In this episode of Follow-Along Friday, Joe and Theo answer a list of 6 questions submitted by readers of the Best Ever Apartment Syndication Book.
The questions answered are:
1) Do I need to visit every property from the 200-property analysis?
2) If I want to do a deal in the Bay Area, CA, should my mentor be local?
3) Where can I find the data to evaluate a market?
4) Who should review my underwriting on my first syndication deal?
5) How do I approach a broker to get them to send out direct mailers for me?
6) What’s the difference between a joint venture and a syndication?
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
Today is Friday, we’ve got Follow Along Friday. We’re going to be answering questions that you have submitted about the Best Ever Apartment Syndication Book. We’ve got a handful of questions that we have received, that we’ve selected — we’ve got a lot of questions we’ve received, but we’ve selected some and we’re gonna be going through it.
If you are focused on apartment syndication or raising money, or even investing passively in deals, then this will be of interest to you. If not, then stop listening right now and go listen to another episode where we interview someone who isn’t related to that stuff.
Theo Hicks, how do you want to approach it? Do you wanna go ahead and just read the first question?
Theo Hicks: Yeah. So we’re gonna go over six questions. The first question is from David. He said that “In the book, Joe mentions evaluating 200 properties. Does that mean that I need to visit each and every one in person?”
Joe Fairless: Anytime there’s a question about what degree should I do something, I always start out with the ideal scenario, and most of the time, anytime I come across a challenge I always start out with “What’s the ideal scenario?” and then what does reality look like and what’s really practical. What David is referring to is in the book we talk about evaluating 200 properties in the market that you select, that you want to focus on to purchase properties in.
Ideally, you visit all the properties in that market, you go and secret-shop them… So you go in, you pretend you’re renting from them, and you get to know the management process, the customer service, the rents, what’s included in the rent, how they qualify residents, what type of income is required, do they take criminals or not, do they take pets, if so, what are the pet fees…? Ideally, you do all of that in-person for every single property that is a potential purchase for you in that selected market. Not necessarily reality and not necessarily practical, because time is limited, and it would take you a very long time, and it’s not necessarily the best and highest use of your time.
So instead of visiting all the properties in person, although that is ideal, because you definitely would learn the most that way, my suggestion is to visit a sample set of those properties. So if you’re doing 200 properties, then perhaps visit 10%, so 20 or so properties. Visit them in-person, do all the things I just mentioned, and then have a database for you to look at, and hire the web scraper, which we talk about in the book how to do, and look at the numbers and look at the different variables that we’ve outlined in the book, and you’re gonna be able to get good information and good insight based on your personal experience, as well as your secondary research that you put together.
Theo Hicks: The only thing I would add is to — again, the idea is to go and basically in-person evaluate 200 properties… So you’re gonna make your initial list of 200 properties, but keep in mind that once you start reaching out to real estate brokers, for example, one of the ways to win them over is to visit some of their recent sales… So they’ll send you a list of five to ten properties; if you have five to seven brokers, that’s almost 50 properties right there. If you repeat the same exercise with your property management company, that’s another five properties… So you’re already a quarter of the way there with those properties, and as long as you — you know, if you’re gonna do a sample study, then that will be enough, but if you wanna do a combination of both, then you can view 10-20 properties on that list, and then view those properties from your broker and your property management company.
Again, there’s a lot of reasons why you’re doing this, but one of them is for these to be potential deals in the future, that you reach out to the owners… So when you go to these properties, you’re gonna look for something noteworthy, that you can mention when you’re talking to them, and also just kind of give yourself the other benefit of this exercise – it gives you the best understanding of the market you could possibly get, because you’re literally driving around to 200 apartments, as you’re probably hitting a decent amount of the apartments that are actually in that neighborhood. It’s one of the best ways to be an expert.
As Joe mentioned, this could take a while to do, but… In Tampa, I’ve probably looked at at least 75 properties so far, and I spend all day Saturday just looking at properties, basically… Which maybe you can’t do, but it’s kind of just prioritizing your time and figuring out how you can get out there and look at these properties, because… I didn’t know the Tampa market at all, and the whole reason why I know it is because of that exercise that I’ve performed.
Joe Fairless: Yeah. Ultimately, as you said, it’s prioritizing your time. One suggestion would be if you know that your six months away from really getting serious about this stuff – and when I say “this stuff”, apartment syndication, so putting together your own deal… But you’re interested right now; so you’re not serious, but you’re interested – then go do the tours in-person, because you’re able to learn significantly more when you do it in-person, versus just looking at it on a spreadsheet.
So use that time, if you’re not quite ready to do syndication – maybe you don’t have time during the week, but you have time on the weekends, so you need more time to focus on this stuff, maybe you don’t have the money lined up, maybe you don’t have the right team members, or maybe it’s just not a right time for you, then spend the time you do have and go visit these properties, because it will be incredibly valuable for you.
Theo Hicks: That’s a really good point. A lot of people I see on Bigger Pockets, or just in general, when they first become interested in the idea of syndication, they’re not ready to do a deal for at least six months, because they have to work on their education/experience. You can visit 200 properties in six months pretty easily. You’re not gonna be doing much else, besides listening to podcasts, reading books, maybe working with a mentor and working on your business experience… But in the meantime, before things start really picking up, take the time to do this exercise then, rather than waiting until you are actually looking at deals to do that. So yeah, that’s a good point, Joe.
Joe Fairless: Number two.
Theo Hicks: Number two is from Cordell. They say that they’re from California and they want their first deal to be in the Bay Area, so they wanna know if their mentor needs to be located near them, or if they can be remote.
Joe Fairless: Either one. They can be near or remote, and I’m reading this question — Cordell is in Oakland, California… And you want to do a deal in your backyard, basically, in the Bay Area. My suggestion to you is to have a mentor who has purchased in the Bay Area. It’s its own beast; a different type of business model to buy in the Bay Area versus what I do, and most apartment syndicators do buying in the South, South-East, South-West, Mid-West… But not where you’re at; or not the North-East… For the most part. I’m making sweeping generalizations, but for the most part.
And the reason why is because of the type of value-add plays that are available in the areas where most people buy, versus the Bay Area or New York City. So in order for this mentor to be very relevant to you, my suggestion is to have someone who knows the ins and outs of investing in the Bay Area.
Ultimately, before you even approach the mentor, or seek out a mentor, define what you want from the mentor, so that you know what success looks like, and now that you have a plan for what you want out of the relationship, then go seek it out. It will be much easier for you to do it that way, versus not knowing exactly what you want to and have the outcome be with your relationship with the mentor, and you won’t be able to have as good of a relationship or partnership with them.
Theo Hicks: Yeah, but then also just a couple other things about the mentor – make sure that they’re an apartment syndicator, obviously, and that they’re still active, and that they’re successful, which means that they’ve been able to at least meet the return projections on their deals. Then also what to expect from a mentor is that they should be someone who connects you with people that you need for your team, and also should be an ally you can call upon whenever you need help with anything real estate-related or personal-related.
What you should not expect is for them to be your knight in shiny armor who basically does everything for you and you’re magically becoming a multi-million-dollar apartment syndicator in a couple of months. So make sure you set the proper expectations with yourself upfront, too.
Question number three is from John. This will be a quick one that I can answer… He says that “I have a few markets that I’m looking at, and using Joe’s six-step process, which we outlined in chapter 15 of the book for evaluating the market; I am struggling to get to the right areas on the census.gov website, wondering if the site locations have changed since they wrote it. Can you provide actual web links to each of these six areas?”
As of last week – and we are recording this November 29th, 2018 – those links have not changed. I actually did a Syndication School series – series number five, if you go to SyndicationSchoo.com – on that six-step process, I explain how to approach it from a different angle… And one of the free documents you get with that Syndication School episode is the market evaluation template, which also includes the guide to how to fill it out, and that guide includes a link to each of those six factors.
So if you go to SyndicationSchool.com, scroll down to series number five, one of those free documents will include all the links that you’ll need in order to get that data.
But the census.gov website – it depends on your experience with pulling data. I had a job where I pulled a lot of data from things that were a lot more complicated than census.gov, so I was able to navigate the site pretty easily. If you don’t have that experience, it might be a little bit more difficult. I would just go check out that document, series number five, at SyndicationSchool.com, to download that guide.
Joe Fairless: Number four.
Theo Hicks: Number four is from Scott. He asks “When you underwrite a deal, do you have a third-party look at it as well? Yourself, a bank and a third-party. On my first deal, I would like someone to verify my underwriting.”
Joe Fairless: Yeah, good thought process, because I completely agree with you, you should have someone verify your underwriting on your first deal. So your question was when you underwrite a deal, do you have a third-party — so you’re asking about me and our process…? I’m gonna answer the question that you asked, which is what do I do, and then I’m gonna answer the question based on what I suggest you do, since it’s your first deal.
What I do now – and we’re on deal 21 or 22 at this point, syndicated deal number 21 or 22 – we have a team of underwriters, and then my business partner Frank, he created our underwriting document from scratch… He is phenomenal at underwriting, but even with the strength that we have on the team, we always share our underwriting with our property management company prior to getting a deal accepted, because we want them to verify that our assumptions are in line with their assumptions… And then you asked about sharing underwriting with the bank – yeah, the lender always sees the underwriting, but not necessarily prior to making an offer on a property… But it depends on your relationship with your mortgage broker, because you do wanna get a good sense of what the debt will look like on the deal, so you want to share that information with them… But it just depends on how your process unfolds, and how detailed and in-depth you get with the lender, and what stage.
So for you, on your first deal, the minimum amount of people that I recommend looking at it would be three: you, your property management company, and then someone else who you know and trust and is in the business, and you talk to about the deal, who has no vested interest in you closing or not closing the deal. That’s important, because it ties back to alignment of interests. You want them to have no interest at all if you do or don’t do the deal, that way they can look at it from an objective standpoint. If you have to compensate them, compensate them. What do you compensate them – I don’t know; ask them. It might be a lunch, it might $1,000, it might be $200, it might be more, it might be less… I’m not sure. But get at least the management company and an objective third-party who doesn’t care if you close on the deal or not, but has the experience to take a look at our underwriting.
Theo Hicks: That’s solid advice. And then once you actually have the deal under contract, as Joe mentioned, kind of depending on how your process is set up, that’s when the mortgage broker will come into play, but… You will also have other third-parties — not necessarily look at your actual model, but they’ll verify the outputs of your model.
If you go to our blog, thebesteverblog.com, and you look at the Ultimate Guide to Performing Due Diligence on an Apartment Building, you’ll see the ten different reports that will be generated, or that you should have generated, and most of those involve verifying the information that you have in your underwriting models… So those are also third-parties that are looking at at least a portion of your underwriting, and will send you back information that can confirm your budget, confirm your rent premiums, things like that.
Number five is from Barry. Barry said “In the book…” – I think this is actually on the podcast, because he said “or maybe I heard it on the podcast… There are agents that send mailers to find potential sellers. Is this understanding true? How would you approach a broker about doing this?” I’ll answer this question, since he’s asking me…
Joe Fairless: Yup.
Theo Hicks: The agents that send mailers — well, I’m assuming that most real estate brokers are sending mailers for themselves, to get deals that they can list… But for them to send mailers for you – yes, this is true, but it’s not something that is gonna happen instantaneously. I knew the agent for at least 2-3 years before I’ve entertained the idea — we had a really solid personal relationships; I had already done a couple deals with her, so… We do have a few blogs about winning over a broker to your side, but at the end of the day, in my opinion, in order for this strategy to work, you’re gonna have to do at least a deal with them first, as well as have a personal connection where you call them on the phone and talk about your day before you ask them to do such a thing, because it’s gonna be expensive for them to do.
Now, I’m sure they would do it if you paid them, and I’m assuming you’re asking how you can get it done for free… So how do you approach a broker about doing this? Time, and build a personal connection with them, and do a deal with them first.
Joe Fairless: Good stuff.
Theo Hicks: And then lastly, number six is from Richard, and he asks “What is the difference between a joint venture and a syndication?”
Joe Fairless: A security that’s registered with the SEC and a partnership among your business partners, and it is not registered with the SEC. So a syndication is a security, a joint venture is not. A syndication requires a securities attorney, a joint venture does not. A syndication is where you raise money from one investor – I believe it can be even one investor – and there is an expectation that based on your expertise they will make money, and they will not be active in the deal, they will be passive. A joint venture is the opposite of what I’ve just said.
Joe Fairless: Exactly. So if you’re essentially doing a deal where you’re raising money from one or multiple people who that’s all they’re doing, then it’s gonna be a syndication. But if you and someone are teaming up and you’re gonna do half the work, they’re gonna do half the work, and you’re gonna both bring half the money, that’d be a JV.
So those are the six questions. If you’ve read the book and have any other questions, submit them to firstname.lastname@example.org, and once we have 5-6 we’ll do another podcast like this and answer them.
Let’s move on to the trivia question… Last week’s question was “What is the best city to live in for career-focused single women?” We mentioned that it was a city that we would not expect… The answer is Buffalo, New York.
If you are a career-focused single woman, then Buffalo, New York would be a good place to live. I guess if you’re a career-focused single man too, you’d head over to Buffalo. I think Baltimore was also on that list; I think those are the top two, but Buffalo, New York was the answer.
This week’s trivia question is going to be “What is the cheapest state to live in based off of the cost of living?” I know the answer, but Joe doesn’t know the answer, so Joe, what do you think?
Joe Fairless: I see the answer in our document here…
Theo Hicks: Aww… [laughter]
Joe Fairless: I know, that would have been a fun one to guess…
Theo Hicks: Mistake on my part…
Joe Fairless: I’ve been influenced, so I can’t pretend I don’t know and then try and guess what I was going to guess. I’ll have to stay mute on this one.
Theo Hicks: If you submit the answer either on the YouTube video, below, or to info@joefairless, the first person to get it right will get a signed copy of the first Best Real Estate Investing Advice Ever Book, vol.1.
Also, we’ve got the Best Ever conference coming up. I think we’re less than three months away now. That’ll be in Denver, Colorado. In order to purchase your ticket, go to BestEverConference.com. Each week those ticket prices go up, so the sooner you secure your ticket, the less expensive it will be.
This week’s featured speaker is going to be Gene Guarino, who is an assisted living facility expert. He’s actually going to be speaking at the conference, but he’s also going to be hosting a workshop that Sunday as well. His talk and his workshop is gonna be all about how to increase your cashflow by converting a single-family home into an assisted living facility.
Joe Fairless: I think as an attendee of the Best Ever Conference you get in free…?
Theo Hicks: Yeah, yeah.
Joe Fairless: Okay. So you get in free to that workshop on Sunday. One thing when you go to besteverconference.com, when you purchase the ticket, put in the code “take5”, and you’ll get 5% off. As Theo mentioned, ticket prices go up weekly, so buy it today and lock in the cheapest price available right now.
Theo Hicks: And then lastly, we’re gonna do our review of the week, so make sure you pick up a copy of the Best Ever Apartment Syndication Book on Amazon. Leave a review, send us a screenshot to email@example.com and we will send you some apartment syndication goodies, as well as read your review live on the podcast. This week’s review comes from Derek W. Peterson. He said “I’m an active multifamily investor and I have a bookcase full of excellent references on investing in real estate. Many of them are excellent in changing mindset and giving general advice on turning real estate investing into a full-time endeavor, but Joe’s book by far is the most specific in giving detailed instructions. I have read the book in full, and am now following the actionable steps and conducting the market analysis. I love it and highly recommend!”
Joe Fairless: Thank you for that feedback, and everyone, looking forward to continuing the conversation tomorrow. If you have read the Best Ever Apartment Syndication Book, then we’d appreciate a review on Amazon, and we’ll continue to read more reviews from the book.
I hope you have a best ever weekend, and we will talk to you tomorrow.