FULL TRANSCRIPT
Slava (00:00)
In this episode of Smart Humans, we talk with Derrick Barker, who's the founder and CEO of Nectar, the real estate platform that focuses on multifamily homes and offering debt instead of equity. He gives us his perspective on the market and why he thinks multifamily real estate is gonna be very green for the years to come. He talks to us about the cities that he likes, like Dallas or Atlanta and others that he's less bullish on. And of course, he gives us his picks for three years out.
Slava (00:56)
Hello and welcome to the latest episode of Smart Humans. I'm very excited for today's guest. We have founder and CEO of the real estate platform Nectar, Derrick Barker. Welcome to the show.
Derrick Barker - Nectar (01:06)
Thanks for having me. Thanks for having me.
Slava (01:08)
Absolutely. So we always like to get started with the basic question. How did you even get into this? How'd you get into alternatives? How'd you get into real estate? Where did it start? Get me from the beginning.
Derrick Barker - Nectar (01:18)
So it started really back when I was a freshman in college. I started a business with a couple of my roommates. It went really, really well. It was not an alts business. It was like a finance type business. I ended up in the 08 financial crisis. kind of let it go, like exited or just didn't make any money, but let it go and started buying real estate. So I've been in the real estate business since my senior in college. And I worked at Goldman Sachs after trading bonds.
and structured bonds usually, and then left there, had about 500 units when I left in 2013, and just spent the next eight or nine years buying and gut renovating, run down apartments, built about a 4,700 unit portfolio, about 5,000.
Slava (02:00)
Wait, time out, time out. Did you say you had 500 units as a senior in college? Okay, I didn't catch that.
Derrick Barker - Nectar (02:04)
No. I had maybe five as senior college. 500 by the time I left Goldman Sachs, which is too late for me.
Slava (02:13)
gosh. So how many years later after college was that 500 units? Wow, so you went from five units as a senior in college to like four years later you had 500? Wow, that's incredible. So what was that first business? What college did you go to? of course you did. Okay, great. And when you were a freshman, what was that first business? It was like a FinTech business or what kind of business?
Derrick Barker - Nectar (02:17)
about three and a half years.
Yes, yes.
I went to Harvard, Harvard University.
It was taught at Veritas Financial Group, and it was really a way to get business school students who used to work on Wall Street to teach undergraduates about finance because Harvard didn't have any finance classes. And then we charged investment banks and private equity firms to do case competitions, to judge case competitions. was really like it was a recruiting budget out of their recruiting budget. But for us, we were charging five or $10,000 per event.
per bank, we five or six banks, it was a really good business. But it didn't, know, in 050607, it was a really good business, in 08, they were like, we'll come and we'll give you like pamphlets, we're not gonna give you any money.
Slava (03:16)
Fair enough, wait, we had some dark days. How do you go from the, let's call it the consulting business, to all of a sudden buying that first unit? What happens, how do you make that decision?
Derrick Barker - Nectar (03:26)
I mean, we, eight happened and I'm in college and we were looking around like, Hey, finance in Washington might not exist. Like we all, me and my two roommates, we want to go into, you know, wall street or consulting. And it just, you're like, well, it might not exist by the time we graduate. So what are we going to do? And we're like, well, it would be great to like buy some derivatives and just ride it out. But we didn't have any money and couldn't get an ISTA. So the easiest thing to do is real estate. We're like real estate market can't go down any lower.
We were wrong. It did keep going down lower. Right, right, right. But that's how we got in. We put it on our pitch deck. We went out to raise money from some alums and some donors. And yeah, we started buying.
Slava (03:57)
Famous, famous last words.
Where was that first unit?
Derrick Barker - Nectar (04:10)
Atlanta, Georgia. So I'm from Atlanta, Georgia. My family lives here. So we didn't have to pay for a rental car in hotel. And the economy was pretty good. And prices were low enough where you can buy properties and get really good cash and cash, like 10 % cash and cash returns. And we were flipping. it just was, made sense to be in Atlanta. And that's where we started.
Slava (04:30)
Nice, so you're at Goldman Sachs, you go from five units to 500 units and then what happens?
Derrick Barker - Nectar (04:36)
Then I leave. I left Goldman Sachs.
Slava (04:38)
Well, actually, how do you parallel being at Goldman and getting to 500 units? I can't even rock that. How does that happen? Are you doing this by yourself? Are you doing this with partners? Are people full time? If you're working at Goldman, tell us about that.
Derrick Barker - Nectar (04:49)
Still the same two partners that I started the business with in college were my roommates. And my dad actually, so we were gonna drop out of Harvard to do this. And my dad was like, no, I'll retire and I'll help you run your business. You need to graduate. So my dad was also helping on the ground. But yeah, a lot of flights, a lot of long nights, a lot of working, a lot. It was just a lot.
Slava (05:12)
Fair enough. So you're at 500 units, you leave Goldman, what happens next?
Derrick Barker - Nectar (05:15)
Then I start buying, back then, this is 2013, so you could buy some really, they weren't great assets, 50s, 60s, 70s, 80s vintage, they were built in the 70s and 80s, but you can buy them for so cheap, 13,000, 15,000, or $20,000 per unit, and we would go and gut them. so eventually we got a team together, we got a management team together, we learned the business from the studs out.
Every little part of it and then we got a machine and we were just doing it We were just doing a lot of it and then eventually the market just kept going up and We got priced out of the market by 2020 By that time my partners and I had gone going different ways. We had all gone different places and gotten married So, you know kind of left the business naturally my wife joined the business She had her own career in her own portfolio and she we partnered But we couldn't buy any properties anymore
And so we were like, well, what's a better way to make money in real estate? And one thing that we always had an issue with was liquidity, just getting liquidity or having a portfolio and needing liquidity. And so we felt like, hey, there's a better opportunity doing something else. so we stole our properties. We took the run up and then sold in 2020. Unfortunately, that was before the big run up in 2021. But I mean, we did OK. And that's kind of how.
how that story went. We still own maybe 350 units, but nothing anywhere like what we used to own.
Slava (06:43)
And then from there you started Nectar.
Derrick Barker - Nectar (06:44)
Then we started NEPTAR, yes.
Slava (06:47)
So we'll get to Nectar in just a second. But when you said that we couldn't be buying any more properties in 2020, what does that mean exactly for the audience? Just so they understand.
Derrick Barker - Nectar (06:55)
So we were always buying properties at a discount and then doing heavy construction. By 2020, when we were going to buy properties, we'd be, when we started, we'd be the only bid. Maybe there'd be one other bid. By 2020, there'd be 20 other bids. And there would be people paying way above market. And we just couldn't make the math work. So we knew how much it costs to construct.
And we knew that people weren't getting lower prices than us, because we had built this machine that was just going. And we didn't know how they were going to make the numbers work, because people were paying 20 % more than we were paying. And we were paying like, we were saying, hey, we're going to push. And so we couldn't make the deals pencil out of really aggressive assumptions.
Slava (07:38)
Got it, so, and the math that you're talking about is you would try to find a unit that was pretty challenged and get it at a pretty decent price, got renovated, and then flip it in what amount of time typically.
Derrick Barker - Nectar (07:52)
Starting out maybe two or three years eventually got longer hold period so once we Did some deals and had a little bit more money frankly to be able to survive longer We hold them longer. We didn't want to sell We just had to sell to keep going the business to get the liquidity. So I'd say four years on average
Slava (08:11)
And what was the average price that you typically were entering at into the homes to purchase them?
Derrick Barker - Nectar (08:16)
I mean, we're talking to purchase them, probably five to $10 million. We were doing apartment complexes mostly.
Slava (08:25)
Got it. And that was like how much money per unit, like how many units would be in a complex for five to 10 million.
Derrick Barker - Nectar (08:32)
I mean, we were, again, we did deals from a 490 unit project to a 17 unit project. So we had a wide range over that eight or nine year period. And they got bigger and then we started just doing things on our own without investors. So then it got smaller again. But I'd say we started out buying properties for maybe 20,000 a unit on average, and then putting in another 20.
And then by the end, maybe we were buying properties at $60,000 a unit and putting in $20,000. We weren't always gut renovating. There were some deals that we just bought and we just freshened up. know, we, every deal was, we did a lot of deals. So, you know, everything wasn't the same. But like we made the most money and we were like really, really good at buying and new electric, electrical, new plumbing, new systems, new everything.
Slava (09:08)
Got it.
And is that what's called multifamily where it's a complex? So that's different than like a single family home where it's, and why weren't you going after single family homes? Why was the multifamily the play?
Derrick Barker - Nectar (09:33)
Exactly.
Exactly. Exactly.
We started with single-family homes back when I was in college. But then, you know, being in New York and having a portfolio in Atlanta, we quickly said, hey, we need to do, like if we bought, you know, a portfolio of quadruplexes, then we can have, you know, 12 units in one place as opposed to all over the city in one transaction. It was just way easier and more efficient. That's what we started. But, and then, you know, when you do something, you start getting good at it.
And then, you know, so you got better at just doing multifamily because it was just easier to manage. And then over time, it turns out it's easier to do bigger deals. You know, smaller deals is hard to get very high quality contractors and very high quality managers on smaller deals because they're not getting paid enough. Well, they only have so much time. They want to spend their time doing bigger things. So, you know, we eventually said, hey, we want to hire the best people.
Slava (10:29)
Hmm.
Derrick Barker - Nectar (10:37)
or keep the best people who we started with and then they start getting really good. So we had to just get bigger. we wanted to always be focused on really low, moderate income, like working class people, providing housing for working class people, because there's just an unlimited number of them. That's what most of America is. There wasn't as much competition to provide very high quality housing to them. Most people, they get in and they say, hey, well, we just won't renovate it that much and so the rent will be cheap. But we said, hey, no, we're going to gut it.
And we will also make the rent just a little bit higher than all these other people. Turns out the best renters, even if they're only making 40 or $50,000 a year or less, still if they have good credit and have a good job and they want a stable life, they will pay more. And those are types of people you want as renters. And so that's, it kind of led us to doing bigger projects and doing multifamily.
Slava (11:26)
Smart, smart. And were this all in Atlanta and the Atlanta area?
Derrick Barker - Nectar (11:30)
We started out in Atlanta, but we eventually got in multiple cities in the Southeast and even Southern California. I had a partner who's based out of LA, so we did some deals in Southern California as well. But say around Georgia, Alabama, South Carolina, and in California.
Slava (11:46)
Nice, so you say you started out with about $20,000 per unit and then it went up to $60,000 per unit. Obviously you started in Atlanta. Was that lucky because that's where your dad was and your family was? Or would you say that was some really great diligence and analysis as to an underpriced market? And the second part of that question is, do you, would you advise others who are trying to find that similar analysis of the next, let's call it Atlanta, how do you think about that?
Derrick Barker - Nectar (12:13)
So I would say it was both. We, so I, as I said, I two partners and we were both looking at, and I was in Boston at the time because I went to Harvard, it was in Cambridge. And we first, we looked at Cambridge and then we looked at the different cities. And Atlanta had the third most Fortune 500 companies at a time. But the prices for a unit of housing were just way lower than comparable cities with the comparable amount of just like, you know, big companies.
And so that is kind of where we honed into. But also we knew the market. Like there were other markets that were similar, but we knew Atlanta better and we could just afford to go there. Cause you know, again, we're college students and we're, you know, we in coming back to Atlanta, we had a place to stay. But I'd say the advice I give to people is in real estate, sometimes execution is more important than market. and it's not all the time. mean,
Slava (13:04)
Mm.
Derrick Barker - Nectar (13:08)
The market can just go up and if the market goes up, then it can bail out a lot of mistakes. Honestly, early in my career, the market bailed us out because we made a lot of mistakes. mean, you know, 22 years old, you're going to make a lot of mistakes and market bailed us out. But if you're if you have something that's in a neighborhood that you know and you just know which side of the train tracks is the right side and you can go and see the property and see when the contractor says, yes, fine. It takes a picture. You can say, OK, well, like right outside the frame. What about that? You know.
especially if you're doing, you know, rehab, I'd stay in the market that you know first. If you're going to be a passive investor, then I'd say, you know, then you can be diverse, you know, diversity matters. But if you're going in, you're trying to actively do something, go someplace you know. You can make money doing what you know and finding places where there's more demand than there is supply. That's what I focus on doing.
Slava (14:02)
Amazing. So obviously you're into real estate. This is a show about alternative investments. What do you think about the other alts in terms of your allocation of investment? You probably have a little bit of public exposure, but what about all the other stuff? We don't really believe in the 60 40 equities bonds mix. We believe there's a lot to go into alts. What do you think about private credit? What do you think about crypto? What do you think about pre IPO venture? What do you think about art or collectibles?
Derrick Barker - Nectar (14:30)
Yeah. So I think that those are all great places to have, you know, money. I would say, I would say the details matter. So something that I learned, you know, is that sometimes it's better to just have concentrated bets on what you really know. And and so you asked where my personal funds are. I do have, you know, I have money that I'm investing that is just in real estate.
I know real estate, I know it well, I know where, and I'd rather just bet on me, and if I'm wrong, I'm wrong. And then I have money in the NASDAQ. It's like, if America's good, then I'm good.
Slava (15:07)
Meaning like literally the QQQ, right.
Derrick Barker - Nectar (15:10)
Yeah. like, you know, I'd say with investments, I'm also a very long-term holder. You know, you can learn a little bit about a lot of things, but that is where you're probably most likely to get in trouble. Private credit, for instance. know, so I traded bonds at Goldman Sachs. I know a ton about, you know, debt, I guess relative to, you know, maybe a typical person, but still to bet on a deal or a sponsor or a fund.
You really want to do research and know the space. so mostly where I, I love private credit because of the risk demand, risk reward dynamics today and where rates are. But I'd say, yeah, my focus is on real estate because I know it, I know it, you know, I like doing something that I can do better than anybody else.
Slava (15:53)
Perfect. Do you have any exposure to crypto or to, for example, pre-IPA venture?
Derrick Barker - Nectar (15:58)
I have some exposure to both crypto and pre IPO venture not enough to like not enough where I need to check on it just because the world is I mean, you know crypto is a technology that's gonna be the future is gonna be there. So I have some Bitcoin and have some Ethereum. If it goes up cool and then pre IPO venture. I know a lot of people with startups and I just invest in some of the betting on people.
And if it goes up, it goes up. And if it goes to zero, then it's probably going to zero. Like most of three-year IPO venture goes to zero.
Slava (16:34)
So it's one of those things where it's like maybe one or 2 % of your net worth you put into those asset classes sort of thing. Okay, and if it turns into zero to zero for 100 X's, that's awesome.
Derrick Barker - Nectar (16:40)
Yes, yes.
That's awesome. That's awesome. And as a matter of fact, I think crypto may even be more than one or 2 % just based on the fact that I bought a little bit a long time ago. Yeah. yeah, I say investing generally, my philosophy is that if you buy something that you can hold for a long time and then hold it for a long time, like time do the heavy lifting.
Slava (16:56)
Right, and it's grown. Good problems.
I like that time do the heavy lifting.
Just taking a note. All right. What do think of the market? I mean, you got great perspective on real estate. So that was a very open ended question. You know, we just had an election. We're getting a new president. You know, the stock market is hot. There's a lot of things that are popping. Is 25 going to be rough? Is 25 going to be awesome? Inflation looks like it's, you know, not going as low as we wanted to, but it's kind of steady. So is it Goldilocks? So just completely open ended question. What do you think of the market?
Derrick Barker - Nectar (17:40)
Yeah, I'll talk broadly a little bit, then, you know, I know real estate, so I'll talk about that too. Broadly, you know, it doesn't seem like inflation is gone. You know, the job market is still strong. You know, the economy honestly is doing pretty well. that's good. Stocks are at all time highs. You know, we have an overall like pretty, you know, a decent economy. I believe that rates, interest rates just might be higher.
for the rest of our working lives. I think that is probably something that we should just expect because I'm looking at where the economy is. It doesn't look like an economy where it makes sense for rates to go down. It just doesn't, other than just people want it to in the real estate space. But rates don't go down because people want them to. Usually if people want them to, it goes up. So I think that means that if you're in a
You know, so if you're in interest rate sensitive sectors, then you should just be cognizant of that. You know, maybe that has an impact on stocks. I'd say a lot of equity seem just well, fully priced, you know, fully priced. I'd say real estate is an interest rate sensitive sector. And we can't we have to talk a little bit more drilling in on that and what I really know. We have just come off of years, a couple of years of just record high
deliveries, completions. So that means, you know, after the pandemic interest rates went down a lot. That means it was very easy to make, you know, to build a project, to get the financing to a project and for the pro forma to work in a model. Because you can look at the interest rates, say, well, the cost of capital is so low, I can build lots of things. And then I'm going to exit it, you know, and interest rates are going to stay the same or maybe go up a little bit and I'll be able to actually make a lot of money. So people did that a lot. we built, you know, we had record
record amounts of new supply come to market in let's say multifamily, but across a lot of real estate sectors. And it takes three years to build an apartment complex. So now at 2024, we're just getting the properties delivered that were built in 2021. turns out rates didn't stay the same. They went up and not by a little bit, they went up by a lot. So you have a lot of people who have loans that are coming due who have
properties that are just finished getting built that are empty because they just finished building it, they have to fill up at all at the same time where interest rates are higher. So it's a lot of competition. There's a lot of supply. There's a lot of competition for the renter. And so rents aren't going up as fast. And you have higher interest rates and higher mortgage rates, which means that cap rates have to be higher, which a cap rate, that's the basically the properties interest rates. So the higher the cap rate, the lower the price. And so it's a tough time.
in the multifamily market specifically for people who bought or started development right after the pandemic and have a short term loan that's coming due now because rents aren't growing. For anyone who bought before that period, if you like me, if I bought property in 2017, 18, rents are way higher than anything I had in Proforma because there was a huge, know, rents went up 20 % in some markets after the pandemic.
and maybe now they're going down four or 5%. Okay, it's not that big a deal. I have a low leverage property, values went up a lot, rents went up a lot, and now there's a little bit of reprieve. Some people are gonna get hurt really badly. The majority of the market, the fundamentals are very sound. So I say it's a great time to be in the real estate market, particularly if you can pick up some of the new suppliers, some of the high quality properties that are just in trouble because interest rates are not what they expected when they bought them.
about the deals.
Slava (21:15)
I know it's not your job to predict on the streets for 2025, but you obviously have to have some thoughts. So what do you think is going to happen between now and the end of 2025?
Derrick Barker - Nectar (21:24)
So I traded bonds at Goldman. And one thing that I said then, and I say now, I like, I'm not an interest rate trader. I don't want to build a business model that's reliant on rates, on interest rates going up or down. That being said, I do have a view, but take what I say with a grain of salt because I'm not an interest rate trader. I can't imagine interest rates going much lower than where they are without a...
the economy getting worse. So if unemployment goes up meaningfully, if we have a slowdown in growth, meaningful slowdown, then I can see interest rates coming down. Otherwise, I see 2025 being around where they are now, interest rates being around where they are now. plus or minus, know, up or down 50 basis points or so based on just how the economy is doing.
But for to be, for interest to go down meaningfully, we will have to have a real meaningful decline in the economy.
Slava (22:18)
I mean, it's pretty contrarian to what the talk was a few months ago, right, when we were saying that it should probably be another 200 basis points by the end of 25, right?
Derrick Barker - Nectar (22:25)
Yeah, I mean that might be, I might be wrong.
Slava (22:28)
No, no, no, it just shows how strong the economy is.
Derrick Barker - Nectar (22:31)
But yeah, the economy is strong. It's like when the Fed says that they're going to be higher for longer and they say that it's going to be data dependent, I just take them at their word and don't overthink it. Like, insurance is probably going be higher and it's probably going be for longer and they're probably going look at data and the data is not bad. So.
Slava (22:47)
And is, so give me a street light, red, yellow, green. What color is the market for 2025?
Derrick Barker - Nectar (22:54)
for, I guess, for which market. Yeah. And I will say that, you I'm a macro, like, you know, you have to have macro context, but like the details matter in terms of what you're buying. But I say in general, if you're looking at real estate and you can buy high quality assets, it's a great time to be invested in, especially like the multi, I know multifamily very well, and it's a great time to be invested in multifamily. The fundamentals are incredibly strong.
Slava (22:57)
You can answer how you like.
Derrick Barker - Nectar (23:23)
We have a huge housing shortage and we have structural issues that are going to make it so that we're not going to be able to create a lot of supply, enough supply to meet the demand.
Slava (23:32)
So does that make you green in 2025 for multifamily?
Derrick Barker - Nectar (23:35)
That makes very green, especially at a time where there are people that are going to be distressed. So green for, I say green for multifamily real estate. I might be yellow for some of the other risk assets just because there's been a run up, you know, and things feel fine, like I like.
Slava (23:44)
Awesome.
What are you considering those risk assets just so the audience knows?
Derrick Barker - Nectar (23:56)
sorry, equities or even private equity, things like that. Just because if interest rates are higher, a lot of people are pricing into their brain, into their business model, into their projections that interest rates will be lower. And I don't think, I think we have just the same probability that interest rates are higher by one or two points in a year or two.
Slava (24:15)
Nice. So tell us about Nectar. Not everybody knows what it is. Obviously you're doing a very successful real estate business. What is Nectar?
Derrick Barker - Nectar (24:24)
So Nectar is a real estate company that provides liquidity to owners of commercial real estate who have low leverage cash flowing assets. So how do we do that? We work with people who typically have portfolios of say, 50 to $500 million worth of stabilized properties with permanent debt. So these are not like newcomers, these are people who have portfolios.
And they may have, if you have a portfolio of these assets, a lot of times you need a million, half a million, a couple million dollars to finish a renovation, to buy another property or take advantage of an opportunity. But we provide liquidity to those people so that they can take advantage of opportunities by providing mezzanine financing to their low leverage and cash flowing properties.
Slava (25:14)
Nice. So, and your customer is who? The accredited investor or retail investor?
Derrick Barker - Nectar (25:19)
accredited investor. we have a fund that takes capital from accredited investors.
Slava (25:26)
Great, so if I want to invest with you, what are my options as to how I would invest? Do I pick the actual managers and the buildings or do I invest into a fund or how does it work?
Derrick Barker - Nectar (25:37)
So the best way to invest with us is investing into our fund. Our fund pays quarterly distributions backed by dozens of properties across 29 states. You know, we're diversified. The underlying investments that we make are amortizing. So we get principal and interest back paid currently monthly. it's getting de-risked every month. We're reinvesting that principal. So your investment gets de-risked and de-levered every month.
I'd say for existing investors, have other options and you have co-investment opportunities. But I'd say for the typical investor, you're best served by investing in our clients.
Slava (26:16)
And is there a minimum that I would need to invest?
Derrick Barker - Nectar (26:19)
For listeners of this podcast and for people coming in through Vincent, the minimum is $10,000.
Slava (26:27)
Got it. So I would invest $10,000. I do that. I have to be accredited, not just a retail investor. So do I give you all $10,000 tomorrow, assuming I sign up tomorrow?
Derrick Barker - Nectar (26:37)
Yes, you give us all $10,000 tomorrow so we can sign up tomorrow.
Slava (26:40)
Great, so I give you $10,000 and then I'm not actually getting exposure to the real estate equity, right? So if the building goes up from worth five million to eight million, I don't get any of that, is that correct? Right, but I do get.
Derrick Barker - Nectar (26:52)
That's correct. That's 5 million to 4 million, you're also probably not going to be hurt also.
Slava (27:00)
Perfect, so I don't see the downside either. But I'm gonna be getting yield out of their rents, right? So they're gonna be getting money and I'm gonna get a piece of that. So what's my annualized return on that $10,000?
Derrick Barker - Nectar (27:12)
Yeah, so at the $10,000 threshold, you get paid quarterly dividends of 12 % or 12 % annualized. And yeah, for anyone who invests 250,000 or more, then that's 14%. So we have two levels of investment. And yes, we get money come in from our investments, which again are
mezzanine so we're senior to equity across the fund we have about we're at about 65 % leverage so it's a very secure investment i think of this as a way to get extra yield on a very low risk type investment
Slava (27:53)
Got it, and so let's say I did do the 250,000 just so we could keep it mixed for different audience members and I get 14%. So that's three and half percent that I'm gonna get every quarter basically, right? And so.
Derrick Barker - Nectar (28:06)
Exactly, Key point, not 14 % every quarter.
Slava (28:12)
Yeah, yeah, yeah, yeah, 14 % annualized. So is that pre-fees or post-fees and what are your fees?
Derrick Barker - Nectar (28:18)
That is post fees. we are invested also and we get the net interest above that 14%.
Slava (28:30)
Got it, so maybe you're, I don't know the numbers, I don't know if you can share them, are you making like 20 % or 16 % or 30%, what does that look like?
Derrick Barker - Nectar (28:41)
I say typically we're gonna be in the high teens to 20.
Slava (28:46)
Got it, so you're making like 20 % as Nectar and then there's some fees there or maybe that was post the fees. So then you keep the 6 % and then you pay out the 14%, is that right? Okay.
Derrick Barker - Nectar (28:57)
That's right. That's right. So we earn the fee as we're getting paid back and paying investors, we're earning alongside as opposed to just a management fee on capital that's invested.
Slava (29:05)
So.
I mean, 14 % for 250K sounds like a pretty good number in terms of a rate. How does that compare versus competition or other type of yield oriented assets like that?
Derrick Barker - Nectar (29:20)
I'd say the best thing to compare us to is probably like bridge debt. you know, a lot of, there are a lot of funds that do construction mortgages. We don't take any construction risk. We don't take lease up risk. We don't take interest rate risk because our investment is, you know, it matures before the underlying mortgage and we're only behind fixed rate mortgages. We're lower leverage. So, you know, the 65%, you know, up to 70 % range.
for the underlying assets. So I'd say we're much less, we take much less real estate risk and much less business plan risk than a like a mortgage fund or a mortgage REIT. But we have structural risk because instead of having the first mortgage, in the second position. And so I think of it, know, so we're in the second position, but we're at a lower leverage on a stabilized property. So I'd say we're similar to that risk profile except for more yield. So those...
First mortgage rates are gonna probably be in the 10, maybe, say 8 to 11-ish range, and we're a little higher than that.
Slava (30:23)
So talk me through that. So you're in the second position to the mortgage and the mortgage will probably get 10 to 11%. But because you're in the second position is why you get the higher return. Talk to me, what is that risk exactly? So let's say I'm not a real estate investor. What does that mean? I'm in the second position to the mortgage and how does that actually manifest when it becomes a problem? What would that look like?
Derrick Barker - Nectar (30:44)
Yeah. So that means that the first mortgage, if the property owner is unable to pay the mortgage and unable to make payments, the first mortgage can foreclose. that means they can, you know, they go through a legal process. It takes some amount of time, but they can take the asset and sell it and wipe out all the equity. like they're so and so you're really secure because real estate.
the value of real estate doesn't fluctuate all that much relative to say equities or stocks. It's rare that the value of a property will go down 20%. So the first mortgage is pretty secure in that sense. But because of that, first mortgages often go up to 75 % or 80 % leverage. often, first mortgage lenders are willing to take construction risk or lease up risk. So you have to actually fill up the building.
because they know if you can't fill it up, then they could just sell it to someone else at a discount, but someone else is taking to fill it up. For us, we're not looking at properties that needs to be fixed or renovated or built or leased up. We're not taking that risk at all. We're investing in properties that are already stabilized, that are already cash flowing. They don't need to do anything except for continue to operate.
If operations, and that's where most of the risk is, the most of risk is construction, lease up The way that you get in trouble, that we get in trouble is if a sponsor has a property that was doing well, but for some reason, you know, a big factory shuts down and they had a lot of the residents, I don't know, or like a hurricane hits and people don't come back to the city like, you know, like New Orleans, you know, maybe things like that.
That would have an impact because in operations for even stabilized properties with decline All of our properties can withstand a 10 % revenue decline So we underwrite so that even if there's a 10 % revenue decline Then we're still covered but if they don't pay us we have the right to sell the asset So whereas the first mortgage they have the right to foreclose a legal process that takes a long time We just have the right to say hey things are not working out
We're going to sell before the first mortgage can foreclose. We can sell it at a discount if we have to, but we will be protected because we're at a lower loan value.
Slava (33:02)
Got it. And yeah, no, it makes sense. Obviously it's a little bit complicated, which is also why there's a little bit more return, which is all great. I mean, if everybody knew how to do this, then everybody would be doing it, but that's why you have Nectar.
Derrick Barker - Nectar (33:13)
Right.
Slava (33:14)
So do you diligence the operator or do you diligence the building or both? Meaning how do you do your underwriting?
Derrick Barker - Nectar (33:22)
Yeah, both. We do a pretty extensive underwriting, but there are five pillars. One, quality of operator. Does this guy have a track record of paying their bills? Have they completed this business model? Do they have properties that are stabilized and cash flowing for a long time? We check bank statements, we check legal records and do state searches. Then the asset, is it actually cash flowing? Have they been cash flowing? Are they stabilized?
Do we believe they're gonna continue to be stabilized? Then leverage. How leveraged is this property? If there's a 20 % correction in the market. In 08, the market probably corrected about 20%. So if you have a 08 level correction, can we still get paid back? So those are the three first primary things. Then after that, we need to make sure that we're.
know, KYC tech make sure the person that we're talking to has the right to enter into the agreement. You know, and you know, so they have to a lot of times these properties are owned in LLCs where there are a lot of people at the table and maybe there's a partner that has to get permission from another partner. We make sure that everyone who has permission, they can do it, you know, and then does the sponsor have actual, sorry, and it's the asset, you know, high quality, is it a quality asset?
If it's the roof falling in and is it falling apart, if not, then it's not gonna last for the term of our loan. But if it's high quality, has low leverage, quality cash flow with high quality sponsor, those are the deals that we do.
Slava (34:54)
Awesome. So just to be clear, you're not the ones running the building. You're the ones choosing the operator in the building to potentially give them a loan, which then your investors get paid back.
Derrick Barker - Nectar (35:03)
Exactly, exactly.
Slava (35:05)
Great, and are there specific parts of the country, and this is US based, right? Are there specific parts of the country that you like or you look for in terms of cities or markets?
Derrick Barker - Nectar (35:09)
This is U.S.
There are, we do like some markets more than others. So places where there's just underlying growth, employment growth, population growth. However, I would say because of the nature of what we do, we're only investing in properties that are already cash flowing and that have low leverage and they've been cash flowing for a long time. And even in weaker markets, existing cash flowing properties,
typically stay cash flowing. So we're open to go into smaller markets or markets that are not necessarily growing because we're not betting on growth. We're not betting on growth. We're betting that a property that is currently performing, that has low leverage, will be able to continue to perform at least 90 % as well as is currently performing. That's what we're doing.
Slava (36:05)
How do you identify these buildings and operators and this opportunity?
Derrick Barker - Nectar (36:09)
So we work with, in every market, there are service providers that work with the top owners and operators. And typically we are working, we have great relationships in the space because me and other people on the team have been in the multifamily and in the commercial real estate space for 30 years. I haven't been doing it for 30 years because I'm 37, but other people on the team. And so we leverage those relationships to...
to get in front of very high quality sponsors with very high quality properties that need liquidity for typically to renovate their existing portfolio or to grow their existing portfolio by buying new deals.
Slava (36:49)
Amazing, and I know this isn't your focus, but while we have a real estate expert like you on, what are three markets you like for the next three years and three markets you don't? When I say market, I mean like a city. Give me three cities you like, let's call them green, and three cities you don't like, let's call them red.
Derrick Barker - Nectar (37:03)
Three cities I like. I would say, Dallas, Atlanta, and Tampa. I'd say those three markets are just, in the Southeast, there's a lot of growth. There's probably Phoenix, another market that we're.
Slava (37:17)
Sorry, what was your third one? didn't hear it. Dallas, Atlanta, and which one? Got it. And then you said Phoenix. And then what are three cities you don't like? Three cities that are red?
Derrick Barker - Nectar (37:20)
Tampa.
Three cities that are red. mean, we don't focus that much on markets that we don't like. I'd say.
Slava (37:34)
Well, to like something you have to compare it against something you don't like.
Derrick Barker - Nectar (37:38)
Yeah, I mean, I'd say some of the Buffalo, know, nah, we like Buffalo New York too.
I'm bashing this question.
Slava (37:47)
So I first gotcha.
Derrick Barker - Nectar (37:48)
I know. And you said you don't have any gotcha questions and you don't. I don't know why. just. You don't have a lot of cities that because we're focused on properties that are low leverage and cash flowing. I mean, you know, there are in that when like like rural Michigan, I say something like rural Michigan, rural Wisconsin, like very, very ex-urban markets. We don't like necessarily they don't have a lot of they don't have a lot of drivers that have like single
factory risks, things like that. Those are things that we don't like. Yeah.
Slava (38:16)
Mm.
Super helpful. Awesome. So that was great context on Nectar. Is there anything I didn't ask that you would have wanted to tell me?
Derrick Barker - Nectar (38:28)
now I say like maybe the thing that say is just like the security of Nectar. You know, we have, you know, we have rights like, like owners because we have the right to sell these assets, but we have risk like lenders because we're senior to the equity and only low leverage cash flowing properties. and we're diversified. So, you you mentioned the top three markets that we like, but the reality is we are in.
dozens and dozens and dozens of markets. And that's kind of the point. The point, and that's why I said it's better to invest in the fund than an individual deal. Because, you know, some of this is just, there's diversification and we sleep very well at night because even though there might be a hurricane that hits Tampa and it just might hurt cashflow for some amount of time, we don't have any single deal that's more than, that's a big part of the portfolio. We have lots of property spread across lots of
parts of the United States. And diversification, low leverage and cash flow are something that can bring the risk in a real estate transaction down pretty low. And that's what we like.
Slava (39:31)
What year did you start, Nectar?
Derrick Barker - Nectar (39:32)
2021.
Slava (39:34)
And what's like your AUM or number of investors or any metrics you could brag about?
Derrick Barker - Nectar (39:41)
Yeah, I probably don't want the AUM is a complicated one because we have a credit facility and done most of our deals in the credit facility, which doesn't account towards our AUM. But so why don't we say, you know, and I started in 2021. Now we have over 100 investors. We've done 120 deals in 29 states. We are fun has made 11 consecutive quarterly distributions.
where we've paid an average 14%. And yeah, think those some pretty, we're 65 % leverage across a portfolio.
Slava (40:19)
Yeah, this All great, all great. So now that we're getting to the closing stretch here, we all want to be as smart as you. What is it that you like to read, watch, or listen to?
Derrick Barker - Nectar (40:26)
So I really like reading and listening to biographies and lessons from older entrepreneurs and investors. So Ray Dalio principles, for instance, there's a podcast called the Founders Podcast, which is just biographies of great entrepreneurs. So these are things that I really like stuff like that. And then just not business things. There's a book called, Zell It.
by, I'm going to botch the name of the author, so I'm not going to say it, but zealot, which is a, a, not a religious story by a non religious biography of Jesus Christ, which is like super interesting. So say those are the, those things. History repeats itself and the market goes in cycles and you can get a, learn a lot by just listening to what people who already built businesses and built investment companies did.
Slava (41:01)
Nice.
Amazing. And then any one piece of content that you'd like to read, a newsletter or podcast related to real estate or any type of news source that keeps you smart.
Derrick Barker - Nectar (41:22)
that specifically real estate focus.
Slava (41:25)
Anything that's business focused that keeps you smart, you know, on a daily, weekly basis.
Derrick Barker - Nectar (41:29)
Yeah, I read, you know, I look at like biz now or a lot of different, you know, like CRE type, you know, journal, know, journals and publications. but I don't have anything off the top of my mind that, keeps me smart. I don't like looking at commentary. I like just seeing like what happened and then looking at history, like what happened. The interest rate is here. Like there's no commentary needed. This is where the interest rates are. and then in the history, this is what happens when interest rates have changed. So I'm more of like a history guy.
Slava (41:47)
I love it.
Derrick Barker - Nectar (41:57)
Because I think most commentary is wrong clouds your judgment
Slava (42:00)
Perfect. Give me the facts, I'll figure it out. So last question, we like to hear three years out, what are your picks? One public markets pick and one private markets pick. So for public, give us any stock that we could go trade if we wanted to. For three years out, it would be a winner. And for private, it's any asset, any fund, anything that's in the private markets.
Derrick Barker - Nectar (42:21)
Yeah. So for the private markets, I'd say it might be cheating, in the Nectar Fund, I'm putting, I'm literally betting on that because ultimately I think that just, there's just a lot in real estate, especially for right now, properties that are cash flowing, they're going to have a run. You know, there's going to like, once all the supply that's currently in the market gets filled up, interest rates are higher, it's harder to build.
Like real estate is, I believe, gonna have another big run and we have a structural supply demand mismatch for the ability to supply the amount of real estate that our country demands. And then to balance that, I would say, honestly, this is not a stock, but I think Bitcoin, people call it digital gold, it is a fixed supply.
And we're going into a world, like the next 30 years are gonna be different from the last 30 years. We're going into a world where centrally controlled currencies, believe, gonna, we are gonna want alternatives. And Bitcoin is an alternative where a sovereign is not controlling the currency. And I think that that's something that's gonna be important.
Slava (43:26)
I love it. So both of those are private markets. So you still owe me a public market one. So Nectar Fund is cool. Looking to try to get 12 to 14 % Bitcoin. Today, hovering at recording at around mid 90s. Very interesting pick for the future. What's your public market pick that somebody can use Robinhood and go buy?
Derrick Barker - Nectar (43:43)
I'd say, no.
Slava (43:45)
We're making Derrick think.
Derrick Barker - Nectar (43:46)
I just feel like if I give an answer, it's going to be bad. I wrote down something, but the reality is I know so much more. I said earlier, I'm a guy who like, do the things that I know and I don't really take flyers. And if I did, it would be a diversified basket of stocks like the NASDAQ. The NASDAQ is like QQ. I play as QQ. Just that the future of like, you know, is more leaning towards tech. And I feel like it's a basket that is
Slava (44:03)
Alright, so your play is QQQ.
Derrick Barker - Nectar (44:12)
that's diversified enough and that is forward-facing companies that are going to be able to, whatever happens from the inflation perspective, I believe that the American economy is strong and will continue to be. And the details is just more uncertain and more unclear now than ever before. So I'll just do the Nasdaq.
Slava (44:29)
Perfect. Well, thank you so much. We've had an incredible conversation here, starting out as a freshman in college at Harvard, thinking about how he could help to make entrepreneurs entrepreneurs. But then turning that into his first five buildings as a senior, then going from there to 500 units just a few years later, which is absolutely amazing. Got the real estate bug going from five units to 500, starting buying units that were 17 unit buildings to multi hundred unit buildings.
from $20,000 a unit to $60,000 a unit, you saw the ride go up, but you were ahead of the game starting in Atlanta. You know, I like this one. Execution is more important than the market. It's first time I heard that, which is awesome. You like to concentrate your investment on things that you know, and you like to bet on yourself, like a lot of our guests, which is amazing. You think it's gonna be a decent economy. You think the interest rates are gonna stay high, probably for a while. You're not sure if the interest rates might even go up a little bit or go down a little bit, but...
There's not gonna be a huge drop like a lot of people are predicting because employment is too strong. You do think it's pretty green, especially for multifamily, maybe a little bit more yellow for the risk assets like equities or PE. And you have the amazing company Nectar that you started in 2021, already have a ton of transactions, 10,000 minimum to enter. You have to be accredited. You could do a $250,000 minimum for a higher return, 12 or 14%, which seems pretty awesome. The major risk is that you're in second position to the mortgage, but you're already post construction, post.
You know, people filling up the apartments, low leverage. You have your five principles as to how you diligence, which is awesome, which people should listen to. You gave us our cities that are green for you. Dallas, Atlanta, Tampa, Phoenix, also some red cities. You couldn't really name too many, but you love the idea of rural Michigan, rural Wisconsin, where you have single factory risks, not a lot of drivers. Those are the factors that can become a problem. You like biographies. You like to figure out the facts yourself. Look at history, Ray Dalio, Founders Podcast, Zealot, BizNow, CRE, and you gave us some picks.
which was of course the Nectar Fund BTC. And then you weren't willing to take a single asset pick in the public markets, but you gave us QQQ. Thank you, Derrick. was a great conversation.
