but Mom’s getting paid. Mom’s still collecting the rent. So that mindset of working hard, and saving my money was a precursor and I didn’t even know that was a couple of muscles that I needed to start to be able to build wealth.
100% Gino. It resonates. And I think a lot of us right in this country, we’re born into a scarcity mindset that’s where our parents came from that generation and look at their parents, even going through the depression and different things. So there was a whole different way about how we approach things, everything from food and energy, and everything was, very limited.
And it was all about sweat equity, how much could you put into the weekends, I was always working on the weekends. I was always working multiple jobs. I was working at night, and you pat yourself on the back and say, Hey, this is sweat equity, We’re putting it in. But when you can transition into an abundance mindset, you realize that your talents can have a bigger impact. You can make more of a difference When you’re thinking in abundance.
But let’s transition Gino into what we were talking about earlier, which I think it’s ironic, We were talking about wealth strategy secrets, and one of the initial secrets to building wealth is not that much of a secret, yet so many of us struggle to achieve that. So why don’t you break down that concept that we were talking about?
When you transition into an abundance mindset, you realize that your talents could have a bigger impact, you can make more difference.
So for me, I realized that saving was a good thing. But if I’m saving for an event, I was taught the middle-class way of saving. Use a 401k, use a 529 plan. The problem was when my children got to the age of going to college or when I retired, there was a certain amount of money there. As the event occurs, that money gets depleted and it’s no longer replenished. When I realized that I needed to save to buy an asset and that asset would pay for the event.
Everything changed for me. And I’ll give you a perfect example. In 2013, we bought our very first deal, Jake and me. We bought a 25 unit, it was our first deal. And over the years, rents went from $350 to where they are currently $1,100. The asset, we bought it for $600,000. It’s worth over $2.5 million today. We’ve owned it, it’s been 10 years. The benefits that we’ve gotten, the principal pay down. The tax benefits are all galore.
But the kicker is the cash flow that I get every month. We get an average of between $8,000 and $9,000 a month. This month, I got a check for $2,500 from that property. Well, that first property has put my first child through college, my second child is about to graduate, and my third one’s up to bat, all from one property. I still own it, and it’s still producing money every single month.
And that was the complete switch and the complete change for me. I think what happens when people are trying to create wealth, they need to have an understanding of their spending habits. You will not be able to create wealth no matter how much money you make. You can make $18 million a year. If you spend 17 and a half million, well, you’re going to go completely broke because you don’t have any money to pay your taxes, but you need to be able to be diligent enough to save some of that money and have an understanding that you need to allocate that into assets. That will be able to pay you today and down the road.
You need to be diligent enough to save some of your money and have an understanding that you need to allocate that into assets that will be able to pay you today and down the road.
I couldn’t agree more. And the best book that encompasses that topic is The Richest Man from Babylon, Where you have to trust and try to save, and I know this is an important lesson, we all try to teach our kids, You know, try to always pay yourself first, try to invest and buy assets, for the long term. And then that will support you. But I know it can be challenging, We always have things in life that come up.
We’ve got things for our kids, maybe with a career, or you’ve got a vehicle that breaks down and some of these unexpected expenses. But now more than ever is critical. We’re coming into Q4 right now, so I think it’s a great time for investors to work on, I wouldn’t call it a budget, but I would call it a forecast. What does the next 12 months look like?
Start by looking at your goals in creating your vision and what you want to get to in terms of a certain cash flow goal you might have or a net worth, how many investments do you want to make in 2024? And then figure out, okay, now how can we get there by saving some additional money and different things?
And the other thing that I would add to that as well, Gino, that I think is super powerful.
It’s, and that’s why we do this show and your show as well, it’s educating investors to realize that even if you feel capital-constrained, it’s amazing the opportunities that you can come up with to generate new capital, It could be a new partnership or a new collaboration you have with someone or side hustle or something. Do any, any thoughts on that?
Before I get to that, that’s a great idea. I need to bring it back to and finish that thought about the savings and all. When you have young children, what do you do with your kids? We tell our kids to save for a rainy day. Hey, you’ve got money from a mitzvah or a baptism. Let me take that money and put it into the bank. Well, all of a sudden a child is denoting savings is painful because you’re taking money away from them and putting it away somewhere for them for a rainy day. So you’re already setting them up for failure and I don’t think we even understand we’re doing that.
I give you a perfect example of how I helped my son understand this. When he was 16 years old he came to me and said, Dad, I want to buy an amp for my guitar. I’m like good Mike, how much is it? It’s 1500 bucks. I said Mike, you have $5,000 in the bank. You already have two amplifiers.
You’re going to spend 25 to 30% of your net worth on an amplifier, I said, I’m not going to let you do that. And hemming and hawing and hemming and hawing, and after six months he gave up, we had a deal come up at that time. I took all of his $5,000, it was painful for him because he sought, to leave the bank, and go to zero, but I put it into an asset. That asset over the next five years has gone 100x. He’s blown up, but more importantly, through the journey, He’s understood what an owner draw is.
He talks to me about seller financing. Dad, when you get your next deal, can you sell your next deal to me? He’s going to want us to dilute me. He’s talking about economic and physical occupancy, which helped on one of our deals, but he understands now that he put that money aside to work and now every month those properties are paying him. And we’ve had like four or five refinances in the last four years from that one deal because he keeps putting into it. Instead of getting that money and buying something with it, he’s saving that money to put into the next deal. And now we’ve got another deal coming up and he loves guns, he loves firearms, my son.
He’s like, I was about to buy a gun Dad, but guess what? We’ve got this deal, I know you need 50 grand, so I’ll hold off on the gun purchase. That’s what you’re trying to teach your children. And that is adults, it’s very hard for us as adults to come through that concept. It’s about the psychology of money. I would recommend the book 100% to anybody, written by Morgan Housel. It’s the relationship that you have with money. It’s a dopamine hit. It’s easy to go out and buy something real quick and you get that dopamine hit. It’s a lot harder to train your mind to get that dopamine hit than to wait to save money. Now my son, I think, feels good every month the draws come in. He gets that dopamine hit from seeing the draw come in from that savings account getting bigger and he’s working towards that. And every time a deal comes, he’s working towards that, which brings him happiness. Not buying the guns, you have to understand what brings you joy, that brings him joy.
But I think if you can balance yourself by understanding your relationship with money, if you get it and all of a sudden you feel the need to spend it, that makes you feel good, it’s going to be hard, Dave, for you to create wealth that way. And that’s where a lot of us get trapped. It’s called Parkinson’s Law. You make 100 grand, you spend 90. You make 200 grand, you spend 180. As you’re starting to earn more money, you tend to increase your lifestyle.
Well, if you can take a look at that and say, well, we were okay with 100, why do we need 200 now? It’s time to look at your account and figure out how to manipulate it and say, I need to put that little extra on the side and then start feeling good about it. And then all of a sudden your brain starts associating saving and investing as a good feeling and going towards that. I hope that helped because to me that was, it’s been weighing heavily on my mind for the last six months wondering, why do people have seven-figure incomes? They’re making a million dollars a year plus and they’re living paycheck to paycheck.
I think this is the reason why, to be completely honest with you, they’ll always be stuck in that rat race, and that hamster will if they don’t adopt this new mindset and these new habits where they can allocate some of their money aside and start putting that money towards assets.
I couldn’t agree more. I think investor psychology is so important Because money is the tool anyway, Why are we buying this asset, Maybe you’re buying this asset because you’re trying to create cash flow, which is going to give you maybe it’s more financial security so you can make different decisions in your life. Like I know looking at my kids, if they had, a few hundred K and the bank, they might be making different decisions right now about their career.
But getting crystal clear clarity on what your goals are, and what your vision looks like, and then starting to put a plan in place to be able to get there. So whether that’s saving more, coming up with more capital creation types of opportunities to get there, that is at the heart of this, Because the investments are the technical piece of how you’re going to get there. But if you don’t have it wired in your mind, You’re going to miss the target if you don’t have one every time.
You asked a great question. I want to answer the question. For me, I think you said collaboration. In real estate, it doesn’t come down to whether you have money or not, because most of us start without money. Jake and I, in that very first deal, it was a total of $87,000. Me, Jake, and my brother each put $27,000 into that deal. We used seller financing on that deal. And guess what? Seller financing is back. It’s raging back, because deals are harder to finance right now. There’s more opportunity with seller financing. I think the other thing that you need to figure out.
If you hit it with goals, but as an investor, and as a person, what are your values? I think if you can figure out what your values are, that comes back to the psychology of money, are you more of a risk-taker? If you have a long-term mindset and you’re willing to defer it, multifamily is the best vehicle because within the next five years, if you start investing now, I can almost promise you, that if you do all the right things, you will be able to retire.
That five-year cycle will allow the assets that you’re buying to be able to matriculate where you’ll be able to pull that equity out and resource that equity. It takes a little bit longer, but figure out what your values are. And if you’re the person who likes adrenaline, who’s a real junkie and all that, multifamily may not be the venue for you early on because you may need to be doing transactions, you may be getting into crypto. That’s why you have to understand what the makeup is all about.
But to your question, Syndications are an amazing way to start scaling up and getting into multifamily. If you don’t have the credibility, go out and find an operator who does. Try to partner with that operator. Try to bring value to that operator. See how that operator can use your help. Are your boots on the ground there? Can you help them asset manage? Can you help them raise capital for it? And get on a team. Or if you have money, and capital sitting around, you as a limited partner, invest in somebody else’s deal. Understand that you have to know how to underwrite the deal and do it as if you’re doing it yourself.
But there are so many ways to get into real estate that I think people think of them doing themselves and there are so many functions and so many different facets of the real estate space that you need to have a team. I mean, multifamily is a team sport because you have investors, you have asset managing, you have property managing, you have deal sourcing. There are so many different avenues and venues to get into this business that if you can find one that you shine in and you can start partnering up with other people, great way to start scaling up in the business.
Have you created an overall wealth strategy for your investment thesis?
I call it the baby monkey soldiers. And, what it is, this is my wealth thesis, I have a dollar bill here, Every dollar that comes into your life is what I call a baby money soldier. Now, a part of that dollar is operating expenses. You have to live with operating expenses, you have to deal with it. Part of it is luxuries. You go out, you have a good time, go to dinner, go partying, and part of that dollar needs to be saved to buy assets.
Part of that dollar you can use for education. Education is an investment in yourself. Part of that dollar needs to be put into reserve because you know what? At one point you may have a problem, or you may have an opportunity. The way you allocate your baby money soldiers, and your dollars will indicate how you become wealthy in life. The goal is to procreate and let those baby money soldiers continue to multiply. Most people early on use too much of the baby money soldiers towards luxuries. When you do that, they’re dead. They have no shot.
They’re using it for operating expenses, like having cars, right, you need a car, but do you need a thousand dollar a month car payment? Do you need to have a $4,000 mortgage bill? Do you need higher? You want to cut them back. The goal is to have enough in reserve. I like to use whole life insurance, to put my money in reserve, because it’s a savings vehicle. It’s a life benefit and it’s also a death benefit. It’s part of state planning, That’s important for me, but I can have access and I have liquidity from day one.
So part of my money in reserves, part of my soldiers, I’m not going to bring them out to the battlefield. But the other part is going to go onto the battlefield. I like the game of risk. They’re going to conquer a property. Once that property is conquered, it’s going to create baby monkey soldiers. I don’t kill them by buying luxuries with them. I take those and I save them to go out and conquer another property. When that first property that I bought refinances, all of a sudden I’ve got a bunch of baby money soldiers here that I’ve got, they procreated.
Don’t kill those baby monkey soldiers. Put those into another deal. Then the second deal, when it refinances or it sells, you’re creating more baby money soldiers. The problem is people kill their baby money soldiers too early in life. They don’t give them a chance to procreate. And that’s the problem. And what I call mercenaries in my game are using other people’s money. When you’re borrowing money at the bank, 80% loan to value, 70% loan to value, you’re borrowing mercenaries from the bank and using them.
If you can use mercenaries wisely in your game, you can become super wealthy, but the goal is to continue to let these baby money soldiers procreate, and at one point, the cash flow from these properties, you’re living off of that cash flow. You can use that cash flow to buy your luxuries and to live a great life, but let these properties continue to matriculate.
Makes sense, to create massive passive income, always taking your income, and reinvesting that right into the future. And this is all about delayed gratification as well, Because when you can, when you can have clarity on that goal and where you’re going, it’s much easier to invest, Your existing assets into something else. Gino, tell us about, um, certainly interesting times, uh, we’re in talking about impending recession.
The multifamily market has been very challenged by the current debt environment. Equity is down on the capital raising side this year. What are your thoughts in terms of where we are in the cycle and what are you thinking about for 2024?
Dave, that’s a great question. Jake and I were talking about it this morning. He sent me an article from Forbes, and Forbes was comparing 2008 to 2022. And they think 22 is where the recession occurred, and we’re already coming out of the recession. You look at the stock market was down, real estate was down. There are some differences between them. Back then, inflation, there was no inflation. Now there’s inflation. The weird part about where we are right now is asset prices are at a certain level. We still have inflation.
They’re going to continue to raise asset prices. The cost of capital has gotten high. So if you haven’t had to sell your property, you’re okay. You can always buy real estate. You can always sell real estate. And this is one of those areas right now where if you need to be a motivated seller, you’re going to get a haircut. And they’ve been able to push off, pushing off, but there’s a lot of distress in the market right now. You saw in October, all those maturities coming due and a lot of new partnerships, a lot of new general partnerships. That’s where the opportunity is. And I think with the cost of capital where it’s gone to the Fed didn’t do a good job. They raised rates too quickly. They should have raised them sooner, slow this thing down a little bit sooner. But there was an election back in 2022. Let’s not kid ourselves. They didn’t do it because they didn’t want to affect the election.
But you know what? They did it back in 2019 when the other guy was in office. So we can’t say it’s one or it’s both parties. It’s the system itself. Understand how the system works. They’re going to have to lower them before the next election. That’s how the system works. That’s my opinion. I think it will happen because it’s already slowed down.
I mean, you see a single-family home, what, at a 30-year low of where they’re trading? I mean, it’s ridiculous what’s going on. They’re talking about supply and demand. To me, I think long-term multifamily for myself, it’s a basic human need. You can’t buy it on the internet. There are certain commercial assets that I would not want to be around. I don’t want to be in office right now, specifically in certain markets. I think self-storage is doing okay, but I’m not up on the self-storage. But what happens if you get into a deep recession? Are people going to stay there?
Their garages, and their self-storage units. They may be because they’re addicted to junk. But I think for me, multifamily going long-term, there’s an opportunity with the seller financing with you got to use recourse debt in some of these loans, but credit unions are an amazing place right now to be looking for financing. Community banks are a little bit more challenging, but that’s how credit unions have stepped in. And for us going forward, rents have stagnated, they’ve slowed, which is a good thing because they were going up 20% a year plus.
I think the key right now is to find markets that you feel comfortable in that are going to be, I don’t want to say recession-proof, but that are going to continue to grow. You want jobs to continue to come down into the markets that you’re invested in. You want people to continue to come down. If you’re in a market where you’re losing a lot of jobs and you’re losing population, well, what follows is rent loss and your supply, your demand for your asset is not there, so rents are going to drop. So be careful.
You’re investing in. And people are talking about secondary and tertiary markets right now as something hot. We’ve been investing in Knoxville. I don’t want to call it a secondary market, but there are secondary markets outside of Knoxville that we’ve been investing in. And we think they’re phenomenal. The price is a little bit cheaper. It’s still an infill because you can still get into that tertiary primary market by commuting. But look at the markets right now. It’s very important to be in a market that is not losing jobs and losing population. And if it is are going to fall in those markets. That’s what ends up happening. Price prices are going to reset. Can you buy that asset today with fixed-rate long-term financing and weather the storm ahead?
That was going to be my question because in October jobless claims have been increasing, So you’ve got unemployment on the rise which is a major early indicator of what’s to happen in some of these markets that have been overheated, If people, they start to lose their jobs, they can’t pay the rent. That could be the potentially the biggest risk that those assets are facing.
And then if you can’t keep up with the cash flow, right, your NOI is going to suffer and then, you’re going to start to see some assets that need to be traded pretty quickly.
So I think there’s going to be opportunities in 2024. But as you pointed out, some of getting into some of these markets that are a little bit more, I would say we’re not recession proof, but maybe recession resistant.
And Dave, what’s interesting is in 08 and 09, unemployment took a big hit. A lot of people were unemployed. This part of the cycle, this market cycle right now in the last couple of years, unemployment hasn’t been affected. And it’s funny because the Democrats want low unemployment. After all, low, I mean, they want low interest rates. After all, low interest rates have low unemployment. Republicans want low interest rates because they want private equity and all these assets to go up in value. There’s a lot more speculation. So they both want the same thing.
But at a certain point, it becomes harmful. And that’s how you create bubbles by having low interest rates for so many years. There’s a lot of speculation, the cost of capital is cheap, and that’s what’s happened. And I think once the Fed gets that unemployment up, it’ll take pressure off of inflation. Inflation will drop, or increases in prices will drop because fewer people have money to go out and spend, That hasn’t been the case. But once these jobs go away, as they should, because there are a lot of jobs out there, especially in tech.
They’re hiring people to keep them on the payroll and you see what’s going on, getting rid of them. But once unemployment does take a hit, then we’ll see, okay, wow, they’re going to think themselves, there’s a recession coming on, let’s drop interest rates to spur the economy. I mean, it’s been going on for the last 150 years, that’s the cycle. Hot, let’s raise rates, we’ll slow the economy down, okay, economy’s in recession, let’s drop rates. Let’s raise rates, let’s drop, that’s what’s been going on for the last, what, 150, 200 years?
And I think that’s where we are right now. They want to get unemployment up a little bit to slow things down. Once they think they have inflation under control, then they can say to themselves, we can drop interest rates.
Do you think now is the right time then to invest in multifamily?
Ah, it’s always the right time. I mean, if you’re ready to invest right now, I’ll give you a perfect example. Two years ago, brokers were not calling Dave Walcott and Gino to put in an offer. I’m sorry, they’ve got six offers. I had the deal, I’m not going to put it on LoopNet. You’re finding deals on LoopNet now. That was non-existent two years ago. You’re having brokers call you. Please put in an offer. There’s a call to offer on Thursday. That means there’s less demand out there. Like the people who are having problems with their properties, they’re having capital calls, they can’t raise money for this next deal, so there are fewer people out there. Plus, when you’re watching the news, everything’s negative all the time.
So you’re having shots of cortisone on your body, and you’re feeling negative, because like, wow, there’s a war going on, we have inflation, we have a recession, I’m getting wary. So people constantly hear the negative news, and you have more or less people that want to invest, there’s less euphoria, and on top of that people see that interest rates are higher and they’re saying to themselves, I’m going to hold off because interest rates are higher.
To me, if you can make a deal work with where the interest rates are right now, wait till the interest rates drop and you can refi. The party’s going to start. So I think for me right now, getting into it and creating relationships with brokers because they’re going to call you back, understanding the market, becoming an expert where you are in that market is phenomenal now. It’s been challenging the last couple of years because You haven’t been able to get calls back from brokers if you’re brand new or if you don’t have any assets.
But now, if you’ve got a plan, you can speak the lingo, you have a process or a framework, you have some capital, and you can go out and speak intelligently to brokers. They’ll love to do property tours with you. They’ll love to send you any deal. So for me, now is the time, and in these next 24 to 36 months, I see a big window of opportunity for deals coming on and people having a chance to buy these deals at a discount.
And what would you say is your philosophy around the debt side of the equation right now? I mean, interest rate caps are quite pricey. And when you look at the overall cost of trying to do a deal in today’s environment.
Our process three-step framework is buy right, manage right, and finance right. We always look at a deal from those three lenses. No one likes to talk about managing right, Jake and Gino, we teach the manager at systems, we’re vertically integrated, and we have a property management company. But from finance, right, Jake and I’ve been saying for the last five years, long-term fixed-rate financing, we have done zero deals with bridge debt, because we saw back in 2021, you couldn’t get labor.
You had supply chain shortages. So if you’re doing a deal with 24, 36 months of bridge, it’s coming due right now. And not from any fault of your own, but you couldn’t pull it through. There wasn’t enough help. These workers were working at Amazon, making more money. They were staying home collecting whatever, unemployment or PPP, whatever money they were collecting. You couldn’t get people to work on that side. So for us, we’re looking at longer-term fixed-rate financing. That’s why we like community banks or credit unions with a five-year term. So at least you have five years to get that deal up and running.
And within five years, you should be able to be able to stabilize the property. So that’s what we’re looking at right now. And Freddie and Fannie, their rates are a little bit higher, but if you’re underwriting for 6.5, 6.9% and the deal makes sense, I mean, that’s what you gotta do. You have to understand what your exit strategy is.
If you’re looking at a deal and you’re going to get out in the next three to five years, maybe you don’t go with what we call yield maintenance. Maybe you go with something on a step-down basis where it may cost you a little bit more on the front end with higher interest rates. But it gives you the flexibility to be able to refi to exit or sell in that timeframe.
We’ve been saying no to the majority of the deals that come our way. And it looks as if, there’s still a gap between buyer and seller. You know, you’ve got this interest rate cap cost, that’s in there. And it also depends on what that financing is like, I’d like your three-step approach. It makes sense. What other ways are you employing to mitigate risk for your investors getting into these assets?
So for us, when you’re looking at it, to mitigate risk, for us, it comes down to, we like to manage our deals. So that’s one way you mitigate risk. I’ll break it down as simple as having a buy-write criteria, and understanding what assets you’re buying. I mean, what market, what price points, what median incomes, what year of the build, what year builds, the 80s build, 90s build, what unit mixes do you like, what amenities? So understanding that crystal clear for every investor is so important.
We even go so far as to say the 1% rule. I mean, if you’re buying an asset that’s 100,000 a unit, you’d like to get renovation, rents that are post-Reno at $1,000. I mean, that deal on the surface makes sense. Now, it’s been hard the last couple of years to find deals like that, but we’ve closed two deals and we’ve got a third deal that we’re closing in 30 days that have all surpassed the 1% rule. So for us, it’s as simple as that.
Looking at our buyer criteria, and understanding it. But then obviously it’s not the 1%. You want to dive in and do some more calculations with your underwriting. But also our strategy is to buy and hold these things for the longer term. Some investors may not like that, but we want to buy and hold these things and then we want to continue to manage these properties. So that’s how we mitigate our risk. Because when you have time on your side, you can tend to make a couple more mistakes. If you pay a little bit more, it’s okay, because you’re owning this asset eight, nine, 10 years. And to mitigate risk for us in this part of the market cycle where pricing is we’re buying assets that are a little bit newer.
We started out buying assets in the 50s and 60s with a lot of deferred maintenance, but when you’re paying 30,000 or 40,000 a unit, you can spend another 10 or 15 a door to make that up. But when you’re buying an asset at a three cap, that’s a 1960s build, I mean, with tons of deferred maintenance, that’s an issue. There’s a lot of risk with that. So that is going by the wayside right now. And I think C properties are going to decompress those cap rates. They’re going to have to go up because there are a lot of old properties out there.
So beware of buying these properties that are older because you’re getting them for a better price. Understand the budget, put a budget in place, make sure that the budget is realistic and always look at where you can bring this property to. You’re buying, always buying a property on a pro forma. Don’t buy it on the broker’s pro forma, buy it on your pro forma.
Makes sense. And what would you say in terms of the markets? You talked about tertiary markets that you’re looking at, Knoxville is one of those. Any other particular markets that you like right now?
Well, we like the Southeast. I mean, for our students, a lot of our students are in the Carolinas. A lot of them are in Florida. Although Florida can be challenging with the insurance, that’s going to take care of itself. If you bought a property in the last two years in Florida, it may be challenging, but now you’re underwriting deals at what insurance is, so you have an advantage if you’re buying a deal right now. Insurance has been up 100% in some of these markets. Look at Houston. Houston insurance doubled in two years. So if you’re a good operator and you bought that on actual numbers, you’re going to be in trouble. You’re going to be hurting in those markets.
But I still like parts of Texas. I like parts of the Midwest, believe it or not. I like the Kansas City markets. I think those are some good markets. You know, everyone says Phoenix. Phoenix has got a lot of assets coming online. Longer term, people are moving there. People are moving out to parts of the Midwest as well. So don’t be shy. Believe it or not, there’s one market that I love. I like the Omaha market in Nebraska. Don’t know why. Other than it’s slow grower, 1%, middle of the country. Its cost of living is so cheap there to what people are paying for rent. It’s not a boomer bus market. You may not make a ton of money on capital appreciation, but you can buy assets for the long term that’ll cash flow.
The problem with those markets is, that five years ago, they were so much cheaper. People who live there are like, this thing is so overpriced. In your paradigm, when you were buying them five years ago, they were.
But on a cost-added basis and going forward with the cash flows, they aren’t that bad. And I think people are going to continue to move to Omaha and look at any markets that have infrastructure projects going on. I hear they’re going to be building an airport in Omaha. You look at any of these markets that have exploded over the last 10, 15, 20 years, Nashville with the airport, Charlotte’s airport, Atlanta’s airport, South Florida, looking at those markets, making sure that they have the infrastructure in place to be able to take care of the growth. But I would stay in the southeast of the country and I like the Midwest of the country as well.
Gino, I’d like to go back and unpack one of the comments you made earlier on and try to make this full circle in terms of a strategy for investors. Because that’s what we’re all about is putting this strategy in place, so that you have something that’s much more all-weather in terms of allocating capital. And you’re not looking at that shiny object, That comes along your way. But you talked about the value of whole life insurance policies.
I’ve been such a strong advocate of myself that we got licensed and we help our clients with that as well. And I’ve been using it for over 10 years and it’s been such a phenomenal tool to be able to, to your point earlier of like, okay, if you’re saving capital where do you want to put it that’s most efficient? Well, when you put it in this vehicle It’s compounding tax-free, You have creditor protection around it, and you have access to it. You have that liquidity option to be able to go invest when that next deal comes around.
And it’s always for me, it’s always been like a rinse and repeat strategy. And then I also had, during building several businesses over the years, sometimes you don’t always have the greatest quarter. So you want to be able to be in a position to protect your downside and what better place to keep your capital that’s working for you on the sideline? So how has your experience been with it in terms of your business and personal wealth investing?
There’s, there’s a few things I could say about this. The first is people always look at their whole life and they look at the price versus the value. All these agents are getting wealthy. Well, what are the agents doing a fidelity with your 401k? If you look at it on a cost basis going forward, your fees and your stuff in a 401k going long-term are a lot more than what you’re paying for your whole life. The whole life may take a few years for it to seed and to grow. But it’s not an investment. It’s an asset. And you’re not chasing yield. Remember that baby money soldier?
That big-money soldier, not every dollar needs to be at risk. We’ve been told that cash is trash and you need to make as much money on every single dollar. You need to have some of that dollar put aside. For me for a whole life, I bought my first policy back in 2000 and my mindset back then was, but this is an expense. I’m putting money into a dark hole, five grand every year and I’m not getting any money back. That’s how it felt to me.
And for me, 20 years later, I’m putting in 5,000 a year and am returning 14 and 15 now. It takes years for it to be seen, but like I said, it’s a long-term mindset. I used that policy back in 2008 to buy a couple of duplexes. If I had that money in a 401k plan, I would have been penalized, I would have been able to take it out. The opportunity cost is so massive, it’s so important, and I think people don’t understand that. We called it the dual asset strategy.
You buy an asset, you have the asset of your whole life, and you’re borrowing the money out. And a concept to me, I have to borrow my own money? That’s not fair. But you’re earning interest on one end, it’s an uninterrupted compound, you’re taking the money out, you’re borrowing that money to buy a multifamily property. A multifamily property starts generating income, you tend to pay the loan back. When this loan is paid back, guess what? You have two assets now. You have the whole life policy with the death benefit, the cash value, and the protection. All of those benefits and you have the multifamily asset.
And if you do that a couple of times, guess what? It’s very difficult for people who are trained to buy term and invest the difference. Well, for some people that may be a great starting, but I’ve interviewed countless eight-figure net worth individuals. Every single one of them has a whole life in their portfolio. They tend to have real estate, they tend to own businesses and they tend to have whole life in their portfolio. Every single one of them. Seven-figure net worth earners tend, I’d say 75 to 80%.
People who have six figures or less, don’t look at it as an asset. They rather say to themselves, I’ll buy term, and then the problem is 99% of term policies expire, which is a good thing, but when you’re 52 years old and you have to re-up it, it gets to be prohibitively expensive when you can have locked it in at a younger rate. It’s that thing where you have to try to borrow money and pay for your own money, which is a painful thing for people, and it is expensive early on because early on it does take a few years for it to get going. But man, once it gets going and you have that money sitting there, it’s guaranteed you know how much money you’re going to be making every year. It’s such an amazing way to put money aside and have that asset there.
And you can forget about it one day when you need the money or you need to collateralize that cash value because you need to put it somewhere but you don’t need to take it out. What a wonderful benefit that was. I needed $75,000 back in 2014. I was broke. We had done a $4 million deal and my banker said he needed a letter of credit. And I’m like, where am I going to get 75 Gs? I don’t have any money.
I said, oh, I’ve got a whole life policy. He goes, collateralize it. You don’t have to take it out of the policy. I’ll collateralize it. I collateralized it for a year and guess what? Game over, life-changing opportunity. If I had a 401k, I would have had to borrow the money out, pay penalties, and then put the money back in. This was such an amazing thing. So it’s about opportunity cost and about buying and continuing to put your money into assets.
It’s a brilliant strategy and most sophisticated investors that I know have this as part of their overall strategy. Gino, if you could give one piece of advice to our listeners about how they could accelerate their wealth trajectory, what would it be?
You said it early on, delayed gratification. If there’s one piece of advice, if you can delay the gratification, put the money in to buy assets that generate the cash flow and the passive income and continue to do that. And then at one point, that cash flow and that passive income will pay for your lifestyle, will pay for all the things that you want.
Excellent. It’s been such a pleasure having you on the show, Gino. I know the audience is going to enjoy this. If they want to connect with you, learn more about what you guys are doing at Jake and Gino. What’s the best place?
Go to jakeandngino.com. If you want to learn more about multifamily, apply to work with the team, jacongeno.com forward slash apply. We’ve got the buy right, the manage right, the finance right. That’s our three-step framework. That’s our process. And it’s for anybody who’s either actively investing or passively. Cause if you’re a passive investor out there, willing to put $150,000 with Gino or Dave in a deal, you should know the business implicitly. You should know how to buy that asset and finance it.
And manage it, even though you’re not going to, you should still have that level of knowledge to be able to do that. So when you do give your money to somebody, you understand that they’re the fiduciary, they’re taking your money, but you understand their plan and you understand that plan fits with what you’re trying to accomplish.
Awesome. Thanks again for coming on the show, Gino.
Thanks, Dave.