Ever felt nervous preparing to talk to a big money partner in a potential deal you would like him to be a part of? Well, Joe and Theo are going to cover how to prepare for that phone call and what message you should convey. Hear about Joe’s recent trip to Texas and some questions from our best ever listeners are answered.
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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.
With us today, as usual, to do Follow Along Friday, Theo Hicks. How are you doing?
Theo Hicks: I’m doing good, Joe. Glad to be back.
Joe Fairless: Nice to have you back, nice hanging out again. Today we are going to talk about a couple things. Do you want to take it away and give us an overview?
Theo Hicks: Yeah, we’re gonna talk about a couple things. First, you had a trip to Texas this past weekend to look at some of your apartment complexes you already own, as well as potentially some new ones, so we’re gonna talk about that. Then we’re gonna talk, secondly, about how to prepare for a conference call with an investor when you’re presenting a new opportunity… Because that’s what we did last night.
Joe Fairless: Yeah, it’s fresh in our minds.
Theo Hicks: Fresh in our minds. Then, finally, we have a question from a listener about raising money for a deal and how to structure the partnership based off of his specific situation. So we’re gonna start off and maybe give a brief overview of how your trip went this weekend.
Joe Fairless: Yeah, absolutely. And by the way, Best Ever Listeners, if you’re listening via the podcast, then you can also watch the video of this on YouTube. What is our YouTube channel?
Theo Hicks: It’s YouTube.com/c/bestevershow.
Joe Fairless: Or just search “Joe Fairless” on YouTube and you can see the video. Or, if you like the Facebook page that we have, then you’ll see it live and you can comment live, next week or whenever.
So the trip to Texas. This past weekend was actually a trip to Texas, and then a trip to New Orleans for my bachelor party. Those were two completely different trips. The trip to Texas – that was business related, and it went really well. Specifically what I did was I met with 10 or 11 investors. Also, most people are in my consulting program, so they met me at the property we have under contract; it’s a 202-unit in Fort Worth, Texas.
We did a tour of the property, a walkthrough… What you wanna do when you do a tour – it depends on your business model on the property I guess, but our business model is we renovate the units, increase rents, and provide the main value add that way. There’s also some additional things like optimizing expenses, [unintelligible [00:04:46].13] and then doing some other income things like putting fencing around ground floor units and things like that.
But primarily it’s renovating units and increasing rents. What we always wanna do if that is our business plan is see what a nonrenovated unit looks like, and if they have done any renovations – which would be ideal, if they’ve done a very small percentage of renovations – see what a renovated unit looks like, and then determine if that renovated unit is comparable to other renovated units in the area based on what they’re getting in rent and what the others are getting in rent.
Basically, you want to validate your assumptions on the renovation premiums and your rent comps. That’s where all roads lead back to. You wanna make sure you get the rent premiums and you wanna make sure you have the correct rent comps. Those were the two primary areas of focus.
In addition, doing other things that you can’t do on paper, you have to do in person – getting a feel for the resident profile that lives there, the type of cars in the parking lot… I mean, there were Lexuses and Mercedes; this is a nice property, built in 1998, in a very, very nice area. So that was the primary focus for the trip.
In addition, I visited two other deals that we are close to getting. Both of them would be off-market deals. More to come on those if and when we do get them. I don’t know for sure, nothing’s under contract, but they are off-market deals that came to us via a broker that we have a really good relationship with and we’ve closed other deals with.
If you’re looking for off-market deal, then broker relationships have been the primary way we’ve gotten off-market deals. Yes, you still pay a broker’s commission in that scenario, but you don’t go through the competitive bidding process that you normally would. You might wonder, “Well, what the heck is the benefit for the seller to do that?”, and that is it’s a much faster, more streamlined process.
For example, the property that we have under contract right now – I was told there were 37 tours, because it was a competitive bidding process. So there was 37 groups that went and toured the property. Can you imagine how many questions they all have for the brokers and the owners? Because the brokers certainly weren’t able to answer all of the questions. And those were just 37 groups that physically toured the property. So if you’re wondering what’s the motivation for a seller to do an off-market deal, that’s a primary motivating factor.
Then also, they wanna make sure that they’re getting a good price, so we’re by no means stealing these deals at 50 cents on the dollar, but we are getting a little bit below market price with the property that we like.
Anyway, so we visited those two, plus the first one that we have under contract – so that’s three, and then we closed on two deals, over 500 units, over the last couple of weeks. I visited those, as well.
And lastly – so I guess I visited six properties. Lastly, I visited another property that we own in the same submarket as these other ones, because I was in the area. It was a very busy trip, it was a very productive trip, and that’s the focus when I go to visit a property.
Theo Hicks: Something you said there that was interesting is about the cars in the parking lot. I remember that was in our new book, Best Real Estate Investing Advice Vol. 2, Grant Cardone’s chapter… He was talking about – obviously, he does more due diligence, but he’s saying that he can do a quick judge on a property based off of a lot of different reasons, but one of them was cars they saw on the street. I thought that was interesting that you brought that up.
Secondly, when you were talking about the two primary things that you focused on during a tour are to prove the rents premium that you’re gonna get from renovations, as well as the comps. For the comps, [unintelligible [00:09:05].20] what do you do to get those? Do you actually go to the property, pose as a tenant? How do you go about understanding the rental comps?
Joe Fairless: Three ways. One is if there’s a broker, then he’ll provide rent comps. That’s just the first way, and you do all three. So there are three ways to do it, and you must do all three. First is the broker and the rent comps they’ve provided. The second is doing your own research and making sure that those rent comps are actually the correct rent comps by simply doing a Google search and seeing what other apartment communities are within driving distance. It depends on the area… Five miles – a five-mile radius is usually acceptable, but again… In New York City it wouldn’t be a five-mile radius, because the island is like seven miles wide, or something. I might be off on that, but only by a couple miles.
Then the third way is you get your butt into those apartments. I’m glad you mentioned that, because I told the group I met with – my investors and some of my clients when we visited – to dress like a B-class apartment community resident, because we’re gonna be doing rent comps. You go in and you ask him about the apartment, and you go look at the renovated unit and you get a first-hand look. So those are the three ways that we validate the rent comps.
What I will mention on the car thing, one additional tip is when you visit the property, if it’s during the work hours, are there a lot of cars in the parking lot? Because if so, do you have a lot of successful, working from home entrepreneurs living in your apartment community? Probably not. Are they unemployed? That’s the more likely scenario if you have a whole bunch of cars in the parking lot during work hours.
Now, of course, there’s second shift and third shift, which I was introduced to when I moved to Cincinnati… I didn’t know what third shift was, I thought it was a restaurant… So there are exceptions, but if there are a lot of cars in the parking lot during the work day, then that’s at least a signal to continue to do more due diligence into that, and specifically do due diligence into the economic occupancy, versus the physical occupancy. Economic is the people who are paying to live there, physical is people who actually live in there. And how you do that is I recommend doing a financial lease audit with a professional – either a management company (they would do that) or you hire a third-party. But ultimately, you wanna juxtapose the bank statements with the P&L that they’re reporting and make sure that it all matches up with the rent roll. So bank statements, rent roll and the P&L – make sure that all matches up.
Theo Hicks: I’ve got a great Follow Along Friday… We’re gonna shove a camera to our chest and we’re gonna do one of those rental comps, so you can see what it’s actually like to do it, because we did that when we went to Columbus.
Joe Fairless: We did that.
Theo Hicks: It was interesting. Out of the six you went to, one of those was the property that we did the conference call in last night.
Joe Fairless: Yes… Smooth segue…
Theo Hicks: That was a good segue, wasn’t it? [laughter]
Joe Fairless: Smooth segue.
Theo Hicks: The idea is to talk about how to prepare for that investor call, because this is my first time actually listening in on one of your calls, and I was on the e-mails when you and your partner were preparing for it, and I thought it would be good for the Best Ever listeners to see what you do to prepare for these things.
Joe Fairless: Yeah, this is important, and it’s fresh on my mind because we just had the call last night… And I think we do it the right way, because I’ve been on other calls before, and I like our format. I’ll share with you how we do it, so that if you’re raising money you can do the same thing.
First is you have to get your part right. What I mean by that is why are you presenting this opportunity to investors? I have a Word document outline that I use during the call, and at the top I mention in bold “I’m here to serve, I’m here to help my investors retire, do what they want with their money, and ultimately do what they want with their time. When they get the returns that we’re projecting, then they’re going to be able to spend their time the way they wanna spend it”, which I believe will help everybody out, because I think when you spend your time how you wanna spend it, I think people naturally gravitate towards doing more altruistic things (that’s just my personal belief).
So starting out with the right mindset, as well as coming from the heart and knowing that you’re there to serve – that’s the first and foremost thing.
After that, as long as you know what you’re talking about, everything else just falls into place. I’ll give you the template. The most important point that I wanna focus on is capital preservation, because when we do our underwriting we’re conservative in the underwriting. I’ve interviewed a lot of people, and my own personal experience, and every psychological study proves us out, that you’d rather not make a dollar than lose a dollar. When people lose money, that’s much more of a hit than it is a gain when you make money, therefore capital preservation needs to be present and discussed throughout the conversation, assuming that it is a conservative investment in your projections. That’s another point.
Then the next part is the introduction – I just write a simple intro of my background, and then I structure my conversation with investors in three categories – one is the deal details, two is the market details, three are the team details. Those are the three categories.
I know what the main highlights are for that particular deal, therefore before I go into those three categories – the deal, the market and the team – I tell them from a high level, “Here are the main couple reasons why I like the deal”, because I wanna focus and continue to reiterate the main points. I don’t want to discuss all these data points and get everyone’s minds swimming in numbers; I wanna make sure that the points I wanna make about the deal are clearly and consistently reiterated and communicated.
Therefore, with this deal, the main two points that I have are exceptional location and proven business model with a proven team. I lead off with that, and that was the theme throughout each of the categories. Then I went into each of the three categories – the deal, the market and the team, and just talking through the highlights… It’s important if you say something like “It’s an exceptional area” – you follow it up with “…and here’s why”, versus just throwing out hyperbole.
You always want to have stats, but then even better will be when you have the stats and you start telling your story. So for example, our deal was in Fort Worth, and I mentioned that it’s an exceptional area, the population is growing, and as a reference point, the U.S. Census Bureau named it the number one fastest growing city in the United States, because they grew 47% in population from 2000 to 2015. And you could leave it there, but then you say, “…and here’s why.” So you wanna discuss they why behind it, and I mentioned the job growth, job diversity, and I gave some specific employers. That was the macro level for that market.
Then I went into the micro level for the submarket. I talked about the school district and the specific employers within that 3-5 mile radius. It’s important during your investor conversations – and this was a conference call with a lot of investors on it – to first off know what you’re talking about (duuh!), but mention the numbers and mention the reason why behind the numbers, not just state the numbers. Tell a story, and then make sure that you are hitting the points that you need to hit, that you’ve predetermined are the most important selling points or desirable attributes for this particular opportunity.
We go through that, I talk for 15 minutes or so, and then Frank, my business partner talks for, say, 20 minutes. He goes into the deal and more detail from an underwriting standpoint. He talks about the business model in detail, he talks about the financing we’re getting etc., and then we go into a Q&A session. Investors e-mail me questions; I mention my e-mail on the call, and then they’ll e-mail in questions, and then I’ll be receiving the questions. Some of them I just reply via e-mail right back to, most of them we field on the call. It’s recorded by FreeConferenceCall.com, super simple, and then we send out the link to the recording afterwards to everyone, because probably about 40% of the investors aren’t able to attend the call, because everyone’s got stuff going on, so we send it out to them.
That’s how I prepare, that’s how it’s structured. I’m gonna summarize in 30 seconds or less the document. Know your why – know why you’re doing it, know the main one or two selling points of the property that you want to reiterate, and structure it: deal, market and team. When you do that, then it’s a very concise conversation and you’re able to have an effective call.
Theo Hicks: You said that perfectly. One quick follow-up question… Obviously, when you’re creating this document, you kind of summarized the why and then one or two unique selling points that you’re gonna use throughout the document – all of this stuff is all written out, and I guess my point is a couple of them are kind of like mindset ways to prepare yourself before going into it… Was that something that you literally have written at the top of the document, that says “This is my mindset going into it – giving – and I focus on capital preservation (that’s next), and then here are my two or three selling points”, and then you type out market, deal, team, and you type out all the things below that. Is that how it works?
Joe Fairless: Yeah, I literally wrote out on my document yesterday before the call the reason why; I’m here to serve, help them retire faster, and a couple other bullet points. Because it could be nerve-wracking to be on a call with a lot of investors, but it’s only nerve-wracking if you’re inside your own head. It’s not nerve-wracking if you’re there to serve others… Because if you’re there to serve others, then you’ll get out of your own way to go help.
So that helps, and completely remedies any nervous feelings that I have prior or during the call, because I know I’m just here to help them, and they need this information, so I’ve gotta present it to them.
Theo Hicks: I think I remember something else you said, too… I think you said something about podcasting. Before you go on a podcast, you smile really big to kind of get your body [unintelligible [00:21:02].24] something else that I do, too… Because the goal is to get outside of your head, so I’ll try to just be very mindful of the situation. I’ll literally say out loud, “Here’s my microphone. It’s got a little blue, shiny light on it.”[laughter] Right now I’d be looking at — “Here’s a microphone with an orange on it.” It kind of just prepares you and makes you mindful, in the present, because you’re not stuck in your own head and thinking about, “Oh, what am I gonna say? What exactly am I gonna say for the next 30 minutes?”, which is obviously impossible. I think those are all kind of the same thing. It’s all about getting outside yourself, and not just being stuck in your own head.
Joe Fairless: Yeah, exactly. I like that.
Theo Hicks: Anything else about preparing for an investor conference call before we get into the last section, which is a Best Ever listener’s question?
Joe Fairless: No, let’s go straight to the question.
Theo Hicks: Okay. Kevin submitted a question, and he says:
“I have a deal, and I’m an experienced investor. My buddy wants to invest in it, but I’ll be managing the deal with the property managers, so having him – I believe his friend – be the limited partner and supplying the down payment, and then me coming in with 0% down and being the general partner. The cash-on-cash return for the deal…”
Joe Fairless: Let me just pause to make sure I… Experienced investor, he’s not putting any money in, his buddy is putting the money in, and his buddy is managing it?
Theo Hicks: I think the situation is it’s Kevin, it’s his friend, and then a property management company.
Joe Fairless: Okay, got it. So a property management company – third-party, they’re managing it. He’s not putting money in, his buddy is putting all the money in.
Theo Hicks: Yeah.
Joe Fairless: Okay.
Theo Hicks: He says: “The cash-on-cash return for the deal is about 14%. The question is how would I structure the percentage for myself?”
Joe Fairless: However you CAN structure the percentage for yourself. The beauty of multifamily syndication is that you’re only limited by your creativity and what the market commands. In this so far – and I know there’s a couple more sentences… So far I don’t know what he’s bringing to the table. He’s an experienced investor… If it’s experience and that’s it and he’s not putting any of his own money in the deal, I don’t find that very valuable, because there’s not alignment of interest, and I don’t care how much experience someone has, if they don’t have their own money in the deal, then there’s not as much incentive for them to help out and use that experience. It’s likely that they would use their experience to go work on projects that they have their own money tied to. But maybe he’s got something new for us in the last couple sentences.
Theo Hicks: He says that “The business plan is holding and refinancing in five years. I was looking for a percentage of income plus money at the end. So I guess this is a second question, but the loan would be under my name, correct? Or would it be under the LLP…” – I’m not sure if he means LLC or Limited Partner – “…with him guaranteeing the loan?” So I guess not more information on what he’s gonna bring to the deal, but more of what he wants…
Joe Fairless: He’s implying that he’s signing on the loan, so that is adding some value, so now I’m seeing a little bit more… The short answer is in this scenario get what you can get. If I’m him, I’ll give you some specific benchmarks for a loan — I’m pretty sure we did a YouTube video on this…
Theo Hicks: Yeah. We’ll put it in the show notes, and I’ll put a link in the YouTube video, as well.
Joe Fairless: Okay. And you can go to MultiFamilySyndication.com and the video will be there as well, along with all the other videos that we’ve done. But we did a video on what the individuals who sign on loans with you on a deal get compensated, and one example is a quarter of a percent of the loan balance paid annually, and then maybe a small ownership interest in the deal, like 5% or something… I mean, that’s pretty generous right there, I believe. Maybe too generous. You could just be 0.25% on the loan balance.
If it’s a recourse loan versus a nonrecourse loan, then I would crank that up more, because you have more personal exposure. But if you’re not putting any money in the deal, you’re just bringing your experience and balance sheet, and you have a third-party management company, somebody’s putting all the money up – you’re providing value for the deal, but it’s certainly not the majority of the value, because it’s just signing on the loan and giving some tips during the asset management phase. If you’re also doing asset management, then perhaps have a fee for that, and that’s your compensation; 2% of the collected income every month.
So I will give you the summary of what I suggest based on this information. One is if you are doing the asset management – which makes sense if you’re the experienced investor in this group – then 2% of the collected income paid every month. So if the property collects $100,000, then you’d get $2,000 every month.
The second is the loan sponsor guarantee of a quarter of a percent. If it’s ten million dollars, I think that would be $25,000 paid annually, if that math works… But 0.25% if that math doesn’t work.
Then the third would be maybe get a small ownership percentage in the deal. I think that’s stretching it, based on the role that you describe. But if your role is greater than what I believe it to be based on the information we’ve read, then up to 5% of the general partnership or of the deal. And as far as signing on the loan, the loan fee is based on your signing on the loan.
Theo Hicks: When I heard this question – let me know if you think I’m wrong – I kind of interpreted it as besides him signing on the loan, that he’s gonna have maybe some kind of a mentorship role to this guy who’s doing the deal. But I guess he said that he himself has the deal, so that wouldn’t be the case.
Joe Fairless: Oh, he’s bringing the deal, too?
Theo Hicks: He says, “I have a deal”, so he’s the one that’s bringing the deal, so I guess the value he’s adding is he has a deal and he’s signing on the loan, and then…
Joe Fairless: He’s doing the asset management. Yeah, so 5%-10% if you have the deal… But you’re not putting any money into it. That would be probably 10% if you have the deal, but if you co-invest alongside them, then I think you can increase that to 30% of the deal.
Theo Hicks: Awesome.
Joe Fairless: Cool. Well, Theo, where can the Best Ever listeners get in touch with you?
Theo Hicks: TheoHicks.org or the Unplugged Podcast on iTunes.
Joe Fairless: Alright. Best Ever listeners, I enjoyed our conversation today. I hope you have a best ever day. We’ll talk to you soon.