Escaping the Drift with John Gafford - Unlock Financial Freedom: Gino Barbaro's Journey from Reinsurance to Real Estate Empire

Starting point is 00:00:00 So when I went to college, went for BS in finance, I worked for a year down on Wall Street for AIG. I freaking hated it. I was working in reinsurance accounting. For those of you that don't know what reinsurance accounting is, you're not missing much. It's like watching paint dry, bro. It is painful. It lasted a year. And then I said, Dad, can we do something? I want to buy your restaurant that you have, or let's go open up another one. And now escaping the drift, the show designed to get you from where you are to where you want to be. I'm John Gafford and I have a knack for getting extraordinary achievers to drop their secrets to help you on a path to greatness. So stop drifting along, escape the drift, and it's time to start right now. Back again, back again for another

Starting point is 00:00:44 episode of like the opening says, man, the show that gets you from where you are to where you want to be. And I promised in the opening, as I do every week, that I am going to bring extremely high performers in here. And I'm talking about people that are rolling and that I'm going to, I'm going to peel back the curtain. I'm going to open their brain. I'm going to extrapolate as much information as I can from them for you. And I promise you, you're going to want to listen to this one today. And if you're watching us on YouTube, make sure you like and subscribe, do all that stuff. And if you're listening to us on whatever podcast thing you are, subscribe to us so you get more of this stuff. If you're a first-time

Starting point is 00:01:20 listener, thank you very much. If you're one of our other many listeners, that keeps us in that top 10 for entrepreneurship on Apple, I appreciate you. But today, like I said, not in the studio, here in spirit, I'll say. We'll say he's here in spirit. He's not live, but we got him in the stream yard. He is in St. Augustine, Florida. This is a guy that he and his partner, Jake,

Starting point is 00:01:41 have almost half a billion dollars of real estate under management. That's a lot they've purchased. They have students that have purchased thousands of doors. He is a multifamily expert. He is one half of the Jake and Gino real estate brand, including their podcast, their new event coming up in Denver in october this guy is a man among men a legend among legends ladies and gentlemen welcome to the show mr gino gino barbaro gino what's up buddy how are you a legend in his own mind don't forget that and brother you've got an amazing voice you've got to be a singer are you a singer no dude don't you i mean well yes but not well like i can't carry but yes i i exclusively like to sing now strictly for the

Starting point is 00:02:31 embarrassment of my 14 year old daughter dude you sound great got a great voice i'm singing opera i'm an italian guy who knew that i had a voice i didn't know until two and a half years ago got into a studio met a singing coach two and a half years later i got into a studio, met a singing coach. Two and a half years later, I'm not too bad, but I recognize talent when I hear it, brother. You are bringing the pain today. I think you're just looking at the hair. The hair is just, you're assuming because of the dude. I think that's what's doing it. I think that's where I'm at. Maybe. I don't know. I don't know. So first of all, let's get out of the way. I mean, look, I gave you a solid intro, but let's bang it out. Give me the Jake and Gino overview with your stats because I want to hear that. This is why you listen to this, people.

Starting point is 00:03:09 This is why you need to listen to this, dude. Well, it's actually interesting. Your podcast title is really a summation of my life. I was trying to escape the drift myself, and I got into the restaurant business out of college, and I loved it. Listen, it was awesome until it wasn't awesome, until 2008 hit. And I'm like, what the hell? I felt like I was drifting. Pick up a book by T. Harv Ecker called Secrets of the Millionaire Mind.

Starting point is 00:03:34 And T. Harv is speaking to me, it seems. I got pissed. I'm like, who is this guy? You don't know who the hell I am. Why is he talking to me like that? And then the quote that really stuck me though was, your fruits are your roots. And I realized that my roots were really shallow. And what do I mean by that? I wasn't creating value for people. My fruits were not existing because I had no value. I had really shallow

Starting point is 00:03:56 roots. And when I understood that, two things needed to happen in my life. I needed to accept responsibility and I needed to start learning how to create more value for myself and for the marketplace. And I fortuitously did two things. I met Jake Stenziano, my business partner in 2009, and I had jumped on the mentorship bandwagon. I started to learn how to invest in multifamily because I had made a bunch of mistakes before that. And I was blaming the economy. I was blaming Bush and Obama. And I realized there's a lot of people out there making money as there are right now. There's a lot of people hurting out there. And there's a lot of people who are really successful. I needed to understand what the successful people were doing. And a lot of them really had that wealth mindset. How do I get things done? How do I become responsible? How do I create more value? Led me to multifamily, which led me to Jake in 2011.

Starting point is 00:04:44 Thankfully, Jake moved down to Knoxville, Tennessee. And I was like, Jake, let's start looking at deals down there. And in 2013, after 18 months, we purchased our first deal. And since then we've been able to purchase over 2,200 units. In Florida or in Knoxville? No, in Knoxville, Tennessee. Yeah. And I was living in New York in 2017. I decided to move to Jacksonville, Florida. I wanted to expand the brand, expand the portfolio here. But listen, when you listen to locals and the locals are telling you things are too expensive here, I made the mistake of listening to locals in 2017. I could have bought assets for 70,000, 80,000 a unit here, which seemed high at

Starting point is 00:05:21 the time, but it was Jacksonville. But if you understood demographics, if you understood population trends, if you understood where jobs were going, it was very, very affordable and very cheap. Those same assets today are probably 180,000 a unit. But thankfully, instead of investing in here, I just kept investing with Jake. We continued to invest in Knoxville. Well, dude, Jacksonville's got to figure it out. The fact that all of that property down on the river stadium is undeveloped, it's just vacant, is insane to me. They just got the approval for what? $2.1 billion on their stadium. So they can't do that. Jacksonville is a market, if you don't know, if you're listening to this real estate investor, if you don't know about Jacksonville, you should know. Every hedge fund

Starting point is 00:06:04 in America is zeroed in on that market now. There's a lot of growth there. There's a lot of opportunity. I know we talked before you jumped on, you live in St. Augustine down towards Doctors Lake. It was really funny. I was at my mastermind group this weekend. I'm in probably what I feel is the best real estate mastermind there is. It's my friend, Kent Clothier, the boardroom. I love it. Oh, yes. You feel what I meant? It is 250 of the best real estate people in the world.

Starting point is 00:06:32 And it was like, this guy was, the reason I knew about all this, the landing being gone and all that stuff is because he was literally presenting a project on that dirt, right? He was talking about, there's just nowhere to go. If you live in Jacksonville, you live there, you live in South Jacksonville, nowhere to go. And I'm like, well, you can go to Whitey's fish camp. And he was like, what? How do you know about Whitey's fish camp? I'm a Floridian buddy. I just live in the desert. Don't kid yourself. I've been around down by doctors like there, but yeah, it's such a great and interesting market you're in to buy stuff down there. So let's go back a little

Starting point is 00:07:05 bit though, because I want to back up. Let's talk about, you got in the restaurant business. Is this what your family always did? Is this what you just wound up in? Did you start busing tables and turn around and suddenly you're like, oh shit, I'm running this place and I'm trapped? What happened? I was eight years old, going to work with dad. Dad had a restaurant, working in the kitchen. I would walk in. I always remember this walking in, in New York, we have the best bread, the best pizza, eight years old.

Starting point is 00:07:32 And you fall in love with the business because it becomes part of you. And you think every child, every kid goes to work with their dad at the restaurant. And it just became part of my life. 14, 15 years old, working on the weekends, working in the kitchen with him. And I just became a hard worker. It just became ingrained in my DNA. So when I went to college, went for BS in finance, I worked for a year down on Wall Street for AIG. I freaking hated it. I was working in reinsurance accounting. For those of you that don't know what reinsurance accounting is, you're not missing much. It's like watching paint dry, bro. It is painful. It lasted a year. And then I said,

Starting point is 00:08:09 dad, can we do something? I want to buy your restaurant that you have, or let's go open up another one. And we decided to open up another one. But back in the early mid nineties, there wasn't as much competition. Food choices were a lot different. People actually waited 30 minutes for a table. People actually came in and enjoyed food. And it was just a lot different. People actually waited 30 minutes for a table. People actually came in and enjoyed food. And it was just a completely different model. Mom and pops back in the 80s and 90s could do really well. They can make a lot of money. I think everything changed once the internet came on, Grubhub starts coming, you start getting food delivered, you start getting a ton of competition. People don't really care as much about food today as they did back 30, 40 years ago.

Starting point is 00:08:47 Anyone will eat a Domino's pizza today. But if you put up a really good quality pie, they don't really care. They're looking for cheap. And so it was very hard for me to compete in that model. And that's why, like I said, back in 2007, I decided Pops passed away in August of 2007. And that's the point. Listen, I said to myself, am I living his dream or am I living my dream? And I have to be honest with you,

Starting point is 00:09:10 I was sort of living part of his dream. I loved working with him. I loved the restaurant, I think because of him and in part because of working with him. And then when he was gone, there was a little bit of that void. But I also was trapped in the sense that I didn't know how to scale the business. And I was always thinking, there's no hope for me. How am I going to make more money? At that time, I had four children. I've got six kids now. But at the time, having four kids, working harder, making less, it was a really challenging situation. Yeah, you were trading your time for money. And there's only so much time. So was there a point when you saw, especially when your dad, you know, towards the end felt ill, you know, passed away at that point that you kind of looked

Starting point is 00:09:49 into the future and said, holy shit, that's going to be me. Like I'm just wash, rinse, repeating this life. Did you see that? That's such an awesome question. I love that question because I think this is when people, they have to become real. There's a come to Jesus moment. I think that's what it was for me. And I said to myself, I don't want to be 62 years old with the chef coat on, barely able to move in the kitchen, having to do this because I have no other options. I think people get confused. I think we're all trying, think we're trying to chase money. When I think ultimately what I was trying to chase was autonomy. Just having the ability to say, I've got enough money that if I don't want to do this anymore, I don't have to. But the irony is when you become financially free and you start getting good at something, you want to work more. You want to produce more. And you're not chasing money. You're chasing opportunity. And that opportunity just creates more money. Money is just the result. I wish I had learned this in my early 30s

Starting point is 00:10:45 because I'd have 30,000 units right now. It took me a little bit long to figure that out. But that's the problem that I had with that restaurant model. It was really hard for me to understand. And I think the biggest mistake that I made, and this is what most business owners need to hear right now, we started this restaurant to provide for our families. And that's what most people do.

Starting point is 00:11:05 They're a plumber. Let me start a business. I got to pay the bills. Whereas any successful business that has longevity starts the business to provide value for their customers. And if you can provide value for enough customers, if you can get enough residents in your multifamily, you're going to be super successful and you're going to be able to scale. I had it all backwards early on. And that's why I think to me, I was so frustrated in that business. Well, I think any business, again, it should be customer-centric. I think you're not going to stay in if you're not customer-centric. But I think also part of that trap that you just talked

Starting point is 00:11:38 about was, and we've talked about it before in the show with other guests guest is what you do for some people becomes so much part of their identity yes they they don't understand like like you walking out of that kitchen right you stopped being gino the restaurant owner and that was who gino was because again it was a family business and all that stuff and some people are so scared to understand that what you do is not who you are. You take steps like this. You've got to wrap up your self-worth in something other than what brings a nickel in the door. Like you've got to bring something that nobody can ever take away from you. Because I don't care if you have a restaurant. I don't care if you have a job at AIG.

Starting point is 00:12:19 I don't care what you do. Somehow somebody can take that away from you. I mean, you're one slip away from losing your restaurant. You are one from your boss walking at A&G saying, yeah, you got cut. So people spend so much of their time wrapping their identity in what they do, not who they are. So I think that it's great that you could make that shift because so many people, like you look at, like I talked about earlier, I told you offline that when I had to move around the country a lot, right. One of the places I had to go for, for a extended period of time was lucky me got to go to Detroit during the winter. Um, Florida guy, let's go to Detroit. Um, and really

Starting point is 00:12:56 the whole state of Michigan. And it was the first time I'd ever been experienced to a heavy, like industrialized union type mentality where it's like, I live with my mom and dad. I go to high school. I'm going to marry my high school sweetheart. We're going to buy a house six blocks from my parents and I'm going to get a job at Ford and work in line next to my dad. And I'm going to have two kids and then they're going to do the same thing. And we're just going to repeat this cycle of this. And so many people get trapped in that because they can't see themselves as anything else but that do you want to know why i think people get trapped yes we do this may be difficult for people to i guess hear or understand or even to assimilate but i think a lot of us need to be a little bit more loving to ourselves.

Starting point is 00:13:45 We need to be a little bit more compassionate to ourselves. And it may sound crazy. It may sound a little woo-woo to you, but I've been doing a lot of work on myself and going back to when I was a child. And listen, we all have traumas. And I'm not just talking about severe traumas. We're talking about getting bullied, parents yelling at you, things happening in your life. And you carry that into your adulthood. And for myself, getting older, parents yelling at you, things happening in your life, and you carry that into your adulthood. And for myself, getting older, just not having enough compassion for myself, always beating myself up. And in a way, it's great because I need to motivate myself and all. But in another way, sometimes just having a little bit of self-love, a little bit of compassion,

Starting point is 00:14:18 it's okay. And that's why we wrap ourselves in our identity. That's who we are. We need to be the biggest. We need to be the baddest. I need to grow this company. Well, take a step back and ask yourself, why are you doing that? I mean, it's not a right or wrong answer. Just are you doing it for the right reasons? Or are you doing it to show your dad that you're not him? Or are you parenting your kids that way because you want to show your parents that you're different than them?

Starting point is 00:14:43 Understanding that and getting back into your childhood and what the things you heard and the things you learned, you have to be that person. And most people aren't aware of this. They're not conscious of this. They just go through life. You said they're in the drift and they're in the moment. And for me, the revelation was going to coaching school. I became a certified life coach and I didn't do it to become the life coach.

Starting point is 00:15:03 I did it for the self-development and that really, really truly helped me out. As far as why am I in this restaurant? Should I be doing this restaurant? No, I'm doing it because my dad did it. I don't really like it. I'm not being an entrepreneur in this venue. What can I find? Well, this multifamily thing is frigging awesome because I can create wealth. I can build a portfolio. I can do it with a great business partner. And oh, by the way, I can do what I really like, which is the education business and tap it on. I wouldn't have figured that out if I hadn't taken the journey back. The other problem that people do is they take that journey back in therapy and they get stuck there. That's not what I'm telling you to do. I want you

Starting point is 00:15:41 to go back into the past, whether it's your relationship with money, whether it's relationship with parents, how you view those things, see them as they are, get into the present, what's really empowering and what's disempowering. And then from there, try to plan for your future. Well, you're exactly right. And that was an event, maybe last month, I think it was, Richard Childress, who's an NBA player, has an investment company for a lot of pro athletes. And I was at his event, and there was a lot of guys there. It was like money managers, family office guys, and then pro athletes. That's who was at this thing. And me. And I'm watching a panel and it was Eric Red, Metta World Peace, the basketball player. And then-

Starting point is 00:16:29 Yes, played the Knicks. Yes. Yeah. And then a major league player. I don't remember who he was. And Eric Red came on there and there was an audience full of players that were kind of ending the end toward their career of what they were doing in the leagues that they were playing. And Eric Red goes, the first thing you need to do like he goes there's tons of deals here

Starting point is 00:16:48 right there's tons of money tons of opportunity tons of stuff there's really smart people here that got great projects and all but before you do anything day one you walk out of the league you got to hire a psychiatrist they're like because you have not been living in the real world for since since the first time somebody told you were special at what you do at your sport, you've not been living in the real world. So you need to get right with you before you try to get with any of these people.

Starting point is 00:17:13 That's right. Of course, all the, all the money managers, but you know, he was right. And the other thing, the other thing you need to understand,

Starting point is 00:17:23 I think is I think all these athletes and anybody listening to this is we have to understand what our relationship with money is. Everyone has a different relationship with money. For some people, I think multifamily is one of the best vehicles on the planet. Tax advantages, cash flow, appreciation. But for somebody who likes action, somebody who wants to wheel and deal and do transactions daily or weekly, multifamily may not be the opportunity for you. I mean, Jake and I, we do two to three deals a year. We've done three deals this year, 150 units. Last year, we did three deals, 300 units. We're not doing deals every day. It's a little boring. Creating wealth long-term may be boring and slow for some people. So if you're that kind of person who wants action, and then once again, go figure out why that is. Are you gambling money? Are you investing? Understand what your blueprint looks like. And that's important. I think that's what they were saying there. Listen, you've been so super successful in what you've done. Separate that away from money because that has nothing to do. You're amazing as an athlete. Understand now that you need to find somebody who's going to help you manage your money. And if you're on the same page with that.

Starting point is 00:18:29 Well, let's talk about multifamily. Let's jump into it. Because they say that you find out who's skinny dipping when the tides goes out. Tides have been out. The debt markets have crushed, I think, the multifamily syndicators. I think there's a lot of blood in the water from these syndicators that ran their performance based on the fact that they thought they could refi at this point and they have not been able to. And it's a real problem for a lot of projects. So that point taken, number one, how are you still finding deals to buy? Has your box changed? Has your list changed?

Starting point is 00:19:07 What's going on? I like to say that I have a life before Jake and I have life after Jake in real estate and investing. When we started buying deals, we figured out this framework of buy right, finance right, and manage right. And I think this can cross over into single family, self-storage. And if you follow the framework, and I'll go through all the three points real quick,

Starting point is 00:19:30 because it's important for your listeners to hear how we've been able to avoid all these mistakes. Listen, I made the mistakes in the last market cycle. The financing component is one of the biggest components. We like long-term fixed rate financing. I don't want debt coming due in 24 months or 36 months when we have shortages of material, when we have labor shortages, things are a lot harder. When you're under pressure, it's very challenging, especially if you're a novice or you don't have operations under control. Now, bridge financing is a great tool when you know how to use it. Big mistake for a lot of syndicators out there.

Starting point is 00:20:05 Jake and I have not used short-term bridge financing on the last three years. We've been able to use credit unions and community banks. Five-year terms gives us a lot more runway, and we're buying deals based on actuals. And listen, this is the problem that happened in 21 and 22. People were buying stabilized assets on bridge financing. That in and of itself, looking back, is an absurdity, right? But you can't blame investors because interest rates were so low for so long, private equity gets into the space, all the money's flowing in because the cost of capital is so cheap. So for you to compete, you have to take on risky debt. You have to start stretching that first pillar, which is the buy-write criteria. All of a sudden, if you don't understand your buy-right

Starting point is 00:20:49 criteria, you're going to make a ton of mistakes. And the buy-right criteria, unfortunately, it's changing as the market cycle changes. When Jake and I started back in 2011 and 2012, it was a heavy buyer's market. You could buy a lot of old assets, C, C minuses for a great price per unit because they were just on sale. But now as the market cycle has lengthened, now it's more of a flight to quality. And this is a problem with a lot of the syndicators over the last two or three years. They were buying four caps in Dallas for C, C minus properties. Four caps, when the market ends and the music stops, become four closures. And that's what's going on right now. It's very simple.

Starting point is 00:21:31 It's just, it's following the market cycle. And I hope anybody listening to this, we're going to have the cycle repeat in the next few years. So right now, our buy-ret criteria is newer assets, 80s and newer. We like brick buildings. We're in the East part of Tennessee. We like the Knoxville market.

Starting point is 00:21:49 We like median incomes. Think about that. People just buying deals because it's a great deal. You need an asset with a median income of a certain number in your market. For us, it's at least $50,000 because we want residents who can pay. We want better neighborhoods. We want two bedroom, one and a half bath town homes. Those are the best assets for us because they're the best profitability for us. And they

Starting point is 00:22:10 have a nice resident base. It feels like a home to the resident. We love washer, dryer hookups. Those are great amenities in the units themselves. Trying to think of anything else that stands out for us. Like I said, the vintage, the newer assets. So when you start looking at that buy box, the next thing you do is I'm going to call every broker in town and let them know what my buy box is. So when a deal comes across the table, the broker is going to call Jake and Gino and say, hey, we've got a 2008, 33 unit, two and three bedroom townhomes, median income is 70 grand, washer dryer hookups, nice asset. And we're closing on that asset in two weeks. That's how you find deals in multifamily. It's

Starting point is 00:22:50 very different than residential from two factors. Oh, keep going. Sorry. No, no, it's okay. This is really important because when you're looking at the residential space, you're online, you're looking at Zillow. I'm not going to call any brokers. I can do everything transaction-wise. But in multifamily, especially the larger assets, you need to connect with brokers. And if you don't connect with brokers, it's going to be harder to find deal flow. And the second component is the financing. In commercial and multifamily, you have terms on your loans. They expire. Whereas residential, you're getting 30-year AMs, 30-year fixed. In commercial, you may get a 30-year AM, but it may be only a five-year term, seven-year term, 10-year term. And like you said before, this bridge financing, some of them are 24, 36 months.

Starting point is 00:23:33 It's fast. So I'm going to go back to the buy box, first of all, in the strategy. Because the name of the game for so long was look for unimproved assets or assets that were beat down a little bit that you could do value add to. And you could move the NOI, refinance out all your money, and now you're in the asset for nothing. And that's just cash flowing and depreciating is what you want. But now, those are hard to find, right? Because everything has been improved. So how do you go about – is value add even a strategy for you?

Starting point is 00:24:04 Are you just trying to change occupancy? Are you trying to change, improve units for rents? What's your strategy to improve the property, or is there one? Love the question. It's another one of those where it's not the market cycle to be able to do that. That market cycle has passed. That was the buyer's market between 2014 and 2018. Typically, a multifamily hold is anywhere between three to five or six years. When you see in 2019, 2020, NOI is not changing. Cap rates are compressing. They're getting lower. You're not doing anything to add value, but you're flipping the property every 18 months.

Starting point is 00:24:41 That's when it starts to signal the market is shifting and that value-add strategy that you've talked about is not going to work because guess what? Interest rates are rising as well. So you can't refi and roll. That's not the strategy right now. Listen, we've been able to refi out over 25 million bucks from our portfolio and put it into the next deal. Right now, we're probably sitting on 12 to $15 million of equity in our portfolio that we can refinance out when rates drop. Right now, what I'm seeing really as a value add is valuation through operation, not just renovation. So you're seeing a lot of these operators, there's a lot of blood in the water. Well, what you're doing is you're trying to buy these newer assets where they have

Starting point is 00:25:21 these mom and pop owners that have rents at 1200 bucks because they don't know the market. They don't know operations. You can go in there operationally, not have to spend 15,000 a unit, but just say, hey, I'm going to deliver better customer service, but I'm going to raise rents to where they should be. And that's where the value is in this part of the market cycle. As the market cycle and prices tend to drop a little bit more, then you'll have that opportunity, as you said, to be able to add value and to be able to buy these assets at a lower price point. And really, it comes down to the price. I'm not saying don't look at older assets, but the older assets now better be at least seven or eight caps based on actuals because you're going to have to fix a lot of crap. The banks are going to say to you, huh, you know what?

Starting point is 00:26:02 I'll give you 65 LTV, but you need to replace roofs. You need to do the driveways. So you just got to be careful with the budget and what you're buying. And this part of the market cycle right now, those prices haven't gone to seven, eight caps. And a lot of markets they have, but a lot of markets, these older assets need to continue to drop in price. On your own deals that you're buying, do you raise capital? Do you not raise capital? Do you use your own? Are you levering the $25 million as collateral against loans? Are you giving equity in deals? Are you just doing debt plays? What's your capital plan for the new stuff? Jake and I started out as two jabronis, as I like to say, just buying deals by ourselves.

Starting point is 00:26:42 We didn't know. It's 2013. We're buying deals on seller financing. We're partnering up. The first 600 units, we basically bought it with me, Jake. My brother was a 10% owner and I had another business partner, Mike, who's still buying deals with us. We did a 281 unit deal that was all seller financed, 20% by the seller and 80% by the bank. That was the big liftoff for us. But after that, we ran out of capital. So from about unit 700 to a little over a thousand, the next three deals, we syndicated them. We needed to raise capital. I wanted to learn how to syndicate because I'm teaching the students how to raise money. So we did three

Starting point is 00:27:19 syndication. After that, we're like, you know what? We don't really like investors. We don't want to scale the business because it's another component to the business. You're doing the multifamily, you're vertically integrated, you have property management. Now you have another business of having to deal with investors. So we're like, let's slow down. Let's start funding our own deals. And at that time, as the deals were matriculating, we're able to extract equity and put into the next deal. So for the last four years, we've been able to fund all of our deals internally. Me, Jake, business partner, Mike, we've sold all three syndications. And the great thing about it is if you're a company out there and you're in the business,

Starting point is 00:27:52 we're allowing our employees that are with us for over two years to be able to invest with us side by side, dollar for dollar, equity partners, and they love it. And for us, it's great. Give them 5% or 6% of the deal. I mean, what better thing can you hear from a property manager than saying, we need to raise rents. And it's because they own part of the deal and they understand the business and they feel as if there's ownership involved in it. And for us, it's been able for us to continue to fund deals ourselves, not to raise capital. And we're looking every year to add between 200 and 300 units. We don't want to outgrow our infrastructure because we do vertically integrate. We do manage our own properties. We have over 80 team members. So if you add 1,000

Starting point is 00:28:35 units, you're going to need to add on a good 15, 18 employees. We don't want to do that. That stresses the system. And all of a sudden, like you said, a lot of these syndicators, that was the other mistake they were making. Their eyes were too big. They outgrew the little infrastructure that they had. And then all of a sudden, whatever systems you have, they just collapse upon themselves. Well, I think the biggest problem with that is that most real estate education that you run into out there says, just lock up a deal. If you lock up a deal, you'll find the money. If you lock up a deal, you'll find the money. And then what happens is people that are inexperienced lock up a deal and then they start, they get

Starting point is 00:29:08 terrible terms on bridge loans. They do terrible equity plays with their investors when really all they had to do was a 5% on the front end debt play with maybe a 6% kicker on the back end of the exit and you could have kept all that. But instead you're giving away equity and then it just turns into a mess. So if you're a brand new person, what do you recommend they do? Do you line up financing first? Do you find a deal first? What says Gino? That's another great question. For me, if I was starting now, as opposed to when I started, there's two things. And I think you'd

Starting point is 00:29:42 agree with me that you need to do when you're in real estate. You're sourcing capital and you're sourcing deals. Those are two of the most important things that you can do in any real estate business. And people are always asking, well, should I look for the capital first or should I look for the deal first? The problem is, is if you find the deal first and you don't have the capital, you can't raise money from people that you don't have a substantive relationship with. And you just can't go to somebody that you've never talked to and said, hey, by the way, I've got this great deal. You need to start doing both in conjunction with one another. And it really depends upon what your goals are. If you're just getting in and you

Starting point is 00:30:17 want to do a 10 unit or a 12 unit, you can fund it yourself. Great. Do it yourself. Fund it yourself. Learn how to buy right, manage right, and finance right. But if you're looking to scale and go longer term and possibly join someone else's team, you need to be doing both.

Starting point is 00:30:31 You need to be sourcing deals and you need to be sourcing capital at the same time. All right. Well, let's play worst case scenario. I find this deal. I lock it up. All my friends are bums.

Starting point is 00:30:40 I've reached out to everybody I know. Nobody has two nickels to run together. I don't know where to get the money. What do I do? You wholesale it. Wholesale it. All right. For those who don't know what you just said, expound on what you just said.

Starting point is 00:30:53 Think about it. Yeah, go ahead. Think about it. I mean, we've had students that wholesale the deal to us last year. It was a $10 million deal. They made a boatload of money. They just couldn't raise the capital for the deal. They're like, hey, we got this deal. For us, it was awesome. Great price point, great vintage, 80s vintage, two bedrooms, three bedroom townhomes, 105 units,

Starting point is 00:31:14 needed some exterior work, ton of value add. They couldn't afford it. So they just locked it up. They did the closing with all the financing you're talking about, hard money, private money, took control of it. Next same day, close it to us. If you've got a deal and that's the opportunity and you can't close the deal, that's what you do. But that's why you join an education company. You need to be in the room with other real estate investors. You need to be not talking to Uncle Jim and Aunt Mary because they know you as Gino the pizza guy. Why am I going to invest with Gino the pizza guy? But by my second or third deal, all of a sudden, Uncle Dino is going, hey, Gino, what are you doing there? Can I invest with you? On the first one, it's a

Starting point is 00:31:53 little bit hard, but on the third or fourth one, they're going to come knocking on your door and saying, what are you doing over there? That's funny you say that. You're exactly right because everybody has that uncle that knows everything they do and and in resident it's like a residential real estate the worst you can see is the the father of the buyer walking for the inspection so question on on your on your students that you teach are you having them write those contracts when you're trying to lock the stuff into a signee or would or would you are you teaching that double that was a double close what you just described. That wasn't it. Yeah. So they didn't really wholesale it to you. They just,

Starting point is 00:32:28 they whole tailed it to you, if you will. Yeah. Yeah, exactly. But it's not, it's pretty, I want to say it's not rare, but it's uncommon to do wholesale deals of that size. I'm teaching students how to buy, manage, or finance. And the whole idea is in our community, Jake and I, we don't raise capital from our students. So when a student joins the community, it's open source. They're raising money amongst themselves. They're partnering up together. So they're putting balance sheets together. They're finding a deal. All of a sudden, I've got this 100-unit deal. Where am I going to find a 2 million? Well, you've got 1,000 students in the community. We have onsite events that students get together and network. I'm putting students together. So it's one of those things where when I started a multifamily, there was no such thing

Starting point is 00:33:09 as a co-GP, basically saying, hey, I'm a person. I don't have experience. I hurt my heart when you just said that. But hear me out for a second, because this is a way that you can get into an opportunity and you're finding an operator who's obviously they need to have experience. They need to have gone through a couple of full cycle deals. You need to get on their team and you need to be able to provide value to the team. You can't get compensated by just bringing capital. But if you do have capital and you want to get on somebody's team and you want to be part of that team, that's another way to do it. I mean, that's another way

Starting point is 00:33:42 for you to start because you're leveraging another person's talent. You're leveraging another person's experience, another person's business plan. If you can't close the 30 or 40 units, but you know that somebody has it and you can help them close the deal and you can get on their team, that's another way. And a lot of people have been doing that over the last three or four years. Well, just so they just feel unfamiliar, let's explain what the difference is between GP and LP, which I think you probably should want to. As soon as you said co-GP, it hurt my heart a little bit because that's like, no, no, let me just have half your kid. What?

Starting point is 00:34:13 No, no, no, no. You come over and cut them sometimes. They're not going to cut them in half. I'm not doing that. Explain the difference. Well, it's interesting. Half a kid is better than no kid, right? That's the way I look at it.

Starting point is 00:34:25 No kid. Especially when you're starting out. The difference between a GP, a general partner, is an individual. Me and you, we get together, let's form this entity. We're going to go out, we're going to buy this asset. We don't have a lot of money, but we have the experience and the deals. We've done some deals. We can put them together. We can run the deal day to day. But we need LPs, which are limited partners. They're passive investors. They're going to invest in our deal. We're going to give them a big percentage of the deal. We're going to keep a little bit of that deal, depending on what the market says. We're going to give them

Starting point is 00:34:59 distributions every month, hopefully, or every quarter. We're going to let this deal work. And at the end of the deal, whether it's three or five years, hopefully, I'd love to see a refinance. But if not, we're going to sell and we're going to split the proceeds. Now, it's great to be a general partner because you collect fees, something like an acquisition fee, where you're charging your limited partners, your past investors, you're charging asset management fees. And it's a great business. But the problem is, and this goes both ways, you may be making fun of GPs and LPs, but I've created a program called Passive Investor Pro. Because LPs, passive investors, their problem is that they had a

Starting point is 00:35:36 ton of money. They needed to find a place to put it. And the first thing they said was, I need a deal. Where can I put my money? Whereas the first question they should be asking is, I need to find a really good sponsor. How do I do that? Because when you're investing passively, the deal doesn't really matter. What matters is the sponsor first. And then the second part of that framework is the alignment of interests. Does that sponsor's interest and your interest align? Are you holding this deal long-term? Is that sponsor putting any capital into the deal? Does the sponsor's timeline fit with yours? Do you like that sponsor's business plan? If your interests align and you like that sponsor,

Starting point is 00:36:16 then let's start talking about the deal, about buy right, manage right, finance right. Don't do it backwards. And that's why I've seen a lot of LPs get in trouble. And the problem is the LPs have been funding these crappy deals by GPs. And now they're up in arms saying, well, these GPs are screwing me. I'm not getting... Well, did you read the underwriting? Did you understand that 20% rent growth ain't going to happen for the next four years? You can blame GPs all you want, but you did not do your due diligence. And I want to teach LPs how to do their due diligence. So these crappy deals don't get funded and this pricing starts to drop and come back more in alignment to where the market should be. Well, that was going to be my next question is give me the three biggest red flags an LP should look for. Oh, that's awesome. I love that.

Starting point is 00:36:59 For me, the mistakes that I made as an LP back in 05 on my very first deal was not vetting the sponsor, not understanding. And I don't care if they've done a couple of deals and gone through some full market cycles. I want to know their business plan, their implicit business plan on how they're going to return my capital. I want to look at their underwriting and I want to make sure that those underwriting is conservative. And you need to have a coach or you need to have somebody who understands underwriting teach this to you. That's the important thing. Number one. Number two, I like to see that group have some of their own money, capital into the deal. Because if something goes wrong and they're vested in this deal, they're not just going to walk away. They're going to try to make you whole.

Starting point is 00:37:43 That's important. And I think the third one, there's so many here, but like I said, the third one is don't focus just on the deal. You need to focus on the sponsor itself. And if you don't focus on the sponsor, and I mean, there's so many here, but looking at the sponsor's team, making sure that you vet the sponsor's property management company, the sponsor's CPA, and all of the sponsors, all of the people that make up that general partnership team, you need to vet them. That's really important. You got to make sure that every single person who's on that deal, you understand that they've got experience and they've done this.

Starting point is 00:38:17 All right. Next question. Let's say you're the GP on a deal and the deal goes south. Two schools of thought. One school is it's investment. You knew there was risk, blah, blah, blah. Or it's very important to make everybody whole. Which way are you going? I mean, for me, I've made everybody whole. Do you want to be in the business long-term or do you want to be in the business short-term? It's not a really big market, to be completely honest with you. It's interesting for people to understand that GPs have a lot of risk. If that deal does go south, you as an LP may lose your money, and it sucks that you lose your money. But me as the GP, I signed on the debt. If I lose that deal,

Starting point is 00:38:58 that does a lot to my ability to be able to borrow from the agencies, Fannie and Freddie, going forward. Now, they may sell at a loss and get the LPs wiped out, the equity wiped out. That's something where the GPS will come and say, hey, next deal I get, I need to make these people whole. I want to make them whole. I want to make them money in this next deal. I would try to make them whole if it was me. Yeah, dude. It's never an easy thing to do. I raised a bunch of capital for a vulture fund in 2015, maybe what it was. And then a partner that I had ended up losing it, I guess, and going a little screwy and in Bolton town, I had to make three quarters of a million right on that. And it wasn't a good day, but I made it right. Because again, just because he hauls ass

Starting point is 00:39:42 out of town, I'm still doing business here. I got to be here. So yeah, always make your investors whole. That wasn't a good decade, let alone a good day. That's a lot of money to put back, but you know what? Tough loss, but it is what it is. You know, look, but here's the thing. I could go to any one of those people and have in some cases and raise debt for anything else I want to do because they know they're going to get it back. That brings up a good point. You asked me something that an LP should ask. You should ask a GP, when was the last time you lost money? And if a GP has never lost money, you probably shouldn't do business with them because they haven't been in business long enough. And then, by the way, what did you do once you lost the money? What was the communication? How did you rectify the problem? Did you just walk away or did you make them whole? And I'm not saying there's a right or wrong answer, but you'll get that feeling if you feel

Starting point is 00:40:28 as if that person is in alignment with you. Oh, dude, I've seen that happen so much in the last, you know, cause here's the deal. I've taken some flyers on not, not even real estate deals. These are, these are angel investing, angel investments in different companies that I got on with some other guys and we just did some investments with some people and you know, some of them them win some of them lose it is what it is and you're never playing you're not you're not playing huge dollars but it's a decent clip of money and it always seems like when they go south you stop hearing from the like you stop hearing right like oh hey man did you get an update this quarter I didn't I didn't get it I didn't see an update dude I think if a deal is going south, if you're in a deal, real estate deal, whatever kind of deal, right?

Starting point is 00:41:08 And it's going bad, the best thing you can do is continue to communicate the issues to your investors. Like, let them know. So if the thing actually does go to zero or just completely crap out, it's not a complete surprise to some people. Some people don't pay attention, but I always do. I'm like, hey, dude, I was just getting an update yesterday. Where is it?

Starting point is 00:41:26 Where is this? So I think that's the same in any business. If your customer is asking you what's going on, you've screwed up. During COVID, I don't know if anybody remembers this because it seems like it was 100 years ago, but those first 60 days of COVID were, I don't want to use the word frightening, but all of a sudden, are people going to pay? So what we ended up doing was actually doing a daily tracker of income coming in. And every Friday, we had an open call to all of our investors. If you want to jump on and see what's going on with the assets, we'll get on with the Zoom call with you.

Starting point is 00:41:58 And not many people even took us up on that, but the transparency is so important. And I think a lot of LPs have understood that they've made a crap ton of money over the last six or seven years. I mean, sooner or later, an investment is going to go bad. And if you explain that to them and say, hey, this one we lost out, next one I'll get you. But if you just hide in the sand and run, that LP goes around the water cooler and starts talking to other LPs. And then all of a sudden, Gino is blackballed and you ain't doing business with any of those LPs anymore. So just be careful. Yeah. I mean, I know some guys

Starting point is 00:42:30 that, that I used to run in the same circles as them that, I mean, you're talking about massive losses over the last 12 months. And, and, and these are guys that have just been smashed across social media that are, I mean, I don't think I mean, I don't think they could raise a stick of gum anymore. I think people are just like, the word is so far and wide on these guys just being screwy that they couldn't raise a stick of gum. So if I'm a brand new investor, would you recommend starting out to a brand new investor going right into multifamily or maybe try a single family first? What do you recommend? I recommend understanding what the goals are. I mean, if it's just to get your feet wet and to start, I think single family is

Starting point is 00:43:10 great. But if you've got $3 million in the bank and you're like, I want to scale up quick. Well, I personally would start with a couple LP investments. I mean, that's what I would do. I would get on, find a great sponsor, put some money to work and see what happens, see how that works and earn while you learn. It really depends upon the time you have, the goals you have, the capital you have. I mean, if you've got 20 years of experience, but no money, those 20 years of experience in real estate can help you out by getting into seller finance deals, by providing sweat equity, by finding deals. And if you can find deals, that's where the value is today. It's still a value today, believe it or not. If you can find

Starting point is 00:43:48 those deals and you have a big enough network, that capital will flow. So for me to say just starting out, I mean, single family is always the easiest thing. And I see most investors, myself included, when I started back out in 2007, I went up to Rochester, New York. I bought the duplexes for 60,000 bucks. They were in a D area, $20,000 median income. Cap rates were 32, but it doesn't matter what the cap rate is because they don't pay. You're not making any money. So it's one of those things. Just be careful about pricing and understand what your goals are. Dude, it's so funny to stay humble and always be learning and always want to learn things. I was in, like I said earlier, I was at my mastermind this weekend. So it's fresh on my brain if I keep

Starting point is 00:44:27 bringing it up because I literally just got back. But a guy that was there for the first time, I'd never seen him before. I won't say his name. Super nice guy. This guy was awesome. I knew nothing about real estate. The guy was exceptional at what he did. His little niche in the world was exceptional. And when I asked him, what are you doing? Why'd you come? Blah, blah, blah. He's like, because I'm sick of paying, quote, unquote, $2 million a year in taxes is what he said. And his first deal is a 50, no, 46,000 square foot building where he lives. That is the first deal he's doing because he got with, these guys are like, what the fuck are you doing? No, no, we got to go. We got to spend some money. We got to go.

Starting point is 00:45:07 And understanding your needs, be it cash flow or in this case, massive, massive tax bills that had to get cured. Yeah. Understanding you don't know what you don't know is clutch. So let's shift gears a little bit and talk about, I know you got the book coming out. Let's talk about the premise behind the book and what you're trying to accomplish with that. Because I think it's kind of similar to what I'm doing, which I love. So let's talk about that. We interviewed a gentleman named Ken Honda, I think who wrote the original Happy Money book.

Starting point is 00:45:35 He sold a million copies. And during the interview, he's like, you need to write a book called Happy Money, Happy Property, Happy Legacy. I'm like, I like that, but I don't want to write about multifamily. I talk about it every day and it's really just a vehicle. I said, I'll write happy money, happy family, and happy legacy. Because I think all three of them really combine so well. And when I talk about happy money, I don't mean that money is going to make you happy. The idea of happy money is the energy around the way you've actually earned the money and the way you spend the money and the way you view the money. I used to view money as unhappy with thinking back at the restaurant because I hated going to work there. It was unhappy. I was

Starting point is 00:46:16 earning unhappy money. And how many of you right now are doing that? You're earning money. You're working in a place you don't want to work to. That's unhappy money. But for myself, being in multifamily and having the Jake and Gino community, I'm attracting happy money. And I think once you start to understand that and understand what money is, it's just a tool. It's just an amplifier. Everything, for me, at least started shifting and being able to create a happy family. I mean, that's what being an entrepreneur is all about. We're all talking about time freedom and life freedom. I just wanted to create a business and have my family involved in it and grow my family within the business.

Starting point is 00:46:54 And I think that's what a lot of entrepreneurs do. I never wanted to lose sight of that. I started a podcast with my wife, Julia. It's called the Julian Gino Podcast. We don't monetize on it, but it's part of our family and we freaking love it. And the third component is happy legacy. And as you had said before, I don't want to raise screwed up kids who feel entitled. And when you see people like that with their children, that they're giving a money way to charity and not leaving it to them, it's because they failed. It's because they failed as parents to incorporate that happy money into the happy family and

Starting point is 00:47:27 to be able to create a legacy to leave to their children, not only of leaving them a legacy of money, but leaving them a legacy of their values. And my values are hard work, integrity, faith, being honest. All of that, I want to teach to my kids and I teach it to them daily and I live it, not by my words, but by my actions. And if you can create that kind of legacy and working and teaching your children about money, because my ultimate slogan is people with financial intelligence can change the world for the better. I truly believe that if more people were financially intelligent in this world, we wouldn't even have a presidential debate right now. There wouldn't even be a choice

Starting point is 00:48:03 because we understand the differences between the platforms with taxes, with jobs, with regulation, whatever. If more people had that, and I want to teach that to my kids, and the legacy comes through the books. It comes through the family meetings we have. It comes through the family vacations. It comes through the monthly calls that I have with my bookkeeper and all of my children are on there. It comes through my kids investing in my deals. I told you that my son has eight K-1s. He also has his FFL license, his federal firearms license. He's only 22 years old. I had the ATF up here about a year ago in my office interviewing him. I mean, I don't know how many 22-year-olds get interviewed by ATF. That was a pretty mind-blowing experience for me. He opens up his own LCs.

Starting point is 00:48:44 Probably a lot, but not for the right reasons. Well, this was the right reason, but that's what I'm saying. That's the legacy that I want to leave. I want to leave them to be able to be financially independent, to be able to make their own decisions. And it's incumbent upon us as parents to be able to teach them. They know nothing. They're a blank slate.

Starting point is 00:49:01 Let's teach them. Let's guide them into the legacy that we want to be able to leave for them. So what do you think the best, if you had to pick three best things you've done with your kids to get them on the right track, what are the three best things you've done? I'll give you mine. I'll tell you mine because I give you two that I know Tom had a third one when I think about it. So the first one is stolen from Tony Robbins, but when they were little kids, like kindergarten,

Starting point is 00:49:23 first grade, whatever it was, we had a time clock. So I bought an old punching clock with the cards and put it in the kitchen there. And I said, your job is to go to school and get good grades. That's your job. And you punch in, you need to punch out. At the end of the week, I give you like a dollar allowance for that or $2, whatever it was. And if they didn't punch in or punch out, I'd look at the card and be like, well, where were you on Wednesday? I don't know what you did. They're like a kindergarten. So I know my wife's trapping them off and I'm like, no, I'm not paying for Wednesday because you didn't clock in. I'm not, this is how I know where you are. You don't clock in, you don't clock out. I don't pay you. That was exceptional when they were very, very little. And then when they were maybe eight and six, we bought vending machines and they run the vending machines in my offices.

Starting point is 00:50:12 So that's their business. They do inventory, accounting, marketing, all of it. And they have since they were little. And now leading up to now, my son actually now works for me, which is great. I pay him what the law will allow me to pay him. I wish I could pay him less. But yeah, because he needs to grunt. And he does all the marketing. He helps with this and does stuff. But more importantly, he's eight feet away from me having really high-level conversations all day, which I love. So he's just absorbing that. So I would say that's the three best things I've ever done with my kids. What about you? I think for me, the first one may sound a little crazy to you, but I used to make a ton of mistakes

Starting point is 00:50:52 with the kids early on is I would push money and I would push all these subjects on when they were younger and I would literally turn them off and they didn't want to hear me sometimes. I'm trying to make them read Robert Kiyosaki and I'm trying to make them read Richest Man in Babylon. They weren't ready for it. I was trying to make them save. Well, I'm taking money from an eight-year-old, pulling it out of their hands and putting into this bank. And they're thinking it's a punishment.

Starting point is 00:51:14 So for those of you out there, let it just become natural. Don't be overbearing to them. I think the second one was when my son was 15 years old. We need to be parents sometimes. He comes to me and he says, hey, dad, I want to buy an amp. I'm like, okay, Mike, how much is this amp? It's 1500 bucks. I said, Mike, do you have any other amps? He goes, yeah, I have two other ones, but this one's really good. How much money you got in the bank, Mike? I've got 5,000 bucks. So you want to spend 30% of your net worth on an amplifier that you don't need. He's like, yeah.

Starting point is 00:51:41 He wore me down for three months. I did not capitulate. I said, when we find an asset to invest in, you will invest in that asset. Hopefully and thankfully, four months later, a deal came in. He put all of his $5,000 into that deal about seven years ago. Within seven years, that deal has literally created him to become an accredited investor. We've been able to sell assets out of that, refi, continue to refi, continue to refi. So if any of you out there say, I don't have a lot of money to invest, it's not the amount, it's the habit. It's the muscle that you need to build. And once he started doing that, all of a sudden his sisters started jumping on the bandwagon. And now I've got the three oldest kids all invested in deals. My 16 year old, we're closing a deal in two weeks. She's got 10 grand going into that deal as well. So it's really just starting and just having an open conversation. And I think the third thing is

Starting point is 00:52:34 I now have them on every month with my bookkeeper. They all have separate businesses. They all have general ledgers. They need to run their business. They need to have their P&L every single month. They need to have what their expenses are. So at end of the year when it's tax time everything's up to date and we can have everything running because that's how you should run a business and that's how you should run your personal life as well love that love that all right well dude if they want to find more of you they want to coach with you train with you how do they? Do you know? Jake and Gino.com. Easiest place to get us. Jake and Gino.com.

Starting point is 00:53:08 If you want to follow me on Instagram, same thing, Jake and Gino, you're bright. You're bringing the same way across the board, right? Yeah. Yep.

Starting point is 00:53:13 All right, buddy. Well, dude, it was a pleasure, man. Having you on. You're welcome.

Starting point is 00:53:17 Anytime. If you have anything in Vegas, you let me know. And, uh, dude, thank you so much. So guys,

Starting point is 00:53:22 listen, if you listened to that today, hopefully it fired you up to go out and do something great, man. Start doing great things, start looking for deals, start talking about money, start having these conversations. And also remember, man, you don't need a ton of money to get started. You can get started with a small amount of money. Just find somebody to let you piggyback on their deal because the fastest way to get out of just the normal trading your life for money, trading your time for money, is to invest in things that pay you passively.

Starting point is 00:53:53 We'll see you next week. What's up, everybody? Thanks for joining us for another episode of Escaping the Drift. Hope you got a bunch out of it, or at least as much as I did out of it. Anyway, if you want to learn more about the show, you can always go over to escapingthedrift.com. You can join our mailing list, but do me a favor. If you wouldn't mind, throw up that five-star review, give us a share, do something, man. We're here for you. Hopefully you'll be here for us. But anyway, in the meantime, we will see you at the next episode.

Escaping the Drift with John Gafford - Unlock Financial Freedom: Gino Barbaro's Journey from Reinsurance to Real Estate Empire

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