Apartment syndication is a great way to invest your money, but doing so requires a lot of work and maybe even some expert guidance.
If you are new to investing, you probably have a lot of questions about real estate syndication. How do you get a project off the ground? How do you find the right people with whom to do business? What is the difference between active and passive investing, and which option is best for you?
Over the years, I have helped curious investors like yourself navigate the world of apartment syndication, and have done so successfully. That’s why I am confident I have the resources you need to thrive, and, as my clients have learned, since I left the world of advertising and immersed myself in real estate, my goal is to help you “do more good.” That means freeing up your time so you can use it as you wish.
Today, I am happy to share some of my real estate syndication insights with you for free through my comprehensive blog. Below, you will find many posts that can help you get started with apartment syndication, including where to find great apartment real estate, what it takes to stand apart from other syndicators, and how to close the deal on your first deal.
After reading these posts, you may want to schedule a planning session, which can teach you how to buy apartments and how to bring in investors; additionally, you can learn how to start investing with me, which would lead to plenty of passive investment opportunities, provided you are an accredited investor.
As I am sure you are aware, CDC is responding to an outbreak of respiratory disease caused by a novel (new) coronavirus that has first detected in China and which has now been detected in almost 70 locations internationally, including the United States. The virus has been named “SARS-CoV-2” and the disease it causes has been named “coronavirus disease 2019” (abbreviated “COVID-19”).
Consequently, the DOW Jones has dropped by nearly 10,000 points over the past 30 days.
Per the CDC, “the best way to prevent infection is to avoid being exposed to this virus.” Therefore, social distancing has been one of the main methods to combat the virus. As a result, many people are working from home and many others have been laid off or furloughed.
From a business perspective, when a crisis – like the coronavirus, hurricane, fire, earthquake, etc. – occurs and you have an investment property, you need to have a process for approaching the situation, and even more so when you have passive investors. The procedure I use is the acronym S.O.S, which stands for Safety, Ongoing Communication, and Summary.
S – Safety
The first step when a crisis occurs is always and most importantly safety. That is, safety for both the people and the money.
So, you first want to ensure the safety of both your residents and your team members on the ground. We sent all of our residents safety notices outlining the CDC’s guidelines for preventing the spread of the disease, which includes:
Wash your hands often with soap and water for at least 20 seconds. If soap and water are not available, use an alcohol based hand sanitizer
Avoid touching your eyes, nose, and mouth with unwashed hands
Avoid close contact with people who are sick
Stay home when you are sick
Cover your cough or sneeze with a tissue, then throw the tissue in the trash
Clean and disinfect frequently touched objects and surfaces
We also provided URLs to the CDC webpages with more information on the coronavirus:
The money side of the safety equation is still up in the air. It is hard to tell how the coronavirus will impact multifamily real estate. The stock market is going down which means more money should flow into real estate. At the same time, many people are losing jobs, which means they will have difficulty paying rent. We will have to see how rent collections are impacted over the next few months.
One interesting strategy I’ve seen is to allow residents to use their security deposits to pay for rent over the next few months. For example, investor Julie Fagan will allow her residents with a $1000 per month rent payment and a $1000 security deposit to apply $500 to this month’s rent and $500 to next month’s rent, reducing their rents to $500 per month. In exchange, the residents sign a new 12 month lease and sign up for security deposit insurance. I like this strategy because it helps the resident as well as the bottom-line at the property.
Investors will need to start getting creative if the coronavirus does negatively impact multifamily collections.
O – Ongoing Communication
Once we have ensured the safety of the people, we sent an initial communication to our passive investors.
The communication we sent to our investors was similar to what we sent to our residents. The major difference is that it also included information on what we are doing to ensure the safety of both the people and the money.
In addition to the relevant CDC information, we mentioned that we are working closely with our property management partners to monitor the operations at the property and that we will have more information for them by the middle of next month. We also mentioned the coronavirus will not impact their distribution for the previous month.
So, we sent one email to let investors know that we are aware of and monitoring the situation and when they can expect another update. It is hard to tell how long the coronavirus pandemic will last, so the plan is to continue to provide monthly updates to our investors about the status of the rent collections at our properties.
Overall, I think it is better to only send emails when there is sustentive information to provide as opposed to hourly or daily updates.
S – Summary
Once things return to normal, we will send our investors a final email with a summary of how the coronavirus impacted the operations at our property and distributions, as well as any changes we will have moving forward to make up for lower cash flow and distributions, if applicable.
When a crisis occurs, like the coronavirus, the three step procedure is S.O.S. – safety of the people and the money, ongoing communication to provide your investors with status updates, and then providing a summary once things return to normal.
A common refrain I hear and read about apartment syndications is “you need a strong track record in multifamily to raise money.”
The idea is that no one will entrust you with their capital if you haven’t completed at least one multifamily transaction already.
However, this is a myth. And it is fairly easy to debunk.
If you needed a strong track record in multifamily to raise money, the majority of apartment syndicators wouldn’t exist. Sure, some operators have previous experience with large apartment communities. Maybe they had the capital to do their own large deals and transitioned into raising money to scale. Or maybe they worked for a large institution that acquired apartment communities. However, many more apartment syndicators – myself included – were never involved with large apartment communities before doing raising money their first syndicated deal.
At some point in every syndicators’ career, they are sitting where you are sitting now. They wanted to purchase large apartment communities using other people’s money. The ones who didn’t have previous apartment experience didn’t let the myth of a strong multifamily track record stop them from buying their first, and many more, deals.
If you too want to raise money but don’t not have a track record in multifamily, here are the three things you need to do:
1. Change Your Mindset
First, you need to change your mindset. Not only is the need to have a strong track record in multifamily to raise money a myth but also a limiting belief. It is just a story you’ve convinced yourself to be true. It may be a powerful story, but it is fiction nonetheless.
It is like watching a horror film about the boogeyman and then checking under your bed every night before you go to bed to make sure he isn’t there!
The boogeyman isn’t real. And neither is this limited belief.
The main difference between an apartment syndicator with a billion portfolio and an aspiring syndicators who is hesitates is the belief in this boogeyman.
The boogeyman isn’t under your bed. You don’t need a strong track record in multifamily to raise money.
I guess I should have said that “you need a strong track record in multifamily to raise money” is only partially false. The first part is actually true. You do need a strong track record. But it doesn’t need to be in multifamily.
One of the two areas that every single-first time apartment syndicator had a strong track record in was business.
Investing in real estate is a business. And apartment syndications even more so. When you are an apartment syndicator, you are creating and executing a business plan. Therefore, if you have a strong business background, you have a track record creating and/or executing a business plan.
A strong track record in business doesn’t mean you’ve just graduate college and were hired by a Fortune 500 company. It doesn’t mean that you had a lemonade stand as a kid (but, surprisingly, this could help you raise money! Click here to learn how).
It does mean that you started your own business in the past. It doesn’t matter how small the company was. What does matter is that it was successful (i.e., profitable). It can also mean that you worked for a large corporation and were promoted to the level of director or higher.
If you created a successful business and/or were promoted to a high level within a large corporation, you have the skill sets needed to successfully execute a business plan.
3. Real Estate Experience
If you do not have a strong track record in business, then you need to have a strong track record in real estate. Even if you have a strong track record in business, having a strong track record in real estate as well is a huge plus.
You have more flexibility with the real estate experience. It can mean that you were an investor (i.e., wholesaler, fix-and-flipper, single family rentals, small multifamily rentals, etc.). It can mean that you were a property manager. It can mean that you taught other people howto become investors. It can mean that you were a broker or a realtor.
When you have a strong track record in real estate, you understand how the transactional and management process works. All you need to do now is use that same knowledge on larger apartment communities.
Believing that you need to have a strong track record in multifamily before raising money is a myth. As long as you have a strong track record in business and/or real estate, your money raising foundation is almost completed.
The last step is to get educated on apartment syndications. A good place to start is by reading my apartment syndication blogs here or by listening to our Syndication School podcast series here.
Speaker: Andre Reed, Buffalo Bills Hall of Fame Wide Receiver
Lesson #1: Value your huddle
Everyone on your team needs to be on the same page. Everyone needs to know what the game plan is and everyone needs to execute the game plan. Everyone needs to respect each other and listen to each other’s input and feedback.
Champions lead by influence, not authority.
Lesson #2: Know your role
Champions know what they are the best at and what everyone on their team is the best at. Everyone focuses on their strengths for the betterment of the team.
Lesson #3: You win some and you lose/learn some
Champions know that things will not always go according to the plan. They know how to handle things when everything goes wrong and make it out the other side stronger.
Lesson #4: Champions aren’t randomly made
Being a champion is not based on luck. It is not a shake of the 8ball. It comes from hard work and following lesson #1, #2, and #3.
The State of Multifamily
Speaker: John Sebree
Lesson #1: New jobs have been the major driver of the economic expansion
There have been 112 months of continuous job gains. Job growth is greater in the south than in the Midwest and northeast over the past three years. However, the US currently has more job openings than people seeking to work because of the disconnect between the skills required for the job openings and the skills of the people who are unemployed.
Lesson #2: Housing construction has fallen short of demand.
From 2000 to 2007, there was an oversupply of 2.5M units. From 2008 to 2020, there is an undersupply of 1.5M units.
Lesson #3: Class C is in demand
Most new construction has been Class A multifamily, so there has been and will continue to be demand for workforce housing, which is reflected by the lower vacancy rate and higher rent growth in Class B vs. Class A.
Lesson #4: Secondary and tertiary markets are in demand
More deals are being done and will continue to be done in secondary and tertiary markets due to the high level of competition in primary markets.
Panel: The Age of Data
Speaker: Michael Cohen – CoStar Group, Jeff Adler – Vice President, Yardi Matrix, Jilliene Helman – CEO, RealtyMogul
Lesson #1: How CoStar collects data
CoStar has over 1000 researchers who are working with the real estate community to collect data, but they are also moving towards internet listings services (ILS) like Apartments.com. They are also using military grade technology, drones, and cars to collect data.
Lesson #2: How Yardi collects data
Yardi has 600 people who independently collect and curate data, which is supplemented with information from property management companies.
Lesson #3: Tips on finding deals
If you are doing broker listed deals, you will overpay and that needs to be offset by focusing on markets with a high net migration.
You can look at Yardi loan maturity data to find owners whose loans are coming due. Come up with a valuation before reaching out to the owner.
Invest in markets where institutional money hasn’t gone to yet.
Fireside Chat: Asset Protection – Shielding Your Financial Empire
Speaker: Ryan Gibson – Founding Partner, Spartan Investment Group, Clint Coons – Anderson Advisors
Lesson #1: Invest through a trust or LLC
Sponsors will not ask you if you are involved in a lawsuit, divorce, etc. Investing through a trust or LLC protects your investment from these and other outside concerns.
Setting up the trust or LLC in Wyoming or Delaware creates anonymity. Should you be sued, assets of the LLC cannot be accessed by creditors.
Lesson #2: How to screen a sponsor before investing
Always do a background check on the operator. Always speak with their other investors.
Accelerate Your Success Through Multifamily Syndication
Speaker: Mark and Tamiel Kenney – Co-Founder, Think Multifamily
Lesson #1: Have a strong why
They transitioned from W2 jobs to apartment syndications in order to save their marriage and to spend more quality time with their kids. Now, their clients are an extension of their family.
Lesson #2: Why multifamily is better than single family
Multifamily has better economies of scale. You can secure nonrecourse debt on multifamily whereas you are personally liable for the recourse debt secured on single family. You can hire a 3rd party to manage multifamily whereas you’ll likely self-manage your SFRs. The value of multifamily is based on performance whereas the value of single family is based on comps. You can go bigger faster with multifamily.
Lesson #3: Why demand for multifamily isn’t going away
Traditionally, people transition from renting to buying when they get married and start a family. Currently, millennials are delaying marriage and starting a family, so they are renting longer.
Lesson #4: You can make more money as a syndicator than as a passive investor
As a syndicator, you can truly make money with $0 down through the acquisition fee, the ongoing asset management fee, and the profit splits. The limited partners must invest money to make money.
15 Strategies That Have Each Created $100M+ of Wealth
Speaker: Richard Wilson – CEO, Family Office Club
Lesson #1: Play a unique game
Come up with a way to separate yourself from your competition. You need a hook. Are you offering a unique product? Or you marketing in a unique way? You need to figure out what you can do to differentiate yourself from the pack.
Lesson #2: Create a barrel of fish
One of Richard’s competitors sold their family office for $500 million. The business revenue didn’t support the $500 million valuation. Rather it was the network that was being purchased.
Revenue is great but having a barrel of fish – a strong network – is even more powerful and profitable.
Lesson #3: Find the choke point
When you find a situation in business where you or someone else struggles and you have a way to relieve that, it can be very profitable. Find out what someone’s pinch point is and create a business that solves that problem.
Lesson #1: The biggest change in agency debt since the recent recession
Brandi says the biggest change since the bottom fell out in 2008 is more strict lending criteria. Anyone could get a loan in 2006 regardless of their credit score and income. Now, lenders want to do business with people that they know and trust.
Lesson #2: What you need to be attractive to private equity
Michael said that the first question an equity firm will ask him when evaluating a potential deal is “who is the syndicator and what have they done?” They will only invest in deals where the syndicator has a proven track record doing similar deals. And they are targeting mid to high teen IRRs and value-add, opportunistic deals.
He also said that family offices are the best fit for apartment syndicators. Family offices are more entrepreneurial whereas institutions are more difficult to work with.
Lesson #3: You can borrow money from more than just banks
Spencer focuses on helping investors line up non-bank capital. One solid option are life companies. They offer longer term (up to 40 years) fixed rate loans. Interest rates are as low as high 2%.
Breaking Down Waterfall Structures
Speaker: Ryan Smith
Lesson #1: Tip for reducing taxes
Invest in GPs whose distributions are not always considered a return on capital but whose distributions are a return of capital. Depending on the source of the return of capital, it may not be taxable
The Pursuit of Value Investing
Speaker: Scott Lewis – Spartan Investment Group
Lesson #1: Tips on hiring the right team members.
Hire team members with experience, which is a combination of skill and luck. Focus on the skill sets your business needs and hire people with those skill sets. Team members must have good character so that they are ethical and responsible when a deal goes bad. Create a culture with a mission, a vision, and values to attract team members who align with that culture.
Lesson #2: Three questions to ask potential team members
What is your leadership philosophy? Tell me about a deal that went sideways and what you did? Tell me about your due diligence process?
Panel: Stories of Raising Capital
Speakers: Matt Faircloth, Neal Bawa, Ryan Smith
Lesson #1: We are transitioning from a LP market to a GP market
Ryan believes that we are transitioning from an LP-friendly market to a GP-friendly market. Margins are being pinched and are under pressure. As a result, he predicts that GPs will do less deals than they expect this year.
There will be more capital looking for deals than deals available. He thinks the 8% to 10% preferred returns will fall or go away entirely and that we will see more unique passive investor compensation structures in the near future.
Lesson #2: A track record isn’t required to raise capital
Neal says that it is a limiting belief to think that you need a track record to raise capital. No one would ever get started if track records were a prerequisite.
People do not invest in projects, they invest in people. It is the emotional connection you have, how candid you are, how well you come across, and how specific you are that matters.
If you don’t have a track record, tell a potential investor that if they invest with a syndicator that has 18 deals, they will get 1/18 of their attention and effort. If they invest with you, they will get 100% of your attention and effort and you are staking your entire business on this deal.
Lesson #3: Have transparency on social media
Matt says it is important to have transparency on social media because it allows you to build more trust with your investors. Matt shares the good, the bad, and the ugly of his deals on social media sites.
The other benefit is that someone can quickly vet him and his company. If someone Googles his name, they see all of the free content he has shared on YouTube and information on his company.
Lesson #4: You don’t scale by adding more content. You scale by repurposing content
Neal’s objective is to repurpose every piece of content at least 10 times. If he records a 1-hour podcast, he will create 1-minute videos and post them to YouTube. The best YouTube videos are pushed to investors and put into an ebook. The podcast and 1-minute videos are also shared on Facebook and LinkedIn. Etc.
Panel: Investing in Development Deals
Speakers: Scott Lewis – Spartan Investment Group, Kathy and Rich Fettke – co-CEO and co-Founder, Real Wealth Network, Celeste Tanner – Chief development office, Confluent
Lesson #1: Key things a passive development investor needs to know
Development has a higher risk.
The success of the project is in the hands of the City Planner.
It is extremely important to understand the county surrounding the project. Within the county, it is the community surround the project that is the most important.
NextDoor has been very influential in getting information out about projects and stopping the spread of disinformation.
Lesson #2: Difference between entitlements and permits
Entitlements are for land use whereas permits are for building code.
2020 Real Estate Location Trends
Speaker: Neal Bawa – CEO and Founder, Grocapitus
Lesson #1: The Bible got it wrong by one letter
Neal says that it isn’t the meek who will inherit the earth but the geek. All of the world’s richest people are geeks. And all of the best real estate investing teams have a geek.
Lesson #2: Most people use data incorrectly
Neal finds that most real estate investors only use the data that supports their viewpoint and throw out everything else. The best geeks are the opposite. They use data to create their viewpoint.
Lesson #3: The top five metrics of the geek
Neal selects target markets based on what he calls Realfocus metrics.
Realfocus metric number 1 is population growth. Only invest in cities with a population growth of at least 21.25% between 2000 and 2017.
Realfocus metric number 2 is median household income. Only invest in cities with a median household income growth of at least 31.5% between 2000 and 2017.
Realfocus metric number 3 is median home values. Only invest in cities with median home values that have grown by at least 42.5% between 2000 and 2017.
Realfocus metric number 4 is crime levels. Only invest in cities with a crime level index calculated by CityData that has been gradually decreasing and is below 500.
Realfocus metric number 5 is 12-month job growth. Only invest in cities with a 12-month job growth above 2%.
Lesson #4: Two top markets you’ve never heard of before
The two markets that you have probably never heard of before that have consistently had a 12-month job growth greater than 2% are St George, UT and Yuba City, CA. Other top markets are Raleigh, NC, Reno, NV, Gainesville, GA, and Ashville, NC.
Underwriting & Asset Management
Speaker: Frank Roessler – President, Ashcroft Capital
Lesson #1: Why asset management is necessary even if you have a great property management company
First is that the biggest risk point is the execution of the business plan. Everything can be right – the right deal in the right market at the right price – but if you don’t execute the business plan, it will lead to disaster. There are hundreds of moving parts that need to be taken into account when executing a business plan, so you need an experienced and organized asset manager to execute the business plan successfully.
Second is that the property is your baby whereas the property management company doesn’t own the property. No one is going to care for your baby – the property – as much as you.
Lesson #2: Asset management duties when managing a single property
Monitor the key performance indicators, like occupancy, rents, evictions, bad debt, loss-to-lease, etc.
Manage the expenses. There is a range for each expense category and it is the asset manager’s responsibility to make sure that you are not overspending or underspending.
Manage and work with the staff. This includes email and phone call communication but also face-to-face meetings.
Oversee capital expenditures. Make sure the major capex projects are on-schedule and on-budget.
Lender communication. The asset manager communicates with the lender if you are required to cure certain deferred maintenance items, during a refinance or supplemental loan, or if you aren’t meeting your debt service obligations.
Improve the quality of life for your residents. Host events to make the existing residents happy so that they pay rent on time, pay more rent, stay longer, and refer other residents.
Lesson #3: Asset management duties when managing a portfolio
In addition to the duties from lesson #2, asset managers who manage a large portfolio have two extra duties.
First is managing scale. Implement a system of schedules and reminders, creating daily, weekly, and monthly to-do lists. Create an organized file sharing platform where each deal has its own folder and each project has its own subfolder. Delegate tasks to other team members because one person cannot wear all of the hats. Don’t become too emotionally invested. Celebrating win and use problems as a learning experience.
Second is implementing more sophisticated processes. Get a revenue management software like Yieldstar or LRO. Do a cost segregation analysis to accelerate depreciation. Hire a local tax protester to protest the taxes each year. Recapitalize rather than sell so that the taxes remain the same. Do 1031 exchanges into new, like-kind deals to defer taxes. Purchase interest rate caps on floating rate loans. Once you’ve done over $500 million in agency loans, secure a line of credit and use that line of credit to buy more deals to avoid prepayment penalties.
Lesson #4: Do’s and don’ts of asset management.
Crawl before you walk. Work with another institution or start small to gain experience before pursuing larger deals.
Know the best practices of property management so that you know if your property management company is doing a good job.
Work with experienced professionals. Hire people who have past experience rather than hiring young talent who have to learn on your dime.
Conduct weekly calls with your team and with your property management company.
Don’t forget about the residents.
Don’t reinvent the wheel. Follow the proven processes used by other successful apartment investing companies.
Don’t spread your staff too thin.
Don’t be a stranger. Make sure you are visiting your properties in-person once a month.
Next Level Portfolio Management
Speaker: David MacAlvaney
Lesson #1: The good
Unemployment is at a 50 year low. Wages are rising. Consumer confidence is high.
Lesson #2: The bad
Corporate debt is at an all-time high and is not being used productively. Executive confidence is low. The FED’s balance sheet is expanding.
Lesson #3: The ugly
The FED deficit. Banks are relying on central banks which is keeping the market together. Total debts are beyond unsustainable. The ratio of debt to GDP is 320%.
We are currently back to the SFR pre-recession prices when adjusted for 2020.
There is a 3.6% REAL return in the stock market.
Lesson #4: The case for gold
It is insurance against the uncertainty from the bad and the ugly. We are in an uncertainty trifecta: political uncertainty, geopolitical uncertainty, and uncertainty in the financial market.
Panel: Taking The Next Leap
Speaker: Dan Handford – Managing Partner, PassiveInvesting.com, Ellie Perlman – Found and CEO, Blue Lake Capital, Holly Williams – General Manager, MQ Ventures, Vik Raya – Co-Founder, Viking Capital
Lesson #1: What not to do when taking the next leap
Dan said that he will not invest with a GP unless the sponsors work in the business full-time. He doesn’t want to invest with a part-time apartment syndicator. But before quitting your job and going into apartment syndications full-time, be a co-GP first to build your credibility and track record.
Lesson #2: Advice on quitting your W2 job to become a full-time real estate investor
Holly said that she made the decision to quit her full-time job when she was more passionate about investing than she was her job. However, even though she was making over six figures as a part-time passive investor, she was still afraid to make the leap. For her, it was about making a mindset shift as opposed to making a rational, intellectual decision to quit her job.
Lesson #3: The two ways to build relationships with brokers
Vikram spent three years building a relationship with brokers before he did his first deal. It involved conversations on the phone, flying to the market to meet with brokers in-person, wining and dining them, and reviewing their deals and providing feedback. He did everything he could to prove to the brokers that he was serious about closing on a deal.
More recently, Vikram was having a hard time being awarded a deal. He was invited to multiple best and final offer rounds but was never awarded a deal. Then, he decided to meet his brokers in person and gave them a bottle of Don Perignon. Within a week, he was awarded a deal.
Lesson #4: How to overcome last minute challenges
Ellie recently had a deal in Atlanta under contract that was at 98% occupancy. Five days before closing, she discovered that the occupancy had dropped to 82%. Due to the occupancy requirement of her lender, she lost the financing on the deal. Rather than cancel the contract and sue the seller, she renegotiated the purchase price with the seller and convinced the lender to finance the deal. Within 45 days of closing, she was able to increase the occupancy to 90% and was able to demand a higher rent on the newly leased units without having to renovate the units first.
Mindset Mastery for Passive Investing
Speaker: Trevor McGregor – Peak Performance Coach and Business Strategist, Trevor McGregor International
Lesson #1: The four things you must continually check in with
Your mindset. Your values. Your rules. And your emotions.
Thoughts are the seeds of a garden and you reap what you sow.
Lesson #2: The six human needs
Certainty, uncertainty/variety, significance, connection, growth, and contribution. Which of these six are the reasons why you are investing?
Lesson #3: Know your emotional home
If you have a negative emotional home, you are moving away from something, like doubt, fear, and worry. You want to have a positive emotional home where you are moving towards something that you want.
A Holistic Investment Approach to Passive Investing
Speaker: AdaPia D’Errico – VP of Strategy, Alpha Investing
Lesson #1: Understand your intentions
Whatever your intentions are for passively investing should align with the intentions of the sponsors. The same applies to values. You must have the same values as the sponsors you chose to invest with.
This alignment is paramount to making money.
Lesson #2: Have a strong why
You need to have a strong and meaningful enough “why” to weather your doubts during a downturn.
Lesson #3: Intellect and instinct
You need to use your intellect and instincts when you are approaching a sponsor and a deal. You need to use your left brain to fact check the deal, using logic, reason, and analysis. And you also need to use your right brain to gut check the deal, using your institution.
Elite Capital Raising Webinar Strategies
Speaker: Bryan Ellis – CEO and Host of Self Directed Investor Radio, SelfDirected.org
Lesson #1: The myth of rationality
Most webinars focus on the background of the team, the capital structure of the deal, the return projections, and details on the investment strategy. This is all important information to include. But people do not invest rationally, so this is not the information that will persuade them to invest in your deals.
Lesson #2: The alchemy of thought
People do not invest rationally. They rationalize.
First, they have an automatic response to the deal. This reaction is not in their control. It is automatic.
Next, they have an emotional stimulus. This is how they feel about what you are saying about the deal and what you are trying to get them to do.
Then, they think about the data and facts about the deal.
Once they’ve gone through the first three steps, they have their impression of the deal. They will go back over each of the three points, pick out the pieces that make the most sense to them and supports their impression, and ignore the rest. In other words, rationalization.
Then they decide.
Most webinars completely ignore the automatic response, the emotional stimulus, and the impression and only focus on the data and facts. But the data and facts are the least important or the last thing that is considered.
Lesson #3: How to get more capital commitments from fewer investors with less resistance and less time
Create questions in the mind of the prospects that can only be answered by reaching out to you. Don’t answer every single question.
Create urgency by design. Let them know why investing now will be better for them.
Have someone else tell the prospects why they should invest. This should be someone who is more credible than you like someone who is currently investing in your deals.
Speaker: Whitney Sewell – Director, Life Bridge Capital
Lesson #1: Have a never give up mentality
Whitney first applied this lesson to his pre-real estate careers as a member of the military, a police officer, a federal agent, and a horse trainer.
When he hired Joe as his coach, Joe told Whitney that it is great to have a never give up mentality but that he needed to focus on putting that mentality into actionable steps. As a result, Whitney started his daily real estate podcast, “The Daily Syndication Show,” which he attributes in part to the growth of this business.
Lesson #2: Scaling a syndication business
Whitney’s second lesson is how to use focus to scale a business. He was a federal agent by day and horse trainer/farmer by night. Once he decided to go all in with syndications, he sold him farm. With this renewed focus, he was able to launch his syndication business.
His other lesson for scaling a business is to find a partner. From his podcast, he discovered that those who had rapid results had a business partner. In fact, Whitney met his partner at his second Best Ever conference.
Lesson #3: Have a why
The mission of Whitney’s company is to help other families through the adoption process. He said that there are 160 million orphans in the world. And the cost to adopt just one child is between $40,000 to $60,000.
Speaker: Glenn Mueller – Denver University
Lesson #1: We are in a lower for longer environment
The three main drivers of real estate demand are population growth, GDP growth, and employment growth. Compared to previous periods of expansion, these three factors are lower during the current period of expansion. Additionally, these factors are nearly identical to the interest rates (i.e., the costs of real estate). As a result, the current expansionary period has been more stable and has exceeded the typical 10-year periods of expansion in the past.
Lesson #2: Look at the important real estate factors constantly
The three metrics that run real estate cycles are vacancy, rent growth, and income. When vacancy is low, rents increase. When rent increases, income also increases.
Since these are the factors that run the real estate cycles, you should be analyzing them on a frequent basis. And the best place to stay up-to-date on these metrics is CoStar. Either purchase a CoStar subscription yourself or leverage a relationship with a broker who has their own subscription.
Lesson #3: Industrial has been the best asset class in the past 5 years
Why? Because of the Amazon and Walmart effect. Amazon’s online business and the resulting increase in Walmart’s online business has benefited the industrial asset class the most.
Lessons Learned from Crowdfunding $2 Billion in CRE
Speaker: Jilliene Helman – CEO, RealtyMogul
Lesson #1: Find your passion
Jilliene’s father was in the import/export business and always talked about the perils of inventory. At 17 years old, when her father asked her what she wanted to do when she grew up, the said she was going to sell money so that she didn’t have to deal with the same inventory issues as her father.
Lesson #2: Get started
Her first transaction was a duplex in a class D area. Her most recently deal was a $60 million transaction. If she didn’t take the leap and acquire the pretty scary duplex deal, she wouldn’t be where she is today.
Lesson #3: You must try even when you may fail
She was afraid to raise money from family and friends. To overcome this fear and change her mindset, she started parking illegally all over LA. She ended up paying over $1,000 in parking fines but was able to change her mindset around fear and taking risks.
Lesson #4: The proforma is always wrong
To minimize the “wrongness” Jilliene always include a minimum 10% contingency budget, because you don’t know what is going to happen.
Use a cap rate at exit that is at least 1% greater than the cap rate a purchase.
Reduce the number of units renovated and re-leased per month. 4 to 6 units per month, sometimes up to 8, is a more realistic assumption.
Increase the vacancy and bad debt during the renovations period. Expect more tenants to leave because of the chaos that comes from the construction process. Also, someone who can afford a $600 rent may not be the same demographic that can afford a $800 rent, so expect a lot of tenants to skip
Panel: Exploring Niche Asset Classes
Speakers: Brandon Kramer – Senior Associate, Marcus & Millichap, Stuart Kerber – Columbia Ag Investments, Kathy Fettke – Owner, RealWealthNetwork.com, Adrian Beales – LifeAfar
Lesson #1: Tips to invest in agricultural land
When investing in agricultural land, it is ideal to have easy access to water.
Specialize in a crop that is in your wheelhouse. Stuart focuses on cherries and apples.
It is better to invest in land that already has the infrastructure rather than starting from scratch.
The more common way to invest in agricultural is the tenant-lease model, which is when someone buys the land and a farmer leases the land. The less common but more profitable model is the direct investment, which is when someone buys the land and farms the land.
Lesson #2: Adding lifestyle to your investment
Adrian’s first business model is to raise money for hotels in foreign countries where the investors can actually vacation at the investment. His other model is to find and sell apartments to his investors in foreign countries. The investors benefit from both returns and a lifestyle experience.
Lesson #3: The resurgence of suburban offices
Suburban offices have been looked down upon during the last few years. However, once millennials start having kids and moving out of the urban core, suburban office will have a resurgence.
The Unknown Unknowns of SEC Law
Speaker: Dugan Kelly – KellyClarke Law, Merrill Kaliser – Kaliser & Associates, Robin Sosnow – Managing Partner, Sosnow & Associates
Lesson #1: Using an online platform to advertise your investment
There are online platforms, like CrowdEngine, that help apartment syndicators advertise their 506(c) deals so that they don’t have to start from scratch.
Lesson #2: You need to be careful with the intent behind a post as a 506(b) syndicator
With 506(b) offerings, you cannot drive traffic to your deal or website when posting on social media but you can talk about putting a deal under contract or closing on a deal. If you don’t follow this practice, you will lose your exemption and need to change to a 506(c) offering that allows for general solicitation.
Lesson #3: If you have an investor who is not happy, buy them out
The SEC isn’t looking for syndicators who are not in compliance. They get involved if an investor reaches out to them. An easy solution to this disruption is to buy them out, especially if they are a smaller investor. It will save both money and stress.
Lesson #4: If the person investing is expecting a return on investment and that is it, it is a security.
This is different when a few people invest and are actively involved in the deal, which is called a JV.
Actively involved could be someone investing a lot of money who has a say over the fees the sponsor charges (i.e., acquisition fee, asset management fee).
JVs are much more cost efficient on smaller deals compared to syndication.
Mark focuses on uncovering any hidden fees. He will request a spreadsheet that lists out all of the fees.
Ansa is a return chaser and wants to invest with a syndicator that she believes has a good track record and that she has a good gut feeling about.
Lue actually doesn’t read the PPM. He is more focused on the person who is putting the deal together and that they are trustworthy.
Lesson #2: Major red flags
Mark’s major red flag is when syndicators overpromise or underpromise on the returns. He eliminates anything that is below a 10% return and anything over a 25% return.
To avoid investing with a syndicator who has any red flags, Ansa talks with people who’ve invested in the past, talks to the principal to make sure they are focused on the operations over the sales and that they understand the financial aspect of the deals.
Lesson #3: The importance of property management
A lesson Lue learned on an unsuccessful passive investment was that the property management company makes or breaks the deal. Therefore, having a back-up property management company is a must. If the first one needs to be fired, the back up can quickly take over as oppose to an extended period of time where there isn’t a professional management company.
Mergers, the Ultimate Collaboration
Speaker: Celeste Tanner
Lesson #1: The development companies who were impacted by the economic recession the most were mono-focused rather than diversified
Lesson #2: Merge with a company whose strengths are your weaknesses and vice-versa
When considering a merger, the most important question to answer is “are we complementing each other or are we cannibalizing each other?” Companies who cannibalize each other have the same strengths and same weaknesses. Ideally, one company has strengths that are the weaknesses of the other, and vice versa.
Lesson #3: The two companies need to have aligned visions
Things that they must be aligned on include how to approach profits, investors, financial interests, trust in leadership, diversity of investments, and governance/accountability with board of directors and investors.
Keynote: How We Win in 2020
Speaker: Joe Fairless – Co-Founder, Ashcroft Capital
Lesson #1: How to accomplish more
Have a thorn. A thorn is a negative experience that you can draw upon to propel yourself forward. My thorn was losing money on his first deal – among other things that went wrong with the deal and around the time of the deal.
The three components of a thorn are that it needs to cut deep, it fades over a certain period of time, and you need to document the thorn.
If you don’t have a thorn, manufacture one. If you need to manufacture a thorn, you need to know what the quantifiable objective is for the manufactured thorn. For example, if you don’t read one paragraph every day for a week, you have to hold dog poop in your hand and lick it. (that’s right – I said dog poop).
Lesson #2: How to raise more money
The number one thing you can do to raise more money is to hire a data scientist. We use data to find markets and underwrite deals, so why should you use data to find more investors.
Things to look at include investors who invest multiple times, largest investors, cities they prefer to invest in, lead sources, loan preference, and top repeat investors.
Lesson #3: How to scale your business
Having the right team members impacts your ability to scale a business. That means hiring people who are both talented and a good fit with your company.
You can hire people who are talented but are not a good fit. And someone who was a good fit at when you first started your business doesn’t mean they will always be a good fit.
To determine if your team members are a good fit, the two questions you should be asking yourself on a quarterly basis are: (1) are the responsibilities that I hired this person to initially do the same responsibilities they are doing today, and if they aren’t, are they uniquely talented to fulfill those new responsibilities and (2) knowing what I know now, would I rehire this person?
Overcoming Financial Hardship
Speakers: Tyler Burke – Investment Associate, Spartan Investment Group, Josh Davis – Owner, Davis JM Capital, Kevin Bupp – Owner and CEO, Sunrise Capital Investors, Matt Owens – Owner, OCG Properties
Lesson #1: Quickly scaling a SFR business is inefficient
Kevin Bupp lost it all during the financial crisis of 2007-08. Among many lessons learned, one was that quickly scaling a SFR business is inefficient. He owned 120 SFRs spread across multiple counties in Florida. As a result, there were maintenance inefficiencies, management inefficiencies, and financial inefficiencies. That is why he now prefers more recession efficient asset classes like mobile home parks.
Lesson #2: Be aware of where you are in a market cycle
Matt Owens’ business also took a hit during the financial crisis of 2007-08. In hindsight, he realized that his success wasn’t based on a fantastic business model but a business model that only thrived during certain parts of the market cycle. His fix-and-flips were successful because the market was great for the fix-and-flips. When the market was no longer great for fix-and-flips, his company suffered.
Now, he always makes sure the numbers would make sense on his fix-and-flip deals during any part of the market cycle.
Lesson #3: Turn a negative addiction into a positive addiction
Josh’s hardship wasn’t real estate related. He was discharged from the military, fell into drug addiction, and landed himself in prison. Eventually, he learned to turn his negative addiction towards drugs into a new addiction of working harder than everyone else in real estate investing and is about to complete his first active deal.
Exploring Alternative Investments
Speaker: Dan Handford – Managing Partner, PassiveInvesting.com, Roni Elias – TownCenter Partners, Jeremy Roll – President, Roll Investment Group, David McAlvany – Precious Metal Portfolios
Lesson #1: Making money through litigation
Roni makes money with a publicly traded litigation company. Each fund has 1000 cases and he has a 90% win rate on 25,000 cases. The IRR on the funds are in the 60%+ range. For example, a personal injury fund could make a 16% IRR in less than 16 months and then 50% or higher over time.
Lesson #2: Making money through ATMs
Jeremy invests in ATMs. The investment funds have a 4 year payback period and 7 year term. The funds result in a fixed cash-on-cash return of 24.5% and an 18% IRR.
Lesson #3: Make money investing in gold
David invests in precious metal portfolios. He likes these investments because they are not tied to the financial markets. If the overall economy worsens, his investment thrive.
Peak Performance with a Special Ops Veteran
Speaker: Alex Racey, First Principles of Performance
Lesson #1: The first principles of performance are eat, sleep, move
These three principals are all tied together. If you are suffering in one, you suffer in all three and your performance suffers as a result.
Lesson #2: The three common performance categories
Most people fall into one of the following three performance categories.
First is “kick the can.” This is someone who was a star athlete in high school or college. They shifted 100% of their focus from athletics to their job. They make a lot of money but their physical, mental, and emotional health is lacking. They tell themselves that they will eventually refocus on their fitness.
Second is “head in the sand.” This is someone who is overwhelmed by the number of fitness routines and diets and say “screw it” and decide to ignore them all.
Third is “all good.” They work out and eat well but ignore ongoing pain and issues, like joint pain, back issues, etc. Alex says this is the category he falls into.
Lesson #3: How to optimize your performance.
To optimize your performance, you must optimize your eating, sleeping and moving. Alex says the best approach is to Google metabolic flexibility for eating, sleep hygiene for sleeping, and minimum effective dose for moving.
Industrial – The Hottest Asset Class?
Speaker: Brandon Kramer – Senior Associate, Marcus & Millichap, Celeste Tanner, John Comunale, Nick Koncilja
Lesson #1: The nuances of industrial
There is a major difference in returns for 22 ft vs. 24 ft ceilings, having cross docking capability, and laser leveled floors, for example.
Lesson #2: Warehouses are the best
Warehouses have been the best performing asset class for the last 5 years. And is forecasted to continue as such for the next 5 years.
Lesson #3: Industrial cap rates are close to multifamily cap rates
Due to low construction costs, low operator exposure, and low turnover costs, cap rates on industrial assets are nearing multifamily cap rates.
eQRP, the Business 401k
Speaker: Damian Lupo – The eQRP Company
Lesson #1: Your biggest financial shackle is the IRS
70% of your earnings go to the IRS over your lifetime. eQRP can drastically reduce this number.
Lessons #2: eQRP vs. SD-IRA
Using a SD-IRA to invest with compared to a eQRP is slower, has a lower maximum deposit amount ($6,000 vs. $57,000), and results in a tax bill, whereas eQRP is faster and is tax free.
Lesson #3: Damian’s rules for investing
Only invest with self-responsible people, have no more than 5% of your capital in any deal, and don’t invest in dangerous places (a security guard was murdered at one of his properties).
Asset Protection Planning for Real Estate Investments
Speaker: Clint Coons – Anderson Advisors
Lesson #1: Ask the right questions
When you are thinking about protecting your assets, the wrong question is how much will it cost? The better questions is if I get sued tomorrow, how many assets will I lose?
Lesson #2: Don’t put multiple properties into an LLC
You should separate your investments into separate LLCs. If you group your properties together under one LLC, one lawsuit puts all the properties at risk.
Lesson #3: Don’t hold cash in your personal bank account
If you are sued, your personal cash is at risk. Set up a separate LLC and deposit profits into a bank account under the LLC’s name.
Lesson #4: Don’t make offers in your personal name
Set up a separate LLC to make the offers. If you end up walking away from the deal, the seller can sue you personally for damages, especially if the value of property dropped during the time the property was off the market.
You can always assign the contract to yourself later.
Senior Housing – the 3 Best Ways to Get Started NOW!
Speaker: Gene Guarino – Residential Assisted Living Academy
Lesson #1: Everyone will get involved with assisted living in one way or another:
Lesson #2: Own a home and lease that home to a senior housing operator
In doing so, you can charge a higher lease amount than you would be able to charge by using the home as a regular rental.
Lesson #3: Own a home and be the senior housing operator
The average cost for assisted living is $4,000 per month per person and the resident will pay all cash. Much better terms than your typical rental.
Intellectual Debate: You Will Have Greater Success Over the Next Years If You Sell More Than You Buy in 2020
Speakers: Jamie Smith, Jilliene Helman – CEO, RealtyMogul, Neal Bawa – CEO and Founder, Grocapitus, John Sebree
Lesson #1: Why you should buy more than you sell in 2020
Only buy long-term value-add deals in quality markets with quality underwriting and management.
When you sell, you lose the future wealth potential and you are taxed on the income.
Three other reasons to buy now is that interest rates are extremely low, there is a huge demand for multifamily but not enough supply, and you will lose 2% each year due to inflation if you are liquid. Even if the returns are lower, it is better than having your money lose value while sitting in a bank account.
You should be playing defensive and investing in asset classes such as mobile homes and workforce housings, which continue to perform during recessions.
Lesson #2: Why you should sell more than you buy in 2020
People are no longer underwriting deals based on fundamentals of property but on aggressive proformas. They are also more leveraged and securing loans with longer interest-only periods, and sponsors are trying to maximize their fees.
The government is continuing to spend our tax dollars to create inflation (i.e., quantitative easing) which is unsustainable.
Rent growth is slowing and expenses are increasing, which means NOI growth is slowing
An economic slowdown is inevitable and you want to have cash to take advantage of the opportunities.
People are now buying overpriced properties from veteran investors who are waiting for a recession.
There is a trillion dollar debt deficit.
People from get rich fast courses are flooding the market.
The FED continues to cut interest rates even though the economy is supposed to be strong. What do they know that we don’t know?
Each month, the US Bureau of Labor Statistics (BLS) releases a monthly Metropolitan Area Employment and Unemployment Report, which includes the current total number of civilian labor force and unemployment by state and metropolitan area (MSA), as well as the same metrics 12 months prior in order to determine the change in the labor force and unemployment over the past year.
The employment situation in a market is an indication of the demand for real estate. People need jobs to pay living expenses, which includes paying for rent. The more people with jobs in the market, the more potential “customers” for us as apartment investors.
BLS releases a lot of relevant economic data on a month basis, which can be found here. You can also view archived new releases for previous years here.
50 states, the District of Columbia, Puerto Rico, and 396 MSAs are included in the data.
Currently, we focus on the Texas and Florida markets for our deals. Here are some interest highlights from their December 2019 report about those two states:
10 states added over 100,000 jobs
#1 was Texas (253,056 jobs) and #2 was Florida (178,978 jobs)
31 states had a reduction in unemployment
19 markets added over 25,000 jobs
The #2 market (Dallas-Fort Worth-Arlington) added more jobs than the total number of jobs added in 40 out of 50 states
The #10 market (Orlando-Kissimmee-Sanford) added more jobs than the total number of jobs added in 34 out of 50 states
The #19 market (Tampa-St. Petersburg-Clearwater) added more jobs than the total number of jobs added in 26 out of 50 states
275 out of 396 markets had a reduction in unemployment
Here is the BLS data for our markets from December 2018 to December 2019
State of Texas
New Jobs Added Ranking: #1 out of 50 states
Total Jobs 12/2018: 13,975,415
Total Jobs 12/2019: 14,228,471
Total Jobs Added: 253,056
Job Growth: 1.81%
Total Unemployment 12/2018: 501,787
Total Unemployment 12/2019: 470,429
Unemployment Rate 12/2018: 3.6%
Unemployment Rate 12/2019: 3.3%
Change in Unemployment: -0.3%
State of Florida
New Jobs Added Ranking: #2 out of 50 states
Total Jobs 12/2018: 10,284,492
Total Jobs 12/2019: 10,463,470
Total Jobs Added: 178,978
Job Growth: 1.74%
Total Unemployment 12/2018: 338,922
Total Unemployment 12/2019: 265,350
Unemployment Rate 12/2018: 3.3%
Unemployment Rate 12/2019: 2.5%
Change in Unemployment: -0.8%
Dallas-Fort Worth-Arlington MSA
New Jobs Added Ranking: #2 out of 396 MSAs
Total Jobs 12/2018: 3,956,122
Total Jobs 12/2019: 4,054,399
Total Jobs Added: 98,277
Job Growth: 2.48%
Total Unemployment 12/2018: 128,944
Total Unemployment 12/2019: 117,547
Unemployment Rate 12/2018: 3.3%
Unemployment Rate 12/2019: 2.9%
Change in Unemployment: -0.4%
New Jobs Added Ranking: #10 out of 396 MSAs
Total Jobs 12/2018: 1,348,435
Total Jobs 12/2019: 1,386,798
Total Jobs Added: 38,363
Job Growth: 2.85%
Total Unemployment 12/2018: 40,421
Total Unemployment 12/2019: 33,987
Unemployment Rate 12/2018: 3.0%
Unemployment Rate 12/2019: 2.5%
Change in Unemployment: -0.5%
New Jobs Added Ranking: #19 out of 396 MSAs
Total Jobs 12/2018: 1,531,930
Total Jobs 12/2019: 1,558,569
Total Jobs Added: 26,639
Job Growth: 1.74%
Total Unemployment 12/2018: 49,086
Total Unemployment 12/2019: 41,111
Unemployment Rate 12/2018: 3.2%
Unemployment Rate 12/2019: 2.6%
Change in Unemployment: -0.6%
You can view the full report for all US states and markets by clicking here.
One of the most important factors used to evaluate a potential target investment market is supply and demand.
The demand side of the equation is measured in part by the change in median rent year-over-year – an increase in median rent indicates an increase in the demand for rental properties in a particular area, and vice versa.
Ideally, the change in rent for your target market is positive (obviously) and is greater than the average national change in rent. From January 2019 to January 2020, the average national change in rent was +1.6% (compared to +1.6% and +2.6% over the same time period in 2018 and 2017 respectively). This would indicate that rent growth is continuing to be sluggish on a national scale compared to previous years. However, the top markets in the country are continuing to outpace the current and past two year averages.
Overall, 217 of the 712 US cities experienced rent growth of 2% of more. 96 had rent growth of 3% or more. 36 had rent growth of 4% of more. And 12 had rent growth of 5% or more. The city with the greatest rent growth was the city of Madison in Alabama (population of 47,959) – 6.9%.
If you are investing in one of these markets, do not assume that the future rent growth will be the same. Always conservatively estimate the annual income growth factor – 2% to 3% maximum. That way, if the rental rates slow, you’ll still hit your projections. And if the rental rates continue or increase, you’ll exceed your projections, which means more money for you and your investors.
Every 6 months, CBRE releases their bi-annual North American Cap Rate Survey, which calculates cap rates and expected return on cost based on recent transactions and interactions with active investors in markets across the country.
The cap rate is the rate of return based on the income that an asset is expected to generate More specifically, it is the ratio of the net operating income and the current market value of the asset (cap rate = net operating income / current market value). Generally, at the same net operating income, the higher the cap rate, the lower the property value.
In multifamily investing, the cap rate is used by appraisers in order to determine the value of an apartment building being purchased or sold. Therefore, as investors, the cap rate can be used on the front end to help us determine a fair purchase price – although it is not as important as cash-on-cash (CoC) return and, if you’re an apartment syndicator, the internal rate of return (IRR). However, the cap rate is very important on the back end, because it is used to determine how much the investor or syndicator can sell their asset for, which determines how much profit they can make at sale.
Here are the cap rates at the end of the second half of 2019 of the nation’s top 50 tier I, II, and III multifamily markets for Class A, B, and C asset classes .
However, once the apartment syndicator has taken a few deals full cycle (i.e., acquisitions to disposition), the door to another money raising option begins to open – private equity real estate.
According to Investopedia, private equity real estate is “an asset class composed of pooled private and public investments in the property markets.” In other words, private accredited investors, institutions such as pension funds and nonprofit funds, and third parties such as asset managers investing on behalf of institutions invest in a private equity real estate fund that is used to invest in real estate.
Experienced apartment syndicators can raise money from these private equity real estate funds to fund their apartment deals.
My company, however, does not pursue private equity real estate funds for the following three reasons:
1. Private Equity Institutions Only Review Deals That Are Under Contract
The main reason why my company doesn’t work with private equity real estate institutions is because they only review deals that are already under contract.
Once an apartment syndicator has signed the purchase sale agreement (PSA) with a seller, the private equity real estate institution will perform their due diligence to determine whether they will provide funding.
This poses a problem for my company.
For us to get a property under contract, we typically have to offer a non-refundable earnest deposit.
If we sign a PSA with a seller that includes a nonrefundable down payment, the private equity real estate institution performs their due diligence, and decide to not fund that deal, we lose the nonrefundable down payment if we need to back out of the contract.
Of course, it is possible that we could lose the nonrefundable down payment by raising capital from a group of individual accredited investors. However, it is less probable because we are raising capital from multiple individuals as opposed to relying on one institution to fund the entire deal. In other words, we don’t need every single person on our investor list to invest to close whereas we would need the institution to invest.
2. Private Equity Institutions Won’t Approve Funding Until a Minimum of 30 Days After Contract
Not only do private equity institutions review deals once they are placed on contract, but they won’t approve or deny funding until at least 30 days after the deal is placed under contract.
Once an apartment syndicator has signed the PSA with the seller, they won’t know if the private equity institution will provide funding for at least a month.
This also poses a problem for my company.
Generally, the number of days from PSA to close is approximately 60 days. We will begin the formal funding period a few weeks after placing a deal under contract and our goal is to secure 100% of the funding approximately 30 days prior to closing. That way, if one or more investor needs to back out of the investment, we have a 30-day cushion to find a replacement.
Let’s say we decided to raise money from institutions instead. Even if they decided to deny the deal at the minimum of 30 days, we’d only have approximately 30 days to raise capital from individual accredited investors. Rather than having the majority or all of the funding required to close 30 days prior to closing, we’d have $0.
As a result, we’d have a compressed timeline to attempt to raise capital from individual accredited investors. It is possible, but much less probable that we’d be able to secure all of the funding required. So, we’d have to back out of the deal and lose our nonrefundable earnest deposit.
3. If the Private Equity Institution Doesn’t Approve, We Lose More Than Just Money
One objection you may have is “well, what if I’m not putting down a nonrefundable earnest deposit? If the institution doesn’t approve, I can back out of the contract without losing any money, right?”
Unfortunately, that is not the case.
When we are 30 days or more into the due diligence period, we have more skin in the game than just the earnest deposit.
First, there are the upfront due diligence costs. Typically, the main due diligence items are completed early in the contract so that we can review the reports and make adjustments to our business plan or renegotiate the contract terms. These due diligence items such as inspections, appraisals, surveys, etc. aren’t free. If we close on the deal, we are reimbursed for these items at sale. However, if we fail to close, that money is lost.
In addition to money, our reputation is also at stake. If we pull out of a deal because we couldn’t raise enough money, our reputation takes a hit with the seller. If the seller owns multiple apartments in the area, we reduce our chances of being award their deal once they decide to sell other assets in their portfolio. If the seller is well known in the local area, our reputation may also take a hit in the eyes of other apartment owners and apartment professionals that they know. “Don’t work with Joe. He wasted 30 days of my time because he couldn’t secure funding.”
Our reputation would also take a hit with the listing broker for similar reasons. Then, we are less likely to get awarded a deal that is listed by that same broker. And since everyone typically knows everyone else in the broker world, we may also reduce our chances of being awarded a deal from any broker.
So it is a double whammy. Not only will we lose our earnest deposit (if it was nonrefundable) and due diligence expenses, but our reputation will also take a hit with the seller and listing broker, at minimum.
Overall, the three main reasons we don’t work with institutions are (1) they don’t review deals until after they are under contract, (2) they don’t approve funding until at least 30 days after the deal is under contract, and (3) we lose money and our reputation takes a hit if they don’t provide funding.
Whether you are a passive investor who is interested in learning more about the apartment syndication process or an active investor who is interested in becoming an apartment syndicator, understanding the responsibilities of the General Partnership (GP) is vital.
Passive investors should have an idea of what the GP does and how the responsibilities are split up between the members of the GP in order to qualify the syndication team prior to investing. In other words, is the GP implementing the syndication process properly and in its entirety and are the responsibilities broken up based on the unique skills and background of each member of the GP?
For obvious reasons, understanding the responsibilities of the GP is even more important for active investors who are interested in becoming apartment syndicators. First and foremost, by understanding the main responsibilities of the GP, an active investor can determine which roles they are capable of fulfilling and which roles they will need to have covered by a partner or partners.
I’ve broken the main tasks of the GP into three categories: (1) pre-contract, (2) contact-to-close, and (3) post-closing. Not every single GP will implement every single one of these tasks. However, these are the tasks implemented by the most successful GPs. When applicable, I will provide links to other blog posts and Syndication School podcast episodes that go into more details on a specific task.
Here are the 51 main responsibilities/tasks done by the most successful general partners in apartment syndications:
These are the 51 main responsibilities of the GP in apartment syndications.
If you are a passive investor, you can use this list to generate questions to ask the GP about their business plan, who does what, and why that person has been assigned that responsibility.
If you are someone who is in the process or interested in starting an apartment syndication business, you can use this list to understand what you need to do to create a successful business and to assign each role to a member of the GP based on their unique skills and background.
Obviously, I’m not just passive. Since I’m the co-founder of Ashcroft Capital, I take a very active role in the business as a general partner (GP). But I have passive dollars as a limited partner in our deals. By a long margin, the majority of my personal money is allocated to investing in my own deals with Ashcroft Capital.
That said, I invest in other people’s deals as well. In fact, as of this writing, I have $818,500 invested in 14 non-Ashcroft deals.
And I do it for three reasons.
1. Makes Me a Better GP on My Deals
First, by investing as an LP in other people’s deals, it makes me a better GP on my deals. As an LP I see first-hand how other GPs organize and execute their deals. Some of the things I am exposed to are:
Initial email announcing the deal – How do they write the email? How is it designed? What does it say? What doesn’t it say? What is their call to action?
The signup process for investing – Do they use an investor portal? If not, what do they use? AdobeSign? DocuSign? Something else?
Deal presentation to investors – I do not attend the new deal presentation. But if I did, I would learn how the deal is presented and what presentation service they use (conference call or webinar, live or recorded). The reason why I don’t attend the presentation is because I prefer to read the information and base my investment decision on that. Plus, I don’t receive investment opportunities from anyone that I wouldn’t invest with because I’ve already screened the operator. Once a new deal hits my email inbox, since I have already vetted the operator, I only vet the deal.
Ongoing communications – Do they send monthly updates, quarterly updates, or sporadic updates? I have invested with one operator whose communication was sporadic and the deal didn’t perform as well as my other passive investments. I won’t be investing with them again – lesson learned though! If they are sending monthly or quarterly updates, what are they including in those updates? What financial reports do they proactively send?
Distributions – Do they send monthly distributions, quarterly distributions, or some other distribution schedule? Do they send the distributions via check in the mail or do they offer direct deposit? I hate getting checks. I prefer direct deposits because it’s easier to track and doesn’t require an extra time commitment. Do I get paid when they say I will? For example, some GPs do quarterly distributions but the investors don’t actually see the money for a month or two due to processing.
What happens when things don’t go according to plan – Do they go dark? Do they clearly communicate the problem and the steps they are taking toward the solution? Investors want to be told succinctly and in a straight-forward manner what is going on at the property. They want consistent updates. If communication slows down when challenges or issues arise, that is a red flag and is something I’ve experienced with one of my passive investments.
2. Test Drive Other Markets
The second reason I invest in other company’s deals is because it lets me test drive other markets. At Ashcroft Capital, we are laser focused on five markets – Dallas, Fort Worth, Tampa, Orlando and Jacksonville (here is the process we use to select target investment markets). Because of our laser-focused approach on those five markets, we don’t have opportunities anywhere else at this time. However, should I want to see how other markets are performing for other operators, this is a great opportunity to get in a deal or two in a market I’m curious about to see any challenges other operators have. This helps me gain first-hand knowledge about some additional considerations about new markets should be start exploring outside our current five markets.
3. Strengthen Relationships with Influencers
Third, by investing with other GPs I am strengthening my relationship with influential people in my industry who are also putting together deals. I live in a world of abundance. And by investing with other GPs, it allows me to help them grow their business while staying in touch with them in a relevant way since I am now one of their LPs.
Other Takeaways From Investing in Other GP’s Deals
Here are some specific observations I have made as a result of investing in other GPs deals:
One operator sent out a deal. I said I’d invest. Then after a month or so they sent a follow-up email saying they are pulling out of the deal. It was a thorough explanation of why they pulled out of the deal and it made a lot of sense. The result of the experience gave me even more confidence in them as a GP.
Some of our Ashcroft Capital investors have said they prefer higher preferred returns and don’t care as much about the upside in the deal. I saw an offering from one GP that offered a 10% preferred return for Class A investors, and a 7% preferred return for Class B investors. Class A had virtually no upside but Class B got the upside at a 70/30 split (LP/GP). After seeing that, and talking to other GPs about it, we tested it out on a deal and it was very well received.
One group I invest with does interviews with experts like SD-IRA custodians, property managers, etc. and shares the webinar recordings exclusively with their LPs. I obviously know a thing or two about doing interviews but I don’t have an exclusive interview series just for my accredited investors. It’s something I’m going to implement.
Another operator mailed me the legal documents which I’d actually preferred not happen. I personally want everything digital and if I want to print something out I’ll do it myself.
An operator mailed me a gift with their logo on it. I think this is a miss. I think that accredited investors don’t need or want another mug, thermos, pen, etc. We have the money to buy one ourselves. I think gifts for accredited investors should be much more thoughtful and personalized. I’m working with my team to create a program for our investors that provides thoughtful gifts on special occasions. Perhaps I’ll write about that once we have it implemented.
To summarize, I invest the majority of my own money into my own deals with Ashcroft Capital. However, I find it valuable to invest my own money into other people’s deals because it educates me on ways to improve Ashcroft Capital, lets me test drive other markets and strengthens relationships with influential people in the industry. The net result is our investors at Ashcroft Capital have a better experience with us because I am constantly learning from others and using those lessons to optimize the experience for our investors.
Every 6 months, CBRE releases their bi-annual North American Cap Rate Survey, which calculates cap rates and expected return on cost based on recent transactions and interactions with active investors in markets across the country.
The cap rate is the rate of return based on the income that an asset is expected to generate More specifically, it is the ratio of the net operating income and the current market value of the asset (cap rate = net operating income / current market value). Generally, at the same net operating income, the higher the cap rate, the lower the property value.
In multifamily investing, the cap rate is used by appraisers in order to determine the value of an apartment building being purchased or sold. Therefore, as investors, the cap rate can be used on the front end to help us determine a fair purchase price – although it is not as important as cash-on-cash (CoC) return and, if you’re an apartment syndicator, the internal rate of return (IRR). However, the cap rate is very important on the back end, because it is used to determine how much the investor or syndicator can sell their asset for, which determines how much profit they can make at sale.
Here are the cap rates at the end of the first half of 2019 of the nation’s top 50 tier I, II, and III multifamily markets for Class A, B, and C asset classes .
Here is how to create an attractive new deal email to maximize the number of investor commitments.
The purpose of the new deal email is to:
Notify investors that you have a new deal under contract
Provide investors with the highlights of the investment
Send them a link to download the investment summary
Invite them to invest
Invest them to the conference call
I recommend using an automated email service like MailChimp to create your emails as opposed to sending one-off emails to each of your investors. With MailChimp, you can create a professional looking email, upload every contact from your investor database, and send the email campaign to everyone.
1. The Subject
The first thing an investor will see when they receive the new deal email is the subject line of the email. So, your subject line needs to convey why they should invest in the opportunity and grab their attention.
A bad subject line would be: “New Deal in Dallas, TX” or “Great Investment Opportunity.” These are too generic and not specific enough.
A good subject line would be: “Off-Market Opportunity Under Contract at 25% Below Recent Sales” or “Significant Value-Add Opportunity in A+ Market.” Both of these examples tell the investor why it is a good deal and grabs their attention.
At the top of your new deal email, you should include a picture or pictures of the asset. On our new deal emails, we actual create a collage of four images. We have a main image, which is typically a picture of the monument sign. Then, we have three smaller pictures below, which are typically things like the pool, the clubhouse, the fitness center, or some other aesthetically pleasing part of the asset.
Additionally, we include our company logo on the collage.
Adding images of the property to the email make it more professional looking and allows the investors to actually see what they are investing in right away.
You should have already added many images to the investment summary, so you can pull four images from there.
Below the image, you should start the body of the email off with the subject line of the email in all bold.
Then, in the next paragraph, you should include the main highlights of the deal, starting off with elaborating more on the subject line. For the “Significant Value-Add Opportunity in A+ Market” example, you would elaborate on why it is a significant value-add deal and why it is an A+ location.
“All of the unit interiors are inferior compared to the surrounding competition.”
“The asset is located in an A+ location, which has one of the most desirable school districts in the state, is the top market in the nation for job, and has an average household income of over $100,000.”
In the next paragraph, you should include an explanation of your business plan. Some questions to answer are:
Will you be doing renovations?
Are these renovations proven?
How many units will you be renovating?
What are the projected rental premiums on renovated units?
How do those rental premiums compare to the surrounding competition?
4. Other Notable Aspects of the Deal
The introduction should be enough to communicate the main highlights of the deal. However, while it isn’t a requirement, you can also include other notable aspects of the deal. For example, you can provide more statistics on the overall market or submarket, provide information on the debt you are securing, explain any major operational upsides you’ve identified, talk about the company managing the project, etc.
All of the main highlights should be included in the introduction. These points should simply reinforce the main highlights and why you are investing in the deal.
5. Projected Returns and Investment Information
After you’ve written out the main highlights and other notable aspects of the deal, you want to include the projected returns and other important information the investors need to know about the opportunity.
Next, include information on the minimum and maximum investment amount. Typically, you want to set the maximum investment amount equal to 19% of the total equity raise. If an investor invests 20% of more of the equity, the lender will perform additional due diligence on that person, which requires personal financial information.
Then, you want to state the closing date and funding date ranges.
Lastly, you want to let investors know how they can commit to the deal (i.e., “once you are ready to commit, please reply to this email with your investment amount”.)
6. Investment Summary
I also recommend including a link to download the investment summary. The best way to do so is to upload the investment summary to Dropbox and include a link to download the file from Dropbox in the email. That way, you won’t need to send out individual emails to investors with the investment summary. Plus, Dropbox allows you to track who actually downloads the file.
To conclude the email, I recommend inviting interested investors to attend your new investment conference call or webinar. We host our calls on FreeConferenceCall.com. So, prior to creating the email, I schedule a date and time with my business partner and set up the call on FreeConferenceCall.com. Then, I include the date, time, and call in information at the bottom of the email.
Before hitting send, double check that the link to the investment summary works and that you are sending the email to your most up-to-date list of investors. After you hit send, the next step is to prepare for the new investment conference call.
As an apartment syndicator, one of your ongoing asset management duties is to frequently analyze the market to estimate the current as-is value of your property.
One way to calculate the current as-is value of the property is to determine the market cap rate based on recent sales and divide that by the current net operating income (value = net operating income / cap rate)
Another way to determine the current as-is value of your apartment is to request a broker’s opinion of value from your commercial real estate broker.
The purpose of estimating your apartment value at least a few times a year? – to determine if it makes financial sense to sell early.
In addition to the current as-is value of your property (i.e., the potential sales price), here are six other factors to consider to help you determine if it makes sense to sell your apartment deal before your initially projected sales date.
1. Status of the Loan
One thing to consider is the type of loan you secured. If you secured an interest-only loan, how many more months of I/O payments are remaining? Generally, you will receive a higher cash flow during the interest-only period, so it may make sense to wait to sell until you start paying down the principal.
Also, when is the loan due? You don’t ever want to get forced to sell, so if you think it is time to sell and your loan is due soon, it may make sense to sell now rather than waiting until the loan is due.
Lastly, if you were to sell now, would you be required to pay a prepayment penalty? If so, what is the amount and how much longer until that prepayment penalty clause expires? If there is a large prepayment penalty for selling early, you will need to subtract that amount from your projected sales proceeds. If the prepayment penalty clause expires soon or if paying the prepayment penalty results in returns that are less than or not significantly greater than your initial projections, it may make sense to wait to sell.
2. Status of the Business Plan
As value-add investors, we make physical improvements to the property via interior renovations and amenities upgrades in order to increase the income. Generally, every time you lease a newly renovated unit, the income increases. So, if you haven’t completed your value-add business plan, how many more units could you renovated if you held onto the property for another 12 months, 18 months, etc.? And what would the overall returns to your investors be if you waited to sell until you renovated those units in 12 months, 18 months, etc.?
If you’ve completed your value-add business plan, then this point isn’t important. But if you still have a large majority of units to renovate, it may make sense to capture that value first so that you can sell for a higher price at a later date.
3. Status of the Market
The income is only one of the factors that impacts your potential sales price. The other is the market cap rate. So, you need to think about where the market and submarket is heading. This is accomplished by analyzing the various reports created by third-party research companies, like Yardi Matrix, CBRE, Marcus and Millichap, etc., to determine the rental rate, occupancy rate, and market cap rate trends for the next 1 to 3 years (or the remaining time until your initial projected sales date). Then, determine how these trends compare to your underwriting projections. If the trends are better than your underwriting projections, it may make sense to wait to sell, and vice versa.
4. Age of Property
Another important factor to think about when considering the sale of your property is the date of construction.
If the property was constructed before 1980, capital expenditures and deferred maintenance will be an ongoing issue. Whatever you have budgeted to cover these ongoing issues will eat away at the ongoing return to your investors, which means that it may make sense to sell early.
5. Risk Tolerance
When you initially presented the investment offering to investors, you provided them with projected returns – most likely an IRR and an annualized cash-on-cash return.
Let’s say you projected an 18% IRR to your investors with a 5-year exit. After 3 years, you determine that you can sell at a price that would result in a 27% IRR to your investors. In addition to the factors above, determine what the projected IRR would be if you held onto the property for 12 months, 18 months, etc. Then, perform a sensitivity analysis to determine what those 12-month, 18-month, etc. IRRs would be if the market were to shift in the positive or negative direction. If those sensitized IRRs are not significantly greater than, following our example, 27%, then you are risking the chance that you will have a lower IRR if you hold.
Most likely, your passive investors have a relatively lower risk tolerance, which is why they are passively investing in the first place. So, if you are not confident that you can achieve a significantly higher IRR (or whatever return factor is important to your investors) by waiting to sell, it is not worth the risk.
6. Investment Goals
At the end of the day, the decision to sell or not to sell is based on the returns you can provide to your investors.
Do they care more about long-term cash flow or about receiving their money and profits back within 3 to 7 years?
If they are interested in receiving their capital and profits sooner rather than later, then IRR is likely the return factor they focus on the most. Keep in mind that IRR is a time-based measurement. The IRR is higher if the initial capital and profits are received today compared to 1 year from now. The longer you hold onto the deal, the lower the IRR. So, if you are not confident that you can make up for that reduction in the value of money over time by creating more value and cash flow, it may make sense to sell now.
On the other hand, if your investors are more interested in receiving an ongoing cash flow payment, you may want to hold onto the deal so that you can continue distribution cash flow payments.
Overall, if you are confident that selling now will get you the highest return for your investors, then you should sell. Each of these 6 factors above will help you determine if now truly is the best time or if you will have a better chance at achieving a higher return by waiting.
The approach is used as the basis for comparative market analysis (C.M.A.), which is an analysis of the prices of recently sold properties that are similar and within the same geographic area. It’s important to note that the sales comparison approach is not an official appraisal, and if a property is unique, a formal appraisal might be needed. One of the best ways to determine multifamily and commercial investment real estate value is by doing a thorough analysis of the property’s physical and financial status. CAP rates are another good way to compare your sale price with others who have sold in your area.
To get sales comparison information you can do things like:
Visit websites like apartments.com and craigslist.com to search for similar properties and units
Get the comparison from your broker
Get survey for rents from your property manager
Access a local MLS listing
Walk the property and visit apartments yourself physically
Make sure that you compile all that data to the spreadsheet and focus on rent per square foot mainly to compare your property to another.
A few great places to start your search is by looking at research from the major real estate brokerage companies in your area as well. A few of the national real estate brokerage firms that have great research reports are Marcus and Millichap and CBRE.
These companies produce research reports each quarter that you can get for free by registering on their websites. These research reports can tell you very valuable information such as; what properties have sold in your area, what they sold for, going CAP rates in your area, and comparable price per unit sales information. They can also tell you how your area compares to the rest of the US and their forecasts for how these numbers might change in the future.
Let’s be honest, if you mess up the distributions, the likelihood of your investors coming back for future deals decreases drastically. Additionally, my largest source of new investors is through referrals. So, by screwing up the distributions, not only would I be losing current investors, but potential investors as well.
In order to retain your investors and attract new investors, here is everything you need to know about sending distributions to your passive investors in order to not only set you and your investors up for success for this deal, but for all future deals.
For the purposes of this blog post, we will assuming you’re sending out monthly distributions and offering an 8% preferred return with a 70/30 profit split thereafter.
The amount of money distributed to the investor is based on the amount of money they invested and the preferred return. For example, if a limited partner invests $100,000 and you offer an 8% preferred return, they receive $8,000 per year in distributions. If you have 10 investors in total who invested $100,000 each, you will distribute $80,000 annually.
Of course, this assumes that the asset cash flows at least $80,000 annually. If the asset does not cash flow at least $80,000 annually (for example, if the asset cash flows $60,000 year 1), then you distribute $60,000 to investors and do not receive your split of the profits.
2. What happens if I cannot make a distribution?
Following the example, if the asset cash flows $60,000 in year 1 and $80,000 per year thereafter, then the $20,000 would accrue and be paid out at closing, assuming you included a catch-up provision in your operating agreement with investors.
3. How do I calculate the distributions?
The distribution is based on the preferred return offered to passive investors and their initial equity investment. The preferred return is an annual return, so since you are offering monthly distributions, you’ll need to divide the preferred return by 12. For example, and 8% preferred return on a $100,000 investment is $8,000 annually, or $666.67 per month.
4. When do I pay out extra distributions?
Every 12 months of ownership, you should evaluate the profit-and-loss statement for the previous 12 months to determine if the property cash flowed more than the 8% preferred return. If the property cash flowed more than the 8% preferred return, a portion of the additional profits (70% or however you structured the profit split) can be distributed to your passive investors.
For example, if 10 investors invested $100,000 each at an 8% preferred return, and the property cash flowed $100,000 year one, the investors would receive an additional $1,400 each ($100,000 cash flow – $80,000 in preferred returns = $20,000. $20,000 * 70% profit split = $14,000. $14,000 / 10 investors = $1,400). This equals a 9.4% return year 1 ($8,000 preferred return + $1,400 profit split = $9,400 / $100,000 initial investment = 9.4%)
5. Who sends out the distributions?
Ideally, your property management company sends out the monthly distributions. Make sure you set expectations with your property management company before closing on a deal (i.e., will they send out the distributions? How frequently? Etc.)
6. When do I send out the first distribution?
We send the first distribution at the end of the third month of ownership. It covers the time we owned the property in month 1 and month 2. For example, if we closed on January 15th, the first distribution is sent by the end of March and covers January 15th to February 28th.
After that, each distribution is sent at the end of the following month – March’s distribution is sent by the end of April.
7. How do I send the distribution?
The two main ways to send distributions are via direct deposit and check in the mail.
You can either offer both options or pick one option. But make sure that your property management company is capable of setting up direct deposits/mailing checks each month.
8. When do I receive my distributions?
Assuming there is cash flow remaining after the preferred return, the GPs receive distributions at the same time and at the same frequency as the passive investors.
First, you will receive your asset management fee of 2% (or whatever percentage you charge).
Then, the remaining profits will be split between your investors and you 70/30 (or whatever profit split you offered). For example, if you have 10 investors who invested $100,000 at an 8% preferred return and the asset cash flowed $100,000 year 1, the GP would receive $6,000.
You also want to assume that your passive investors will want to know this information. You can either wait until they ask you and spend your weekends writing individual emails to investors. Or, you can proactively answer these questions. My company creates an Investor Guide for each of our deals and include it in our “we closed” email. This guide outlines everything our investors need to know about distributions, including what the distributions are, when they will receive them, how they will receive them, and how we re-evaluate the deal every 12-months to determine if we can send a larger distribution.
Once you’ve answered all of these questions yourself, make sure you are communicating the answers to your investors as well – with the most effective way being the creation of an investor guide and including a link to download the guide in your closing email to investors.
Each year, Integra Realty Resources (IRR) releases their ViewPoint report, which analyzes commercial real estate trends and forecasts performance for the coming year. One of the factors they track are the market cycles for the top MSAs (which you can find here). Another important factor they track are cap rates.
The cap rate is the rate of return based on the income that an asset is expected to generate More specifically, it is the ratio of the net operating income and the current market value of the asset (cap rate = net operating income / current market value). Generally, at the same net operating income, the higher the cap rate, the lower the property value.
In multifamily investing, the cap rate is used by appraisers in order to determine the value of an apartment building being purchased or sold. Therefore, as investors, the cap rate can be used on the front end to help us determine a fair purchase price – although it is not as important as cash-on-cash (CoC) return and, if you’re an apartment syndicator, the internal rate of return (IRR). However, the cap rate is very important on the back end, because it is used to determine how much the investor or syndicator can sell their asset for, which determines how much profit they can make at sale.
IRR tracks the cap rate for urban and suburban Class A and Class B multifamily products both nationally and regionally, as well as the year-over-year change (measured as BPS, or basis points, where 1 BPS is equal to 0.01%).
Each year, Integra Realty Resources releases their ViewPoint report, which tracks major trends and development in the commercial real estate industry.
One of the data points in this report that is relevant to you as a multifamily investor is their categorization of the major cities into their respective stage in the market cycle. That is, which markets are expanding, which are recovering, which are experiencing hypersupply, and which are in a recession.
Based on the most recent multifamily market data, 83% of the markets reviewed are in the expansion phase and only one is in recession. According to IRR, most markets are in the expansion phase because debt capital for new development has been very disciplined and builders have been focusing on highly demanded niche products like senior housing, student housing, workforce housing, etc. Also, employment and unemployment trends have been the best demand indicator for apartments over time, and the number of jobs have been steadily increasing.
Before showing you which stage in the market cycle your target market is in, let’s first define the four stages:
Rental Rate Growth
These four categories are a part of a cycle, which goes like this: recovery to expansion to hypersupply to recession back to recovery:
IRR also broke each of these four categories into three sub-groups, which for the purpose of this blog post I will label as 1, 2, and 3. Using expansion as the example, markets in the 1 subgroup have the strongest expansion market factors (i.e., vacancy rate is decreasing the most, new construction is highest, absorption is highest, employment growth is highest, and rental rate growth is highest), whereas markets in the 3 subgroup still meet the expansion criteria but not as much as the 1 subgroup (i.e., vacancy decreasing at a slower rate, moderate new construction, high absorption, moderate employment growth, medium rental rate growth).
Since this is a cycle, markets in subgroup 1 are closer to the previous market stage and markets in subgroup 3 are closer to the next market stage. So in reality, the market cycle looks more like this:
That said, here are the market cycle categorizations for all of the major cities/markets:
Las Vegas, NV
Long Island, NY
Los Angeles, CA
New York, NY
Orange County, CA
San Diego, CA
Broward-Palm Beach, FL
Fort Worth, TX
Kansas City, MO
New Jersey, Coastal
New Jersey, No.
Salt Lake City, UT
San Francisco, CA
San Jose, CA
St. Louis, MO
San Antonio, TX
Little Rock, AR
What Does This Mean For Me?
Each of these markets are categorized based the following factors: vacancy rates, new construction, absorption, employment growth, and rental rate growth trends. So, one thing to think about is if you can find a submarket or neighborhood within one of the hypersupply or recession markets that have expansion or recovery factors. In other words, just because the overall market isn’t in the expansion or recovery phase doesn’t mean that you should abandon that market nor that you won’t be able to find great investment opportunities. In fact, you’ll likely be able to find more deals and have less competition when not pursuing expansion markets.
Additionally, if your market is in the 1 or 3 subgroup, you’ll want to monitor those market factors to see if the market has moved to another stage. This would be a good thing if your market moved from hypersupply 1 to expansion 3, and it would be concerning if your market moved from expansion 3 to hypersupply 1.
Lastly, just because your market is in the expansion phase doesn’t mean that every deal is a good deal. You should still complete a full underwriting analysis based on your business plan and perform the proper due diligence on all prospective deals.
While it is possible to perform all of the duties of the general partnership on your own, most apartment syndicators elected to partner up with one or more individuals, either on a deal-by-deal basis or in order to launch a full fledge syndication business.
If you want to become an apartment syndicator, one of the first steps after educating yourself on the process is to seek out a potential business partner. And the structure of this partnership and even the type of person/people you partner up with will vary depending on your current skill set.
In this blog post, we will go over the process for creating an ideal partnership so that you are setting yourself up for success from the start.
What Do You Want Out of a Partnership?
When making any sort of business decision, the first thing you need to know is what you actually want.
What do you specifically want to get out of your new partnership? The answer to this question will determine the characteristics of the ideal partner.
First, you will likely want to find a partner who is able to invest a similar amount of time into the business. If you have a full-time job and plan on spending a few hours each night on the business, you’ll likely want to seek out a partner who will do the same. Of course, you may desire a partner who will invest more time into the business than you, but you are likely setting yourself up for failure, as this person may begin to resent the fact that they are spending significantly more time on the business than you. In order to address this potential resentment from the beginning, the equity ownership of the general partnership should reflect any imbalances in time investments.
Next, you will want a business partner whose skillsets are complementary to your own. This starts by honestly evaluating your own skill sets and desires to determine the role you will play in the business. The roles that you either don’t have experience in or don’t want to do can be fulfilled by a business partner. For example, do you have a network of high net-worth individuals but hate underwriting? Then you can focus on raising capital, find a business partner with underwriting expertise, and determine how to split up the remaining roles.
To piggy back off of the previous point, in order to maximize your business’s efficiency, you will also want each partner to stay in their own lane. Obviously, all partners in the business should know what the others are doing. However, that doesn’t mean the person responsible for equity raising should be underwriting deals, unless that is one of their other responsibilities. Each partner should have a defined role in the business and should focus on fulfilling their duty.
You’ll also want a partner that you can get along with. This doesn’t mean that you and your business partner need to be best friends. But you do need to have complementary personalities. This point is more subjective than the previous characteristics of an ideal partnership, so you are going to need to rely on your own judgement. If you’ve known a potential partner for a while, it is a little easier than if you’ve just met the person. Either way, don’t rush into a formal partnership. Work together for a few months informally (i.e., don’t meet someone at a conference and create an LLC together over lunch) to determine if this is an individual you enjoy working with and if this person is serious about building an apartment syndication business.
Lastly, you will want to set expectations about how the business will function and flow from the start. This includes setting expectations on the responsibilities, ongoing communication, initial goals, etc. We will go into more details about assigning responsibilities in the next section.
In regards to ongoing communication:
How often will you have meetings?
What will be the logistics of these meetings? Who will call who? Will you use a call-in service like Zoom?
What will be the agenda for these meetings? Will each meeting follow a similar structure?
If you have a question for the other business partner, how quickly will they respond?
In regards to goals:
What are the initial goals of the business?
Do your goals align with your business partners’ goals?
How will the success of these goals be measured?
Will you have a shared project tracker so that you can see what the other person is doing?
What are the goals each week, each month, each quarter, each year?
What are the longer-term goals of the business?
What Will Be Each Partners’ Role in The Business?
As I mentioned in the previous section, an ideal partnership is one in which the partners have complementary skillsets. And each partners’ role in the business is based on their skillsets.
In apartment syndications, the roles of the general partnership can be broken into 7 categories, and each responsibility has a commonly accepted range of equity ownership.
First, who will raise the equity? The person who raises the equity should also be responsible for all ongoing communication with the passive investors. They will notify investors when there is a new opportunity. They will lead the new investment offering conference call. They will be responsible for formalizing investor commitments. They will notify investors once they deal has closed. And they will be responsible for sending ongoing deal updates to the investors. Generally, this investor relations person will receive anywhere between 25% to 40% of the general partnership.
Next, who will guarantee the loan? In order to qualify for commercial financing, someone who meets the lender’s liquidity, net worth, and experience requirements will need to sign on the loan. When you are first starting out, this will likely be a third-party, because you and your business partner won’t meet the lender requirements on your own. If this is the case, you will offer this individual an equity stake (5% to 20%) in the general partnership and/or an upfront fee (0.5% to 5% of the principal balance). Eventually, you and your business partner will be able to guarantee the loan and you can split the equity ownership 50/50.
Third, who will find the deals? The person who finds the deals will focus on building relationships with the commercial real estate brokers and implement off-market lead generation strategies. Generally, 5% to 10% of the general partnership is allocated to the deal finder.
Fourth, who will perform due diligence on deals? This person is responsible for underwriting deals, submitting offers on deal, securing financing, overseeing the post-contract due diligence, and ensuring a successful close. Mostly likely, the person who finds the deals will also perform due diligence on the deals. If this is the case, this person can be referred to as the acquisition’s manager. Generally, 10% to 15% of the general partnership is allocated to the person who performs due diligence, and 15% to 25% is allocated in total to the acquisition’s manager.
Next, who will asset manage the deals? This person is responsible for ensuring the successful implementation of the business plan once the deal has been closed on. Among other duties, they will do the weekly performance reviews with the property management company and frequently analyze the market to determine the best time to sell. Generally, 20% to 35% of the general partnership is allocated to the asset manager.
Sixth, who will pay for the upfront due diligence costs? There are costs associated with closing an apartment deal. These costs are typically reimbursed at closing, but someone will need to front these costs. These costs include lender fees and legal fees associated with securing financing and formalizing the syndication partnership between the GPs and the LPs. Generally, 5% of the general partnership is allocated to the person who fronts these costs.
Lastly is the upfront work required to create the foundation syndication business. Who will evaluate and select the target investment market? Who will create the business’s brand (i.e., the website, company name and logo, business cards, thought leadership platform, etc.)? Who will find and interview team members? Most likely, these responsibilities will be split up between the partners, and will likely be based on who is responsible for the other 6 duties (i.e., the equity raiser will likely be responsible for the thought leadership platform, the deal finder will likely be responsible for finding commercial real estate brokers, the asset manager will be responsible for finding the property management company, etc.).
One of the first things you’ll want to do with a new partner is determine who will perform the duties for each of these seven categories and negotiate a fair split of the general partnership equity based on those duties.
The formation of a business partnership is both common and extremely beneficial to launching and growing an apartment syndication business.
In order to create the ideal partnership, the first thing you want to do is determine what you specifically want out of the partnership. Overall, you want a partnership where the equity percentages reflect the time investment and role of each partner, where each partners’ skillset complements the others, where each partner stays in their own lane, where each partner can get along, and where expectations are defined from the beginning.
Once you’ve found a partner or partners who meet this criteria, the next step is to determine who is responsible for what and the equity percentage given to each partner.
Follow these best practices in order to maximize the long-term success of your new syndication business!
Why exactly did you decide to get into real estate? If you’re like many investors, chances are that the first answer that comes to mind is having more freedom. But if you dig deep, you’d likely uncover a slew of other reasons for building a real estate brand.
Perhaps you remember having a positive renting experience years ago and would like to deliver that same experience to current tenants. Or maybe a family member was in real estate and has instilled in you a passion for the same. Maybe you simply like owning a high-value asset that, unlike stocks, you can actually touch with your hands.
Whatever the reason, it’s critical that you understand why you’re in the real estate game. Then, you can use this awareness to sell yourself through effective business storytelling. Here is a rundown on how to brand your company in the real estate world through business storytelling and building connections.
Solidify Your Vision
An important step in telling your story as a real estate company is to first determine what that story is. If you don’t have a foundation of values and goals, your brand’s messaging may end up being confusing and even inconsistent.
So, first, determine what your company’s purpose is. Ideally, your goal should be to generate the financial returns you’re looking for while also helping to meet people’s needs, thus adding value to society at large. The people you may be striving to help include the prospective tenants who will rent one of your apartment investments or fellow investors who are looking for that next great deal to join in on, for instance.
Communicate Your Company’s Core Values
Once your real estate brand features a strong vision, it will naturally develop strong values. Your job as the founder is to use business storytelling to communicate these ethics to your audience and build a connection between the two.
Ideally, you should pinpoint between three and five main ideals that you have built your business on as you navigate how to brand your company. Then, ask yourself why each of these values is essential. How does each one serve your vision in the real estate world?
For example, one of your core ideals could be to embrace opportunities, which include being creative and flexible in your company’s approach to seeking and securing deals. You could also emphasize that you value integrity, which may help you to attract tenants who are looking for a forthright and honest landlord.
Produce Compelling and Authentic Content as Part of Your Business Storytelling Efforts
Now that you have created a solid vision, identified your target audience members, and selected your company’s core values, it’s time for you to create a brand language that will help you to tell your unique story. This brand language certainly includes written words, but it also includes visuals. This content can be displayed in the form of posts on social media, in a blog, or on your real estate company’s website.
No matter where you place the content, make sure that it echoes your company’s core values and mission. You should view the content you create as a puzzle piece that fits your business’s overall picture in the real estate world. Most importantly, you need to be authentic to capture not just the eyes and the minds of your target audience but also their hearts.
Keep Your Business Storytelling Simple from the Start
One of the biggest mistakes people make when they set out to tell their businesses’ stories is that they complicate the process. As you work on figuring out how to brand your company, stay focused on three core things from the start: your business problem, your solution, and your success. That’s all you need to determine your vision, identify your core values, and effectively tell your story.
A Glimpse at the Steps of Business Storytelling
For instance, as you work on creating content for your website, first think about the beginning of your story—the problem you initially attempted to solve through your business. Maybe you wanted to provide more rental options in a certain area of town.
Then, identify the middle—how you solved the problem. In your case, maybe you purchased several properties that offer the types of amenities that local residents are seeking in that area of town.
Finally, determine the end—the success you’ve had in meeting the needs of tenants in the local area. Your end should create optimism for your audience.
All in all, your real estate story can appeal to tenants interested in renting from you, as well as investors interested in partnering with you on future deals. With the right story—one that isn’t too complicated—you can easily build trust with your audience.
Be Personable in Your Business Storytelling
Another important part of mastering how to brand your company is making sure that your personality shines through in your business’s story. As mentioned earlier, it is critical that you are authentic and make your personal values your real estate company’s values. This will help to ensure that your brand is totally unique.
Remember that, in the end, the people who will work with you on an investor or a tenant level will be drawn to you, not necessarily to your company. That’s because people partner with and buy from other people. In light of this, make sure that you are visible in your brand, as this will enable you to build important connections and successfully drive the brand forward.
Start Engaging in Effective Business Storytelling Today!
As a real estate business owner, you may understand the importance of branding your company, but you might be unsure about how to go about it. Fortunately, you don’t have to navigate this process alone.
I can help you to tap into the power of storytelling to successfully market your company to your target audience every time. With my help, you can confidently create engaging, memorable, and profitable messaging for your business. Contact me to learn more about how you can strengthen loyalty to your real estate brand and achieve your financial goals in the months and years ahead.
This week’s question is about how to approach multifamily deals that have “whisper prices”.
A whisper price is the price that either the seller or the broker wants or believes the value of the property to be.
The question we asked the expert is: “at what point do you pass on a deal when you cannot hit your return projections using the current whisper price? Do you continue underwriting with a price that is lower than the whisper price? What is the cutoff point? 20% below the whisper price? 10%? In other words, how do you know when to stop and not look into a deal anymore?”
We often find that brokers and sellers set their expectations too high when creating a “whisper price”. On the other hand, we have seen deals that far surpass the whisper pricing. While it’s important to understand the expectations of the seller, we tend to put the whisper pricing aside until we have completed our initial review of the deal.
The initial review consists of, first, looking at the property from a high level. Is this a property we want to own? Do we like the location? Is the quality of the asset what we look for? Does it fit the profile of deals we are trying to buy (in our case, value add deals)? If the deal passes these questions, then we start our initial underwriting the deal. After the initial underwriting, we get a general idea of what we feel the property is worth to us in order to hit our desired returns. We then compare this to the whisper price to get a gauge of how close or far we are from the seller’s expectations. If we are significantly off on pricing, we usually have a conversation with the broker or seller and give them our initial feedback to explain that pricing seems a bit aggressive to us. This will typically elicit a response and the broker/seller will provide their feedback that maybe other potential buyers have the same reaction or perhaps that other buyers think the whisper price is reasonable. Depending on this response, this will typically dictate how much additional time we will spend on the deal. If it is a deal that is good fit for us and a property that we want to own, we will continue to make an effort to put our best foot forward. This includes doing some more detailed underwriting such as calling rent comps, discussing the budget with our property management company, speaking to potential lenders, etc.
After completing either just our initial underwriting or performing a more detailed analysis of the property, we will submit a Letter of Intent (LOI) at a price that we are comfortable at or we have another conversation with the broker/seller about where other LOIs have been submitted. Usually, a bid process with have more than one round of bidding, so after this first round we get a general idea of where the “market” is valuing this property as opposed to the “whisper” price. If our value is in line with the other groups bidding on the property, then we will continue to pursue the transaction with the hope of buying it.
In summary, you should always take the whisper price with a grain of salt. The buyers are the ones who tell the seller and the brokers how much the property is actually worth, because they are the ones who are underwriting the deal and formulating a business plan. If a deal doesn’t pencil in at the whisper prices, let the seller and brokers know. Maybe they’ve received similar feedback from other buyers. Submit an LOI at your price and if your offer price is in line with other buyers, continuing pursuing the opportunity.
Would you like to Ask the Expert a question? Let us know in the comment section below!
The prepayment penalty is a clause specified in a mortgage contract stating that a financial penalty will be assessed against a borrower if they significantly pay down or pay off the mortgage before a specified period of time.
“What you’re saying is that the lender will actually charge me a fee to give them their money back?”
As counterintuitive as that sounds, that is correct.
When a lender is underwriting a loan, they consider the fact that they will make money off of the interest payments. If you pay off a large portion of or the entire loan balance, the lender will no longer receive those interest payments. Therefore, the prepayment penalty protects the lender against the financial loss of interest income that would have otherwise been paid over time.
Typically, the prepayment penalty is incurred if the borrower significantly pays down or entirely pays off the loan balance via a refinance or sale within 1 to 3 years, and sometimes up to 5 years.
There are three main categories of prepayment penalties: (1) hard/soft prepayment penalties, (2) yield maintenance, and (3) defeasance.
(1) Hard and Soft Prepayment Penalties
The first category of prepayment penalties is referred to as hard and soft prepayments. A soft prepayment penalty allows a borrower to sell their home at any time without paying a fee. But, a fee is incurred if the borrower decides to refinance. A hard prepayment penalty does not allow the borrower to sell or refinance without paying a fee.
Both hard and soft prepayment penalties are either a percentage of the remaining loan balance (generally between 1% and 3%), a fixed amount, or a certain number of months’ worth of interest. For the latter, an example would be 80% of six months’ worth of interest.
(2) Yield Maintenance
The second category of prepayment penalties is yield maintenance. Yield maintenance is a prepayment penalty that allows the lender to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date of the loan.
Remember, when a lender provides a loan, they do so with the expectation of receiving interest on the loan amount. If the borrow repays the loan amount earlier than expected, a yield maintenance premium can be charged, which allows the lender to earn their original yield.
The purpose of the yield maintenance prepayment penalty is to protect the lender against falling interest rates.
The yield maintenance premium is the difference between the amount of money the lender would have made from interest payments on the loan and how much money they would make if they were to “reinvest” the remaining loan balance. The most common investment vehicle used to calculate the yield maintenance is a US Treasury bond. For example, if the borrower repays the entire loan balance 5 years early, the yield maintenance would be the difference between 5 years’ worth of interest payments and the interest earned from a 5-year US Treasury bond.
Click here for the US Treasury Yield Curve rates (1, 2, 3, and 6 month and 1, 2, 3, 5, 7, 10, 20, and 30 year) set by the Federal Reserve Bank of New York at or near 3:30pm each trading day.
The third category of prepayment penalties is called defeasance. Rather than getting charged a prepayment fee, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan. Defeasance only applies to commercial real estate loans, while the other two prepayment categories apply to all mortgage loans.
The new collateral, which is normally a Treasury security, is usually much less risky than the original commercial real estate investment, so the lender is far better off because they receive the same cash flow they would have received from the interest payments on the loan and in return receive a much better risk-adjusted investment.
Which Prepayment Clause Should You Choose?
Each prepayment category has its pros and cons to both to borrower and the lender. The best option depends on your business plan and the investors’ expectations on future interest rates.
The benefit of having a prepayment penalty clause for the borrower is that they will receive a lower interest rate and lower closing costs compared to the same loan without a prepayment penalty. As long as your projected business plan is longer than the prepayment period, you benefit from the lower upfront and ongoing costs without having to worry about paying a prepayment fee. It gets a little trickier if you’re projected business plan is shorter than the prepayment period.
The hard and soft prepayment penalties is based on the timing of the refinance or sale, which make it easier to calculate upfront. If you secure a 5 years loan with a prepayment penalty during years 1 to 3, you should be able to calculate the prepayment penalty if you plan is to sell during year 2 – the fee is, for example, 1% of the remaining loan balance or 80% of six months of interest).
The other two prepayment categories are dependent on the interest rates at the time of sale or refinance, which requires some speculation on the part of the investor.
Generally, the yield maintenance premium and defeasance fees are based on the US Treasury rate, and the US Treasury rate is based on the market interest rate. As interest rates go up, the costs to invest in US Treasury rates go down, and vice versa.
If the borrower has a yield maintenance prepayment clause and the current interest rate is higher than the loan interest rate, the yield maintenance premium usually decreases to zero. When interest rate rise, US Treasury bonds are cheaper, so the difference between the remaining interest rates and the cash flow from buying US Treasury bonds or providing another mortgage loan is zero or a net gain to the lender. However, lenders will typically add a clause that if the yield maintenance is zero, a 1% to 3% prepayment fee is required. For example, the prepayment penalty may be the greater of the yield maintenance or 1% of the remaining loan balance. If an investor fees that interest rates will rise, selecting yield maintenance can be the cheaper option compared to a hard or soft prepayment penalty fees or defeasance payments.
The defeasance fee is also based on the US Treasury rate. However, unlike yield maintenance, the borrow can technically make money with defeasance. Again, if interest rates on loans rise to a rate greater than the loan’s interest rate, US Treasury bonds lose value and become cheaper. The borrower is then able to purchase the required bonds for less than what is required to prepay the loan, resulting in additional cash flow. However, if interest rates fall, US Treasury bonds gain in value and the borrower has to pay an amount greater than the loan balance at prepayment. Defeasance is good if the investor thinks interest rates will rise or plans on selling their multifamily property early and are worried about the potential increase in mortgage payments with a floating rate loan. However, the defeasance process is quite complicated. The investor will likely need to hire a defeasance consultant, which increases the associated costs.
Overall, prepayment penalties protect lenders from falling interest rates and allow borrowers to negotiate loans with lower interest rates and lower closing costs.
With the hard and soft prepayment clause, an investor can accurately predict the prepayment fee as long as they have a good idea about when they will sell or refinance. However, these fees will likely be the highest of the three.
Yield maintenance is less predictable than the hard and soft prepayment costs. However, if interest rates rise, the fee will be less than the hard and soft prepayment fees and maybe even the defeasance fee. But the investor will always have to pay a fee of some amount.
Defeasance is also less predictable than the hard and soft prepayment costs. However, defeasance is the only category of prepayment penalties that can result in a net gain to the borrower, depending on how high interest rates rise. There are also added costs with defeasance, because it is necessary to hire a consultant to structure the defeasance portfolio and send ongoing payments to the lender.
You couldn’t be prouder of the real estate investment business you’ve built up. And with the access you’ve gained to important resources, like capital and expertise, you have every reason to be. There’s just one problem: Not many people know about you.
The reality is, mastering marketing is one of the most difficult aspects of running any business, and a real estate company is no different. At the same time, marketing is one of the most important pieces to the puzzle of growing your firm and reaching new financial heights.
Fortunately, I’ve compiled the best ever guide on how to market your business in the real estate world. Here’s a rundown on the top unique brand marketing strategy options.
If you don’t have a real estate podcast yet, you’re already falling behind the competition, and you’ll soon be left in today’s digital dust. That’s because podcasts are becoming increasingly popular among U.S. consumers.
Back in 2018, about 73 million people listened to podcasts. However, this number is expected to increase to about 132 million in 2022. In addition, more than 25% of people in 2018 said they had listened to podcasts within the past 30 days—a major increase from 9% back in 2008.
Let’s take a look at why podcasting is such a smart real estate brand marketing strategy and how you can take advantage of it.
If you’re trying to figure out how to market your business, you can’t go wrong with podcasts, as these tools are proven to be excellent at generating awareness about a brand. A podcast is also great for sparking thought leadership and engagement.
Podcasts additionally allow you to develop a loyal online community where you and your experienced guests can share your industry insights. From there, you can drive traffic to your website or boost your revenue stream.
As a general rule of thumb, podcasts are a must-have brand marketing strategy if you’d like to form a strong relationship between your audience and your brand. Likewise, a podcast is a smart move if you’d like your real estate company to have its own voice. However, as a podcast host, you must be willing to share information about the real estate industry regularly. An alternative option is to get booked as a guest on other real estate experts’ podcasts.
Getting Started with a Podcast
To begin using the podcast brand marketing strategy, you first need to decide how you’ll approach it. For instance, how frequently will you post a new episode, and for how long? Also, will you be the only host, or will you share the spotlight with another industry expert? What guests will you invite to join you, and what will your core point of view be in your real estate area?
From a practical standpoint, you should invest in a do-it-yourself podcasting setup that includes a microphone and stand, headphones, acoustic panels, and a mixer. You’ll also need to locate a hosting site for your podcast. The right site will let you upload your podcasts yourself, and then, podcatchers can syndicate your episodes through RSS feeds. These podcatchers include the likes of iTunes, Google Play Music, and Spotify.
Once you’ve hosted and uploaded about six shows, you’re in a position to start seeking investments in the form of sponsorships. You can expect your sponsorship and advertising revenue opportunities to grow from there the more you upload episodes and attract regular listeners.
Another unique brand marketing strategy that is imperative to use includes social media sites, like Facebook, Pinterest, Flickr, YouTube, LinkedIn, Twitter, and Instagram. However, before you start using these sites randomly, it’s important that you analyze the various kinds of audiences that each site caters to. This will help you to determine how to craft appropriate messages for each platform based on the platform’s voice.
As an example, you can use your Facebook page to share news and local events that are relevant to the real estate industry. Twitter can also be useful for news syndication purposes and for remaining in the audience’s mind. Meanwhile, on Instagram, you may want to focus on sharing stories about recent purchases or sales of your properties that stand out.
YouTube is a great place to showcase videos of your for-sale properties and direct people to your website, and Pinterest and Flickr are excellent for sharing photos of these properties as part of your real estate brand marketing strategy.
If you’re wondering how to market your business, hosting a real estate meetup is yet another wise move. With this approach, you can invite local experts to come to speak to your attendees. You can also encourage attendees to bounce ideas off one another and support one another in their entrepreneurial endeavors.
For your meetup brand marketing strategy to work, it is critical that you offer something that attendees value. Your guests need to gain something from participating in your group, including new knowledge and helpful connections. In fact, when you first invite people to join your group on social media and start attracting interest, it wouldn’t hurt to ask interested parties what they would like to get out of your group.
The benefit of hosting a real estate meetup is that it allows people to learn more about your real estate investment business. Through this brand marketing strategy, you may find yourself coming across new potential business partners or even people who would like to buy your properties. You could even find people who want to sell you their properties before they place them on the market, which means less competition for you.
Take Advantage of a Unique Brand Marketing Strategy for Your Real Estate Investment Business Today!
Drawing positive attention to your real estate investment business can no doubt feel like a daunting task. However, with the right knowledge, you can easily implement a winning brand marketing strategy that will help you to attain the results you want.
I can show you firsthand how to market your business effectively. Get in touch with me today to learn how you can take your real estate investing company to the next level.
The idea of forming a real estate investment partnership can no doubt be exciting. However, if you don’t practice due diligence, the process of forming a partnership may end up causing you more harm than good.
The reality is, creating a real estate investment partnership agreement is a process that involves many moving parts. If you master each one of these parts, though, you can quickly elevate your investing career, as you’ll be able to confidently work alongside someone who can help you to move to another level.
Here’s a look at what a partnership agreement involves between general partners and limited partners.
What is a General Partner vs a Limited Partner?
A general partner is a seasoned property manager, for example, who is interested in expanding his or her real estate investment opportunities. As a general partner, you’ll form a real estate investment partnership agreement with limited partners—outside, accredited investors who are willing to finance your real estate projects.
Benefits of Being a General Partner
One benefit of being a general partner is that you’ll dictate how your real estate projects go. You’ll use the capital contributions from your limited partners to pursue potentially profitable opportunities that both you and your limited partners can benefit from. With your limited partners’ financial contributions, you can more easily buy a property that you couldn’t purchase on your own.
Because your limited partners are helping to fund your projects, they will receive shares of ownership in the deals. They won’t always have management-level control in your projects. However, they’ll receive the benefit of having less exposure to risk.
The Responsibilities of the General Partner vs the Limited Partner
One of the most important components of a real estate investment partnership agreement is the section that outlines what both parties’ responsibilities are. If you’re a general partner and you don’t clearly define your roles and your limited partners’ roles, your partnership may be fraught with conflict down the road.
General Partner Duties and Expectations
As a general partner, you’ll be responsible for scouting properties and even handling repairs/construction, unless you have another general partner working alongside you who can handle this. General partners are also responsible for performing marketing and sales duties, as well as any other essential business operations tasks.
If you do have a fellow general partner working with you, be sure to spell out in your agreement how much time both of you will commit to the business as well; this will prevent feelings of resentment in the event that one person feels that the other person isn’t pulling his or her weight in the business.
Limited Partner Duties
A limited partner’s main function is to simply invest money and then wait for their returns. They’re passive real estate investors who don’t take part in and influence your partnership’s everyday operations directly. Instead, they must put their trust in you, the general partner.
Limited Partner Expectations
Before entering a real estate investment partnership agreement with you, limited partners must understand that investments in partnerships are typically long-term ones in the real estate world. In other words, your limited partners might not have the flexibility to suddenly resell their investments if they need to do this. Unlike with stocks, which they can cash out at any time, they might have to wait for a property to be sold before they can pursue other investment opportunities with their capital.
Also, because the real estate market fluctuates frequently, you can’t guarantee as a general partner that all your deals will be profitable, as project expenses may sometimes exceed the budget. Your limited partners need to understand and accept this reality. At the same time, your goal is to remain profitable so that limited partners will continually want to work with you; only then can you consistently be in a good position to grow your business.
Real Estate Investment Partnership Agreement Should Outline Financial Considerations
The financial aspect of your partnership is important to solidify before you make your partnership official. For example, if your business incurs losses, your limited partners will be liable only for the money they contributed, not for all of the business’s debts. Meanwhile, as a general partner, you can expect to be held liable for your business’s debts. This means that your business assets and your personal assets may be needed to pay off your business’s debts.
It’s critical that you firmly grasp your real estate company’s financial situation. The more you understand your financials and clarify them, the less likely you are to experience complications with your fellow business partners in the short and long terms.
Form a Strong Partnership Today!
Purchasing investment properties can certainly be a thrilling yet intimidating process. However, partnering with other investors is a smart move, as it allows you to leverage their capital and your capital to achieve new heights in the real estate investing world. Of course, both you and your partners need to create a strong real estate investment partnership agreement to put yourselves in the best position to reap financial rewards.
I can walk you through the process of developing such an agreement. I’ll show you how to tackle potentially confusing and contentious areas like general partner and limited partner compensation. I can also help you to figure out how to choose the right partners for your business, as not all potential partners may be right for your needs. Get in touch with me today to learn more about how you can make the most of your real estate investment partnerships in the years to come.
We’ve all read articles that tell us how much money we would have made if we had invested in a major stock when it first became public. If we would have invested $100,000 in Apple in 2009, it would be worth over $1 million today. However, if you waited and invested that same $100,000 in Apple in 2014, you would have lost over $70,000. So, in order to make huge gains in the stock market, you must “time the market” or, in other words, speculate.
That is one of the major advantages that real estate investing, and multifamily investing in particular, has over investing in the stock market. As long as you follow my Three Immutable Laws of Real Estate Investing, you will make consistent cash flow without having to time the market.
And as evidence to support this claim, here is how much money you would have made if you invested $100,000 into a multifamily building every five years starting in 1985, according to the NCREIF Property Index:
If you invested $100,000 in 1985, you would have made $43,370 in five years.
If you invested $100,000 in 1990, you would have made $26,130 in five years.
If you invested $100,000 in 1995, you would have made $59,260 in five years.
If you invested $100,000 in 2000, you would have made $51,020 in five years.
If you invested $100,000 in 2005, you would have made $18,640 in five years.
If you invested in 2010, you would have made $62,570 in five years.
Since NCREIF began calculating their property index, apartments have seen a positive cash flow during every five year interval, even during the period that includes the 2008, 2009 economic recession. The best five year period is 2010 to 2014 (62.57% NPI) and the worst five year period was 2005 to 2009 (18.64% NPI).
If you are interested in seeing the quarterly NPI breakdown for apartments, other commercial real estate classes, click here.
One of your biggest reasons for getting into real estate was to make money and have more freedom. And if you ask your real estate investment partners their motivation for getting into the field, they’d no doubt say the same thing. So, naturally, your number-one focus is on generating streams of revenue that will keep both of you happy.
But, according to the old adage, “money isn’t everything,” and this couldn’t be truer in your case. That’s because, in addition to making your real estate investment partners money through your deals, it’s critical that you also look for non-monetary ways to add value for these partners.
Here’s a rundown on how you can help to increase your partners’ ROI in real estate in a few non-monetary ways.
Take Ownership of Your Digital Footprint
This is one of the smartest things you can do if you’re wondering how to add value in business. How exactly can you accomplish this? By using a combination of online business listings and forums in your local area, video, search engine optimization, and social media to ensure that your real estate company’s brand is in every location where people are conducting searches for local investors and cash buyers.
The truth is, various consumers absorb information in a variety of ways. For this reason, it’s important that you represent your brand online in various forms, as this will increase your chances of being discovered and help you to build trust with your audience. When used correctly, your digital marketing resources can effectively show the masses what your real estate business is all about and how you can add value to their lives. In no time, you can expect to generate monetary value for your investment partners as a result.
More on Adopting a Technological Focus to Add ROI in Real Estate
The good news about using social media, in particular, is that it’s a low-cost tool for promoting the properties that you and your real estate investment partners are trying to rent out or sell. There’s no need to shell out large sums of money for traditional advertising like investors had to do in the past. Instead, you can simply post pictures or videos of your company’s properties on each social media platform, ranging from LinkedIn to Facebook, Instagram, and even Pinterest.
Also, be sure to take on a “mobile-first” approach in your marketing strategy. This means creating a website that is fully responsive, featuring video tours as well as photo galleries that will engage your readers no matter what devices they’re using to view them. The easier it is for people to navigate your website, the easier it will be for you to drive revenue for both you and your partners.
Present Yourself as a Subject Matter Expert in Real Estate to Add ROI for Real Estate Investment Partners
If you’re wondering how to add value in business, another smart move you can make is to share your expertise with the world online. You can do this by jumping into discussions on online forums dealing with real estate investing, for example.
By answering people’s questions about real estate and sharing your own learning experiences in the industry, you’ll add value to online users’ lives and achieve higher levels of name recognition over time. This will help you grow your business and, in turn, your potential revenue stream. This, of course, is a great situation for you, but it’ll also ultimately add value for your real estate investment partners.
Create Informative Articles If You’re Wondering How to Add Value in Business
You may also want to look for opportunities to add ROI for real estate investment partners by writing expert articles for high-authority sites. The goal is to make this content informative and educational, not “salesy.” If you do this, you may generate more inquiries from potential buyers as well as developers looking to sell their properties. In addition, media sources may begin to view you as the go-to source for your real estate industry niche, and this will only create more positive publicity around your real estate company. The more well known you are, the more money you can potentially make for you and your investors.
Host Real Estate Meetups to Add ROI for Real Estate Investment Partners
If you’re wondering how to add value in business, another step you can take is to host real estate meetups in your local community. These meetups offer the benefit of allowing you to network with other industry professionals and grow in your knowledge of the industry. The more you know, and the more industry players you know, the more effective you can be in adding ROI for real estate partners and for yourself long term.
You can plan to host your first meetup at a bar or even a local church that is willing to accommodate you. As your membership grows, be prepared to change locations as needed. Over time, you’ll develop a reputation for being the person who knows everyone in the industry and understands the industry like the back of your hand. This will serve you and your investment partners well by helping you to gain credibility and thus more opportunities to grow your business.
Start Adding Value and ROI for Real Estate Investment Partners Today!
As a real estate investor, you should constantly be exploring how to add value in business. After all, running your real estate business is a 24/7 job that requires persistence and creativity if you want to really succeed.
Fortunately, I can make this process a little easier for you by helping you through it. My goal is to give you the tools you need to develop a stronger reputation and generate more revenue in your area of real estate. Get in touch with me today to find out more about how I can help you to add value for your business and for your real estate investment partners both now and in the years ahead.
“Hey Joe. My cousin’s friend’s grandfather’s former college roommate is a Russian Oil Tycoon with a trillion dollars to invest. Do you want me to make an introduction?”
Okay, maybe not that extreme…
While I do receive the majority of my potential inquiries through my Invest With Joe landing page, I also receive inquiries from people I meet who say they or someone they know has a whole bunch of money and either want to buy a piece of real estate or passively invest in one of my future deals.
If you have had some level of success in apartment investing, you do or will run into similar scenarios – even if you aren’t currently raising capital.
Many high net-worth people know the wealth conservation and wealth building benefits of multifamily real estate. However, just because someone has enough capital to invest in your deals doesn’t mean they can, will, or even should invest. In order to determine if a high net worth individual is serious about investing in one of my deals, here are the 11 questions I ask:
1. Do you want to invest in multifamily, value-add projects?
Our business plan is to purchase stabilized multifamily deals that have the opportunity to add value. That is, either increase the income or decrease the expenses by improving the physical property or improving the operations.
Value-add multifamily projects are just one of many syndication business plans. Maybe they invest in value-add deals that aren’t multifamily. Or maybe they invest in multifamily deals that aren’t value-add. If the high net worth individual doesn’t invest in value-add deals and multifamily deals, then my business may not be the ideal fit.
Obviously, if you’re business model isn’t value-add multifamily, then replace “multifamily, value-add projects” with your investment strategy.
Keep in mind that just because they haven’t invested in your investment type in the past doesn’t automatically disqualify them. Instead, you should provide them with a resource that educates them on your business plan (like my Passive Investor Resources Page).
When speaking with a prospective investor, I want to know what their return expectations are. Most high net-worth individuals will be familiar with these two return factors. If their cash-on-cash return and internal rate of return expectations differ greatly from the returns we offer to our limited partners (LPs), our deals may not be an ideal fit.
Of course, you may run into high net-worth individuals who care more about another return factor or care more about capital preservation than the ongoing returns. The purpose of this question is to determine if the returns you offer to LPs are aligned with their return expectations. If they aren’t, this individual likely won’t invest in one of your deals.
3. What is your investment minimum and maximum hold time?
Another important question I ask prospective investors is when they need to receive their initial equity investment back. Generally, our exit strategy is to sell our deals within 5 to 7 years. On some deals, we are able to return a portion of the LP’s initial equity upon a refinance or supplemental loan. However, this question is focused on the investors’ entire equity investment.
If I ask a potential investor this question and they say “I would like all of my capital back within 2 years” or “I don’t want my capital back for 10 years”, then our deals may not an ideal fit.
4. Can you show proof of funds?
I may speak with an individual who claims to be an accredited investor, but doesn’t actually met the liquidity and net worth requirements. Asking for proof of funds is a simple way to confirm their accredited investor status.
If you are doing a 506(b) and are accepting non-accredited investor money, you may still want to ask for a proof of funds. If you have a minimum investment of $50,000 and they send you a screenshot of their bank statement that shows a balance of $15,000, they likely won’t be able to invest in your deals (or at least not in your next deal).
5. Have you invested as a limited partner on a syndication deal?
I ask this question to gauge the experience of the high net-worth individual. From my experience, if I receive an inquiry from someone who hasn’t invested in a syndication deal before, the chances of them investing in one of my deals is very low. Apartment syndication is a complex investment strategy. Heck, the PPM is usually over 100 pages long. It takes time for someone to not only become educated on the syndication investment strategy but to become comfortable with it as well.
I don’t recommend that you reject someone who has never invested as an LP before. However, while it is definitely possible, don’t expect them to invest right away.
6. Are you comfortable investing with other LP’s or would you require to be the only LP in this investment?
The majority of my investors are comfortable investing alongside other LPs or they don’t have enough capital to cover the entire LP equity investment themselves. However, I do have a handful of investors who want to be the only non-general partner (i.e., my business partner and I) LP on the deal.
When speaking with a prospective investor, I like to know if they are comfortable investing alongside 10, 20, 50, or more other investors or if they would like to be the only LP. If it is the former, great. If it is the latter or if they are investing a substantial portion of the equity, I will ask them if they are willing to commit non-refundable equity (we will do the same) to create an alignment of interest to close. Our reasoning is simple – if they are investing all or most of the capital and back out last minute, we have to scramble to find other investors on very short notice.
7. What is the amount you are looking to invest should we both find this to be a good fit to move forward?
I also like to get an estimate on the amount of capital they are able and willing to invest. First, we have a minimum investment amount for all of our deals, so I need to confirm that they will exceed that threshold.
Second, if someone invests more than 20% of the equity required to close, the lender will perform additional due diligence on that person, which includes looking at bank statements and tax returns.
Third, see question 6.
And lastly, and this is more important for investors who are just starting out, the size of deals you look at is dictated by the amount of money you can raise. For example, if you are capable of raising $1 million, your maximum purchase price is around $3 million (generally, you are required to raise 30% to 35% of the total project costs). Additionally, a good rule of thumb is to have verbal commitments equal to 150% of the project costs, because not every single one of your investors is going to invest in every single deal. If you need to raise $1 million, you want verbal commitments of at least $1.5 million. By understanding the maximum amount of money someone is able and willing to invest will allow you to calculate your maximum purchase price.
8. What is your timeframe for investing that equity?
Assuming this high net-worth individual is a good fit, I want to know when they are able to invest their equity. Some people are ready to invest right away. Others may need to liquidate other investments before investing. The individual’s answer to this question isn’t a disqualifier, but if they account for 50% of your verbal commitments and cannot invest in a deal for 12 months, then that will affect your maximum purchase price for those 12 months.
9. (If out of the country) Have you invested in the US real estate market before?
If you are speaking with an international investor, the first thing you need to determine is if your offering type (i.e., 506(b), 506(c), etc.) allows you to accept international money.
If you are able to accept international money, you want to know if this international individual has invested in the US real estate market before. There are extra steps required on the part of the international investor to place capital in US real estate. If they haven’t completed those steps, their capital might be delayed to the point where they cannot invest in one of your deals. If they committed a substantial portion of the equity, that is a huge issue.
10. Should we both think this is a good fit, who is/are the decision maker/s when deciding to invest or not invest?
The answer to this question also isn’t a disqualifier. It just lets me know how to approach this individual. If they are the sole decision-maker, great. But if I know that they have a partner, significant other, or someone else that needs to sign-off on the investment, I want to also speak with that person as well.
They may have different passive investing expectations or concerns than the person I’m speaking with that I would like to know and address upfront, rather than in the middle of the capital raise.
11. Is there anything else we should know about you?
This final question is to obtain information about the potential investor that wasn’t provided in the answer to one of the previous ten questions on this list.
The entire purpose of asking these questions is to gauge the seriousness of the investor. Whenever you send out a new offering to your list of investors or present the deal on a conference call, expect to receive a lot of questions from investors. When you understand each investors’ specific situation, you will have a clear picture on who will and who won’t ultimately invest, which can save you a lot of time and headaches while raising capital for a specific deal.
Securing a real estate investment deal that will generate a comfortable revenue stream for you is your dream. Unfortunately, if you’re like many real estate investors, you’re currently walking through the nightmare of figuring out how to fund real estate investment opportunities.
You’ve considered going to local banks to get help with funding your deals, but these traditional lenders may not necessarily be the best entities to partner within your real estate business. Instead, you may want to consider going to an accredited real estate investor to fund your deals with passive investment capital.
Here’s a rundown on who accredited investors are and how they can help you to more easily achieve your financial goals than a traditional lender can.
A Glimpse at the Accredited Investor
These individuals are different from banks and even hard money lenders in that they are not professional lenders themselves. Instead, they are high net worth individuals who are looking for greater returns on their monetary investments.
By definition, an accredited real estate investor in 2019 is any person whose income surpassed $200,000 in both 2017 and 2018. This figure jumps to $300,000 if he or she has a spouse. Or , an accredited investor is anyone whose net worth exceeds a million dollars (with or without a spouse). Accredited investors also include trusts whose assets total more than five million dollars or entities where each equity owner is an accredited investor.
Get More Flexibility
If you’re wondering how to fund real estate investment opportunities, a major reason to choose accredited investors over banks is that passive investor money doesn’t come with the types of points and fees you get with traditional lenders. In addition, you can more easily negotiate the loan’s term length in a manner that will best serve your interests and the other party’s interests equally.
These Investors are Qualified to Work with You Financially
In addition to offering flexibility in the area of funding, an accredited real estate investor has the net worth and income needed to finance large deals—something that small investors simply can’t do. This is a major advantage because these investors enable you to take advantage of opportunities you otherwise may not be able to tap into. These deals may include a large apartment building or even a retail shopping center investment, for example.
If you’re wondering how to fund real estate investment opportunities, having accredited investors on your side is also a wise move, considering that investments in real estate are inherently complex.
Accredited investors are known for having extensive experience and knowledge in business and financial matters, particularly when it comes to evaluating a prospective deal’s risks and merits. In addition, these investors are sensitive to market conditions at the local level as well as the nation’s economic cycle. Therefore, with the help of an accredited real estate investor, you can more easily understand your investments’ risks and thus absorb possible losses.
You May Have More Success with Obtaining Funds through Accredited Real Estate Investors
Another major reason to consider passive investor capital over loans to fund your deals is that you may have more success.
The reality is, banks are tightening their standards when it comes to commercial real estate loans. As a result, going through the process of attaining a bank loan can feel like fighting a battle that will never end. However, with an accredited real estate investor, you don’t have to go through all of the red tape associated with banks. This means you can get your deals funded more quickly and without the headache that banks typically cause.
What Accredited Investors Get Out of the Deal
So, why exactly are accredited investors so much more agreeable and easier to work with than banks in general? Here are a few reasons.
First, whereas banks tend to be more cautious, an accredited real estate investor is more willing to take greater risks, as these risks lead to higher returns on their cash. Some of their deals can easily generate returns of around 8%, mirroring what they’d likely get in the stock market, but other deals can lead to returns of between 15 and 25%.
Accredited investors are generally willing to take on the additional risk of working with you and having an illiquid investment because they know that the returns will be higher than what they may get with bonds, stocks, and real estate investment trusts.
Seeking funding from an accredited real estate investor rather than a bank is also a wise choice because these investors are all about diversification. Because today’s stock market remains volatile, investors are focused on diversifying their portfolios by pursuing assets that aren’t as correlated with the market. These assets include, for example, industrial buildings and apartment buildings. In this way, if the stock market ends up tanking, their real estate investments can help them to buffer their losses.
Start Investing with the Help of an Accredited Real Estate Investor Today!
If you’re trying to figure out how to fund real estate investment opportunities, you generally can’t go wrong with an investor. These investors can quickly become your new partners, helping you to more quickly and efficiently achieve your monetary goals in real estate.
The question is, how exactly do you go about seeking these investors and taking advantage of their funds? I can show you how to start using accredited investors’ funds instead of going to banks. With my help, you can become educated on this funding method and learn how to network with investors, all the while practicing due diligence. Contact me today to find out how I can work with you to take your real estate investment business to another level this year.
When you’re a rental property owner, you can easily get caught up in focusing on all of your “bad” tenants. But what about the tenants who are actually doing things right? Don’t they deserve your attention, too?
The good news is that, for every subpar tenant you may come across in your career as a landlord, you’ll have the privilege of working with many more good tenants out there.
Because tenant retention is an incredibly important part of managing your apartment investments, it’s critical that you motivate your good tenants to stick with you. But how?
Here’s a rundown on a few apartment resident appreciation ideas.
Respond to Your Tenants Quickly
The reality is that tenants are most impressed with responsiveness, as they seldom experience it. So, be sure to respond quickly when a tenant emails or calls with a property-related issue. Don’t follow in the footsteps of other landlords by brushing your tenants off or telling them that they must wait until unknown future times to have their problems addressed. The faster you respond to tenants, the more appreciated they will feel.
Also, if you ever plan to go out of town, be sure to let your tenants know. In this way, they won’t think they’re being ignored if you can’t respond to messages in a timely fashion. Be sure to also give your tenants a phone number they can call in the event they experience emergencies. Of course, if you would like to take a more passive role and ensure tenants are still listened to, you can always hire a real estate property management company that will care for your occupants and your property.
Take Care of Your Property
One of the most worthwhile apartment resident appreciation ideas is to make it easy for your tenants to keep up your property. For example, you can offer them complimentary carpet cleaning services or even landscaping services.
Offering these is an excellent way to thank your residents for being good tenants. You’ll make them feel more welcome and at home. At the same time, you’ll show your tenants that you truly care about your property’s condition, and this will encourage them to take care of it as well. It’s a win-win situation for you both.
Respect Your Tenants’ Privacy
If you’re looking for winning apartment resident appreciation ideas, you can’t go wrong with this one.
So, what exactly does it mean to respect your tenants’ privacy? It means giving your tenants plenty of notice prior to arriving at their rentals—unless there’s an emergency, of course. Most areas’ laws actually require you to provide adequate notice to tenants when you have to access their rentals for repairs, routine maintenance, or property checks. Still, you can take things a step further by taking their schedules into consideration so that you enter their rentals at the most convenient times for them.
As a general rule of thumb, tenants hate being promised things and then watching their landlords go back on their word. This is why being honest is one of the most essential apartment resident appreciation ideas.
For example, if you tell your tenants that you’re planning to install new outdoor porches for them, be sure to follow through. In the same way, don’t say you’re going to install hardwood flooring if you’re not certain you’ll do it. This will only give your residents false hope. If they end up disappointed, you may very well lose a good tenant.
When it comes to apartment resident appreciation ideas, showing fairness is another critical one to employ. This is particularly the case at properties featuring multiple units, as word usually travels quickly in these environments.
Showing fairness includes enforcing your lease terms fairly. For example, don’t let one resident slide when it comes to paying his rent on time, while you expect everyone else to pay their rents on time.
Give Gifts or Host Resident Events for Apartments
Some of the best apartment resident appreciation ideas also include giving gifts or hosting special events for your tenants.
For example, you can give your tenants coffee shop gifts cards or gift baskets during the holidays. Even scrumptious gourmet treats can make excellent gifts for tenants.
Another gift that your tenants may especially like is a discount on the next month’s rent. Just a certain dollar amount off, for example, can go a long way in making your residents feel appreciated.
In addition, feel free to host resident events for apartments. These events may include summer barbecues, holiday events, and even coffee carts in the morning. Such events add value to your tenants’ living experiences at your property.
Be Reasonable with Rent Increases
Rent hikes are sometimes inevitable, even if they may not necessarily be popular. In light of this, one of the wisest apartment resident appreciation ideas to implement is to exercise caution before sending out rent-increase notices.
For example, as a general rule of thumb, raising the rent around Christmas is not a good idea. After all, that’s when most tenants are cash strapped. Instead, try to raise your rent after New Year’s Day, as your rent hike will likely be received more positively then.
Another option is to keep your rent prices low if you have good tenants. This will encourage these good tenants to stay with you. Of course, you can’t keep your rental prices the same forever, so when you do decide to increase your rent amounts, do it in small increments versus a large increase at one time.
Keep Your Tenant Retention Rate High with Practical Resident Appreciation
One of the best things you can do to keep your bottom line strong as a landlord is to keep your tenants happy from day one. And fortunately, the above apartment resident appreciation ideas, including hosting resident events for apartments, are a great step in the right direction.
Managing an income-generating property, however, can be quite complicated, involving several other responsibilities. Fortunately, you don’t have to worry about navigating these responsibilities on your own.
Get in touch with me, Joe Fairless, today to find out more about how you can take care of your tenants, take care of your property, and thus take care of your bottom line in the months and years ahead.
Find a diamond-in-the-rough apartment. Check.
Secured funding for it. Check.
Made the apartment complex move-in ready. Check.
Discovered the right tenants for your brand-new apartment investment? Well…not quite yet.
I would offer consolation by saying, “Don’t worry, you’ll find your first good tenant eventually.” The truth is, choosing the right tenants is one of the most important things you can do as a real estate investor. After all, a bad tenant can easily cost you thousands of dollars if you end up having to evict him or her.
The good news? You don’t have to go blindly into choosing tenants for your property. Here’s a rundown on what to look for in a good tenant for your syndicated property investment.
Look for Good Credit Scores
If you’re wondering how to screen tenants, one of the first things you need to look for is a strong credit score. That’s because a good credit score shows that a potential tenant is financially responsible. Therefore, he or she will likely pay rent in a timely fashion. After collecting applicants from possible tenants, you can simply run credit checks to see which tenants have a history of making their bill payments on time.
No Criminal History
Checking potential tenants’ criminal backgrounds is another vital part of pinpointing a good tenant for a syndicated property investment. To do this, you’ll need a potential tenant’s name, as well as his or her birthday. Check the individual’s identification before performing a criminal background search to make sure that the data they give you is indeed accurate.
The great thing about criminal background records is that they are public. However, no database exists for these types of records nationwide. Therefore, you might want to have a company that screens tenants search your state’s criminal databases as well as other states’ databases before you give any tenant the green light to stay in your apartment complex.
A Good Tenant Possesses a Strong Rental History
People’s rental histories provide a glimpse at whether they have previously made great tenants. For this reason, it’s a good idea to ask your applicants where they’re moving from, as well as their reasons for moving. In addition, ask for the names of a couple of their previous landlords, who can serve as their references.
It’s wise to speak with a minimum of two landlords, as your potential occupant’s most recent landlord might falsify information just to get rid of the tenant. Questions you can ask the references include whether the tenant’s rent was paid in a timely fashion and whether the tenant took care of their properties. Also, make sure that the renter provided the landlords with a minimum of 30 days’ notice before relocating.
A Good Tenant Has Integrity
If you’re wondering how to screen tenants, another smart move is to double-check everything your possible occupants tell you or include on their applications.
You ultimately want to go with applicants who don’t lie to you about paying rent, their financial situation, or any damage they caused to the properties they previously rented. If certain applicants can’t be honest with you upfront, then you’ll never be able to trust them with your syndicated property investment.
Has Verified Income
A good tenant always has a consistent income; after all, that’s the only way he or she will pay his or her rent on time. So, be sure to ask your applicants for pay stub copies as well.
The ideal situation when you’re looking for the ideal occupant is to find one whose income each month is triple the monthly rent amount. Of course, you’ll still need to take into consideration how much debt he or she has. That’s where the credit check comes in.
As a general rule of thumb, you’re better off going with a tenant who has a lower income than another tenant does if he or she also has lower debt levels. The less debt that renters have, the easier it will be for them to make full payments to you on time every month.
A Good Tenant Respects You
An incredibly effective way of determining if a person would make the right occupant for your syndicated property investment is gauging how respectful he or she is.
If tenants respect you and/or your management company and your property, they’ll let you know if something at your property requires attention right away. So, listen to your gut when interacting with your applicants: Do they treat you in a mannerly way? And did they arrive on time to meet you and your property?
Also, listen to what their references have to say about them: Did they take care of their prior landlords’ properties, or did they damage them? Did these landlords receive complaints from the tenants’ neighbors?
Disrespectful tenants may try to exploit you by paying their rent late or giving you excuses about the damage they cause your property. In fact, they may simply neglect your property, treating it as your responsibility, not theirs. That’s the exact opposite of who you want occupying your property in the months or years ahead.
Master How to Screen Tenants and Start Generating Income Today!
If you’re ready to start making money from your rental property, screening tenants is a step you absolutely shouldn’t discount. Of course, being a landlord is a multifaceted job filled with a slew of responsibilities even after you’ve settled on a good tenant. So, it’s easy to become overwhelmed.
Fortunately, you don’t have to navigate the process of overseeing your apartment investment by yourself. Contact me, Joe Fairless, to learn more about how to protect your investment by choosing the right tenants and making other smart property management decisions. With my help, you could be well on your way to achieving your financial goals in the real estate investing world.
The author of the list said, “after reading many books on real estate investing and trying all types of investing, Joe Fairless’ Best Ever Apartment Syndication Book was the most helpful in getting me to think differently. Instead of spending hours investing in single family homes or flipping houses, Fairless explains how to invest money in real estate that has a sponsor who manages the project for a pool of investors. This is the best book ever for learning the apartment building investment syndication process.”
Check out the full list here for other books that are inspiring active real estate professionals. And if you haven’t so already, pick up your copy of the Best Ever Apartment Syndication Book today!
You have been presented with the opportunity to purchase a non-residential property and, when you look at the potential asset, you see dollar signs. The question now is, how exactly are you going to fund it?
When it comes to multifamily real estate investment, you have a couple of funding options. One, you could use your own money for apartment building investments. Two, you could take advantage of apartment syndication, a popular way of buying multifamily homes for investment.
Let’s take a look at both of these options and why apartment syndication may be the best approach for you.
Buying Multifamily Properties Without Syndication
If you’re interested in apartment building investments, you may be tempted to use your own cash. However, you may not have enough to cover the cost of the down payment and the closing costs. After all, these properties require far more upfront capital than single-family residences do.
Likewise, you may not have sufficient funds to cover the rehab costs associated with the commercial building. Or perhaps you’d rather not drain your coffers to make this happen. In light of this, a better way for many investors interested in apartment investing is apartment syndication.
A Look at Syndication
Syndication involves raising capital from high-quality private investors to fund a large real estate project. This can be done not only for apartment buildings but also duplexes and condos. All of these assets can generate more cash flow than you’d produce with several single-family rental units.
Syndication is a great move if you cannot afford to purchase the property on your own or you don’t have hands-on experience in managing these types of real estate properties. It essentially allows you to leverage your partnerships as well as additional financial resources to close on more deals and build an empire.
How You May Profit from the Syndication Process in Multifamily Real Estate Investment
Your profits from syndication can come in the form of acquisition fees. As a syndicator, you’ll get compensated for locating a deal and structuring it. Your fees could be between 1% and 5% of your project.
You could also receive asset management fees, totaling between 1% and 5% of the gross income each month. This is possible if you manage your partnership as well as the deal syndication process.
Furthermore, you could be compensated for your participation in the project. This equity participation percentage could range from as low as 5% to a whopping 50% ownership.
Start Making Syndication Deals Today!
If you are ready to build a real estate empire, there’s no better time than the present to start taking advantage of multifamily real estate investment opportunities. Still, apartment syndication carries with it a great deal of responsibility, so it’s critical that you know what you’re getting into.
Fortunately, you don’t have to embark on the journey to making money from apartment building investments on your own. You can start today with setting a 12-month goal and using the right success formula to get you on the path to building financial wealth. Get in touch with me, Joe Fairless, contact me to find out how you can capitalize on the benefits of apartment syndication and enjoy its benefits for years to come.
You’ve promised yourself that you’ll take your real estate investing career up a notch this year. But you know good and well that you can’t make big moves in real estate without big money. And unfortunately, that’s a level of money you don’t have.
Just because you don’t have a large sum of money in the bank to fund your real estate investment deal doesn’t mean you can’t get it. But what’s the best way to go about raising money for real estate syndication, for example? Let’s take a look at a couple of common property investment strategies: raising money from a few accredited investors versus crowdfunding for real estate deals.
If your business plan is to buy and sell apartment complexes, as I do, it helps to have the financial backing of investors with whom you already have relationships. This may include family/friends, property owners, doctors, attorneys, financial planners, accountants, and business associates.
Essentially, you present them with the details of the deal and they passively invest if they feel like your project is a good fit for them. Pursuing capital from a handful of accredited investors means building trust and networking with those you know may be interested in your next big deal. It also means choosing high-net-worth and business-savvy individuals to whom you can bring future deals and work with them over and over.
Crowdfunding for Real Estate Deals
With crowdfunding, you place your deal up on a site or other media where investors come to find a deal. This leaves you (and your real estate business) at chance’s mercy. Under this strategy, not only are you not actively seeking investors for your deals but those who respond to your post may not offer much value to you. For example, it may be someone with only a couple thousand dollars to invest, which is great if your deal is small or you’re willing to have lots of different people involved in a single deal, but is not so great for larger, more expensive properties or if you’re looking for a more streamlined process.
Plus, it is likely the investors who contact you as you’re crowdfunding for real estate deals will be unknown to you, meaning you cannot be sure of the validity of their business practices. You don’t want to end up getting scammed by illegitimate lenders.
Why Not Bank Loans?
Both syndication and crowdfunding are generally inexpensive and not as time-consuming as going through the traditional bank lending process. As a result, they’re two of the best property investment strategies if you have a time-bound and specific real estate investment goal. At the same time, it does take time and work to convince others that your cause is worth investing in. When done properly, though, it can be a very promising way of upping your game in the real estate world.
Start Investing in Real Estate Today with the Right Property Investment Strategies!
If you’re eager to build up your bank account and thrive like never before in the world of real estate, it’s critical that you employ the right property investment strategies. Get in touch with me, Joe Fairless, to discover which investment strategies are proven to work and which ones may be most suitable for you.
Regulation D (also referred to as Reg D) includes two important exceptions to the general requirement securities registration with the SEC set forth in the Securities Act of 1933. Through Reg D, you can raise capital from investors without having to register the securities (i.e., the securities you are selling to your investors to fund your deal) with the SEC.
The volume of transactions completed through Reg D far outpace those of the other two common money-raising options: Reg A and IPOs. The Reg D transaction volume in 2017 across 40,000 offerings was $1.7 trillion, compared to $250 million for Reg A.
Reg D states that the issuer (i.e., the person selling securities) is exempt from registering with the SEC if the following requirements are met:
Must file a notice to the SEC on Form D within 15 days of the date of the first sale of a Reg D security on the SEC’s Edgar System (online database that allows for electronic filing) – Form D asks for basic information about the offering and the issuer
Must file a notice with the state in which the security is sold within 15 days of the first sale – the majority of states have an online databased to allow for electronic filing through the North American Securities Administrators Association (NASAA).
Work with your securities attorney to make sure you are filing these notices on time and accurately.
The two distinct Reg D registration exceptions are 506(b) and 506(c).
What is 506(b)?
If you sell securities under the 506(b) exception, here are the general guidelines:
General solicitation or advertising of the securities is prohibited
Allowed to sell to an unlimited number of accredited investors (current accredited investor requirements are a $200,000 annual income individually ($300,000 jointly) or a $1 million net worth (individually or jointly) and up to 35 non-accredited (but “sophisticated”) investors
Must provide the non-accredited investors with disclosure documents, including an audit of the fund’s balance sheet
Issuer may rely on investor self-certification
Issuer must have a substantive, pre-existing relationship with investors
The SEC defines a pre-existing relationship as “one that the issuer has formed with an offeree prior to the commencement of the securities offering…”. In other words, it is a relationship that began prior to them investing in your deal.
The relationship must also be substantive, which the SEC defines as “a relationship in which the issuer (or person acting on its behalf) has sufficient information to evaluate, and does, in fact evaluate, a prospective offerees financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor…self-certification alone without any knowledge of a person’s financials circumstances or sophistication is not sufficient to form a substantive relationship.”
The SEC has made it clear that the establishment of a substantive, pre-existing relationship results from actual effort on the part of the issuer in getting to know the individual investor, and their current financial situation and wherewithal, rather than just checking a self-certification box, subscribing to your email list, or waiting a set amount of time.
When in doubt about whether your relationship with an individual investor will qualify as a substantive, pre-existing relationship in the eyes of the SEC, speak with your securities attorney.
What is 506(c)?
In 2013, the second exception of Reg D was introduced – 506(c).
If you sell securities under the 506(c) exception, here are the general guidelines:
Issuer may openly market their offering (i.e., advertising and general solicitation) but may only sell to accredited investors
Investors must be accredited – current accredited investor requirements are a $200,000 annual income individually ($300,000 jointly) or a $1 million net worth (individually or jointly)
Issuer must verify that the investors are accredited
For 506(c) offerings, you must take reasonable steps to verify the accredited investors status. To do so, you can have your CPA, attorney, or a registered broker-dealer review the investors financials, such as W-2s, tax returns, brokerage statements, credit reports, and the like. Self-certification is not permissible.
The major differences between the 506(b) and 506(c) are:
Solicitation is prohibited for 506(b) but permitted for 506(c)
Non-accredited investors may invest in 506(b) but not 506(c)
Self-certification of investor status is permitted for 506(b) but not 506(c)
You must have a substantive, pre-existing relationship for 506(b) but not 506(c)
So, if you are interested in raising capital from non-accredited investors with whom you have a pre-existing relationship, 506(b) may be your best option. If you are interested in mass marketing your deals online to accredited investors you do not know, 506(c) may be your best option.
Other Capital Raising Option
One of the other capital raising options you may identify is Regulation A (also referred to as Reg A). Reg A allows qualifying companies to raise capital from the public without taking on the exorbitant costs and legal requirements needed for filing a traditional IPO.
At its inception in the Securities Act of 1933, the Reg A requirements set forth were:
Securities sold in a year must be valued at $5 million or less
The issuer must file an offering statement with the SEC
An offering memorandum must be prepared for the potential security purchases
The issuer must register the offering in any state in which they plan to sell securities
For comparison purposes, there were over 100 Reg A filings in 2017 totaling more than $250 million. So a much smaller volume compared to Reg D.
In 2015, there was an update to the JOBS Act which broke the Reg A filings into two tiers. For tier I Reg A, the annual limit is $20 million. For tier II Reg A, the annual limit is $50 million. To find more information about Reg A offerings, click here.
More Resources on Money-Raising with Reg D
For more information on Regulation D, listen to my following podcast episode:
Fortunately, this is a lesson I learned early on in my syndication career. I had always known that an important question to ask a seller is “why are you selling?” On one of my earliest deals, when I asked the seller’s broker this question, they said, “They plan on taking the money and moving to Greece for retirement.” Fair enough, right?
Eventually, through further investigation and due diligence, I discovered that the seller didn’t plan on using the proceeds to retire to Greece but rather to develop a new apartment community directly next door! Maybe the seller initially planned to retire to Greece but came across this development opportunity and changed their mind. Or maybe it was their intention to develop the neighboring land the entire time. Either way, I was fortunate enough to uncover the truth prior to closing and was able to adjust my business plan accordingly.
Now, back to this most recent deal – when we asked the seller’s broker why they were selling, they said they were shifting their focus from value-add to new construction. Upon further due diligence, we discovered that they were indeed transitioning to new construction (and it wasn’t going to be next door).
Since we knew their motivations for selling, we were able to put together a more compelling offer. In this case, since we knew that the seller wanted surety of closing so that they could use the proceeds for a new development deal, we offered a large nonrefundable deposit from day one and a strong sales price. As a result of our strong offer that addressed their needs, we were awarded the deal.
The lesson learned (or shall I say confirmed) on this deal is to perform adequate due diligence on the seller in order to determine their true motivations for selling the property. And this requires more than simply asking the seller “why are you selling?”
Of course, you still want to ask the seller why they are selling. But when you do, ask open-ended questions and have the interaction be more conversational than formal. Examples are:
What do they plan on using the proceeds for? Retirement? Same business plan but a new deal? New real estate product? Something non-real estate related?
How do they plan on using the proceeds? Will they 1031 into a new deal? Do they have a new opportunity identified?
How quickly do you need to sell and why?
It is also helpful to ask the same questions multiple times, because you may receive different answers as the seller’s motivations change or as you build more rapport with seller and they open up to you more.
Then, you want to conduct further investigations to learn about the seller’s reputation:
Talk with the listing broker, asking them about the seller’s motivation to sell
Look at their website. Are they institutional investors or a private group? My company prefers to buy deals from institutional investors because the asset is likely maintained better. Do they use a 3rd party management company or their own management group? We prefer to buy deals that were managed by 3rd parties because there is likely better financial documentation and less uncertainty about their CapEx projects, which decreases the risk of the deal
Look at their company and property reviews. What are other apartment operators, their investors, their vendors, and their tenant saying about them?
Speak with local owners. Commercial real estate is a small world, and if you’re tapped into that world, you can use your relationships with other owners to learn about the seller. But only speak with local owners with which you have a pre-existing relationship.
Through your investigations, you should have a clear picture on the owner’s reputation, which will give you an idea of the quality of the asset, and the owner’s motivation, which will allow you to evaluate the risk points of the deal and submit the most competitive offer that is curated to fulfill the seller’s needs. And in doing so, you put yourself in the best possible position to preserve and grow the capital of your accredited passive investors.
In a recent blog post, I outlined the three economic metrics that will encourage you about the impact a potential market correction will have on the multifamily industry (which you can read here).
Essentially, the economy has been extremely strong since the last market correction in 2007-2009 while, at the same time, the overall number of renters and the overall share of renter-occupied units has also increased.
In 9 cities, the percentage of renter-occupied units has increased by 30% or more. And in one of those 9 cities, the increase was more than 50%.
In March of 2008, the Dow Jones was at 12,216.40. One year later, the Dow Jones plummeted to 6,626.94. Nine years later, the Dow Jones has skyrocketed – nearly tripling to over 24,000. During that same period, unemployment decreased from nearly 10% to 4% and GDP increased from $15 trillion to $19.39 trillion.
All-in-all, the economy has seen a strong bounce back since the 2008/2009 recession.
With such a strong performance over the past decade, there are fears in the air about a looming correction. And everyone who was investing in 2008/2009 knows firsthand the effects a correction/downturn has on real estate.
The economy is a complex animal that is nearly impossible to predict. However, by studying the impacts of economic corrections on real estate in the past, you can have an idea of how real estate will be impacted by any correction in the future– big or small, in the next few months or the next few years.
One major fact that will encourage you about the impact a potential economic correction will have on the multifamily industry is that renting has increased as the economy has gotten better.
Say what? There are more renters even when the economy has gotten stronger?!
One of the most telling statistics is the increase in the number of renters during the past decade. Between 2006 and 2016, the US population grew by 23.7 million. During that time, the number of renters increased by over 23 million and the number of home owners increased by less than 700,000. In relative terms, the overall renter population grew by more than 25% in a decade. In fact, according to Pew Research Center, more U.S. households are renting than at any point in the last 50 years!
Sure, a large portion of this growth occurred immediately following the economic recession (an increase of 1.4%, 3.1% and 4.4% in 2007, 2008, and 2009), which is expected. The economy tanks and people cannot afford nor qualify for a mortgage, so they are forced to rent.
But what is surprising is that the increase in renters didn’t stop. In fact, while the Dow Jones tripled, unemployment was cut in half, and the GDP rose by nearly $5 trillion, the renter population increased nearly every single year (3.4%, 3.3%, 3.1%, 2.0%, 2.0%, 0.9% in 2010 to 2015).
And a lot of this growth has been concentrated in big cities across the US (population greater than 200,000).
Additionally, renter growth outpaced homeownership in 97 of the 100 largest cities in nearly every year between 2006 and 2016. That means that the number of owners grew at a faster pace than the number of renters in only 3 major cities across the county.
Even more staggering, during a robust economy in 2015 and 2016, rent growth outpaced homeownership in 46 of these major cities!
Okay, more people are renting now, but they plan on buying a home eventually, right?
Well, in a 2017 survey conducted by Freddie Mac, renters were asked a series of questions, including when they expected to move and whether they expected to rent or buy when they move.
Because of the turnaround we saw in the economy, you might think people would move out of their rental and into their own home. But, only 14% of renters expected to move within a year while 37% said they didn’t know and another 9% said they expected to never move. But what was even more shocking was this – only 41% expected to buy, which is the lowest it has ever been.
Another interesting fact is that 55% said they either strongly agree/somewhat agree with the statement “I like where I live and don’t plan to move despite the changes in my rent.” And only 31% said they would move into a different rental property if their rent increased in the next year.
Now the question is why did more people decide to rent while the economy was booming?
All of these reasons will be with us for the immediate future.
The fact that the number of renters increased by over 25% in the decade following the recession, even while the economy dramatically improved, gives me confidence in the prediction that when the next correction occurs, the same percentage of people or more will rent. And when the economy begins to improve again, the same percentage of people or more will rent. Which means that the multifamily investment strategy will continue to thrive now and in the foreseeable future, regardless of which correction takes place.
I was recently a speaker at Dan Handford’s virtual multifamily summit. The topic of my talk was how to attract passive apartment investors. More specifically, I provided 5 proven ways to attract passive investors based on my experience raising capital for over $470,000,000 worth of apartment communities, interviewing over 1,000 passive investors, and writing the best-selling book on apartment syndications – Best Ever Apartment Syndication Book.
The main thing I’ve discovered through my money raising experience is that passive investors don’t chose to invest with apartment syndicators who offer the best returns, who invest in the most favorable market, or who implement the greatest investment strategy. These are all reasons why someone choses to invest, but not the primary reason. Primarily, passive investors will invest only with someone they trust – both personally and as a business person.
And it must be both. I trust Jim Halpert from The Office as a person, but I would never invest in Jim’s apartment syndication because I don’t trust him as business/real estate person.
The best way to gain a passive investor’s trust is through time (to gain their trust personally) and expertise (to gain their trust as a business person). So, a more apt title to this blog post is “5 proven ways to build trust with passive apartment investors,” and here are those 5 ways:
You gain both types of trust with a thought leadership platform.
With a thought leadership platform, you are reaching hundreds of potential investors every day. This provides you with a head start in gaining people’s personal trust, because when you eventually hop on an introductory call with them, they’ve already heard you speak for hours. At the same time, since you’re interviewing other real estate experts and offering your own expertise on the apartment syndication process, you’ll become recognized as an apartment expert, which covers the “business person” type of trust.
My overall thought leadership platform and online presence (via podcast, YouTube newsletters, Facebook, and Forbes) has attracted a large portion of my passive investors.
2 – BiggerPockets
There are 1.2M members on BiggerPockets and only 6,702 (~ 0.5%) have received the “addict” award. To receive the addict award, you must visit the BiggerPockets website every single day for a month.
When I was first launching my apartment syndication business, I made it a habit to visit and engage on BiggerPockets every day, which is why I am one of the 0.5% who’ve received the “addict” award. And these efforts have paid off greatly, because another large portion of my passive investors have come from BiggerPockets.
To get the most out of BiggerPockets, you need to be engaged in the forums and member blogs and add value on a consistent basis. Set up apartment syndication and passive/accredited investor keyword alerts so you are immediately notified when those keywords were used in the forums.
Answer questions in the forums. Reply to direct messages quickly. Provide referrals to other investors in your market. Republish thought leadership platform content to the forums and member blogs.
In doing so, just like the thought leadership platform, you will build a personal connection with people you haven’t met in person, as well as become recognized as an apartment syndication expert, especially if you make it on the Top Contributors list on the multifamily or private lending forum.
3 – Create a Local Meetup
Creating a local meetup group in your market is very similar to a thought leadership platform. The major difference is that the meetup group is an in-person event. You will form personal connections with the followers of your thought leadership platform, but you can form deeper personal connections faster at an in-person meetup.
By being the host of the meetup, you will instantly gain the trust and respect of the attendees, and even more so after you host the meetup month-after-month and it continues to add value to their investing businesses.
Start small with a monthly meetup group in your target market. Then, slowly scale over time. Capture content provided at the meetup (via speakers or conversations you’ve had/overheard) and share it on social media, ideally on a Facebook community you’ve made for the group. On that same Facebook community, have attendees post their monthly goals. Also, use that community to create Facebook ads that target passive investors within a certain radius of the event.
Once you’ve successfully scaled your meetup group, the next step is to create a yearly, in-person conference, where you’ll gain even more respect and trust from potential passive investors – both those who attend and those who simply hear about how great your conference was.
4 – Transparent and Quick Communication
Who do you trust more? A colleague who is constantly shows up to work late, takes 2 to 3 days to reply to emails and texts, never answers their phone, and brings up problems without solutions? Or a colleague who shows up 15 minutes early, replies to emails within a few hours, always answers the phone, and is a problem identifier and problem solver?
It should be a no brainer. We trust people who are punctual, transparent, and quick communicators. And that also holds true for apartment syndications.
One of the voicemails I have saved on my phone is from a passive investor who was thanking me for my communication skills. He appreciated our monthly recap emails and the fact that we sent accurate distributions and accurate K-1s on-time. And I’ve received countless more phone calls, emails, and texts from investors saying the same thing, so what we are doing is clearly appreciated. Here is a list of what we do to ensure that we are effectively communicating with our investors:
Send detailed, transparent monthly recap emails with images for all deals
Send profit and loss statements and rent rolls on a quarterly basis
Provide information on new business and economic developments in the surrounding market
Send accurate monthly distributions on-time
Reply to emails, texts, and voicemails within 24 hours at most
Provide investors with cell phone number
Record new investment offering calls to send to investors who couldn’t attend
Send accurate K-1 tax statements on-time
5 – Volunteering
Volunteer at a nonprofit organization that aligns with your values, interests, and beliefs. The primary reason is to give back. But while you are giving back, a secondary objective is to get on the board.
A board member at a nonprofit organization is likely affluent with a high net-worth and has a circle of influence consisting of other high net-worth individuals. So, find a nonprofit organization, volunteer for a few months, and work your way onto the board. Once there, focus on building genuine personal relationships with your fellow board members outside of volunteering (which covers the personal trust). Then, organically bring up passive investment opportunities and see where the conversations lead.
Let me reiterate: the primary objective is to give back. Do not show up to your first day of volunteering and ask others to invest in your deals. Focus on giving back. Try to get on the board with the intentions of giving back even more. When you are volunteering, focus only on volunteering. But once you start to build relationships with other board members outside of volunteering, you can begin to organically bring up things that interest you, with apartment investing being one of them.
There are many ways to attract passive investors and this list is by no means exhaustive. However, I have used every strategy on this list to raise capital for my deals (hence the “proven” in the title). I recommend picking one of the strategies that interest you the most and focusing on scaling it for at least 6 months. Once it is rockin and rollin, pick a second strategy and repeat until you’ve built yourself a passive investor lead generating machine.
For the longest, you dreamed of becoming a thriving real estate investor. The only problem was, you needed money to make money and you did not necessarily have all of the funds required to kick start your real estate investment empire. Fortunately, you decided to become a real estate syndicator and now it’s all about continued growth and sustainability for your business.
Take Diversification More Seriously As Part of Your Real Estate Syndication Business Plan
Your job is to manage every aspect of a property purchase that you and other investors take part in after pooling your resources together. You’ll also likely help with managing the property you found for the deal. A major benefit of being a real estate syndicator versus just an investor is that you can reap acquisition fees along with a portion of the rental profits that your property generates over time for all investors involved.
However, a lack of diversification is a major mistake that many syndicators make when choosing their properties. Let’s take a look at a couple of different types of diversification you should strive to achieve in the new year.
Your portfolio ideally should feature various types of real estate. For example, you should take time to learn about areas such as apartments, mobile home parks, and even undeveloped land, to name some. After all, these assets are more stable and thus might fare better than office properties would in a struggling economy. Understanding asset trends and cycles is key to having a robust portfolio.
In addition to purchasing various types of real estate properties through the syndication process, you should make it your mission in the new year to diversify your holdings geographically. This is wise because, if you have all of your real estate properties in one state, for example, this exposes you to regional economic risks that are hard to overcome if you don’t also have properties in healthier markets at the same time. Complete serious market analysis before diving into investments, but consider branching out.
Investigate Properties Thoroughly Before Risking Your Money
Another smart New Year’s resolution to have as a real estate syndicator is to master how to keep control of your target property long enough to finish investigating it as an investment. In this situation, your aim is to maintain control of the property without risking your money.
If you’re interested in purchasing a property with other investors, note that the seller’s aim is to obtain from you the most money possible and to do this in the quickest manner possible. However, you can structure the purchase contract in a way that will minimize your exposure while maximizing your time simply by including contingencies that are well structured.
A Closer Look at the Purchase Contract Structure:
As a real estate syndicator, you can make your deposit and the purchase of the property subject to your acceptance of several conditions, which will give you enough time to fully investigate the property. The conditions you should look for include, for example, an acceptable property condition and status of all leases. You should also be happy with the property’s history of expenses and income, the title’s state, and any other items that can impact the property’s value, such as the presence of a man-made or natural hazard.
You can also include a special contingency in the purchase offer that states that you have the right to cancel the property purchase transaction if you’re unable to subscribe your group of investors during a specific time period. In other words, if you can’t raise enough cash in time, your transaction will be canceled and your deposit will be returned to you.
Take Advantage of Options to Purchase
Another smart New Year’s resolution to adopt as a real estate syndicator? Start using purchase options. Let’s take a look at why this is.
Sellers may quickly become uncomfortable with you if you include several contingencies in the purchase contract that feature lengthy removal periods. Rather than working with you and your group of investors, they may simply wait for faster buyers. However, by using an alternative tool known as a purchase option, you gain the undeniable right to buy a given property in the period of time you specify in your purchase option.
More Details about How Purchase Options Work:
An option may range from a single week to an entire year, depending on the situation. However, most are around three to six months. In addition, you may be able to make a smaller option payment for a briefer period — an arrangement that is known as a “free look.” This smaller option payment may be a few hundred dollars, for example.
Pros and Cons of Purchase Options:
A major benefit of using purchase options is that they are typically less costly than escrow deposits because nobody becomes tied up in the purchase contract. However, options do come with a downside as well: They are not refundable. That means if you fail to purchase the given property, you lose your option payment.
Still, the ideal situation is for you to structure the option so that you receive an extension period in the event that you decide you’d like the property. Note that you’ll need to submit more money each time you take an extension, though. Also, you’d be wise to still outline contingencies in your purchase contract. The difference in this situation is that you won’t have as much time to approve the several conditions you call attention to.
Hone Your Real Estate Syndication Business Plan Today!
Being a real estate syndicator can no doubt be exciting, but it can also be intimidating if you don’t know what steps to take to protect your money. Work with me to learn more about how you can minimize your risk and maximize your profits for the coming year and beyond!
There are many different ways to generate a return on investment for your real estate, but starting with your current apartment syndication could be a relatively simple way to generate some additional money. Here are a few ways to help you increase your profit, as well as the investment property value.
Keep Turnover Low
One of the best ways to ensure that you are getting a successful return on investment (ROI) is to make sure that you keep turnover low. As an investor, constantly losing renters and bringing in new ones increases costs in a variety of ways.
When a tenant moves out, you must then clean and repair the property to ensure that it is up to date. This means painting, repairing minor damages, and overall clean up to prepare the apartment. In addition, you must assume any advertising costs associated with listing the property in order to find a new tenant. All of these costs can quickly add up. By keeping turnover low, you not only minimize your costs, but also help to create steady income. Having high-quality tenants is another key aspect of keeping turnover low. The right tenant will pay their rent consistently and also take care of the apartment.
Another way to increase the return on investment for real estate deals is to gradually increase the rent for long-term tenants. But, before changing the rent, be sure to do a full cost-benefit analysis to ensure that you are raising the rent by the correct amount. There are a variety of websites available today to check rent prices in your area and compare properties. It is also incredibly important to look at the market and discover the current trends across the industry so you’re staying competitive.
Another great way to increase rent is to coordinate maintenance to the buildings and related facilities with increased rent. Maintenance is an important part of sustaining your investment property value while also creating additional value for your tenant. For example, if you are planning to replace one of the appliances in the kitchen, it could be a good idea to coordinate the replacement with lease renewal so that your tenant can see the value in the additional cost.
Charge Late Fees When Necessary
Having tenants who pay consistently and on time is an important aspect of any apartment investment. At the end of the day, your tenant has signed a contract and it is your job to ensure that all transactions are done on time and according to the lease. If your tenant pays rent late, then you are entitled to charge a late fee. Late fees allow you to make additional revenue but also encourage your tenant to pay on time. Not charging could mean that your tenant learns it is okay to pay late or that they will get away with it. Always charge a late fee when necessary to ensure timely payment.
Have Multiple Revenue Streams
Having additional services that you offer is another way to generate additional revenue from the property. For example include cleaning, laundry, or landscaping services that you offer to your tenants for a fee. You can then work with a contractor so that you are able to make a profit. For example, you can hire a cleaning service to come and clean the apartment for $65 every month while charging your tenant $100 for the service. This increases your revenue by $35 every month or $420 every year per unit! Whatever the needs of your residents, see if there is a way for you to offer an additional service to help generate profits and keep tenants happy.
There are a variety of ways to not only increase your real estate profit but ultimately maintain and improve the value of your investment. To learn more about return on investment real estate and investment property values, check out my blog, which focuses on giving you the information and tools you need to become a successful real estate investor.
Getting involved in real estate and starting your own investment company is one of the best ways to generate sustainable income and build wealth. To enable you to buy into larger deals, such as apartment syndications, however, it may be necessary to get real estate investment capital from accredited investors who want you to go out and find the properties while they provide a portion of the financial support.
There are a variety of advantages that come from raising funds this way, including:
You may not have the real estate investment funds to purchase a 500-unit apartment community or a large commercial building, which is where your fellow investors come in. Combining forces (and capital) means you are able to bring them larger investment opportunities.
Additional Support and Advice
It’s possible the passive investors you work with have been involved in real estate for a while, and you can gain some wisdom from their experiences and advice. Maybe you want the low-down on recent market trends in the area or you’re not entirely sure how to find potential buyers once you’re ready to sell. Similarly, being responsible for other people’s money will give you a great incentive to invest in only those properties you know will offer a big return!
Long-Term Capital Gains
The larger the deal, the larger the potential return on investment (ROI). Your cut of the sale will obviously depend on the terms of your agreement with investors, but the revenue earned from an apartment deal is likely to be more than on a single-family home, for example. Plus, while a rental property is still in the hands of you and your investors, you will collect that rent as well.
It’s easy to understand why so many people today are interested in getting involved in real estate. But how do you know where to start looking for accredited investors? Particularly if you’re just starting out in the business, raising real estate investment funds can be challenging.
Here are my top 3 recommendations on how to raise real estate investment capital:
Build Trusted Partnerships
One of the best ways to raise the capital you’ll need is by using your network. Especially if you don’t know where to start, start with what, or in this case, who you know. Think of every person you’ve met and whether or not you think they would be interested in real estate. Once you have narrowed down your list of both personal and professional contacts, begin scheduling time to meet with everyone on that list to discuss your plan. Even if they are not interested in investing with you, they may be able to introduce you to someone who is. It is always important, particularly in business and real estate, to build trusted partnerships and relationships. Keeping in touch with the right people could help you land your first big real estate investment.
Develop a Strong Back and Forth Conversation
Once you’ve started identifying potential investors and contacts to target, you’ll need to offer them the deal and center the conversation around why you think it will be a good investment for them. Having a strong plan that grabs the attention of your investors, while also providing an overview of the project, is key.
One of the most important things to remember when preparing for the discussion is to be authentic. You’re asking people to invest their money in you and your knowledge, so you need to make sure that it is something that you fully believe in. Don’t be afraid to practice and rehearse until you have a strong command of what you want to say.
Time is precious, so you should be able to quickly brief anyone on your idea in a few minutes. After you’ve been able to get their attention, you can then go into greater detail about your idea and the investment opportunities.
Build Your Brand
Building credibility is one of the most important aspects of raising real estate investment funds. Investors only want to give their money to people they trust and know are credible. Building your own brand is a great way to build legitimacy when first starting out in the real estate business. One of the most effective ways to do this is by creating thought leadership content.
Having your own thought leadership channel is a great way to build your brand and also reach a broader audience. Examples of thought leadership channels include having a podcast, YouTube channel, blog, or being a contributor for a notable website or financial magazine. The key is to actively get your ideas and content published so that you are able to reach as many people as possible. In addition, regularly sharing your strategies, ideas, tips, and tricks is a great way to build your audience but also your credibility.
Raising real estate investment funds is a great way to begin your journey of investing in larger and larger deals. As the real estate market continues to grow and change, there are endless possibilities. By creating lasting relationships, having a strong conversation, and building a solid brand, you’ll be able to lay the foundation for a success in real estate.
Learn more about raising funds through various means here.
Apartment syndication, which means making deals and investing in apartment complexes, is a complex strategy that can lead to an incredibly lucrative career. Whether you’re interested in active or passive investing, understanding the basics of apartment syndication is invaluable.
Here’s what it takes to become a successful apartment syndicator:
Some Basic Industry Knowledge
First and foremost, in order to become an apartment syndicator, you need to have a strong knowledge and understanding of the real estate industry as a whole. This means knowing and understanding basic real estate terminology, legal implications, and industry buzzwords.
Investing in apartment complexes requires meeting with potential investors and outlining all of the key aspects of a deal. Knowing the basics of real estate investing and apartment syndication, such as passive investment, target markets, due diligence, and off-market deals will give you a competitive advantage and is fundamental to not only getting a deal but closing the deal.
You can gain extensive industry knowledge through academic courses, online trainings, or certificate programs. There are a variety of ways to augment your real estate knowledge and expand your general knowledge.
Stay in the Loop
Continuing to stay up-to-date on all the latest industry trends and topics will also ensure that you have a strong foundation to rely on when becoming an apartment syndicator. This includes keeping up with the latest market trends and any updates to legislation that will impact the real estate industry and overall economic climate.
Staying in the loop is key to truly keeping up with the market. For real estate, this means understanding the property values and demographics in the area you’re investing in. Even following popular real estate blogs, podcasts, and thought leaders will give you an advantage and help you to learn about the issues impacting the industry.
Regularly reading industry magazines and publications will also help to make sure that you are staying up to date on the latest information available. Being aware of what is going on in the market will also allow you to have in-depth conversations with investors and can help with negotiations.
Once you have developed a solid amount of industry knowledge and education, another key aspect of investing in apartment complexes is having overall business skills.
Basic business skills that are applicable to apartment syndication include:
Project management skills
Business plan development
Apartment syndication involves managing large amounts of investment capital and being able to determine a successful overall strategy that will offer investors timely return on investment. Just remember, find partners and create a team of experts so you don’t have to wear all the hats at once.
Becoming a Successful Apartment Syndicator
Investing in real estate is one of the best ways to generate wealth and create passive income. Combining extensive industry knowledge, business know-how and overall real estate experience will give you the foundation you need to be successful in apartment syndication.
If you want to learn more about investing in apartment complexes and apartment syndication, check out the only book available today to offer a comprehensive deep dive on the subject: Best Ever Apartment Syndication Book.
Test your apartment syndication knowledge by taking this 20 question, multiple choice quiz. After submitting your answer, you will be given a “correct” or “incorrect”. If you answer the question incorrectly, read the note below for an explanation on the correct answer. Then, based on your results, you will know if you are ready to start on the path to your first deal or if you need to spend more time on your education…
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.
What’s the more profitable apartment deal – a 2% cap rate in Manhattan or a 10% cap rate in Stillwater, Oklahoma?
If you’re answer was the 2% cap rate deal in Manhattan, you’re wrong.
If you’re answer was the 10% cap rate deal in Stillwater, don’t get too excited, because you are also wrong.
The correct answer is that it depends.
Capitalization rates are relevant when analyzing multifamily deals, but it is nowhere near the top of the list of the most important factors.
Let me elaborate with an example.
A passive investor who invests with my company also invests with a value-add syndication group in Manhattan that purchases rent stabilized, 2% cap rate apartments. They purchase these assets because they were able to identify a unique way to add value. On rent stabilized properties in New York City, it is common for residents to pass their rent stabilized lease to someone else who does not qualify for the lower rental rate while claiming to still live there. This group implements a system that minimizes the occurrence of this sort of lease transfer, which allows them to increase the net operating income after purchase, resulting in a cash flow that is greater than the cash flow from a 10% cap rate property in a rural market.
Since it is a 2% cap rate property, even a minor increase to the net operating income has a massive effect on the value. In addition to the benefits from the increase in cash flow, the group can also sell the property to someone who is looking to purchase a 2% cap rate property in Manhattan with the hopes of gaining from natural appreciation at a price based on the new, increased NOI. We personally do not buy for appreciation, only cash flow, but there are investors who do, especially in markets like New York City.
The moral of the story? The business plan is more important that the capitalization rate for every apartment deal.
The cap rate can indicate the current, in-place cap rate, but it cannot tell you by how much you can increase the net operating income, which is vastly more important. The business plan can.
Rather than asking yourself or a syndicator “what is the cap rate you/I are/am buying this deal at?”, a better question is “what is the business plan you/I will implement after purchasing the deal?”
Of course, not all business plans are equal. The best business plans have been (1) implemented by the syndicator in the past and (2) implemented by the syndicator’s team in the past.
For example, let’s say the business plan is to spend $5,000 per unit in interior renovations to increase the rents by $100. Sounds like a good plan, right? Well, only if the syndicator and their team has successfully implemented a similar business plan in the past. Additionally, the business plan goes from “good” to “great” if the seller has already proven the business plan (i.e., they’ve renovated a portion of the units for $5,000 and are already demanding the $100 rental premium).
If the seller hasn’t proven the business plan, then the proof is in the competition. To strengthen the business plan, the syndicator should look at the direct competitors (i.e., the rental comps) in the market to determine the rents they are demanding. Then, they identify how much it would cost in renovations to achieve the same rents as the competition at the subject property.
Now, the cap rate is still a relevant factor and you want to make sure you are buying competitively (or ideally, favorably), but a proven business plan implemented by a proven team is where the real money is made.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.
You are about to read the ultimate guide on apartment syndications.
Simply put, an apartment syndication is the pooling of money from numerous investors that will be used to buy an apartment building and execute the project’s business plan.
Typically, an apartment syndication is best used when buying large apartment buildings or communities that would be difficult or impossible for the parties involved to purchase and handle individually, which allows companies to pool their resources and share risks and returns.
The syndicator – also commonly referred to as a sponsor or general partner (GP) – is tasked with raising money from qualified investors – also commonly referred to as passive investors or limited partners (LP) – and then using that money to buy apartment buildings.
By the conclusion of the post, you will learn:
What a qualified apartment syndication investor is
The two main types of apartment syndications
The major parties involved in apartment syndications and their responsibilities
How each of the major parties are paid
The 11-step apartment syndication process
How to get started as a general partner or limited partner in apartment syndications
Let’s do this!
What is a qualified investor?
Only qualified investors are permitted to passively invest as limited partners in apartment syndications. To qualify to invest in apartment syndications, you must be an accredited investor or sophisticated investor.
An accredited Investor is a person with an annual income of $200,000, or $300,000 for joint income, for the last two years or an individual with a net worth exceeding $1 million.
A sophisticated investor is a person who does not meet the accredited investor requirements but has the knowledge and experience in financing and business matters and is therefore capable of evaluating the merits and risks of the prospective investments.
If you do not meet the qualifications of one or both of these investor types, you are not eligible to passively invest in apartment syndications at this time.
What are the main types of apartment syndications?
Most likely, the general partner is either selling private securities to the limited partners under Rule 506(b) or 506(c). One key difference is that 506(c) allows for general solicitation or advertising of the deal to the public, while 506(b) offerings do not. But the other difference is the type of person who can invest in each offering type. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors only.
If the general partners are doing a 506(c) offering, they must verify the accredited investor status of each passive investor with a 3rd party, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified account.
If the general partners are doing a 506(b) offering, they are not required to verify the accredited investor’s status with a 3rd party – the passive investor can self-verify that they are accredited or sophisticated. However, some general partners only work with accredited investors even though they do 506(b) offerings. In addition, for the 506(b) offering, to prove that the general partners didn’t solicit the offering, they must be able to demonstrate that they had a relationship with the passive investor before their knowledge of the investment opportunity, which is determined by the duration and extent of the relationship.
Overall, for 506(c), the general partner is allowed to advertise their offering to the public and only accept verifiable accredited investors. For 506(b), the general partner is allowed to accept up to 35 sophisticated investors and must be able to demonstrate an existing relationship with the investors.
Who are the major parties involved in apartment syndications?
There are five main parties involved in apartment syndications.
General Partners (GP)
First are the general partners (GP). The GP is an owner of a partnership and has unlimited liability. The GP is the managing partner and is active in the day-to-day operations of the business. For apartment syndication, the GP is also referred to as the sponsor or syndicator.
The GP is responsible for selecting a target investment market, selecting and hiring the various team members, sourcing capital from passive investors, and managing the entire apartment project from start to finish.
While it is possible for the general partnership to be a single individual, most likely, the general partnership is made up of multiple individuals. For example, one member of the general partnership may be responsible for investor relations and raising capital; one member may be responsible for acquisitions and asset management; one member who has a high net worth may sign on the loan; another member who has previous apartment investing or apartment syndication experience may also sign on the loan. Other partnerships will have the property management company, listing real estate broker, or attorney as a part of the general partnership. In other words, GPs come in all shapes and sizes.
Another major party involved in apartment syndications are the limited partners (LP). The LP is a partner whose liability is limited to the extent of the partner’s share of ownership. For apartment syndication, the LP is also referred to as the passive investor.
The LP is responsible for funding a portion of the initial equity investment. They do not have control over any aspect of the business plan. It is a strictly passive investment and is completely hands off except when reviewing investor reports and doing taxes at the end of the year.
Similar to the GP, the LP may be a single person or multiple people. For some syndications, one large investor funds the entire equity investment. For others, one large investor funds the majority of the equity investment and members of the GP fund the rest (which is beneficial to the LP because it promotes an alignment of interest since the GP has their own skin in the game). But, for the majority of apartment syndications, the LP is made up of multiple investors who come together to fund the equity investment.
For the general partner, one of their most valuable team members is the property management company. The property management company’s main responsibilities are to manage the day-to-day operations of the apartment community and execute the GP’s business plan. But a great property management company will offer additional services.
For example, pre-deal, a great property management company will advise on attractive or struggling neighborhoods within a market, offer locations of prospective properties based on the GP’s business model, and provide a pro forma (i.e., projected financials) on prospective properties based on how they would manage them.
Once a deal is placed under contract, a great property management company will aid the GP during the due diligence process, like inspect the property and its operations to create due diligence reports and help the GP finalize the capital expenditures and ongoing budget.
Finally, post-closing, a great property management company will host resident appreciation parties, implement the best marketing and advertising practices, and frequently analyze the market and the competition to maximize the rental rate.
Typically, the property management company is a 3rd party provider and is not a part of the GP. However, there are some instances where the property management company is a 3rd party provider and is on the GP, which is beneficial to the LP because of the added alignment of interest. Examples are when the GP offers the property management company an equity stake in the GP for a reduce ongoing management fee or when the property management company brings in their own investors. Also, the property management company may invest in the deal themselves as a LP.
For some apartment syndications, typically for larger firms, the property management company is brought in-house and is a part of the GP.
Another major party involved in apartment syndications is the commercial real estate broker. A commercial real estate broker actively sources apartment deals in a specific market. When a deal is identified, they either create a marketing package (i.e. offering memorandum) and list the deal for sale on-market or offer the deal off-market to GPs they’ve worked with in the past. For on-market deals, a commercial real estate broker manages the offer process, which typically includes one or multiple calls to offer and a best-and-final round of offers. Once the deal has been awarded to an investor, the commercial real estate broker ensure that they deal makes it to the closing table.
Typically, apartment syndicators will work with multiple commercial real estate brokers to source their deals. But once they place a deal under contract, they will typically work with the listing commercial real estate broker until close, and then again once they list the property for sale.
The fifth major party involved in apartment syndications are the attorneys. The two attorneys are real estate attorneys and securities attorneys.
The attorneys are responsible for creating and reviewing all of the contracts. The four major contracts required for apartment syndications are (1) purchase and sale agreement, (2) operating agreement, (3) private placement memorandum, and (4) subscription agreement.
Purchase sale agreement: The purchase sale agreement (PSA) is the contract between the buyer and seller of an apartment community. Typically, the PSA is created by the seller and their real estate attorney. However, the buying party should always have their real estate attorney review the contract before signing. Once the syndicator goes to sell the property, they will work with their real estate attorney to create the PSA for the buyer to fill out.
Operating agreement: Typically, there are two types of operating agreements for apartment syndications. First is the operating agreement between the members of the GP. Second is the operating agreement between the GP and the LP. If the GP is made up of more than one member, the operating agreement outlines the responsibilities and ownership percentages for each member. Then, for each apartment deal, the GP typically forms a new LLC of which they are owners, and the LP purchases shares of that LLC. The operating agreement outlines the responsibilities and ownership percentages for the GP and LP. All operating agreements should be prepared by a real estate attorney.
Private placement memorandum: The private placement memorandum (PPM) is a legal document that highlights all the legal disclaimers for how the LP could lose their money in the deal. Generally, the PPM will have a summary of the offering, a description of the asset being purchased, the minimum and maximum investment amounts, key risks involved in the offering, a disclosure on how the GP and LP are paid, and other basis disclosures like the GP information and a list of all the risks associated with the offering. The PPM should be prepared by a securities attorney for each apartment deal.
Subscription agreement: Simply put, the subscription agreement is a promise by the LLC to sell a specified number of shares to the LP at a specified price, and a promise by the LP to pay that price. Like the operating agreement and PSA, the subscription agreement is prepared by a real estate attorney for each deal.
Then, the GP will consult with their attorneys on an as needed basis.
How do the major parties involved in apartment syndications make money?
Now to the money question – literally! How are the various parties involved in an apartment syndication compensated for their responsibilities?
How do General Partners Make Money in Apartment Syndications?
The types of fees and the range of each fee will vary from syndicator-to-syndicator and from deal-to-deal. But every fee charged by the GP should be directly tied to a task that is explicitly adding value to the apartment deal. Here are the most common fees charged by GPs:
Profit split: Generally, the GP will structure the apartment syndication such that the total profits are split between the GP and LP. The split can be anywhere from 50/50 to 90/10 (LP/GP), but 50/50 for experienced GPs and 70/30 for less experienced, newer GPs are the most common.
If the apartment syndication is structured such that the LP is offered a preferred return (more on the preferred return later on in this post), the remaining cash flow after the preferred return is distributed is split between the LP and GP.
At the sale of the property, after the LP receives the remainder of their equity investment (and if applicable, the accrued preferred return that wasn’t paid out yet), the remaining profits are split between the LP and GP.
Some GPs will structure the apartment syndication such that the profit split changes after a certain internal rate of return to the LP hurdle is achieved. For example, the profit split may be 70/30 until the LP achieves an internal rate of return of 16%, at which point the profit split changes to 50/50.
Acquisition fee: The acquisition fee is an upfront, one-time fee paid to the GP at closing. The fee ranges from 1% to 5% of the purchase price, depending on the size, scope, experience of the GP, and profit potential of the deal. The acquisition fee is similar to a consulting fee paid to the GP for the behind-the-scenes worked required to put the deal together.
Guaranty fee: The guaranty fee is a one-time fee paid to a loan guarantor at closing. As I briefly mentioned above, a loan guarantor signs on and guarantees the loan, because they meet the liquidity, net worth, and/or experience requirements needed to qualify for financing. Either the main partners in the GP will act as the loan guarantor or they will bring a 3rd party into the GP in order to sign on the loan.
The guaranty fee is an upfront fee paid at closing and/or an equity stake in the GP. If the main members in the GP are acting as the loan guarantor, they will typically charge a one-time fee of as low as 0.5% to 1% or as high as 3.5% to 5% of the principal balance of the loan paid at closing. If the GP brings on a 3rd party, they will likely offer 10% to 30% of the GP in addition to or instead of a one-time fee.
The size of the fee depends on the risk level of the deal, the risk level of the loan, and – if it is a 3rd party – their relationship with the main members of the GP.
Asset management fee: The asset management fee is an ongoing fee paid to the GP in return for overseeing the operations of the property and implementing the business plan after closing. The fee is either a percentage of the collected income (2% to 3%) or a per unit per year fee ($200 to $300 per unit per year). The size of the fee depends on level of work required to implement the business plan and the experience level of the GP.
I prefer the percentage-based asset management fee, because – since it is tied to the actual performance of the deal – it promotes alignment of interest. An additional way to have alignment of interest is when the GP places the asset management fee in a position after the LP’s preferred return, because the LP gets paid before the GP collected the asset management fee.
Refinance fee: The refinance fee is a fee paid to the GP for the work required to refinance the property. Of course, if the business plan doesn’t include the potential for a future refinance, the GP will not charge this fee. At the closing of the new loan, a fee of 1% to 3% of the original loan amount is paid to the syndicator. However, to promote alignment of interest, the fee should only be collected if a specified percentage of the LP’s equity is returned at refinance. For example, the PPM could state that the GP will charge a 3% refinance fee only if the LP receives 50% or more of the equity investment.
How do Limited Partners Make Money in Apartment Syndications?
The limited partners in apartment syndications are typically compensated in three ways.
Preferred return: The preferred return is a threshold return offered to the LP before the GP receives payment. The standard preferred return is 8% of their current capital account (capital account is initially equal to their equity investment). That is, the LP will receive a return of up to 8% before the GP is paid. If the apartment community cash flows 8%, the LP receive the 8% preferred return and the GP does not receive a profit split. If the apartment community cash flows less than 8%, the LP receives a return of less than 8% (and the preferred return may or may not accrue, depending on what is outlined in the PPM). If the apartment community cash flows more than 8%, the LP receive their 8% preferred return and the remaining profits are split between the LP and GP.
Typically, the preferred return is considered a return on capital. That is, the preferred return distributions do not reduce the LP’s capital account.
Profit split: If a preferred return is offered, the remaining profits are split between the LP and GP. As I mentioned above, the typical profit splits are either 50/50 or 70/30 (LP/GP). The LP will receive their distributions from the profit split on an ongoing basis during the business plan (if the cash flow exceeds the preferred return) and/or at the sale of the apartment community.
Typically, the distributions from profit splits are consider a return of capital. That is, the profit split distributions reduce the LP’s capital account and therefore the preferred return. However, some GPs will continue to pay out an 8% preferred return based on the initial equity investment and catch-up with the profits from sale.
Refinance or supplemental loan proceeds: If the GP refinances into a new loan and/or secures a supplemental loan, the LP will typically receive a distribution that is a portion of their initial equity investment.
Similar to the profit split, the proceeds from a refinance or supplemental loan are typically considered a return of capital. That is, the proceeds reduce the LP’s capital account.
How do Property Management Companies Make Money in Apartment Syndications?
As I mentioned above, the property management company is a 3rd party provider or is in-house and an arm of the GP’s syndication company. Either way, the property management company in apartment syndications are typically compensated in three major ways:
Management fees: The main way property management companies are compensated is from ongoing management fees. One of these fees is a percentage of the collected income. Standard fees range from 2% to 10%, depending on the size of the asset. Additionally, property management companies may also charge other fees that are not covered by the ongoing percentage-based fee, like lease-up fees, renewal fees, eviction fees, application fees, marketing fees, referral fees, or any other fee incurred on behalf of the GP.
Construction management fee: If the business plan involves interior and/or exterior renovations, the property management company may manage the renovations for an additional fee. Typically, the fee is a percentage of the total capital expenditures budget, with the larger projects having a lower fee.
Equity ownership: As I mentioned above, sometimes the syndicator will offer the property management company an equity stake in the GP in return for a lower ongoing management fee or to simply incentivize them to manage the property as if it were their own. Additionally, if the property management company brings on their own investors or invested in the deal themselves, they will likely receive an equity stake in the GP and/or LP based on the amount of equity they secured and/or invested.
How do Commercial Real Estate Brokers Make Money in Apartment Syndications?
The commercial real estate broker in apartment syndications are paid in two main ways:
Commission: Commercial real estate brokers are mostly paid from the commissions earned upon the closing of an apartment community in which they represented the buyer and/or seller. The size of the fee varies from broker-and-broker and market-to-market, but a good rule of thumb is between 3% and 6% of the purchase price for apartment communities under $8 million and a flat fee of $150,000 for apartment communities over $8 million.
Equity ownership: In some instances, the commercial real estate broker may have equity ownership in a deal. One example would be if they invested their commission in the deal as an LP.
How to Attorneys Make Money in Apartment Syndications?
The attorneys in apartment syndications make money from preparing the four main contracts and agreements mentioned above. Depending on the size and scope of the deal and the partnership structure of the GP and between the LP and GP, these contracts may costs a few hundred dollars each to tens of thousands of dollars each.
What is the typical process of an apartment syndication from start to finish?
There are 11 main steps for taking an apartment syndication deal through a full cycle. Below is a list of each of the 11 steps, along with a brief description. For more details on each step, I recommend purchasing our book, Best Ever Apartment Syndication Book, which walks you through the entire apartment syndication process in over 450 pages worth of information
Select a target market
The first step is for the GP to identify a market in which to invest. This involves analyzing multiple markets across the US via online research in order to narrow it down to a handful of potential markets. Then, the GP performs boots-on-the-ground and more detailed research in order to confirm the markets investment potential.
Once the GP has identified and selected a target market, the next step is to create their local team. As I mentioned above, the main team members are a property management company, commercial real estate brokers, and the limited partners.
A smart GP will obtain verbal commitments from potential passive investors BEFORE they begin their search for deals. It is important to have an idea of how much money they are capable of raising, because that will be a determining factor in the size of deal they can acquire. Plus, having an idea of where the funding will come from will strengthen the GPs position when speaking with property management companies, commercial real estate brokers, and mortgage brokers/lenders.
With the team in place and verbal commitments from potential passive investors obtains, the GP is now ready to begin searching for a deal. They will receive on-market deals from various commercial real estate brokers and/or off-market deals as a result of their marketing efforts.
Once the GP receives a deal, they will put it through their financial evaluation process. Typically, this starts by initially screening the deal based on their investment criteria (e.g., number of units, construction age, value-add potential, market, property class, etc.). Then, using the historical financials, assumptions for how they will operate the property, and rental comps, they underwrite the deal using their financial model.
Typically, the GP will set certain return thresholds to determine which deals to submit offers on. The two main return thresholds used are cash-on-cash return and internal rate of return. If the deal meets or exceeds their return goals after completing the entire underwriting process, the GP will submit an offer on the apartment community. If the offer is ultimately accepted, the GP puts the deal under-contract.
Once the deal is under contract, the GP usually has 60 to 90 days until close. During that time, they perform detailed due diligence on the apartment community in order to confirm or update their underwriting assumptions and finalize their business plan.
Concurrent with the due diligence, the GP will officially secure commitments from their passive investors. This typically involves a conference call or webinar where the investment opportunity is presented to the LPs so that they can decide whether to invest.
The majority of the purchase price is funded by a lender. So, while the GP is securing commitments from their investors, they are also in communication with a lender or mortgage broker to securing the debt financing.
Most syndications have a projected hold period and exit strategy. Sometimes the hold period is shorter and sometimes it is longer, depending on the market conditions and success of the business plan. But, at some point, the GP will sell the property, return the LP’s remaining equity, and distribute the profits.
If you are interested in getting started in apartment syndications as a general partner, I recommend enrolling in my FREE apartment syndication course at www.SyndicationSchool.com in order to learn what it takes to become a syndicator and how to break into the industry.
If you are interested in getting started in apartment syndications as a limited partner, I recommend visiting my passive investor FAQ page or go to www.InvestWithJoe.com to learn more about the investment opportunities my company has to offer.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.
In this blog post, you will learn the definitions of these two important return factors, how they are calculated, and why they are relevant in apartment syndications.
What is Cash-on-Cash Return?
Cash-on-cash return (commonly referred to a CoC return) is a factor that refers to the return on invested capital. CoC return is the relationship between a property’s cash flow and the initial equity investment, which is calculated by dividing the initial equity investment by the cash flow. For the purposes of the CoC return calculation for apartment syndications, cash flow is the profits remaining after paying the operating expenses and debt service.
There are actually two different versions of the CoC return for apartment syndications: including profits from sale and excluding profits from sale. The CoC return factor excluding profits from sale will show passive investors how much money they should to expect to receive for each distribution during the hold period, as well as an average annual return on their investment. The CoC return factor including the profits from sale will show passive investors how much money they should expect to make from the project as a whole.
In order to calculate both CoC return factors, you need the initial equity investment amount, the projected annual cash flows, and the projected profit from sale for both the overall project and to the passive investors.
Here is an example of how to calculate CoC return for an apartment project:
Passive investors aren’t as concerned about the overall project’s CoC return but more so the CoC return to the limited partners (LP).
Here is an example of how to calculate the CoC returns to the limited partners based on an 8% preferred return and 70/30 profit split:
In this example, the average annual CoC return to the LP is 8.33%, which is good because it is above the preferred return offered. The overall CoC return for the five years is 185.72%. So, someone who invested $100,000 would make $85,720 in profit.
However, as you can see in the example above, the CoC return to the limited partner is below the preferred return percentage in years one and three. So, for this deal, the syndicators options are to review their underwriting assumptions to see if they can increase the cash flow, have the preferred return accrue and pay the accrued amount at sale or when the cash flow supports it (i.e. end of year two to cover the year one shortfall), or pass on the deal.
A “good” CoC return metric is subjective and based on the goals of the syndicator and the passive investors. However, a good rule of thumb is a minimum average CoC return excluding the profits from sale equal to the preferred return offered to the limited partners.
What is Internal Rate of Return?
The main drawback of the cash-on-cash return metric is that it doesn’t account for the time value of money. For example, receiving a 185.72% CoC return over a 5-year period is very different than receiving the same CoC return over a 10-year period or a 1-year period. That is where internal rate of return comes in.
The technical definition of internal rate of return (commonly referred to as IRR) is the interest rate that makes the net present value of all cash flow equal to zero. In layman’s terms, this equates to a project’s actual or forecasted annual rate of growth by isolating the effect of compounding interest if the investment horizon is longer than one-year, which CoC return does not.
If you have the data to calculate the CoC return, you can calculate an IRR for the overall project and to the passive investors. What is needed is the initial equity investment and the annual cash flows, with the final year including the profit from sale.
The IRR formula is complex (click here if you want to see the full formula), so for simplicity, the IRR() function in excel should be used.
Following the same example, here is the 5-year IRR for the overall project and for the limited partners:
Another IRR metric is XIRR. For the regular IRR calculation, the assumption is that the cash flows are distributed on a fixed, periodic schedule (i.e. annually, monthly, quarterly, daily, etc.). The XIRR function calculates the internal rate of return when cash flows are distributed on an irregular period.
In order to calculate XIRR, the additional data required are the exact days that the cash flow was distributed. Examples of instances where the XIRR would come into play are when the syndicator refinances or secures a supplemental loan to return a portion of the passive investors’ equity and when the syndicator sells the asset since the closing date likely will not be exactly 1, 2, 3, etc. years after purchasing the deal.
A “good” IRR metric is also subjective and based on the goals of the syndicator and their passive investors. For my company’s deals, we want a 5-year IRR to the limited partners of at least 15%.
The main difference between the cash-on-cash return and internal rate of return metric is time. If the investment is held for one-year, then the two return metrics are interchangeable. But if the projected hold period is more than a year, internal rate of return is more accurate.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.
We created the Syndication School to provide you with a FREE apartment syndication education so that you have the tools to launch your own investment empire.
Each week, we will release two podcast episodes that focus solely on apartment syndications. For the majority of episodes, we will offer you a FREE resource, which will be available for download below.
Series #1 – Why Apartment Syndications?
In this first series, we will discuss the benefits and drawbacks of the syndication strategy so that you can determine if it is the ideal investment for you.
In part 1, we will define what an apartment syndication is, as well as compare and contrast raising money vs. using your own money to buy apartments. We will also discuss the difference between being a passive investor or active sponsor in apartment syndications.
In part 2, we will compare and contrast syndications to other popular real estate strategies, including single-family rentals, smaller multifamily properties, REITs, and development.
Series #2 – Are You Ready to Become an Apartment Syndicator?
In the second Syndication School series, we will discuss the two main requirements before you are ready to start your apartment syndication business.
In part 1, we cover the first requirement – the experience.
In part 2, we cover the second requirement – the education.
Click here to download your FREE Master the Lingo presentation, which has a list of over 80 apartment syndication terms, including the definitions and real-world examples, that you need to memorize and know how to immediately calculate before you are ready to become an apartment syndicator.
Series #3 – How to Break Into the Apartment Syndication Industry
In this Syndication School series, we will discuss the 9 creative ways to break into the business of apartment syndications after meeting the experience and educational requirements.
Series #4 – Tony Robbins’ Ultimate Syndication Success Formula
In this Syndication School series, we will discuss the first two steps in Tony Robbins’ Ultimate Success Formula and how to apply those steps to your syndication business.
In part 1, we cover step one of Tony Robbins’ Ultimate Success Formula – Know Your Outcome.
In part 2, we cover step two of Tony Robbins’ Ultimate Success Formula – Know Your Why.
Click here to download your free resource, the Annual Income Calculator. The Annual Income Calculator is a spreadsheet that automatically calculates how much equity you need to raise from passive investors in order to achieve your 12-month apartment syndication goal.
Click here to download your free resource, Tony Robbins Goal Setting Exercise. Watch the 35-minute goal setting video by Tony Robbins and complete the four-step goal setting exercise for your apartment syndication business.
Series #5 – How to Select a Target Apartment Syndication Investment Market
In this Syndication School series, we will discuss the process of selecting a target investment market for your apartment syndications.
In part 1, we introduce the concept of a target market and the overall process of selecting a target market.
In part 2, we cover the process of selecting 1 or 2 target markets.
Series #6 – How to Perform an In-Depth Analysis of Your Target Apartment Syndication Market
In this Syndication School series, we will discuss the process of performing a more in-depth analysis of a market after selecting 1 or 2 target investment markets (which was accomplished during Series #5).
In part 1, we re-introduce Joe’s Three Immutable Laws of Real Estate Investing and discuss an exercise that accomplished the goal of understanding a target market on a neighborhood-level.
In part 2, we discuss other strategies to implement to also accomplish this same outcome.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process of completing your first apartment syndication: Best Ever Apartment Syndication Book.
A supplemental loan is a type of loan that is subordinate to the senior indebtedness and is secured at least 12 months after the origination of the first agency loan or the most recent supplemental. In other words, a supplemental loan is additional funding that is available 12 months after closing on an apartment deal.
A supplemental loan is not the same as a refinance. The supplemental loan is a second loan secured in addition to your existing loan while a refinance is the process of replacing your existing loan with an entirely new loan.
The benefits of securing a supplemental loan compared to a refinance are the lower cost, certainty of execution, faster processing time, and ability to obtain multiple supplemental loans each year.
A supplemental loan must be secured from the same debt provider as the original loan. If the original loan was provided by Fannie Mae, the supplemental loan must come from Fannie Mae, and the same applies to Freddie Mac.
Supplemental Loan Terms
Here is an overview of the general terms for the Fannie Mae and Freddie Mac supplemental loans:
Then, they will perform an appraisal and a physical needs assessment (which is essentially a property conditional assessment) in order to determine the size of the supplemental loan.
You also want to ask your mortgage broker or lender how many supplemental loans are permitted, because you may be able to get more than one (as long as you wait 12 months between loans).
Example Supplemental Loan
If you plan on securing a supplemental loan for an apartment deal, you must include that assumption in your initial underwriting. Once the loan is secured, your debt service will increase, which will reduce the overall cash flow.
To estimate the maximum supplemental loan and debt service, you need to know the following:
For example, the initial Fannie Mae loan amount is $22,000,000 with three years of interest-only payments at 4.94%. The plan is to take out a supplemental loan at the end of year two, so the loan balance remains at $22,000,000 (since only the interest was paid for the first three years). After inputting all of the underwriting assumptions, the projected net operating income at the end of year two is $1,828,101. The in-place capitalization rate (i.e. the rate based on the purchase price and net operating income at purchase) is 5.5%. To be conservative, we assume a cap rate of 5.75% at year 2. The property with a net operating income of $1,828,101 and a capitalization rate of 6% is valued at $31,793,061.
Since the initial loan was secured from Fannie Mae loan, the maximum LTV is 75%. In other words, Fannie Mae will fund a maximum of 75% of the property value, which, for our example, is $23,844,796 at the end of year two. Since the loan balance on the initial loan is $22,000,000 and assuming $220,000 in closing costs, the maximum supplemental loan available is $1,624,796.
To determine the additional debt service from the supplemental loan, you need to know the expected loan terms. Based on the Fannie Mae supplemental loan terms, we can expect a 30-year amortized, 5-year loan at 5.04% interest (4.94% + 100 bps). Apply these loan terms to a $1,624,796 loan and the annual debt service of $106,178.
If the plan is to refinance the property, the process to calculate the new loan amount is similar to that of calculating the maximum supplemental loan. A smart underwriter will create two scenarios, one in which a supplemental loan is secured and one in which the property is refinanced, and compare the return projections and risk levels of each.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book
In an apartment syndication, a syndicator raises money from passive investors to acquire apartment communities while sharing in the profits. It being an advanced real estate strategy, an investor will rarely, if ever, begin their career by raising millions of dollars to purchase and asset manage an apartment syndication by themselves. They must have the educational and experience requirements before becoming a syndicator.
Now that sounds like a Catch-22: To become an apartment syndicator, you need the education and experience. To gain experience and obtain an education, you need to be a part of an apartment syndication.
So then, how do you become an apartment syndicator?
Well, as an experienced apartment syndicator myself, with a company that controls $570 million in apartment communities across over 6,000 units, I’ve identified three main ways to break into the apartment syndication industry with no real estate experience.
1. Past Business Experience
If you don’t have prior real estate experience, but you do have a successful business background, then you may easily be able to translate those skills into buying apartment communities. And by a “successful business background,” I mean that you’ve either started your own company or you’ve held a high-level position at a large corporation.
To start a business or climb the corporate ladder, you typically need high-level project management skills, networking abilities and resourcefulness. As an apartment syndicator, these skills will help you manage team members, find and oversee apartment deals and find passive investors, which is about half of the syndication puzzle.
However, since you’re still lacking in real estate experience and education, it’s vital that you surround yourself with a credible team, which includes an advisor (ideally, someone who is an active apartment syndicator), a partner who complements your background (ideally, someone with real estate or apartment operational experience), a property management company to manage the day-to-day operations and a real estate broker to help you find deals.
2. A Thought Leadership Platform
If you don’t have prior real estate or high-level business experience, you can break into the apartment syndication industry by creating a thought leadership platform. This is an online networking tool where you create valuable content about a specific business niche (in this case, apartment syndications). Examples of thought leadership platforms are a podcast, a YouTube channel or a blog, with the most powerful — in my opinion — being the podcast.
To fulfill education and experience requirements, your platform must be interview-based. That is, the content you create must be based on interviews with real estate professionals in the apartment syndication industry. Through these interviews, you are getting a practical, real-world education from people who are active in the field. At the same time, you are networking not only with the people you interview but with the people who are consuming your content. This opens up the opportunity to find the advisors, partners and team members that will offset your lack of experience, as well as passive investors to fund your deals, covering all of your bases.
An additional benefit of a thought leadership platform is your ability to become a reputable, well-known force in the apartment syndication industry. You’re creating content that is valuable to apartment syndicators and passive apartment investors alike. I cannot count how many times I’ve spoken with passive investors or other real estate professionals who say they feel like they already know me because they’ve listened to my podcast. This will give you a leg up that you wouldn’t have without the platform, because it essentially allows you to network worldwide, even while you sleep.
3. Intern For An Apartment Syndicator
The third option for breaking into the industry is to intern for an apartment syndicator. This will cover the educational and experience requirements because you are getting a practical, real-world education and you’re actually implementing your education on a day-to-day basis.
To find apartment syndicators, attend real estate and apartment conferences, seminars and meetup groups. Listen to podcasts, watch YouTube videos or read blogs that are hosted by or have interviewed active apartment syndicators. Search on social media networks. Nearly every apartment syndicator will have an online platform, so perform a Google search to find their websites and blogs.
The easier part is finding apartment syndicators. The hard part is getting them to bring you on as an intern. People constantly reach out to me asking to intern for my business. The vast majority of the messages are people simply asking to intern for my business for free. While I always appreciate the offer, we’ve reached a place where “free labor” isn’t enough of a value-add to my business.
To increase the chances of an apartment syndicator accepting you as an intern, offer something more than free labor. One strategy is to conduct research on the apartment syndicator’s business, identify a need they might have and then in your message, offer to fulfill that specific need.
If you want to really impress the apartment syndicator and essentially guarantee an internship, take the previous strategy one step further. Once you’ve identified a need, proactive fulfill it before reaching out. For example, if an apartment syndicator is struggling to find deals in their market, bring them a deal. Or, at the very least, show them that you’re in the process of finding deals in that market, even if that just means you’ve spoken with a real estate broker who has sent you a handful of deals. The point is to stand out from a sea of messages by showing the syndicator that you’re actually willing to put forth effort and that you’re serious about adding value to their business.
These strategies have been used by aspiring investors with no experience to break into the apartment syndication industry. Pick one, stick to it and you could find yourself completing your own syndications in the next 12-24 months.
I wrote this book specifically for anyone who wants to become an apartment syndicator but doesn’t have the experience, access to capital, access to deal flow, and/or the ability to execute a business plan.
In the book, you will learn how I overcame the aforementioned challenges, as well as the exact step-by-step process I implemented in order to go from owning four single family homes and making $30,000 a year at a NYC advertising agency to building a portfolio of over $400,000,000 in apartment communities.
For a sneak peak of the content offered in the book, check out these four interviews where I discuss different parts of my journey and tactics that helped me get to where I am today!
In my interview on the Apartment Building Investing w/ Michael Blank Podcast, I explain the additional reasons why I wrote the Best Ever Apartment Syndication Book, which will hopefully inspire you to write your own book!
I offer advice to aspiring apartment syndicators for how the overcome the lack of experience challenge, which includes four ways to gain credibility with potential investors through alignment of interests and how to approach staying top-of-mind with investors
I also provide my insights on the benefits of partnerships in real estate, as oppose to attempting to build a business alone.
My interview on The Cashflow Hustle Podcast with Justin Grimes focuses on the mindset shift required to transition from a W2 job and/or smaller real estate investment strategies to purchasing large multifamily properties.
I explain how I made the leap to multifamily real estate. Of course, like all business endeavors, you will face many challenges as an apartment syndicator. So, I also offer advice on the tactics I use in order to overcome these challenges, which includes having a vision board, knowing where and who to turn to when looking for feedback and guidance, and asking “what would a billionaire do in this situation.”
My interview on the Cash Flow Connections Podcast with Hunter Thompson focuses on three aspects of building an apartment syndication business.
First, you need to know where to invest. This is your target market. I outline my seven-step process for selecting and evaluating a target investment market.
Second, people need to know who you are if they are going to trust you with their money. I’ve found that the best way to accomplish this is through a thought leadership platform. I provide tactics for how to become a thought leader in a highly competitive sector of the investing world.
Third, you need to raise money in order to fund your deals. I explain the systems, technologies, and processes that can help you raise more money faster, which includes how my mentorship program has helped me raise millions of dollars.
My interview on the Unbelievable Real Estate Stories podcast with Ellie Yogev focuses on how to complete your first syndication deal when you have zero apartment investing experience.
I know that you can complete a deal without prior apartment experience because that’s what I did. I share the story of how I acquired my first deal, including my first experiences with real estate brokers, creative financing, and how I overcome the multitude of challenges as a first-time apartment investor.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book
Apartment syndication, which is the pooling of money from numerous investors that will be used to buy an apartment building, is a complex real estate investment strategy with one of the highest barriers of entry. In fact, before even searching for your first apartment deal, you’ll likely require years of preparation in order to set yourself up for success.
After leaving a $30,000 a year advertising job and acquiring four single family rental homes, I syndicated my first deal in 2014. Over the next four years, my company built a portfolio of over $400,000,000 in apartment communities. Through this experience, I wrote a book, Best Ever Apartment Syndication Book, distilling all of the lessons I’ve learned along the way so that others my replicate my company’s success.
Here are the 11 steps I followed to create a $400,000,000 apartment syndication business from scratch:
1 – What are the experience and educational requirements needed to syndicate an apartment deal?
The two main requirements needed before becoming an apartment syndicator are education and experience.
First, you must comprehend the fundamental apartment syndication terminology in order to effectively communicate with your team members and passive investors, as well as to understand how to create and execute a business plan (here is a glossary of terms you need to memorize). These are concepts like internal rate of return, effective gross income, economic occupancy, preferred return, profit and loss statements, and many more.
Additionally, you will need a successful track record in business or real estate – ideally in both. Your team members and passive investors need to trust that you are able to execute an apartment syndication business plan. Understanding the apartment terminology is a good start, but having a successful background in business and/or real estate will give them confidence in your ability to replicate those successes as an apartment syndicator.
So, if you haven’t received promotions or awards in the business world or if you haven’t succeeded in a different real estate investment niche, that should be your focus before moving forward in the apartment syndication process.
2 – Why is goal setting important when beginning to syndicate apartment buildings?
Once you have the educational and experience requirements covered, the next step is to set a compelling goal. However, instead of simply setting a goal for how much money you want to make, take it a step further and determine how much money you must raise in order to achieve that goal.
One of the main ways an apartment syndicator makes money is from an acquisition fee, which is paid to the syndicator at closing for putting the deal together (here are the other six common fees). This fee ranges from 1% to 5% of the purchase price. So, if your goal is to make $100,000 and you plan to charge a 2% acquisition fee, you would need to syndicate $5 million worth of apartment communities. Assuming an equity investment of 35% of the purchase price, you would need to raise $1,750,000.
At this point, you know exactly what you need to do (i.e. how much money you need to raise) in order to achieve your specific, quantifiable apartment syndication goal.
3 – Why should you create a thought leadership platform to syndicate a real estate deal?
Even though you comprehend the apartment syndication terminology and have a successful track record in business and/or real estate, since you haven’t completed an apartment deal, you are still going to face a credibility problem. A thought leadership platform, which is an interview-based, online network where you consistently offer valuable content to your loyal following free of charge, is a major part of the solution. Examples of thought leadership platforms are a podcast, a blog, a YouTube channel and a meetup group.
Through your thought leadership platform, you will position yourself as an expert in the apartment syndication field. Additionally, you will build upon your initial apartment syndication education by having conversations with active real estate entrepreneurs, probing them for the best advice they have to offer. Lastly, you will get your name and voice in front of real estate professionals while you sleep, which will help you source apartment deals and private capital, as well as network with potential team members.
Overall, a thought leadership platform will help address your credibility problem, as well as be a tool for finding potential team members, business partners and passive investors. So, while you are working on the experience and education requirements, launch and grow a thought leadership platform (here is my guide for how to create a real estate thought leadership platform).
4 – How do you select a target market for apartment syndication?
The last step before you beginning put together your team is to select a target market, which is the primary geographic location in which you will focus your search for potential investments. There are more than 19,000 cities located in the United States, and it is impossible to evaluate and target every single one.
I recommend selecting seven potential target markets based on where you live, where you have lived (because these are markets with which you are likely already familiar), and the top apartment markets in the country. Then, evaluate those markets across a variety of factors, including population growth, population age, unemployment, job diversification, and supply and demand, in order to select one or two markets to target (here is my guide for evaluating and selecting a target market).
5 – How do you build an all-star apartment syndication team?
You’ve covered the education and experience requirements, launched a thought leadership platform, and selected a market in which to invest. Now, it is time to create your core real estate team. Your core team will consist of a real estate broker who will help you find on-market deals and close on deals, a property management company who will help you during the due diligence process and manage the apartment after closing, a mortgage broker who will help you secure financing, a real estate attorney and securities attorney who will help you create the partnership documents between you and your investors, an accountant and a mentor/consultant.
Again, since you haven’t completed an apartment deal, you are going to have a credibility problem with your passive investors. The thought leadership platform is part of the solution and finding experienced team members is another part. The best approach to building your team is to 1) find a mentor/consultant through referrals, 2) leverage your mentor’s relationships and the relationships you created through your thought leadership platform to find the other members of your core team, and 3) conduct interviews to select the best candidate.
Each member of your team will have their own motivations, so it is your job to prove to them that by becoming a part of your team, they will achieve their goals too. That means leveraging your background, thought leadership platform, and the expertise of your mentor and team members to prove your ability to successfully raise money for, close, and execute a business plan on an apartment deal.
6 – What are the best strategies for finding passive investors?
Surprisingly, the main reason people will invest with you is not based on the returns you offer. Instead, it will be because they trust you with their money. I’ve found that this trust is created in three important ways – through time, displaying your expertise, and creating personal connections.
The best way to find passive investors with which you already have a trusting relationship is through your existing network. Therefore, the approach I recommend is to create a list of every single person you know and categorize them based on how you know them (i.e. work colleagues, family, college friends, neighbors, etc.). Then, your goal is to get one person from each category interested in investing with you and, with their permission, name drop them to the other people in that category. People are more likely to invest with you if they know someone else who is interested in investing too.
If your existing network is small, or to expand your network, other great ways to build personal connections are 1) through your thought leadership platform, 2) participating on BiggerPockets, 3) attending or creating a meetup group, and 4) volunteering (here are a collection of articles with more money raising tips).
Before moving on to the next step, your goal is to obtain verbal commitments from your network of investors that is greater than the amount of money you need to raise in order to achieve your goal, which you set in Step 2.
7 – What’s your ideal apartment syndication business plan?
There are three main apartment syndication business plans. The first is the distressed strategy, which is to purchase an apartment community with an economic occupancy level below 85% (and likely much lower), address the deferred maintenance, bring the property to stabilization, and either sell for a large profit or refinance and hold for cash flow. Another is a turnkey strategy, which is to purchase a completely updated, highly stabilized apartment community with an economic occupancy level of 95% or higher and cash flow starting day one. The third, and the one that my company implements, is the value-add strategy, which is to purchase an apartment community with an economic occupancy level between 85% and 95%, add value (which is to improve the physical property and operations in order to increase the income and decrease the expense), and sell after five to seven years.
Your ideal business plan is based on the goals of you and your investors. If you and your investors are interested in a large, lumpsum return after 12 to 24 months with minimal to no cash flow, as well as the risk of losing most or all of their initial investment, the distressed strategy is ideal. If you and your investors need a place to park capital without the upside potential at sale while receiving a return that beats inflation, the turnkey strategy is ideal. If you and your investors want an ongoing return and a moderate lumpsum return after five to seven years, the value-add strategy is ideal.
Similar to selecting a target market, you cannot pursue every single investment opportunity. There are simply too many. Instead, you must select one of the three investment strategies and only pursue properties with the specific criteria that aligns with that strategy, which includes the current occupancy, condition, asset class, construction date, and resident demographic.
8 – How do you find your first apartment deal?
As I mentioned in the introduction, a large time investment is required before finding your first deal. But, now that you’ve covered the education and experience requirements, set a goal, launched a thought leadership platform, selected a target market, created your core team, obtained verbal commitments from passive investors, and selected a business plan, it’s time to find your first deal.
There are two types of apartment deals: on-market deals listed by a real estate broker and off-market deals without a listing broker. To receive on-market deals, contact your real estate broker, as well as the top brokers in your target market/s and ask to be added to their email list.
Sourcing off-market deals requires more proactive effort on your part, but you will benefit from dealing directly with the owner, avoiding a bidding war, having more financing flexibility, and potentially closing faster. Also, off-market deals are perceived as stronger opportunities in the eyes of passive investors.
There are countless ways to find off-market opportunities, but here are the five most effective strategies. I recommend having at least two lead generation strategies that bring in at least one new off-market lead each week.
9 – How do you evaluate apartment deals?
As you receive on-market leads from real estate brokers and off-market leads from your lead generation strategies, you will need to determine if the lead warrants an offer. This process is called underwriting.
To properly underwrite a deal, you need to obtain a current rent roll and trailing 12-month profit and loss statement, as well as create or purchase a financial model. The underwriting process for apartment communities is quite complex, but here is a brief overview:
Determine how the apartment is currently operating
Set assumptions for how the apartment will operate once you’ve taken it over and implemented your business plan
Create a pro forma, which is the budget with projected income, expenses, and cash flow during the hold period
Use the pro forma cash flows and the desired returns of you and your passive investors to set a purchase price that will achieve those returns.
After setting an offer price, you’ve arrived at the point where you need to determine if you will submit an offer. If the results of the underwriting process meet or exceed the return goals of you and your passive investors, you will submit a letter of intent, which is a non-binding letter that represents your intent to purchase the property. If your letter of intent is ultimately accepted, you will sign a purchase and sale agreement to officially put the property under contract to purchase.
Once you have the property under contract, you will perform additional due diligence in order to confirm the assumptions you made during the underwriting process and decide if you need to update your offer price and terms or cancel the contract. If you decide to move forward, you will secure financing from a lender. If it is your first deal, you likely won’t meet the liquidity, net worth or experience requirements to qualify for financing. If that is the case, you will need to bring on and compensate a loan guarantor.
10 – What’s the process for securing commitments from passive investors?
Once you have the property under contract and while you are performing due diligence, you will present the new apartment offering to and secure investments from your passive investors.
First, you will use the results of your underwriting and due diligence to create an investment summary document, which outlines the main highlights of the investment and the market, as well as the return projections to your passive investors. Then, using the investment summary as a guide, you will present the new investment offering to your passive investors. Finally, you will officially secure investments from your passive investors, having them sign the required documentation, including an operating agreement, subscription agreement and a private placement memorandum, which are prepared by your attorneys.
11 – How do you execute your business plan on an apartment building?
After the deal has passed the due diligence process and you’ve secured commitments from passive investors, you’ll close on the deal! Upon closing, you will notify your investors of the close and set expectations for ongoing communication and distributions. Then, you will execute your business plan by performing your duties as an asset manager.
Your 10 asset management responsibilities are:
Implement the business plan by adhering to the income and expense budget
Conduct weekly performance reviews with your property manager
Send the correct distributions to your passive investors
Provide monthly recap emails to your passive investors
The last step in the entire syndication process, and when you and your investors make the BIG money, is to sell the property. The ideal time to sell is based on your business plan and the market. Obtain a broker’s opinion of value from your real estate broker a few times a year and calculate the return projections to your investors based on that sales price. If you can meet or exceed the return goals early, great! If it comes time to sell and the market is such that you cannot meet or exceed the return goals, don’t feel forced to sell. Hang on and wait for the market to turn around before selling.
In regards to the GP, if all of the duties are performed by one person, then that individual would receive 100% of the compensation allotted to the GP. However, it is unlikely that the GP will be a single person, especially one the first few deals. Instead, the GP responsibilities will be fulfilled by two or more individuals.
When that is the case, how do you determine how much money each individual makes? Like most things in apartment syndications, it depends because every deal is different. There are, however, general guidelines for how to create a compensation structure for the GP.
Basically, the GP is broken into five parts. Each part has certain duties, as well as an assigned percent ownership of the GP. All of these percentages are negotiable, but here are the general guidelines:
1 – Due Diligence Costs
The time between signing the purchase sales agreement and closing the deal is known as the due diligence phase. During the due diligence phase, certain costs are incurred by the GP. These include the earnest deposit, legal fees to create various contracts, inspection costs and appraisal costs. Most of these expenses are due before reaching the closing table.
Since you are dealing with multimillion-dollar deals, these due diligence costs will likely be in the tens of thousands of dollars. If you can personally pay for these upfront costs, great. Front the costs and reimburse yourself at close. If you cannot, then you will need to bring on a third-party to cover these costs.
In return, you will need to compensate this person. There are a few approaches. You could borrow the money from a family member or friend and sign a personal guarantee, promising to pay them back at close. Another option is to ask one of your passive investors to front the cost. In return, you can offer to pay them back at closing with interest. Or, you can offer them a percentage of the general partnership.
For the latter approach, expect to give up 5% of the general partnership to the person who fronts the due diligence costs.
Eventually, you will be able to cover these costs yourself (or between you and your partner).
2 – Acquisition Management
Another collection of duties performed by the GP is acquisition management. The acquisitions manager is responsible for finding deals. They generate off-market leads and build relationships with brokers to source on-market deals. Once a deal is located, they are responsible for underwriting the deal and submitting offers on qualified deals. After the deal is under contract, they will manage the entire due diligence process, secure financing from the lender and oversee the closing process.
In return, the acquisition manager will generally receive 20% of the GP.
3 – Sponsor
The sponsor is the individual or individuals who sign on the loan. This person may also be referred to as the loan guarantor.
Usually, first-time apartment syndicators will not have the liquidity, net worth or experience requirements to qualify for a loan. So, they must find an experience apartment syndicator as well as someone with a net worth equal to the principal loan balance and liquidity equal to 10% of the principal loan balance at closing. Ideally, the sponsor covers the experience and financial requirements.
The compensation offered to the sponsor varies from deal-to-deal. Typically, they are either offered a one-time fee at closing or an ongoing percentage of the GP. The one-time fee can be as low as 0.5% to 1% and as high as 3.5% to 5% of the principal balance of the loan paid at closing. The ongoing percentage of the GP can range from 5% to 20% or higher.
The riskier the deal and the riskier the financing, the higher the compensation. For example, the sponsor of a distressed apartment community will receive more compensation compared to a turnkey apartment community. And the sponsor who signs on a recourse loan will receive more compensation compared to a nonrecourse loan.
Generally, 35% of the GP is allotted to investor relations. On some deals, 100% of the equity investment is raised by a single individual. In other cases, multiple people raise money for the deal. For the latter, make sure that this individual or these individuals are doing other activities and can justify their percent ownership of the GP based on those other activities. The money raising should be a byproduct and not what they are being compensated for. Technically, according to Rule 3(a)4(1), if someone is only raising capital, they are not considered a GP.
5 – Asset Management
Lastly, the GP is responsible for the ongoing asset management of the deal after close. They ensure that the property management company is implementing the business plan, which includes conducting weekly performance reviews with the site manager, frequently visiting the property, analyzing the market and the competition and addressing any issues that arise.
Generally, the asset manager receives 20% to 35% of the GP.
Again, these are the general compensation numbers for the five parts of the GP. But everything is negotiable and will vary from deal-to-deal.
One person might perform all of these duties, a handful of people might perform all of these duties or multiple people might perform one of the duties (i.e. multiple people raising money, sponsoring the deal, finding deals, etc.). Usually, on the first few deals, there will be multiple people on the GP. But, as you complete more and more deals, you will need to bring less and less people onto the GP. But when you are starting out, you should do whatever it takes to complete a deal, even if that means giving up a majority stake in the GP.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book
You’ve acquired an apartment community at the right price and successfully executed your value-add business plan, renovating the interiors and upgrading the community amenities in order to achieve your projected rental premiums. Now, you just ride out the business plan until the sale, right…?
However, the more sophisticated (and likely more successful) apartment syndicator will rely on more than the results of the rent comps to determine when is the opportune time to raise the rents. Here are the seven other factors to keep in mind:
1 – The Business Plan
To determine if it is the right time to raise rents, the first question to ask is “what is the business plan?”
Prior to closing on a deal, you should have created a business plan for how you will approach raising the rents during the hold period, which should have been confirmed by your property management company. So, how well were you able to adhere to that plan?
Were you able to achieve your projected rental premiums? Are you on track with the return projections to your investors? Were you able to complete the interior and exterior upgrades on-time? Were you able to achieve the desired loss-to-lease? How are you performing relative to what was projected in terms of occupancy?
If the business plan was executed without a hitch or any major deviations – or even better, if you were able to exceed expectations – then you may consider raising the rents. However, if you or your property management company were unable to achieve one or more of these projections (i.e. rental premiums, investor returns, renovation timeline, loss-to-lease, occupancy, etc.), your focus should be on how to get back on track rather than raising the rents.
2 – Concessions
Another factor to consider is the amount of concessions you are offering to new applicants. The amount of concessions you need to offer to entice prospective residents to sign a lease is directly related to the demand of your apartment community. The more concessions you offer, the lower the demand and the lower the gross potential income.
If your concessions are greater than 3% of your gross potential rent (this percentage may vary from market-to-market), then your focus should be on reducing the amount of concessions offered before you consider raising the rents.
3 – Bad Debt and Delinquency
You also want to look at the bad debt and delinquencies (i.e. delinquent rent and other expenses paid by residents) at your apartment community. Similar to concessions, the more bad debt and delinquencies you have, the lower the gross potential income, which negatively affects your returns.
If residents aren’t paying their rent on-time or if the bad debt exceeds your business plan assumption (ideally, bad debt is less than 1.5% to 2% of the gross potential rent), then your focus should be on minimizing these factors first before you consider raising the rents.
Another question to ask when you consider to raising the rents is, where are my rents relative to my competitors? This is accomplished by performing a rental comparable analysis on a monthly basis, at the very least.
While you do not want to be the market leader in terms of rental rates, if your current rents are significantly lower than a similar apartment community in a similar neighborhood, then you may want to consider raising the rents. The key term here is similar – when analyzing your competition, make sure that the community has similar amenities, similar unit upgrades and similar property operations. In terms of property operations, for example, do both properties include utilities in the rent? Do both properties offer the community amenities free of charge? Do both properties offer coin-operated laundry facilities?
5 – Number of Evictions and Skips
Before you consider raising the rents, review the number of evictions and skips (i.e. residents leaving before the end of their lease) at your apartment community over the past few months.
Evictions and skips are very costly. There are legal fees, turn/make ready costs, marketing costs, administrative costs and lost income associated with both. If you are experiencing a higher than normal number of evictions and skips, your focus should be one minimizing those first prior to raising rents.
6 – Cancelled Applicants
A cancelled applicant is a resident who has signed a lease, has a scheduled move-in date but when that day comes, they fail to show up. Similar to evictions and skips, there are costs associated with cancelled applicants, as well as an overall waste of your property management team’s time.
If you have too many cancelled applicants (with “too many” depending on the size of the property and the market – speak with your property management company to get an acceptable number), determine why they are cancelling and focus on reducing those first prior to raising rents. Because higher rents mean nothing if the resident fails to move in.
7 – Rental Season
Lastly, determine when the peak rental season is in your market prior to raising rents. That is, what month are you currently in and how close are you to the beginning and end of the rental season?
Generally, rental season begins in the spring and ends before winter. So, if you are inside of that time period, it may be the opportune time to raise rents. However, during the winter, your best bet is to focus on maintaining your occupancy rates in preparation for the start of the rental season in the spring.
What about you? Comment below: What factors do you analyze when you consider raising the rents at your properties?
The property management company is one of the most – if not the most – important member on your core apartment syndication team. They are the boots-on-the-ground who oversee property operations on a daily basis and execute the business plan. Therefore, the success or failure of a deal is highly dependent on the quality of the company managing the property.
Well, they may need to be let go and another property management company will need to take their place.
In this blog post, I will outline the three reasons why you would need to part ways with your property management company, the five things you need to address in order to ensure a smooth transition and how to approach the conversation when letting the old manager go.
When Should You Fire Your Property Management Company?
There are three main things your property management company could do that should start the firing process:
1. Criminality or fraud
If you discover that your property management company has committed fraud or a criminal act, you should begin the firing process immediately.
2. Lack of execution
Lack of execution is another reason why you would fire your property management company. However, before beginning the firing process, confirm that the lack of execution is due to the property management company and not some other factor. For example, a failure to meet rental premiums on renovated units, a lower than expect occupancy rate or a high loss-to-lease could be due to the current market conditions and not the property management company. Or poor unit renovations or deferred maintenance could be due to a poor vendor and not the property management company.
You don’t want to go through the trouble of firing your property management company if the problem will continue once a new management company is in place, so make sure you do your homework.
3. Lack of communication
While this reason is subjective, you will know if your property management company is an ineffective communicator. Are they ill prepared for, don’t show up to, or have to constantly reschedule the weekly meetings? Do they take days to reply to your emails? Is it a struggle to get them on the phone? Do they communicate with you immediately when something goes wrong at the property? These are examples of a property management company that lacks communications and should be fired.
Unless the property management company has committed fraud or a criminal act, I recommend waiting at least one quarter before beginning the firing process. If after a quarter they still aren’t executing the business plan and/or lack communication, the first step of the firing process is to find a replacement property management company.
5 Things to Address to Ensure a Smooth Transition
Once you’ve made the decision to fire your property management company and found a replacement, there are 5 things you need to address in order to ensure the smoothest transition possible.
First, you need to decide if you are going to fire all of the existing onsite staff or if you will allow some of them to stay under the new management company. To determine who stays and who goes, have the new property management company interview and vet the current staff. After the interviews and vetting, they can decide who to keep and who to let go.
Keeping some of the existing staff can be very helpful with the transition, because they have previous experience of and inside knowledge on operating the property. But if the current staff isn’t performing, the property management company may need to bring on an entirely new staff.
Your new property management company should proactively request all of the financial documents they need in order to take over the operations. This include the historical profit and loss statements, the current leases and rent roll and the chart of accounts (list of income and expense line items and the bad debt/delinquency).
The new property management company will also need a list of the units that have and haven’t been renovated. Additionally, they need to know the exact renovations that were done for each unit. This information needs to be as detailed as possible. The new property management company needs to know what units are completely renovated (and what the upgrades were), what units have been partially renovated (and what upgrades remain) and what units have not been renovated. That way, once they take over management, the can start right where the old management company left off.
The new property management company will need a list of all the vendors who work on the property, like the maintenance person, plumber, painter, appliance repair person, carpet person, drywall person, etc. Similar to the staff, continuing to work with the current vendors will help with the transition process.
5. Service Contracts
The new property management company will also need a list of all the contractors who work on the property, like the pest control company, pool person, landscaper, security, etc. And, they will need the actual contracts as well.
Other Things to Think About
Firing a property management company isn’t easy and unforeseen difficulties will arise. So, in order to minimize these difficulties, I recommend the following.
First, use soft communication skills when explaining the reason why you are firing them. Don’t call them on the phone, say “you’re fired” and hang up. Instead, I recommend placing the blame for the firing on your passive investors. For example, I would say, “I am getting a lot of pressure from my investors to find a new company to manage the property so we are going to have to part ways.”
Next, read the contract between you and your property management company. Make sure you understand how much time in advance you need to notify the property management company before firing them.
Finally, have a representative from your new property management company address the 5 things I outlined above with the old property management company. You shouldn’t be doing them yourself. Also, have your new representative talk with a neutral party from the old property management company. They shouldn’t be talking to the president or the person who oversaw the property. A regional manager who isn’t emotionally involved with the property is the ideal go-between.
What about you? Comment below: Tell me about a time you had to part ways with a property management company and how you approached it.
One of the main factors that will make or break your apartment budget is the quality of resident you attract. A high-quality resident is someone who pays rent on time, treats the unit and apartment community as if it were their own home and is courteous to the neighbors. High-quality residents not only make your life easier, they make you and your passive investors more money in the long run.
Sure, low-quality residents can help you increase your occupancy rate in the short-term. But they will negatively impact other important financial factors longer term. Low-quality residents lead to higher turnover costs, both due to more frequent turnovers and more expensive, lengthier turns. They also lead to more expenses associated with evictions, higher bad debt (i.e., uncollected debt after a resident moves out) and a higher amount of delinquent rent.
Therefore, the successful apartment syndicator or property manager will proactively implement procedures with the purpose of attracting the best-qualified residents in the area. This approach minimizes the number of low-quality leads and maximizes the higher-quality ones, which has a positive feedback effect: Attract high-quality residents to your apartment and they refer your apartment to others, which brings in more of the same caliber.
As a result of building a portfolio of over $400,000,000 in apartment communities, I have identified seven market strategies that attract these high-quality residents.
1. Maximize Internet Advertising
According to Zillow’s 2017 Consumer Housing Group Trends Report, online tools are the No. 1 way that renters are searching for their home (87%), followed by referrals from a friend, relative or neighbor (57%). Therefore, an online presence for your apartment community is a must. This starts with having a URL and website for the apartment community.
Next, all of your “for rent” units should be listed on a variety of online real estate and apartment listing services, with the most effective ones being Apartments.com, Craigslist, Realtor.com, Trulia and Apartmentfinder.com. You should also market your listings on social media, including Facebook, Twitter and Pinterest.
To optimize your rental listing, make sure it includes a clear and accurate description of the unit and the community, highlighting the major selling points. Invest the few hundred dollars into having professional pictures taken.
2. Hire Locators
A locator is an apartment rental agency that helps prospective residents find their ideal apartment community based on their specific needs. Therefore, locators can be great resources for finding high-quality residents.
To find apartment locators in your market, Google “apartment locators in (city name).” Then, reach out and offer them a commission of the first month’s rent for providing you with a converted lead. (50% commission is standard).
Once you’ve hired a locator, provide them with weekly email and phone call updates on your current unit availability.
3. Target Local Businesses And Employers
Use the current resident demographic data, which you should have collected on initial rental applications, and the surrounding job hubs to create a list of target businesses, employers and schools in the area. You can also add local tax preparation offices, bus stops and train stations to your list.
Print out and drop off flyers, business cards, price sheets, floorplans and site maps to your targets, always asking for permission first.
Additionally, you can send a small gift (e.g., a gift card, gift basket, wine, toolkit, etc.) to your current residents who are employed at the business on your target list. Thank them for their residency and ask if they are willing to refer the apartment community to their colleagues at work.
4. Build A Referral Program
As established, 57% of renters find a home through referrals. To capitalize on this, you should create a referral program and offer a fee to any current resident who refers someone to the apartment community. A fee of $300 paid 30 days after the execution of the new lease is standard.
To advertise the referral program, deliver notes to your residents’ doors and send out friendly emails with the details of the referral program on a monthly basis.
5. Financially Incentivize Your Leasing Staff
Most apartment owners or property management companies offer their leasing staff a small bonus for each new move-in, with $50 being the standard. In addition, you can set monthly move-in or occupancy goals and offer a larger bonus, like a $100 to $250 gift card, if they hit the specified target.
6. Hold Resident Appreciation Parties
To promote resident satisfaction and retention, host monthly resident appreciation parties. These can be as small as providing a small breakfast or wine night in a common area on a monthly basis. Another idea is to host timely or holiday-themed events, like a Valentine’s Day card-making event, holiday gift-wrapping party, back-to-school barbecue or a Halloween costume contest. Click here for 51 additional resident appreciation event ideas.
7. Encourage And Monitor Online Reviews
The online rating of your apartment community will probably be the first thing that a prospective resident will look at during their apartment search. Organic reviews are great, but you should also implement strategies to increase the number of reviews.
One strategy is to ask a resident for a review after fulfilling a maintenance request. Only use this strategy for minor maintenance requests that were addressed in a timely fashion. Another strategy is to have a laptop station set up during the monthly resident appreciation parties, which the residents can use to write a review before they leave.
All seven of these strategies have been proven to attract the highest quality residents to an apartment community and are beneficial to your bottom-line. Do not wait to come up with a marketing plan until after you close on an apartment deal. This is something that should be created prior to close so that you can account for the expenses in your underwriting.
As an apartment investor or apartment syndicator, the three main times you will perform a rental comparable analysis is 1) during the underwriting process when initially analyzing a deal, 2) as a part of the market survey during the due diligence process and 3) on a recurring basis after closing on a deal.
Ideally, you’ve partnered with property management company who agrees to perform the rental comparable analysis during all three of the three stages – and most importantly, during the due diligence phase. However, there may be times when you will need to perform the analysis yourself. For example, if you find a deal before partnering with a property management company, if you only have a few days to submit an LOI or if you want to perform you own analysis for comparison purposes. Therefore, it is important that you have the ability to calculate the market rents on your own. And in this blog post, I will outline the process to do so without the use of fancy property management software. All you will need is an internet connection and a phone.
The first step of the rental comparable analysis is to find 5 to 10 apartment communities (i.e. rental comps) that are similar to the subject property. That means they were built around the same time, are in the same submarket and have the same level of interior upgrades and amenities. The best resource to find rental comps is on www.Apartments.com.
Once you’ve located the 5 to 10 rental comps, log the property address, year built, number of units and contact phone number. Then, pick up the phone and call the property. The purpose of the phone call is to collect data required to confirm that the rental comp is similar to the subject property, as well as to collect the rental data so that you can determine the market rents of the subject property. And in order to obtain this information, you will pose as a resident who is interested in renting a unit.
Here are the 6 main pieces of information to obtain:
1 – Rental Data
One of your main goals is to obtain the rental data for the rental comp. Sometimes, this information will be listed on the rental comp’s Apartments.com page. However, you still want to confirm that the information is accurate on the phone call.
If the rental comps has 1-bed and 2-bed units only:
First, ask “I am interested in renting a 2-bedroom unit. How much do those rent for?” to which they will respond with the rental amount. If they offer multiple 2-bed units, whether they are different floorplans or have different upgrades, they will provide you with a range of rents.
In order to obtain the 1-bed unit rents, say, “Oh. Your 2-bedroom rents are slightly outside of my price range. I was hoping for an extra bedroom but how much are the 1-bed unit rents?”
If the rental comp has 1-bed, 2-bed and 3-bed or more units:
Follow the same approach for the 1-bed and 2-bed apartments
Call back a few days later and ask for rents of the other unit sizes
At this point, you will have the rental data for all of the unit types offered at the rental comp.
2 – Upgrades
One of the most important factors in the rental comparable analysis are the unit upgrades. You want to make sure that the units at the rental comp are of the similar type and quality at the subject property.
When gathering the rental data, ask, “have you performed any unit upgrades recently?” The upgrades to the kitchen and bathrooms, in particular, must match the upgrades at the subject property in order to qualify as a rental comp.
Additionally, ask “have you performed any property-wide upgrades recently?” The quality of the common areas must also match those at the subject property as well.
At this point, you will know the upgrades for all of the unit types offered at the rental comp, as well as any property-wide upgrades.
3 – Amenities Package
Another factor that must match between the rental comp and the subject property are the amenities offered to the residents. Because, like the level of unit and property upgrades, the type of amenities offered will dictate the rental rates demanded.
Ask, “something that will heavily weigh into my decision to rent are the amenities offered. What are the individual unit and property amenities?”
Examples of unit amenities are the type of flooring, washer and dryer hookup or actual washer and dryers in unit, storage availability (i.e. closet space), pet-friendliness, patios/balconies, fenced in yards, etc.
Examples of property amenities are fitness center, clubhouse, pool, online rent payment, online maintenance request, type of parking, common area, utilities included in the rent, etc.
Then, for all of these amenities, ask “are there additional monthly fees for any of the amenities you listed?”
At this point, you will know if type and quality of amenities offered match those of the subject community.
4 – Rent Specials
Next, you want to know the types of concessions offered. Concessions are the credits given to offset rent, application fees, move-in fees and any other revenue line items, which are generally given to residents at move-in.
Ask “do you currently offer any rent or move-in specials?” Examples are security deposit specials, rental discounts for signing longer leases, referral programs, etc.
Concessions are generally offered to boost occupancy rates. So, understanding the types of concessions offered at your competitors will give you an idea of the types of concessions you will need to offer at the subject property. Additionally, if they are offering a lot of concessions, that implies that either the demand is low or the rental rates are too high.
5 – Demand
Understanding the rent specials offered will give you an idea of the demand at the property (which will give you an idea of the demand at your subject property).
For additional demand information, ask “I am relocating to the are in the next couple of months. Do you have any available units are is there a waiting list?” If they have a waiting list, that implies that the rental rates may be too low, and vice versa.
6 – Customer Service
At the conclusion of the phone call, take a few minutes to take notes on the level of customer service you received. If you own the subject property or end up closing on the subject property, the person you spoke with will be your competition!
Determining the Market Rents
At the conclusion of the phone call, you will have confirmed or disproved that the property is a rental comp, keeping in mind that the upgrades and amenities do not need to be an exact match – just similar. Also, the rental comps should be similar to your stabilized subject property. That is, for value-add apartment syndications, the unit upgrades should match the post-renovation upgrades and not the current level of upgrades.
Repeat this process for all 5 to 10 rental comps.
After all of the phone calls, the apartments that aren’t similar to the subject property can be eliminated. For the ones that are, determine the rent per square foot for each of the unit types in order to determine an average rent per square foot for each unit type in the overall market. Then, you can determine the market rent of the units at the subject property using this average rent per square foot and the square footage of the subject property’s various unit types. For example, if the average market rent per square foot for 1-bed units is $1.09 and the 1-bed unit at the subject property is 900 square feet, then the market rent is $981.
This was a general outline for how to approach performing the rental comparable analysis over the phone. It is not an exact step-by-step guide to be followed verbatim. Instead, it should be used as a guide for what questions to ask to obtain the information you need to gain a better understanding of the market and the market rental rates.
Also, the results of this rental comparable analysis should be used in tandem with a more detailed analysis performed by your property management company. This analysis can be used as a starting point for the market rental rates but should not be the sole basis for purchasing a deal.
Finally, if you are just starting out, I recommend doing a few practice calls on non-rental comps to get a feel for the flow of the conversation.
What about you? Comment below: How do you perform a rental comparable analysis for apartment communities?
“To whom it may concern” is how my letter started out.
It was 9 years ago and I had finally, after 10 long months of looking for my first investment property, found a deal. It was a 4-bed, 2-bath single family residence in Duncanville, Texas. The purchase price was $76,000. The rent was $1,050. The property didn’t really need any repairs. The puppy was going to cash flow and I was going to get my first investment property. Heck yeah!
Well…that was until the lender had their say. Apparently, in 2009, a bunch of lenders were feeling the burn of loose or nonexistent underwriting guidelines from years prior and were looking to correct those mistakes. Good for them. They should. But, it was bad for me at the time because they were asking me why on earth would I want to buy an investment property if I didn’t *gasp* own my primary residence?
Pretty simple, actually. I lived in NYC. Places cost too much. After all, I started out making $30,000 as a junior project manager so how the heck could I have afforded to buy a NYC apt?!
So, on September 25, 2009 I wrote a letter to the lender and told them the situation. Here it is:
To whom it may concern,
I am a resident of New York City and am looking to purchase an investment property in Duncanville, Texas. I have lived in New York City since June 2005 but am originally from Texas. I went to elementary, middle and high school in the DFW area and graduated from Texas Tech University with a degree in Advertising.
My mom, brother, sister, dad, niece and nephew all still live in the DFW area and I visit them as often as I can and usually spend Christmas in DFW. My family, particularly my sister and dad both of the whom have professional real estate experience, has been instrumental in helping me identify the income-producing property I currently have under contract and am looking to close on. Additionally, I already have had conversations with XYZ Property Management (edited this part because the management company was TERRIBLE – that’s another story) office in Duncanville and am planning on utilizing them to manage the property.
Although I’m not sure when, I do plan on eventually moving back to Texas and specifically to the DFW area. Under normal circumstances, I would own my primary residence; however, I live and work in Manhattan where the cost of real estate is prohibitive.
If you would like any further information, please call me directly at XXX.XXX.XXXX.
Fortunately, it worked! They approved me for the loan and I was the proud owner of this, ahem, beauty!
I still have this house today. Speaking of today, I just got done signing the loan guarantor docs on a 400+ unit apartment building worth over $30M that my company is closing on tomorrow. It will put our portfolio at 4,169 units and worth over $350,000,000.
I have documented most of the lessons learned after I close each project and you can read the lessons learned here:
The purpose of this is to simply say that whatever you’re looking to do in real estate, it is possible. I went from making a $30,000 salary with $20,000 in student loans after college to being a multi-millionaire.
If you have big, audacious goals then good for you. It’s possible. Others before you have accomplished it (or something similar) so you can too. It’s possible.
Here are 9 beliefs that I’ve lived by through my 9-year journey:
Nothing in life has meaning until I decide to give it meaning.
Challenges are a gift. Life happens for me, not to me.
Help enough people get what they want and I’ll get everything I want.
Richest people in the world build networks. Everyone else looks for work.
The secret to living is giving.
Work harder on yourself than you do your job.
Best way to get out of a funk is to move and be grateful.
Have perspective by remembering that I will die.
Be proud of who I am when nobody is looking.
Here are 9 habits that have helped me be consistent with my progress:
Immediately think of one thing I’m grateful for when I wake up.
Drink a liter of water with a scoop of wheatgrass in the morning
Do cardio and weights (not just cardio)
Volunteer at least once a month
Think about life in terms of # of experiences remaining, not years remaining
Journal my thoughts, feelings and whatever else comes in my head daily
Always have a vision board prominently displayed everywhere (wall in office, phone, computer background)
B.R. (always be readin’)
Be incredibly responsive to my clients and my investors. And even more responsive to my wife!
What about you? Comment below: Do you have any beliefs or habits that have helped you achieve success? If so, what are they? Would love to learn about them so I can see about incorporating into my life/routine as well.
Resident appreciation parties have massive benefits, with the foremost benefit being the fostering of an inclusive community. Hosting resident appreciation parties offer residents the chance to engage with in the community. They get to know their neighbors, as well as the management staff, forming relationships that are deeper than merely being acquittances. And as a result, residents will likely to stay longer, treat the apartment community with more respect, be more courteous to their neighbors and the staff and pay their rent on-time.
Hosting resident appreciation parties also motivates the residents to leave reviews (which is important for the reputation of the apartment community) and recommend the community to their friends and colleagues.
Overall, hosting resident appreciation parties will result in higher occupancy, less turnover, lower bad debt, better and more leads and higher quality residents, which means a higher net operating income.
They type of resident appreciation party to host depends on the resident-demographic. In other words, the type of event hosted at an A-class luxury apartment will usually differ from the event hosted at a C-class property in a working-class neighborhood. So, use common sense when brainstorming party ideas.
That being said, here is a list of 51 more resident appreciation party ideas:
Valentine’s Day Event Ideas
Valentine’s Day CardMakingEvent: Set up a card making station in the clubhouse.
Speed DatingEvent: For the single residents only!
Mother’s Day Event Ideas
Flowers for Mom: Free flower pots in the clubhouse for residents to give to their moms.
Mother’s Day Card Making: Set up a card making station in the clubhouse.
Gift Wrapping Station: Set up a gift-wrapping station in the clubhouse.
Fourth of July Event Ideas
BBQ: Pool party with hot dogs, burgers, chips and drinks.
Fireworks: Most likely firework viewing, unless you want to do your own fireworks (depending on the local laws).
Halloween Event Ideas
CostumeCompetition: Host a costume party and have everyone vote on the best costume, with the winner receiving a Halloween themed gift.
Pumpkin Carving Party: Host a pumpkin carving event and have everyone vote on the best Jack-o-Lantern with the winner receiving a Halloween themed gift.
Caramel Apple Bar: Set up a caramel apple making station in the clubhouse.
Gingerbread House Competition: Host a gingerbread house making competition and have everyone vote on the best house with the winner receiving a Christmas themed gift.
Pictures with Santa: Have someone dress up as Santa and take pictures with the children.
Cookie Frosting: Set up a cookie frosting station in the clubhouse.
Cookies and Hot Cocoa Party: Host a party where you offer cookies and hot cocoa.
Ugly Sweater Party: Everyone dresses up in their ugliest sweater and offer refreshments in the clubhouse
Movie night: Watch It’s a Wonderful Life, A Christmas Story or your favorite Christmas movie.
White Elephant: Host a gift exchange party in the clubhouse.
Free Food Ideas
Breakfast-On-The-Go: Purchase portable breakfast foods (burritos are the best) and juice and give them to the residents while they drive through the gate on their way to work. You could also pack brown bag breakfasts or lunches for the kids, or hand out bagels or muffins instead.
Sip-N-Sweet Mondays/Fridays: Set up a coffee and donut station in your clubhouse.
Wine Tasting: set up a wine tasting station with cheeses in your clubhouse.
Take and Bake Pizza Parties: Set up a pizza making station in the clubhouse. Residents can come in, make a custom pizza and take it home to cook.
Pops(icles) by the Pool: Hand out popsicles on a hot day at the pool.
Snow Cones in the Shade: Hand out snow cones on a hot day at the pool.
Sundae Sunday: Set up an ice cream sundae making station in the clubhouse.
Taco Tuesday: Set up a taco making station in the clubhouse.
Pancakes and Pajamas: Offer pancakes on a Saturday or Sunday morning to residents who show up to the clubhouse in their pajamas.
Parties for the Children
Back to School party: Host a pool party for the kids on the weekend before school starts.
Froyo Friday: Set up a frozen yogurt station in the clubhouse.
Egg hunt: Host an egg hunt on Easter Sunday.
Back to School Bingo Bash: Winners get free school supplies.
Teddy bear picnic: Picnic for the kids with their favorite stuffed animal.
Game night: Have the kids bring their favorite games to the clubhouse for a game night.
Legos and Eggos: Serve waffles and offer Legos for the kids.
Water Balloon War: Dodgeball, but with water balloons.
Astronomy Night: Invite astronomers from a nearby observatory or university, asking them to bring along a telescope, and invite the kids to gaze at the night sky.
Arts and Crafts: Set up craft making or finger-painting stations in the clubhouse.
Chalk Party: Provide children with sidewalk chalk to write on the parking lot or sidewalks, have a hopscotch competition with prizes.
Superhero Party: kids dress up as their favorite superheroes.
Princess Party: kids dress up as their favorite princesses and have a small fashion show.
Pajama party: Kids come to the clubhouse dressed up in their pajamas with their sleeping bags. Offer popcorn and smores, and have a movie or game night.
Cupcake decorating: Set up a cupcake decorating station in the clubhouse.
Competitions with Prizes
Trivia Night: Host a trivia night in your clubhouse with prizes.
Game Night: Host a game night in your clubhouse with prizes.
Chili cook off: Host a chili-making competition. Offer prizes (and maybe even a trophy) for the annual winner.
Poker night: Host a Texas Hold’Em tournament.
Other Event or Party Ideas
Clean Out Your Closet: Host a community-wide closet cleaning event, collecting gently used clothing from residents. Enter the participants names into a raffle and give away a gift card to a clothing store.
Yard Sale: Host a yard sale in the parking lot by the clubhouse. Residents can sell stuff and buy stuff from other residents.
Pool Party: Host a pool party with a DJ.
Fitness classes: Host fitness classes, like Zumba, aerobics, pilates or yoga, in your fitness center or at a nearby gym. Other fitness ideas are a run club, hiking club, or bike club.
Nacho Average Tailgate: Set up a nacho making station in the clubhouse on gamedays.
Passive investing is one of the best ways to receive the benefits of owning a large apartment building without the time commitment, funding the entire project or obtaining the expertise require to create and execute a business plan.
A passive investor might not see the same returns as an active investor who is finding, qualifying and closing on an apartment building use their own capital and overseeing the business plan through its successful completion. But compared to other passive investment vehicles, like stocks, bonds or REITs, apartment syndications cannot be beat (assuming the passive investor has found the right general partnership and qualified their team).
The returns offered to the limited partner (i.e. the passive investors) vary from general partner to general partner. Before making the commitment to invest, the limited partners (referred to as the LP hereafter) should understand the general partner’s (referred to as the GP hereafter) partnership structure, which includes the type of investment structure and how the returns are distributed.
Typically, a passive investor is either an equity investor or a debt investor in an apartment syndication. In this blog post, I will outline these two investment structures and the types of return structures for each.
Of the two main types of investment structures, being an equity investor is the most profitable, because they participate in the upside of the deal. However, they typically will not receive their initial equity investment until the sale of the apartment.
The equity investor is offered an ongoing return, as well as a portion of the profits at sale. Generally, after the operating expenses and debt service are paid, the a portion of the remaining cash flow is distributed to the LP. For some partnership structures, the GP will take an asset management fee before distributing returns to the LPs. I do not like this approach since it decreases the alignment of interest because the GP receives payment before the LP. So, my company puts our asset management fee in second position to the LP returns (which means we don’t get an asset management fee until we’ve paid the LP).
The most common ongoing return is called a preferred return. The preferred return ranges from 2% to 12% annually based on the experience of the GP and their team, the risk factors of the project and the investment strategy. The less experience and the more risk, the higher the returns. In regards to the preferred returns associated with the three main apartment syndication investment strategies, the GP will offer the highest percentage for distressed apartments and the lowest percentage for turnkey apartments, with value-add apartments falling somewhere in-between.
For example, on a highly distressed apartment deal, the GP may offer a 12% preferred return. However, since the deal will likely have a lower or no return during the stabilization period, the preferred return would accrue and be paid out to the LP in one lumpsum. For turnkey apartments, the preferred return will fall towards the lower end of the range because, since the apartment is already stabilized and minimal value can be added, there is less risk. For value-add apartments, the typical preferred return that is offered to the LP is 8%.
Conversely, the GP may not offer a preferred return but a profit split instead. For example, 70% of the cash flow is distributed to the LP and the remaining 30% to the LP. However, I do not like this structure for the same reason why I don’t like putting the asset management fee ahead the LP returns – a reduction in alignment of interest. Therefore, the GP will usually offer a preferred return and the remaining cash flow is split between the LP and GP.
This remaining profit split can range from 90/10 (i.e. 90% to the LP, 10% to the GP) to 50/50. A common variation on the profit split will include hurdles, using return factors like the internal rate of return (referred to as IRR hereafter) or cash-on-cash return. For example, the LP is offered an 8% preferred return and the remaining profits are split 70/30. But, once the LP receives a 13% IRR, the profit split drops to 50/50.
Another example is the LP is offered a 6% to 8% preferred and the remaining profit is split 50/50. But, once the LP receives an annualized return of 12% to 16% (which would occur at sale), the GP receives the remaining profits. This is the most ideally structure from the GPs point of view.
The equity investor also participates in the upside of the deal, which means they are offered a portion of the sales proceeds.
The most common equity structure for value-add apartment deals is an 8% preferred return with a 50/50 LP/GP profit split. The next most common equity structure is an 8% preferred return with a 70/30 LP/GP profit split until the LP IRR passes a certain threshold (10% to 20% is the standard range), at which point the remaining profits are split 50/50.
Of the two main types of investment structures, being a debt investor is the least profitable. However, the lower profitability comes with a lower risk. Once the GP pays operating expenses and debt service, the remaining cash flow must go to distributing the fixed interest rate to the debt investor. However, unlike the preferred return offered an equity investor, if the GP is unable to pay the fixed interest rate (assuming they are still able to cover the operating expenses and debt service), the debt investor can take control of the property. Hence, less risk.
Unlike the equity investor, the debt investor doesn’t participate in the upside of the deal. Instead, they are offered a fixed interest rate until the GP is able to return 100% of their investment.
Similar to the preferred return, the interest rate that is offered to a debt investor is based on the GP’s experience, the risk factors associated with the project and investment strategy. However, since there is an overall reduced risk involved with being a debt investor, the interest rate is typically lower than what the preferred return would be for a similar project.
Another difference between equity and debt investors is that debt investors will typically receive their capital back before the apartment is sold, which generally occurs after a refinance or securing a supplemental loan. A supplemental loan is a financing option that is secured on top of the existing financing on the property that is typically available 12-months after closing the initial loan.
What’s a Better Passive Investment?
Like any investment, the best partnership structure is based on the passive investor’s goals. For those looking for a low-risk investment vehicle to park their money for a few years while receiving a fixed return that beats inflation, then becoming a debt investor may be more appealing. For those looking for an investment vehicle that offers a higher ongoing return (although not guaranteed) and the potential for a large lumpsum profit at sale, then being an equity investor may be more appealing. And of course, diversifying between the two structures is also an option!
How does an apartment syndicator earn back-to-back “Rental Owner of the Year” awards and obtain a 5-star Facebook review rating for their apartment portfolio?
The answer: foster a community.
You foster a community by implementing marketing strategies that will create an atmosphere in which people want to live. A place where residents are engaged in the community. Where neighbors know each, respect each other, and like each other.
The creation of this type of community is best accomplished by giving back to the residents.
At least this is the approach of Bruce Peterson, an apartment syndicator and property investor with a portfolio of over 800 units. By following this strategy, Bruce has won local and national apartment owner rewards and has achieved a 4.9 out of 5 star rating on Facebook. In our recent conversation on my podcast, he explained his exact marketing approach, which included these two creative and unique strategies.
Strategy #1 – Raffles
First, Bruce consistently hosts raffles and drawings at his apartment communities to boost the value of his rental investment and give back to residents. However, these are more than just putting the names of everyone at the community in a hat and randomly picking a winner. Because where’s the engagement in that?
Instead, Bruce, as the property investor, creates engaging activities in which residents are required to complete a task in order to be entered into the drawing.
For example, he hosts a food drive every November and a toy drive every December. Residents who drop-off an item and like the property Facebook page will be entered into a drawing. The winner will receive a turkey dinner!
Another funny, yet effective, example is a Garden Gnome Competition. Bruce purchases a garden gnome, gives it a name, and hides it on the property grounds. Residents will then search for the gnome. If they find it, take a selfie, post the selfie to their Facebook timeline and tag/mention the property Facebook page, they will be entered into a drawing. The winner receives a gift card (although, I recommend that if you replicate this strategy, you give them the gnome too!).
Strategy #2 – Demographic-Specific Events
Second is for the property investor to host demographic-specific events with the focus on adding value to their rental investment and/or fulfilling a need of their residents.
For example, after purchasing a new dog washing station at one of his properties, Bruce hosted a “Yappy Hour.” Residents could bring in their dogs for a free wash, as well as receive a token that could be used for another free wash in the future and are entered into a drawing to win gifts like doggy beds, treats, toys, and food/water bowls.
And speaking of the children, one of the most creative events Bruce hosts at another one of his properties is a “Free School Supply Giveaway” event. They reach out to the local elementary and middle schools, get the school supply lists for each grade and purchase school supplies for all of the children at the property. Then, they bring all of the school supplies into a vacant unit and purchase pizzas to giveaway. Each family comes in, grabs a piece of pizza and picks up a backpack full of their required school supplies for the year. Bruce said he’s never seen kids with bigger smiles on their faces! And he also said that this event was the main reason why he’s won “Rental Owner of the Year” awards for two years running.
Other events the 5-star property investor, the Bruce hosts at his apartment communities are:
Cinco de Mayo: a party with a piñata, a band and an ice cream truck
Annual Halloween costume party
Breakfast at the Gate: a drive-through at the gate where residents are given free breakfast tacos and juice on their way to work
Sip-N-Sweet Friday: offer free donut and coffee in the clubhouse Friday mornings
Fiesta Party: a party with a DJ, face painter, food truck and – of course – a raffle.
For both of these marketing strategies, Bruce and his team are constantly taking pictures and videos and posting them to the respective property Facebook pages. I would recommend visiting Bruce’s website and look at the social media pages for his properties to see his company’s social media strategy.
By participating in these types of activities, events and raffles, the residents are engaged and having fun, which motivates them to not only like and leave reviews on the social media page but talk about the apartment community with their friends and colleagues.
From a financial perspective, this strategy will help you, the property investor, retain current residents and attract more leads, which directly impacts your bottom-line.
However, in order to achieve that 5-star status, you may need to rebrand the property after purchase. As a value-add apartment syndicator, we will often acquire deals that have a poor reputation (and therefore a low online rating). To move away from the previous reputation and start from scratch, we rebrand the property. That is, we change the name of the property, as well as the logo and signage.
What about you? Comment below: What types of events do you host in order to foster a community at your properties?
A glossary of terms and definitions, listed in alphabetical order, used in apartment syndications for aspiring apartment syndicators and passive investors to study in order learn the industry terminology.
Absorption Rate: The rate at which available rentable units are leased in a specific real estate market during a given time period.
Accredited Investor: A person that can invest in apartment syndications by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000, or $300,000 for joint income, for the last two years with the expectation of earning the same or higher, or a net worth exceeding $1 million either individually or jointly with a spouse.
Acquisition Fee: The upfront fee paid by the new buying partnership to the general partner for finding, evaluating, financing and closing the investment.
Active Investing: The finding, qualifying and closing on an apartment building using one’s own capital and overseeing the business plan through its successful execution.
Amortization: The paying off of a mortgage loan over time by making fixed payments of principal and interest.
Apartment Syndication: A temporary professional financial services alliance formed for the purpose of handling a large apartment transaction that would be hard or impossible for the entities involved to handle individually, which allows companies to pool their resources and share risks and returns. In regards to apartments, a syndication is typically a partnership between general partners (i.e. the syndicator) and limited partners (i.e. the passive investors) to acquire, manage and sell an apartment community while sharing in the profits.
Appraisal: A report created by a certified appraiser that specifies the market value of a property. The value is based on cost, sales comparable and income approach.
Appreciation: An increase in the value of an asset over time. The two main types of appreciation that are relevant to apartment syndications are natural appreciation and forced appreciation. Natural appreciation occurs when the market cap rate naturally decreases over time, which isn’t always a given. Forced appreciation occurs when the net operating income is increased by either increasing the revenue or decreasing the expenses. Force appreciation typically occurs by adding value to the apartment through renovations and/or operational improvements.
Asset Management Fee: An ongoing annual fee from the property operations paid to the general partner for property oversight.
Bad Debt: The amount of uncollected money owed by a tenant after move-out.
Breakeven Occupancy: The occupancy rate required to cover all of the expenses of a property.
Bridge Loan: A mortgage loan used until a borrower secures permanent financing. Bridge loans are short-term (six months to three years with the option to purchase an additional six months to two years), generally having higher interest rates and are almost exclusively interest only. Also referred to as interim financing, gap financing or swing loans. The loan is ideal for repositioning an apartment community that doesn’t qualify for permanent financing.
Capital Expenditures (CapEx): The funds used by a company to acquire, upgrade and maintain a property. Also referred to as CapEx. An expense is considered CapEx when it improves the useful life of a property and is capitalized – spreading the cost of the expenditure over the useful life of the asset. CapEx included both interior and exterior renovations.
Capitalization Rate (Cap Rate): The rate of return based on the income that the property is expected to generate. Also referred to as the cap rate. The cap rate is calculated by dividing the net operating income by the current market value of a property.
Cash Flow: The revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue.
Cash-on-Cash Return: The rate of return based on the cash flow and the equity investment. Also referred to as CoC return. Coc return is calculated by dividing the cash flow by the initial equity investment.
Closing Costs: The expenses, over and above the purchase price of the property, that buyers and sellers normally incur to complete a real estate transaction. These costs include origination fees, application fees, recording fees, attorney fees, underwriting fees, due diligence fees and credit search fees.
Concessions: The credits given to offset rent, application fees, move-in fees and any other cost incurred by the tenant, which are generally given at move-in to entice tenants into signing a lease.
Cost Approach: A method of calculating a property’s value based on the cost to replace (or rebuild) the property from scratch. Also referred to as the replacement approach.
Debt Service: The annual mortgage amount paid to the lender, which includes principal and interest. Principal is the original sum lent to a borrower and the interest rate is the charge for the privilege of borrowing the principal amount.
Debt Service Coverage Ratio (DSCR): The ratio that is a measure of the cash flow available to pay the debt obligation. Also referred to as the DSCR. The DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the DSCR is 1.25 or higher. A property with a DSCR too close to 1.0 is vulnerable, and a minor decline in revenue or minor increase in expenses would result in the inability to service the debt.
Depreciation: A decrease or loss in value due to wear, age or other cause.
Distressed Property: A non-stabilized apartment community, which means the economic occupancy rate is below 85% and likely much lower due to poor operations, tenant problems, outdated interiors, exteriors or amenities, mismanagement and/or deferred maintenance.
Distributions: The limited partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.
Due Diligence: The process of confirming that a property is as represented by the seller and is not subject to environmental or other problems. For apartment syndications, the general partner will perform due diligence to confirm their underwriting assumptions and business plan.
Earnest Money: A payment by the buyers that is a portion of the purchase price to indicate to the seller their intention and ability to carry out sales contract.
Economic Occupancy Rate: The rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy is calculated by dividing the actual revenue collected by the gross potential income.
Effective Gross Income (EGI): The true positive cash flow. Also referred to as EGI. EGI is calculated by subtracting the revenue lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt from the gross potential income.
Employee Unit: An apartment unit rented to an employee at a discount or for free.
Equity Investment: The upfront costs for purchasing a property. For apartment syndications, these costs include the down payment for the mortgage loan, closing costs, financing fees, operating account funding and the fees paid to the general partnership for putting the deal together. Also referred to as the initial cash outlay or the down payment.
Equity Multiple (EM): The rate of return based on the total net profit and the equity investment. Also referred to as EM The EM is calculated by dividing the sum of the total net profit (cash flow plus sales proceeds) and the equity investment by the equity investment.
Exit Strategy: The general partner’s plan of action for selling the apartment community at the conclusion of the business plan.
Financing Fees: The one-time, upfront fees charged by the lender for providing the debt service. Also referred to as finance charges.
General Partner (GP): An owner of a partnership who has unlimited liability. A general partner is usually a managing partner and is active in the day-to-day operations of the business. In apartment syndications, the general partner is also referred to as the sponsor or syndicator and is responsible for managing the entire apartment project.
Gross Potential Income: The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates plus all other income.
Gross Potential Rent (GPR): The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates. Also referred to as GPR.
Gross Rent Multiplier (GRM): The number of years it would take for a property to pay for itself based on the gross potential rent. Also referred to as the GRM. The GRM is calculated by dividing the purchase price by the annual gross potential rent.
Guaranty Fee: A fee paid to a loan guarantor at closing for signing for and guaranteeing the loan.
Holding Period: The amount of time the general partner plans on owning the apartment from purchase to sale.
Income Approach: A method of calculating an apartment’s value based on the capitalization rate and the net operating income (value = net operating income / capitalization rate).
Interest Rate: The amount charged by a lender to a borrower for the use of their funds.
Interest-Only Payment: The monthly payment for a mortgage loan where the lender only requires the borrower to only pay the interest on the principal.
Internal Rate of Return (IRR): The rate needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal paydown on the mortgage loan) to equal the equity investment. Also referred to as IRR.
Lease: A formal legal contract between a landlord and a tenant for occupying an apartment unit for a specified time and at a specified price with specified terms.
Letter of Intent (LOI): A non-binding agreement created by a buyer with their proposed purchase terms. Also referred to as the LOI.
Limited Partner (LP): A partner whose liability is limited to the extent of their share of ownership. Also referred to as the LP. In apartment syndications, the LP is the passive investor who funds a portion of the equity investment.
London Interbank Offered Rate (LIBOR): A benchmark rate that some of the world’s leading banks charge each other for short-term loans. Also referred to as LIBOR. The LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.
Loan-to-Cost Ratio (LTC): The ratio of the value of the total project costs (loan amount + capital expenditure costs) divided by the apartment’s appraised value.
Loan-to-Value Ratio (LTV): The ratio of the value of the loan amount divided by the apartment’s appraised value.
Loss-to-Lease (LtL): The revenue lost based on the market rent and the actual rent. Also referred to as LtL. The LtL is calculated by dividing the gross potential rent minus the actual rent collected by the gross potential rent.
Market Rent: The rent amount a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay for tenancy, which is based on the rent charged at similar apartment communities in the area. The market rent is typically calculated by conducting a rent comparable analysis.
Metropolitan Statistical Area (MSA): A geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core. Also referred to as the MSA. MSAs are determined by the United States Office of Management and Budget (OMB).
Model Unit: A representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.
Mortgage: A legal contract by which an apartment is pledged as security for repayment of a loan until the debt is repaid in full.
Net Operating Income (NOI): All the revenue from the property minus the operating expenses. Also referred to as the NOI.
Operating Account Funding: A reserves fund, over and above the purchase price of an apartment, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments or higher than expected capital expenditures. The operating account funding is typically created by raising extra capital from the limited partners.
Operating Agreement: A document that outlines the responsibilities and ownership percentages for the general and limited partners in an apartment syndication.
Operating Expenses: The costs of running and maintaining the property and its grounds. For apartment syndications, the operating expense are usually broken into the following categories: payroll, maintenance and repairs, contract services, make ready, advertising/marketing, administrative, utilities, management fees, taxes, insurance and reserves.
Passive Investing: Placing one’s capital into an apartment syndication that is managed in its entirety by a general partner.
Permanent Agency Loan: A long-term mortgage loan secured from Fannie Mae or Freddie Mac. Typical loan terms lengths are 3, 5, 7, 10, 12 or more years amortized over up to 30 years.
Physical Occupancy Rate: The rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units at the property.
Preferred Return: The threshold return that limited partners are offered prior to the general partners receiving payment.
Prepayment Penalty: A clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.
Price Per Unit: The cost per unit of purchasing a property. The price per unit is calculated by dividing the purchase price of the property by the total number of units.
Private Placement Memorandum (PPM): A document that outlines the terms of the investment and the primary risk factors involved with making the investment. Also referred to as the PPM. The PPM typically has four main sections: the introductions (a brief summary of the offering), basic disclosures (general partner information, asset description and risk factors), the legal agreement and the subscription agreement.
Pro-forma: The projected budget with itemized line items for the revenue and expenses for the next 12 months and five years.
Profit and Loss Statement (T-12): A document or spreadsheet containing detailed information about the revenue and expenses of a property over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T-12.
Property and Neighborhood Classes: A ranking system of A, B, C or D assigned to a property and a neighborhood based on a variety of factors. For property classes, these factors include date of construction, condition of the property and amenities offered. For neighborhood classes, these factors include demographics, median income and median home values, crime rates and school district rankings.
Property Management Fee: An ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property.
Ration Utility Billing System (RUBS): A method of calculating a tenant’s utility usage based on occupancy, unit square footage or a combination of both. Once calculated, the amount is billed back to the tenant.
Recourse: The right of the lender to go after personal assets above and beyond the collateral if the borrower defaults on the loan.
Refinance: The replacing of an existing debt obligation with another debt obligation with different terms.
Refinancing Fee: A fee paid to the general partner for the work required to refinance an apartment.
Rent Comparable Analysis (Rent Comps): The process of analyzing the rental rates of similar properties in the area to determine the market rents of the units at the subject property.
Rent Premium: The increase in rent demanded after performing renovations to the interior and/or exterior of an apartment community.
Rent Roll: A document or spreadsheet containing detailed information on each of the units at the apartment community, including the unit number, unit type, square footage, tenant name, market rent, actual rent, deposit amount, move-in date, lease-start and lease-end date and the tenant balance.
Sales Comparison Approach: A method of calculating an apartment’s value based on similar apartments recently sold.
Sales Proceeds: the profit collected at the sale of the apartment community.
Sophisticated Investor: A person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
Subject Property: The apartment the general partner intends on purchasing.
Submarket: A geographic subdivision of a market.
Subscription Agreement: A document that is a promise by the LLC that owns the property to sell a specific number of shares to a limited partner at a specified price, and a promise by the limited partner to pay that price.
Underwriting: The process of financially evaluating an apartment community to determine the projected returns and an offer price.
Vacancy Loss: The amount of revenue lost due to unoccupied units.
Vacancy Rate: The rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.
Value-Add Property: A stabilized apartment community with an economic occupancy above 85% and has an opportunity to be improved by adding value, which means making improvements to the operations and the physical property through exterior and interior renovations in order to increase the income and/or decrease the expenses.
Yield Maintenance: A penalty paid by the borrower on a loan is the principal is paid off early.
Regardless of their investment criteria, an experienced GP will perform underwriting on tens, if not hundreds, of deals before finding one that qualifies for an offer. And once they do, there is a four-step process for submitting an offer.
Understanding this process is obviously important for those striving to syndicate their own apartment deals in the future. But it is important for those passively investing in apartment syndications to understand as well. If they are entrusting the GP with their hard-earned capital, they should know how the offer price and terms are calculated.
1. Pre-Offer Conversation
Before completing the underwriting process and submitting an offer, the GP will likely need to reach out to the listing real estate broker and their property management company.
If questions arise during the course of the underwriting process, the GP will need to get the answers from the listing broker before submitting an offer. For example, there might be a discrepancy between the rent roll and the offering memorandum in regards to the number of units renovated by the current owner. Or the properties used by the listing broker for the rental comparable analysis are too dissimilar to the subject property. Or the GP needs more information on the exterior capital expenditures completed by the current owner over the past few years. The GP should leave no stone unturned before determining an offer price.
Similarly, the GP should review the underwriting with the property management company who will manage the deal after acquisition in order to confirm the assumptions there were made.
Additionally, the GP should visit the property in-person. Ideally, the GP visits the property with their property management company and, if they plan on performing renovations after acquisition, a general contractor. Together, they should look at the condition of the big ticket exterior items, like the roofs, siding, parking lots, clubhouse, amenities (i.e. pool, fitness center, playground, etc.), landscaping and signage. They should interview the onsite property management company to understand the historical operations of the property. They should tour a handful of units, preferably the “best” and “worst” unit. Then, they should leave the property and drive a 2-mile radius around the property, making note of nearby retail centers, restaurants, employment hubs and other apartment communities. Lastly, they should visit these other apartment communities to gain an understanding of the local competition.
Based on the feedback from the real estate broker and property management company, and the in-person visit, the GP should update or revise any underwriting assumptions in preparation for submitting an offer. At this point, the GP will have better assumptions than those that were made by simply reviewing the rent roll and profit and loss statement. But, if they are awarded the deal, the GP will conduct more detailed due diligence in order to finalize their assumptions.
2. Determine an Offer Price
During the underwriting and pre-conversation phase, the GP will usually have an idea of the price at which the owner is wanting to sell. Sometimes, the sales price is explicitly stated but this is usually only the case for smaller apartment deals. For deals with 50 to 100 or more units, the listed purchase price will likely say “to be determined by the market.” If that is the case, the GP can usually get a ballpark number from the listing real estate broker or the owner. If not, then they may use the current market cap rate and the current net operating income to get an estimated sales price.
However, the sale price the owner desires is fairly irrelevant when determining an offer price. Experienced GPs will set an offer price that results in projected returns that meet their investment criteria. For example, my company will set an offer price that results in, at minimum, a 8% cash-on-cash return and a 16% 5-year internal rate of return to the limited partners.
If the GP’s offer price differs greatly from the listed, stated or estimated sales price, it may be due to an error on the GP’s side or due to the seller making too aggressive of assumptions. If it is the latter, the GP can either walk away from the deal or submit their offer along with an explanation for why the offer is much lower than what the seller desires.
In addition to determining an offer price, the GP should also have a conversation with their lender or mortgage broker to obtain estimated loan terms to include in their offer.
3. Submit an LOI
At this point, if the results of the underwriting meet their investment criteria, the GP will submit an offer in the form of a letter of intent (referred to as LOI hereafter). The LOI should be prepared by the GP’s real estate attorney.
The LOI is not legally binding. Its purpose is to show the GP’s intent to purchase the apartment at the stated price and terms, which includes the purchase price, down payment amount, earnest deposit and the due diligence timeline.
For the earnest deposit, 1% of the purchase price is standard and goes hard (i.e. is non-refundable) once the inspection period is completed (30 to 45 days). However, if the GP is in a competitive offer situation, the earnest deposit terms can deviate from the norm, whether it is a higher deposit amount and/or a shorter time frame before it goes hard (with the most competitive offers having the earnest deposit go hard day 1). For example, on a recent deal, my company had a $200,000 earnest deposit go hard day 1.
The GP can have a conversation with their real estate broker about what they are seeing in the current market for earnest deposit and its terms. Or, the GP can base the earnest deposit amount and terms on their previous acquisitions in the same submarket.
After submitting the LOI, the GP may be invited to a best and final call with the sellers. This is when the sellers ask for the interested investors’ best and final offer. Then, the investors with the most competitive offers will be invited to a call with the sellers, which is basically an interview so that the seller can determine if the investor is capable of closing on the deal.
4. Submit a Formal Offer
If the sellers accept and sign the GP’s letter of intent or they are awarded the deal after the best and final round, the GP will submit a formal offer in the form of a purchase sales agreement. Similar to the LOI, this sales agreement should be prepared by the GP’s real estate attorney. The purchase sales agreement is a detailed contract that outlines all of the terms of the sale.
Funding the upfront costs
In addition to the earnest deposit, other fees paid prior to closing are the upfront bank fees. Since the earnest deposit is due soon after closing, the GP needs to know where these funds will come from prior to putting the property under contract. The GP may front these costs and reimburse themselves at the close. Another option is for the GP ask an investor to fund the earnest deposit and upfront bank fees and create a promissory note so that the GP is responsible for paying the investor back if they lose the money (which happens if the contract is cancelled after the earnest deposit goes hard). Or, the GP could partner with someone on their team that has those funds. Ideally, the party who funds the earnest deposit will fund the other upfront banks fees as well.
In terms of how much upfront cash is needed, a good estimate is 2.5% of the purchase price (1% for the earnest deposit and 1.5% for the bank fees). For example, a $10 million purchase price would require an estimated $3.5 million in equity (25% down payment, GP fees, closing costs and cash reserves) at close. Of that $3.5 million, the GP would need approximately $250,000 in cash to cover the earnest deposit and upfront bank fees to get the deal to the closing table.
DISCLAIMER: THIS IS FOR YOUR INFORMATION ONLY. SINCE I AM NOT A TAX ADVISORY FIRM, I REFER ALL GENERAL TAX-RELATED REAL ESTATE QUESTIONS FROM PASSIVE INVESTORS BACK TO THEIR ACCOUNTANTS. HOWEVER, I WILL SAY THAT INVESTORS OFTEN SEEK REAL ESTATE OPPORTUNITIES TO INVEST IN DUE TO THE TAX ADVANTAGES THAT MAY COME FROM DEBT WRITE OFF AND LOSS DUE TO DEPRECIATION. BUT I DON’T INCLUDE ANY ASSUMPTIONS ABOUT THESE TAX ADVANTAGES IN OUR PROJECTIONS.
In addition to the capital preservation and cash flow benefits, one of the main reasons that passive investors seek to invest in real estate opportunities, and apartment syndications in particular, is because of the tax benefits of rental property.
When a passive investor invests in a value-add apartment syndication, they will generally receive a profit from annual cash flow and the profit at sale. Being a profit, this money is taxable. However, for apartment syndications, there are five pieces of tax information that the syndicator and the passive investor need to understand in order to determine the tax advantages of investing. These are 1) the depreciation benefits, 2) accelerated depreciation via cost segregation, 3) depreciation recapture, 4) bonus depreciation, and 5) capital gains tax at sale.
Investment property depreciation is the amount that can be deducted from income each year as the depreciable items at the apartment community age. The IRS classifies each depreciable item according to its useful life, which is the number of years of useful life of the item. The business can deduct the full cost of the item over that period.
The most common form of depreciation is straight-line depreciation, which allows the deduction of equal amounts each year. The annual deduction is the cost of the item divided by its useful life. The IRS considers the useful life of real estate to be 27.5 years. So, the annual depreciation on an apartment building worth $1,000,000 (excluding the land value) is $1,000,000 / 27.5 years = $36,363,64 per year.
As one of the tax benefits of apartment syndications, the depreciation amount is such that a passive investor won’t pay taxes on their monthly, quarterly, or annual distributions during the hold period. They will, however, have to pay taxes on the sales proceeds.
Cost segregations is a strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring income taxes. A cost segregation study performed by a cost segregation engineering firm dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27.5 years, the useful life of a residential building. The primary goal of a cost segregation study is to identify all property-related costs that can be depreciated over 5, 7, and 15 years
For example, my company performed a cost segregation on our portfolio for 2017. On one of the properties, we showed a loss from investment property depreciation of greater than 412% than we would have seen with the straight-line depreciation using the 27.5-year useful life figure.
To perform a cost segregation, the syndicator will need to hire a cost segregation specialist. This can cost anywhere between $10,000 and $100,000, depending on the size of the apartments.
Depreciation recapture is the gain received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is “recaptured” by reporting it as income.
For example, consider an apartment that was purchased for $1,000,000 and has an annual depreciation of $35,000. After 11 years, the owner decides to sell the property for $1,300,000. The adjusted cost basis then is $1,000,000 – ($35,000 x 11) = $615,000. The realized gain on the sale will be $1,300,000 – $615,000 = $685,000. Capital gain on the property can be calculated as $685,000 – ($35,000 x 11) = $300,000, and the depreciation recapture gain is $35,000 x 11 = $385,000.
Let’s assume a 15% capital gains tax and that the owner falls in the 28% income tax bracket. The total amount of tax that the taxpayer will owe on the sale of this rental property is (0.15 x $300,000) + (0.28 x $385,000) = $45,000 + $107,800 = $152,800. The depreciation recapture amount is $107,800 and the capital gains amount is $45,000.
One of the major changes with the Tax Cuts and Jobs Act of 2017 was the bonus depreciation provision, where business can take 100% bonus depreciation on a qualified property purchased after September 27th, 2017. This is definitely one of the tax benefits of rental property you should learn more about, so click here for more information on the qualifications and benefits of the change in bonus appreciation.
When the asset is sold and the partnership is terminated, initial equity and profits are distributed to the passive investors. The IRS classifies the profit portion as long-term capital gain.
Under the new 2018 tax law, the capital gains tax bracket breakdown is as follows:
Taxable income (individual or joint)
$0 to $77,220: 0% capital gains tax
$77,221 to $479,000: 15% capital gains tax
More than $479,000: 20% capital gains tax
Annual Tax Statements
At the beginning of the following year, the syndicator will have their CPA create Schedule K-1 tax reports for each passive investor. The K-1 is a tax document that includes all of the pertinent tax information that the passive investor will use to fill out their tax forms.
If you’re interested in partnering with me and potentially gaining from these tax benefits of rental property, please fill out the form here.
There are three main steps to take an apartment deal from contract to close. First, the apartment syndicator performs detailed due diligence to confirm or update the underwriting assumptions. Next, the apartment syndicator secures a loan to finance the deal. Lastly, and the focus of this blog post, the apartment syndicator secures financial commitments from passive investors in order to fund the deal.
For apartment syndications, and the value-add investment strategy in particular, the syndicator will get a loan to cover the majority of the project costs. Generally, the costs that are not covered by the loan are the down payment for the loan (which is 20% to 30% of the purchase price or the purchase price plus renovations, depending on the loan), general partnership fees charged by the syndicator, financing fees (which are approximately 1.75% of the purchase price), closing costs (which are approximately 1% of the purchase price) and an operating account fund (which is approximately 1% to 3% of the purchase price).
In total, a syndicator should expect to require 30% to 40% of the total project costs in order to close on the deal. These remaining costs come from a combination of the general partners (i.e. the syndication team) and the limited partners (i.e. passive investors), with the majority generally coming from the limited partners.
The purpose of this blog post is to outline the 5-step process for securing financial commitments from passive investors after an apartment deal is under contract in order to cover this 30% to 40% of the project costs and close on the deal.
1 – Investment Package
From the syndicator’s perspective, one of the first steps towards securing commitments from passive investors is creating an investment package. Before closing on the deal, the syndicator underwrote the property, conducted a rental comparable analysis, visited the property in-person and negotiated a purchase price. During this time, they become extremely familiar with the property and the surrounding area. The purpose of the investment package is to take all of this knowledge gained by the syndicator from initially qualifying the deal and consolidating it into a digestible form so that the passive investors can review the deal and make an educated investment decision.
The form of and the information included in an investment package will vary from syndicator to syndicator, depending on their experience and the business plan. At the very least, the investment package will include the main highlights of the deal that are relevant to the passive investor. These highlights include the purchase price, the projected returns for the project and to the passive investors, an explanation of the business plan including the exit strategy, and the partnership structure. However, ideally the investment package includes much more about the underlying assumptions behind these investment highlights.
For example, my company creates an investment summary package which includes the following sections:
Executive Summary: a summary of the information that is relevant to the passive investor, which is expanded upon in later sections. This includes things like purchase price, return projections and the business plan
Investment Highlights: an explanation on why this apartment deal is a solid investment. This includes things like our value-add business plan, the debt terms, the exit strategy and anything unique to the specific deal or market
Property Overview: an overview of the property details. This include things like the community amenities, unit features, a property description, the unit mix and floorplans, and a site map
Financial Analysis: shows the underlying analysis and assumptions of the return projections. This includes things like the offering summary, debt summary, projected returns to the investor and the detailed proforma
Market Overview: an overview of the submarket and market in which the apartment deal is located. This includes things like job growth, demographic data, nearby transportation of developments and the rental and sales comparables that were used to calculate the projected rents
Mostly everything that a passive investor needs to know in order to make an educated investment decision should be included in the investment package.
2 – Passive Investors Notified about New Deal
Once the investment package is created, which could take anywhere from a few days to a week, the next step is for the syndicator to notify their investor database about their deal.
I highly recommend that a syndicator gets verbal commitments from passive investors and creates an investor database prior to looking for deal (here are over 20 blog posts on how to find passive investors). In fact, understanding how much money they can raise will determine the size of deal a syndicator should pursue. For example, understanding the they will require approximately 30% to 40% of the project costs to close, a syndicator with $1 million in verbal commitments can look for apartment deals in the $2.5 to 3.3 million range.
For my company, once we put a deal under contract and creates the investment package, we notify our passive investors about the new opportunity via email. In this email, we include the top two to three highlights of the deal, include a link to the investment package and invite them to a conference call where we will go over the deal in more detail. We set up the conference call using www.FreeConferenceCall.com and include the date and call-in information in this email.
Provide an overview of the deal, the market and the team
Go into more detail on the deal, the market and the team
Questions and answers session
Conclude the call and send the recording to the investors
This is my company’s approach, but it will vary from syndicator to syndicator. Some syndicators will structure their presentations differently. Some syndicators may host a video webinar. Others might just send the investment package and/or a recording to their investors.
4 – Secure Commitments
After the new investment offering presentation, however the syndicator decided to approach it, the next step is to secure financial commitments from the passive investors.
If you are a passive investor, if the deal aligns with your investment goals, you can verbally commit to investing in the deal. How you make your commitment will vary for syndicator to syndicator. For my company, we send our investors a recording of the conference call and ask them to send us an email with their commitments (and whether they are investing as an individual or LLC) and we hold their spot until they review and sign the required documentation, which I will outline in the next section.
If you are an apartment syndicator, this process will vary depending on your experience level. When you are first starting out, you will need to be more proactive when securing commitments. A good strategy is to send emails to your investor database every week or two, inviting them to invest in the deal and providing them a new piece of positive information. You don’t want to send them an email that only asks them to invest. You want to provide a new piece of positive information like a due diligence report came back clean, a new development that was recently announced down the street, the rental comparable report came back and the rents are higher than what you projected, etc. Then, as you gain more experience and credibility from passive investors, they will come to you. Your goal should be to have 100% of the funding 30 days before closing. And once the deal is fully funded, don’t turn away interested investors. Instead, tell them that the deal is fully funded but that you will put them on a waiting list.
5 – Complete Required Documentation
The last step is for the passive investors to make their investments official by reviewing and signing the required documentation. There are five main documents that the syndicator needs to prepare (with the help of their real estate and securities attorney) and the passive investors need to sign in order to make the investments official. We will send our investors these documents to sign via Adobe Sign.
Private Placement Memorandum (PPM)
The PPM is a legal document that highlights all the legal disclaimers for how the passive investor could lose their money in the deal.
Generally, a PPM will include two major components. One is the introduction, which includes a summary of the offering, description of the asset being purchased, minimum and maximum investment amounts, key risks involved in the offering and a disclosure on how the general partners are paid. The other section covers basic disclosures, which includes general partner information, offering description and a list of all the risks associated with the offering.
The PPM should be prepared by a securities attorney for each apartment deal.
The PPM will also include funding instructions. Once the investor has signed the PPM and sent their funds, we will send them an email confirmation within 24 to 48 hours.
For each apartment deal, my company forms a new limited liability company (LLC). My company is a general partner (GP). Our investors will purchase shares in that LLC and become a limited partner (LP). However, every syndicator should speak with a real estate attorney to determine which approach is best for them.
The operating agreement outlines the responsibilities and ownership percentages for the GP and LP.
The operating agreement should be prepared by a real estate attorney for each apartment deal.
Simply put, the subscription agreement is a promise by the LLC to sell a specified number of shares to passive investors at a specified price, and a promise by the passive investors to pay that price. For example, a passive investor that is investing $50,000 would purchase 50,000 shares of the LLC at $1 per share.
Like the operating agreement, the subscription agreement should be prepared by a real estate attorney for each deal.
Accredited Investor Qualifier Form
The accredited investor form required is based on whether the offering is 506(b) vs. 506(c). Most likely, the general partner is either selling private securities to the limited partners under Rule 506(b) or 506(c). One key difference is that 506(c) allows for general solicitation or advertising of the deal to the public, while 506(b) offerings do not. But the other difference is the type of person who can invest in each offering type. For the 506(b), there can be up to 35 unaccredited but sophisticated investors, while 506(c) is strictly for accredited investors only. That being said, a syndicator should have a conversation with a securities attorney to see which offering is the best fit for them.
If the general partners are doing a 506(c) offering, they must verify the accredited investor status of each passive investor, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified account. The accredited investor qualifications are a net worth exceeding $1,000,000 excluding a personal residence or an individual annual income exceeding $200,000 in the last two years or a joint income with a spouse exceeding $300,000.
If the general partners are doing a 506(b), they are not required to verify the accredited investors status – the passive investor can self-verify that they are accredited or sophisticated. In addition, for the 506(b) offering, to prove that the general partners didn’t solicit the offering, they must be able to demonstrate that they had a relationship with the passive investor before their knowledge of the investment opportunity, which is determined by the duration and extent of the relationship.
This form should also be prepared by a securities attorney, but only on one occasion (unless the accredited investor qualifications change).
Lastly is the ACH application. This document is optional but recommended. It will allow the passive investor to receive their distributions via direct deposit into a bank of their choice.
Once a passive investor has committed to investing in a deal, the general partners should them these five documents to make the partnership official.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.
Once a syndicator puts an apartment deal under contract, concurrent with the due diligence process is the process of securing investment property loans. Generally, debt is a part of the apartment syndicator’s business plan because of the benefits that arise from leverage. Rather than purchasing the apartment community with all cash, they obtain a loan for upwards of 80% of the value while benefiting from 100% ownership.
However, not all debt and apartment financing are the same. The type of debt and financing an apartment syndicator puts on the asset is highly dependent on the business plan. Also, different types of financing bring different levels of risks. Therefore, as a passive investor or an apartment syndicator, it is important to understand 1) the different types of debt and 2) the different types of financing. In doing so, you will be able to identify which combination of debt and financing is in your best interests based on the business plan.
Two Types of Debt: Recourse and Nonrecourse
Before diving into the two main types of loans, it is important to first distinguish the two types of debt – recourse and nonrecourse. According to the IRS, with recourse debt, the borrower is personally liable while all other debt is considered nonrecourse. In other words, recourse debt allows the lender to collect what is owed for the debt even after they’ve taken the collateral (which in this case is the apartment building). Lenders have the right to garnish wages or levy accounts in order to collect what is owed.
On the other hand, with nonrecourse debt, the lender cannot pursue anything other than the collateral. But, there are exceptions. In the cases of gross negligence or fraud, the lender of investment property loans is allowed to collect what is owed above and beyond the collateral.
Apartment syndicators almost universally prefer nonrecourse debt, while lenders almost universally prefer recourse debt. But, while nonrecourse is advantageous to the borrower for the reasons stated above, it generally comes with a higher interest rate and is only given to individuals or businesses with a strong financial history and credit.
Two Types of Financing: Permanent and Bridge Loan
Generally, an apartment syndicator will secure one of two types of loans when seeking apartment financing: a permanent agency loan or a bridge loan.
The other most common type of investment property loan is the bridge loan. A bridge loan is a short-term loan that is used until the borrower secures long-term financing or sells the property. This loan is ideal for repositioning an apartment, like with the value-add or distressed apartment strategy.
Typically, bridge loans have a term of 6 months to 3 years, with the option to purchase an extension of a year or two. They are almost exclusively interest-only. For example, with a 2-year bridge loan, the investor would make interest-only payments for two years, at which point the investor must pay off the loan, refinancing, purchase an extension, or sell the property.
The bridge loan is an LTC (loan-to-cost) loan at 75% to 80%, which means the lender will provide funding for 75% to 80% of the total project cost (purchase price + renovation costs) and the syndicator provides the remaining 20% to 25%.
Generally, bridge loans are nonrecourse to the borrower and have a faster closing process. Also, since they are interest-only, the monthly debt service is lower. However, the disadvantages are that they are riskier than permanent loans because they are shorter-term in nature. Before the end of the term, which will likely occur before the end of the business plan, the syndicator must refinance or sell. And if the market is such that permanent financing isn’t available or if the business plan didn’t go according to plan, the syndicator is in trouble.
Permanent Agency Loans:
A permanent agency loan is secured from Fannie Mae or Freddie Mac and is longer-term compared to bridge loans. Typically loan term lengths are 5, 7, or 10 years amortized over 20 to 30 years. For example, with a 5-year investment property loan amortized over 25 years, the syndicator would make payments for 5 years at an amount based on a loan being paid off over 25 years. At the end of the loan term, the syndicator will either have to pay off the remaining principal, refinance into a new loan, or sell the asset.
The permanent agency loan is an LTV (loan-to-value) loan at 75% to 80%, which means the lender will provide funding for 75% to 80% of the value of the apartment and the syndicator provides the remaining 20% to 25%.
Generally, permanent agency loans are nonrecourse. However, value-add or distressed investors likely won’t be able to have the renovation costs included in the loan. Additionally, depending on the physical condition and operations, the asset may not qualify for permanent financing.
Compared to bridge loans, the interest rate is lower, and you may be able to get a few years of interest-only payments. Also, since these loans are longer-term in nature, they are less risky. The permanent loan is a set-it-and-forget-it-loan where you won’t have to worry about a balloon payment or refinancing before the end of your business plan.
When securing apartment financing, the most important thing is that the length of the loan exceeds the projected hold period, which is law number two of the Three Immutable Laws of Real Estate Investing. In doing so, as long as the syndicator follows the other two laws (buy for cash flow and have adequate cash reserves), the business plan is maintainable during a downturn. This law will usually be covered with the permanent loan. However, if the syndicator secures a bridge loan that will come due in the middle of the business plan, they better have a plan in place well ahead of time, whether that’s an early refinance or purchasing an extension.
Overall, the type of debt and financing a syndicator secures is based on their business plan. Bridge loans can be great for value-add investors, as long as they buy right, plan ahead and have an experienced team in place. And permanent financing is great because it is less risky and is a set-it-and-forget-it type of loan.
But regardless of the business plan and type of investment property loans, the syndicator should always have a conversation with a lending professional before securing financing for a deal.
One of the 11 responsibilities an apartment syndicator has as the asset manager of an apartment community is maintaining and maximizing the economic occupancy. For value-add investors, this involves renovating the units and upgrading the community amenities in order to increase the rents, thus increasing the cash flow and returns.
However, no matter how beautiful the newly upgraded apartment community is, the syndicator still needs to implement a marketing strategy in order to fill the units with high-quality residents. Ideally, the syndicator hires a property management company that already applies the best marketing practices. But it is still their responsibility to oversee the management company and make sure the marketing strategy is being implemented properly.
Therefore, whether you are an apartment syndicator or a passive investor in syndications, it is helpful to understand the main ways to effectively market rental listings to attract the desired resident – one who pays rent on time and is courteous to their neighbors – and increase overall economic occupancy.
Here is a list of 18 creative ways to market an apartment rental listing to accomplish the above stated goals:
Create a landing page, either standalone or as a part of your website, that captures the information of potential residents
Create a direct mailing campaign and send it out to people living in similar buildings, inviting them to move into yours by offering some sort of concession (i.e. reduced rent for the first month, reduced security deposit, waive the application fee, etc.) and highlighting the major selling point of your community compared to theirs (i.e. direct garage access, new fitness center, BBQ pit, etc.). This strategy could anger local owners, so if you decide to do this, don’t expect to be popular and expect others to do it to your residents
Contact the Human Resources departments at all the major employers in the area, letting them know that you own an apartment in the area and asking if they can direct new hires to your community
Create a resident referral program where you offer current residents a flat fee ($300 is standard) if they refer someone that signs a lease
Set up an open house and invite members of the local community to attend. Having a model unit and offering refreshments is helpful
Offer special pricing to soldiers, police and first responders, like 50% off the first month’s rent
Design a “for lease” banner and put it near the entry of your property, or near an area that has high foot or car traffic
Design and place flyers at local establishments that are frequented by your resident demographic, like laundry mats, hair salons, nail salons, gyms, coffee shops, etc.
Purchase advertisements in the local newspaper
Post “for rent” listings to Craigslist, Zillow, Realtor.com, Apartments.com and other free online rental listing services
Partner with a real estate broker or agent and advertise your apartment community on the MLS
Create a Facebook advertisement, which allows you to select criteria to hyper-target your preferred resident
Create a Facebook page for your apartment community, posting weekly content to generate a following and posting your rental listings
Pay close attention to the nearby landmarks to cater to that audience, like colleges, military bases, large corporations, etc.
Provide good old-fashioned customer service. Be responsive and timely with requests and questions. If doesn’t matter if you are a marketing wizard and get hundreds of responses to your rental listings if you don’t pick up the phone or respond quickly to emails, politely answer their questions and get them one step closer to viewing the property and signing the lease
Call all residents who have previously notified you that they plan on leave at the end of their lease, asking them about their reason for leaving to see if it is something that can be addressed
Send marketing material or gift baskets to businesses and employers surrounding your community
Follow-up with old leads that are older than 90 days
Some of the strategies are free and just require effort on the part of the syndicator and/or property management company. Others will require an upfront investment or result in a short-term reduction in income. Therefore, it is important that the syndication team understands the marketing strategy prior to closing on the deal so that they account for these expenses in the underwriting.
What about you? Comment below: What strategies do you implement to fill vacancies at your rental properties?
Ask a room full of active real estate investors what they think is the most important factor that makes for a successful investment and a significant portion will respond with “it’s all about location, location, location.” The market in which you invest is one of the most impactful decisions you will make.
Or is it…?
Real estate investors have made money in every market across the country, and more recently the world, at every point in time since the first person purchased a piece of real estate for investment purposes. So, how can two investors investing in the same market see totally different results, with one thriving and one failing?
The answer is quite simply: the actual market means nothing if the investor cannot execute on the business plan properly.
This doesn’t mean that you can blindly invest in any real estate market. To maximize your chances of success, you should always evaluate a market before investing. However, from my experience scaling from a handful of single family rentals to controlling over $400 million in apartments, and from interviewing thousands of active, successful real estate professionals on my podcast, I identified a pattern.
I discovered that there are three laws that, when followed, result in a real estate investors ability to thrive in any market at any time in the market cycle. These Three Immutable Laws of Real Estate Investing are 1) buy for cash flow, 2) secure long-term, low leveraged debt and 3) have adequate cash reserves.
Law #1 – Buy for Cash Flow
The first of these three laws is buy for cash flow. The opposite of buying for cash flow is buying to appreciation. And in particular, natural appreciation. Natural appreciation is completely out of your control because it fluctuates up and down based on the overall real estate market and economy. Whereas forced appreciation is the bread and butter of value-add investors. Forced appreciation involves making improvements to the asset that either decreases expenses or increases income, which in turn, increases the overall property value.
Many investors, past and present, buy for natural appreciation instead of cash flow, and it is a gamble. Eventually, they all get burned – unless they’re extremely lucky. Buying for natural appreciation is like thinking you’ll get rich at the casino by playing roulette and only betting on black. Yeah, maybe you can double up a few times, but sooner or later the ball lands on red or – even worse – green, and you lose it all.
That’s why you should never buy for natural appreciation. Instead, buy for cash flow. Because when you buy for cash flow (and as long as you have a large supply of renters), you don’t care what the market is doing. In fact, if the market takes a dip, the demand for rentals will likely increase!
Law #2 – Secure Long-Term, Low Leveraged Debt
The second law is to secure long-term, low leveraged debt. The leverage that comes from financing is one of the main benefits of investing in real estate. Let’s say you have $100,000 to invest. If you decide to invest all of that money into a stock, you would control $100,000 worth of that stock (you can leverage a stock by investing in options contracts, but there is significantly more risk). On the other hand, if you wanted to invest all of that money in real estate, you could spend $100,000 on a down payment at 80% loan-to-value and control $500,000 worth of real estate. That’s the power of leverage from financing.
But there’s also a catch. With leverage comes a mortgage, which you must continue to pay each month. If you fail to make a payment or cannot sell/refinance once the loan comes due, the bank will take the property.
The less money put into a deal – or more specifically, the less equity you have in a deal – the more over-leveraged you are. Consequently, the higher your mortgage payments will be. In a hot market, over-leveraging may seem like a brilliant idea, but what happens when property value or rental rates start to drop? Well, if you purchase a property with less than 20% equity at close and the market drops by 5%, 10% or 20% (which has happened in the past) by the end of your loan term, you are forced to sell the property at a lower than projected price (maybe even at a loss) or you are forced to give the property back to the bank.
My advice? Secure a loan with a term that is 2 times the length of longer your business plan and have 20% equity in an apartment deal at minimum. You shouldn’t run into this problem if you are getting a commercial loan from a bank, as they will typically offer loan terms of 5, 7, 10, or 12 years and require at least 20% to 30% down. However, if you are pursuing a creative financing strategy, you may have the opportunity to purchase an apartment with a significantly less than 20% down and the length of the loan is completely negotiable. Don’t be tempted. Similarly, a bridge loan (a loan usually used to cover the purchase price and renovation costs before securing permanent longer-term financing) may offer a higher loan-to-value ratio and are generally 6 months to 3 years in length. In these cases, have 20% of the total cost (purchase price plus renovations) in the deal and make sure you have the ability to purchase enough extensions on the bridge loan to cover 2 times the length of your business plan.
Technically, you will be able to secure a loan with a term that is shorter than your business plan and with less than 20% equity. But doing so will expose you and your investors to more risk. Although securing long-term, low leveraged debt, in tandem with committing to buy for cash flow, will allow you to continue covering your mortgage payments, avoid having negative equity in the event of a downturn and avoid being forced to sell/give the property to the bank.
Law #3 – Have Adequate Cash Reserves
The final law is to have adequate cash reserves.
When you don’t have adequate cash reserves, you won’t have funds to cover an unexpected expense that occurs during operations. When you cannot cover an unexpected expense, you’ll need to either do a capital call, which will reduce your investors’ returns, or sell the property at a loss or give the property back to the bank if these expenses pile up.
To mitigate these risks, I recommend having an ongoing operating budget of at least $250 per unit per year in reserves. Additionally, to cover unexpected expenses that occur in the first year, create an upfront operating account fund equal to 1% to 5% of the purchase price.
By sticking to these Three Immutable Laws of Real Estate Investing, don’t buy for appreciation, don’t over-leverage and don’t get forced to sell, your investment portfolio will not just survive, but thrive in any real estate market and in any economic condition.
Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book
After putting a deal under contract, the due diligence process for an apartment building is much more involved and complicated in comparison to that of a single-family residence or smaller multifamily building. For the real estate due diligence process on an SFR or smaller multifamily building, the lender will likely only require an inspection report and an appraisal report in order to provide you with financing. Then, for your own knowledge, you’ll perform your own financial audit, comparing the leases and rent rolls with the historical financials to make sure the rental rates are in alignment.
When you scale up to hundreds of units, the increase in the number of potential risk points is such that the lender will require additional reports prior to financing the deal, and you will want to obtain additional reports before deciding to move forward with the deal.
For the apartment community due diligence process, you’ll want to obtain and analyze the results of these 10 reports:
Financial Document Audit
Internal Property Condition Assessment
Property Condition Assessment
Environmental Site Assessment
In this ultimate guide, I will outline the contents of each report, how to obtain them, the approximate cost of each (for apartment communities 100 units or more) and how to analyze the results. This should be a great introduction to how to do due diligence on real estate, and you can build on this for your unique deals.
1 – Financial Document Audit
The financial document audit is an analysis that compares the apartment’s historical operations to your budgeted income and expense figures you set when underwriting the deal.
For the audit, a consultant will collect detailed historical financial reports from the sellers, including the last one to three years of income and expense data, bank statements, and rent rolls. The output of the analysis is a detailed spreadsheet of the asset’s historical income, operating expenses, non-operating expenses, and net cash flow which are compared to the budgeted figures you provided.
The summary will take on a form that is similar to a pro forma, with the income and expenses broken down into each individual line item for an easy comparison on your end. They will also provide you with an executive summary document, which will outline how to interpret the audit, what data was used to create the audit spreadsheet and an explanation of any figures that deviate from your budget.
To obtain this document, you will need to hire a commercial real estate consulting firm that specializes in creating financial document audits. An approximate cost for this report is $6,000.
When you initially underwrote the deal, you set the income and expense assumptions based on how you and your team will operate the property once you’ve taken over. These assumptions came from a combination of the trailing 12 months of income and expense data and the current rent roll provided by the seller and the standard market cost per unit per year rates for the expenses.
Once you receive the results of the financial audit report, part of your real estate due diligence is to go through each income and expense line item and compare them to the assumptions in your underwriting model. Ideally, the consultant that performed the audit already compared the results to your provided budget, made adjustments based on their expertise and any inputs you provided, and commented on any discrepancies.
If any discrepancies were found or if the consultant recommended any adjustments, discuss them with your property management company to see if you need to update your budget. If you and your management company come to the conclusion that the budget needs to change, make the necessary adjustments to your underwriting model.
2 – Internal Property Condition (PCA) Assessment
The internal property condition assessment (PCA) is a detailed inspection report is an integral part of your real estate due diligence because it outlines the overall condition of the apartment community.
A licensed contractor will inspect the property from top to bottom. Based on the inspection, he or she will prepare a report with recommendations, preliminary costs, and priorities for immediate repairs, recommended repairs, and continued replacements, along with accompanying pictures of the interiors, exteriors, and the items needing repair.
Being an internal report, you will be responsible for hiring a licensed commercial contractor to perform the assessment. An approximate cost for this assessment is $2,500.
During the underwriting process, you created a renovation/upgrade plan for the interior and exterior of the apartment community, which included the estimated costs. Once you receive the internal PCA, compare the results to your initial renovation budget.
The results of the internal PCA are preliminary costs, not exact costs. However, they will most likely be more accurate than the assumptions you made during the underwriting process. Therefore, if there are discrepancies between the contractor’s estimated renovation costs and your renovation budget, update the underwriting model to reflect the results of the internal PCA.
Hopefully, your initial renovation assumptions were fairly accurate. And ideally, if you made very conservative renovation cost assumptions, you discover that you over-budgeted and can reduce the costs in your underwriting model.
3 – Property Condition Assessment
The property condition assessment is the same as the internal property condition assessment, except this one is created by a third party selected by the lender. The cost is approximately $2,000.
Analyze this reports the same way that you analyzed the internal PCA. Then, compare and contrast the results of the two PCAs. Maybe the lender’s contractor caught something that your contractor did not, and vice versa.
4 – Market Survey
The market survey is a more formal and comprehensive rental comparison analysis than the one you performed during the underwriting phase, which is why it is a necessary part of your real estate due diligence.
For the market survey, your property management company will locate direct competitors of the apartment community. Then, they will compare your apartment community to each of the direct competitors over various factors to determine the market rents on an overall and a unit type basis. A few key points on the market survey analysis is to make sure that your property management company uses apartment communities that are upgraded similarly to how your apartment community will be post-renovations and not in its current condition. These should also be in similar neighborhoods and built within a similar time period.
When initial underwriting the deal, you set your renovated rental assumptions based on a combination of performing your own rental comparable analysis and, if the sellers had initiated an upgrade program, proven rental rates. Compare the results of the market survey to your initial renovated rent assumptions. If there are any discrepancies, update your underwriting model to reflect the results of the market survey and complete this portion of the real estate due diligence.
5 – Lease Audit
Your property management company will collect all of the leases of the current residents at the apartment community and perform an audit. They will analyze each lease, recording the rents, security deposits, concessions, and terms. Then, they will compare the information gathered from the leases to the rent roll provided by the owner, recording any discrepancies.
Unless the current property management company was extremely incompetent, the discrepancies should be minor, if there are any at all, and it should affect your financial model.
6 – Unit Walk
A question my apartment syndication clients ask a lot is “when I am performing real estate due diligence, do I need to walk every single unit?” The answer is a resounding yes! And that is the purpose of the unit walk report.
During the unit walk, your property management company will inspect the individual units. The purpose of the unit walk is to determine the current condition of each. So, while conducting the unit walk, they will take notes on things like the condition of the rooms, the type and condition of appliances, the presence or absence of washer/dryer hookups, the conditions of the light fixtures, missing GFCI outlets, and anything else that stands out as a potential maintenance or resident issue.
Once you receive the unit walk report, compare the results to your interior renovation assumptions to determine the accuracy of your interior business plan.
Do the number of units that require interior upgrades match your business plan? Is there unexpected deferred maintenance that wasn’t accounted for in your budget? Are there a high number of residents who will need to be evicted once you’ve taken over the operations?
Using that data, you can create a more detailed, unit-by-unit interior renovation plan and calculate a more accurate budget. Make any adjustments to your interior renovation assumption on your financial model.
Most likely, your property manager will perform the market survey, lease audit, and unit walk report, and they will usually do it for free. However, ask the property manager how much they will charge you for these three reports if you do not close on the deal. And if you have to hire a 3rd party to create these three reports, the cost is approximately $4,000.
7 – Site Survey
A site survey resembles a map and shows the boundaries of the property, indicating the lot size. It also includes a written description of the property.
There are a lot of third-party services that can conduct a site survey. A quick Google search of “site survey + (city name) will do the trick. I recommend reaching out to multiple companies to get a handful of bids for your project. The approximate cost for the site survey is $6,000.
The site survey report will list any boundary, easement, utility, and zoning issues for the apartment community. Generally, if a problem is found during the site survey, the bank will not provide a loan on the property. So, if something does come up during this real estate due diligence report, your options are limited and should be addressed on a case-by-case basis. If the problem can’t be resolved, you will have to cancel the contract.
8 – Environmental Site Survey
The environmental site assessment is an inspection that identifies potential or existing environmental contamination liabilities. It will address the underlying land, as well as any physical improvements to the property, and will offer conclusions or recommendations for further investigations of an issue is found. The environmental site assessment is also performed by a 3rd party vendor selected by your lender. The approximate cost is $2,500. Similar to the site survey, if the vendor identifies an environmental problem, the lender will not provide a loan for the property. Again, these issues should be addressed on a case-by-case basis.
9 – Appraisal
The appraisal report is created by an appraiser selected by your lender and determines the as-is value of the apartment community. The cost is approximately $5,000.
The appraiser will inspect the property, and then calculate the as-is value of the apartment community. The two appraisal methods that will be used to determine the value of the property are the sales comparison approach (i.e. comparing the subject property to similar properties that were recently sold) and the income capitalization approach (i.e. using the net operating income and the market cap rate).
Once you receive the appraisal, you should compare the appraised value to the contract purchase price as part of your real estate due diligence. The lender will base their financing on the appraised value, not the contract price. Therefore, if the appraisal comes back at a value higher than the contract price, fantastic! That’s essentially free equity. However, if the appraised value is lower than the contract price, you will have to either make up the difference by raising additional capital or renegotiate the purchase price with the seller.
10 – Green Report
The Green report is an optional assessment that evaluates potential energy and water conservation measures for the apartment community. The report will include a list of all measures found, along with the associated cost savings and initial investment.
The report is created by a 3rd party vendor selected by your lender. The approximate cost is $3,500.
The green report, which is the only document that won’t disqualify a deal, will outline all of the potential energy and water conservation opportunities. It will list all of the opportunities that were identified, the estimated initial investment to implement, the associated cost savings and the return on investment. Deciding which opportunities to move forward with should be based on the payback period and the projected hold period of the property.
An Example of Green Options
For example, the following energy efficient opportunities were identified at an apartment project my company assessed:
Dual pane windows
Wall insulation and leakage sealing
Low-flow showerheads and toilets
Interior and exterior LED lighting
Energy Star rated refrigerators and dishwashers
After analyzing the investment amount and cost savings, the opportunities we implemented, and the associated savings and payback periods were:
Exterior LED lighting: 14.4-year payback, $3,236 annual savings
Pool cover: 1.5-year payback, $409 annual savings
The reasoning behind the low-flow showerheads and pool cover was that we planned on holding the property for 5-years, so, once we paid back the initial investment amount, it was pure profit. We ended up losing money on the exterior LED lighting project. However, we installed these lights to increase resident safety.
You will find that the green report will list ALL opportunities, even if the payback period is absurdly long. If we implemented all the opportunities identified in the example above, the overall payback period would have been 91.9 years, with the longest payback period being 165 years for the Energy Star rated dishwashers. Unless we decided to hold onto a building until we died or unit they’ve discovered an immortality serum, we stuck to the opportunities that either resulted in a payback period lower than our projected hold time or address a resident safety concern.
How to Pay for the Due Diligence Reports
Usually, the costs of the real estate due diligence reports will not be due until closing. So, when underwriting the deal, make sure you are taking these costs into account when determining how much equity you need to raise.
Other times, you will need to pay for a due diligence report upfront. If this is the case, you can do one of two things. You can pay out-of-pocket and reimburse yourself at close. Or, you can take a loan from a third-party (maybe one of your passive investors) and reimburse the initial loan amount with interest at close.
Review the Results of Your New Underwriting Model
Based on the financial document audit, market survey report, lease audit report, and green program report, you will either confirm or update your income assumptions. The financial document audit will help you confirm or update your expense assumptions. The two property condition assessments and the unit walk report will lead you to confirm or update your renovation budget assumptions. Based on the appraisal report, you will either confirm the accuracy of the purchase price or determine that you have the property under contract at a price that is below or above the as-is value. And based on the site survey and environmental survey, you will determine if there is anything that disqualifies the deal entirely.
Once you have received the results of all 10 real estate due diligence documents and made the necessary adjustments to your underwriting model, you need to re-review your return projections. If you had to make drastic changes to the income, expenses or renovation budgets in the negative direction, then the new return projections will be reduced. In some cases, the return projections will be reduced to such a degree that the deal no longer meets the return goals of you and your investors. Also, if an issue came up during the site survey or the environmental site assessment, which is rare, it will need to be resolved prior to closing. If the seller is unwilling or unable to address these issues, your lender will not provide financing on the property, which means you will have to cancel the contract.
If the updated return projections fall below your investor’s return goals, adjust the purchase price in your underwriting model until the projected returns meet your investor’s goals again. Then, explain to your real estate broker that you want to renegotiate the purchase price and state the reasons for doing so.
If the seller will not accept the new contract terms, don’t be afraid to walk away from the deal. At the end of the day, it is your job to please your investors, which means providing them with their desired return goals.
Real estate brokers can be a great resources for finding on-market and off-market real estate deals. However, do not expect a real estate broker to automatically put you near the top of their go-to client list, especially if you haven’t completed your first syndication deal.
After finding a real estate broker, one of the biggest challenges you are going to face is proving that you are the real deal. From the real estate broker’s perspective, there is a lot of uncertainty. They’ll be thinking, “if I begin working with them, are they really going to pull the trigger on a deal?”
Therefore, in regards to your relationship with a real estate broker, your main focus needs to be proving that you are a serious, credible apartment syndicator who is capable of closing on a deal.
Don’t just take my word for it. Thomas “T” Furlow, who is a commercial real estate investor who has specialized in apartments for years, agrees. Experience real estate brokers won’t take a newbie investor at their word. They must prove, through action, that they are serious. In our recent conversation, he offered four tactics a newbie apartment syndication can implement in order to win over the trust of an experienced real estate broker.
1 – Consulting Fee
One tactic is to offer the real estate broker a consulting fee. To show that you are serious and that you respect their time, offer to pay them an hourly fee ($150 to $200 per hour), even if you don’t find a qualified deal. In return, you can use them as a consultant, including asking them questions, sending them potential deals to review, having them run rental or sales comp reports and – ideally – having them send you prospective off-market deals.
2 – Visit Their Recent Sales
Another tactic is to get in your car and drive to the real estate broker’s recent apartment sales. Ask them to send you a list of their most recent 10 apartment sales and visit those properties in person.
After visiting the 10 properties, follow-up with the real estate broker, telling them which properties meet your investment criteria and why. In doing so, you are not only portraying yourself as a serious investor but are also giving the real estate broker an idea of what type of apartment you are interested in acquiring.
3 – How Will You Fund Your Deals?
The third tactic is to provide the real estate broker with information on how you will fund a potential deal. Since we are apartment syndicators, we are raising money from accredited investors. Explain how many people have expressed interest or have verbally committed to investing. Tell them about the strategies you are implementing to find potential private money investors
Since you will likely be securing a loan, tell them about the mortgage brokers you’ve spoken with.
Anything else related to the funding of the deal should be communicated to the real estate broker to qualify yourself as a credible investor who has the financial capabilities to close a deal.
4 – Constant Follow-Up
Lastly, and most importantly, constantly follow-up. Whenever you perform a task that brings you closer to completing a deal, notify the real estate broker. A simple email will suffice.
For example, if you have a conversation with a lender, provide the real estate broker with their contact information and the outcome of the meeting (i.e. “I met with XYZ Lending. I told them about my business plan and they told me that I will qualify for a loan.”).
Before sending out a direct mailing campaign, as well as when you start receiving phone calls from interested sellers, notify the real estate broker.
However, only follow-up with information that is relevant to completing an apartment deal. The real estate broker probably won’t care much about what you had for breakfast.
Overall, proving your seriousness to the real estate broker is about communicating your effort towards and commitment to finding and closing on an apartment deal. To accomplish this, you can offer a consulting fee, visit their recent sales, communicate how you will fund a potential deal and constantly follow-up with relevant information.
How about you? Comment below: What tactics have you implemented to win over a real estate broker?
Of the three main apartment syndication strategies, two (value-add and distressed) involve making improvements to the physical property or the operations in order to increase the revenue or decrease the expenses, increasing the value of your apartment building or community.
Regardless of whether you decide to pursue the active or passive apartment investing route, understanding the various ways to “add value” is a must.
As an active apartment syndicator, it is your job to identify how to add value to an apartment building deal in order to create a business plan that maximizes the projected returns for your passive investors.
As a passive investor, you need to be capable of analyzing a distressed or value-add syndicator’s business plan in order to determine if the opportunities identified are conducive with the property type, market, resident demographic, etc. and if they will result in an increase in revenue and/or decrease in expenses.
Five syndicators looking at the same deal will create five different plans to increase the value of apartment buildings involved. Therefore, the ability to identify value-add opportunities has a direct impact on not only the return projections but also the syndicator’s ability to even acquire the property in the first place. Generally, the most creative syndicator will underwrite the highest projected returns and, as a result, be able to find more deals that meet their investment criteria.
I break down the value-add opportunities into two categories – simple and advanced. Simple opportunities are more creative, require little to no capital or effort to implement, and can be added to most sized apartments. Whereas advanced opportunities require more capital and more effort and usually only make financial sense on larger projects, with some only making financial sense on luxury apartment communities. However, the opportunities in both categories will result in an increase in property value and allow the community to stand out against its competitors.
1. Add Washer and Dryer: Install washer and dryer units into all or a select number of units and charge a monthly premium. Another option is to create a laundry room and install coin-operated washers and dryers.
2. Stainless Steel Appliances: If the units have dated or black/white appliances, such as refrigerators, dishwashers, microwaves and/or stoves, upgrade to new stainless-steel appliances and charge a rental premium.
3. Appliance Upgrade Packages: For units that already have newer or nicer appliances, charge a rental premium.
4. Appliance Rentals: Offer rentals for common items like vacuums and carpet cleaners. Not only could this increase the value of apartment buildings because tenants will be caring for their space but this will also reduce the expenses associated with turnovers.
5. Upgrade Light Fixtures: Installing new light fixtures is a quick and inexpensive way to make for a more aesthetically pleasing unit.
6. New Hardware: Of course, units with new cabinetry in the kitchen and new vanities in the bathroom will demand a higher rent. However, a more inexpensive way to update the look of the kitchen and bathroom is to install new hardware, which includes new cabinet/vanity handles, sinks, toilets, faucets, shower heads, etc. Additional new hardware upgrades are new door handles and installing curtain rods.
7. Ratio Utility Billing System (RUBS): Implement a RUBS program, which bills back a portion of the water, sewer, trash, electric, and/or gas expenses to the residents.
8. Parking: Rather than implementing the more advanced parking upgrades, charge a monthly or yearly fee for a guaranteed or premium-location parking spot.
9. Pet Fees: Charge a one-time deposit or monthly fee for residents with pets. This strategy of increasing the value of apartment buildings is best for communities that already allow pets but do not collect a fee.
10. Location/View Premiums: Each unit has its own unique view and location, with some being better than others. For units with better locations and views, charge a rental premium. Examples are first floor units, units near the front of the community or amenities, units with a view of a body of water or fountains, units with better surrounding greenery, etc.
11. Bike Rack Rental: Depending on the market and resident demographic, install bike racks and rent them out for a monthly fee. Bike racks are best when the resident demographics are Millennial or Gen X.
12. Clubhouse Rental: For large communities that have a clubhouse, offer to rent it to residents for special events at a flat fee.
13. Upgrading Property Management Software: Use the latest and greatest property management software to accurately calculate the market rents to ensure you are charging the correct rental rates.
14. Short-Term Leases: Depending on the market, offer short-term leases or offer furnished units and list them on services like AirBnB or work with a corporate housing provider.
15. Demographic-Based Amenities: When looking for advanced ways to up the value of apartment buildings, consider constructing specific amenities based on the demands of the renter demographic. From a generational perspective, Millennials prefer a resort-style living experience. They value convenience and flexibility so they will often seek apartment communities that offer high-tech amenities and services. These include free coffee in the common areas, high-speed Wi-Fi, in unit USB charging ports, and a modern fitness center with fitness classes offered.
Gen Xers also prefer high-tech home furnishings, but also concierge services and family-friendly features like playrooms, playgrounds and areas that offer family-friendly activities. Additionally, Gen Xers want easy access to washers and dryers and fenced in backyards.
Finally, Baby Boomers demand larger living spaces (both individual units and common areas), state-of-the-art fitness centers and common areas that offer fitness classes and social gatherings.
16. Patios or Balconies: Build patios for the ground level units and/or balconies for the non-ground level units and charge a rental premium.
17. Fenced-In Yards or Patios: Increase privacy (and the value of your apartment buildings) by constructing fences around the yards or patios of all or a select number of ground level units and charge a rental premium.
18. Carports: Build a select number of carports and charge a monthly or yearly fee.
19. Extra Rooms: Add extra bedrooms, bathrooms, dining rooms, living rooms, sunrooms, etc. by erecting walls in larger units or building additions onto existing units.
20. Dog Park: If the apartment community has a large amount of unused green space and depending on the renter demographic, fence in an area and create a dog park. But don’t forget the poop bag stands!
21. Storage Lockers: Install storage lockers in the clubhouse and rent them out for a monthly or yearly fee.
22. Vending Machines: Buy or rent vending machines and install them in the common areas.
23. Billboards: Depending on the traffic and building codes, install billboards on the grounds and lease them to local businesses.
24. Daycare, After School, or Summer Programs: Attract the family demographic with the convenience of a childcare facility for daycare or after school/summer programs.
25. Coffee Shop or Convenience Mart: I’m not talking about building a Starbucks or CVS/Walgreens. Just a small shop or cart that offers coffee and/or snacks, similar to those found in hotel lobbies.
26. Fitness Center: Update or construct a fitness center and offer free fitness classes like yoga, aerobics, spin, etc.
27. Miscellaneous: Other advanced/luxury upgrades that can be offered for free (i.e. with the costs built into the rents) or a monthly/annual/one-time fee include: a car-sharing service, 24-hour concierge, cooking classes, dry cleaning/laundry service, free Wi-Fi, iCafe, package delivery management, personal shoppers, pet grooming, rock-climbing wall, rooftop terrace, spa/massage center, tech/business center and a wine cellar.
Whenever you are analyzing a prospective apartment deal or trying to determine how to add value to an apartment building you’ve already acquired, run through this list of 27 simple and advanced upgrades to determine if they make financial sense based on the property type, market, and renter demographic, which is accomplished by ensuring that the required capital investment is returned, and then some, during the projected holding period. And always make sure the projected rental premiums are confirmed by the property management company and are supported by the rental comps in the area.
You’ve acquired a new asset, completed your value-add business plan and have been distributing higher than projected returns to your satisfied investors – or if you’re just an apartment investor, to yourself – for the past few months.
You think your investors are satisfied now? Well, they are going to be ecstatic when they receive that massive distribution upon sale! So, when and how do you sell your apartment community?
One of your responsibilities as an asset manager is to evaluate the market in which your property is located on an ongoing basis. Once you’ve stabilized the asset, completing all of the value-add projects, estimate the property value at least a few times a year. Find the current market cap rate and, using the net operating income, calculate the value of the asset.
Even if your business plan is to sell in five years, don’t wait until then to evaluate your asset. You may be able to provide your investors with a sizable return if you sold, or refinanced, before the end of your initial business plan.
If you get to the end of your business plan and the market conditions are not such that you can sell the asset and meet your investors return expectations, don’t be afraid to hold onto the property longer.
When the market conditions are right, here is the 8-step process to sell your apartment community:
1 – Be Mindful of The Sale
As you are approaching the end of your business plan, or when you determine that it makes financial sense to sell earlier, be mindful of the sale. The value of the asset is dependent on the market cap rate (which is outside of your control) and the net operating income. In order to maximize the value, you want to maximize the net operating income, which means maximizing the income and minimizing the expenses.
Once you’ve made the decision to sell, don’t start certain projects if the payback period extends past the sale’s date. For example, if you plan on selling in three months, it doesn’t make sense to renovate a unit for $5,000 to get a $100 rental premium.
Consider spending a little bit more money on marketing to increase occupancy. Offer more concessions than you usually would to increase rental revenue. Pursue collections a little harder than usual.
Overall, look at your profit and loss statement and see which income and expense line items can be improved in the months prior to listing the asset for sale.
2 – Send Your Lender a Notification of Disposition
When you decide to sell, you will need to notify your lender. To do so, you need to send them an official notification of disposition. This is typically two months prior to listing the apartment for sale to the public. Work with your experienced attorney to draft the notification and send it to your lender.
Depending on the loan program you used, you may have a prepayment penalty. Keep that in mind when deciding to sell, because a large prepayment penalty will drastically reduce your sales proceeds.
3 – Request a Broker’s Opinion of Value
Based on your evaluations of the market, if you are confident that you can sell your apartment at the price you need in order to get the returns you want, the next step is to find a listing broker. It’s easy to write down a value that makes you happy, so you’ll want to get a relatively unbiased second opinion without having to shell out a few thousand dollars for a full appraisal.
You want to find a broker who is the best fit to sell the property. Loyalty is important in this business, so I recommend using the same broker who represented you when you purchased the asset. But, there might be reasons why you want to go with someone else. If that is the case, reach out to two or three of the best brokers in the market and ask them for a Broker’s Opinion of Value (BOV). Send them whatever information they request (T12, rent roll, etc.).
When you receive their opinion of value, ask them a few follow-up questions. You need to be confident that they can sell the property at that value. Ask them questions like:
What valuation approach did you use?
What types of buyers do you typically sell to? What size and price range do they invest in?
Why do you feel confident that those buyers will purchase this asset at this price?
Have you sold similar assets recently?
Based on the value and follow-up questions, select a broker to list the property.
4 – Start a Bidding War
Over the next six weeks or so, your broker is going to create the offering memorandum and market the apartment to the public to whip up a whole lot of interest. Interested parties will come visit the property and follow the same approach that you did when you purchased the property – talk to the property manager, tour units, inspect the exteriors, analyze rent comps, run the numbers, and submit an offer. The goal is for your broker to create a bidding war in order to push up the offer price and get you the highest offer price possible.
5 – Screen Out Newbies with a Best and Final Call
Once you stop accepting offers, you will review the submissions and have a best and final call with the top offer or offers to qualify the buyers.
You want to know about their track record, funding capabilities and proposed business plan to gauge their ability to close. Ideally, you sell to a sponsor with a large track record. You don’t want a newbie that has to back out of the deal during the due diligence phase because they cannot fund the deal, did poor underwriting, etc.
6 – Negotiate a Purchase Sales Agreement
Select the best offer and negotiate a purchase sales agreement (PSA). Have your experienced attorney draft a PSA. Don’t let the buyer draft the PSA, because you want to start the negotiation with terms closest to where you need them to be, and not the other way around. Send them the PSA for their attorney to review. You’ll likely go back and forth to negotiate the terms of the contract, with the end resulting hopefully being reflective of what was in their letter of intent.
This negotiation process typically takes about a week. Sometimes longer, but usually not shorter.
7 – Fulfill Obligations During Due Diligence
When the negotiations have concluded and both you and the buyer have signed the PSA, the due diligence period begins. The buyer will be required to adhere to the schedule agreed upon in the PSA (i.e. they have X number of days to perform due diligence, Y number of days close, etc.). And you owe them whatever it is you agreed to in the PSA (i.e. they can come to the property with 24 hours’ notice, they can look at your bank statements, financials, leases, marketing material, etc.).
Best case scenario is that nothing comes up during the due diligence period and you sell the property at the price and terms defined in the PSA. If something does come up, there may be additional negotiations back and forth with the seller on either the terms, purchase price or both.
Once the due diligence is completed, the buyer will work with the lender and title company to finalize things in preparation of closing.
8 – Close and Distribute Sales Proceeds
A few days prior to the officially closing date, you will sign the hundreds of execution documents. Then, on the day of closing, you will be wired the sales proceeds.
Distribute the sales proceeds to your investors according to what you and your investors agreed to. They will then go from satisfied to ecstatic and will be ready to start the process all over again!