Latest / Real Investor Radio Podcast / EP41 | Kris Garin - Building a Rental Portfolio: Insights from Riparian Capital Partners CEO
Transcript
- Craig Fuhr (00:12) All right, so let's go ahead and bring in our guests for today. Welcome everybody to the episode today. We're excited to speak with Kris Garin, who is the principal and chief executive officer of Riparian capital partners and investment firm who operates here in Baltimore as well as Pittsburgh. And you'll fill us in on the other cities as well, Kris. And so welcome to the show. Looking forward to speaking with you. Thanks for taking the time, really appreciate it. Kris Garin (00:43) Thanks for having me. It's a pleasure to be on. Craig Fuhr (00:45) Jack, you want to kick it off for us? Jack BeVier (00:47) Yeah. So, uh, it was psyched to get Kris on the show because Kris, uh, I met him a number of years ago, uh, came from outside the real estate industry with a real interest in workforce housing and started buying, bought buying houses in Baltimore where we are. And that's how, that's how we intersected is that we were both, you know, active in the real estate space in Baltimore city. And Kris immediately struck me as an incredibly intelligent, you know, incredibly intelligent person. and someone who I knew had a long -term view of this industry after having spoken with him for 10 minutes. And that's only proven out over the course of the past, I don't know how many it's been, six, seven years that we've known each other. And Kris, could you just give a little bit of intro on Reparian and what you guys are doing and your approach to building a rental portfolio, I think would be really helpful because it's unique in a lot of ways. Kris Garin (01:40) Yeah, happy to. And I'll first just say maybe for Craig's benefit, you know, probably, you know, maybe 10 minutes after we closed our first portfolio in Baltimore, I got an email from Jack, incredibly gracious, basically saying welcome to the neighborhood. And and and just, you know, we had a nice introductory call. It's been great to get to know him ever since. But Jack BeVier (01:54) Thank you. Craig Fuhr (02:00) I'm starting to think that there's not a transaction that goes by that Jack BeVier is not aware of, and at least Baltimore and probably several other markets. But yeah, that's all. Kris Garin (02:08) Well, you know, this is a sharp elbowed kind of corner of the industry. And the fact is, it's so fragmented and there's so much space for good operators to just come in and operate alongside one another. You know, it was just, it was a great way to enter Baltimore. And I always appreciated that about Jack. So we are a vertically integrated, owner, operator, asset manager of, we talk about scattered site workforce housing. So overwhelmingly single family rental will do small multifamily. We're really focused on that segment of the landscape where it's too small to park management team on site. And so you have to have a distributed management operation and you have to. have a financing operation where you can efficiently capitalize your business without being able to just do a couple of big agency loans. And Bob's your uncle and you're good. So we currently have right around 1 ,350 units in the portfolio, mostly single family. A little bit more than half of that is in Baltimore. And then Craig, as you know, we're in Pittsburgh and we're in Detroit. And about two thirds of our residents are using some kind of a voucher to pay the rent. And overwhelmingly, we're operating at rent levels that would be affordable to people earning 60 to 100 % of median income. But typically, we've got a lot of 0 to 30 % median income earners in our homes with the help of a voucher. And so. Craig Fuhr (03:50) Mm -hmm. Kris Garin (04:02) I think Jack, you and I first spoke in 2020. Late 2020 was when we did our first, we closed our first acquisition. Reparion was almost two years old at that point. So we started out doing a little bit more focused on multifamily. We did a couple of co -GP deals with larger investors. We sort of thought that there was an opportunity to pick up a spread. by buying effectively scattered site multifamily at cap rates that are incrementally higher relative to larger multifamily than the cost of borrowing. And what we found was that was exactly wrong. At least at that moment. I'd spent, we could talk about my background in a bit, but I'd spent a fair amount of time. Craig Fuhr (04:47) Hahaha. Kris Garin (04:58) Arbor, among others, does a great job of reporting on kind of how the small balance loan programs out of the agencies perform relative to larger conventional multifamily. And, you know, for a long time, there was a 60, 75 basis point cap rate spread versus conventional and only like a 20, 30 % spread on the actual borrowing cost. And that felt like a pretty good thing to focus on and timing is everything. And by the time I got my act together to start focusing on it, that wasn't true anymore. The cap rates had come in and the spreads hadn't moved at all. So there wasn't a lot of value creation there. Yes. Yeah, it was. It was. And so I'll pause there. I can go through what we do today. How we got there is part of the story. Craig Fuhr (05:43) It was an eye opener for many investors during that time, Kris. Jack BeVier (05:59) Yes. Yeah. Talk to, so buying one thing that I think is really interesting is you buy portfolios. Like we've accumulated 800 houses in Baltimore one at a time, literally like no portfolio acquisitions. Um, so you can't, you came in and one of the, you know, I was like, welcome to the neighborhood because I'm like, you know, I saw the, saw a press release for repairing partners, but I don't know. How was it? How big was the biggest, the first portfolio? 272 homes. Yeah. Kris Garin (05:59) Where would you like me to focus first? 272 homes. Craig Fuhr (06:29) It's quite a splash, Jack. Jack BeVier (06:29) Which is quite a splash, right? Yeah. Like all of a sudden, like zero to player, uh, in the backyard. And I'm like, Hey, that's going to be interesting. Cause I think that that's got a set of really unique, difficult challenges, portfolio acquisitions. I mean, as a, as a business model, particularly in older neighborhoods and, and B and C class neighborhoods where the sprint, you know, the cash on cash returns are better. Um, and they're more creative from a. current cash point of view, but operationally, they're also like, you know, kind of tough. And so going from going from, I don't know these houses or a diligence period to I'm operating 272 houses. I was like, I mean, he's gonna be here in two years or he's not like he's gonna he's gonna be here in 20 years or he's gonna be out in two. And so and I didn't know right like at that time, I was like, I should meet the guy, you know, Craig Fuhr (07:14) Thank you. Jack BeVier (07:28) Um, so how's, how's that? Yeah. Yeah. Yeah. Kris Garin (07:29) while he's still here. Craig Fuhr (07:31) Kris, at the time you had a full head of hair or two, didn't you, when you purchased that first portfolio? Kris Garin (07:34) Oh, it was beautiful, Craig. You should have seen it. Craig Fuhr (07:37) Lustrous. Jack BeVier (07:37) Flowing, flowing locks at the, at the, at the settlement table that first time. Kris Garin (07:40) Yeah, I was a couple inches taller too. Craig Fuhr (07:42) I when you said when you said first purchase in 2020 to 1350 homes now I get it. You know, in four years that's that's no small lifting. So yeah, I'd love to hear about those first transactions. Jack BeVier (07:55) Yes, to talk to you talk to us about about the the first transactions, how you found them, the operational experience, I want to dig into that, you know, that stuff, the operational experience of like building a property management portfolio around around a portfolio that you just bought, and then continuing to do so. Like, how's that experience been? Kris Garin (07:59) you Yeah, so let me take half a step back here. So, you know, I came from about a decade in investment banking, working for great middle market bank that didn't have a balance sheet. And so, you know, if you got a weird idea of a good time, you're buying workforce rental portfolios, scattered site is a great thing to do. Having a being a real estate investment bank without a balance sheet is also a great thing to do. It was a really wonderful learning opportunity for me because the layups in that business always go to the providers of credit. And so we had to be true advisors where we were creating value either by bringing differentiated ideas or frankly just getting deals done that nobody else wanted to work on. And a lot of time... in that seat focused on emerging asset classes, emerging managers, niche markets, niche geographies. And I got to see a couple of things there that gave me comfort that this was a non -crazy thing to do. The first was really had a front row seat to the institutionalization of the workforce housing segment in apartments. 10, 15 years ago, the institutional bid for Multifamily was really kind of B plus A gateway markets and the stuff, you know, that sort of B minus C plus secondary market apartment building, you know, that today trades right on top of an A cap rate, different per pound number, right? But cap rate very similar. Back then, institutional investors were saying, what's my exit? Which you don't hear anymore. And as a result, they were participating. at all with the cap rate spread 100, 150 basis points wide, which is similar to what you get for taking development risk. And watching the capital flow in over that decade, post GFC and watching the cap rates kind of start to compress was really instructive because you could see an asset class where everybody agreed the fundamentals made sense. The institutional liquidity wasn't really there. And there was a a spread to be picked up if you believed that over time the liquidity would come if the fundamentals were there. The second thing we saw was the emergence of single -family rental as an asset class institutionally full stop. Prior to the GFC, it didn't really exist. Post GFC, you had these huge once -in -a -lifetime foreclosure portfolios. Colony, BlackRock, Blackstone, et cetera. Everybody knew that those had been bought very well and that those firms would make a lot of money on that trade. But the question you heard in those days was, is this a business or is this a trade? There was a lot of questioning about whether you could really operate a large scattered site portfolio, kind of like a big apartment building, effectively. And it's one of those things where, I think technology is playing such a big role in everything we do right now. If the GFC hadn't been happening against the backdrop of the iPhone and mobile computing and all of that stuff, I don't think the SFR industry probably would have emerged at all. You really couldn't have run it in the 90s. It wouldn't have worked. And those portfolios would have just gone back into the homeowner market when things stabilized. Jack BeVier (12:00) Has the market recovered? Yeah. Kris Garin (12:03) But as it was, that sort of emerged. And so those two things were really interesting. And I'd had a number of clients who were kind of the best operator in less desirable markets. And I'd seen what a good business that could be. And my current partner and I, we also formed it. We do a bunch of nonprofit work, particularly around food access in lower income areas, DC, Maryland, elsewhere. And So it had some experience there and it all just felt like the workforce segment of SFR at some point should institutionalize and getting in front of that would be an interesting thing to do. So the idea was always to do it in scale if we could. And so one of the early questions we had to answer was how would we accomplish that? The last thing that made a big impression on me was, Craig Fuhr (12:55) I would get off of that. Kris Garin (13:02) I'd seen a lot of people kind of like me who were pretty good with an Excel spreadsheet and a PowerPoint deck who'd never really run a piece of real estate in their life, you know, just kind of get pancaked by operations because, you know, they think it's a balance sheet business and it's really an operating business. And I didn't want to be one of them. A little humility goes a long way in our business, you know, I found. And so I got a partner, James Anderson, who's got like 35 plus years in the business doing everything. And Jack, you know, James, you know, you're doing everything, everything in real estate, you don't want a banker doing right, you know, construction, property management, full cycle, you know, like made it through the GFC without giving the keys back, you know, all that stuff. And so first thing I did was he was kind of coming to the end of a really great run he'd had with a with a set of prior partners, and it was a good time for him to make a change. And he agreed to go on this journey. And so we actually started with a third party management on that first portfolio, but always with the idea that at some point we were going to bring management in -house. We didn't think it'd be quite as early as it ended up being, but that was kind of how we got there. So there's a dog that caught the fire truck part of the story, for sure. That comes a little later, but... Jack BeVier (14:06) you Kris Garin (14:32) We didn't just buy 272 homes to buy 272 homes. We bought it to sort of anchor what we're working on building into a large institutionally investable, hopefully permanent capital type of portfolio. And I'll come back to this too, but there's a lot of stuff we see out there that actually is, we think, worth more inside of a portfolio like ours than on its own. And so we're working on some structures to... to facilitate that as well. But let me come back to your question real quick. So when you're buying a portfolio, particularly the type that you described, you know, probably been owned by for five to 15 years, renovations, little long in the tooth, it's either third party managed, or there's a couple of employees, right? You know, and I'm talking between 50 and 300, right? I mean, I think, you know, Craig Fuhr (15:02) that as well. But let me come back to your question real quick. you Kris Garin (15:31) I'm not sure Jack when you guys really started. scaling your organization, you know, but there's a break point there where it just doesn't make sense, right? Under a certain size. And so you're coming into, and let me also say, nobody picks up 50 to 300 houses as like a side hustle, you know, because they're not super sharp, you know, super organized, you know, and they're able to get things done, right? I mean, the guys we bought the initial portfolio, neither of this, they both had full -time jobs. elsewhere. So unbelievable accomplishment to put that together. And I think the owners of these portfolios are generally... impressive people, right? They're also tired. You know, they're at the end of a long run. You know, they're in at a very low basis and they're in a regulatory compliance environment that was kind of unimaginable when they first got into the business as municipalities are now looking for fees and permitting and licensing and stuff that they never did. That's operationally intensive. Capital markets, you know, obviously very different, particularly in the last couple of years. Jack BeVier (16:45) Yeah. Kris Garin (16:48) So like that easy leverage has kind of been washed out of the system. And labor is still challenging in ways I think that was probably impossible to imagine when these homes were being picked up for, you know, five, 10, $20 ,000 and you could get a pretty decent renovation done, you know, for very little. And now that renovation being... 10, 15 years old, getting that redone today, it's a very different opportunity. So it's not really a, hey, we can come and do this better. The market has shifted. And structurally, these assets kind of need to be reset for the next generation of ownership. And how do we build a mousetrap? That's designed for that. And talk about... Talk about how we do that, but I'll pause there. Jack BeVier (17:46) You talk and talking about the so like what you know, you go through the diligence product you put up, you know, you got a portfolio you like that you like the addresses you think you got a good counterparty who's not just like a slumlord pass, you know, sending you know, is his problems. But you got it, you know, you got to. Yeah, it's just yeah, there's a price for work. Yeah, it's always always a price. It's just work. Yeah. Kris Garin (18:03) We'll take those problems at a price. I mean, we view at scale part of our mandate is we're preserving irreplaceable affordable housing stock. Right. And so I think there's a bit ask spread in that situation you just described. But if we can make the numbers work, we're not scared of everything that comes with that. Jack BeVier (18:37) So okay, so to me that begs a question of like, because taking a portfolio that you've never touched before, you don't know like what the, you know, you don't know what the sewer lines are, you don't know, you know, how, you know, how much galvanized you got in there, like, you don't know how you know, you don't, you don't know what the wiring is behind the walls. And you know, you know, it's been operating for a long time, the scenario that you just described, I would think is full of those hazards. How do you, how do you value the Craig Fuhr (19:04) Mm. Jack BeVier (19:06) do you frankly how do you value that portfolio even right like you can't do that off of a pure cap rate basis there's a extremely intense like capex diligence process to figure out like this one you know this one's been stable for 10 years and it needs 15 grand this one's been stable for for 10 years and it needs 40 grand and they could be right next to each other and that could be totally the case like to me that like the the lift of not only diligent sing that but then taking over the keys taking over liability for Craig Fuhr (19:26) Hmm. Jack BeVier (19:37) everything that's behind the walls that you don't know what's there like you don't even know the extent the liability would be it would be a fear that I have like how do you how do you diligence that to get comfortable that you're not like, you know, really stepping into an existential threat. Kris Garin (19:52) Yeah, you know, it's not relaxing. For sure. You know, we are, we stay away from entity transactions that aren't appropriately ring fenced, you know, specifically for that reason. So there are, I said, there's sort of a capital aspect to it, a structuring aspect to it, and then an operational aspect to it. So. just start with the economics. In that scenario, what we're going to start by doing is walking a representative sample in detail. And so we'll go and look and we'll say, we've talked about this price, this price assumes certain things. Typically, we're very careful. So coming back to the comment about a typical portfolio owner, and there is no typical portfolio owner. But one thing that is in most cases is true is as sharp as these guys are and as much as they've had success in getting to the point where they're even in a position to exit a portfolio like this, they've never sold anything in their lives. And if they have, it's only one or two things. And so the whole dance, like where you kind of, it's very, it's a very personal interaction because... Craig Fuhr (20:59) and they went where they were positioned at. With a portfolio like this, they've never sold anything. And if they have, it's only one or two days. And so the whole dance, where you kind of, it's very personal interaction because the need for a portfolio. Jack BeVier (21:17) Mm -hmm. Kris Garin (21:19) you know, the typical kind of private equity acquisitions guy who comes in the day before you're going to go hard and they're like, feels like it should be cheaper. You know, like, like, yeah, like that trade doesn't actually happen because those guys will get personally offended, right. And unless they're in a level of distress, you know, where, where, where, um, Jack BeVier (21:26) How's it go smart? Yeah. Of course. Of course you can just wait for the call, you know, like. Craig Fuhr (21:33) Yeah. Kris Garin (21:45) where they're just exposed to it and their face is completely ripped off, you're just not going to get that deal done. And so we spend a lot of time upfront really defining our terms and explaining our process. We say, we understand that these are below market. These are a little old, cosmetically, but that there's limited deferred maintenance. And we define what we mean by deferred maintenance, which we'll typically define. very clearly is if we were going to replace the rent roll at the same rents, would we have to put capital in over and above a typical turn? And if the answer is yes, that's deferred maintenance. And the conversation we have is there's a few buckets of capital here. There's one bucket. where it's value enhancing, revenue enhancing, capex, that's our issue. You should never hear as a seller about that from us. Shame on us if we're trying to kind of come back relative to the price we put out there on that. We should know what we think the rents are. We should know what all that is before we put an offer on the table. On the other side, there's true deferred maintenance. We're going to come back to you on that. And we might have a discussion about what the right pricing is. And we're not on the same side of the table here. But expect us to come back to you on that. You've told us this is what we expect. We're going to diligence it. We find something different. We're going to talk about that. There's going to be a price implication. But we'll be very transparent about what that is, and we'll have that conversation. And then in between, there's a gray area. And we've got to just figure that out. Jack BeVier (23:28) I can see that. Yeah, I could see that sampling idea being productive, a productive and immediate step, right? Because like, go look at 10 and then give them feedback on the 10 because, you know, cause you know, they'll, they'll understand the nature of your feedback by, you know, based off of those 10 and then just extrapolated out to 150, you know, like you're not going to. Kris Garin (23:54) That's right. We're typically trying to get 40 to 60 % if we're seriously looking at something. And so there'll be, I mean, you brought up what's behind the walls. I mean, a great example is cloth wiring. How do we deal with that situation? That's something that is, it's functioning, it's there, but when that unit turns over, you're gonna have to replace that, price that in. Jack BeVier (24:08) Mm -hmm. Kris Garin (24:24) And that's a gray area item. And so the way we look at it is we think about where do we want to be on an all -in fully renovated yield at market pricing when this is all turned over? And what kind of a spread do we want to retail pricing to make sure that we've got a little bit of a cushion there? And we don't really look at the in -place cap rates actually that much at all because their operating expense structure isn't our operating expense structure, property taxes, all that stuff. I mean, we'll think about rent yields, but we're really thinking about what does this look like by the time we've completed our business plan? And then we reverse engineer into what we can pay for it. And so we work very hard to keep these. under common ownership because the normal distributions are friend here. We know that we're going to have outliers where we, you don't have an average rent. There's no average, right? If you think you're going to put an average of 15 ,000 or 25 ,000 or whatever it is into each home on the first turnover. That's going to be some $7 ,500 turns and some $60 ,000 turns. But what you care about is the performance of the aggregate pool, because it's all flowing up to the same thing. And so you have winners subsidize the losers, and you're relying on the performance of the overall portfolio. And so what we got to be really careful to do is when something goes a little better than expected, which if we're doing our job right, it happens roughly. Jack BeVier (25:52) Hmm. Kris Garin (26:18) roughly the same amount of time, you know, that we don't say woohoo, let's give ourselves a bonus. You know, we have to set that by to offset the one we know is going bad. And so, you know, it's not perfect. And I'll tell you that we've gotten more conservative as we've gotten educated, right? There's definitely been some tuition along the way. And I think we take a harder line on certain things. But typically what we'll do is we'll get through 40, 60 % and we'll say, look, this is what this looks like, right? And it's, you know, we think that there's an average of whatever, right? This is how we got there. This is our cost. We think somebody's gonna have to do this. It's not gonna cost us any more than it's gonna cost anybody else. And maybe it'll cost us less. And we can either treat this as representative. and apply these findings to the entire portfolio. Or we can just keep walking units and walk 100 % of them. And I've never had anybody go through door number two. So what we got to make sure is that we're doing a good job on. Jack BeVier (27:23) Mm -hmm. Kris Garin (27:36) on those walks. And a lot of what we're doing internally now is we're in a different place organizationally than we were when we started this. And so we've now got in -house construction managers who can support our acquisitions folks and then are going to be eating their own dog food when that turnover comes. And so there's a full cycle accountability piece there. And it's also... Jack BeVier (27:55) Right. Yeah. Kris Garin (28:05) It's harder than you would think to actually say, all right, we're sort of budgeting this for the portfolio. You're going to get some light, some heavy within that and then keep track of how you're actually doing once that goes into the larger pool of houses. And so we spend a lot of time really figuring out that reporting and that insight and not letting things just kind of get. get lost in the pool. But it's definitely a challenge. I mean, we're focused on an onboarding process that. And this was a shift really starting in late 2022. But we bring on a new portfolio now. And our expectation is 100 % of that portfolio within the first year has either been requalified, renewed into a unit that we feel comfortable owning for the long term, or that lease is just not renewed and we renovate it and we turn it over. And so that's our plan and we budget. Craig Fuhr (29:07) for the long term. Kris Garin (29:16) for it. So we're not stepping into like long term ownership of the status quo. We are budgeting a repositioning of these assets and those yields have to make sense. Jack BeVier (29:27) And you're, you're so you're and you're, are you forcing the issue in terms of that repositioning to let it happen, to make it happen, you know, now, like within the first year of ownership, or do you let some sleeping dogs lie? Kris Garin (29:37) Yeah, 100%. So everybody needs to be on a Riparian lease within that first year. And to get on a Riparian lease, we need a qualified resident in a compliant performing unit. And so that's... Jack BeVier (30:00) So you buy your typical portfolio. How many, how many breach of leases and evictions, like how much of the portfolio turns over in that process? Craig Fuhr (30:11) Jack, I'd like to save that answer for the next episode as a bit of a tease because as you're sitting here talking about really the CapEx side of the business in terms of when you pick these things up and sort of the repairs that you know you'll ultimately have to do on many of them, I'm thinking, I remember, Jack, you used to have a map on your wall of Baltimore and the neighborhoods. Jack BeVier (30:15) Okay. Craig Fuhr (30:38) And you classify those neighborhoods in A, B, and C. And sometimes in Baltimore, as you know, Kris, those, those boundaries can be sort of block by block. And I think what Jack became very good at early on was sort of identifying where the, where the returns versus the headaches would be, you know, in terms of tenants. And so in the next episode, I'd really love to talk about how. Raperian has learned how to do diligence on the tenant side of the equation and how you manage all of that because that had to be quite a learning process for you guys as well. So we'll wrap up this up. Go ahead, Jack. Jack BeVier (31:21) Let me tease one more thing that I'm really excited to talk about with Kris is that from a financing point of view and a deal structuring point of view, something that I learned about when we were buying houses in Atlanta 10 years ago was this up -reach structure where portfolio owners can contribute their portfolios to an entity in exchange for shares in that entity. And it's a 1031. They achieve a tax deferral the same as a 1031. but they're able to get out of management. And Kris has done some acquisitions using that structure, which I think is novel. I think it's like going to be a big thing on a going forward basis as there's a lot of a lot more folks these days who get to that 50 to 250 level. And then they're just like done and they needed exit strategy. And if you're not in, you know, and you're not in Scottsdale, Arizona, you know, there's not as many bidders necessarily for a portfolio of that stuff. Uh, and Kris has done a lot of like, I think he's, he's, he's, he's really pressing that he's, he recognized. that opportunity and is actually executing on it. So we're going to jump into that as well on the next episode. Craig Fuhr (32:29) All right, well, thanks for listening to this episode with Kris Garin I'm Craig Fuhr and Jack BeVier will be back for episode two. Join us then. We'll see you on the next one.