JF2325: 20 Markets to Buy Multifamily in 2021| Syndication School with Theo Hicks

 

In today’s Syndication School episode, Theo Hick discusses the best 20 markets to buy multifamily properties. He also shares the 3 rules that will keep your investments safe and sound no matter the current state of the economy. As long as you’re buying right, your deals will be well-maintained even during the time of economic uncertainty.

Theo based his list of 20 trending markets on the annual report put together by PWC and the Urban Land Institute. Over 3000 real estate professionals have been interviewed in order to put together an in-depth report.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. Although this will be released in about mid-January, this is my first time recording in the new year, so happy new year’s, happy 2021, and thank you for tuning in.

Today we’re going to pick up right where we left off in 2020 by talking about the how-tos have apartment syndications. Make sure you go and check out some of the older syndication school episodes that we released in 2020, and also in 2019, and maybe even 2018. I’m not sure how long I’ve been doing this for now, but lots of valuable information, as well as lots of valuable free resources to download. These are PowerPoint presentations, how-to guides, Excel template calculators, things that will help you along your apartment syndication journey.

Being the new year, I thought it’d be great to kick it off with an episode that talks about some of the markets to look into 2021. So 2020 has been a pretty crazy year. We talked about the impacts of COVID19 in real estate in general, and some of the projected changes. We did talk about some of the information on particular markets, but today I want to go through a list of some of the top markets to buy multifamily in in 2021.

Now, one of the things that we talked about a lot on Syndication School are these three immutable laws of real estate investing. And the entire concept behind these three laws, which as a refresher, are 1) buy for cash flow, not appreciation, 2) secure long term debt, and 3) to have adequate cash reserves. Now, the idea behind all these rules is that no matter what the condition of the overall real estate market is, you’re still able to maintain your existing portfolio, and then based off of the three rules, being involved with buying allows you to buy new deals. And so follow these rules all the time; you can buy deals during a recession, which we’re technically in right now, and the deals you bought prior to the recession we’ll at least maintain and not be completely destroyed during a recession. And again, when you think about these three laws, the whole point is that you can still buy real estate, you can still buy multi-family, you can still invest during these downturns, during these periods of uncertainty, as long as you’re buying right.

And what I’m going to talk about today is evidence of that point, that you can continue to buy during recessions, downturns, whatever you want to call it right now; we’ll call economic uncertainty. Periods of economic uncertainty. So this is based off of a very lengthy report, that’s over 100 pages long; I highly recommend reviewing it, and I’ll link to it in the show notes of this episode. It’s called The 2021 Emerging Trends in Real Estate. This is an annual report put together by PWC and the Urban Land Institute.

I really like this idea… They essentially interview a bunch of real estate professionals, and then the ones that they don’t interview, they’ll send surveys to. And they do this for over nearly 3,000 individuals. So they say that they interview 1,350 individuals, and then they surveyed another 1,600 individuals. These are people who own commercial real estate, or develop commercial real estate, work for some sort of advisory firm… They are passive investors in commercial real estate, they’re like investment managers, advisors, banks, lenders, homebuilders, land developers, REIT companies… It’s incredibly a broad spectrum of commercial real estate. And they ask them a bunch of questions on what they think is kind of going on, and then based off of the 3,000 or so responses they get, they put together this really detailed report. They also obviously pull data from the Bureau of Economic Analysis, US Department of Commerce, some of the big commercial real estate reporting firms out there, and they put together a really nice report.

And the one thing I wanted to focus on today, as I mentioned in the beginning, are what are some of the markets that we should be looking at in 2021? More specifically, what they did is they asked all of the respondents to let them know, “Okay, so based off of all these major metropolitan statistical areas, MSAs, would you recommend that people either A, buy, B, hold, or C, sell their properties?” And so for all the markets, they compiled all these responses. So out of 100, what percentage said that you should buy real estate in this market? What percentage said “Well, you shouldn’t buy. If you have an existing property, you should probably hold and not sell.” And then “No, if you hold property, you need to sell and get out of this market.”

So these are the markets that all these different active real estate professionals think and recommend that people buy in in 2021. So I’m going to go over those today. This is specifically for multi-family. They have a breakdown of the same survey for other commercial real estate niches, like office, and retail, which – for retail, obviously, not a lot of buy here; a lot of sell actually. They have the top 20 here for retail, and number 20 is 0% buy. And the most is Orlando, which is 28%  buy; it’s kind of interesting.

Same thing for hotel, and then they have other rankings for markets. But again, I want to focus on the buying multi-family. So according to these experts, what are the top 20 markets that experts are recommending that you buy in? And of these top 20, more than 50% of the respondents said you should buy multi-family. And to put that in perspective, for office, for retail, and for hotel – I think they have one other one on here, which is industrial. But for office, for retail, and for hotel, the number one market to buy in, for all three of those, is less than 50%. So office is 45% in Salt Lake City, Orlando, 28% for retail. And then for hotel, it was 23% at Fort Lauderdale.

And so the number one market to buy in for those three asset classes, so less than the top, say, 15 multi-family markets to buy in, with industrial obviously being kind of, in a sense, better and more attractive, and more recommended than multi-family. We’ve talked about it on the show in the past before. So without further adieu, let’s jump into these actual markets. But the whole point of that is just introducing the fact that hey, multi-family is doing a lot better than these other asset classes. And these experts are predicting that it’s still going to do well in 2021.

So number one is going to be Raleigh, Durham, North Carolina. 72% of the respondents recommended buying multi-family in Raleigh, Durham. 20% said you should hold, and 9% said to sell. So that’s the number one market.

The next two are tied for second. Still very high recommendation, at 67%, buy in Tampa, St Petersburg, and Salt Lake City. For Tampa, St. Petersburg, 30% recommended to hold, and 2% recommended to sell. For Salt Lake you have 27% hold, and 6% sell.

In fourth place is going to be Austin at 63% buy, 28% hold, and here we see a pretty high sell of 12%, relative to some of the other ones on this list. Only a few of them have a double-digit sell recommendation. But still the majority think that Austin is a good market to buy in.

This one kind of surprised me, but Boston comes at number five. Boston, Massachusetts at 60% buy, 32% hold, and 9% sell. Now, for some of these, they actually don’t add up to exactly 100%, right? 72 plus 20, plus nine is 101%. I think they rounded these without a decimal point. So they’re all within one percentage point of 100%.

Number six is going to be Boise, Idaho. Now, if you remember from some of the rent analyses that we did in late 2020, Boise, Idaho experienced the greatest rent growth out of any major market since the onset of the COVID-19. I’m pretty sure it’s a double-digit rent growth percentage. So clearly, Boise is going to be on this top list of places to buy, with 59% recommending to buy, 34% recommending to hold, and 6% recommending to sell.

Next we have Nashville, Tennessee, 59% buy, 37% hold, 4% sell.

Next, coming in at number eight we have a repeat in North Carolina this time, it is Charlotte, North Carolina at 56% buy 36% hold, and 8% to sell. Number nine, we’ve got our first repeat for Texas, which is San Antonio, which is 55% buy, 35% hold, and 10% – so another double-digit, but still relatively low to sell.

And then rounding off the top 10, which is one of the only places on this list where no one recommended that you sell – it was a 55% buy, 45% hold, Columbus Ohio. So no one recommended that you sell in Columbus, Ohio. So that is the top 10. Again there’s Raleigh, Tampa, Salt Lake City, Austin, Boston, Boise, Nashville, Charlotte, San Antonio, and Columbus.

So kind of really all over the country. A lot of southern states, but also you’ve got Boston which is Northeast, you’ve got Boise which is in the West, and then you got Columbus in the Midwest. So really kind of all over the place. It’s not necessarily focused on one particular section of the country.

So I’m going to quickly go through the next 10 to round off the top 20. So at number 11, Washington DC at 54% buy, 43% hold, 3% sell. 12, Fort Lauderdale – 53% buy… I’m just talking about the buy here. I want to do all this. So, Fort Lauderdale, it was 53% buy, 39% hold, 8% sell. Atlanta 53% buy, 33% hold, 14% sell. Phoenix 52% buy, 30% hold, 15% sell.

And then the last location that the majority of respondents recommending to buy would be the Inland Empire, which is parts of California, 51% buy, 42% hold, 7% sell. Now the last one, Phoenix – that actually has the highest of these top ones, highest percentage of sale; but obviously, they’re only featuring the top 20. A lot of these markets are going to have a pretty high sell, but they  don’t include those ones on the list. So of the top 20, 17% recommending selling in Phoenix; that’s the highest one.

Next we got Long Island at number 16, which is 46% buy, 54% hold, and then another 0% here for selling. So Columbus, also Long Island – they’re not recommending that you sell. Either buy or you hold. 17 is Cape Coral, Fort Myers, Naples, so third is Florida on the list, in addition to Tampa, St. Petersburg and Fort Lauderdale. It’s 44% buy, 50% hold, 6% sell.

Back to the Midwest in Indianapolis at 44% buy, 56% hold, and the third one on our list where no one says to sell, also in the Midwest (I guess Wisconsin is technically Midwest), Madison, Wisconsin, at 43% buy, 57% hold, another 0% sell. And then lastly, number 20 is Virginia Beach, Norfolk at 33% buy, 56% hold, and 11% sell. So those are the top 20 markets to [unintelligible [00:16:57].21] real estate, but multi-family in 2021.

Now kind of going full circle back to the beginning, back to those three unbeatable laws of real estate investing… Just because 72% of people say you should buy in Raleigh, Durham, it doesn’t mean you should buy every deal in Raleigh, Durham, right? You still need to do your market analysis that we’ve talked about before, and you still need to buy right, you still need to underwrite, you still need to follow the Best Ever practices we’ve talked about on this show. But at the same time, you want to set yourself up for success by buying in a solid market. So these are forecasts, right? These are recommendations from experts. These aren’t, again, guaranteed. Raleigh, Durham is not guaranteed to be the best market. It’s not like — in Columbus they say no one should sell, but then if you own a property in Columbus it doesn’t mean you shouldn’t sell, right? It all kind of depends on where you’re at in your business plan, and things like that. But at the end of the day, the idea behind all this is “Okay, here are some of the top-rated markets.” So if you’re in them, great. If you’re focused on them, great. If you’re not focused on them, you might want to consider looking into these.

I might do some future episodes going more in-depth on this report, because there’s a lot of solid information on here; it’s really long, and I don’t expect every single person listening to this to read all 112 pages. So maybe I’ll do that for you, and we can dive into this on future Syndication School episodes as it makes sense.

So yeah, thanks for tuning in. Make sure you download this report and at least go to the multi-family section of this report, or at least read the key highlights of the executive summary to get an idea of where we’re at as it relates to real estate in general… And more particularly commercial real estate, and even more particularly, multi-family real estate. This link will be in the show notes.

Until next week, make sure you check out some of the other Syndication School podcast episodes, download all those free documents that we have available as well at syndicationschool.com. Thank you for listening, as always have a Best Ever day, and we will talk to you tomorrow.

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JF2318: Red Flags to Avoid When Presenting New Deal to Passive Investors| Part 4 of 4| Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares the most common red flags that you should recognize before presenting syndication deals to potential passive investors. Not every red flag is a deal-breaker if presented the right way.

In this series, Theo lists 26 common red flags that stand in the way of finding investors and closing deals. To learn about the rest of them, make sure to check out the other three parts. 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome  to the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes, we’ve given away free resources, free documents; these are PDF how-to guides, PowerPoint presentation templates, and most of them are Excel calculator templates that you can use to help you along your apartment syndication journey. So make sure you check out our previous Syndication School episodes; all of those free documents are available at SyndicationSchool.com.

Today we’re going to conclude the four-part series that focused on some of the things to avoid when you are underwriting and then presenting your new deals to investors. So these are things that you want to proactively address, that your sophisticated passive investors are going to recognize or look for when reviewing a deal. So they might have a checklist of things in their mind, and say “Okay, I’m not investing in deals that have these red flags.” So my goal for this series was to present to you what those red flags are, so that you can avoid them whenever you are underwriting deals and presenting them to investors, or at the very least understand why they’re red flags, and then maybe there’s a reason why you’re doing this, and you can explain that to your investors.

Not every single one of these things is a deal-breaker. Some of them are. A lot of them are just things that investors are going to ask, and so they make you look more professional if you’ve done these things already, that way they don’t have to ask.

So let’s jump into where we left off, which is at number 17 on our list, which is in our category of the pro forma. So the proforma is going to be your income expense projections broken out by line items for each year of the hold period. And then usually, it’s compared to the T-12 and/or the T-3, which is the trailing 12 month of income and expenses, or the trailing 3 months annualized of income and expenses. So when you are putting together your proforma, here are some of the things that you want to think about.

The first that’s gonna be a red flag – and again, this is 17 on the list – is that there are large variances between your projections and the actual T-12 or T-3, and there’s no explanation for why there’s a big difference. So a T-3 and a T-12 column is gonna include the most up-to-date information on the actual income and actual expenses at the property. And then next to that is gonna be your year one projections, year two projections, year three projections, year four projections. So since it’s presented in that fashion, investors are gonna very quickly look down and say “Okay, let’s take a look at the T-12 expenses, and then take a look at the year one expenses… Oh, wait a minute. Why is May’s repairs so much lower in year one? I’m gonna mark that down and ask the syndicator. Why are taxes so much higher? Why is insurance so much higher?” Things like that.

So to proactively address that, have a column to the right of the proforma, or you can have a footnote section at the bottom of the data table of the proforma explaining all of your assumptions for every single line item. So for gross potential rent – why is year one projections way higher than the T-12? Well, see rent comps for this explanation.

Why is concessions zero, whereas they’re paying X dollars per year in concessions? Well, the plan is to burn off concessions, because they’d been giving concessions for whatever reason.

Why is vacancy higher year one, and then not as high in year two and year three? Oh, because we’re doing renovations, and we assumed a higher vacancy rate during renovations. Why is maintenance and repairs so much  higher in the T-12 than on the year one projection? See cap-ex budget for deferred maintenance investment. Things like that. So any line item. There should be an explanation, even if it’s just same as T-12, or same as T-3. Or based off of current expenses, based off of current income. And for any differences, there should be an in-depth explanation as to why that is. If that’s not there, it’s gonna be a red flag for your investors.

Now, more specifically on the proforma would be the real estate tax assumption. So whenever you’d buy a property, you take a look at the T-12 and they’re paying 100k/year in taxes. And that’s based off of the current assessed value of the property. Usually, what happens after you buy a property with a new  purchase price, the taxes are reassessed based on the new purchase price, and then go up, usually, assuming the property was sold for more than it was bought. When that’s the case, taxes are gonna go up, which is why you can’t just set the year one and on tax assumption to the taxes on the broker’s proforma, or the taxes that the current owners are paying. You’re gonna need to determine what the tax rate is in that market, and then create your tax assumptions based off of that and your projected purchase price.

Again, in some cases it might be the same, but especially in the past five years and now, taxes are gonna go up, because of how much values have increased over the past 10+ years. So if you are assuming that the taxes are the exact same, that’s gonna be a red flag to your investors.

The last proforma red flag, which is something that if you’re a Best Ever listener you’re not gonna be doing this, but it’s still possible… And that would be not having a reserves budget. Now, you’re gonna have your upfront reserves budget, which I talked about last week a little bit. This reserves budget is the ongoing reserves budget. Now, most lenders require this anyways, so it’s gonna be included regardless. If you’re getting a loan, you’re gonna have to include a reserves budget, because your lender is gonna require it each month… So just make sure that you’re including this on the proforma, so they know that this is an operating expense. To not include that to make the net operating income look higher, and in reality you’re spending extra tens of thousands of dollars a year to the lender for the reserves budget… So make sure you’re including that in there if you’re securing debt.

That one’s not that big of a deal, because as I said, you’re gonna have to do it if you’re getting debt… But if you’re not getting debt – you’re either buying it all cash or something, or the lender does not require this, make sure you’re still saving some of the cashflow each month into reserves.

Okay, the end is in sight… Next category is rental and sales comparable properties red flags. So whenever you are doing any deal, you’re gonna have sales comps. These are comparable properties that have sold recently, and use that to determine if you’re overpaying for the property or getting a discount… So the sales comp that sets the market rates for buying. And then rental comps are gonna be comparable properties that you use to determine what the market rents are at the subject property.

So some red flags when it comes to these types of properties would be number 20 on your list, which is not actually a comparable property. So in your investment summary you should include your rent comps and your sales comps, or what properties you used to determine your purchase price, in part. Or what properties you used to determine your rental rates. And these properties should actually be comparable.

So when we’re talking about the sales comparables, a comparable property is gonna be a property that is similar to the subject property in its current condition. So not in its value-added condition, when it’s done with your value-add program, but in its current condition what are similar properties, that are in the same condition, that have sold. They should offer similar types of amenities; it’s not gonna be the exact same, but if a comp has a clubhouse and a pool and a fitness center and a Amazon package center, and free parking, and a barbecue area and a dog park, and then the subject property has none of those things, it’s not a sales comp.

This should have been sold within at least the past couple of years; It shouldn’t be a sales comp from ten years ago. So those are the three main criteria for a sales comp. For the rental comp, the comparable property should offer similar types and quality of amenities as the subject property once it’s stabilized and upgraded. So unlike the sales comp, this rental comp should be the final product. So once you’re done doing all of your upgrades to the property, your value-add business plan is completed, what’s that property gonna look like at that point – find properties that look like that. Similarly for the interior; it should be the same as well.

So the quality and types of upgrades to the amenities and the quality and type of unit interiors should be the same, or at least very, very close to being similar. And then the units at this rental comp property should have been renovated and rented within the past few years at most, ideally more recently… Because you don’t want a property that was fully renovated five years ago. You want a newly-renovated property, because you’re is gonna be newly renovated.

And then something else that’s important too would be that the fees that are included in the rent or excluded from the rent are the same. So if you plan on billing back utilities to the residents, the rental comps should also bill back utilities. So these are what make a property a comparable property, and if they do not meet this criteria, it’s a red flag.

Number 21 on our list is going to be that the market leader that your subject property that you’re buying, rental premiums are going to make it the market leader in rents, or the purchase price is going to make it the highest sales price per unit in the entire market. So assuming that you’re using the comparable properties, then in order to determine your rent premiums, you’re going to take the average rent per square foot of the rent comps, and then the price that’s the average sales price per unit, and get an average number. And then for the rent comps and for the sales price, based off of that average number, you’re gonna determine a rental rate assumption, as well as a fair market offer price.

Now, you should not be assuming that you’re going to achieve the same rental rates as the market leader, or rental rates that are above the market leader. Similarly, you should not have the deal under contract for a price per unit that is equal to or above the most expensive property that sold recently. Instead, they should both be closer to the average, or even better, below the average. So the sales price – that means you’ve gotten the deal below market value, and for the rents, it means you’re being very conservative in your assumption. If you are the market leader in rents or you’re the market leader in sales price, that’s a problem; that’s a red flag that your investors are going to be concerned over.

And  then last in this category would be that the comparable property is not actually near the subject property. So we talked about the material characteristics of the property, and we also need to talk about the location where the property is.

For both the sales comps and for the rental comps, they need to be near the property. And then the bigger the market, the closer it needs to be. If you’re in a rural market, in the middle of nowhere, it might be hard to find a comparable property within a mile of your subject property, so that’s fine. Or maybe you’re in a very unique part of a major market, that there aren’t a lot of comps on the water, on a lake, and there aren’t a lot of lakes nearby, so you need to find a property on a lake further away, or maybe even in a similar market across the country… But if you’re in a big market like Dallas, Chicago, or any other major market, it should be very close. It might even be on the same street, but at the very least, it should be in the same neighborhood, and then if not, in the same submarket. But if you’re investing in Dallas, you shouldn’t have one comp that’s in Fort Worth, another one that’s in Garland, Texas, and maybe another one that’s way out in a rural area somewhere. If that’s the case, if they’re all over the place, it’s a red flag.

Alright, the last section is gonna be the other red flags that don’t really fit any of these categories, but they’re still going to be things that you want to avoid when you’re creating your investment summary in particular. Number 23 on the list is that it’s a short investment summary. So your investment summary needs to be long, because it needs to proactively address any potential question that one of your passive investors might ask. The more information you include in your investment summary, the better. The less questions that the passive investor has to ask you, the better for you, because it saves you time, plus it shows that you’re a professional, experienced person that knows what information to include… Which means that your investment summary shouldn’t be ten pages long; it should even be longer than about 20 pages long… But anything less than that is a huge red flag.

24 is going to be not having a Risks and Disclosures section. Since you are raising money, you are working closely with your securities attorney, and in order to make sure you’re going by the book, there are lots of risks and disclosures you need to provide to your passive investors in that private placement memorandum.

Now, the investment summary is technically like a marketing piece, so you don’t need to include [unintelligible [00:16:32].17] but you should. That shows that you’re a professional, that shows that you’re working with your experiences securities attorney, it shows that you’re transparent, which overall builds trust with your investors.

25 may seem minor, but it’s still a pretty big deal, which is typos. So you’re dealing with hundreds of thousands of dollars, millions of dollars of people’s capital. If you can’t review your investment summary to make sure that there aren’t any typos in it, that shows that you don’t pay attention to details, it shows that you’re maybe inexperienced and you lack professionalism, which might be a problem.  Now, if you’ve got one typo in a 100-page document… But if you’ve got typos on every page, it’s a pretty big deal.

And then lastly would be not including any case studies. The case studies, assuming you’ve done deals before, will explain the deals you’ve done, and that should include your return projections, the actual projections, and if they sold or not. That will give your investors an idea of how aggressive you are on your return projections for this current deal, based off of if you’ve exceeded, or met, or under-delivered on previous deals. Plus, it shows that you’ve done this before and this isn’t your first deal.

So assuming you’ve done a deal before, make sure that those deals are included in your investment summary. But hopefully, they’re good deals. If they’re not, make sure you have an explanation as to what happened.

So those are the 26 red flags. I’m gonna quickly go over them, and then we’re going to wrap up this four-part series.

So the number one red flag, stagnant or shrinking population. Number two, stagnant or shrinking rental rates. Number three, low absorption rate. Number four, no neighborhood or submarket-level data. Number five, population demographic doesn’t match the property. So those are all the market-related red flags.

For the business-related red flags, number six, the property doesn’t match the business plan, and number seven – it truly isn’t a value-add deal or it truly isn’t a turnkey, or it truly isn’t a distressed/opportunistic deal.

Next, under projected returns red flags we’ve got 8) you’re guaranteeing a return, and 9) you are not providing a sensitivity analysis.

Under debt, 10) the total loan term is less than two times the business plan. 11) There’s no cap on the adjustable interest rate loan, and 12) you are including the refinance or supplemental loan proceeds in the return projections.

Under the purchase and sales assumptions red flags we’ve got 13) the exit cap rate is equal to or less than the in-place cap rate. 14) there’s a very aggressive revenue growth assumption. 15) you’re using the same vacancy rate during and after renovations, and 16) no contingency cap-ex budget. And 16.a) would be not having an upfront operating reserves budget.

Under proforma red flags, 17) no explanation for variances between the proforma, so your projections, and the T-12 or T-3, what’s actually going on on the property. 18) Real estate tax assumptions is the exact same as the T-12 taxes, and 19) no ongoing reserves budget. Under rental and sales comparable properties, which we’ve talked about today, is they aren’t comparable properties. 21) You’re assuming you’re gonna be the market leader in rents, or you have a property under contract at the market leader’s sales price per unit, and number 22) comparable properties are not nearby the property you’re buying.

And then the other red flags is 23) a short investment summary, 24) no Risks/Disclosure section, 25) typos, and 26) no case studies.

So those are the major red flags, 26, to look out for, to not do when you’re underwriting and creating your investment summary. Now, again, I said earlier, not all these are gonna be complete deal-breakers. One typo is not gonna result in you not doing the deal. Some of these other ones, like maybe not explaining every single item on the proforma… But most of these are major red flags, so make sure you’re avoiding these when you’re underwriting and when you are presenting your deal to your investors.

Thank you for tuning in. Make sure you check out parts 1-3 – this is part 4 – of the 4-part series, where we go over the red flags to look out for, the holes to poke in your underwriting. Besides those episodes, make sure you check out some of the other episodes we have on the how-to’s of apartment syndications. Download our free documents at SyndicationSchool.com.

Thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2317: InvestNext With Kevin Heras

Kevin is the co-founder at InvestNext, a software that modernizes the way real estate syndicators raise and manage capital. Prior to funding InvestNext, he was employee #2 at the college career network startup, Handshake, where he contributed to initial product development efforts. Handshake is currently valued at over $400 million and it is the leading college-to-career recruiting platform in the nation. Today, Kevin is honored to be part of the season team of software engineers and a real estate professor.

Kevin Heras Real Estate Background:

  • CEO & Co-founder of InvestNext, software that modernizes the way real estate syndicators raise & manage capital
  • 5 years of real estate experience
  • InvestNext platform has hosted 230+ syndications worth over $1 billion
  • Based in Detroit, MI
  • Say hi to him at www.investnext.com 
  • Best Ever Book: Crossing the Chasm

Click here for more info on groundbreaker.co

Best Ever Tweet:

“The benefit of InvestNext is being able to manage and raise your capital” – Kevin Heras


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Kevin Heras. Kevin, how are you doing today?

Kevin Heras: Good, Theo. How are you doing?

Theo Hicks: I am well, thanks for asking and thanks for joining us. I’m really looking forward to this conversation. We’re gonna talk about Kevin’s InvestNext apartment syndication/real estate syndication software platform. So he’s the CEO and co-founder of InvestNext, a software that modernizes the way real estate syndicators raise money and manage capital. He has five years of real estate experience, and the platform has hosted over 230 syndications worth over a billion dollars. He is based in Detroit, Michigan, and you can say hi to him at InvestNext.com.

Before we get into what InvestNext is, do you mind telling us some more about your background and then what you’re focused on today?

Kevin Heras: Sure thing. To give context on InvestNext – as you mentioned, real estate investment platform geared towards your private network of investors, manager investors, on that platform. But ahead of InvestNext I was kind of going through the corporate track. I worked at a consulting firm and we implemented CRMs, ERPs, accounting systems and so forth… So I got exposed to a lot of different enterprise-level clients, as well as even real estate clients ahead of that… So that was kind of my systems background.

Ahead of that, really one of the most formative parts of my life was actually my time at Handshake. Handshake, for context, is basically what you might call the LinkedIn for college students. So it’s a career network. I was involved there when it was just a dorm room founded startup. Today they’re over a half billion dollar company. I was employee number two, working with the co-founders, building out the product, going to university career centers, getting shut down, going back, building more… The rest is history.

That being my third year of college was pretty formative in what I’m doing today, and I knew at that point that I really wanted to be involved in the tech space; I wanted to build something meaningful that solved a systemic problem.

Fast-forward to a few years back, when I met my co-founder, Michael Gisi; he was working on this interesting side-project, working for a real estate investment firm that was really just trying to streamline the way they interacted with their investors, they were they reported and communicated to them. It was a tool that was meant to be a one-off tool for that firm, but we got people knocking on the door, saying “Hey, would you mind deploying something like this for our group?” And we’d been talking about it for a while, and that was kind of the a-ha moment, and pretty much the founding moment of InvestNext. We realized at that point that there’s a massive gap in this space, how people go out and they syndicate and manage their capital partners and investors. From that point on, the rest is history.

Theo Hicks: Sure. And then InvestNext – was that five years ago when it started?

Kevin Heras: Yeah, proof of concept, product – that would be five years ago; we were really just getting into this space, exactly.

Theo Hicks: Okay. Are you a coder?

Kevin Heras: I’m on the product team. I stay away from the code. I did the design portion of it. I let Michael and his team work through that stuff, but I am heavily, heavily involved in the side of the workflows and the product.

Theo Hicks: So he was essentially working for an existing company, created something for them, and then other people were asking for the same things, so that’s where you identified the need.

Kevin Heras: Exactly. It was pretty serendipitous from that standpoint.

Theo Hicks: How did you meet the co-founder.

Kevin Heras: I think back to how this all came together, and really, at my last company where I worked at, it was an indirect connection. One of my customers said “Hey, my good friend’s working on a side project. Maybe you guys might be able to connect, or interact on this.” So there was really no presumption on what we’d be working together, or especially on what we’d be  building.

He just happened to know that I had experience with Handshake, I’d been in the startup world, and perhaps I could lend some advice. So an indirect connection, and then we really just hit it off from that point.

Theo Hicks: Nice. I always like hearing about how partners met each other, because it’s traditionally pretty random.

Kevin Heras: It really is… And again, something I always think back to is just the serendipity of it all. You really just never know the doors that you can keep open, and you never know who you meet… So absolutely.

Theo Hicks: Exactly. Perfect. So let’s talk a little bit about InvestNext now. I have experience with syndications, so in my mind, when it comes to investors, it’s really finding the investors, and then it’s getting the money from the investors, or raising money for a particular deal or for a fund, and then the investor relations part. Obviously, your business focuses – from what I’m understanding – on helping with the actual process of raising the money for a particular deal or  a particular fund. Then once that deal is closed on, helping with the investor relations portion.

Let’s start with the raising money part first, and then we’ll talk about the investor relations second. So how does InvestNext help the syndicator raise money? You do help them find more money, but help them manage that process.

Kevin Heras: Yeah, so the concept around this is that whether  you’re a first-time syndicator or you’ve already done this many times, our intent with the platform is you have a single workspace to manage the very beginning lifecycle of that syndication to start with. So that’s everything from you have a CRM, of course, to manage prospective investors, capital partners, just people that you are interacting with. That ties in directly into what we call an online deal room. So when you’re ready to go live with your offering or your deal, it’s really housing that digital tear sheet, that presentation. You can send it out to your groups, they can view that full offering, and then of course, commit online, run the entire transaction, subscription docs and everything through the actual deal room.

So that’s the big, major component to begin with, is just streamline that entire initial transaction with the investor, and of course, saving you time at the end of it all.

Theo Hicks: So it has a CRM that I have to track all my investors that I have. Would that also be like “Here’s ones that are potential, and here’s ones that have invested, here’s how much they’ve invested, and here’s the deals that they’re in”?

Kevin Heras: Exactly. It’s really being able to manage your entire pipeline of prospective capital. And again, it’s from the very onset; we work with groups that are doing their first deal, and they know that “Okay, perhaps we may not land on something for the next few months”, but at the very least they wanna start building up that pipeline, building those relationships. So they’re just tracking those relationships in the CRM, tracking their pipeline. And then of course, when the deal hits, they put together all their collateral, all their documents in the deal room, and of course, when they’re ready to actually present that, it’s as easy as sharing that.

Theo Hicks: So you said there’s an online deal room. So I have a  deal… A big thing is obviously keeping your investors up to date on where you’re at, when are funds due, when do you need to submit the documents, getting that information to them. So is there some sort of email service you’re connected to, that I can say “Okay, I want to send an email every week to remind them about funding. People who have funded will get one email, people who haven’t funded will get another email.” Is it capable of doing all that stuff, too?

Kevin Heras: That’s exactly it. So when you go live with the deal — first and foremost, what we wanna present to the investor is… Call it that kind of single source of truth. So they can go back to the deal room and say “Hey, what’s the status of anything that’s happening?” And within that deal room they can see all the updates of what’s been going on. So that’s kind of the inbound approach, so the investor knows — instead of digging through their email chain and looking for what was the last update, it’s all in one place.

The second part to that is yeah, there’s the intelligence built behind this, so that when the sponsor goes out, they market the deal, they have all their commitments in, they can transact the capital, transact the funds… And of course, who’s left in the previous sequence to that. So then from there, there’s intelligent reminders to follow up with those investors. That’s a very common scenario that we see, especially when you go on a capital  raise.

Theo Hicks: As an investor, how am I getting access to this?

Kevin Heras: Multiple ways. Different groups have different approaches to how they’re gonna interact with their investors. Some groups are very “by invitation only.” Of course, this can live behind a security layer that you can only be granted access to the deal room, and of course, once you’ve been verified, you can go in to view the deal. Other groups – call it maybe like a 506 open format fundraise; you can literally open it up to the internet as a whole. So varying groups do varying open access to the deal room.

Theo Hicks: So would I need to share a link with my investors, or would I input their email into InvestNext and then they’d get the “Here’s  how you set up your account” email from InvestNext?

Kevin Heras: Both ways. Basically, imagine if you’ve had a mass communication out  to a group of investors – you could actually grab that shareable link; you can say “Hey everyone, feel free to access the deal room right at this link.” And of course, when they jump in, they can view all the details there.

On the other side of that, whatever you wanna do with that – you can post it on your website, you can send it out… And of course, back to that “by invitation only”, you can select a certain group of investors and directly send them an invitation to that deal room.

Theo Hicks: Perfect. Okay, so I think we hit on that front part pretty well… So deal is closed, investors get the email that the deal is closed, and then now let’s talk about the investor relations aspect. So how does InvestNext help me manage my communication, and then getting the proper information to my investors about the deal?

Kevin Heras: That ties in directly into what we call the investment part of the product. First of all, that’s all connected. Once you’ve actually received those contributions, those investments, that’s now being tracked on the cap table. You can now set up your waterfall structure around this. So it’s a full drag-and-drop builder, exactly as you see it in your operating agreement; you model it right in the system, and then moving forward, when you’re running your distributions, whether that’s monthly/quarterly schedule, that’s being all run through the system. Investors are getting paid out.

On the flipside of that, on the investor relations side, of course investors gain access to their portal, they can view their full portfolio with you, distributions to date, return metrics etc. So that’s where we now carry into the investor relations part.

Theo Hicks: What about reporting? So do I upload my own reports? Am I inputting individual line items for data? How does that work?

Kevin Heras: One of two ways that can be done. Individual investor reporting… Since InvestNext houses the entire investor transaction data – so again,  contribution amounts, distributions – we are now the calculation engine for a lot of the investor performance metrics. So maybe you’re sending out a quarterly batch of statements out to your investors… You can generate those in the system; those can get placed outbound to the investors. Or the investors can log in at any point, as they would with their Charles Schwab account, they can view those in live… And then the other side of that is if you have any sort of property-level reporting or any sort of asset-level reporting, we’re working through integrations with systems.

So if you have an asset-level — we’ll call it your standard property management software, we can actually connect right into that and marry that data into your reporting. That’s especially useful for groups that, again, maybe at scale you’re working with multiple property managers, and each one of those may utilize a separate system. So what we need to be able to do is connect the data from each one of those systems and then aggregate those up both for internal reporting, as well as external reporting for investors.

Theo Hicks: So you’re saying that InvestNext can connect to ABC Property Management Company’s software, so that you’ll have instantaneous access to the reports for my property…? Like rent rolls, profit and loss statements, and things like that.

Kevin Heras: That’s exactly it. We’ve facilitated many of those integrations in the past, and that’s really the vision around all this stuff – again, we aggregate the very asset-level data, and not only for the sponsor, but for the investor, that’s now presenting an added layer of transparency, exactly.

Theo Hicks: And then the last question – so not sending distributions, not sending the reports, but sending monthly or quarterly update emails with specifics on current occupancy rates, and renovation updates, things like that… So would I need to do that somewhere else, and manually type in my explanations of what’s going on, or is there some sort of automation for that as well?

Kevin Heras: Yeah, so we have this — and maybe I’ll get a little into the nuts and bolts or techy about this, but we have this concept known as merch variables. The idea here is that when you’re drafting up a new communication, or even in our system, what we call a post, you can actually carry in as part of your natural language, as you’re typing out your summary or so forth, you can actually include metrics that you can embed into that paragraph line. So it could literally pull metrics in from the system that are already being automatically calculated. Of course, you can set that as your template moving forward when you’re doing your monthly or quarterly cadence reporting… And again, two different formats, as I just mentioned.

One way is I’m gonna send out a mass communication or mass email out to my industrial park investors. Of course, the system already knows who your industrial park investors are, it knows their actual reporting metrics… But then the other side of that is we have this concept of posts. When you do that, you basically can post an update to the investor portal; the investor logs in or they can receive that on their phone and they can view it in a rich-format text, as you would an online blog.

So it’s kind of the historical concept where maybe you sent out a mass email, you attached a PDF or an Excel, just kind of saying “Hey, this is what’s going on.” It’s a bit more of a richer format, where you can even embed YouTube videos or whatnot.

Theo Hicks: Like pictures, and stuff?

Kevin Heras: Yeah, exactly.

Theo Hicks: This is very neat. Alright, Kevin, what is your best real estate investing advice ever? Or your best advice ever for running a business?

Kevin Heras: I always say “Focus.” It seems pretty standard, but for me personally, focus has been an incredible paradigm to go after. Just understanding that when you’re building something, it’s really about becoming really good at what you do… And it’s, again, just staying focused on the core problem you’re trying to solve. And again, that’s from the paradigm of a problem-solving platform and a software. So focus is my big statement here.

Theo Hicks: Perfect. Alright, Kevin, are you ready for the Best Ever Lightning Round?

Kevin Heras: Sure thing.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:17:26].14] to [00:18:17].21]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Kevin Heras: I’d say one I’ve revisited is “Crossing the chasm”. Again, primarily related to product building, product development, but I think it’s extremely applicable to any business. So it’s just about as you’re getting started, it’s being able to handle that initial growth, and at the same time it’s being able to keep yourself disciplined on what the problem is that you’re trying to solve. You’re not gonna build a business that solves everyone’s problems. They use the landing beach analogy; when you land on your beach, focus on that area, really own that area, and then of course, later on you can always expand your business. So… Crossing the chasm.

Theo Hicks: If your business were collapse today, what would you do next?

Kevin Heras: I would definitely have to ask myself what led to the point that the business collapsed. After that, it’d just be a matter of reflecting on what led to that moment, what inflexibility caused the business, unless some act of God… But if the business fell apart, I’d say I’d still be in real estate, I’d still be solving the problems in that space, because for us I think it is truly the final frontier for a lot of the stuff that’s happening in the world economy around real estate.

Theo Hicks: Besides this particular need of apartment syndicators needing technology for managing investors, what’s the other biggest pain point or biggest need that could be solved by tech that you see in real estate?

Kevin Heras: We really think that the entire transaction of real estate still  is yet to be disrupted, because just the process of acquiring real estate, all of the stakeholders involved, we have literally barely  scratched the surface on that side… And I think that’s very much so open for disruption. So the whole acquisition side is a very interesting problem to solve.

Theo Hicks: What is the best ever way you like to give back?

Kevin Heras: As you stated earlier, we’re a Detroit-based company, and we’ve made it our internal mission — Detroit is our home, and when people think about Detroit, you get this sense of “It’s seen better days/It’s grungy” and whatnot… And it really is, for us — I’m a transplant to this city, I’m not a Detroiter, but I’ve moved here five or so years ago and I’ve seen the place rebuild itself. A lot of big tech companies moving in; they’re seeing the opportunity. So our focus is hiring local talent, as well as just giving back to the local community here. So that’s kind of our mission locally.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Kevin Heras: Best ever place – you definitely can reach me directly at my email, at Kevin@investnext.com. Of course, you can hit me up on the website; there’s a little chat bubble and you’ll likely see my mugshot on there. Likely me or one of the people on our team that will get to you… But yeah, kevin@investnext.com is the perfect place.

Theo Hicks: Awesome, Kevin. Thanks for joining us today and walking us through the capabilities of the InvestNext platform. Very fascinating. We’ve talked about, first of all, how you met the co-founder of the business, and how it was kind of just random, and keeping in mind — this is pretty common, that I get people who have partners and just realizing that really any relationship that you have, or any action that you take could lead randomly down the line to a deal, to a partnership… You never really know. So keeping all of your doors open is always a smart play.

And we talked about the two main areas that are addressed by the InvestNext software – the raising money and the investor relations. And really, it covers everything that I can possibly think of, that is involved in the raising money part of it, from when you first touch someone who’s interested in investing, to the deal closing, and then from the investor relations standpoint, once a deal is closed, until the deal is sold. It’s seems as if it’s capable of covering all of that in one centralized location.

So anyone who’s interested in raising money, or has raised money, or is currently raising money, definitely check out this InvestNext.com. So definitely check that out. I’ll be checking it out as well after this interview.

Kevin, thanks again for joining us. Best Ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2311: Red Flags to Avoid When Presenting New Deal to Passive Investors| Part 3 of 4| Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares the information about the purchase and sale red flags that can turn potential passive investors away from your syndication deal.

In this series, Theo lists 26 common red flags that stand in the way of finding investors and closing deals. To learn about the rest of them, make sure to check out the other three parts. 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to another edition of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes there are free documents for you to download, especially for the first batch of episodes we did, where we walked through the entire syndication process in extreme detail, from A to Z; from being a complete noob, to selling your first deal.

So all the documents that were given away in that period are something that can help you on each step along the way in the process. And then every once in a while we give away free documents for episodes where we go into more detail on those steps… But those are all available at SyndicationSchool.com.

So we are in the midst of what was originally a three-part series, and depending on how long we go today, it might be turning into a four-part series, about some of the red flags when you are presenting a deal to your investors/originally underwriting your deal.

So these are things that a sophisticated passive investor is going to very easily recognize when they’re reviewing your deal as a red flag, and will either ask you what’s going on  here, to which you should have a good answer, or they just won’t invest at all, and you won’t hear from them, at least for that deal. So these are things that you want to avoid at all costs.

In part one we started out by talking about the market red flags. These would be 1) a stagnant or shrinking population, 2) a stagnant or shrinking rental rates, 3) a low absorption rate, 4) not including an analysis on the neighborhood or the submarket that the property is located in, but only the overall MSA, or the city, or even the state… I don’t think I’ve ever seen someone just say “Hey, I’m investing in this property in Dallas, Texas. Look how great the state of Texas is”, and that’s it. But I’m sure it’s possible.

Number five would be the population demographic doesn’t match the property. And then in part two we began by talking about business plan red flags – the property class doesn’t match the business plan – and then number seven would be that it’s not actually a value-add, or it’s not actually a turnkey, or it’s not actually a distressed or opportunistic type deal. It’s something else.

And then we talked about projected return red flags. So number eight overall would be guaranteeing a return, or guaranteeing anything to your investors… And then number nine would be not performing a sensitivity analysis, which is when you adjust different assumptions you’ve had –  the best-case scenario and worst-case scenario – and then present the best case, the worst case, and the baseline scenario to your investors.

And then we concluded part two by talking about debt red flags. So this was number ten, a total loan term that is less than 2x the business plan. So that would essentially be a turnkey when you plan on selling for value-add, and distressed when you plan on being done with all the renovations. Debt two times that length.

Number 11 overall was not buying a cap on an adjustable interest rate loan, and then number 12 would be including the refinance or supplemental loan proceeds in the return projections to your investors.

So parts one and two were  the first 12 red flags. We’re going to knock out as many as we can today in part 3, and then as I mentioned in the beginning, potentially go into a part four to conclude.

For now, let’s go on to part 3, but make sure you check out part one and part two, where I go into a lot more detail on those first 12 red flags that I talked about.

To kick off part three, let’s start talking about the purchase and sales assumptions red flags. This is something that [unintelligible [00:07:37].24] but again, we’re looking at this from the perspective of your passive investor – what are the things that you typically present to your passive investors, that you wanna make sure are conservative.

Now, on your end, we’ve talked about at length how to underwrite a deal properly, so we’re gonna go over some of the main assumptions that you make, and what would be considered a red flag or a hole in your underwriting, that a passive investor will definitely identify when reviewing your investment summary, because this information is either included and a red flag, or it’s missing, and is therefore a red flag.

So again, these are the assumptions you make when you’re underwriting a deal for the purchase and for the sale of the property. The first one, potentially the most important one – because this has the biggest impact on the returns – is going to be the exit cap rate. So the red flag would be the exit cap rate equal to or less than the in-place cap rate. So when you’re underwriting the deal, you input all your project assumptions; you input your proforma for every single year, what you think your operating income is going to be, and base off of that you hit the 7%, 8%, 10% preferred return to your investors. And if you’re doing a value-add or opportunistic deal, then once you sell, based off of that forest appreciation, based off of that value added via the increased net operating income, now that new year 5 (or whatever year) net operating income is going to be used to determine what the sales price is going to be.

Maybe you project to have a 50% return at sale. But if you change it change the cap rate just a little bit, that 50% return might be a 40% return, or a 30% return, or a 20% return. Or a negative percent return, depending on how high the cap rate is and how high the net operating income is.

So when you buy the property upfront, the in-place cap rate is set based off of the purchase price, and then the in-place net operating income. Or sometimes it’ll be based off of the purchase price, and then the stabilized net operating income. So essentially, what cap rate are you buying the property at?

If it’s  a really distressed deal, sometimes the in-place cap rate will be based on what the market cap rate is for similar deals that recently sold, based on the final product. So if you plan on renovating up to a class A, then you wanna look at other class A product at that time to see what cap rate they’re trading at. That’s the in-place cap rate – the cap rate you buy the property at.

Now, on the backend you want to estimate to the best of  your ability an exit cap rate. That is the cap rate in this future time, that will be used to determine the value of the property. Now, the red flag here being that you assume that the in-place cap rate is the exact same as the exit cap rate. Or you assume that the exit cap rate is less than the in-place cap rate, which is even worse… But just assuming that, in the first scenario, the market is the same at sale as at purchase; the second scenario, where the exit cap rate is less than in-place cap rate, you’re assuming that the market is better at sale than at purchase, which is totally possible.

It’s totally possible that you buy during a recession or you buy at a time where cap rates are really high, and then five years later the cap rate is actually lower. So not only do you get the value from the increase in net operating income, but you also get the increase in value from the reduction in the cap rate, because there’s an inverse relationship between the value and the cap rate.

But what if the cap rate doesn’t go down? What if the cap rate goes up? Well, then the return projections that you provided to your investors are gonna be way off in the wrong way. As opposed to saying “Okay, right now cap rates are 5%, and it’s possible the market keeps chugging along, or it’s possible that things get better… But to be safe, we’re assuming that the market is actually going to be worse at sale.” So a rule of thumb would be 0.1% every year. So if the in-place cap rate is 5%, you’re selling at year five, then you’re assuming an exit cap rate of 5.5%. Some people will go even higher than that, some people have a different way of calculating it, but in general, that’s a rule of thumb, 0.1% every year. That way, if the cap rate is still 5%, or 4.75%, or 4,5%, then your returns are off, but they’re underestimated, as opposed to overestimating your returns.

So a huge red flag is when you’re underwriting, you’re assuming that the exit cap rate is going to be better than the in-place cap rate. And then it’s also a red flag – still big, but not alarm bells going off as DefCon20 would be if the exit cap rate is equal to the in-place cap rate. So that’s number 13.

Number 14 is another assumption that you make, which is the revenue growth. This is separate than if you’re doing a value-add, or a distressed play, where you are renovating the property, and then renovating the interiors, and then you are raising rates based off of that. I’m talking about the natural revenue growth that you’re underwriting into the deal based off of the various rental forecast predictions and inflation.

Traditionally, apartment syndicators will assume a natural revenue growth of 2%-3% every year, and the same thing for the expenses. Now, sometimes you might come across a deal where you’re reading the OM, and the broker is telling you that “Oh, we’re assuming a 5% revenue growth every single year, because the past five years rents have grown by 10% every year. So we’re being conservative in saying 5%.” Well, just because you see that, as a syndicator that should be a red flag; when you’re [unintelligible [00:13:05].13] similarly a passive investor who is reviewing your deal will see that as a red flag.

So if you say that rents have grown by 10% every year for the past five years, and they’re projected to grow by 10% every year for the next five years, and you’re being conservative and assuming a 5% revenue growth every single year, you’re not being conservative. You don’t want to be aggressive with your revenue growth, for similar reasons as exit cap rate – what if those projections are wrong, and it grows by 3% instead of 5%? Then your returns are way off in the wrong direction, as opposed to if it actually ends up being 5% and you assumed 2% or 3% – well, there you go. Icing on the cake for your investors.

So make sure you’re being smart with these revenue growth assumptions and you’re not basing them off of forecasts or basing them off of the standard 2% to 3%.

Number 15 is going to be about the vacancy rate assumptions. This is assuming you’re doing a value-add or a distressed business plan; a red flag would be having a vacancy rate that’s the exact same the entire time. So year one, year two, year three, year four, year five, 5% vacancy rate, regardless of what you’re doing to that property. [unintelligible [00:14:16].03] that’s not actually the case, because when you’re doing a value-add deal, you go in there and just by taking over the property, and you start doing your exterior renovations right away, some of the residents are going to get the hint that “Okay, this new owner’s in here, they’re making the property look nicer… They’re probably at some point gonna do this to the units too, and I’m probably not gonna be able to afford that new rent, so I’m gonna move out. I’m gonna month-to-month lease, and I’m going to give my notice, or I’m going to just skip and just disappear, or somewhere in between. Or at the end I’m just gonna leave and not renew.”

So from  that you’re going to get some skips, and some people leaving, so that’s going to increase vacancy… And then once units begin to be turned over, as opposed to just going in there and maybe slapping on a new coat of paint and redoing the carpet and putting  a new renter in there, which might take a week or two, you need to go in there and renovate the entire unit. So it’s gonna be vacant longer.

So because of those reasons, you may even force vacancy up, where you go in there and everyone who’s on a month-to-month lease, you’re giving them a notice to vacate. So because of all these different reasons, when you’re doing a value-add business plan you want to assume a higher vacancy rate during at least the first year, maybe even into the second year.

And even if the current vacancy at purchase is 5% or 3%, it doesn’t matter. If you plan on going in there and doing renovations, expect tenants to leave, and expect units to be vacant longer. So you need to account for that in your underwriting.

So if you have in your investment summary that you plan on renovating 100% of the unit in two years, and the vacancy is gonna be 5% during those two years, as well as 5% afterwards, that’s a problem… Because you need to be assuming a higher vacancy rate – 8%, 10%, maybe even higher, depending on the market occupancy during your renovations. That way, if renovations go faster, if no one skips, if everyone’s willing to stay and just have their units renovated while they live there, and the vacancy ends up being 5% or lower, that’s great. But again, if it’s not, then you’ve already accounted for that in your returns to your investors.

The last assumption we’re gonna talk about would be your cap-ex budget. So even if you’re doing a turnkey deal, there’s gonna be some cap-ex expense. For the turnkey it might be very minor; maybe you repair a couple of small things, or maybe you’re just going to rebrand into something new, or whatever…

So there’s usually gonna be a cap-ex budget for everything, and then obviously for value-add it will be even bigger, and for distressed it will be the biggest. So this is important for all business plans, but probably the most important when you’re doing any sort of renovations.

So this budget is going to include – let’s just take a value-add, for example. It’s going to take all the costs to update the units, to replace whatever you’re replacing, to add the new stuff, and then the labor costs. Similarly for the exteriors, or any deferred maintenance – you’re gonna have the materials and labor costs. Any amenity upgrades – materials and labor costs.

You don’t wanna stop there though. You wanna also have a contingency for if something goes wrong. Again, the heavier the value-add, the more important this contingency budget is, because you’re not going to 1) know every single thing that’s wrong with the property before you buy it. 2) You’re not gonna have the actual quotes from contractors until after you buy that property. So you can get estimates from contractors, you can have an estimate based off of previous deals, but at the end of the day it’s still a pretty big unknown. So give yourself a 10%-15% buffer, which means that you have a 10% to 15%  contingency budget, so that you say “Okay, I plan on spending a million dollars on all these different things, but I don’t really know exactly how much this contractor is gonna charge, and maybe they’re breaking into a few walls and they might find issues back there… I’m gonna have an extra 150k just in case.” If it’s not used, that money goes back to your investors anyways. But if you need it, then it’s there to use.

So a big red flag is if you don’t have a contingency budget included in your budget. 10% to 15% is pretty normal… And again, this is on top of any operating reserves that cover any sort of shortfalls at the beginning of the business plan because of vacancies, and lower rents, people leaving, and things like that.

So I think we’re gonna stop there. We’ve kind of talked about that one a lot. We’re going to complete in part four the remaining red flags. We’ve got ten red flags to go. So we’re going to talk about red flags on your proforma, and then red flags in the rental and sales comparables.

So we’re kind of going in order of how these variety of things appear when you’re underwriting, as well as in the investment summary.

So that concludes this episode. Make sure you check out parts one and two, where again, we talked about the red flags as it relates to markets, business plans, and the projected returns, and the debt. Today we talked about the purchase and sales assumptions used when underwriting, and the next episode, part four, we’re gonna talk about the proforma, the rental/sales comparable properties, and then other red flags that couldn’t really fit into any of these categories.

Until then, check out our other episodes, download the free documents… Have a best ever day, and we will talk to you tomorrow.

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JF2304: Red Flags to Avoid When Presenting New Deal to Passive Investors| Part 2 of 4| Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares information about the red flags that can cost you the potential passive investors’ interest and turn them away from the deal.

In this series, Theo lists 26 common red flags that stand in the way of finding investors and closing deals. To learn about the rest of them, listen to the other three parts. 

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Nathan Britten. Nathan, how are you doing today?

Nathan Britten: I’m doing great. Thanks for having me on, man. I appreciate it.

Theo Hicks: No problem. Thanks for joining us. A little bit about Nathan, he is a full-time insurance broker and a part-time real estate investor with five years of real estate experience. His portfolio consists of two flips and one rental. He is based in Oklahoma City, Oklahoma, and his website is www.pi-ins.com/nathan-britten. Just go to the show notes and click on his website. It will be easier that way.

Nathan Britten: [laughs] Yeah, I’m sure everybody’s writing that down, letter for letter.

Theo Hicks: Alright, Nathan, do you mind telling us some more about your background and what you’re focused on today?

Nathan Britten: Yeah. So I graduated from OU in 2014, with a degree in entrepreneurship, and that’s not a very common degree, but generally speaking, it’s kind of general business… Essentially, we started companies basically each semester and pitched to investors and banks and tried to prove viability, stuff like that. So that gave a lot of good background and training into sales and general business. After I graduated, I started a CNG conversion business with my dad, which was converting vehicles to run on natural gas. We sold that about two years once oil and gas was going down, and got out of that.

I knew of a guy who worked in insurance in Oklahoma City, and I was just kind of exploring all my different options, and interviewed with them. It was kind of the entrepreneurial spirit of being able to create your own book and go out and build your own thing, but kind of under the scope of a company, but haev a lot of freedom and a lot of freedom to do whatever you do in a great business. So with that, I got into running a lot of property for insurance, a lot of single-family investors, large schedules, apartment schedules… And being in Oklahoma, that’s a little bit more challenging than other places to ensure things. So with that, I met a lot of good contacts, I got involved a lot in real estate investing groups, and kind of learned from them and picked up some things along the way, and decided to kind of do my own things.  It really came out of needing a place to live… And it’s like, “Well, I guess we’ll just buy a house.”

[unintelligible [00:05:40].21] I guess what brought me to there, but I got into a deal that was a short sale. It was terrible, kind of a drug house almost, not in good condition; I turned that into basically a flip property. That was my first endeavor in that, and that’s kind of where it got me to this point of what I do now… And obviously, full-time as an insurance broker for a lot of property risks… And then now I just basically do it in my free time, just looking for deals and flips and other rentals.

Theo Hicks: So for your insurance job – that’s providing insurance for real estate, right?

Nathan Britten: Primarily, yes.

Theo Hicks: Interesting. It’s the first time I’ve heard of someone getting into real estate through insurance.

Nathan Britten: It’s an unusual path, and reall, because a property is not everyone’s favorite thing to do for insurance. It’s just something that I was kind of naturally drawn to. We’ve got a really great program now that we write nationwide; we probably have about 20,000 rental properties in there, and a great apartment program as well… So I’ve got to get my own plug in here – anybody looking for single-family rentals or apartment quotes, I’m your guy.

Theo Hicks: So when people are kind of first starting off, there are usually two philosophies. The one philosophy is after they’ve gotten interested in real estate, their main focus is to quit their job and then do real estate full time. And then there’s the other philosophy that’s “I’m going to keep working, and then do real estate part-time, because of the benefits of having a full-time job.” So from your perspective, is your plan to eventually do real estate full time? Or do you plan on doing it with this full-time job? And then whatever your answer is, why do you select that route?

Nathan Britten: I think there’s a line that you cross once you either have a certain amount of funds, or you have a model that you’re going after, and a situational job that would force you to go full time into real estate investing. Insurance is one of those, where – as I was mentioning earlier – there’s a lot of flexibility, a lot of freedom. And that’s what allowed me the two flips that I’ve done thus far. Granted, they were pretty close to my office, but I was spending primarily all my time during the day managing contractors and projects at the houses, and I can still get most of the insurance stuffs done through my phone. So it gives me that kind of freedom.

But eventually, I do enjoy investing in real estate and doing those types of projects more than insurance… But that’s the thing that provides me my money to do that. So there’s a line, I think it’s probably a money line; not to say you can’t go out and raise some money and partner with people, different ways to do that. But for now, what works best for me, and kind of how I see it for the foreseeable future is to keep the insurance boat rowing, and invest in real estate on the side, and kind of have the best of both worlds.

Theo Hicks: What would be your recommendation to someone who wants to get started in real estate, and they have a full-time job, but it’s not like yours, where it’s very flexible. Let’s say they have a full-time job and they’re in an office; they have a non real estate related full-time job. They’re in an office – I guess not now technically not in the office, but they need to be in front of their computer or in an office starting at eight o’clock, and they can’t get off until five o’clock. What would be your recommendation to them to get started?

Nathan Britten: Well, you’re going to have to delegate a little bit; if you buy a rental, you’re probably going to have to hire a property manager. I don’t have a property manager personally, just because I’ve just got one rental and I handle that pretty well, and they’re five minutes from my office if they ever needing anything. You’re going to have to put in some overtime. You can’t be looking for deals and meeting with people during your work hours. That’s a little bit of conflict of interest. The boss probably wouldn’t appreciate that.

But after hours – the internet is 24/7, so you can get a lot of stuff done on the internet, I’m sure you know, Theo. And as far as a lot of those real estate investing clubs – they meet after hours, and you can learn a lot there. Obviously a lot of books and articles and websites like BiggerPockets, where we connected… You can get a lot of information that way. As far as if you were to do a flip, that’s pretty tough, because I personally like to be very hands-on… And I don’t know everything off the top of my head, to tell you, “Hey, go do this and do it this way.” I need to be there. And if you ask me a question, I can answer it, say how I want it. But that’s going to be a lot more hands-on, so I probably wouldn’t go with the full flip… Otherwise, it’s going to either take way too long, or it’s going to be way too troublesome, I think, if you’re not actually there.

Theo Hicks: So obviously, it’s very difficult to do the flip. So if you did not have this insurance job, would you have not done the flip? Or would you have been willing to change to a more flexible job to do flips?

Nathan Britten: I would have found a way. I’m just kind of a problem solver by nature; this just happened to be the way I did it. I think if I was tied to a desk, eight to five, I don’t think I could do that for very long. I would probably be out in I would say less than a month, of that kind of situation. And I think I would have gone more towards drop that eight to five, go full-in on real estate, because obviously, I’m young, I can take a few more risks… I would figure out a way to raise some money and partner with people, and… I’m just a problem-solver by nature, so whatever situation I feel like gets thrown at me, I’d figured out a way to solve it and make it work.

Theo Hicks: Let’s talk about your rental. So you mentioned the first flip – did you go in with the intention of living there and it turned into a flip?

Nathan Britten: Yeah. I actually did live there for a bit.

Theo Hicks: Was it like a live and flip?

Nathan Britten: Yes. I got it on a short sale, which I had no idea what that meant, and I don’t think my realtor really did either. So I wasn’t very well-prepped for it. And I had a lease ending this month, and it ended up taking much longer to get the property actually closed. And once we did, I was like, “Man, we were right on the line here.” [unintelligible [00:11:48].18]  $30,000 and basically a full remodel of this place into one month. And we ended up doing it. And I was there pretty much all day, every day. It was definitely trial by fire… And I really enjoyed it, I thought it was awesome. And then it turned out exactly how I wanted it.

I kind of combined a few different of the entryways into real estate investing… I had a buddy who’s in med school, he was renting from me and basically paying my mortgage for it too at the same time, once we got it finished. So we did that for a couple of years and ended up selling it for basically double for what we had into it. So it was a good deal.

Theo Hicks: And then after that flip, was the rental next, or was the rental the third deal?

Nathan Britten: The rental was next. It was actually a place next door, and I just had been keeping tabs on it. It was a great area. I essentially did my exact same deal of how I bought this house, the first flip, and just bought the one next door. It was in even worse condition, and I had a little more time to evaluate the area… And obviously, now I have my contractors that I trust and know they can do good work, and more of an idea of what it would take to do this. So I got that fixed up and ready. Not as nice as the first one, because I knew I was going to be renting it, but I’ve had pretty much the same tenants in there for coming up on three, four years now.

Theo Hicks: You said it was next door… Was this something that you kind of just waited for it to go on the market? Or did you actively pursue this deal?

Nathan Britten: I did actively pursue it. I knew that they were renting it, and I didn’t like the neighbors. I didn’t like the renters. They were terrible. I think it was a drug house. And it was just a situation poorly kept, and I just reached out to the guy who owned it, found him online and was like “Hey, man. I live next door. I like this house, I’d like to buy it from you.” And it just turned out to be a situation where they were kind of a hassle for him. So we bought it, got some new renters in there and it worked out. But I definitely had to pursue him.

Theo Hicks: Did you use the same contractors on that deal that you used in your first deal?

Nathan Britten: Most of them. They’re not general contractors, but I just know a lot of people that do a lot of that type of work. As for bigger companies, I’d say ‘Hey, man. Do you know anybody that can do this?” And then they would refer me to someone that way. But for the most part, it’s kind of the same crew; a couple of different changes, but kind of the same crew.

Theo Hicks: So those contacts – that was from your insurance shop?

Nathan Britten: I’ve grown up in Oklahoma City my whole life, and my dad was in sales, so he just knows a lot of people around town… And that’s kind of how I came into contact with other people. And then they were nice enough to say “Hey, yeah. This guy’s great for this. Go ahead and use them.” It wasn’t really interfering with their business; he was one of their subcontractors,

Theo Hicks: Circling back to the rental really quick. So you call the guy, was he “Yeah, I’ll sell it to you right away”, or did it take some convincing?

Nathan Britten: Oh, it took some convincing. And I really kind of overpaid for what I thought was market, but it was a deal I saw long-term value in. I knew there was a commercial development going into the end of the street, and really that was my main driver. I was like, once this actually gets approved, then everything on the street – it’s really going to increase the value. So I was like “Well, I’ll overpay now for the market value, and I’m going to hold it for a long time, and I’ll be covering my holding costs anyway…” So yeah, it made sense to me.

Theo Hicks: That was my next question – so eventually he agreed to sell it. How did you determine the price? You said it was a little bit over the market. So a two-part question – how did you figure out the market, and then where did that over-the-market price come from? Was that just what he wanted?

Nathan Britten: I’m not extremely educated in real estate. So there’s a lot of terms, and outside factors, and equations, probably that I’m not familiar with… What I always boil it down to is, okay, what’s our average price per square foot around here of what sold recently, and then what’s on the market below that? And I’m not scared of an ugly-looking house, where nothing works. I think the two that I’ve done are some of the worst that you can do, as far as keeping the existing structure, and not just knocking the thing down and building it back up. So that’s never deterred me at all.

So I really just look for the worst house in the neighborhood, and if the price per square foot is right, then what I’ve done in my past is basically use a construction loan to do the costs. And then I know that my after renovation value is going to be enough to get my equity, and I’ll be set that way. So I boiled it down to price per square foot in the area and tried to find the crappy ones, and then go from there.

Theo Hicks: And what about the rehab cost? Do you typically know that before you buy? Or is that something that’s more narrowed down after you put the property under contract? Or is it not until after you buy it?

Nathan Britten: I can ballpark it before, depending on the projects that are needed. A lot of stuff you can research online and make a couple of calls to your contractors, and if you have the right people come out and inspect it beforehand, you’ll know exactly what you’re going to do before. And I try to jam in as many people as possible. Realtors hate me, because I try to jam in as many people as possible in that inspection period, and I try to extend the inspection period for as long as possible, so that way, I’m basically risk-free in my evaluation of this house, and I can just basically have all my guys come in and bid it during the inspection period. So that’s my plan about it.

Theo Hicks: Yeah. And then the construction loan, the down payment – is that just money you have saved up from work?

Nathan Britten: Yeah. I’ve got saved up from work and we sold our business, I had some funds there… And I just always lived pretty cheap as it is, so yeah. And I’ve got pretty good banking relationships as well around here, so been kind of flexible with me on down payment stuff as well. So it’s really just — if you find a good banker that can do that kind of stuff for you, that’s really, really valuable.

Theo Hicks: Okay, Nathan. What is your best real estate investing advice ever?

Nathan Britten: I could go basic and say buy low, sell high, but… I guess figure out the lowest barrier of entry, with the highest ceiling at the end of the project; that’s probably what I would say, especially just starting out. And anybody who invests in real estate kind of has the same mindset of “I want to make money in a way that’s passive. I want to make money in a way that is a little bit unconventional.” So the end goal, I think, for most people is making money. So if you’re just starting out especially, just find that lowest barrier of entry with the highest upside… So that’s the expanded buy low sell high.

Theo Hicks: Alright, Nathan, are you ready for the Best Ever lightning round?

Nathan Britten: Let’s do it.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:18:34][00:19:17]

Theo Hicks: Okay, Nathan, what is the Best Ever book you’ve recently read?

Nathan Britten:  Recently read… I kind of went back into the archives a little bit and re-read How to Win Friends and Influence People, Dale Carnegie. And that’s not necessarily real estate focused, but the practices in there of dealing with people – you have to deal with a lot of people in real estate and just in life in general, and learning how to understand people and how to treat them, that’s key.

Theo Hicks: If your business were to collapse today, what would you do next?

Nathan Britten: So if insurance collapsed… Yeah, I think I would probably partner up with my family and we would probably start a real estate empire. I’d just go full bore at it.

Theo Hicks: What is the Best Ever way you like to give back?

Nathan Britten: Probably my favorite was Big Brothers, Big Sisters. Great national organization, still really involved in Oklahoma. It’s just awesome giving back to kids that haven’t been really been given a fair shot, for whatever reason, and being able to mentor them, and just be there for them to talk to them. Really cool, really rewarding.

Theo Hicks: And then lastly, what’s the Best Ever place to reach you?

Nathan Britten: Probably my cell phone. 405-802-9930.

Theo Hicks: Alright, Nathan, thanks for joining us and walking us through your journey from entrepreneurship degree in college, to insurance, to real estate. We talked a little bit about how to navigate getting into real estate while you have a job. So if you have a flexible job, then you’ll be able to work on things like flips during the day. If you don’t have a flexible job as a nine to five, and you’re not like Nathan, you [unintelligible [00:20:52].23] at the desk, then you have to put in time after hours, put in overtime, have property management. But if you’re like Nathan, you don’t like nine to five, and you’re young, and you can take risks, then you could just not work at all and go straight into real estate.

We talked about a few of his deals; his first deal with a short sale, a kind of live and flip that he sold for two times what he had into it, and his next deal was a rental that was actually the property next door. So I don’t think I’ve talked about this in a long time, but a really good way to find off-market deals is to buy the property, whether it’s a single-family or massive apartments, buy a property on that same street, because you kind of already have that credibility from owning something there. So they can look at this property –  and I’m sure in Nathan’s case, seeing a dump turned into a really nice property, they’re more willing to sell to someone like that than some random person they’ve never met before.

So he kind of walked us through his business plan with the construction loan, bringing as many people as he can during the inspection period to make sure that the rehab costs are super accurate, having good banking relationships to get those good loan terms, and then to determine the offer price using the average price per square foot on recent sales. So the sales comparable approach, in a sense.

And then lastly, his Best Ever advice was for those looking to get started, find that lowest barrier of entry, so that $30,000, $50,000 house that’s in horrible condition, because it has not only the lowest barrier of entry, but also the highest best potential exit, and the most upside. And then he gave us his phone number; if you want to learn more about him and his business, talk to him, text him.

So Nathan, thank you for joining us. Appreciate it. Enjoyed our conversation. Best Ever listeners, as always, thank you for listening. Have a Best Ever day, and we’ll talk to you tomorrow.

Nathan Britten: Awesome. Thanks, Theo. Appreciate it.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2297: Red Flags to Avoid When Presenting New Deal to Passive Investors | Part 1 of 3| Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks shares some information on putting together an investment summary and presenting it to passive investors. The three risk points of the deal are the market, the team, and the business plan. In this series, Theo will be talking about the red flags that can show that the deal might not be the best, and how to approach them when writing a deal summary. 

 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

 

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the syndication school series, a free resource focused on the how-to’s of apartment syndications. As always I’m your host Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. And for a lot of these episodes, especially the first batch of episodes we released, say first fifty or so episodes, we gave away some free resources, free documents with those. So make sure you go to syndicationschool.com and check out some of those earlier episodes, as well as more recent episodes too, and download all of those free documents we gave away; very helpful when starting and growing your apartment syndication business.

Today we’re going to kick off a series – it’s most likely going to be a three parts series – on some red flags when underwriting an apartment syndication deal. I wrote a very long blog post from the perspective of the limited partners on identifying holes or red flags when reviewing an investment summary document.

The idea is that your passive investors are not going to be experts on real estate investing. And the purpose of you creating the investment summary is to provide them with that data, which you know how to find, in a simple summarized format, so that they don’t have to go out there and do it themselves, right? They can just trust that you pulled the correct information and that you’ve included everything that you need to include on the investment summary, all that the data that they need in order to determine how to invest.

But you might have some passive investors who will simply scroll down to your returns section and say “Okay, they’re offering a 20% IRR, a 15% IRR, and a 10% preferred return… So, yeah, I like the returns, I’m going to invest.” Whereas on the other hand, on the other side of the spectrum, you might have passive investors who read every single word of the investment summary and then send you an email with a bunch of follow up questions they have on where you got these numbers from, why isn’t this included in here, things like that.

So what I wanted to do for this Syndication School series was to talk about the same concept of red flags when underwriting, making an investment summary, but from the perspective of you, the GP, the sponsor, the apartment syndicator, so that you can make sure you’re including all of the relevant information in not only your investment summary, but also in the conference call.

So we’ve done episodes in the past on the new investment offering conference call, how to put together an investment summary, but this is going to expand upon that and go over when you’re reading your investment summary, or when you’re making your investment summary, what to think about, how to proactively address things that a very detailed, meticulous passive investor is going to ask.

I’ve broken these into a couple of categories. So we’ve got market, red flags, business plan red flags, projected return red flags, debt red flags, purchase and sales assumptions red flags, proforma red flags, rental and sales comparable property red flags, and then some other miscellaneous red flags that do not really fall into any of the other categories. And so obviously, some of these are red flags that would come up based off of things you’ve done prior to identifying a deal, so I guess we are going to be covering more than just a deal, but also the market a little bit, as well as the business plan.

Now, keep in mind that the three risk points of the deal are going to be the market, the business plan, and the team. On most, we can maybe talk about a little about the market, but when it comes to the team, we have other episodes on that, on how to make sure you’re setting yourself up for success based off of your background and experience and knowledge, your partner, and the other various team members. But mostly, this is going to focus on “Okay, I’ve identified a deal, I’m making the investing summary… How do I make sure that I can, for one, save time without having to answer a bunch of questions from my passive investors if I left some things out? And two, how can I make sure that not only am I addressing those concerns, but in the eyes of the passive investor they see this opportunity and think that it’s a good deal.”

So let’s start off with the market. Obviously, the market is going to be the geographic location that the subject property is located in. Obviously, the first red flags for your market would be if they don’t meet the criteria we talked about in the previous Syndication School episodes on qualifying the market. The first thing would be the overall population, so are the people in the market going to be your customers? If you’re selling some widget, then you need to figure out who your demographic is that’s going to buy this widget; those are your customers, right? So in this case, your widget is not a widget, but an apartment unit. And in order to determine how many customers you have and if your customer base is growing or shrinking, you need to know what the population stats are historically, and then the projected population stats for that market.

Obviously, the more people that are in the market, the more people that are competing for apartments, and the higher the rents go; the less people competing for apartments, then you as an operator would need to do lower rents or offer concessions to attract the limited customer base. So you want to see a positive net migration, which is more people moving in than are moving out. And if it’s not the case, if it’s stagnant or shrinking then that’s going to be a red flag.

So if you don’t include any information about the population in your investment summary, by default your passive investor is probably going to think that “Well, there’s a reason why they’re not including that, and it’s because the population isn’t growing or it’s shrinking.”

So make sure that number one, you’re investing in a market that’s growing, and then when you are, include that information in your investment summary. Same thing for rental rates, same idea. You want to see an increase historically and forecasted, in rental rates in the average or median rent for the market; and then if it’s decreasing or stagnant, then that’s an issue.

So the rule of thumb here would be you want to see rental rates increasing by 2% to 3% every year in the years prior, maybe the five years leading up, and then 2% to 3% annually in the future is ideal. We’ll talk a little more about those percentages and where are those come in to play in part two or part three, when we talk about the rental comparable properties.

Another important factor when analyzing a market is the absorption rate. Another red flag would be a market with a low absorption rate. Like the population and like the rental rates, the absorption rate indicates the supply and demand of a market. So for multi-family, for apartments, the absorption rate is going to be the measure of newly created apartments that have been rented over three months. So for Q1, how many new apartments came online? And then of those apartments that came online, what percentage of those were rented in that 3-month period? So you’re never going to see 100% absorption rate, because that means that every single unit that came online during those three months, including the one that came online the day before in that three-month period was rented. That’s not going to happen.

So when it comes to the absorption rate, there’s two things you want to look at. Number one, you want to look at the absolute absorption rate for the market, and even more ideally, much greater than the national average absorption rate for multi-family. But then just like the rental rates and the population, you also want to take a look at the trends, so you want to take a look at the historical trend, where is the absorption rate going based off of where it’s been. And you want to see an absorption rate that is increasing, which again, indicates that there’s more and more competition, more and more customers to fulfill the supply that’s coming online.

Whenever you see a low absorption rate or a decreasing absorption rate, it may indicate that the market is in or entering into a state of hyper supply. So they’re building too fast, too many new apartments are coming online compared to the demand for apartments, whereas with the opposite case is that they can’t keep up with the demand. Typically, if it’s hard to build new apartment units, you’re going to see a very high absorption rate.

So low absorption rate – pretty big red flag; it might be something that you want to consider including in your investment summary. And of course, there’s other demographic information as well, like unemployment and economic diversity and things like that. So, same thing – any positive aspect of the market, you want to include that in your investment summary. Why did you pick this market? Why do you like this market? Let them know in as much detail as possible.

Now, another thing to consider – this is number four on my list – is not including neighborhood or sub-market-level data. So if you remember, [unintelligible [00:13:15].28] let you know that in the episodes where we talked about analyzing and qualifying the target market, you start off by looking at the overall MSA and city-level data. So you look at Dallas-Fort Worth, Houston, Orlando, and Tampa. It covers a pretty large geographic area, and we kind of want to take a look at what’s the average demographic, economic data, employment data for all of the submarkets in that overall MSA. And then after we pick the top MSA’s, then we say “Okay, well the averages are really high here. So let’s dig into more detail to figure out which neighborhoods are actually exceeding that already high average.” And then those are the neighborhoods and the submarkets that we want to target.

So you don’t want to just stop at the MSA or the city level, you want to take it a step further and go down into the submarket, and then in this really big markets, these really big MSA’s you want to dig into the neighborhood-level detail as well. So for the population trends, for the rental trends, the unemployment, absorption, economic, employment data, you not only highlight, again, the overall MSA, but also the neighborhood and talk about how much better this neighborhood is than the already better total MSA. Because what happens is if you just focus on Dallas-Fort Worth, or Tampa, St. Petersburg, Clearwater, your passive investors aren’t going to know “Well, okay, we’re not buying an apartment that’s a million units, covering the entire state. We’re investing in a particular neighborhood, so what are the demographics there? Is the population growing there or is it decreasing?”

So that savvy passive investor is going to put up an alarm in their mind if you don’t highlight and focus on the actual neighborhood. And to make sure for the absorption rate — they might not have the absorption rate for a neighborhood level, but at least the rental rates, the population, unemployment, things like that, you should find data for the neighborhood first, and then make sure you’re including that information in the investment summary to proactively address that in the minds of your investors. If you don’t, well that’s a red flag.

Now, something else that’s important that we haven’t talked about, and it’s kind of a subset of the population, which is going to be the population age, or the dominant generation in, again, the overall market, but also in the submarket. So, right now we’ve got on the younger end Gen Z, and on the higher-end baby boomers, and in then in between that is Millennials and Generation X. And all four of those generations want and desire different types of rental housing. So when a savvy passive investor is looking at your deal, they’re not just going to see “Okay, well the overall population is growing. That’s great.” Well, no. “I want to know what parts of that population are growing, and which parts of that are actually shrinking.” So they want to know who is this apartment syndicator targeting with their product, who is going to be their end customer.

And then based off of who the end customer is, what is the population trend for that group of people? And then based off of that, “Okay, so they’re targeting Millennials. Millennials are growing. Okay, well is this property going to fit the needs of Millennials? Or fit the needs of the baby boomers?” After, obviously, all the renovations and upgrades are done. So these need to match. The target demographic needs to be growing, and a large chunk of the portion of the total population in a target market.

And the property needs to match their needs. For example, a mismatch would be if I plan on buying a class B property, and then the plan is to add super high tech amenities, making it a really smart type eco-experience, with maybe smaller unit sizes, but very large common areas, a basketball court, and a lot of fitness-related things, and maybe having things for families or something, when a population expected to grow by 10% are baby boomers. That’s not going to be the best match. Whereas if those were Gen Z or Millennials, sure that might be a good match.

So those are actually just five red flags, and I think I still have about 26 red flags. So we’re going to stop there; this will conclude part one, where we talked about the market red flags. In part two we’re going to start off by talking about some business plan red flags, which will include red flags about the projected return you present as well… And then we’ll probably focus on the debt red flags as well. And then we might get into the purchase and sales assumptions red flags. And then we’ll conclude in part three with proforma red flags, rental and sales comparable red flags, and then some other miscellaneous red flags that didn’t fit into any of the other categories.

So that will conclude this episode. Thank you so much for tuning in. Make sure you check out some of the other syndication episodes we have so far, as well as those free documents, at syndicationschool.com. Thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2290: 5 Ways To Get More Apartment Deals| Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks shares 5 ways of winning the bidding wars. When it comes to securing your bid, simply offering the most money doesn’t always work. Besides, sometimes you are competing against other investors who have way more experience and capital. In this episode, Theo talks about 5 ways to get more apartment deals by making your bid stand out and tell the seller that you are serious and capable of seeing the deal through.

 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of The syndication School series, a free resource focused on the how to’s of apartment syndications. As always, I’m your host, Theo Hicks. Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we give away free resources. We gave away a lot of these documents in the past, so make sure you go to syndicationschool.com, check out some of those episodes and get those free documents.

Today, we’re going to be talking about how to win more bidding wars. So these are tactics that you can implement when creating offers to get awarded more deals. These are particularly good and beneficial in competitive markets, or if maybe you don’t have a lot of experience and you want to create a better offer to attract the seller to your offer, as opposed to someone else who has more experience.

Obviously, one way to create a better offer is to offer more money, which is obvious. So that’s not going to be one of these five. So these are five ways to win more bidding wars in addition to simply paying more money, which might not always work.

So the first is going to be offering a hard or a non-refundable earnest deposit. So the earnest money is what you give to the seller as a good faith deposit upfront, which is usually equal to about 1% of the purchase price. This is essentially showing the seller that you’re serious and capable of buying the property. Usually, by default, the earnest money is going to be refundable, that is a buyer will receive the full deposit back if the contract ends up being cancelled. Sometimes it might be a fee, but overall, you put down the money within the first few days of the contract, and if you cancel it, 30 days down the line or 45 days out, then you get that money back.

So one way to create a more attractive offer is to submit a non-refundable earnest deposit; this is more attractive to the seller because of the negative consequences of a buyer selling a contract. So for example, once a seller places their deal under contract, they’re no longer marketing the deal, they’re no longer taking other offers, they’re no longer doing tours… So if you end up closing, everything’s great. But if you don’t and you back out, then at the very least the seller is annoyed because you wasted their time, but there’s also other potential negative outcomes; maybe the economy changes and on the second round of offers, they get a lower offer price. Maybe the reason why they were selling is because they identified a new opportunity, that they now cannot purchase because they don’t have a capital that’s locked up in the property. Maybe they go back to other people who had submitted offers, maybe the second-best offer, third-best offer, and they’re no longer interested.  So it’s very advantageous for the seller to close the first person they award the deal to. So to prove that you’re capable of closing, you can go non-refundable.

Now, there’s a few different ways to go non-refundable. The first is going to be the timing, the money goes hard. So the most attractive timing to the seller would be if the earnest money went hard day one, so immediately. The second you give them the money, it’s non-refundable; they get to keep it no matter what.

Another option would be for the money to go hard after a certain clause is triggered, like at the end of a certain number of days or the end of the due diligence period, for example. Or it could be a hybrid of both, where the earnest money goes hard day one, so a portion of that earnest money goes hard day one, and then the remainder goes hard after a certain number of days or after a certain trigger clause is triggered. So for example, you can put down a 1% down payment on a deal, and then half of that money goes hard day one, or maybe 75% of that money goes hard day one, and then the remaining half goes hard after 30 days.

Another iteration of the earnest money going hard would be the amount of the earnest deposit. So it can be non-refundable, but higher than what is usual. So instead of 1%, you can go 2%. And then again, you can go hard day one, hard three days out, hard after a certain clause is triggered, or kind of a combination of both.

When you do the non-refundable earnest deposit, you still want to make sure you’re including some contingencies, and these are going to be things that are outside of your control. So if something outside of your control were to happen, then you can get your money back. But if you do something, you decide to cancel the contract, then the money is not refundable.

So examples of things that are outside your control would be a major lien on the title. If something comes up during the survey, if something comes up on one of the environmental reports, that’s really not your fault, so you shouldn’t lose your money because of that. But if you just had to cancel because you did improper underwriting, or you can’t qualify for financing, well, then they get to keep that money. So that’s number one.

Number two would be to shorten the due diligence period, to make a more attractive offer. So we’ve done episodes on due diligence before, so I’m going to assume you know what this means. But usually there’s a timeframe where you have this many days to perform your due diligence, and then there’s a contingency where if you’re not going non-refundable, you can back out and get your money back. But after that timeframe, you can’t back out and get your money back for a due diligence related issue. Usually this is going to be 30 days; it could be longer, but usually it’s 30 days. So during that 30 days, the buyer can cancel the contract. So if you offer a shortened due diligence period, then you’re shortening the time that you can cancel the contract.

Kind of like the non-refundable earnest deposit, this shows the seller that you’re more serious about closing on the deal since you’re willing to shorten the amount of time you’re spending on due diligence. And additionally, you might be able to close a little bit faster if you shorten the due diligence period, which results in the seller getting their capital back sooner. That may not necessarily the case all the time. But what is the case is that if you’re shortening it, they’re more confident in your ability and your seriousness to close, and it’s less likely or you have less time to cancel the contract. So that’s number two.

The third way would be to sign an access agreement while you’re negotiating the contract. So there’s usually a period of time – it could be very short, it could be very long – where you are awarded the deal and you actually sign on the contract. So you submit your LOI, they say, “Hey, we want to go with you,” you negotiate back and forth with the LOI to get a purchase sales agreement, you sign it, and the deal’s official and you’re under contract, and that’s when the time starts. But again, it could take a while; the time from LOI to signing the contract might take a while, or the negotiations just might fall through and the deal never comes to fruition, which is also a waste of time for the seller.

So to respect the seller’s time and to show that you’re serious about closing, you can sign an access agreement within a certain number of days after you’re awarded the deal. And by signing an access agreement, what this does is the seller is giving you, the buyer, permission to inspect the property before this contract is actually signed; your access is going to be limited compared to what the access is after the PSA is signed, but you can still get a head start on your due diligence. So this is not only shows that you’re serious about closing, but you can tie this to something else, which would be to stipulate that once this cross access agreement begins, the due diligence period begins.

In other words, from the time of you being awarded the deal – maybe it’s a few days of signing the cross access agreement. From the time when the cross access agreement, the due diligence period begins. So if it’s 30 days, then once you sign that cross access agreement, 30 days later, the due diligence period has expired… As opposed to waiting until the contract starts, you might be five days, 10 days, 20 days into the PSA, when the due diligence period expires. Again, it shows that you’re a lot more serious about closing on a deal and you have less time to back out of the contract.

Number four is kind of similar as number three, which is to use and mark up their purchase sales agreement. So again, there’s a time between the LOI and the PSA that is, in a sense, the time that the seller is not going to have access to their money. So the longer the negotiations draw out, the more likely the deal falls apart, but also the longer it takes them to get their money, because usually the contract starts and then it’s 60 days out and they close. So by offering it to use their PSA, and you mark up their PSA, you’re reducing that back and forth negotiation, plus you’re reducing any potential disqualifiers from legal language.

So essentially, instead of you sending them your PSA, you just use theirs. You give it to your lawyer, they use a red pen or red ink or red in PDF or some software they’re using, and they make changes to the seller’s PSA so that the seller can see very quickly what legal changes you made, as opposed to getting a 50 page PSA from you, they give it to their lawyer and they go through every single thing and they mark it up, there’s back and forth negotiation and then maybe there’s some disagreement over legal language that kills the deal. You just use theirs, they can see specifically what changes you made, and this lowers the chances of the deal being cancelled, plus it reduces that LOI to PSA timing.

And then number five, and this is something that might not always be a way to win more bidding wars, but it can be very powerful at a certain time of the year or if a certain event is occurring, which is to guarantee a closing date by a certain date.

So this can be really good for taxes, if you guarantee to close by December 31; then it’d be advantageous to them for taxes, depending on their business plan that they had for the property. Maybe they raise capital and it’s better that their investors get their money back this year. Or the next year — maybe there’s some tax changes coming up in the next year or at some point in the future, and they wanted to close before these new taxes come into effect. An election year, right? You might want to say, “ I guarantee to close before November 3rd,” or, “I guarantee close to the end of the year,” or, “I guarantee to close by inauguration during an election year.”

So essentially what this means is that you’re guaranteed to close by a certain date, which means no extensions to anything. It might also mean shortening the time from contract to close. So again, this might be attractive to a seller depending on what’s going on in the world.

So there you have it. Those are five ways besides paying more money to win more bidding war to create a more attractive offer to the seller. Number one is offer a hard non-refundable earnest deposit. Number two is to shorten the due diligence Period. Number three is to sign a cross access agreement or an access agreement while negotiating the contract before the contract is assigned. Number four is the use and markup the sellers PSA as opposed to giving them your own PSA created by your own attorney and then number five is to guarantee a closing by a certain date.

So you follow these five tactics, all of them, one of them is a combination of a few, you’re going to maximize the chances that you come out as a winner in a bidding war.

Now, one thing to mention is that when you’re in a competitive market, something like simply doing a non-refundable earnest deposit might not be enough, right? Because maybe all the offers have a non-refundable earnest deposit. And so the power is in increasing it, making it go hard day one or maybe only a portion of it going hard day one, it kind of depends on how competitive. The market is not competitive, the deal is. The same as shortening the due diligence period, maybe you need to shorten it a lot, maybe you only need to shorten it by a few days. And then maybe closing by certain date is completely irrelevant, they don’t care, which is why it’s important to understand why the seller is selling so you can figure out what’s important to them and then which of these to use, right? If they don’t pay taxes, if tax is increasing in three months. Well, you can guarantee to close by a certain date. If they want to close as quickly as possible, well, you can shorten the due diligence period and sign an access agreement. If they want to close no matter what, well then you can do the non refundable earnest deposit or a combination of those things.

So that concludes this Syndication School episode. As always, make sure you check out the other episodes we’ve done as well as those free documents at syndicationschool.com. Thank you for listening, have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2283: Multifamily Lending 101 Part 3| Syndication School with Theo Hicks

In this Syndication School episode, Theo Hicks explains how to compare the different loan options and factor in different variables that are at play.

Loan terms will determine what kind of ROI your multifamily unit will generate for the investors. Factors such as interest rate, debt service, loan term, and the amount of capital you put down will affect the cash flow and the future earnings. It’s also important to remember that some of these factors can benefit you short-term, and some will give you long-term advantages (i.e. having adjustable vs fixed interest rate).

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of The Syndication School series, a free resource focused on the how to’s of apartment syndication. As always, I’m your host, Theo Hicks.

Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy, aka Syndication School. And with a lot of these episodes, especially the first batch of episodes we released, that went by the step by step process, in order, from not really even knowing what apartments syndications are, to completing your first deal and selling it on the end and returning a big, fat, whopping check to your investors. We gave away free documents during those episodes. We give away some free documents with the more recent episodes, but really every single series we did before had a free document, so you’ll definitely want to check that out. Those are at http://syndicationschool.com.

This episode is going to be part three of a three-part series. So we’re wrapping up the series on multifamily lending; so this was a Multifamily Lending 101 course. Make sure you check out parts one and two, which have aired the previous two weeks, or if you’re listening to this way in the future, 7-ish and 14-ish episodes ago, since we release the episodes every week.

So overall, this series is about understanding how to select the best loan for your apartment syndication deal. So in the first episode, we talked about the different type of lenders that you can use, and then whether or not you should use these lenders, or whether you should use a mortgage broker, or what type of loan you should get, whether if you get a bridge loan or an agency loan, and then when to actually engage your mortgage broker and your lender.

And then in part two, we talked about how to qualify for agency loans, since agency loans are usually going to be the best loans you can get on your standard value-add syndication deal. So obviously, there are a lot of exceptions, with the main one being if you plan on selling early, and you don’t want to pay a large prepayment penalty with that agency loan, you might consider getting a bridge loan, and then either selling it or refinancing it into an agency loan later on. But assuming you want to get an agency loan, how do you qualify for that? So we talked about in part two the qualification process which involves qualifying the borrower… So you, your partners, any big investors, any loan guarantors and really anyone who’s signing on a loan or meets the criteria to be a borrower in the eyes of the agencies; what do they look at? What do you need in order to qualify for agency loan? And then assuming the borrower qualifies for agency debt, what types of properties? What are the characteristics of the actual deal itself that the agencies look at before giving debt on that property? So that was part two.

And we also talked about some of the changes in the upfront reserves requirements due to the virus, as well as talked a little bit about the renovations on value-added deals and how those could be included in the loan up to a certain dollar amount.

Now, this last part, part three, we’re going to wrap up and talk about – very high-level, because we’ve only got 20 minutes to talk about this; very high-level, how to compare different loan options and what the different factors for the loans mean when you’re looking at it, what the terminology means, and how to look at those numbers and those figures. So that’s going to be what we talk about in this episode. So let’s jump right into it.

So the output of the loans – you input all these different loan terms and the output is going to be a debt service. So the debt service is the technical term for the payment that is owed by the borrower to the lender each month. So when you’re looking at a T12, for example, profit and loss statement, usually the debt service is not going to be on there, because the debt service is below the net operating income line item and usually the T12 will stop at net operating income.

The reason why the debt service is obviously going to be very important is because the net operating income is used to calculate the value of the property, and so the type of loan you get won’t necessarily affect the value of the property, but it will impact the cash flow that the property generates… And the cash flow that the property generates determines the returns to your investors.

So you have the exact same deal, bought at the exact same price, and two different investors execute the business plan flawlessly, you get the exact same brands, you get the exact same operating expenses, but the operator that can get the better loan terms is going to be able to distribute a higher ongoing cash-on-cash return to their investor. It’s not going to change the value of the property, it is not going to change the sale proceeds. Well, actually, it might change the sales proceeds, but it’s not going to change the overall value of the property. But the lower the debt service, the more cash flow the property is going to generate.

Now, when you’re comparing loan options, the lowest debt service isn’t necessarily the best, because – some of the caveats, some of the exceptions… For example, let’s say that there’s two investors and one investor’s debt service is way lower than the other investors debt service from the get-go… But maybe it’s because of the fact that they have an IO loan, or maybe it’s because they have an adjustable interest rate. So you have two loans – one is a fixed interest rate, one’s an adjustable interest rate. The adjustable interest rate starts lower than the fixed interest rate loan, so the debt service is lower at first. But if the interest rate goes up, at the end of the business plan, the one with a floating rate might have paid more than the one with the fixed interest rate over the 5-10 year business plan, whereas maybe the adjustable interest rate was better at first.

There also might be higher closing fees for the one with a lower debt service, maybe the loan is not assumable, maybe there’s really a high prepayment penalty… So some of the other factors we’re going to talk about later on in this episode, those are going to be different from loan to loan. So you can’t just look at debt service, that’s the entire point here.

So to start off [unintelligible [00:09:57].22] the loan debt service, the more cash flow. But also there’s other things to take into account as well, which we will, as I mentioned, talk about here in a second. But that’s one thing to be aware of, because the fact that the cash flow is going to be dependent on the debt service.

The next few terms to know, which aren’t necessarily going to be something you’re really comparing or not something that’s super important, because they’re not going to be that different, which is the loan amount, which is going to be based off of  LTV, which we’ll talk about in a second… But this is basically how much money the lender is going to lend to you.

There’s also the loan term, so that is the number of months until the loan must be repaid in full. Generally speaking, on the loans with the shorter terms, you may have an option to purchase an extension, especially when we’re talking about a bridge loan… But for the loan term, you’re going to want the loan term following the three Immutable laws of real estate investment we’ve talked about the past – to be at least twice as long as the value-add business plan portion. So if the plan is to renovate all the units and the renovation timeline is two years, then the loan term should be at least four years. That way you aren’t forced to sell or refinance before you’ve finished the value-add business plan.

Generally speaking, the longer the term, the higher the interest rate is going to be. So there’s kind of a fine line, like, you don’t want to get a 20-year term because you don’t plan to hold down the deal for 20 years, and you’re going to pay more interest than if you got maybe a five-year term when you plan on selling the deal after three, four or five years.

So the longest term loan isn’t necessarily the best, but then the shortest term loan also isn’t the best. There’s going to be a sweet spot, which is at least 2X the value-add business plan.

Next is amortization. So amortization and loan term are different. So the loan term is how many years until the loan needs to be paid back in full. The amortization is the time period that the principal and interest payments are spread over. So the longer the amortization, the lower the monthly payments are going to be, but also the higher the interest payments are going to be. So a 30 year amortized loan doesn’t have the lower debt service than a 15 year amortized loan. But a 15 year amortized loan, when you look at the amortization schedule, you’re paying more principal on that loan from day one than you are on a 30-year loan… Because the way that it works is there’s an inverse relationship where in the beginning you’re paying mostly interest and a little bit of principal, and then towards the end, you’re paying all principal and very little interest. So usually, you can have an option, the loan will have an amortization, like, it’ll be 30 years or 25 years or 20 years. So that’s something to kind of be aware of because you can know, “Okay, well, this amortization is longer, which means that I’m not going to have as much principal to pay down. So I’m not going to take advantage of that benefit of real estate investing, which is having residents pay down the principal.”

This next one is going to be one of those factors that might result in one loan having a lower debt service upfront and then ultimately being higher overall. It’s interest only. So an interest-only period is going to be the number of months that the operator only pays interest payments, and then once this interest-only period is over, the principal and interest payments are going to be due, so you need to pay both. So interest only obviously is going to be lower than the principal and interest.

Now, the main benefit of the interest-only period is the increase in cash flow, which results in a higher IRR, because investors are getting more money faster and this increase in cash flow is even more beneficial on value-add deals because of the fact that you can immediately begin sending distributions to your investors upon closing, because your debt service is lower while your cash flow is lower, because you haven’t forced the rents yet.

Now, there are a few drawbacks. There’s no principal pay downs [unintelligible [00:13:37].28] that benefit, which might also impact future supplemental loans or refinance proceeds, which will ultimately reduce the IRR because you’re not able to give a large chunk of capital back to your investors sooner.

And then once the interest-only period expires, the debt service is going to pop up. And so you might have a fixed interest rate loan of say 4.5%, and they’re paying principal and interest from day one. Or you might have a fixed interest rate and loan at 6% with interest-only that’s at 4%. So at first is better than the 4.5% loan but then once it expires, it goes up to 6% [unintelligible [00:14:11].14] principal and interest, you’re paying more. I guess it wouldn’t be exactly like that. But I’m saying — you have two loans; one’s a 6% interest rate loan and one’s a 4.5% interest rate loan. And in the 4.5% interest rate loan, you might have a higher debt service if you’re paying principal and interest compared to a 6% interest-only loan. But once that interest-only loan goes to the principal and interest, it’s going to be higher than the 4.5% loan.

I know it’s nice that the more experience you have, the longer interest-only period you can get, and so you might have to worry about this second drawback. And then the third drawback could be that an unsophisticated investor might do a bad deal, because they say, “Oh, why you’ve got two interest-only deals cash flow and so much money. Let’s go and buy this deal,” without realizing that, oh, your three shoots up and then the cash flow went from 7% down to like 2% and now my investors are mad at me.

I did a whole episode on interest-only loans. So you can check that out at syndicationschool.com.

Next is going to be the debt service coverage ratio. And so this is a ratio of net operating income to the debt service. So the debt service is your monthly payment. It’s basically saying, “Okay, well, what percentage of the debt service is the net operating income?” Usually, it’s 1.25%. So the net operating income needs to be 125% of the debt service and often they’ll give you a loan. And then sometimes the higher that debt service coverage ratio, the better loan term you’re going to get. And then certain loans might have different types of loan terms for different windows of debt service coverage ratio. And this also might determine how much they’re going to loan to you. So they look at the net operating income, and they say, “Okay, well, you can get debt service up to a certain number and then based off of that, let’s reverse-engineer how much we’ll actually loan you on the deal.” And so overall, the lower the debt service coverage ratio, the more money that you can get loaned to you, but then also the less wiggle room that you have, because if the net operating income drops too much, you won’t be able to cover the debt service, you get foreclosed on and that’s not a good thing.

Another thing to think about is the interest rate, which we’ve kind of hinted at already, but… This is the rate the lender charges you to borrow their money. And the two different types of interest rates are going to be fixed or floating. So we kind of talked about that before, where fixed is going to be the same no matter what; floating, it could go up, it could go down and it usually starts off as lower than the fixed interest rate, it doesn’t necessarily mean it’s going to remain lower. So if the interest rate is floating, you want to know what’s the floating interest rate tied to, how long is it updated… Right now, it’s usually based off of the one month LIBOR rate, but I know in 2021, at some point, that’s going to change to something else. So you can take a look at that trend of that index just to guesstimate if the interest is gonna go up or down based off of previous trends. Again, it’s impossible know for sure, but at least it’ll give you a better understanding of whether you can expect interest rates to go up if they’ve been rising for a long time, or to continue to go down, or at least not go up too much.

And then for the floating interest rate, you can also buy a cap, which is helpful and reduces the risk. You basically pay an upfront fee, and it says, “Okay, my interest rate will not go higher than 100 basis points or 200 basis points or 500 basis points or whatever.” So this is ideal regardless if you’re doing a floating rate loan. That way, the interest rate doesn’t explode and go too crazy. And then also you’re going to want to know for these loans when the rate actually locks in. And so if the rates are all over the place, you want to be able to lock in the rate earlier, rather than later in the due diligence. So kind of comparing the different loans between when the rate locks in, and how much the cap costs, what the cap actually is for the floating rate, or things to look at.

We also have a Syndication School episode or at least a blog post on fixed versus floating rate interest rates. So check that out.

Some of the other things that are definitely important, but I think the most important ones are going to be the interest rate and the interest-only period and the debt service and probably the loan term, too… But these things are still important nonetheless. I just skipped one; loan-to-value, which I’ve currently talked about; that’s the ratio of the loan amount to the appraised value of the apartment community. How much money will they lend? So the higher the LTV; 80%, 85%, 90%, the more leveraged the deal, which means the less equity we have in the deal. This is good, because you get to put down less money, which means the return on your investment is higher, but you also have less wiggle room or less cushion against any market fluctuation. So we always recommend to not go above 85% maximum, right? But ideally, a little bit lower than that. But if you have to go super high or you really want to go super high and test it, 85% of the absolute max. And usually, if you’re looking at agency debt, you can’t go higher than that anyway, so it shouldn’t be an issue.

Okay, something else is recourse. So usually, most loans are going to be non-recourse, which means that the people signing the loan aren’t personally liable. So if something happens and the deal is foreclosed on, the lender can only go after the property, they can’t go after the property and your home and your other properties in your portfolio and your wife and your wife’s stuff or your husband’s stuff or whatever, your family. Whereas a recourse, you are personally guaranteeing this. So they can come after your personal assets if something were to happen. So usually, the agency deals are going to be non-recourse with certain exceptions, certain carve-outs, like fraud and misrepresentation, or gross negligence… Or maybe, depending on your background, you might not have the track record, the financials to qualify for a non-recourse loan. But again, ideally, to reduce your risk here, you’ll want non-recourse.

Some other things you might think about are lender reserves and then tax and insurance escrows. So these are going to be things that are acquired upfront by the lender. Maybe the lender wants you to pay for the first years of taxes and insurance upfront, even though they’re only paid on a quarterly or a monthly basis. Or maybe they’re going to be monthly instead, and you pay them along with your debt service. If escrows are required, then you’re going to raise more money for that loan, which means that the cash-on-cash return is going to be lower. Same thing with lender reserves, which we kind of talked about in part two, upfront, but it’s also going to be ongoing [unintelligible [00:20:09].25] reserves as well. So again, these are operating expenses that are going to lower your cash flow. So you’ll want to think about when you can access these funds as well, because that’s also going to vary.

So then the other terms that are going to be important on the loan are going to be prepayment penalties. And so comparing the prepayment penalty amounts, as well as when they come into effect. So when are you allowed to exit the loan without paying a fee, basically. This is one of the reasons why bridge loans might be more advantageous than agency debt, if you plan on selling before the end of the prepayment period… Because you’re talking about a $50 million deal and it’s got a 2% prepayment penalty – well, that’s a million dollars that you’re losing right off the bat, right? 2%. So that’s a pretty big deal. So you’ll wanna understand how the prepayment penalties work on the property, as well as — another term [unintelligible [00:20:58].01] the loan is assumable, because that’s something that is attractive to buyers on the backend, especially if loan terms are less advantageous now than when you bought the property. So they could just take over your interest rate; that could be something that’s attractive. So if the loan isn’t assumable, that might be something that you want to consider.

Something else to think about is how these supplemental loans work. So a supplemental loan is a secondary loan you can take out on top of the existing mortgage; usually, it’s a year after the first mortgage. But the LTVs might be different, the fees associated with it might be different, the number you can take might be different… So that’s something you want to think about as well.

And then a few other things, like financing fees is another upfront cost; how much does it cost to get the loan, a certain loan. There’s like streamline loans that the agencies have that have lower fees. So again, that’s more money upfront that lowers the cash-on-cash return.

And then this isn’t something that’s necessarily going to be a deal-breaker for a deal. It is just something else to think about when it comes to debt – it’s the reports that are required. Some lenders might require more due diligence reports, which again, is a higher cost to you upfront.

So a lot going on there, for a lot of these terms… I defined them in this episode, but you also have them defined on the passive investing resources site on joefairless.com. And then for a lot of these like prepayment penalties, assumable loans, supplemental loans, the due diligence reports, fixed-rate versus floating interest rates, the pros and cons of interest-only periods… We’ve written blog posts on the past and/or we’ve done syndication episodes. If you just  type in those words into joefairless.com, you’ll come across a lot more resources than that, because this already a 25-minute episode, and I can’t keep going on and on and on.

So those are some of the things to think about when you are comparing loans, other things to look at and to compare, to determine which loan is ultimately going to cost you more and which loan comes with a higher risk. And the loan that’s going to be best for you based off of these terms is going to vary from deal to deal. So I tried to as much as possible mention when that’s the case, which of these facts are the most important, and kind of looking through this list of facts.

Let’s say that the loan term is obviously important, the interest¬only period is going to be very important, the interest rate section is going to be important, and then depending on the business plan, prepayment penalties, is it assumable, and supplemental loans is also going to be good.

And then things like taxes and insurance escrows, lender reserves, financing fees, the required reports – those are going to affect the down payment that you have to give for things that aren’t necessarily going to result in ROI. So I think that’s it. Makes sure you check out The Top Loan Programs free document that you can find in the show notes of this episode, and make sure you check out part one and two, because this concludes the Multifamily Lending 101 course.

So I hope you learned something. If you have any questions, feel free to email me at theo@joefairless.com. No one’s taking me up on this yet. I give my email address out on the show every once in a while and no one’s emailed me yet, so I’m willing to answer any question you have. So that’s theo@joefairless.com.

Thank you for tuning in and make sure to check out our other Syndication School series episodes at syndicationschool.com. Have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2276: Multifamily Lending Part 2| Syndication School with Theo Hicks

In this Syndication School episode, Theo Hicks explains what lenders look at before approving the loan for a multifamily real estate deal. He lists the qualifications that a prospective investor needs to have in order to be considered by various agencies, as well as how to get around them.

He also covers the specific metrics of the market and the deal that will be required to get the loan. This guide includes relevant information about the recent changes in response to the pandemic.

To listen to other Syndication School series about the “How To’s” of apartment syndications and download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks:  Hello, Best Ever listeners, and welcome back to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks.

Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes we give away free resources, including today, this little mini-series we’re doing. So if you want to get these free resources – PowerPoint presentation templates, a lot of Excel calculators and templates, as well as a few PDF “how to” guides – make sure you go to syndicationschool.com and then all of the previous Syndication School episodes are there as well.

As I mentioned, this is going to be a continuation of a series we’re doing about multifamily lending. This is like a multifamily 101 course, breaking down how to select the ideal loan for your apartment syndication deal. Make sure you check out part one, which was released last week, or if you’re listening to this in the future, seven episodes ago, where we talked about how to decide what lender to use, and then do you always use agency loan, agency lenders…?

We also talked about the differences between a mortgage broker and a lender, the pros and cons of those and which ones you should use. And then we talked about at what point in the process should you be engaging the mortgage broker or the lender… Upfront, and then at what point in the process should you be engaging them again.

In this episode, we’re going to talk about the qualifications for agency loans. And then we’ll also talk about a few other things like upfront reserves and renovation costs. And then likely, we’ll finish it off in part three next week, when we go over what to look forward when actually reviewing options, depending on how long this episode goes.

So let’s get started. Again, this is assuming that you’re pursuing agency financing, because their qualifications, their criteria is going to be a little more strict than your bridge loan or when you’re working with a bank, typically. And as I mentioned in the previous part, the agency loan is in a sense like the holy grail of loans, because they have the best terms. So because they’re so good, not every single person is going to qualify for them. So the borrowing party, because it may be multiple people, which includes you—it’s less about who the borrower is, but the borrower is going to be analyzed, and then the deal itself is going to be analyzed, and it must meet particular criteria set forth by Fannie Mae and Freddie Mac in order to actually qualify.

So let’s start with a borrower. So the borrower is going to be the guarantor; this is the individual who guarantees the loan, who signs the loan, the people or peoples who sign the loan. So it might be you, it might be your business partner, it might be someone else, or one of your investors or something. And then the key principles, which is defined as any person who controls and/or manages the partnership or the property, that is critical to the successful operation and management of the parts of other property, and who may be required to provide a guarantee. So again, assuming you and any of your partners who are on the actual GP.

And then the third are going to be principals; this is any person who owns or controls a specific interest in the partnership. So for example, the LLC is going to be someone who owns 25% or more membership interest. So this could be the GP, but they’re already covered by the key principals; so it could really be someone on the LP that has a really big investment, then they’ll be considered a borrower as well. So they will analyze these group of individuals across a few different factors.

So first it’s going to be the organizational structure… This is important, but it’s not something that you’re not going to be able to do. So for example, for most agency loans, only single-purpose entities are eligible borrowers. So a brand new entity needs to be created for each transaction, which is not that difficult to do. And there’s really no, from my understanding, criteria that you need to meet in order to create an entity. There are some exceptions with small balance loans, where you can put that in your name, or in a non-single asset entity… But if you’re going to do an agency loan, you need to create a brand new LLC for that deal. So the LLC can be under another LLC, but the LLC that property’s name is going to be in needs to be an LLC that doesn’t own any other real estate.

The next thing they’re going to look at is the experience of the borrower. Again, the parties that are involved in the borrower. So both Fannie Mae and Freddie Mac have different ways in which they qualify the borrower, based on their experience. So Fannie Mae uses a service called Application Experience, ACheck. So their DUS lenders submit the information of the borrower to this ACheck system, and then it will take a look at the members and the borrower, their experience with Fannie Mae loans in the past, and then the DUS lender is going to get a go or no-go from ACheck, based on the borrower’s history.

So generally speaking, one of the borrowers needs to have been on a Fannie Mae loan in the past in order to receive that pass score from ACheck. If no one has ever had a Fannie Mae loan, then I’m not sure if it’s a definite no-go, but the likelihood of it getting a no-go goes way up.

Freddie Mac’s is a little bit different, and they also go into a lot more specifics on their website for how they qualify borrowers. So a borrower must have a minimum of three years in experience in the same capacity that it will have for the proposed transaction, which means that they must have three years of experience doing whatever they plan on doing for this particular deal. And they also say that they must have owned a minimum of three separate deals in the past.

They also must have owned and managed other property in the same market that the subject property, the property that is being purchased is located in. And then if the borrower is lacking in one of these areas, so if they don’t have the three years experience, they haven’t done three properties, they don’t own a property in the same market, then — that doesn’t necessarily mean they’re not going to qualify, but Freddie Mac might come back and say, “Well, you’ll have to put down a larger replacement reserve deposit in order for us to trust you enough to give you this loan.”

So again, Freddie Mac is a lot more specific than Fannie Mae. But overall, you’re going to need to have experience doing this. And if you don’t, then you’re going to bring someone on the GP who does have that past experience with Fannie Mae, Freddie Mac and multifamily in general.

Next is going to be a general credit check. So nothing too fancy here, just taking a look at any other loans or liabilities that the members of the borrower have, to make sure that they’re able to fulfill the debt obligations based off of a past debt obligations they’ve had, or current allocations they have; what’s your credit score, basically.

They’re also going to take a look at the current and prospective financial strength. So the agencies don’t have a specific liquidity and net worth requirement for their conventional loan programs, so it’s going to vary from deal to deal. And then if you have a weak liquidity or a weak net worth, again, combined with a borrowers, then you might need to put more upfront reserves. But to get a general idea of how much liquidity and net worth you’re going to need, you can take a look at the loan requirements stated for Fannie Mae and Freddie Mac small balance loans.

So for Fannie Mae, these are loans between $750,000 to $6 million. And for Freddie Mac, these are loans between $1 million and $7.5 million. And the requirements for both of these are nine months of principal and interest in liquidity, and then a net worth equal to the loan amount. So they’re going to want to see that amount of liquidity and that net worth between the borrowers in order to qualify for the small balance loan. So it’s safe to assume that for conventional loans, it is going to be something similar to that in order to qualify… Although it could be less, it could be more depending on your background and your experience. These are general rule of thumbs. So to get more specifics, you’re going to want to talk to the lender or the mortgage broker, because they’ll be able to look at your history, your finances to see if you qualify or not.

Now, assuming that the borrower qualifies for agency debt, it doesn’t mean that every single deal qualifies for agency debt. The first check is, “Okay, I qualify,” or “Me and my business partners and my guarantor, we qualify for Fannie Mae or Freddie Mac debt.” Now, you need to make sure you find the actual right property. So they’re also going to look at the specific deal, to make sure that it meets their requirements for agency loans.

So first is the actual property itself. So they only provide loans on certain types of properties. There’s a really long list of all the different checks that the property needs to meet. But as long as it’s like a normal multifamily property, then you’re going to be fine. Most of the things on there are just things that are kind of, obviously always at a multifamily property that’s fully developed and not in complete disarray. So it will check to make sure that it is actually multifamily, it’s accessible by a road, all the units have bathrooms and kitchen, there’s water and sewer services hooked, these are up to code, there’s access to emergency services, things like that.

The main criterion that the deal needs to meet relates to occupancy, and this is going to be the major factor that determines if a deal is going to qualify for agency debt or not. So for Fannie Mae’s conventional loan program, they want to see a minimum physical occupancy of 85%, and a minimum economic occupancy of 70% for 90 days leading up to close. And then the occupancy requirement is even higher for your small loan balance, at 90%. So, in other words, it needs to be a stabilized deal. Same thing for Freddie Mac, that has a minimum physical occupancy of 90% for 90 days. So the deal needs to be stabilized. If it is not, it is not going to qualify for Fannie Mae or Freddie Mac’s conventional loan programs. It might qualify for one of their more renovation type programs, but most likely, if it’s not stabilized, you’re not going to be able to get an agency debt.

And then lastly, they’re going to want to take a look at the property management company and the market. So they have some criteria for the company that’s actually managing the deal. They don’t really have any stipulations on whether it’s in-house or third-party, but the borrowers must have adequate experience with this particular size of property and type of property. And then I thought I remember seeing somewhere that you actually might have to have an in-house or third-party, depending on your experience and if you live in the market or not. But overall, the management company needs to have experience managing this type of property and this size of property.

And then for the market, they want to make sure that it’s a strong market, and so they look at these typical metrics like vacancy, demand, supply, jobs and [unintelligible [00:15:05].23]. And then for some of the loans, for example, for Freddie Mac, they have different minimum debt service coverage ratios and maximum LTVs based off of the market. So they break it down to top markets, standard markets, small markets and very small markets, where the terms are more favorable to the bigger markets.

Something else that you need to keep in mind when you’re dealing with the agencies, as I mentioned a few times earlier in the episode when talking about the requirements of the borrower and the experience requirements, and how they might have to put down a larger upfront reserve if they have less experienced or weaker financials… And one thing I wanted to mention – this is something that’s timely and is likely to change, so make sure you’re consistently staying up to date on these COVID-related changes, but they did change their reserve requirements in response to the pandemic.

So Fannie Mae is actually requiring 12 months of principal and interest for loans that are $6 million and more, and 18 months for loans less than $6 million. And then it could be as low as six months or down to zero dollars if you go past a certain debt service coverage ratio and loan-value ratio. So a debt service coverage ratio of 1.35 or higher, and an LTV that is 65% or lower, then it’s six months, and if the debt service coverage ratio is 1.55 and the LTV is 55 or less, then there’s no reserves required. So the more money you put down and the more cash flow there is, then the less reserves they’re going to require. But if it’s got a lower debt service coverage ratio, then they’re going to want more money upfront to protect themselves.

For Freddie Mac, it is nine months principal and interest on loans, with a debt service coverage ratio of less than 1.4, and then six months if it’s above 1.4 and then 12 months for their small balance loan. So pretty large upfront reserves.

And then when you have access to that money, it kind of really depends… So this is something that you really need to talk with your lender about, to know exactly what you need to have upfront in reserves… Because again, this is going to impact the cash-on-cash return to your investors, and also have an understanding of when you can distribute that money back to your investors or when you can tap into that capital to do a value-add renovation program.

Which brings us to my last point I wanted to make in this episode, which is going to be the renovation costs. So with Fannie Mae and Freddie Mac, with agency debt, can you get a loan where the rehabs are included? And the answer is yes, they both have a loan programs that cover renovation costs.

Fannie Mae offers a DUS moderate rehabilitation supplemental loan, aka the mod rehab loan. It’s actually you’re getting two loans; you get the regular conventional loan, and then you can get a supplemental loan on top of that to cover renovation costs. And the advantage here compared to other supplemental loans that Fannie Mae offers, is you don’t need to wait the full year to get a supplemental loan; you can get it right away, as long as the renovations are at least $10,000 per unit.

Freddie Mac offers two renovation loans – a moderate rehab loan and a value-add loan. And the difference between these two is going to be the renovation costs. And so for the second loan, the value-add loan, renovations need to be between $10,000 and $25,000 per unit. And then the moderate rehab loan would be renovations that are $25,000 to $60,000 per unit. And then the minimum of $7,500 needs to go into the actual interior. So that includes the exterior costs as well, obviously.

So if renovations are less than $10,000 per unit or greater than $60,000 per unit, then you’re going to need to get a bridge loan or pay for those renovations out of pocket, a.k.a. out of your passive investor’s pocket.

So that’s going to conclude and wrap up this part two. We talked about how to qualify for agency debt as a borrower, what deals qualify for agency debt, some of the changes to the upfront reserves based off of the Coronavirus, and then the fact that you are able to get a loan that covers the renovation costs.

So we’re going to wrap up next week with part three, where we’re going to go over the various different metrics of a loan – debt service, loan amount, interest-only, what these things mean, and then how you can analyze and compare and contrast multiple loan options based off of these variety of metrics.

We’re giving away a free document for this series. It’s the top loan programs document where you’re able to view more specifics on the different Fannie Mae, Freddie Mac, and the non-agency loans, the terms of each of those loans in more detail… Because in this episode and in this series we’re focusing more on not necessarily high-level, but we’re not going to go into detail on every single loan. Like here’s the interest rate, here’s the service coverage ratio, here’s the LTV, here’s all these various different terms. But we are, next week, going to talk about what those terms actually mean, and then what the pros and cons are for the different options that you’ll have.

So until next week, make sure you download the free top loan program’s document. Make sure you listen to some of the other Syndication School episodes. Have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2269: Multifamily Lending 101 Part 1 | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares some knowledge and experience about choosing a lender. Just because agencies tend to have the best terms on their loans, it doesn’t mean that you shouldn’t consider other options.

Theo also talked about the most well-known agencies and their process of transforming your loan into MBS (mortgage-based securities), and how it works on the borrower side of dealing with DUS Lenders.

To listen to other Syndication School series about the “How To’s” of apartment syndications and download your FREE document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow. 

Click here for the top loan programs

Click here for more info on groundbreaker.co


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks:  Hello, Best Ever listeners and welcome to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes, including this episode today, we offer some free resources. So there are going to be free documents, PowerPoints, PDFs, Excel template calculators, things like that’ll help you along your apartment syndication journey.

All of the previous episodes and previously given away free documents are available for free at syndicationschool.com/. And this is going to be most likely a two-part series, depending on how long I talk today, about multifamily lending. This is going to be a multifamily 101 course talking about these specific topics.

So today, we’re going to talk about how you determine which lender to actually use. We’re going to talk about agency lenders versus private loans, and which ones you should use, should you always go with agencies. We’re going to talk about using mortgage brokers versus working directly with a lender. We’re going to talk about at what point of the process you’re supposed to engage the mortgage broker and the lender. And that’ll probably be about as far as we get to in today’s episode.

And then next week, or if you’re listening to this in the future, the syndication school episode that is seven episodes after this, as we release daily episodes, we’re going to talk about how to know if you qualify for an agency loan, and then we’re going to talk about things like upfront reserves, can you have renovations costs, including the loan, and then what you need to look at when you are reviewing options. And then for both of these episodes – because we’re not going to get into super specifics on the different types of loans that you can get through the agencies and through the bridge lenders… So in a separate document, we’re going to provide the top loans program, which will be an Excel template that will have the most popular agency loans, bridge loans and other types of loans that you can get on multifamily properties. So to kick things off – well, how do you know what lender you should use?

Now, most of the time, the best terms you’re going to get on a loan is going to be the agency loan. Now, just because agency loan has the best terms, it doesn’t necessarily mean that you should always use an agency loan, because of the fact that, for example, there’s a prepayment penalty, which we’ll talk about a little bit later. But that is something that is on the agency loan. So if you are doing a deal that you plan on refinancing or selling after a few years, well, it might not be best to get an agency loan because of the extra fee you’ll have to pay. In that case, a non-agency loan would be ideal. But most of the time, I would say that if you can qualify for an agency loan and the plan is to hold the deal for, say, 5 to 10 years, then you’re going to want to get an agency loan.

So with an agency loan, a lender is going to provide you with the debt to purchase the apartment, but rather than actually holding that mortgage on their books, they’re going to sell that mortgage to an agency. So that’s why it’s actually called an agency loan. And then the agencies are then going to pull together thousands of these different types of loans they bought, and they’re going to sell them to private investors or investment firms on the open market as Mortgage Backed Securities (MBSes).

So the two agencies that everyone knows about that will actually purchase these loans from lenders and then resell them as these mortgage backed securities or MBSs are Fannie Mae and Freddie Mac. And both of these agencies guarantee the MBSes that they sell to investors, because they are government-sponsored entities, GSE’s, which means that not only is the agency guaranteeing these loans, but the United States government explicitly say it, but they’re implicitly, as a sponsor of these agencies, also backing these loans. So in order to provide that guarantee, these agencies are only going to buy certain types of mortgages from approved providers.

So Fannie Mae was actually created first, and then Freddie Mac was created later to generate some competition to drive down the rates even more for both the borrowers, the lenders and the MBS investors.

So why am I going through this entire history? Well, the question is, what lender do you use? So if you want to get an agency loan, then you can only use the lenders that are allowed to sell their products to these agencies. So you’re not going to be working directly with Fannie Mae or Freddie Mac; they’re the ones that are buying the mortgages. You’re going to want to work with an approved lending institution.

So both Fannie Mae and Freddie Mac have a list of these approval lenders on their websites. So for Fannie Mae, they only buy loans that are originated from what are called delegated underwriting and servicing lenders (DUS lenders). So what this basically means is that Fannie Mae is delegating the underwriting process and the servicing of the loans to a third-party lender that must meet their strict qualifications.

So in order to obtain a Fannie Mae loan, you must go through one of these delegated underwriting servicing lenders or DUS lenders, and there’s 25 at the time of this recording; you can go to Fannie Mae’s website, if you just Google Fannie Mae DUS lenders, then you’ll see that list.

And then Freddie Mac also has an approved list of lenders and they’re actually called the Optigo® conventional lenders. And similarly, if you just Google Freddie Mac Optigo® lenders, then the list of Freddie Mac approved lenders will come up, and a lot of them are the same as the DUS lenders.

So if you are able to qualify, which we’ll talk about, I guess next week, if you are able to qualify for agency, then you’re going to want to go through one of these DUS or Optigo® lenders in order to get the agency debt.

Now, the next question is, should you always use these agency approved lenders?

As I mentioned before, one of the major benefits of the agency loan are going to be the loan terms. So when you compare the agency loans to the non-agency bridge loans, you’re going to see usually lower down payments, and then you’re definitely going to see lower debt service because of the lower interest rates, which means that of course, you’re going to have a higher cash-on-cash return. But as I mentioned already, not every deal is going to be best served by an agency loan, using an example of a shorter hold period, but also not every deal or borrower is even going to qualify for an agency loan.

Obviously, if you don’t qualify for an agency loan or the deal doesn’t qualify for an agency loan, then there really isn’t that great of an advantage of using that lender; it’s probably better to use a mortgage broker to help you find the best loan that you qualify for or that the deal qualifies for… Although, obviously, that lender will probably still provide financing, this won’t be an agency loan and the terms won’t be as good. Which kind of brings us to the next point, do you use a lender or do you use a mortgage broker?

So the mortgage broker is a firm or a person who acts as an intermediary between a lender and then the borrower. And then the major benefit of using a mortgage broker is that they are going to have a higher level of expertise and a larger breadth of relationships than you, because that’s their main focus, is working with lenders.

So since there are countless different multifamily loan programs offered at any given time, when you work with a mortgage broker and you send them information on you, your team and the deal, then they will come back to you with the ideal loan program, or a lot of options to choose from. So that’s kind of their expertise; they can use their expertise and find the best loan program, whereas you might not be able to do that on your own. Although working with a lending institution, they should do the same thing. So in a sense, they both have expertise, so really, the major benefit is more the breadth of relationships. So the mortgage broker is not going to be limited to the loan programs offered by single institutions.

So if I go and work with Wells Fargo, Wells Fargo has their list of loans, and if you want a loan that’s not on their list, well, they really can’t make up a loan for you. Whereas a mortgage broker is working with Wells Fargo and then all these other lending institutions, and so they have access to all of Wells Fargo loans, as well as all loans at other lending institutions, which means that they can offer you may be a better loan program in general, plus, they can negotiate with multiple lenders to get you the best terms for a particular loan program.

So overall, your options are a little bit more limited when you’re working with a lender than with a mortgage broker. And then I guess one of the downsides of a mortgage broker is that since they are an intermediary, they’re going to charge a fee for their service, a certain percentage of the loan that you pay to the mortgage broker as a fee.

So who do you use? It really kind of depends on different things. If you’re just planning on always using agency loans, it maybe makes sense just to work with an agency-approved lender. But if you plan on using some bridge loans and agency loans or you want to have a mortgage broker who works on your behalf,  goes out there and maybe one DUS lender is offering better terms today, and then a month from now a different DUS lender is offering the best term, but they can kind of figure all that out for you, as opposed to going out and talking to all of them…

So if you want to get the best terms, working with a mortgage broker is probably the ideal strategy, and it’s definitely the ideal strategy if you plan on pursuing a private loan, a bridge loan, because they’re going to find you the best terms for that as well.

So the last thing we’ll talk about in this part one will be when do you engage with this mortgage broker or the lender. So you decide that you’re going to go with a lender or decide you’re going to go with a mortgage broker – at what point in the process do you actually reach out to them?

So let’s just assume that you’re just getting started and you haven’t done a deal before – you should not be reaching out to a mortgage broker or a lender once the deal is under contract. In reality, you really shouldn’t be looking at deals until you’ve spoken and engaged with a lender or a mortgage broker… Because when you have a conversation with them, they’re going to ask you information about your background, and the type of deals you’re looking at and the amount of money you can raise, what markets you are investing in… And then based off of that, they can tell you what loan program you’re going to qualify for. But more importantly, they can tell you how much debt you can qualify for.

So if you assume that you’re going to qualify for, let’s say, $10 million in debt, and you’re going out there looking at deals that are in the 12 plus million dollar range, and you find a rock solid deal, get it under contract and then you engage your mortgage broker and say, “Hey, I’ve got this $12 million deal. Here’s the information on it. Here’s my background”, and they say, “Oh, well, hey, Theo, you can actually qualify for $5 million in debt.” Well, there are obviously solutions like finding a loan guarantor, which we’ll talk about next week, but it’s better to know upfront how much money you can qualify for, and then you can either pursue those types of deals or pursue partnerships to qualify for more money.

So ideally, before you even start engaging real estate brokers to find deals, you should really get your property management company and your mortgage broker on board first, and then you can start looking at deals, and then the mortgage broker will tell you what you should send them if you find a deal you’re interested in. And then before you submit an offer, your mortgage broker or your lender will ideally give you kind of an estimate quote on how much they can loan, what the interest rates are going to be, so that you can calculate an accurate debt service so that you can actually determine a good offer, right?

Because not only do you have your traditional operating expenses, but you’re going to have to pay your debt service as well, which is going to really impact the cash-on-cash return, especially when you’re talking about getting interest-only or you’ve got higher LTVs or lower LTVs. All that’s going to affect how much money you’re paying to the lender each month. And the more you’re paying to the lender each month, all other things being equal, the lower the cash flow is ultimately going to be, which means the lower the return is going to be to your investors, which means the lower the offer has to be.

So again, you don’t want to submit an offer and then realize that the debt service is so high on that type of loan that you’re not going to be able to meet the cash-on-cash return requirements of your investors, and then you have to lose that deal, and you lose credibility in the eyes of the brokers, and even the owners… It’s not a good situation at all.

So overall, engage your lender or your mortgage broker upfront before you start pursuing deals. Again, have that general conversation to determine how much you can qualify for, and then before you submit an offer on a deal, make sure you’re getting a quote from your mortgage broker or your lender so you can get that estimated, the debt service amount and the estimated loan amounts, which in turn determines the down payment, so you can get a better credit representation of the cash-on-cash return, so that you know if it’s actually worth submitting an offer on or not.

So that’s the first half of the multifamily lending one-on-one a course. Next week, we’re going to most likely finish it off by going over in detail some more of the process, like how do you qualify for these things, what are the reserve requirements or renovation costs including the loan, and the other things to look for when reviewing the option. Now that I think about it, it might have to be a three-part series, because I think I might make the what to look at when reviewing loan options into its own episode, but we’ll see; at least two parts, potentially three parts. So that concludes this episode. Thanks for tuning in.

Make sure you check out some of the other episodes we have about the how-to’s of apartments syndications, as well as free documents, at syndicationschool.com/. And also, as I mentioned in the beginning of this episode, make sure you click on that free top loan program document and download that, so you can get more specifics on the different terms for each of the different types of loans available.

Thank you for listening. As always, Best Ever listeners, have a best every day and we will talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2262: How To Be A Best-Selling Author | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks, shares his advice on becoming a Best-Selling Author. He will give you 10 ways to market your next book release.

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hello Best Ever listeners. Welcome back to another episode of the Syndication School podcast. As always, I’m your host, Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. And for a lot of these episodes, especially the episodes early on, we have free resources that will help you along your apartment syndication journey. So make sure you check out the previous episodes so you can access those free documents at syndicationshool.com.

In this episode, I’m going to talk about how to promote and market a book. You’ll notice that a lot of people that we interview on this show, and more specifically a lot of apartment investors, a lot of apartment syndicators have published at least one book. We have published three books, with one being, obviously, the inspiration for the show you are listening to now. And I threw together a list of some of the things that we did in order to promote our book, both before it was even written, and then through the launch. And through this, we’ve gotten over three hundred reviews on Amazon and sold a bunch of copies of the book.

So I wanted to share it with you, because especially right now would be a great time to write a book, since everyone is at home, listening to audiobooks, reading more. It doesn’t have to be a 450-page tome like the Best Ever Syndication Book was. This could be used for promoting an eBook, or this could be used for promoting a course you’re trying to do. Or you can be unique  and apply this to getting more investors. But more specifically, this is about promoting some sort of book, or some sort of thought leadership platform. This is probably as broad as it’ll get. But I’m sure there are some tactics you could apply to other things here as well.

So ultimately, when you are marketing something, in this case, a book, what you want to think about… Or before I get into that, we’ve done an episode before on actually how to write a book, about how to approach, making an outline, writing it, getting it edited, and how to tactically, logistically publish it. So you can check that out. I think we did a Syndication School episode, but at the very least we have a blog post on how to self-publish your own book, so I’m not going to talk about that today. It’s more about, “Okay, your book is done, how do I get people to buy this thing?”

Like most things, the goal would be to create a win-win situation for all parties involved. In this case a win-win-win situation, because the three parties involved are going to be the author, so you, co-authors, ghost-writers, and then obviously the customer, so that’s going to be who buys the book… But then also you’ve got a third party, which would be anyone who contributed to the book. This could be someone who contributed actual content to the book, so they wrote the foreword, they provided testimonials, maybe they are featured in the book, they’re quoted in the book, or you ask them questions and then based on their advice, you include their information in the book. Or they could be people who helped you publish the book, like an editor, or a formatter, maybe even the publisher, depending on how you approach this. So the goal would be to create promotion strategies that play into the self-interest of each party, so that they’re going to want to promote the book, and they’re going to want to buy the book.

So here are ten things you can do. The first one is going to be using social media. This is something that you can start the second you realize you’re going to start writing the book. And the goal here would be to engage the audience you’re following, as well as would-be purchasers, in the process of writing the book. That way, they’re going to feel as if they have a stake in the book, since they were involved in the creation process. And also more practically speaking, the earlier and the more often you talk about the book, the more people would be aware of it, which means the more likely they will buy the book once it’s released. And ideally, even promote the book, which we’ll talk about in a second.

Some examples of things you can do on social media pre-launch would be announcing the topic of the book you are writing. And then asking for feedback along the way, like, “Hey, here are a few title ideas. Which one do you think is the best?” Or, “What type of questions should I answer in this book?” Or, “Hey, here is three cover designs I’m choosing between. Which one do you think is best?” Things like that.

You can also provide frequent updates on your progress, like, “Hey the outline is done, the first chapter is 50% done.” But whenever you give an update, again, you want to be adding value and engaging them in process. So you can provide advice along the way, like “Hey, here’s how to write an outline. Hey, here’s how to get over writer’s block to get that first chapter done.” Things like that.

An example is we took a picture of my little command center here that I write on, and then based off of what I had, like a coffee mug, and music up, and multiple monitors, nice comfy chairs, I just talked about lessons I learned to help me overcome writer’s block when writing a book. So those are social media things you can use pre-launch.

And then once the book is published – these are kind of obvious… You can create a social media post saying, “Hey the book is available for purchase.” You can even do some sort of paid advertising for the book. And I’ve found through my conversation on this show that some of the best ways to advertise a book would be a 30 to 60-second spoken video, explaining what people will learn in the book.

And then besides what I have mentioned here, a lot of the other things that I’m going to talk about in a second, you’ll also want to use that as other examples of social media, starting up with a pre-order page, which is the second way to promote your book. So rather than the book just kind of going live on Amazon and wherever you’re selling it the day it’s available, you can have a pre-order page, “Go to Amazon.” I know you can do it on Amazon, I’m not sure if you can do it on all book publishing services. But on Amazon, you can create a pre-order page, where it looks exactly how the page will look once the book is done, except rather than saying, “It’s available” and the shipping time, it’ll say like “Pre-order available at this date”, or whatever. Now the process for doing is kind of a little bit detailed and there are some good blog posts out there. Just Google “pre-order on Amazon” and you’ll be able to find some blog posts on how to do this. But then once the pre-order page is live, obviously, you can direct people to that page using your social media.

And then also, you want to create a book page, so this is the third way to promote your book. So when you create a book page, the timing of this can kind of depend on what you want to do, but it’s better to do it once there’s a way to actually buy the book. So this is kind of combined with the pre-order page. Once the book is available for pre-order, you can make your book page, and then the link that’s included in there will go to that pre-order page. And then for each of these, you’re going to want to answer the questions, “Why should I buy your book?” So you want to give them a sneak peek into the top valuable information that you’re going to want to obtain, as well as including the link to that pre-order page, as well as feature the fourth way to promote your book, which is the free giveaways.  This is when we’re getting into the juicy stuff. I think this is likely the best way to promote a new book before it’s launched and after its launch, to generate sales.

So again, on this book page, you want to go ahead and put the pre-order page, but also talk about any type of free giveaways you’re going to do. These are going to be free resources above and beyond the content in the book, yet obviously related to the book. So the best thing to do here would just be various Excel type of calculators, things that you can’t necessarily include in the book, but can help them actually apply the information in the book.

For our Best Ever Apartment Syndication book, these documents included a simplified casual calculator, construction matrix, weekly performance review template for property management companies, loan matrices to compare loans… Things like that, things that you can’t easily put a book and say “Hey, here in the book is your cashflow calculator.” This is not going to work.

So you create these free documents and then you give them away. And how you give them away really depends on what you want to do, but the best approach seems to be that you give away the largest batch of free documents to people who actually pre-order your book. So in order to get these free documents, you need to pre-order this book. That will incentivize people to pre-order the book, because of the fear of missing out. “I’m not going to be able to get access to all these amazing documents.” Maybe even give a dollar value to the documents. A hundred dollar worth of free documents for free if you pre-order the book.

So when you are kind of thinking of the free documents, like what to create, just be creative, and while writing your book, just think about ways you can create Excel templates to give away for free, or extra PDF guides that go into more detail on something that are more timely. Maybe you can create a timeless book, but you want to create maybe some sort of supplemental guide talking about the current pandemic, or something. Or maybe you want to give away a free copy of the other books you’ve written. Or maybe people who contributed to the book are willing give away free eBooks. Just think of anything you can and give that away.

And then once the pre-order period is over and the book is published, you can still use these free documents, either just in general as a part of buying the book, but not as many as the people that pre-ordered. Or you can give away… Well, I’ll  talk about that other thing in a second… But another twist would be to do a free give away to essentially create some sort of contest where people can win a free copy of your book.

Something that we used to do back when me and Joe did Follow Along Friday, where we would do a trivia question of the week, and the first person to email us the correct answer, or post on YouTube, would receive a free signed copy of our book, with the idea of constantly talking about the book and what it is. And one person wins, but maybe someone who participated ends up buying the book, right? Or two people end up buying the book.

Now, the fifth way to promote your book would be to leverage the reviews. So obviously the people who know you are hopefully going to buy your book… But, what about the people who don’t know you? What about if your audience isn’t very big? Well, in order to expand out to people who don’t know you, you’re going to need to get reviews for your books, because that will people are going to look at and that’s what, in a sense, determines where your book ranks on Amazon, how visible it is for people to see on the top of the list of real estate books. So that’s what they’re going to use to make their purchase decisions.

So you’re going to want to have a high quantity of high-quality reviews. So you don’t want a few really long, detailed, high-quality reviews, and you also don’t want to have hundreds of reviews like, “What a great book. Good job. Learned a lot.” Right? They need to be a balance. You want to get as many reviews as you can that are actually quality reviews. So to do this and to avoid fake and generic reviews, which are gonna turn buyers off, then you can send a PDF of the book to your friends, family, and other people, have them read the book, at least skim the book, and then once it’s published, you can say “Hey, read this book. Could you please give me review?” And then, “The book goes live on this date. Could you please copy and paste that review into Amazon when the time comes?” And once the book is actually launched, you want to follow up with them again and make sure they actually left the review. And of course, they benefit because they get to have access to a best-selling book before the public did, for free.

Something else you can do if you have a team, or maybe a co-author, or some very loyal friends, or family members, then you can ask each of them to be responsible for giving a certain number of reviews, for your circle of influence. This is something that we did for our book. And then once the book is published, this is where go back to the free giveaways. So once the book is published, you can leverage more reviews by doing a free giveaway. So on your platform, you could say “Hey, if you buy a copy of my book, review it and send me a screenshot of that review, then we will send you one or more free documents.” So not as many free documents as those who pre-ordered the book, but still something they care about, to get them to leave a review. And using this strategy of reviews, getting reviews before the book launched based off of how people review in the PDF, and then giving away free documents to those who reviewed, we were able to get over 300 reviews on Amazon, and counting. We’re still getting reviews every week.

Next is going to be focus more on the contributors and getting them to promote your book. The first would be testimonials. So get people to give you testimonials on either the books, so giving them the book beforehand, they read it, talk about how great the book is… So in a sense  like an Amazon review. Since you’re already doing the reviews beforehand, you can use some of those in the book if you want to.

Or you can go and find a famous person and have them give a testimonial. So for the first book we wrote, Barbara Corcoran of Shark Tank actually gave a testimonial. And then for the second book, Brandon Turner of BiggerPockets gave a testimonial based off of the book. And both of those were featured on the cover. Obviously, that is really a good way to get credibility for your book.

But the people who wrote the testimonials, they will benefit because their name, and maybe their business, will be in a best-selling book. And then also, you can hopefully in return have them promote the book, share it on social media, since their name is in the book, so you can tap into their audience as well. And of course, you can also use these testimonials and put those on your book page.

Number seven is going to be the foreword. So kind of like the testimonials, just a bit more detailed… The person who writes your foreword can share the book with their audience, especially since there are multiple pages, depending on how long the foreword is, of the book.  Maybe they are co-authors; sometimes they’re even included on the cover, and so they’ll be motivated to share that with their audience.

Number eight would be the other contributors that I talked about before, them sharing the book to get exposure for their business. The editors, the designers, and the other acknowledgments you have for people who helped you along the way. And also, something we did for the first two books was the book actually featured — each chapter was a person. So each book featured twenty or so investors, and so since the entire chapter was dedicated to them, they were incentivized to share to book as well, because there was essentially a marketing piece for them. “Hey, I’m in this best-selling book. Learn more about my business, what I do, and here’s my advice”, it gives exposure for them as well. So while writing your book, think of different ways to incorporate people into the writing of the book, contributors, that way you’ve got more potential promoters on the backend.

Number 9 and number 10 are kind of similar. Number 9 is going to be your own thought leadership platform. So besides social media, leverage other aspects of your thought leadership platform – newsletters, podcasts, blogs, YouTube channels, to obviously promote the pre-order page, the book page, and the on-going posts that you make about the book, and then obviously once the book is actually live.

And then something else you could do too is you can maybe do some sort of thought leadership mini-series about the book. For example, I’m pretty sure Joe and I did a 10-part podcast series summarizing the book, The Best Ever Apartment Syndication book. And obviously, it turned into Syndication School as well. And then on the flip side, you can use other people’s thought leadership platform. So try to get as many podcasts as you can in general, and then at the end, hopefully, they’ll allow you to plug your business, and plug your book. But what’s even better is if you can get people to interview about the content in the book. So you’re not on there just saying “Hey, buy my book.” Instead, you can talk about, “Here are 10 tips on how to become a Best Ever apartment syndicator. Oh, by the way, if you want more detail on these 10 tips, plus 20 more tips, plus all these free documents, you can check out my book that’s available on Amazon.”

The most ideal way would be to do that, but be on multiple different podcasts, and have all those air the week or so after your book is launched. I’m pretty sure that’s something that Tim Ferriss talks about in Four Hour Work Week, I think. And I’m not 100% sure, but he talks about it somewhere, I’m pretty sure.

And then maybe give some sort of discount code for the audience, or you can do a free giveaway, or a document for whoever buys it and sends you a screenshot of it, or picture of them doing something, right? Like, you can say, “Please take a selfie of yourself with a thumbs-up sign and email it to me, and that way I’ll know you listened to it from this podcast, and then I’ll give you a free document.”

And then kind of overall — those are the 10 ways, but overall, just be creative, right? Use your creativity to figure out ways to either add to this list… Because for each I kind of gave examples to be creative within these lists, right? So think of other ways to leverage reviews, to get more exposure for your book, how to use social media to get more exposure for your book. Contributors, testimonials, forewords, thought leadership platforms, things like that.

So yeah, again, I think writing a book is definitely beneficial to a business, it gives you lots of credibility, and it helps you fine-tune your own knowledge on whatever subject you’re writing about, and it adds value to people. Especially right now, as I’ve mentioned, a lot of people are at home, and I’m sure at least some — I would imagine… I mean, I’ve read more books since the onset of the pandemic, and maybe other people are as well, so it’s a great time to get a book out. So start writing that book you’ve always wanted to write… And as I mentioned, we’ve got at least one blog post on how to self-publish the book, tactically and logistically speaking, and now you know how to promote the book once it is available.

And again, even if you haven’t done a syndication before, you can just interview 10 syndicators, or 20 syndicators, and then you create a book that compiles the best advice from syndicators, right? You don’t really need to have done a deal before, or if you’ve done one deal, the book can be about that deal. So also be creative in the type of book that you write.

That’s all I’ve got for today, thank you for tuning in. Make sure to check out some of the other Syndication School episodes, as well as all of those free documents, at syndicationschool.com. Have a Best Ever day and we’ll talk to you tomorrow.

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JF2255: Apartment Make Ready Checklist | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares a make ready checklist to help you with your next apartment deal and provides you with the checklist by clicking here.

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hello, Best Ever listeners and welcome back to another episode of The Syndication School series, a free resource focused on the “How To’s” of apartment syndication. As always, I’m your host, Theo Hicks.

Each week, we air a Syndication School episode that focuses on a specific aspect of the apartment syndication investment strategy. And for a lot of these episodes, especially the first batch of episodes, included free documents. These are free PowerPoint templates, PDF, “How To” guides, Excel calculator templates, things that help you along your apartment syndication journey. So make sure you check out those past episodes as well as all those free documents at http://syndicationschool.com/. And today is going to be another one of those days where we give away a free document. We haven’t given away a free document in a while, so the document that will be given away for this episode, which you can find in the show notes, is going to be a make-ready checklist. So nothing too fancy or too groundbreaking, but at the end of the day, when it comes to operating apartments or really any real estate in general, it’s kind of details that count.

And one of the expenses that you will have are the turn to make-ready costs. So whenever a unit goes vacant, generally, you will inspect the unit to determine any damages that were caused so that you can not only address those damages, but also reduce the previous tenants security deposit by whatever amount is necessary. So it could potentially result in increased expenses in two ways.

One, you’re not being compensated for damages that the residents did above the normal wear and tear. And at the same time, you might have a poor reputation in the market if someone moves into the units and the washer and dryer doesn’t work, and there’s still nails hanging in the walls. So what you’re going to want to do – this is either going to be you or your management company – you’re going to want to have a walkthrough of the unit once someone has moved out, so you know exactly what you need to do in order to get the property ready for the next resident… And so that the management company or you aren’t doing the inspection from memory, you want to have some sort of checklist prepared. And the checklist that we have available for you today for free is going to fit that need.

So I’m going to quickly go over the checklist and how to use it, but I’m not going to go over every single item that you’re going to want to check; all that is in the document. But essentially, what you want to do is you start on the outside and then you make your way in to the units. And every single room, you want to check really every single thing in that room. So four different things you could check for each item in the room; it’ll be completed, which means that, “Hey, I looked at that item.” And then the other option would be replaced. And so let’s say you look at the item and it needs to be replaced; maybe it’s completely missing, the tenant stole it, or it’s damaged beyond repair. So you check, “Okay, well, this is something that we need to replace.” Or the other option might be that, “Okay, well, it’s damaged, but I think it can be salvageable. I think it’s something that can be simply repaired and then it’ll be good to go.” So you can check “repair”. And that is going to be non-applicable, because not every single unit is going to have the same things in it. But every single room is going to have the same things in it. And so if it’s not there, you can check an A. So you do this for every single item in the house.

And so the categories we have in here are the mechanical, and so you’re going to want to inspect the furnace, the air conditioner and the water heater to make sure that they are functioning and that there is no damage to any of these.

Depending on the type of apartment, there might not be individual water heaters or individual air conditioners or individual furnaces. If you’re one of those large skyscrapers, mid-rise complexes, it’s likely that they’re shared, and so you won’t have to do that for those. But at the very least you want to make sure that it’s working in the unit.

Next is the laundry. And so if there are washer and dryers, you’re obviously going to want to check those. If there’s not washer and dryers, you’re going to check the connections and make sure that all the different nuts and bolts are operating properly; there aren’t any leaks or any issues.

And then now that you’re inside the house for all these rooms, you’re going to also want to check the same things in each room. So the light fixtures, the light bulbs, the light switches, the electrical outlets, the HVAC registers, the walls, the ceilings and the baseboard. So again, this is super detailed.

Again, you want this to be very detailed, because you want to provide a high-quality product to residents. And you might not think that a nick on a door or a nail on the wall or a damaged floorboard might not be that big of a deal to you, but it’s the little things that make your units pop, that make the units high quality. And typically, people aren’t going to do reviews when things are great, but they’re going to be reviews when things are bad.

So I guess that’s something else too that I didn’t mention in the beginning, which is that this could also result in the reduction of reputation and poor reviews for your property if they move in and things are damaged. Actually, I think I might have mentioned that. So again, the laundromat might not be in the unit, [unintelligible [00:09:17].28] So if that’s the case, you don’t want to look at that.

Next would be the entrance. So you would inspect the outer aspect of the entry and the inner aspect of the entry to make sure everything is working and nothing is broken or missing. And then you’re going to enter into the living room and check everything. So once you enter into these rooms, new things would be things relating to the windows – do they open? Are there blinds there? Are there screens there? Then also take a look at all of the smoke alarms and CO2 detectors. Make sure those are functioning properly.

Then you want to check out the patios or the balconies if those exist again, just making sure everything works properly.

The kitchens and the bathrooms are where you’re going to be spending most of your timem just because there’s the most moving parts in there. When you go to the kitchen, what you’re expecting is every single thing that the resident might use. And so you don’t want to just look at everything and say, “Okay, everything looks good.” You want to test everything as well when it comes to the kitchen. So you want to test to make sure that the oven works and that the various settings of the oven works, broil and bake; that the actual range elements work. There should be a hood in the hood filters, so make sure the hood actually works. Same thing with the fridge. Is the fridge on? Do the temperatures work? Is the ice maker working? Does the sink work? Are there any leaks in the sink? Is the sink actually draining? Does the garbage disposal work?

Same with dishwashers. Is the dishwasher working? Is the microwave working? And you want to check every single cabinet to make sure that there’s no damage to those cabinets. That’s a big one, because the cabinet might look good on the outside, but you might pull open a door and lo and behold, one of the hinges isn’t connected properly and the door falls off, right? That going to be the first thing a new resident experiences when they move into your unit, is they open up a cabinet door and the cabinet door falls off on top of their head.

And then next is the dining room. Pretty simple things in there, nothing too fancy. Essentially, the exact same as the living room. The bedrooms – again, still nothing fancy. The only main difference here would be to make sure that the doors actually lock from the outside; or I guess they lock from the inside, but you can’t enter from the outside… And that the closet isn’t damaged. So the closet is going to be a high traffic area, just like the entryway, just like the kitchen cabinets. So the high traffic areas might take a little bit more time to inspect. But in the closet, make sure that any of the racking or the rods are secure and they’re actually there and they’re not damaged. Make sure that the doors open and close properly and that they’re not damaged. So you’re going to do this for each of the bedrooms.

So right now we’ve got it set up for two bedrooms, but you could very easily just copy and paste and add a third or a fourth bedroom, or you can remove one of the bedrooms if it’s only a single unit; or if it’s a studio unit, I guess you can technically remove both bedrooms.

Now besides the kitchen, the next pretty intensive spot would be the bathrooms, because there’s a lot of different things you want to check. So again, you don’t want to just walk into the bathroom and look and then say, “All right, I think it looks good.” You want to check to make sure that the toilet works, flushes properly, refills up. Make sure that the shower head turns on, the top faucet turns on. Make sure that everything’s draining properly. In the shower, you want to check to make sure that none of the tile is damaged or molded or has any water damage. I’m not sure exactly how to pronounce them, but it’s called escutcheons. It’s the ring that’s connected to the wall for the shower head and for the tub. A lots of times, those are no longer connected and they’re kind of just sitting up there. If you touch them, they fall off. So you want to make sure you check all of those. Again, something small, but it’s something that’s going to be annoying to a resident and they move in there and their escutcheons, or however you pronounce it, is damaged.

Same thing with the sink. Does the sink turn on? Does the hot water work? Does the cold water work? I guess that applies to the shower or tub as well. But make sure everything’s draining properly, that there aren’t any leaks in the P-Trap at the bottom. Make sure there isn’t any damage to the vanity. Make sure all the cabinet doors work properly. If there’s a missing cabinet mirror, make sure that’s not scratched or anything. And then again, the standard things from there.

So we’ve got two bathrooms that you can inspect using this make-ready checklist. If there’s more than two bathrooms, again, make sure you add. If there’s less than two bathrooms, you can subtract one of them.

So what you’re going to do after you’ve gone through this entire checklist, you can then have a quick handy guide to know, “Do I need to just clean and then we’re good to go, or is there something else that I need to repair or something else that I need to replace before this unit is ready to be rented again?” And then you can give it to your maintenance person or whatever your process is going to be, they can address everything and then the unit is ready to be rented again.

So again, this is the make-ready checklist. You can get that for free at http://syndicationschool.com/ or in the show notes of this episode. So that’s all I have, a short one, short and sweet, but again, super-important to making sure that your unit is very high quality, everything works, everything looks good, so when that new resident comes in, their first impression is, “Wow, this is a very clean and slick, functioning apartment. I’m going to stay here forever,” versus, “Oh, my escutcheons just fell off my showerhead.” I will figure out one day how to pronounce that word, I promise.

Alright, so thank you for tuning in, as always. Besides this episode, make sure you check out some of our other syndication school episodes on the “How To’s” of apartment syndications. Download this free document, download the other free documents that we have and have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2251: Ground Up Syndications With Shannon Robnett #SituationSaturday

Shannon is a full-time real estate investor and developer with over 21 years of investing experience. He has a portfolio that consists of buildings, police departments, fire stations, city halls, residential, and much more. Shannon focuses on developing syndications from the ground up for his investors and today he shares his journey into this niche.

Shannon Robnett  Real Estate Background:

  • Full-time real estate investor and developer
  • Investing for over 21+ years
  • Portfolio consist of office buildings, police depts, fire stations, city halls, subdivisions, residential, commercial, & industrial
  • Based in Nampa, ID
  • Say hi to him at: www.shannonrobnett.com  
  • Best Ever Book: Never Split the Difference 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Starting over wouldn’t be the end of the world because I would put one foot in front of the other and start building” – Shannon Robnett


TRANSCRIPTION

Theo Hicks: Hello, best ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we will be speaking with Shannon Robnett.

Shannon, how’re you doing today?

Shannon Robnett: Good, Theo. Thanks for having me on the show.

Theo Hicks: Absolutely. Thanks for joining us. Looking forward to our conversation. A little bit more about Shannon. He’s a full-time real estate investor and developer with over 21 years of experience. His portfolio consists of office buildings, police departments, fire stations, city halls, subdivisions, residential, commercial and industrial. He is based in Nampa, Idaho. And you can say hi to him at his website, which is https://www.shannonrobnett.com/.

So Shannon, do you mind telling us a little bit more about your background and what you’re focused on today?

Shannon Robnett: Sure, Theo. I grew up in a real estate family. My mom is a third-generation realtor. And my son is a fifth-generation. My father was a commercial builder. I was the kid that saw his first 1031 at probably 13 years old, probably not appropriate for a child to see that. But that was the kind of stuff that I saw growing up at the dinner table, the conversations that were had. And so as I grew up and I started trying to pursue things on my own, I saw where development was something that kind of came naturally, because we had clients that were looking for buildings or clients that were looking for offices and they couldn’t necessarily find what they wanted or there wasn’t land available. So we would buy that, we would develop it, we would build the office, we would have some excess land to do another deal or two on, and that just kind of grew into what we do today.

Through that process, we kind of involved a few partners here and a few partners there, and as that began to grow, we quickly found ourselves with more deals than dollars. So we’ve stepped into the syndication process and are doing ground-up syndications now all across the Treasure Valley.

Theo Hicks: Thanks for sharing that. So you said that when you first got into development, it was because you actually had a customer that needed a property that did not exist. So, is that what you still do today? You build based off of what someone else wants or are you building and then selling to someone after it’s already created?

Shannon Robnett: We do two things. We build for other people… So currently, I’m building about 140 doors worth of apartments – some seniors, some regular – for customers. But we also have about 230 that we’re doing for our own development, where we build them, fill them and then look to resell them based on market value.

Theo Hicks:  Which one is the majority of your business, the building for other people or then building and then selling afterwards?

Shannon Robnett: Well, in the last two years, our business has swung, as our syndication ability to syndicate product has gotten a little bit better; we are now able to bring on more projects. And we’ve got about 1,000 doors in our pipeline that we’ll bring through our syndication program over the next year and a half.  That will all be ground-up, and we’ll eventually phase out building for other people because it just won’t be necessary.

Theo Hicks: Got it. So let’s focus on the building for yourself, in a sense, the syndications. So what type of compensation is typically offered to people who invest? Because my background would be in the apartment syndications that are already built, five-year hold periods, preferred returns, profit splits… Is that is same way it works for development, or are people who invest in development deals getting a different type of compensation structure?

Shannon Robnett: Well, Theo, if you think about that for a minute, when you’re getting into the deal that you’ve just described, you’re trying to blend the person that is in their mid-30s, let’s say, that is looking to grow their real estate value or grow their net worth, and you also have the gentleman or the woman that’s in her late 60s, early 70s that wants to live off of the money that’s coming in every month. And you’re trying to blend those two and get those to fit into a scenario where you’re giving enough on the cash on cash return to attract maybe the more well-heeled investor that has a little bit more cash to deal with, and yet, you’re also trying to get enough growth in there that is attractive to people that are trying to grow their net worth.

In the ground-up development, we’re different in a couple of ways, because we’re not necessarily chasing the forced appreciation. I think the market that we’re looking at right now, a lot of people that were planning on forced appreciation are becoming very surprised in the fact that they’re lucky to maintain the rents that they were getting prior to COVID. So forcing appreciation really isn’t the thing that that people are doing right now. And typically, you’re trying to score an apartment that is at value or maybe a little bit undervalued, but there’s things that you can do to bring it up to value.

We’re looking at something where by assembling the sticks and stones, we look at the appraised value, and there’s typically between 20% and 30% difference between the cost to construct and the appraised value. The beautiful thing about an appraisal is it’s an independent third party that’s taking a good hard look at it and gone with historical fact, on what rents are, not what you hope rents to be.

So we were able to put together a project, we just broke ground on it two weeks ago, that we had a cost to build all in of $5.3 million; our finished appraised value at rents from the appraisal that was done in December of ’19 put the project’s value at $6.3 million. So we can see that there was clearly some definite profits there. And then we just look at bringing that to a stabilized place, and then once we reach stabilization, and we’ve achieved the goals of the syndication, then that project gets sold and we harvest there.

The typical times — this particular one I just described is 36 units; that’s about a 12 to 14 month period of time that our investors are involved, and the return on that will be mid-20s for that period of time. And most of our clients are using a self-directed IRA product, so that they’re bringing it right back into their IRA portfolio and not having to deal with the tax implications that come with not holding the project for three to five years.

Theo Hicks: So your strategy, just to confirm – you build it, you stabilize it and then you sell it.

Shannon Robnett: That’s correct.

Theo Hicks: Okay. From my understanding, I thought that developers would typically build it and then sell it while it was vacant. Am I wrong there, or do people also do that, and you just do this strategy because you’re able to make more money from it that way?

Shannon Robnett: Yeah… When you look at it, Theo, I think there’s money to be made in the ground. The guy that sold me the ground, he made some money; building the buildings makes some money, filling the buildings makes some money… I just see that taking it from the raw ground to the stabilized product where you’re able to sell it on a cap rate, you’re able to maximize the dollars that go into it. So you could build it and sell it during construction. I do get offers all the time on product that’s underway. But it’s hard to convince someone that it’s going to rent for this, so the easiest thing to do is to prove the rents… And then somebody can step in, just like somebody can buy a value add project, they can buy this one, it’s brand new, they can pay top dollar for it, they could know that for 10 years or 12 years they’re not going to have repairs to be done to it. Brand new roof, brand new air conditioning systems – all of those things. So it makes it a different kind of an investor that buys that… And they tend to pay a little bit more for that.

Theo Hicks: Once the property is actually built, who is responsible for stabilizing it? Do you have your own in-house management company, or is there a third party you partner with? And then based off of your answer, why did you choose one over the other?

Shannon Robnett: Well, we do all of our own in-house management. And the reason that we do that is because as you know, cap rates are what rule the game on industrial and multifamily properties. In fact, when I started out, I had another property management company that was a friend of a friend, and they did such a horrible job. So I went out and I hired the guy that I knew that was the best at it. And the very first thing that he told me was, “We need to make this about a choice.” And I said, “What do you mean?” He said, “There’s four other complexes right around yours that are brand new.” And he said, “We need to make this about a $35 choice, where we are $35 more than the guy next door. That’s a couple of cups of Starbucks coffee, but when people will make the choice to rent with you, regardless of that $35, they’ll stay longer and they’ll be better tenants, because there’s something about your particular complex that they like better than the others.”

Well, that has proven itself to be very, very true, so we have a lower turnover rate. But you also look at that and you take that — the complex that he started with me on it was 180 units. Getting $35 a door more than the competition put our value on that particular project alone at the same cap rate as the park project next door at $1,000,007 more, just because of that one piece of advice.

So Jeff has done a lot to help us grow that, because we have control of that. We’re not necessarily offering the concessions that the guy next door is to rapidly fill, because we’re managing an asset for the sales price that’s tied to the cap rate based on the NOI.

Theo Hicks: Okay, I understand the calculation; same cap rate, the greater the NOI, the greater the value of the property. And you also mentioned the benefits of having that higher cost. But my question is, what specifically is your management company doing in order to demand that extra rent, compared to what the competition is doing? Is it just a higher quality product? Do you offer different amenities? What types of things differentiate your property from the competitors that allow you to get that premium rent?

Shannon Robnett: Well, the thing that we start with is your experience the minute you come to our properties. We interview our personnel to make sure that they have the type of personality we want. We want somebody that’s warm and inviting, professional, follows up to the point that you’re not wondering where the property management company was on getting back to you on the results of your application, or anything like that.

So we tend to hire a better quality of staff, so that your experience once you come to our property is to know that we’re all about property management. We’re not doing it as some function of, well, this is what we have to do. But we go after a certain personality to make sure that that experience is awesome.

And as you know, everybody builds a different product for a different reason because they feel that that’s the best. Just like cars, not everybody’s going to pick the same car. But what we’re looking at is maybe we’re closer to your job or maybe we’re closer to your grocery store of choice, or your gym or your church. There’s a lot of reasons why people pick apartment complexes, and it has a lot to do with the experience that they have, and what they feel is the amenity mix that they’re looking for. So we just go out of our way to make that the best customer experience that they can have, and I think it shows. We have better reviews than the surrounding properties on our stuff. We tend to make sure especially with what’s going on with the world right now, that our tenants feel like they’re our customers. We’re really working with them to get through this time. They’re not just a number of somebody that can be evicted and we can go on to what’s next. It’s not the right experience to give them.

Theo Hicks: My second product question was, you said 12 to 14 months is kind of typical hold period. So do you mind breaking down that, from raw land to when it’s completed, from when it’s completed to when it’s stabilized, and from when it’s stabilized to when it’s sold? How long do these stages take?

Shannon Robnett: The current project we were discussing is a 36-unit ground up. We’ve got another one that’s a 2000-unit that it’ll take about two and a half years. But it takes about six months to build a twelveplex. So we started that project, we’ll begin to sanitize those as soon as the buildings are done individually, so we will start bringing tenants into that environment in about seven and a half months, eight months, nine months, 10 months. We’ll probably reach 95% occupancy on that 36 unit project.

We’ll give it a couple of months so that if someone wants agency debt, you can now get the 221(d)(4) program done with 90 days of occupancy over 90%. So we’ll season it for that period of time so that it’s available for the optimum financing. And we want to make sure we close out at least a full three-quarters of bookkeeping, so that we’ve got enough records there that we’re in a sense, bankable. So that’s the process. And we’ll give it three to six months of stabilization as we take it to market, so that by the time the transaction is closed, it’s usually been stabilized for about nine months. So nine months to build, it goes under contract in three to five months and then it’s closed, usually by month 15 or 18.

Theo Hicks: And then the people who are investing, do they start getting paid once it’s built, once it’s stabilized or once it’s sold?

Shannon Robnett: The way that we do that is it’s just about a payment when it’s sold. So they are getting an 8% pref in this particular case, and then they’re getting a rather large percentage of the profits at the point that it’s sold. So with the guaranteed GMAX on the contractor side, it’s pretty easy to see how that comes out. And then if we’re able to get higher than projected rents, then obviously they get higher than projected returns.

Theo Hicks: And then the last question before the money question, what is your process for selling these on the back end? Is there like a preferred broker you use? And then at what point in the process do you typically have that buyer? I guess what I mean is when you start seeing interest in the property, and then when do you start actually taking action against that interest? Because you already mentioned that people will start expressing interest while it’s being built. So, are those people put on a list, and you mail it out that list to everyone who’s expressed interest? How does that process work?

Shannon Robnett: You’ve seen that happen quite a bit where you do a call for offers. We don’t really do that, but we do market it once we have reached stabilization. So once we have filled 90% of the units and we know what our exact rate calculation is, and then we can get into the nitty-gritty of what our NOI is going to be – once we have that, then we can put out a number that nobody needs to be disputing. And then at that point, we will contact all the brokers in our area, we will contact a couple of national brokers, let them know what we have, and then just see what happens there. That usually only takes about two and a half weeks to put that property under contract, because they’re brand new, they come tenantized; there’s not a lot of risk to it. So at that point, we’re able to usually attract some really good offers on the property.

Theo Hicks: Okay, Shannon, what is your best real estate investing advice ever?

Shannon Robnett: Do your due diligence. Know what you’re getting into long before you get into it, because once you’re in it, you’re creating solutions to maybe get out of it or not lose, or whatever. But the more time you spend on your due diligence, the better prepared you’re going to be… Because it doesn’t matter what deal I’ve ever done, there’s always something in it wasn’t anticipated. So the more of that that you can spend the time to uncover before you pull the trigger on it and make that baby yours, the better prepared you’re going to be to face what you’re going to uncover at some point.

Theo Hicks: Alrighty, are you ready for the best ever lightning round?

Shannon Robnett: Sure.

Theo Hicks: Alright.

Break: [00:18:54] to [00:19:36].

Theo Hicks: Okay, Shannon, what is the best ever book you’ve recently read?

Shannon Robnett: Never Split the Difference with Chris Voss. I just finished and it was excellent. I haven’t had the chance to use the principles, but it was an excellent book. I look forward to it.

Theo Hicks: If your business were to collapse today, what would you do next?

Shannon Robnett: Build it again. I build things, so for me, starting over wouldn’t be the end of the world. You just put one foot in front of the other and get started.

Theo Hicks: If you don’t mind, could you tell us about a time that you lost money on a deal, how much you lost and then what lessons you learned?

Shannon Robnett: Well, if you’ve been in this game for very long, you will definitely encounter that. I had a deal that I did, it was a two-warehouse deal I put together, and I had pre-sold it. I did one of those things that we talked about in the show, where I pre-sold it to a guy at a certain price, and it took about five months longer than I had anticipated to build it, the tenants wanted some other things, I wasn’t keeping a microscope on the cost… And yet, I already had a fixed price on the other end. It did really well for the investor, because he was able to get a much higher rent out of his tenant because of the things that I did, because I wasn’t watching the costs on that. And then when I sold it, my price was fixed and I lost about $200,000 on that particular deal. It was really hard to walk away from closing after doing all the work, building a couple of buildings, getting all the tenants in there and knowing for about the last two months that this was happening, that I was going to lose 200k.

Theo Hicks: And on the opposite end of the spectrum, tell us about the best deal you’ve ever done. And that could be best in regards to money, or something else.

Shannon Robnett: It’s kind of hard to beat – I think the very first deal I ever did was one of the best. I think it has a lot to do with the nostalgia, because it was my first real estate deal. I was working on a job, and I was talking to my crane operator on the job, and he was looking for a place to put his cranes and everything, and he needed a yard, and he was looking for something maybe with an old house on it that he can create an office out of. And the little old lady next door and her son came to me and said, “Hey, you don’t know anybody that would want to buy our three acres here and our house?” And I thought, “Gee, this is perfect.”

So I was 20 years old at the time, and I wrote an earnest money check that wasn’t my last $500 deal, it was my only $500. I was newly married. I had no money. I wrote this check. I knew that it wasn’t going to bounce, but I knew I wasn’t going to have anything left. But three months later, when I closed that deal, I bought the place from the lady the same day that I sold it to the crane operator, so I never took possession of property. And that 500 bucks made me 80 grand in 1996. That was a lot of money, and one of the best returns I’ve made on a $500 investment.

Theo Hicks: Wow. What is the best ever way you like to give back?

Shannon Robnett: I like to be involved with organizations that help people. I know that when we get done with our projects and we have leftover building materials, I love to get involved with Habitat for Humanity on that stuff. We also make sure that we make it a point to be involved with our communities as far as special programs that we can be helpful to kids in mentorship programs, because I know there’s a lot of kids that need mentors, and they are our future. So we’re always looking to partner with programs that allow us to bring what we know and bring that into a mentorship program with adolescents in our area.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Shannon Robnett: https://www.shannonrobnett.com/ is easiest thing for me to remember also. So if you just go there, all my links are there; you can find me on social media and all that other stuff, but https://www.shannonrobnett.com/ is where I hide.

Theo Hicks: Perfect. Shannon, thanks for joining us today and giving us your best ever advice on real estate, as well as more specifically on development. You started off by breaking it down into the two different types of deals you’ve done. The first is where you actually build a development for someone else, so you already know what they want; you to build it for them and you’ve got a buyer already.

And then what you focus on now, which is to build and then resell after stabilization using the syndication model. So you also mentioned the two types of investors – the one who invests growth and the other one who invest for cash flow. And you mentioned one of the reasons why you really like development is because you don’t need to rely on the forced appreciation, which relies on the assumption of rental growth in the future… Whereas your money is made by the difference between the cost to construct and the appraised value being about 20% to 30%. And that appraised value is based off of what rents actually are.

You mentioned that instead of actually selling once it’s built, you will stabilize the product first, get up to 90% occupancy, you’ll wait 90 days, so you exit that window of having 90 plus percent occupancy for 90 days in order for the end buyer to get optimum financing. You also mentioned that a lot of your investors use a self-directed IRA.

You talked about your reasoning behind having an in-house management company as opposed to a third party. First of all, because if you tried a third party and they didn’t do a very good job; then you ended up hiring someone you knew was really good. And because it’s in-house, you can focus more on the customer.

Your management company is not just a part of your business you kind of ignore, but it’s kind of the central portion of how you’re able to make money, because you like to charge $35 more than the competition, because you’ll get better residents who end up staying longer, as well as a greater value at the same cap rate. And you do this by making sure you hire the right people, have a warm and inviting personality that always follows up and just gives the resident a really good experience.

You also talked about the location and making sure it’s close to different amenities they want, as well as making sure you have the proper amenity mix at the actual property. You told us about your sales process, which is another reason why you like to stabilize, because you have a proven NOI, which allows you to get a proven sales price. You don’t have to worry about people coming in and saying, “Well, I think it should be this.” Like, “No, it’s this, because I’ve proven this to be the case.” And you contact brokers locally and nationally, and you said you’re usually under contract within two weeks, I believe you said.

And then your best advice was to make sure you are spending enough time doing your due diligence ahead of time. That way you’re prepared for when things ultimately don’t go according to plan.

So Shannon, thanks again for joining us. Best ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Shannon Robnett: Thanks again.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2248: Passive Investing In A Fund vs Individual Apartment Deals | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks, compares two ways to invest, one by passively investing into a fund which you have probably heard of in the past on previous episodes versus the opportunity to invest in individual apartment deals. 

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks. Each week we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes you will find a free resource to download. So make sure you check out the past episodes for those documents at SyndicationSchool.com.

In this episode I want to talk about the differences between investing into individual deals and investing into a fund. We’ve talked before about the types of passive investments – there’s the equity investments, which is the most common, and then there are the debt investments, which are less common, but they’re out there. Typically, you see debt investments for smaller deals, like a hard money lender, for example. When you hear someone is a private lender, that would be a debt investor.

One distinction that needs to be made for the equity side, which means that you actually own shares in the LLC that owns the property, is that as a passive investor, I can invest into one deal at a time, or I can invest into funds, where I invest into a fund that owns multiple deals. So as an apartment syndicator, those are your two methods of raising capital to fund your deals… So understanding the differences between the two, and the pros and cons for the passive investor will help you decide which one you should use. So again, the two are going to be the individual deals, and a fund.

For the individual deals – this is what most syndicators do, especially when they first start off, is they will raise money for a single deal at a time. So as a syndicator, we always recommend having verbal commitments equal to about 150% (at least) of the total project cost before you put the deal under contract. So if you can raise a million dollars, then you want to look for deals that are less than 30 million dollars. That way you know you can cover it assuming that a portion of those people actually end up investing.

Say you go out and you find your deal, and then you’ll send that deal out to your list of investors, and then people will commit to the deal, send  the PPM, submit their funds, and then they’ll be an investor in that particular deal alone. So with that deal, the syndicator follows a business plan, and then obviously that one deal is in a single market. So everything is very unique to one specific deal.

A fund is kind of the opposite, where it’s  a private partnership that rather than buying a single deal, it buys at least two, most likely more pieces of real estate, or for our cases, apartments. So if I’m raising money in a fund, I’ll have numerous investors send in their commitments, and then I will use their capital to buy a bunch of apartment communities.

So the GP of the fund  – unlike the single deal – might do multiple business plans… Or they might just do one business plan. So maybe I just do value-add deals in my fund. Or maybe I just do turnkey properties in my fund. But it is possible to do a fund where it’s a mixture of business plans. I think it’s ideal to focus your energy on one, because they are different, and I think you’ll have economies of scale if you focus on one, as opposed to multiples. But I’m sure there’s people out there that do focus on multiple business plans. So if  you’ve got multiple business plans potentially, obviously multiple deals, and then also it could be in multiple markets or it can be in one market. So there’s more diversity across the deals for sure, and then potentially diversity across business plans and the market.

So let’s talk about the funds. There’s two different types of funds that you can create. The commonly referred to as close-ended funds, or just like a regular fund… And then an open-ended fund, also known as the evergreen fund. For the close-ended fund – pretty self-explanatory by the name… It has a specific end date. So the investors would commit a certain amount of money to invest, and then the syndicator would continue to accept commitments until they’ve hit that desired fund goal. So maybe they wanna create a ten-million-dollar fund, so they’ll keep taking commitments until they reach ten million dollars. And maybe they’ll do a waiting list after that, up to, say, five million dollars, or something.

And then once they’ve achieved that desired goal – or maybe before –  they  will start to buy apartment communities over a certain period of time. So depending on how long the fund is – let’s say it’s a ten-year fund – it’ll be probably around three to five years maybe. So the fund starts, and then for the first five years they’re continuously buying deals. And then these deals are held, depending on the business plan, for 3 to 7 years. So again, the buy time, and then once you buy that last deal, however long that hold period is is typically gonna be how long that fund will be.

Most close-ended funds you’ll see are gonna be about ten years. But as a syndicator, you also have the opportunity to close the fund early, or you can extend the fund by multiple years too, depending on how you made the contract.

Now, for a close-ended fund the passive investors are not gonna get their initial equity back until the end of the fund. But as I mentioned, some funds might end early, also some close-ended funds might distribute large lump sum profits to the passive investors once an apartment is sold or refinanced. The GP may also have some option to recycle proceeds from a sale refinance back into the fund if some criteria is met, like the deal was sold before two years, or something; or a refinance before two years. So very flexible… But it is possible to get some lump sum profit by investing into a fund, but the passive investor is not gonna get their full investment back until that fund ends, after ten years or so.

The other fund is the open-ended or the evergreen fund. The main difference between the open-ended and the close-ended – again, as the name implies – is that the open-ended fund does not have an expiration date or an end date. So rather than accepting commitments up until a certain limit, and then stopping, and then buying deals for only a certain period of time and then stopping – the money-raising and the deal buying is continuous.

An example would be I raised money up to a certain point, and then I’ll buy some deals, and I’ll raise more money, and I’ll buy some deals, and I’ll raise more money and I’ll buy some deals, I’ll raise more money and I’ll buy some deals… Or I’ll buy a bunch of deals, then I’ll raise a bunch of money, then I’ll buy a bunch of deals and I’ll raise more money. So it can be one at a time, two at a time, it really just depends on how available capital is and how available deals are.

So unlike the close-ended fund, where the initial equity is only received back at the end of the fund, for evergreen funds the passive investor can get their equity at any time by selling their shares. Of course, there might be some sort of lock-out period where you can’t sell your shares for a year without a penalty or something… Again, highly flexible.

So those are the types of funds. Now, how do these compare to the individual deals? So when is the passive investor’s money due to you as the syndicator? Well, when investing in individual deals, the passive investor commits, and then surely thereafter their funds are due, because generally, they’re gonna commit and the deal will be closed within 60-90 days, traditionally… So the money is due pretty quickly. Whereas for a fund, that’s not necessarily the case.

What happens to the fund is that – say I’m a passive investor, I commit a million dollars to the fund right at the very beginning, and then the syndicators are continuing to get commitments for let’s say a year, until they reach their fund limit of 100 million dollars. So for a year, I have not submitted any money; and then the syndicators identify a deal, and then they’ll send out an email to all of the people who committed and signed the documents of their commitment. It’ll say “Hey, we have a deal, and we need either all of your investment, or we need a portion of your investment to cover this deal.” This is referred to as a capital call. Again, this could be a portion or all of the capital you committed. And when the GP sends this formal capital call notification, the passive investor is legally obligated to fulfill that call based on whatever they’re committed amount was, and whatever percentage the GP is requesting.

And if the passive investor fails to meet that call, then the GP can force them into default, and then if this capital call happens after the passive investor has already invested some of their money, then they will forfeit their entire ownership in the deal, and then other passive investors can buy that ownership.

So depending on what point in the process you make your commitment… Or if it’s in the beginning, then you might not have to submit your capital or any capital at all for a year, or maybe less, or maybe more… Or maybe you’ll submit all of your capital gradually over three years or five years. Or if you jump right in in the middle, maybe you submit all of your capital right away. So it varies. There’s not a standard timing in which you will have to submit your money. It’ll depend on the fund for the passive investor.

The compensation structure for funds and individual deals are gonna be the same, and so the passive investor will be offered a preferred return, and/or a profit split. That profit split might change to be more favorable to the syndicator once a certain return threshold (like an IRR) is passed. And then the timing of the ongoing distributions are similar once the passive investors have submitted their capital, once a deal has been identified. But the time, as I mentioned, from commitment to receiving your first distribution has a potential to be longer for the fund, because again, you’re committing and then you’re only submitting capital at the capital calls.

So you might receive distributions pretty quickly, it might be a year… And even if you submit a portion of your investment, you’re not gonna get the full return based off of your entire committed amount until all of your money is in that fund.

Return of capital – we already talked about that for the fund. And then investing in an individual deal – passive investors get their money back when the deal was sold. So depending on the length of the fund, the length of the hold period for the individual deal, passive investors might get their money back earlier in a fund, they might  get it back later in a fund, or they might get it back at the same time.

Profit upside is gonna be a pretty big difference. For the individual deals, the profit upside is going to be higher, because if I’m a passive investor investing in a deal that does really well, then the size of my equity and my distributions grow in proportion to that single deal. Whereas if I’m investing in a fund, then the passive investor’s return on investment is going to be an average of all the deals in that portfolio. So if a few deals in the portfolio perform exceptionally well, the performance of the other average or below average is going to flatten the overall return.

Now, on the flipside, when it comes to risk, that means that there’s more profit potential for individual deals, but there’s also the greater potential to lose more money in the individual deals, because if the one deal performs really bad, then the negative effect on the passive investor’s equity is going to be directly proportionate to the badness or the goodness of the deal. Whereas in a fund, if a few deals perform really badly, the performance of the average to above average deals will bring that return up and will dampen or entirely cover any of the passive investor’s losses.

Something else to consider about the fund is that the passive investor is putting a lot more trust in you, the syndicator, when they’re investing into a fund, especially when it’s early on in the fund and there aren’t any apartments, or only a few apartments. So as a passive investor, if I’m investing in an individual deal, I can analyze you (the GP) first and say “Okay, I really like this guy/girl.” And then once a deal comes in, I say “Okay, well I like them, but I don’t really like this market, or I don’t really like the business plan, or I don’t like this deal, so I’m gonna pass on this one.” Or “Okay, I really like this one. I’m gonna invest in this one, but I wanna invest all of my money into this one deal.”

Whereas for a fund, all the passive investor can do is vet the GP and their proposed usage of the funds. But once they make that commitment and a capital call comes in, the passive investor is not allowed to say “Well, I don’t wanna invest in this deal.” Or “Hey, I actually wanna invest all my money into this deal.” The GP gets to decide how much of your capital goes into that deal. So again, this could come with added risks to the fund from the perspective of the passive investor, because they’re putting a lot more trust in the syndicator, which is why the syndicator that opens a fund is most likely going to have a lot of experience. You’re not gonna start your syndication business by opening a fund. I’m sure it’s possible, but you’re more likely going to do individual deals, and then move to a fund, if ever, much later on.

From a  tax perspective, the distributions to passive investors are taxed the same. Ongoing distributions are subject to income tax; that taxable income might be reduced if the depreciation is passed on to the passive investors. And then the profit at the conclusion of the individual deal or the fund are considered gains, and they’ll be subject to capital gains taxes. I’m not necessarily sure how 1031 exchanges work in funds.

And then the last thing would be feasibility for the passive investor. It’s gonna be easier and harder at the same time in the individual deal. The easy part is that the passive investor doesn’t have to be accredited to invest in your syndications if you’re raising using 506(b), whereas for the fund, the passive investor is gonna have to be accredited. So no sophisticated investors are allowed to invest in funds.

This is kind of minor, but it might be a deal-breaker for some passive investor… But when investing in a fund, the paperwork is less, because I’m only signing one set of documents when I’m making my commitment to your fund… Whereas for individual deals, I have to fill out paperwork for each deal. So that’s kind of like an upfront thing, but that is one difference.

So really overall, from the passive investor perspective, the major differences between investing in individual deals and investing in a fund is going to be the level of risk. Individual deals – a little bit more risky, but minor. It could be offset by a really good GP, a really good business plan, a really good market… So it could be riskier; but individual deals also have a greater profit upside, and it’s possible to receive the distribution sooner, and to receive the initial equity back sooner.

Whereas for funds, if they are diversified across multiple apartments, potentially in multiple markets, risks are reduced. But then because of that reduction in risk, the upside is also flattened… And it’s likely that the passive investor’s money is gonna be tied up a little bit longer, and that distributions will start a little bit later.

So that’s some of the characteristics, the pros and the cons of the individual deal investing versus the fund investing. This was inspired by an interview I did with Kris Benson, who does [unintelligible [00:20:17].15] the way he was explaining it in the show. I don’t think the episode has aired yet. All the information I’ve talked about today, he talked about in the episode, and I did some further research to bring more information to the table.

So yes, that concludes this episode on the differences between investing in individual deals and investing into a fund. Make sure you check out our other Syndication School series episodes, and those free documents I was talking about at the beginning of this show, at syndicationschool.com.

Thank you for listening, have a best ever day, and I will talk to you tomorrow.

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JF2247: Investor Friendly Agent Dan Rivers

Dan is a full-time realtor and investor who has over 10 years of real estate experience with a portfolio consisting of 9 doors and has invested in 2 syndications. As an investor-friendly agent, Dan gives advice on how to approach an agent and how to properly start as a new investor.

 

Dan Rivers Background:

  • Full time realtor and investor
  • Has over 10 years of real estate experience
  • Portfolio consist of 9 doors, 6 with business partner and 3 others
  • Has invested in 2 syndications
  • Based in Charleston, SC
  • Say hi to him at: www.danrivers.com 
  • Best Ever Book: Mindset

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Mindset is one of my favorite books because it really opens your idea around fixed and growth mindset” – Dan Rivers


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we are speaking with Dan Rivers. Dan, how are you doing today?

Dan Rivers: Excellent, Theo. Thanks for having me on.

Theo Hicks: Thanks for joining us. I’m looking forward to our conversation. Before we dive into that, a little bit about Dan – he’s a full-time realtor and investor, with over 10 years of real estate experience. His portfolio consists of nine doors, six of which he did with a business partner, and then three others. He’s also invested in two syndication deals. He is based in Charleston, South Carolina, and you can say hi to him at DanRivers.com.

Dan, do you mind telling us a little bit more about your background and what you’re focused on today?

Dan Rivers: Sure, Theo. I started back in around 2004, moved from Boston down to Tampa, and got into property management, the condo and HOA side. I hit the ground running, learned by fire; I started out with 16 properties to manage, which consisted of high-rises on Clearwater Beach, to some homeowner associations  downtown.

From there, I moved back to Boston in ’07, where I moved up the ranks there, finishing around 2015 as division president for a property management company… It was around then that I realized that property management was great, I had a lot of experience from it, between learning contracts, financials, insurance – really all the ins and outs of a property… But it wasn’t my passion. And in 2018, my wife and I decided to move down to Charleston – best decision ever – and I got my real estate license in May of 2018 and hit the ground running from there.

In 2019 was my first real full year as a realtor down here. I realized at the end of 2018 I wanted to focus on investing and working with investors. It was my niche, it was my passion… And in 2019 I was able to become a top 10% realtor down here, selling 26 homes. That was my first full year. This year I’ve actually surpassed my goal of 5 million, and gonna shoot for 10 million this year in sales… Primarily focusing on investors, but I also do regular residential sales as well. My business partner and I – areas that we’re focusing on right now are particularly BRRRRs in the North Charleston area down here in Charleston, South Carolina. We have six ourselves under our belt, we’re refinancing a couple and we’re looking to grow to at least ten this year, and really get that to about 40 units over the next five years.

Theo Hicks: Perfect. So you’ve got two focuses right now, which is the BRRRRs with your business partner, and then also you’re working with investors to help them buy deals, right?

Dan Rivers: Exactly. I have several out of town investors that are BRRRing, flipping, doing those types of things. So yes, exactly.

Theo Hicks: Okay. So you’re what’s considered an investor-friendly agent, which a lot of people in the investing world would love to have… So one question I have for you is whenever you are — and again, I’m doing this for people who want to work with investor-friendly agents… So whenever you are considering working with someone, will you work with literally anyone who reaches out to you and says “Hey, I wanna invest in real estate. Will you be my realtor?” or are there certain things that an individual needs to have done first before you start working with them, if that makes sense?

Dan Rivers: It’s actually a great question, because people always say “I wanna get into real estate investing” – okay, well then what? And I’m happy to help out anybody. If someone just wants to have a call just for guidance, they’re not looking to invest in the next six months, I’m happy to chat with them to kind of guide them on where they need to be… To the person who’s been real estate investing in several markets and now just wants to get into the Charleston area market and is a pro at it.

So all levels, always happy to help out. Everybody has to start somewhere. And it depends on where you’re at, and that’s the guidance I’ll give you. If you’re a brand new investor and really wanna get into it, then that’s where I really go over “Alright, we’ve gotta start from the beginning. You’ve gotta know your end goal.” What are your goals? Because one of the biggest things people do is they’ll want to invest in real estate, they wanna flip, they wanna BRRRR, they wanna wholesale; they kind of wanna do a handful of things. But if you don’t really specify a niche of what you wanna attack first, you end up having paralysis by analysis.

So I try to guide someone, “Alright, what are you goals?” Passive income/Active income. What are you looking to actually accomplish, and then help them hone in on those goals. That’s the first step of any investor – really know your niche. And then once you have that going – if you want me to get into and kind of go over a few things that I do, it’s build a strong team. That’s definitely step number two. Once you know what you wanna do, you need to build that strong team. Lenders, investor-friendly agents, contractors, insurers, property managers if you’ve gonna be buying a rental portfolio. I think people don’t understand how important that part is. And as an investor-focused agent, I’m happy to try to set those things up and help guide people to all of those contexts, to give them that extra value. And I think that’s really the beginning part of investing. Anybody who wants to invest in the area or invest with me – those are the areas I really try to focus on to really guide people and help them out.

Theo Hicks: Are these team members – these lenders, these insurance people, property managers – do you refer them to your go-to people that you have built relationships with?

Dan Rivers: Absolutely. I have a couple of go-to people in all of those areas, but I also welcome people to research on their own. We have plenty of investment groups down here in the Charleston area, and sometimes people just reach out to other investors as well, to see what’s worked for them. Because it’s not a one-size-fits-all. I wanna make sure the personalities and the end goals match up to what the client wants.

Theo Hicks: Do you help your clients find deals?

Dan Rivers: Absolutely. Whether they’re on or off-market deals, I’ve actually in the past couple weeks have helped lock up a few wholesale deals, some off-market deals for clients… One wants to flip it, the other one is going to BRRRR it… As well as on-market deals. So however I could find them something that’ll match their criteria, I’m happy to help them out.

Theo Hicks: What are some of your lead-generation tactics that you’re using to find these off market and on-market deals? Do you mean on-market that you list them on the market, or you found them on the MLS from some other agent?

Dan Rivers: Yeah, the on-market is mainly just through the MLS. If I have something coming soon, or something that I am aware of in my brokerage, I’ll obviously send that off to my clients right away first, before it hits the market. But besides that, the off-market stuff are a lot of local wholesalers. I make sure that I’m on as many email lists as possible. I built relationships with the local wholesalers… As well as I have a team here that will send out letters to communities or specific houses if someone’s interested in something, to try to market that way as well.

Theo Hicks: Say you’ve got an off market deal – and you mentioned that before you list it on the market, you’ll give it to your clients first… But how do you know which clients to send it to? Do you send it to all of them, and they all get a fair shot, whether they’ve never done a deal with you before or they have done a deal with you?  Whether you’ve just met them or you’ve known them for a while…? How do you decide who gets the deal?

Dan Rivers: That’s a great question. I will send it out to people that I know are ready to buy and can close on the deal, because that’s one of the most important factors here, especially on off-market deals. They either have to be cash or hard money, and it’s gotta be someone who’s willing and ready to close on the deal. Because if not, I don’t wanna waste that wholesaler’s time or that connection’s time, because they may not send that deal to me first next time, or they may not be as apt to do business.

So the  investor has to be ready to do the deal, and I’m happy to get them to that point, but they have to be ready to close on that deal.

Theo Hicks: Perfect. So what can listeners do to portray to the investor-friendly agents in their markets that they’re serious, they’re credible, and they’re able to close on the deal? To be more specific, let’s say they actually haven’t done their first deal before; is it possible for them to portray the ability to close without having that prior track record of actually closing? Or do you wanna see someone who’s actually closed on a deal before, and you know that based off of that they are capable of actually closing?

Dan Rivers: Obviously, the latter is nice, because if they’ve done deals before, you know that they’ve gone through the process, so they’re ready to do a deal and they can analyze it usually a little bit quicker… But no, I’m happy to help the person out with their first deal. Everybody’s gotta start somewhere.

So if it’s their first deal, I’m just gonna make sure that they have all their pieces in place, as I mentioned before. Most importantly, how are they getting the money? Can they close on the deal, can they buy the deal? I’ll also guide them if they’re analyzing a deal; I have my own spreadsheets I hand out to people, or if they have their own, I’m happy to take  a quick review over it, just to give a second set of eyes to make sure that the numbers look good and the deal seems to be right up their alley. But as long as they have the proof of funds and the ability to close on that deal, it’s okay if it’s their first deal or their 50th.

Theo Hicks: Perfect. Do you want them just to tell you “Hey, I’ve got the money”? Do you wanna see bank statements of the money actually in the account?

Dan Rivers: Yeah, either see a bank statement, or some sort of approval letter from a lender. Sometimes I’ll even check in with a lender, but yeah, I want some sort of physical copy of that… Unless we’ve done deals in the past and I know that they have that ability, then I don’t have to see this every time, once I know that  they’re able to close.

Theo Hicks: So besides actually transacting with an investor-friendly broker and doing deals, proof of funds, working with them on the education piece, what are some of the ways that investors can network on an ongoing basis with investor-friendly agents, besides what we’ve talked about already? What types of things do you like to see – texting you, catching up with you, maybe in-person types of things, adding value to your business? Again, the entire purpose of all of this is try to give the listeners the best advice on how to win over someone like you, so that every time you get a deal, they’re the first person that gets to see it? So what are some other networking things that they can do to put themselves in that position?

Dan Rivers: That’s a good question. As I mentioned, just  being serious about it, going for 100%, having that team in place. Once you know someone’s serious on that level and not just trying to pick your brain – which I don’t mind, if someone asks me just general questions; they may not be ready for all this, and it’s perfectly fine… But it’s just having the pieces in place and ready to go, and be willing to go for it. So to not just analyze deals, but actually act on them. As long as they’re ready to go, that’s the biggest thing. And being willing to do it. If they’re just kind of sitting on the sidelines, saying “I’ve been analyzing…” I had one guy actually tell me he’s been analyzing stuff for three years, he’s just been a little nervous to really go for it… But I don’t mind helping walk someone through and get them to that level… But you’ve gotta be able to take that plunge. There’s no way to make money in this business until you take the risk.

Theo Hicks: So transitioning for a little bit to your deals that you buy… So  your business partner – is he involved in the realtor business with you, or is this someone separate?

Dan Rivers: No, he’s actually the finance guy. He works for a pharmaceutical company in finance, and he takes care of all the backend stuff for us. When it comes to analyzing deals, find the deals, managing the deals – that’s all on my end. He helps keep the books and makes sure that he gets stuff ready for the tax accountant at the year end, and those types of things.

Theo Hicks: How did you meet him?

Dan Rivers: It’s pretty easy, he’s my brother in law. That made it a little bit easier. He’s my wife’s brother, so we just hit it off, had a lot of the same goals of where we wanna be in the future, how we wanna invest passively… A lot of our goals just aligned, so it just made sense to start off. We did our first deal together and it went about as smooth as possible. From there, we were able to grow — I think our six units we have together, we’ve got them in a matter of 15 months. So we’re trying to grow as quickly as possible, but our goals align, how we work together really benefits each other… So it worked out really well.

Theo Hicks: How are you guys funding your deals?

Dan Rivers: We have kind of a unique strategy. We try to buy one or two BRRRRs at a time. Usually, under 100k you can actually do that down here in some parts of North Charleston. We have some investments in the stock market, and we were able to find a bank that gave us a line of credit against the stock market investments, so that we’re able to use a line of credit at about 4%, 4,5% interest to purchase the deals, to rehab the deals, and then we refinanced out of them.

Theo Hicks: Is this a local community bank?

Dan Rivers: Yup, local community bank here in Charleston.

Theo Hicks: And you just go in there and ask them to do this? Did you know ahead of time you wanted to get a line of credit against the stock market, or is that something that they were offering, and why you selected them?

Dan Rivers: No, we actually just found creative ways. We initially put a certain amount of money into an account together, kind of matched it, and we were like “You know what – we wanna grow as fast as this is gonna allow us to.” So we were just trying to think creatively, and I went to the bank — I do a lot of banking with this specific bank here in Charleston… And I went to them and we kind of just were brainstorming some ways to be able to get a line of credit… And when we brought up the fact that we had money in the stock market and they were able to go on and credit against it, we just kind of fell into it.

Theo Hicks: Alright, Dan, what is your best real estate investing advice ever?

Dan Rivers: Go for it. Take the first step. You’ve really gotta take the plunge, you’ve gotta try it out. You may lose a little bit of money, you may win on your first deal, but if you don’t start, then you’re definitely not gonna be successful.

Theo Hicks: Alright, are you ready for the best ever lightning round?

Dan Rivers: I’m ready, let’s do it.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:16:19].03] to [00:17:11].08]

Theo Hicks: Okay Dan, what is the best ever book you’ve recently read?

Dan Rivers: Mindset. It’s one of my favorite books. It talks about the fixed vs. growth mindset, and it really opens up your mind to the idea of how you used to think of things, and how you could think of things in the future, whether it’s business-related, family-related, with kids… It’s a great read.

Theo Hicks: If your business were to collapse today, what would  you do next?

Dan Rivers: I would like to work in the school system here to help educate kids on personal financing. And definitely [unintelligible [00:17:36].18] inner cities.

Theo Hicks: Tell us about the best deal you’ve done.

Dan Rivers: The best deal I’ve done… I’ve done an off market deal for about 65k. I had to put about 20k into it, and one down the street just sold for 175k, so I was able to build a lot of equity.

Theo Hicks: If you’ve ever lost money on a deal, how much did you lose and what lessons did you learn?

Dan Rivers: I have. One of our very first deals when I moved down here – we lost about 35k, and the biggest lesson I learned from that is make sure you’re aligning yourself with people with the same values as you have.

Theo Hicks: Solid lesson. Alright, what is the best ever way you like to give back?

Dan Rivers: I like to volunteer for the parks and rec down here, the county parks and rec… Whether it’s cleaning up beaches, or… My favorite event – they have a special needs prom every fall, and it’s a great thing to volunteer for.

Theo Hicks: And then lastly, what’s the best ever place to reach you?

Dan Rivers: You’ve already mentioned my website, danrivers.com, but if not, you can follow me on Facebook or Instagram @ecofriendlyrealtor.

Theo Hicks: Perfect. Dan, thanks for joining us today and giving us the ultimate guide to working with an investor-friendly agent. You mentioned that you are willing to have a conversation to give guidance to anyone, whether they’re totally brand new, or they’ve been in the business for decades.

You mentioned that if someone is brand new, the first two things you do is 1) you make sure they have specific goals and they have a specific niche they wanna focus on. Then once they know what they want and what niche they’re gonna focus on, you tell them that they need to build a team; you can help them find lenders, an agent (if it’s not you), insurance people, property managers… Or they go out and do research on their own.

We talked about how you’re finding deals. Obviously, you’ve got the deals on the MLS, you’re also finding off market deals through direct mail, as well as networking with local wholesalers and making sure you’re on all of their lists. And then we kind of talked about what people need to do in order to position themselves to get those pocket listings, to get those off-market deals from investor-friendly agents… And really, it ultimately comes down to them proving that they are able to close on a deal.

You gave an example of – you wanna make sure they have proof of funds. You wanna see a bank statement, so that you know that they have money to close. It’s ideal if they’ve done deals in the past.

You also wanna take a look at the numbers and make sure the numbers look good, so you’re not wasting your time putting it under contract and getting them to do due diligence, and they back out because their numbers don’t make any sense.

We also talked about ways that you can network with brokers… Really more of the same – just showing that you’re serious and that you’re not just there to pick your brain… Which you said is fine, but ultimately you have to be willing to go for it, to take that risk to actually buy the deal. And then also, you wanna make sure that they have the team in place first.

We also talked about your business partner, who is the finance person, it’s your brother-in-law, and that the reason why your partnership works so well is because you have the same goals, the same values, and you kind of just hit it off, you work really well together.

We talked about your strategy, which is really interesting… So you get a line of credit from a local bank against your stock market investments. You said that you were in there, brainstorming different ways to get cash, get money, get lines of credit, and you’ve mentioned that you had a stock market investment, and because of your previous relationships with this lender, they were willing to give you that line of credit.

Then lastly, we’ve got your best ever advice, which was to go for it, take the plunge, because if you don’t ever do anything, if you never start, you’re not going to be a successful real estate investor.

Dan, I appreciate you coming on the show and sharing that invaluable advice with us. Best ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

Dan Rivers: Thank you, Theo.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2241: Find Off Market Apartment Leads with These 7 Online Services | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks shares 7 different ways to find off-market apartment deals through utilizing methods that allow you to be on your own personal coach. 

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hello, best ever listeners and welcome to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.

Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes, we’ve given away free documents. Make sure you check those out, the free documents and the past Syndication School episodes, to help you along your journey, at http://syndicationschool.com/.

Today, we’re going to talk about off-market deals and more particularly how to use the internet and the variety of services on there to generate off-market apartment deals. There’s lots of ways to actually get off-market apartment deals tactically – so direct mailing, cold calling, you can text, you can put a bandit sign.  But before you get to the point where you’re able to send out marketing information or calling owners, you need a list of owners first. In order to get a list of owners, you’re going to need to know what type of properties you want to target. That’s kind of the three steps to generating off-market deals is, what type of asset am I targeting? Who are those owners? How am I going to contact those owners?

Today, we’re talking about who are those owners and how do we get the information required to contact them. We’re going to talk about ways that you can do this online at home. I’ve broken these different strategies into three categories.

The first one is free, so these won’t cost you any money out of pocket, but there’s going to be a trade-off, whereas you’re either going to have to spend more time doing the strategy, or you’re not going to have a very targeted list.

The second category would be budget-friendly services or economical services. These cost money, but are a little bit less expensive than the third category. You should be buying lists one-off, maybe a subscription type deal, but it’s going to be a little bit less costly than the professional services. Not free, but you will be able to generate a more custom list.

The third category are going to be the professional services. These are the costliest, these are pretty expensive and runs into the $10,000 plus per year, but they’re very robust. Because not only can you create the most customized, hyper-targeted lists, but you’ll also have access to other services to help you grow your apartment investing business. We’ll talk about those when we get to that section.

Let’s start off with these free services, the ones that are probably the most interesting, most unique, whereas the other ones are kind of just, “Hey, you go to the website, click a few buttons and then you’ll get a list.” But if you don’t want to do that, it could be you don’t have the money and you want to have maybe other advantages, then you can use these free services. But the first one being a LoopNet. Yes, you can find off-market deals on LoopNet, even though LoopNet is a place where brokers will actually list their on-market deals. But since there are brokers actively on this site, the strategy here is to get in front of those brokers in order to get their deals before they’re listed on LoopNet.

To do this, you’re first going to want to compile a list of brokers who are on LoopNet. LoopNet has a ‘find a broker’ search function, pretty easy to find. You can type in your location and the type of property you’re looking at, multifamily, hit Search. The results will be all the brokers in that market who have a LoopNet profile that service multifamily, with their phone number and their email.

Then the next step is to make a first point of contact, either through email or through phone, introducing yourself to the brokers, providing relevant details on your background, why they should work with you, express interest in the fact that you’re looking to buy apartments, and then tell them, “Hey, here’s my investment criteria. Do you have anything?” If they say no, which they probably will say, or maybe they’ll direct you to some their on-market listings, say “Okay, well, thanks, I’ll take a look at those. And then I will follow back up in two weeks to see if you’ve got any new deals on the horizon.”

That’s the first point of contact. And then again, every two weeks, you will follow up with that broker. You can use a standard template where you say the same thing every single time, where you remind the broker who you are, “Hey, it’s Theo, we spoke two weeks ago. I told you, I’m looking for 150 plus unit Class B in this market.” You want to provide each time you contact them a piece of evidence that shows them that you are getting either closer to the ability to close or might have to have the ability to close.

For example, we got this strategy from an interview guest, Antoine Martell, and what he would do is he would say, “Hey, I just refinanced on a property and I’ve got x amount of dollars that I need to put to work,” or “Hey, here’s a screenshot of my bank statement with a million dollars that I can put to work,” right? Something like that, that shows that you’re making effort towards actually being able to close on a deal, as opposed to just saying, “Hey, I’m looking for a deal, what do you got?” Let them know, “Hey, I’m able to close.” This strategy certainly took a little bit of time, but you get an off-market lead.

What are the benefits of this LoopNet strategy? The first one – it’s free, as I mentioned. Secondly, that once you’ve created your list of brokers, the time commitment, surprisingly, is actually minimal… Because you’re using a template that you’re sending to the same brokers each week. The only difference is that last sentence. Once you’ve got your template, you’ll go to your computer, you’ll type in your last sentence, you’ll insert your screenshot and you’ll send your email to 20-30 brokers. Pretty quick.

Third would be that you know, right off the bat, that if you get a lead, the seller is already interested in selling. This is the only strategy that you know the seller is interested in selling if you receive that lead, because the broker wouldn’t be in contact with an owner who’s not interested in selling. You kind of skip that step of having to negotiate or convince them to sell.

Lastly, and maybe most importantly about this strategy, is the relationships you’re building with brokers. Eventually, you won’t have to even follow up with them, and they’ll just naturally send you the off-market deal. This has the opportunity to be the most hands-off strategy, even though it’s free. But the drawback, as I mentioned earlier, with a free list, is the lack of precision. You really don’t have any control over the types of deals the broker sends you. Sure, you can say, “I’m looking for 150-unit deals, Class B, in a certain market,” but they might send you all their off-market deals; they might not have any deals for you for a while. Whereas with the other strategies, you can target all the properties that meet your investment criteria.

And then of course, the strategy might take some time to work out, since you aren’t targeting people personally and you’re kind of waiting for the broker. It might take a little bit longer to find a deal that meets your investment criteria.

For Antoine, he followed this strategy for nine months before buying his first deal. But who knows, maybe it happens right away. But I think that this strategy is so fast and free… Everyone should be doing this if they want to find off-market apartment deals.

Something similar to this LoopNet strategy would just be going to commercial real estate brokerage websites instead. So rather than creating your list on LoopNet, or in addition to creating your list on LoopNet, you can search for the top commercial real estate brokerages in your market, and then reach out to them directly following the same strategy. “Here’s who I am, here’s what I’ve done, here’s what I can do, here’s what I want to do, do you have anything for me?” And then every two weeks following up. Just an extra way to build the list, just in case certain brokers aren’t on LoopNet.

From my experience doing this strategy, it seems like the smaller guys are harder to find by doing a Google search. That’s where LoopNet comes into play. But then the bigger guys, they are pretty easy to find. If you just Google commercial real estate brokerages in Chicago, you’re going to get thousands of search results and as you go down the list, open up a new tab, and then find that email address, find that phone number of the relevant contact.

The last free strategy is going to be the county auditor sites. All counties will have an auditor or sometimes it’s called an appraisal office. Most of these counties will actually have an online version of this; some sort of website you can go to access auditor or appraisal information. On these websites, there’s information on every piece of real estate in that county. Most of these—I haven’t come across one that’s not free. But most of them are free to access. You don’t need to pay any money to actually access the website. There might be potentially fees to access certain lists, but I haven’t come across that yet.

At the very least, every auditor site should have a property search function where you can input some level of information and then output a list of properties. Depending on the county, they might also have an advanced search function, which is ideal, because then you can target rather than a street or a specific neighborhood, you can target a street or a neighborhood or a school district or property type which you want to get to. If you need to get to property types, you can filter out all of the non-apartments. Usually, they’re going to have some filters; ideally, they have that property type filter.

Now, in addition to this property search function and advanced property search function, you might be able to skip all that and go straight to a pre-created list. Sometimes, the auditor will just have a list they update maybe every month or every few months, of all the properties with delinquent taxes, all the properties that are in pre-foreclosure, going into foreclosure, recent sales, things like that. But these lists aren’t super-easy to find, even if they are on there, and it will vary from county to county, which is one of the drawbacks we’ll get into in a second.

Now, how quickly you can get the info, either through pre-created a list or through a custom search — but how do you actually get the data? Well, obviously, if it’s just the list, you can just download that list. Ideally, they have a list specific to what you want. But the next best thing would beto have an easily downloadable list of all the properties in the market. This might be like a tax information list, where you can download a list of every single property in that market, and then you can just filter in Excel to pull out only the properties that you want to target.

Whereas in other counties, you’re not going to be able to download a super-detailed list. If this is the case then, this is where it gets really time intensive, because you need to manually input the data for every single property. If you’re in a smaller market, this might take you a week to do, but if you’re in a bigger market, and you don’t have the ability to download a list, then I would forego this strategy, because you’re going to be manually typing in property address, owner name, owner address, property value, and all the relevant information for a parcel, and you’ve gotta click ‘Next’ to the next parcel, and next to the next parcel, for 1000 entries, right? You’re not going to do that. But if they have an easy way to access and download the list, then this is a great way to generate a list, because it’s free, and it’s based off of all public information.

Now, obviously, there’s a few drawbacks of this strategy.  The first one – I’ve already hinted at it… It’s that since each auditor site is going to be created and managed by the county, no two websites are the same. You’re going to have to kind of mess around on the site to figure out what it can and cannot do. Which means that the way you access a list is going to vary from county to county. Some counties might have these pre-created lists, some might have that full tax information list, some might have advanced searches, other ones might not. It kind of just depends.

Another drawback is you can’t really be super targeted here. Usually, you’ll be able to maybe filter based off of the number of units, but you’re not going to get the exact number of units. It could be five to 20 units, and then 21 to 40 units, and then 41 to 100 units, and 100 units plus. Or maybe you can filter based off of where the owner lives or something… But there’s not a lot of flexibility in targeting people, like some of the other services. But also since you’re looking at apartments that are usually owned by LLCs, they’re not going to even have the actual owners info on your list. They’re going to have some LLC information, which means you’re going to need to skip trace in order to identify the correct owner and their contact information. And then of course, unlike LoopNet, there’s no guarantee that anyone you mail to is even going to be interested in selling their deals.

The last note on this point is that if you are navigating the auditor site website and are having trouble finding a list, or the property search function, there’s usually an email address for the webmaster or some sort of assistant that you can email to ask them for help. I know for Cincinnati, you can get temporary login information to get like a back end access to their systems, so you can download a little bit better lists, faster. But overall, it’s not going to be very detailed.

Now, the next one that everyone’s heard about is going to be Listsource. Listsource pulls data from the public records. But rather than you having to do it manually, they have a software where you can input filters and then it’ll pull all properties that meet that criteria. This is geography, mortgage status, property information, demographics, foreclosure and other options, or they have some quick lists, like absentee owners, a list that tells you how much equity people have in their property, foreclosures.

What’s nice about Listsource is that you can access their build list function for free. So you can see what filters are available, you can see based off of the filters you’re looking at how many properties there are in that market… And then to actually get the list you need to pay money.

One of the drawbacks of Listsource is going to be similar to the county auditor, which is that you’re going to get a lot of LLC names and not the actual owners, so you’re going to have to do some sort of skip trace. The manual way would be to go to the secretary of state website and hope that the LLC of the properties incorporated in the states that the property is located in, and then you can find the contact information that way, or you can use a paid service like TLO, American Tracers, IDI, Delvepoint and Skip Genie to skip data. But Listsource – you type in your filters and then it’ll generate a list for you. And then you’ll skip through that list to get the contact owners information.

The second budget-friendly service is PropStream. PropStream is kind of in-between Listsource, and then the two bells and whistles full-service professional ones that we’ll talk about next… Because it seems like it pulls in the same public information that Listsource does, but the way you search is going to be different. In PropStream, it gives you a dashboard, a map you’d see on like apartments.com or Zillow, and you can type in your geography and then it filters that way and then it’ll output a map with all the properties on the map, and then a list would be on the right.

PropStream also has built-in a skip tracing capabilities for a fee. You can append the LLCs owner information to your list, without having to do that somewhere else. But unlike ListSource, you can’t really access anything on PropStream without paying. You can watch some videos, but you can’t actually go in there and mess around with the software or mess around the filters without actually buying the subscription. It’s similar to Listsource and the county auditor’s site; no guarantee that any of these people are going to be interested in selling, but you can create very targeted lists.

The last two are going to be the professional services, and this is CoStar and Yardi Matrix, which are essentially the exact same, with some minor differences. But they both have a similar map function as the PropStream, but way more detailed and way more robust; free skip tracing, so it’s going to automatically have the owner’s contact information. The reason why they have more info is because they pull from public records, but also have in-house research teams that are working full-time finding data on these properties.

So all the filters you can possibly think of will be on CoStar and Yardi Matrix. And also, you’re going to get a lot of extra tools for these; tools and services. The lists are going to be way more detailed, you’re going to have way more information on the property. There’s built-in sales and rent comp data, there’s market data and KPIs, there’s historical performance of the property… So once you actually find a property, there’s a lot of information on there that you can actually start your underwriting process, you can generate market reports to include in your investment summaries, lots of bells and whistles. The only difference between Yardi Matrix and CoStar is that Yardi Matrix has a little bit better sales and loan data, which means that their sales and mortgage ready filters are going to be better than CoStar’s.

And really, the major drawback is just going to be the cost. That’s really it. The cost of these. But if cost is not an issue, then these are the best ways to create your list.

So there you have it. Those are the seven ways. I kind of focused on the earlier free ones, because I think those are the most interesting, whereas the other ones are more like you buy it, you input information, and you get your list pretty easily.

If you want links to all these and more information on the people who use these strategies, we have a blog post called Seven Free and Paid Online Services to Generate Off Market Apartment Deals on our website. Make sure to check it out on our blog.

That’s all I have for today. Thank you for tuning in. Make sure you check out some of the other Syndication School episodes and download the free documents at http://syndicationschool.com/. Thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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