JF2477: Moving from Passive Investor to Active Syndicator with Kent Ritter

After spending 12 years as a management consultant and forming a circle of mentors, Kent decided it was time to start investing in real estate. Starting out as a passive and then active investor, he grew his career by building a portfolio of assets. Learn about how he got people to invest with him while he had little real estate experience, and how he built his portfolio of 440 doors in three states in just five years. 

Kent Ritter Real Estate Background:

  • Managing director at the multifamily private equity firm Birge & Held Asset Management
  • 5 years of real estate experience
  • Portfolio consists of 440 doors in 3 states
  • Based in Indianapolis, IN
  • Say hi to him at: www.kentritter.com 
  • Best Ever Book: Think Again

 

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m here with our guest today, Kent Ritter. Kent is joining us from Indianapolis, Indiana. He’s the managing director of the private equity firm Birge & Held Asset Management. Kent has five years of real estate experience and his portfolio consists of 440 doors in three states. Kent, thanks for joining us. How are you today?

Kent Ritter: Hey, Ash. Thanks for having me on. I’m doing great, man.

Ash Patel: Wonderful. Before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Kent Ritter: Yeah, definitely. I spent 12 years as a management consultant flying all around the country helping large organizations solve big problems. That was how I got started. About seven years into that we decided to go off, myself and a few partners, and start our own firm. We ran that for about five years, I got that up to about 95 employees, about 30 million in revenue, and then we decided that it was time to exit time to sell. That really started my real estate career, because I had this capital from exiting that business and knew I didn’t want to be 100% in the stock market, but didn’t really know where else I wanted to invest. So I kind of started this learning of looking at different asset types and alternative investments. I landed on real estate, fell in love, now specifically multifamily, and just haven’t looked back. So really the past five years, I’ve been focusing on real estate investing, first passively, and then moving actively to sponsor my own deals.

Ash Patel: What was the first active investment that you did?

Kent Ritter: My first active investment was actually selling houses on contract and building up a note portfolio. I was on the debt side of things. And that was all well and good, I made good returns. But one day, about a year into it, I got a HUD statement, because one of the people sold their house and looked at the HUD statement and the house had doubled in value in that time. They were making a huge profit, and all I was doing was getting my loan paid back. I said, “Well, that’s good, but I want to own assets.” So that really put me on the equity side, and I started looking to purchase assets and sharing that appreciation.

Ash Patel: What was your first asset purchase?

Kent Ritter: First asset purchase was 30 units down in Louisville, Kentucky.

Ash Patel: Did you raise financing for that? Or was that your own deal?

Kent Ritter: No, I raised the equity for it. We raised about a million dollars and syndicated the deal.

Ash Patel: Alright. There’s a natural progression where most people start out investing, taking down their own deals. You went right towards syndication. How did you come to that decision?

Kent Ritter: I had good mentors. I built up a great network in real estate. I had a discussion with one of my mentors, a guy that owned about 1,000 units. Because originally, I was like, “Now I know I want to buy assets. I know I like multifamily. I’ve done my education. Okay, I’m going to go out and buy a 50-unit property.” He’s like, “Okay. Well, after you buy your 50 units, then what do you do?” I’m like, “What do you mean? I’m going to run it.” He goes, “Yeah, but all your money will be gone. You’re all tied up in this one property, all your eggs are in one basket again, and that’s why you didn’t want to be in the stock market.” So I was like, “Okay, okay.” And he’s like, “Well, what you need to focus on is syndication.” I go, “Oh, tell me more.” That led down the whole path to understanding the process.

Once I learned about it, it just made so much sense to me. It’s like, “Okay, we can all pool our money together to buy something bigger and better than I can buy on my own. In doing that, it allows me to invest in that deal, but also spread my money around a little bit and invest in multiple properties and diversify.” So it just seemed like a no-brainer to me, and I was kicking myself for not knowing that this existed previously. Because I fancied myself a pretty savvy investor, but I’d never heard of that process and really didn’t know that a lot of the apartments out there are owned by individuals or groups of individuals like us. I assumed they’re owned by large corporations.

Ash Patel: Kent, at that time, you didn’t have a whole lot of real estate experience. How did you convince investors to invest alongside of you?

Kent Ritter: Well, it starts with friends and family. It starts with people who you know, it starts with ex-coworkers, people that I had relationships with and had trust with. I think you kind of have to start there, because when you don’t have a track record, it’s really tough to go out and find Joe Schmoe on the street and say, “Hey, invest with me.” But you start with me your inner circle. The thing that I had going for me was I built up a certain level of, I guess, just trust, because I had experience running my own business, I had successfully built that business, and sold that business. So I had that business background that I think people saw that “He was successful here, maybe you can be successful there, too.” But what I underestimated when I first started setting out to raise for that first deal was that people didn’t really view me as a real estate person, because I was fairly new.

I realized that I really had to alter people’s perceptions. I really had to change their perception of me, and really view me as somebody who is an expert in real estate, who is passionate about real estate, and loves it. So one, you just kind of start living and breathing that, just talking about a lot of time, letting people know what you’re doing. I started a couple of thought leadership platforms – I started a podcast, I started a blog just to show that I have that expertise.

Ash Patel: What was the big challenge on your first deal? What was the biggest lesson learned?

Kent Ritter: There’s a lot of lessons learned on the first deal. The biggest one was probably not over-raising enough. What I mean by that is, typically how the process works is you’ll go through a process and get soft commitments from folks. That soft commitment is basically somebody just holding their place in line, saying “Okay, I’m interested, and I’m interested in this much.” But nobody’s actually signed up for anything or sent in any money. I was feeling pretty good. Like, “Oh, I’ve got these commitments for a million dollars. That’s what I need. Feeling great.” And then it was like a couple of days before closing, I’m following up with everybody like, “Hey, guys, you’ve got to send your money in. Blah, blah, blah.” And I had somebody back out. They’d just be like, “Oh, no, sorry, I can’t do it anymore.” I was immediately short, because I had not expected anybody to do that. The rule of thumb now, lesson learned, is always getting commitments for one and a half over what you think you’re actually going to need. Anyway, I ended up short. It was a scramble, but had another investor who actually wanted to double down on the deal and increase his amount, so it all worked out. But that was a stressful couple of days trying to go into closing.

Break: [00:07:05][00:09:06]

Ash Patel: Kent, is there a rule of thumb on how early you can fund a deal before you close?

Kent Ritter: Well, a lot of it’s driven by legal paperwork. You’ve got to have the right paperwork in place, you’ve got to be able to get the subscription agreements in front of everybody, the operating agreements. It typically takes two to three weeks to develop from when you get the deal under contract and when you’re talking to your attorneys, it takes them about two to three weeks to develop. From there, once you have those, you can start getting people signed up and you can start accepting money. Now, most people don’t like to send their money that early. They want to wait until closing until the deal is actually going to close. But really, it’s driven by making sure you have the right legal documents in place to make sure that you can accept money.

Ash Patel: If you had to do it over again. Would you have started into real estate syndication versus the other career that you had previously?

Kent Ritter: 100%. I got another question on a podcast, it was like “What would you tell your 20-year-old self?” Quit screwing around with consulting and just start buying real estate. Start buying duplexes, quads, whatever you can afford at the time, just start buying it.

Ash Patel: Tell me more about this 440-door portfolio in three states. Let’s dive into that.

Kent Ritter: Sure. Within Birge & Held, if you think about it like this big umbrella, I lead a business unit within Birge & Held, we call it Private Select. Really, I’m executing a strategy that’s focused on smaller to medium-sized properties in more tertiary markets throughout the Midwest. Really, it’s a yield-first play where we’re focused on cash flow first. That’s why we’re in the Midwest, and that’s why we’re in more tertiary markets, because we’re finding relatively good values. We’re buying often from mom-and-pop owners. So I say that we’re buying mismanaged, undercapitalized, and undervalued properties, because I know that we can come in and we can immediately improve the management. I know that we can bring the capital that needs to be brought to improve the property and bring it up to the standard of where it needs to be brought. We can affect change very quickly in those properties.

That’s what we’re doing. We’re at 440 right now, it will soon be right at about 550 or so. So the portfolio is growing nicely. We’re just seeing now, the strategy we began executing middle of last year is paying off and we’re just continuing to rinse and repeat throughout the Midwest, in towns like Louisville, Kentucky, Lexington, Kentucky, Dayton, Ohio, Cincinnati, Indianapolis… All of those markets we like, because all of those markets have good job growth, they have good job diversity, meaning there’s a lot of healthcare, there’s a lot of higher education, there’s a lot of government, there’s a lot of logistics in all those markets, all jobs that we like, and all things that are kind of non-cyclical. Those are the key things that we’re looking for, and we’re really looking to just add a nice cash flow to investors’ portfolios.

Ash Patel: What are some of the big metrics that you look at? Do you look at new development from fortune 500s, household income, demographics, traffic counts?

Kent Ritter: Yeah, all the above. But some things that we’ve become hyper-focused on, especially coming through COVID… One is the rent to income ratio. What I mean by rent to income ratio is how much of the person’s income are they paying for rent? Is it 20% of their income goes to rent, 30% of their income goes to rent? HUD defines rent-burdened as somebody that pays over 30% of their income toward rent. Meaning, you can’t afford that. Most people can’t afford that. We look at that very closely. We like to purchase properties that are in the teens or low 20s from what the residents make to what they’re paying in rent. Because we know that even coming in and doing the improvements that we need to do and raising the rent to where we need to raise it to return the returns we promised to our investors, that we could still be in the low 20s to mid-20s and have a nice gap and have a nice level of affordability still on the property.

Ash Patel: And you look at all of this data prior to purchasing?

Kent Ritter: Oh, yeah. I hope you’re looking at it prior to purchasing; it’s a little late afterward.

Ash Patel: What was your challenge when you went from friends and family to taking outside investors? Because now you’ve got to sell yourself. They don’t know you.

Kent Ritter: Well, you’re always selling yourself. It just depends on the kind of who you’re selling to. I think in life, we’re always selling ourselves, no matter if we think we are or we’re not. The challenge of moving from friends and family to outside investors really comes down to, as you said, they don’t know you. I think track record becomes much more important, because they’re like, “Well, I don’t have a history of knowing you for 20 years to be able to trust you. So I need to see the results.” So track record becomes more important. I think where a lot of people go wrong is just how they approach this idea of selling. I look at it as I’m just trying to advise them that one, this investment type exists, two, why I think it’s the best investment that there is on a risk-adjusted basis.

That’s why I’ve now dedicated my life to investing in multifamily, because obviously, I like it, and try to just educate people so that they get the clarity to be able to come to that decision on their own. At a certain point, what I see in people is it becomes really like a no-brainer, it becomes, “Wow, I should be investing in real estate, I should be investing in multifamily.” You’ve got to get people there before you can even start talking about trying to pitch yourself or your company. My education really starts way upfront.

Once you get there, because you’ve brought them through that path, ideally, you’ve developed a trusted relationship, you’re bringing them in the right direction. So if they were going to go invest, and why would they invest with anyone but you who’s kind of brought them along this path.

That’s how I try to look at it. I think where people go wrong is when they get on the phone, you’ve got your pitch deck, you want to just kind of tell everybody everything you know, and show off all your expertise. You’ve got to meet the investor where they’re at. What I’ve found is a lot of people aren’t ready to hear that yet, they’re not ready to hear about that deal yet. They need to be convinced that they should be investing in real estate, or they should be investing in multifamily, and building that relationship with you as an individual. Because until they trust you, they’re not going to want to hear about that specific deal you have.

Ash Patel: A lot of high-net-worth people often devote a lot of time to their profession. From my experience, when you ask them about investments, “Yeah, I’ve got a guy. My guy handles all of that.” Have you come across that? How do you answer that?

Kent Ritter: That’s a tough one, because often, that guy doesn’t know much about real estate. Some of them do, but a lot of financial advisors don’t. One, they may not know much about it; two, they’re never incentivized to tell you to go invest with somebody else and not them. Why would they ever say that that’s a good idea? So you run into those things.

But I’ve talked to that guy for people. I’m totally happy to do that. I’ve sent analysis and things to try to get them comfortable. As an investor, hopefully, people understand the incentives that are driving the things that people say, or why people do the things, they hopefully understand “Is the person that’s advising, are they incentivized for me to grow wealth, no matter what? Or are they incentivized to sell me products?” Because financial advisor relationships can be set up in very different ways. I hope that people just look at me as another type of advisor, honestly. I’m a real estate advisor, and that’s a lot of why I do my blog, and I do my podcast, and I host my monthly networking event things, because I’m really trying to advise first… As I said earlier, because I think if I educate people, I think they’re going to come to the same decision that I did. The same conclusion that “Man, this is a no-brainer, I need to be invested in this.” I don’t think it is a hard sell if you do that right.

Break: [00:16:39][00:17:17]

Ash Patel: Kent, have you tried to bridge that gap with wealth managers and money managers and tried to get them to see real estate as a potential avenue for investing money? I know the challenge is that they are not incentivized, but is there a way to incentivize them for doing so?

Kent Ritter: There probably is. I know several wealth managers very well who will refer their clients to me because they really care about their client’s well-being and they’re educated enough to know that the stock market is not the end all be all. There are three financial advisors that I know very well that will refer their clients to me, because they know that folks should be diversified in real estate.

If you look at the wealthiest people in the world, their allocations for real estate are typically between 20 and 40% of their portfolio. That’s a metric I give people. I say, “Look at what the richest people in the world are doing. Now, what’s your real estate allocation?” Most people say, “Well, zero.” I said, “Well, if it’s working for them, don’t you think it’ll work for you, too?” And it does.

Anyway, I don’t know how to create an incentive structure. I’m sure there are SEC rules with that as well. I think if there are financial advisors out there who are educated enough to know that real estate can be a great piece of a portfolio… I don’t ever recommend putting 100% in real estate. Again, you’re losing diversification; diversification first. But there’s a portion of your portfolio that should absolutely be invested in real estate. I think those good financial advisors know that, so they find folks like myself who can provide those opportunities to their clients. I think in doing that they view it as they’re providing value-add service to their folks. It’s something that they don’t have to do.

Ash Patel: How do you go about finding deals in these tertiary markets? From mom-and-pop sellers?

Kent Ritter: We really have two strategies. One is direct to seller, so reaching out and trying to talk to folks and get them on the phone. But the second is broker relationships, like anywhere else. The thing that you find is there are national brokers that work in all the big markets, and they work across the country. But if you get down a level, there are tons of regional and local brokers who work maybe just in Northern Texas, or work just in Lexington, for example. Those are the people, oftentimes with these smaller owners, that are going to have those deeper relationships, because they’ve been in that market for 30 years and they’ve built these relationships over 30 years, which is like the same time that person is on that property. So I’ve found great success in really digging up these local or regional brokers and building relationships there. That’s been our best strategy.

Ash Patel: What’s on the horizon for you? What’s next?

Kent Ritter: Well, from a strategy standpoint, I think we’re right where we need to be right now with where the market is and where I think things are going to go. I think just focusing on yield first, asset appreciation will come… But we’re just going to keep rinsing and repeating what we’re doing. Then the thing that we’re going to layer on and we’re continuing to layer on is really technology. That’s how we’re driving a lot of the efficiencies in the smaller properties. The hardest thing about a small property is running it efficiently, because it’s just difficult to do, you can’t have on-site management, all these things. So we’re applying technology to solve that problem and we’re doing things like smart locks, self-guided tours, AI Chatbots, and a host of different things.

We’re going to keep finding new technologies and layering those in to continue to add management efficiencies, but also add value for our residents. For example, we’re installing fiber optic internet at all of our properties and becoming the internet service provider for our residents. We’re able to provide a better product, faster internet at a cheaper price than the local Comcast, Spectrum, or whoever is doing it. It’s not an additional financial burden to the resident, because they’re already paying somebody for their internet. We just shift it so that they begin to pay us for their internet.

Ash Patel: That’s a great value-add.

Kent Ritter: Also, they never have to deal with a cable company. Who the hell wants to deal with a cable company?

Ash Patel: In addition to internet, you’re doing TV services as well?

Kent Ritter: Well, we did internet primarily, and then yeah, there is a TV add-on.

Ash Patel: Through you, through your company?

Kent Ritter: Yeah, exactly. They can do that, too. But really, it’s internet first and then if they want TV, they can add on TV.

Ash Patel: Got it. Kent, what’s your best real estate investing advice ever?

Kent Ritter: Best real estate investing advice ever is just get started. You don’t have to start big. A lot of people nowadays say you’ve got to start big, get 100+ units or whatever. If I could tell my 20-year-old self I’d say, “Go house hack, buy a duplex, live in half of it, rent the other half. You’ll learn how to be a landlord, you’ll get that paid off, and just do that every year.” So just get started and start building a portfolio of assets.

Ash Patel: Great. Kent, are you ready for the lightning round?

Kent Ritter: Ready to go.

Ash Patel: Let’s do it. What’s the Best Ever book you’ve recently read?

Kent Ritter: I recently read a book called Think Again by Adam Grant. It’s all about just challenging your beliefs and this whole idea that your beliefs should not be held in stone. You are not your beliefs and a belief that you formed 30 years ago should change, because each day you’re bringing in new information. There was a great quote in the book by Ray Dalio. If you can’t look back every year and say, “Wow, last year, I was really stupid”, that means you haven’t learned very much in the last year. I think it was just really eye-opening to me, especially in the time we’re in today. Challenge your beliefs and challenge why you think the way that you do and make sure that you’re adjusting based on the new information that you’re getting every day.

Ash Patel: That’s a great takeaway. Kent, what’s the Best Ever way you like to give back?

Kent Ritter: Right now, I’m focused on giving back my time. I try to be a mentor for people. I host a networking event. The reason I was able to get so far in the last five years is because of the network I developed and the mentors that have given their time for me. So now, having a moderate level of success myself, I’m trying to do the same thing for folks that are coming up and trying to get started. I offer time on my calendar for folks and just try to be a resource.

Ash Patel: That is a great way to give back. Kent, how can the Best Ever listeners reach out to you?

Kent Ritter: I’m a pretty easy guy to get a hold of. You can go to kentritter.com, that’s my website, that’s really my home base. I also have a podcast which is called Ritter on Real Estate which I’d love for everybody to check out if you’re interested in multifamily investing and specifically passive investing. But if you go to my website, you can find everything there: podcast, blog, passive investor resources… And we just actually posted a freebie, if you sign up. It’s the top four things you should look for in a syndicator before investing. And really, it’s from my own experiences starting out as a passive investor.

Then from the first 40 episodes of my podcast where I asked that question on the show, I aggregated all those responses, and these top four things really bubbled to the top. So I put a little one-pager together on that, and if you sign up on the website, you’ll get it for free. I hope it helps people avoid some mistakes or some bad operators.

Ash Patel: Kent, thank you for joining us today and sharing your story with our Best Ever listeners. You shared your whole second life, your second career with us. A lot of success in your first life and had you done it over again, you would have started out in real estate. Thank you for all the advice today and have a Best Ever day.

Kent Ritter: Thanks for having me on. I had a blast.

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