Barrett Linburg (03:53):

“We’ll raise a little money from friends and family and this deal we’re going to do together.” I would do the mortgage brokerage, he would do the property management and it was a good fit. And we had some really good wins, but it was one or two deals a year. And what that turned into was, I was making more money on the side on these deals than I was as a mortgage broker. So I stopped doing that. And at the same time, his property management company had really grown. We started this business called Savoy Equity Partners, which really focuses on the property investment. And it naturally fit next to his property management business, which has grown now to almost 20,000 units under management. So, that’s how the vertical integration happened. And it was a much more natural fit than some other groups that have said, “Hey, this is our firm. We do all our business with them and now we’re vertically integrated.” Whereas this is, hey, the principle of one firm is also the principle of the other firm.

Robert Leonard (04:51):

Are you paying a property management fee to them, or is it just through equity in the deal?

Barrett Linburg (04:56):

And there are two totally separate companies. Yes, there are fees that go back and forth between the two, because there’s employees of both companies that have to eat.

Robert Leonard (05:06):

So you can’t just do equity. You can’t just give the property management company equity in the deals because then you can’t pay your employees. Correct?

Barrett Linburg (05:13):

That’s right. There’s a bonus pool for the Indio employees and that bonus pool invests in the deals and they participate in the upside. So they’re incentivized to do a great job. Then the Savoy folks are obviously reliant on the Indio folks for data, for execution. And we’re also able to be on top of them for asset management and make sure that everything gets done correctly to the business plan.

Robert Leonard (05:39):

Your firm Savoy Equity Partners focuses on acquiring properties in the Sun Belt region of the US with a specific focus on DFW, Houston and North Carolina. Why’d you choose those markets? And how do you pick and analyze markets that you want to acquire properties in?

Barrett Linburg (05:55):

A bit of that is aspirational. To date, everything that we own is in DFW. Indio has expanded with some of their clients who have bought a critical mass of deals in Houston and in North Carolina. What Savoy will likely do in the future is take the data that Indio is gathering in Houston and in North Carolina, use that data to create a business plan. And use the people that Indio is putting into those markets to say, “All right, well, now Indio has enough people, has enough data in those markets, let’s use that to our advantage. Let’s create a business plan in those markets and go do what we’ve been doing in Dallas for 15 years in another market.” Once we know it well enough, and once we feel like we have the confidence to succeed somewhere else.

Robert Leonard (06:42):

Are you only willing to go into markets where Indio is?

Barrett Linburg (06:47):

Maybe. I think we’re only willing to go into markets where we feel like we have an edge. And in Dallas, we know that we have an edge. If somebody brings me a deal where I was born and raised and where I’ve done business for so long, I can look at that deal. And in 30 seconds, I can underwrite it and say, “Yeah, that’s it. Here’s my ROI. Here’s what I’m willing to pay. Let’s go right now.” And in other markets, I do not have that level of confidence.

Robert Leonard (07:14):

Does that edge in Dallas just come from your experience, like you said, living there, growing there, knowing the market so well and having the property management? Or is there more to it than just that?

Barrett Linburg (07:24):

Yeah, I think it’s all the above. And it’s a lot of muscle memory. And just knowing, we signed four leases at a property down the street last week and here’s what the rents were. So I can use those rents in my underwriting. Or we just renovated the property in that same sub-market or one sub-market over and the cost to do a gut renovation were X on a similar vintage property. So now I can apply that for my underwriting.

Barrett Linburg (07:50):

You have all those numbers that are already in your head, so it’s very easy to apply that when you do an unlevered yield on cost. Whereas in another market, the labor’s different. Maybe it’s union labor, or maybe you don’t have the same vendors to sell you the materials. You don’t have the pricing power, or you just don’t know the rents as well. it’s on the wrong side of the street or on the wrong side of the highway, or whatever. So I think you learn that over time. Not that you can’t go into a new market and learn it pretty quickly if you really dig in, but it takes a little bit.

Robert Leonard (08:25):

I’m sure being in Dallas for as long as you have, I’m sure you’ve built quite a few relationships. And being a mortgage broker, that’s all relationship business. So I’m sure you have some relationships there. How big of an edge does that give you as well?

Barrett Linburg (08:38):

I think it’s all interconnected. Yes, mortgage brokerage is really good for building banking relationships, building relationships with principles, building relationships with real estate brokers. And then my business partner, on the property management side. It’s the same thing. A ton of vendor relationships, a ton of principal relationships. All of that has made our rolodex pretty enormous. And that works very well.

Robert Leonard (09:02):

How are you competing in Dallas? I know we just talked about how you have an edge and I’m sure that’s a component of it, but the reality is that I’ve read that Dallas is a really competitive market, and there’s a lot going on there right now. So I’m just curious, how are you competing? How are you finding deals that make sense and fit into your portfolio?

Barrett Linburg (09:19):

We’ve always underwritten deals the same way, which going back to when we bought our first deals in 2012, is unlevered yield on cost. Which I talk with investors about, talk about on social media. And what that is, you’re looking at, hey, when I stabilize this deal, what’s my return if I were to have bought it all cash. Which we don’t end up doing, but just so I can compare every deal the same way. If I paid all cash for it, what would my return be once it’s done? By doing that, I can look at every deal I’ve bought in the last 10 years and say, “What was my unlevered yield on cost?” When you do that, you say, “Man, 10 years ago, it was really easy to buy a deal. The market was easier.”

Barrett Linburg (10:01):

“There was less competition, there was more lower hanging fruit and brokers were just slinging deals and throwing them at you.” And then as you fast forward a couple years, it got harder. More people were coming into Dallas, more people were moving here and more investors were coming here. So it got harder. We had to adapt to that, because we were unwilling to say, “Well, we were underwriting 250 or 200 basis points over what we thought prevailing cap rates were. So now we’re willing to accept a lower profit margin.” No, we weren’t happy doing that, because we’d had this cushion for a long time. What did we do? Well, we had to venture into different strategies. So we tried a couple. We tried historic tax credits. Well, that worked really well, but it’s pretty complicated. And that’s okay. We like complicated.

Barrett Linburg (10:54):

The bigger problem was, there aren’t many old buildings in Dallas, so we couldn’t really scale that model. We tried another thing called fractured condo de-conversions. That’s also really complicated. And we might go back to that, because it is a little bit more scalable. It’s just harder when the market’s really hot, there aren’t as many opportunities. Then we got into opportunity zones. They came out in 2017, 2018 is when the rumbling started. And then you really got definitive guidance in 2020 from the IRS. That’s when we dug into opportunity zones and we bought our first portfolio in 2020. And what we realized quickly is, hey, not only does this fit very well with what we do. It also is very scalable. That’s when we had the realization that, hey, this is for us because we can buy deals that maybe don’t fit the hurdle rate without any subsidy. But if you have that additional tax incentive, all of a sudden we can hit our numbers and we can do a lot of deals. So that’s been what we focused on for the last two years.

Robert Leonard (12:06):

We’re going to talk about opportunity zones in just a second, but I want to learn a little bit more about that condo strategy that you mentioned. I don’t think I’ve ever heard of it, can you break that down for us?

Barrett Linburg (12:15):

There’s a couple guys on Twitter who do it and we’ve done one deal as well. And like a lot of the stuff that we’ve done, we accidentally got into it. We weren’t planning on doing it first. But in Florida, in Illinois and in Texas there’s legislation which says, “Hey, if you own 80%,” and that percentage varies between states and municipalities. “But if you own more than 80% of an HOA, then you can judicially force the sale of the remaining 20% of the HOA and terminate it,” which obviously you can imagine can be a little messy. But with things like that, condo building collapsing recently in Florida because the HOA had not invested properly in capital improvements in fixing deferred maintenance, you can understand the rationale behind it.

Barrett Linburg (13:05):

What you can do is, go in and buy a 1960s or seventies or eighties condo building that is falling apart. The owners haven’t spent the money necessary to keep it up, so you go in, you can buy 80% of the units and then you can force the sale of the remaining 20%. Now you own the whole thing. You turn it into an apartment building and you sell it on a cap rate rather than as a condo, which is based on a price per square foot. And there’s generally a spread there to be made once you do it. At the most basic level, you’re buying a value add apartment deal, but you can buy it cheap.

Robert Leonard (13:44):

That’s interesting, because I would’ve expected that the cost of the condos would’ve just been so high given that they’re valued on a comparable basis. I just assumed that the cost would’ve been really high on a per unit basis, so I didn’t think it would make sense as a rental. And I didn’t think really that the cap rates would be enough. I didn’t think the return on the cap rate would be enough to cover the cost of the units.

Barrett Linburg (14:07):

You have to find the right one for sure, and then the market has to be set up for it. As I mentioned, over the past couple years, it hasn’t quite worked out right, especially with debt being so cheap for the retail buyer. In Dallas, there’s been no inventory of single family and many markets in the country. So all of a sudden people are willing to pay a lot of money for condos. That arbitrage hasn’t really been there. Will it be there over the next couple years? Yeah, I think that there’s a possibility it will be.

Robert Leonard (14:39):

One of the interesting things is that, with condos, typically the value… Let’s just say you have a two or three bedroom condo and you have a two or three bedroom single family house. Typically, all else equal, a condo’s going to be worth a little bit less of the HOA fee. So when you look at what a retail buyer can afford, they can afford a lower price condo because they also have to take into consideration that HOA. So I wonder if that’s a component that keeps condo value a little bit suppressed so that you can come in and buy it. And then once you get rid of the HOA, you’re good to go from there.

Barrett Linburg (15:07):

That’s the theory, is that you can buy condos much cheaper, but then once you roll it up, you get rid of the HOA fee. You lower expenses, you run it as an apartment efficiently, you fix the CapEx, you fix the deferred maintenance, you upgrade it. Now you can run it as an apartment building and sell it on a cap rate. You win.

Robert Leonard (15:25):

It’s really interesting. I’ve heard of the other approach, is where you buy an apartment building and then you condo… I think it’s called condo-izing it, and you basically turn them all into condos. I’ve heard of that approach, but I hadn’t heard of this one. Do you think one is better than the other?

Barrett Linburg (15:39):

Well, no, they both work. It’s just which market? What’s your product? What’s your business plan?

Robert Leonard (15:45):

I think based on what you said, is there’s only a couple states that you can do the way where you buy them as condos and then turn them into apartments. But I don’t think there’s as much limitations on buying apartment buildings and turning them into condos. I could be wrong, but I don’t think-

Barrett Linburg (15:56):

That’s probably right.

Robert Leonard (15:57):

I think you just have to get the approval to make that happen. One of the things you were talking about is the unlevered yield on cash, UYOC. How is that different than NOI? How is that different than looking at your return with your NOI?

Barrett Linburg (16:12):

Unlevered yield on cost is really simple, but it’s also really simple to manipulate if you screw it up. Unlevered yield on cost is, hey, I want to know every single dollar that it costs me from the time that I buy it to the time that it gets stabilized. I’m looking at, what’s my purchase price? What’s my cost to buy it? My closing costs and things like that. What does it cost me to carry it? What are my property taxes? What are my utilities in the interim, all that stuff? So what are my purchase price? My closing costs, my carry costs and then my renovation costs? So I’ve got all that stuff built in. As you can imagine, it’s fairly easy to manipulate, especially carry costs and very especially renovation costs. Because one person from out of the market might say, “Well, hey, I’m going to renovate that building for 20,000 bucks a unit.”

Barrett Linburg (17:07):

Then somebody who really knows what they’re doing might say, “You can’t do that for 20,000 a unit, that thing’s going to cost you 40,000 a unit every day.” That’s what it costs. So that’s pretty easy to manipulate. But that’s how you calculate it. You say, “What are all of my costs to do this deal?” That’s number one. That’s your denominator. Now, how do you figure out your numerator? Well, your numerator is your NOI, after it’s stabilized. You’re going to look at what are my rents? In order to figure out your rents, you need to understand your sub-market. What are two bedrooms running for? What are ones, what are studios? You need to understand all that. And that’s easy to manipulate, by the way. Then you need to understand your expenses. Once I have a stabilized building, what are my utilities going to be?

Barrett Linburg (17:55):

Or insurance. In Texas, taxes are a huge number. How are those going to be readjusted after acquisition and after renovation? So you go through and figure out, number one, what’s your cost going to be? Number two, your rents and number three, your expenses to get your NOI. And then ultimately unlevered yield on cost is just NOI divided by your total cost in the deal. So, it’s a very simple calculation that’s very easy to screw up. But once you have it, then you’re able to figure out what’s my yield going to be if I were to have paid all cash. Because notice I didn’t ever mention financing, I didn’t ever mention interest rates or anything like that. So it allows me to look at a deal, whether it’s 2021 and 2% debt is available, or whether it’s 2022 and bridge debt is six or 7%. It doesn’t matter.

Robert Leonard (18:48):

Are you including the entire purchase price in your denominator?

Barrett Linburg (18:52):

Yeah, the purchase price and the renovation costs and the closing costs and the carry costs. Everything that it costs me to get all the way to a stabilized building.

Robert Leonard (19:03):

Because I was going to say, it sounds very similar to what I use as cash-on-cash, but in my cash-on-cash calculations, I don’t include the purchase price as a cost of actually acquiring the property.

Barrett Linburg (19:14):

From there, once you’ve done all that math, it’s very easy to then go in and say, “All right, well, now I’m going to use this type of debt. What’s my cash-on-cash return if I use that type of debt, what’s my DSCR? Well, I can throw that in.” So you can do a whole bunch of math after that, but I always start with unlevered yield on cost because then I can say, “Well, how does that look compared to the deal I did down the street? How does that look now compared to the cap rates that buildings are selling at in the area? How does that look compared to the debt that I can get?” Just keep eating the same drum, that’s just the math that I use. And I know there’s a bunch of other guys who do the same thing and I think it’s the easiest way to underwrite.

Robert Leonard (19:58):

So what happens if you compare two deals on this metric? Let’s just say they’re both a 10% return, but then one, you can get financing at, like you said, 2%. And then now, today, because you got that couple years ago, now today you’re getting it at six, 7%. When you look at that net cash flow, you really look at the profitability of those deals. They are not equal, even though on the unlevered yield on cost they are. So, how do you consider that?

Barrett Linburg (20:21):

The way that we typically are looking at deals is we’re saying, “Hey, we want the unlevered yield on cost to have a very comfortable spread over what we believe either market cap rates are today for a stabilized building, or what we believe the market interest rate would be once we go to refinance that deal.” If you say, “Hey, I want my…” For an apartment building in Dallas, if I say, “Hey, I want my unlevered yield on cost to be seven and a half.” Well, why would you choose seven and a half? Well, maybe I think that the market cap rate for that same deal is going to be five. All right, well, now I have a two and a half percent development spread. Well, that feels pretty good. I’m going to make a bunch of money if both of those numbers come true.

Barrett Linburg (21:10):

So, that’s great. Now, the next question is, what are interest rates going to be if I decide I want to hold it and refinance it? Well, if interest rates are five, I’m going to be fine. I’m going to be able to do a big cash out refinance and everybody’s going to be happy. If interest rates go to seven, well, I’m going to be able to refinance, but I’m not going to be able to pull a whole bunch of cash out. I’ll still be happy, I’ll still have positive leverage, but not a hell of a lot. So you just have to think of it in those terms. Yes, I can use unlevered yield on cost to look apples to apples at deals, but I have to use that metric in today’s environment to compare that deal to where do I think cap rates and interest rates will be once that deal is stabilized.

Robert Leonard (21:57):

Can you use this approach and metric on really any size deal? Could you do it on a six or seven unit deal as the same you would with a 100 unit?

Barrett Linburg (22:05):

Absolutely.

Robert Leonard (22:06):

How are you acquiring these and doing the renovation phase? Are you using hard money, bridge debt and then going to do that refinance on the backend?

Barrett Linburg (22:16):

We’re using local bank relationships, regional bank relationships, and it’s the same as we’ve always done it. I would say the big difference in today’s market is, we’re using lower leverage than we ever have and we’re using non-recourse. So we closed one last week that was at 60% loan to cost, purchase price and renovation expenses. And it was a non-recourse deal. It was also a fixed-rate deal, which historically our renovation loans have been floaters. And now, we’ve been able to find some banks that are willing to do them at fixed rate for three years with extension options. I think that feels better, we’re hedged against these three quarter point increases by the Fed. So that feels good. And then we’ll see. If in 24 months everything’s cut back to zero, I think I’ll still be happy that I had had a fixed-rate deal.

Robert Leonard (23:11):

Could you refinance out if rates drop?

Barrett Linburg (23:14):

Yeah. At least the last two that I’ve done did not have pre-payment penalties, it was the perfect loan. I don’t know that I’ll continue being able to get them, but the last two were pretty nice.

Robert Leonard (23:26):

You’re protecting yourself, like you said, on the upside from a what? 75 basis points increase yesterday to you’d refinance out on the downside if rates dropped. So, it sounds like, like you said, a pretty perfect loan. Earlier, you mentioned opportunity zones. I know you’re doing a bit there, I want to talk a bit about that. Real estate is already considered to be one of the better tax advantage asset classes that you can invest in. But when you bring in opportunity zones, it could be an even better asset class for tax advantages. And opportunity zones are something that you talk a lot about on Twitter. You mentioned you’ve done some deals. So for those listening, who haven’t heard of opportunity zones, break down what they are, how they work and then tell us how they’re different from a 1031 exchange.

Barrett Linburg (24:05):

This is going to go into the weed, so everybody take extra sip of coffee. And also when I really go into this, I’m not an accountant, I’m not an attorney. And some of this stuff, there are severe penalties if you try and do it by yourself and you screw it up. So, don’t do that please. I mentioned we like to do complicated stuff and we’re not scared of going down these rabbit holes. As we explore ways to continue to get the yield that we wanted to, and to continue to scale our business, we had to explore a lot of different things. One of those was opportunity zones. We got lucky in that the CPA that we’d always use and the attorney that we’d always use were both early adopters into the opportunity zone legislation. Just lucked into that.

Barrett Linburg (24:55):

Even further, one of the areas in Dallas that we had played in historically had also been designated an opportunity zone. It just worked out that early on we were able to say, “Hey, this is going to be a fit, let’s dive in.” In 2020, we bought a portfolio of a deal. It was structured as an OZ deal. We learned a lot and drank through a fire hose. What we had to do was figure out, who is this right for? How do we set it up? What does this mean? What are all the advantages? And now we’ve learned, what’s our strategy going forward? Let me talk through that one piece at a time. Who is the opportunity zone tax structure right for, from an investment perspective? Well, you can only get the tax benefits investing in an OZ deal if you’ve had a qualified capital gain.

Barrett Linburg (25:48):

That means if you have sold absolutely anything and you had a short or long-term capital gain, then you can invest into opportunity zone deals. If it was in your personal name, like crypto or a stock or something, or your house, and it was titled to you personally, then you have 180 days to make the investment. That’s very simple. If you were invested in someone else’s deal or invested in a corporation or whatever, and you get a K1 for that, then you have a whole lot longer to make the investment. You can either do it 180 days from when the game happened or you can do it 180 days from March 15th from when the K1 is first due. I mean, theoretically, somebody could have had a gain in January of 2021, and doesn’t have to make the investment until September of 2022. So, there’s this really long window to make the investment. I’ll pause there, Robert. I know I just spat out a bunch of stuff.

Robert Leonard (26:44):

Can you only invest the money that came from the capital gain?

Barrett Linburg (26:48):

Yes.

Robert Leonard (26:49):

And what designates an opportunity zone? I’ve done a little bit of research into where opportunity zones are in my area. I guess I don’t really know exactly, what are they looking for that make something an opportunity zone?

Barrett Linburg (27:01):

Opportunity zones were… So the program was federally created by federal legislation. With that federal legislation, they gave a mandate to all 50 governors, including, I think, the governor of Puerto Rico and all these American territories. They gave a mandate to all these governors and said, “Hey, you now have the job within your own state or territory to create the opportunity zone areas.” And those are census tracks. So they had to be low income or low income adjacent. It was this pretty vague language and the governor of each state got to choose where do they go. So if anyone out there says, “Well, hey, that area is an opportunity zone,” and it really shouldn’t be, the bone pick that you have is with the governor at the time in 2017.

Barrett Linburg (27:49):

But that’s how they were designated. There’s 8,600 of them throughout the country. And some of them are in very needy parts of the country and others, frankly, probably shouldn’t exist. They’re in areas that maybe are pretty high income, but they got designated when they shouldn’t have. That designation of low income or low income adjacent was based off of the 2010 census data. So you can imagine you’ve got 2010 census data, then you have maybe politically motivated people using that data in 2017 to figure out who should get tax advantages. and you can imagine the process was better some places than others.

Robert Leonard (28:28):

Well, yeah. And you think 2010, that’s just coming out of a pretty bad time here in the US. I think, and I could be wrong, but I think Puerto Rico got quite a bit of opportunity zones, didn’t they? Isn’t a lot of Puerto Rico right now an opportunity zone? Mostly I think-

Barrett Linburg (28:41):

It is.

Robert Leonard (28:42):

… because of the natural disasters. Right?

Barrett Linburg (28:44):

Yeah. And it’s almost all of Puerto Rico. And it’s interesting, I’ve talked to a handful of people in Puerto Rico and the folks who live there can’t really take advantage of it because of their tax status. So really for someone to take advantage of the OZ census tracks in Puerto Rico, they have to be Americans. Puerto Ricans are Americans, but they have to be mainland people who then take their money and invest in the Puerto Rican opportunity zones. It’s interesting the way that the tax code views the Puerto Rican opportunity zones.

Robert Leonard (29:18):

Are you an opportunity zone fund or do you just have… Is your company have different smaller funds inside and those different funds might be opportunity zones?

Barrett Linburg (29:27):

Yeah. We have an interesting structure and I’ll keep going on how this works. I mentioned you have these 180 day clocks. So all of those clocks are to invest into an opportunity zone fund. All you have to do if, say, you sold some stock at the beginning of the year, and it was in your name, you just have to invest into an opportunity zone fund. What do you get from doing that? Well, if you sold in January, you would owe tax next April. Now, by investing in an opportunity zone fund, you don’t owe tax next to April, you owe your tax in April of 2027. That’s your first big benefit. Your next big benefit is, by investing in an OZ fund, whatever that fund invests into, if they hold it for 10 years, you’re not going to owe capital gains tax on that investment.

Barrett Linburg (30:19):

So, that’s a huge benefit. And then the final benefit, which never really makes the headlines and it should because it’s enormous is, the OZ funds investment, once it’s depreciated, you’re going to get those losses on a K1. But when the OZ fund sells it stuff, it never has to recapture the depreciation. On your normal real estate investments, on all mine, that’s always a pain. Because it’s like, oh, I’ve enjoyed all these losses over the whole period, I got all these write-offs. But then you sell it and it’s like, wait, I have to recapture all those wonderful losses? But in an OZ investment, you never have to. So, that’s enormous. You can do cost seg and bonus depreciation. And you get to write all those losses off against your income and then you never have to pay the piper.

Robert Leonard (31:07):

That is massive. I have two properties that I’m looking at selling. One of them has not a lot of depreciation, so I’m not really too worried about the recapture, but there’s one that has a lot of depreciation already. I’m pretty worried about that recapture, to be honest, if I sell it this year. Yeah, I think that’s an enormous benefit.

Barrett Linburg (31:24):

Back to your question, you said do I have an OZ fund? The answer is yes, but the way that we structure our deals is very interesting. One of the ways that an OZ fund… So an OZ fund has to put their money out every year, and they have to invest in qualified opportunity zone property, which a lot of times it’s real estate, but it can also be what’s called a qualified opportunity zone business. What we’ve chosen to do is create a qualified opportunity zone business, which is basically where we syndicate our deals, is in a qualified opportunity zone business. Which is just a type of LLC with some special language and our pref and our promote and everything, all the language is at the qualified opportunity zone business. And then that business takes investment from a whole bunch of qualified opportunity zone funds. Because what we found is, a lot of really smart people, family offices, and just wealthy guys created their own qualified opportunity zone funds.

Barrett Linburg (32:22):

We wanted to be able to take money from all these qualified opportunity zone funds. If you’ve got the Robert Leonard qualified opportunity zone fund because you made a bunch of money last year, then you could invest into our qualified opportunity zone business. That’s how we structured our stuff. Now, there’s a lot of other investors, they sold stock in January and they want to invest with us but they don’t want to set up their own opportunity zone fund. So we set up an opportunity zone fund as well that doesn’t have any fees, it doesn’t have any pref, it doesn’t have any promote. Its sole purpose is to invest into our opportunity zone business. Our deals end up having anywhere from eight to 15 opportunity zone funds investing into them. It sounds super complicated, but it’s meant to just be a fairly simple way to comply with these pretty difficult rules.

Robert Leonard (33:17):

Are all those different funds considered captives?

Barrett Linburg (33:20):

No. The ones that are started by individuals, so like the Robert Leonard family OZ fund, that would be a captive OZ fund. But we have funds that have multiple people in them, there’s one that has two fathers and sons that invest together. Then we have a quasi institutional fund that invested with us. So they went out and raised money from a couple hundred people and then they allocate money. So there’s a handful of different types of funds that we see out there in the world and they’ve got money to put out.

Robert Leonard (33:52):

Can individuals do this on a smaller scale? Could somebody go buy a duplex, a triplex even maybe like a five or six unit and still take advantage of opportunity zones? Or do you have to be a bigger fund or buy bigger [crosstalk 00:34:03]?

Barrett Linburg (34:04):

You absolutely can. What I’ll tell you is, I have now, after being in this world for two years and being public about it on social media, I’ve talked to a lot of people who do it. And what I found is, it is not a DIY space. But some people treat it that way. And the problem is, as I mentioned earlier, there’s these severe tax implications for getting it wrong. And you might not find out that you screwed up until you sell in year 10. So you’ll get down the road and you’ll think, man, I’m a genius. I made a million bucks, I’m not paying any taxes. And then you get that dreaded IRS letter, and it’s like, oh crap.

Barrett Linburg (34:46):

Not only do I not get the benefits, I owe penalties because I didn’t pay my taxes back in 2022 and I should have. And my concern, whether it’s going to come true or not, I don’t know, my concern is that there’s a lot of people who are either trying to do it themselves or are just very loosely following the guidance from a CPA or an attorney that they might not get it right. I think the shorter answer is yes, someone can do it to flip a house or a duplex or whatever. But they really should seek the guidance of an expert, because the stuff’s complicated and the penalties are severe.

Robert Leonard (35:24):

I was going to say, to just put it simply is you could do it with these smaller deals, you just have to have the right team of professionals and legal help to make sure you’re following all the guidelines. But other than that, you could do it with those deals. I know there’s some interesting and important dates coming up over the next few years related to opportunity zone fund deadlines. Talk to us a bit about what those deadlines are, when they’re coming up and just break down that whole idea for us.

Barrett Linburg (35:48):

The hope is that some of them get extended. There’s some pending legislation, I’ll ignore that because none of it’s happened yet. So, here’s what exists right now. You can continue deferring taxes by putting money into an opportunity zone fund through the end of 2026. As it gets closer to that date, you get less deferral. So earlier I mentioned, hey, you sold some stock, you put money into an OZ fund. You owe your taxes in April of 2027. Well, you can imagine, as you get closer to the end of 2026, a deferral until April 2027 doesn’t mean as much to you. That benefit gets less important the further down the road we get, but it continues to exist and you continue to be able to put money into an OZ fund for the next four and a half years.

Barrett Linburg (36:39):

And really the whole point of that is, you want to get the long-term hold benefit. I can buy real estate and I can hold it for 10 years. And when I sell it, I don’t recapture depreciation and I don’t pay capital gains when I do sell it. That’s the biggest benefit of the deal and you still get that. I can put money into the fund through the end of 2026. In my opinion, the bigger date is, I can buy opportunity zone real estate until the end of 2028. And the reason that that date exists is a crazy one when you think about it. The reason is, the map, the opportunity zone map that exists right now that you can go Google and look up, it ceases to exist on December 31st, 2028. It becomes uncertified. So if you close on a deal that was in the old opportunity zone in 2029, well, that will not qualify as opportunity zone property, so you won’t be compliant.

Robert Leonard (37:43):

What is the pending legislation and what do you personally think is going to happen? I know you don’t have a crystal ball, but just give me [crosstalk 00:37:48].

Barrett Linburg (37:50):

I attended virtually the Novogradac conference earlier this year. And Novogradac, for anyone who doesn’t know, they’re like the gold standard of LIHTC deals and opportunity zone and all this weird stuff that I love. They’re the guys who do it and they lobby for it. And they’re really good. I attended their conference virtually earlier this year. So what this legislation does is, it extends and even retroactively brings back some of the goodies that sunsetted at the end of 2021, at the end of 2019. It adds back in some benefits of the OZ program, and it also extends the dates that I just talked about. The end of 2026 becomes I think the end of 2028 and the end of 2028 becomes the end of 2022. You push these dates out further and it extends the life of the program. The other thing it does, which I think is good, is it adds reporting requirements. On the tax return that I file now, I don’t have to say, in very much detail at all, what kind of projects am I doing?

Barrett Linburg (38:57):

I don’t have to say, did I create any jobs? I don’t have to say, what’s my rent per unit now versus what was it before? I don’t have to give this detail, which really would help IRS, HUD, all these different groups speak to, is the opportunity zone program successful? Is it doing what it’s supposed to be doing? I believe that it is and I believe that data would help legislators make an informed decision to extend the program. It was passed as a bipartisan deal, the extension is bipartisan legislation. And I think that it would likely get extended again in a bipartisan way if they had the data to show that it was working. I think that it’s all a good thing, essentially Republicans like it because it’s a tax break and Democrats like it because it’s helping low income areas. So very different reasons that people like it. But overall it works. That’s what’s going on. Novogradac is handicapping this deal and saying it’s likely that it may happen, may get passed in a lame duck session after the midterm elections before Christmas. We’ll see.

Robert Leonard (40:04):

You mentioned LIHTC, do you do any LIHTC deals or is that just something you’re interested in learning about might come in the future?

Barrett Linburg (40:10):

I went down that rabbit hole about the same time we started doing OZ deals. The bottom line is, to do a LIHTC deal, you really need an entire staff that’s dedicated to LIHTC deals. You need to bring in full GC team dedicated to that. You need in-house counsel, you need a bunch of stuff that’s just dedicated for that. And a lot of those deals, you’re in the whole a million plus dollars before you’re doing a deal, one deal. And it hasn’t excited me enough yet.

Robert Leonard (40:40):

If you want to talk about complicated strategies, LIHTC stuff is complicated. Some of the financing you can get there though is… I don’t know how much you went into the financing side of things, but the financing you can get. I was doing some research on some LIHTC stuff, you can get like upwards of 98% loan to value. So you’re talking like 2% down and these interesting bond financing, 50 year turn. You’re working with the municipalities. It’s pretty interesting stuff.

Barrett Linburg (41:03):

It’s super compelling. At face value you say, “Well, man, I can own this asset.” [inaudible 00:41:09] all the way up. I put a thousand dollars in and I can own a $50 million deal. But then you say, “But wait, before that, I have to put up two million bucks and it might not close.”

Robert Leonard (41:19):

And then like you said, the team you need. It’s just so complicated you do need the team. There’s a lot of concern, I’m sure you’re aware, in the US right now about a recession. When it specifically comes to real estate, people are worried about rising interest rates and inflation. When you take a step back and you look at the markets, what are you thinking? Are you worried? Are you excited? Where do you think we’re heading?

Barrett Linburg (41:42):

Number one, there’s pain right now across everybody. The consumer, our buddies like investors, there’s pain. Rates go up and there’s pain, things get more expensive. Housing’s more expensive. There’s pain and that’s not fun. Leave that there. As far as from an investment perspective, what do I see happening? I don’t try and make macroeconomic guesses. That’s not what I do. I do like to listen to other smart people and then try and pick, hey, what do I hear and what makes the most sense to me? So a couple very smart economists recently have said, hey, they think that rates in the short-term will continue going up, probably higher than anyone expects to try and fight inflation. And that will cause more of a recession, more of an economic decline.

Barrett Linburg (42:33):

Then after that, rates will probably drop faster than anyone expects. This was an hour long talk that they gave. I found it on YouTube and I posted on my Twitter. But his talk really rang true to me. He gave it 90 days ago and half the stuff he said already came true. $125 oil and all this stuff. I think that really rings true to me. So what does that mean? I think it means, for me, number one, it’s okay to continue to do what we do. I don’t think we’re going to have this 10-year or eight-year, even five-year prolonged, really hurtful cloud over us. I think that we’re going to have a couple years of tough time because of high interest rates. So, how do we get through that on the investment side?

Barrett Linburg (43:18):

Well, we underwrite deals with really good yield on costs that make sense, that we can lever with fixed rate debt and get through. If we can find those deals than we, as in my team, should buy them. And sometimes that’s scary, because I say that to myself and then I’ll be presented a deal next week. And I’ll say, “Man, I don’t know that I can do this. Will I be able to raise the equity. What’s going to happen in the world. Can I pull the trigger?” And I’m speaking to myself, can I pull the trigger when I have that good deal in front of me? And I know that’s hard and I just have to remind myself, that is my investment thesis. And if I have the cushion that I need and I have the fixed rate debt and things are hedged. And I believe that this is not going to be a five or four, whatever, a long-term economic problem, then I need to do what I’ve always done and pull the trigger on those good deals. And that’s how I look at it.

Robert Leonard (44:13):

Are you underwriting with higher vacancy going forward, for a short period of time?

Barrett Linburg (44:18):

Yeah. We’ve always underwritten a 7% vacancy, and Dallas right now is at three. We’ve never underwritten big rent increases either. We’ve had a lot of upside surprise in our deals recently, but we’re underwriting 3% rent increases going forward. And for unlevered yield on cost, we don’t underwrite any rent increases between now and stabilization.

Robert Leonard (44:42):

As we’re getting towards the end of this interview, there are two other topics that I want to get to before we wrap up. And the first one is, that back in 2015, you did this deal where you signed an LOI for 116 unit apartment building on the trunk of your car, just three hours after it was listed on the MLS. And then 18 months later, you were able to sell it for what you say was a life-changing amount of money. Break down for us how you bought it and how you made that deal work.

Barrett Linburg (45:09):

Every day I get the MLS listings emailed to my phone. The theory behind it is, if a big apartment deal gets listed on MLS, then there’s an issue. Either the deal is really messed up or a broker is dealing with it that shouldn’t be, or there’s some problem. I happened to be able to buy a little 13 unit deal in 2013 and I got a good deal on it and it worked out well. And then 2015, ’16, I woke up, checked my email, having my coffee. And there was 116 unit deal in a market that I knew, a C-class market. And it was listed for like $2 million. And I said, “That does not make sense.” I threw on my clothes, started driving. I just headed straight for the property. And it was like 6:45 in the morning. And I started calling the broker.

Barrett Linburg (46:02):

Just like every 15 minutes I’m calling the broker. “Hey man, where are you?” And finally he picked up and he’s like, “I’m like 45 minutes away. I just woke up.” I said, “Okay, well, I’m in the parking lot. When are you going to get here?” Finally he showed up, he’s like the buddy of the seller, there were four guys and they’d own it for a couple years and they were done with it because they were self-managing. They showed up and they walked me around. And I said, “Great, I’ll pay you what you want. I took an LOI, like a draft with some blanks in it with me. And I said, “I’ll pay you what you want.” Then the guy realized that I’m like sitting there, giggling to myself, ready to buy it.

Barrett Linburg (46:39):

He said, “Well, we own the washing machines and we want to get paid for those.” And I said, “Well, how much do you want?” And he said, “We want a hundred thousand.” I said, “I’ll give you 50, sign right here.” So I paid them 50,000 for the washing machines, which there were like, I don’t know, there were like a dozen, but I just had to… There were expensive washing machines. They ended up being cheap, but expensive at the time. I closed the deal right there, got him a contract a couple hours later and got it tied up. At the time, I certainly did not have the money to close the deal. I knew that I would be able to raise it very quickly, because I knew that I was buying at half price for what it was worth.

Barrett Linburg (47:21):

Just started smiling and dialing with folks who had invested with me before, which at that point was a very small circle of friends and family. Got the equity raised, called a couple bankers. I was a mortgage broker still, so had good banking relationships. And we did a little rehab to… It was a class C deal. And on that, our thesis is, we need to make this a good clean, safe place to live that people can have pride of ownership. So we were able to do that pretty quickly. We were able to get rents in line with market pretty quickly. Then we sold it for a market cap rate. And that turned out to be an enormous windfall.

Robert Leonard (47:56):

Why were they selling it so cheap?

Barrett Linburg (47:58):

It was one of those situations where you just smile and pay it. I think that they were very sick of it. It was a chiller boiler property, one of the chillers was going out. It was in an area of Dallas called Cockrell Hill. It’s a municipality that… It’s a city actually, that’s entirely surrounded by Dallas, but it’s a small city. They have their own government, their own code compliance. And what we found out later is that the code compliance team down there, which is really just one guy, was all over him. So, I think that it had become a management problem. Also, it needed more money, which I don’t know that they had. And they were just ready to go.

Robert Leonard (48:37):

Do you wish you had held onto that deal till this day?

Barrett Linburg (48:40):

We wrestled with the decision to sell, refinance. We took that money and we put it back to work and did well with it. Now that deal is selling… Well, who knows? They did a call for offers two weeks ago. So they probably got [inaudible 00:48:53]. But the bottom line is, it’s worth double now what we sold it for in 2016. That being said, we took the money we made and we probably doubled it somewhere else. So, I don’t regret that.

Robert Leonard (49:04):

The last thing I want to talk about before we wrap up is, your creative strategy that you do with water savings on your class B and class C deals, where you’re not doing a full gut renovation. You say that there are few CapEx items that can provide a better ROI. What is your playbook with this strategy?

Barrett Linburg (49:23):

I certainly don’t think we’re geniuses here. I think maybe we were one of the few groups in Dallas doing it in 2014. But now, I think almost every broker that presents a deal with a water problem is putting that in his offering memo. But essentially the playbook is, when we’re under contract, we ask for a year of water bills. We will ask for a year of all the utility bills, but specifically water. We’ll look at… The math that we do is, what are the gallons used per unit per day? And it allows us to pretty quickly say, “Hey, if it’s more than 200 gallons per unit per day, there is an issue. When we’re doing our unit walks, we can look at, what kind of toilets do they have? Well, if they already have small toilets, 1.2 gallon toilets or 0.8 gallon toilets.

Barrett Linburg (50:13):

Well, it’s probably not that. But if they have big, old toilets, well, okay, it might be the toilets. So then you look at their fixtures. Do they have low flow fixtures on the sinks, on the kitchen sink, bathroom sink and the showers? Well, if they have low flow fixtures, then it’s probably not that. But if they’re old ones again, well, you know that you need to fix those. That’s the low hanging fruit. The faucets and the toilets. That’s pretty easy. If it’s not that, then you’ve got a harder problem. The next step is the shower manifolds. In the shower, bath combo units, which are common in apartment buildings. You have a mixer, that’s between the hot and cold water. And especially in old buildings, that thing can get screwed up. So what’ll happen is, when somebody’s taking a shower, it actually is wide open.

Barrett Linburg (51:04):

It’s almost like trying to send water to the bathtub, but instead it’s just shooting straight down the drain. Somebody will take a shower and pull a gallon a minute or two gallons a minute, whatever it is. But that exact same amount of water is going down the drain and nobody notices. That can be a huge problem. So you have to check all those. And then the last problem is definitely the hardest. If you get lucky, it can be by far the least expensive and the highest ROI thing ever, which is underground leaks. We have a guy on our team who we call the water whisper, they have special… They’ll put on headphones and they can like listen to the ground with a piece of equipment, listen for running water. And essentially they’re just walking around, listening for water. And if they hear it, they’ll know, I need to dig for a leak right here. And sometimes it can be in the middle of a courtyard. Well, that’s really cheap and easy to dig up a courtyard.

Barrett Linburg (52:00):

Unfortunately, a lot of the times it’s under somebody’s bedroom or kitchen or bathroom. Then they either have to tunnel in from the outside of a building or they have to jack hammer down through a slab foundation, which gets a lot more expensive. The biggest one that we’ve ever found was outside of a building and it was a four inch supply line, a water main almost, that was dumping directly into a storm drain. It was pumping out five or eight gallons a second into a storm drain. We found it right after we bought the property, but we think it had been doing it for a year based on the utility bills that we’ve been getting. Do that math. You’re talking about hundreds of gallons a minute for a year. Then you cut that out and put it on a five cap, it was like over a million bucks in value to the property just by finding that one leak which cost a thousand dollars to fix.

Robert Leonard (52:59):

That’s crazy. I’m guessing you’re only going through this trouble on deals where you’re paying the water utilities? Or are you finding on most of your deals you have to pay water in your area?

Barrett Linburg (53:08):

Yeah, because… Look, even if the tenant is paying water through a RUBS bill back or whatever, if they’re paying that. So if the water bill of the property’s 200 grand and you’ve got a hundred units, and then you cut that bill to 50 grand. Well, that tenant’s going to be pretty happy. Because all of a sudden, their monthly budget to spend on groceries or car payment or whatever just got bigger. You just put money back in their pocket. They’re not necessarily thinking about that the day they move in, but they’re certainly thinking about it when it comes time to renew. So, I think it’s a big deal. Plus, look, you’re saving water, everybody’s happy. And the landlord’s paying usually 15 to 25% of the water bill anyway, even if you have a RUB system in place. So yeah, it’s a good thing.

Robert Leonard (53:53):

Barrett, we’re at the end of the show. I know I’ve really enjoyed it. I’ve learned a lot from you. I know the audience is going to enjoy it as well. I want to give you a second to tell everybody that’s listening where the best place is to go connect with you, learn from you, and just anywhere they want to find you on the internet.

Barrett Linburg (54:09):

Well, Robert, thanks so much for chatting. Enjoyed it. I’m active on Twitter, that’s where you can find me. Hopefully soon I’ll post this podcast up there, as well as have our website, which will launch very soon up there. And I just chat a lot. So if anybody wants to chat, please join me on Twitter where I am and that’s @DallasApartmentGP, DallasAptGP.

Robert Leonard (54:31):

I’ll be sure to put a link to Barrett’s Twitter in the show notes below for anybody that’s interested in connecting with him. Barrett, thanks again for your time. I really appreciate you joining me.

Barrett Linburg (54:41):

Thanks so much, Robert.

Robert Leonard (54:43):

All right guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (54:49):

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