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Accredited Investors vs. Qualified Purchasers

You’re interested in growing your net worth through real estate, and you’re approaching the prospect with a “go big or go home” mentality, so to speak.

The question is, do you have what it takes to make it happen? And no, we’re not just talking about having gusto and a can-do attitude. We’re talking about what you’ve got in the bank or in your current real estate portfolio.

To be in the best position when it comes to investing in real estate, you need to be an accredited investor or a qualified purchaser.

Let’s take a look at the differences between an accredited investor vs. a qualified purchaser, including what the qualified purchaser and accredited investor qualifications are.

A Glimpse at Accredited Investors

We’ll delve into the accredited investor requirements first. Please note that, as a general rule of thumb, you can certify yourself as an accredited investor.

According to the Securities Act’s Rule 501, current accredited investor qualifications include earning an income exceeding $200,000, or earning more than $300,000 in tandem with your spouse, during the past two years. In addition, you must expect to attain the same level of income this year.

Furthermore, the net worth of an accredited investor and his/her spouse must exceed a million dollars. This amount excludes how much the investor’s primary residence is worth.

In addition, an entity falls under the category of an accredited investor if accredited investors exclusively own the entity and have over $5 million worth of assets.

Now, let’s take a look at the difference between an accredited investor vs. a qualified purchaser.

A Rundown on Qualified Purchasers

Qualified purchasers can be either family-owned companies or individuals who own at least $5 million in investments.

Qualified purchasers may also be entities or individuals who invest a minimum of $25 million in private capital on other people’s behalf or for their personal financial accounts. For example, corporations or professional investment managers fall under this category.

Note that, if you are part of a qualified purchaser entity, all of the entity’s beneficial owners must be qualified purchasers. Also, a qualified purchaser can be a trust that is sponsored/managed by multiple qualified purchasers.

Other Important Points

As you explore the difference between an accredited investor vs. a qualified purchaser, it’s critical that you understand what “investments” means for the qualified purchaser. Investments include securities, such as bonds and stocks, along with real estate, cash, financial contracts, futures contracts, and physical commodities.

Also, a term related to qualified purchasers is “qualified institutional buyers.” This type of buyer is any institution that owns and invests at least $100 million in securities. It also refers to a bank that owns and invests securities worth a minimum of $100 million and that has a net worth totaling a minimum of $25 million based on an audit.

Comparing an Accredited Investor with a Qualified Purchaser

Now that we’ve outlined the qualified purchaser as well as the accredited investor qualifications above, let’s look more closely at what makes these two so different, even though they are often viewed as synonymous.

The key difference between an accredited investor vs. a qualified purchaser is that the financial threshold for an accredited investor is a lot lower when compared to that of a qualified purchaser. As a result, becoming an accredited investor is far easier than reaching the status of a qualified purchaser.

In fact, a qualified purchaser is sometimes called a super-accredited investor, since these professionals must attain higher financial levels.

Accredited Investor and Qualified Purchaser Scenarios

Let’s take a look at a few examples of what an accredited investor vs. a qualified purchaser looks like.

One person may have a stock portfolio worth $10 million. In addition, their total net worth may be around $15 million.

Meanwhile, a second person is a wealth manager responsible for investing $22 million for their clients. Some of these clients are not qualified purchasers.

Also, a third person makes $500,000 per year with their spouse and has a net worth of $2 million.

Here, the first individual is a qualified purchaser, as their value of investments is over $5 million. The second person happens to be a wealth manager but, because they don’t invest a minimum of $25 million for clients, they’re not a qualified purchaser.

The third individual is an accredited investor because they earn more than $300,000 jointly with a spouse and has a joint net worth greater than a million dollars.

Become a Successful Real Estate Investor

When it comes to being an accredited investor vs. a qualified purchaser, both roles offer solid benefits in the current real estate market. However, even if you meet the requirements for the net worth of an accredited investor or qualified purchaser, you may be short-changing yourself if you don’t know how to capitalize on deals in today’s dynamic, constantly evolving market.

I have experience working with accredited investors and qualified purchasers who are seeking passive real estate investing opportunities. I will find the perfect apartment property for you to invest in with me, develop a solid plan for boosting the property’s cash flow, and negotiate the real estate deal. In the end, you’ll be able to generate income without having to work a 9-5.

Get in touch with me today to learn more about being an accredited investor vs. a qualified purchaser, including qualified purchaser and accredited investor qualifications, and how I can help you to boost your bottom line as an investor or purchaser in the months ahead.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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How to Calculate the Preferred Return and IRR for Apartment Syndication Deals – Ask The Expert

One of my consulting clients asked me two questions about calculating the two return factors that are the most relevant to passive investors: preferred return and internal rate of return.

Questions #1: When a syndicator purchases an apartment complex, how can they determine what the preferred monthly return is going to be?

Questions #2: When a syndicator purchases an apartment complex, how can they determine what the profit is going to be that gives them the estimated IRR?

Theo Hicks, who is the key underwriter for my consulting program, provided answers to these two questions and here is what he said.

 

Question #1 – How to Calculate Preferred Return

The preferred return is a threshold return that limited partners are offered prior to the general partners receiving payment. If the preferred return is 8% paid out monthly, for example, the limited partners will receive the first portion of the monthly cash flow up to 8%.

To calculate the preferred return amount, multiply the total equity investment from limited partners by the preferred return percentage. If the preferred return is 8% and limited partners invested $1 million, the annual preferred return is $80,000 (0.08 * $1,000,000). Typically, profits above the preferred return are split between the general partners and limited partners.

The general partner sets the preferred return percentage based on the business plan, the goals of their limited partners, and what other general partners who are implementing similar business plans are offering.

When underwriting a deal, the average annualized cash flow should exceed the preferred return amount offered to investors so that you can distribute the preferred return.

 

Question #2 – How to Calculate Internal Rate of Return (IRR)

To calculate IRR, you need to know the amount and date of all payments to investors. Unlike cash-on-cash return and equity multiples, IRR takes into account the time value of money (i.e., $100 received today is worth more than $100 received in 5 years).

Typically, the IRR calculation includes the ongoing distributions plus profits at sale. If there is a refinance or supplemental loan, those proceeds are included in the IRR calculation.

When underwriting a deal, you set income and expense assumptions based on how the property is currently operating, market rates, and conversations with your expert property management company. The output of your underwriting is the projected ongoing cash flow and sales proceeds. IRR assumes that distributions are paid annually. A more accurate IRR metric is XIRR, which tracks real time distributions.

 

Click here for more Ask The Expert blog posts. If you have a question you would like to have answered by an Expert, comment below.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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What is an apartment syndication?

What is Apartment Syndication?

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.

 

  1. 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.

 

Related: How a Passive Investor Qualifies an Apartment Syndicator

 

  1. Limited Partners (LP)

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.

 

Related: What is Your Ideal Passive Apartment Investment?

 

  1. Property Management Company

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.

 

Related: When to Raise Rents – It’s More Complicated Than You Thought

 

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.

 

Related: How to Approach Hiring an Apartment Property Manager

 

  1. Commercial Real Estate Broker

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.

 

Related: 4 Ways an Apartment Syndicator Can Win Over an Experienced Broker

 

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.

 

Related: The Ultimate Guide to Finding an Apartment Broker

 

  1. Real Estate and Securities Attorney

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?

 

  1. 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 GPs receive a catch-up distribution based on the profit split. Then, 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.

 

Related: How the General Partner Makes Money from an Apartment Syndication

 

  1. 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.

 

Related: What is Considered Return of Capital and Return on Capital?

 

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.

 

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.

 

Related: How Do Passive Investors Make Money in Apartment Syndications?

 

  1. 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.

 

Related: How to Approach Firing a Property Management Company

 

  1. 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.

 

  1. 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

 

  1. 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.

 

Related: Ultimate Guide to Selecting a Target Real Estate Market

 

  1. Build a team

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.

 

Related: How to Find Private Money Regardless of Where You Live

 

  1. Find a Deal 

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.

 

Related: Five Ways to Find Your First Off-Market Apartment Deal

 

  1. Underwriting

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.

 

Related: How to Perform Your Own Rental Comparable Analysis Over the Phone

 

  1. Offer 

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.

 

Related: How the General Partner Submits an Offer on an Apartment Deal

 

  1. Due Diligence and business plan

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.

 

Related: The Ultimate Guide to Performing Due Diligence on an Apartment Building

 

  1. Secure investor commitments

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.

 

Related: 5-Step Process for Securing Passive Investor Commitments for Apartment Syndications

 

  1. Securing financing

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.

 

Related: How a Syndicator Securing Financing for an Apartment Deal

 

  1. Close

Assuming the apartment community passed the due diligence phase and the funding (both passive investor equity and debt) is secured, the GP closes on the deal and takes over the operations.

 

  1. Execute the business plan

Once the GP closes on the apartment community, they perform their duties as the asset manager and implements their business plan.

 

Related: So You Just Closed on Your First Apartment Community…Now What?

 

  1. Sell

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.

 

Related: 8-Step Process for Selling Your Apartment Community

 

How Can I Get Started in Apartment Syndications?

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.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

 

 

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internal rate of return vs. cash on cash return

Internal Rate of Return (IRR) vs. Cash on Cash (CoC) Return: What Is the Difference?

When an apartment syndicator analyzes the results of their underwriting, and when a passive investor is deciding whether to invest in a syndicator’s deal, the two main return factors they focus on are the cash-on-cash return and the internal rate of return.

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.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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Apartment Syndication School

Apartment Syndication School

Welcome to the Syndication School

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.

Free Resource:

  • 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.

In part 1, we cover strategies 1 to 4.

In part 2, we cover strategies 5 to 9.

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.

Free Resources:

  • 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.

Free Resources:

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.

Free Resources:

Series #7 – The Power of Your Apartment Syndication Brand

In this Syndication School series, we will discuss the process of creating your unique apartment syndication brand.

In part 1, we discuss why you need a brand as an apartment syndicator, how to select a target audience, and how to create the first three components of your brand.

In part 2, we discuss the fourth component of your brand: the website.

In part 3, we discuss the fifth component of your brand: the company presentation.

In part 4, we discuss the sixth and final component of your brand: thought leadership platform.

Free Resources:

Series #8 – How to Build Your All-Star Apartment Syndication Team

In this Syndication School series, we will discuss the process of building your apartment syndication team.

In part 1, we discuss who your core and secondary team members will be, how to find prospective team members and the process of hiring team members #1 and #2 – partner and mentor.

In part 2, we discuss the process of hiring team member #3 – property management company.

In part 3, we discuss the process of hiring team member #4 – real estate brokers.

In part 4, we discuss the process of hiring team members #5 – #7 – attorneys, a CPA, and a mortgage broker – as well as what order to hire the team members in.

Free Resource:

Series #9 – How to Raise Capital from Passive Investors

In this Syndication School series, we will discuss the process of raising capital from passive investors.

In part 1, we discuss how to overcome any fears you have in regards to raising money from passive investors.

In part 2, we discuss the differences between the various types of money-raising structures.

In part 3 and part 4, we discuss ways to find passive investors.

In part 5 and part 6, we discuss the process of initially approaching and conversing with interested investors.

In part 7 and part 8, we discuss how to be prepared to respond to the 49 most common questions asked by passive investors.

Free Resource:

Series #10 – How to Structure GP and LP Compensation

In this syndication school series, we will discuss how to create compensation structures for the GP and LP.

In part 1, we discuss how to structure the GP compensation.

In part 2, we discuss how to structure the LP compensation.

Free Resource:

Series #11 – How to Qualify an Apartment Deal

In this Syndication School series, we will discuss how to qualify an apartment deal using a three-step evaluation process.

In part 1, we discuss step 1 of the apartment deal evaluation process – setting your initial investment criteria.

In part 2, we discuss step 2 and step 3 of the apartment deal evaluation process – underwriting and due diligence.

Series #12 – How to Find Your First Apartment Syndication Deal

In this Syndication School series, we will discuss how to find your first apartment syndication deal.

In part 1, we discuss the distinction between on-market and off-market deals.

In part 2, we discuss how to find on-market and off-market deals from real estate brokers.

In part 3, we discuss how to find off-market deals via direct mailing campaigns.

In part 4, we discuss 9 more ways to find off-market apartment deals.

In part 5, we discuss one real-world case study for how a syndicator found an off-market deal.

In part 6, we discuss two more real-world case studies for how a syndicator found an off-market deal.

Free Resource:

Series #13 – Breaking Down the Apartment Financials

In this Syndication School series, we will discuss the three pieces of information you need to underwrite a deal.

In part 1, we discuss the rent roll.

In part 2, we continue our discussion on the rent roll.

In part 3, we discuss the T-12.

In part 4, we continue our discussion on the T-12.

In part 5, we discuss the OM.

In part 6, we continue our discussion on the OM.

Free Resources:

Series #14 – How to Underwrite a Value-Add Apartment Deal

In this Syndication School series, we will discuss the eight-step process of underwriting a value-add apartment deal.

In part 1, we discuss steps 1, 2, and 3 of the underwriting process.

In part 2, we discuss ways to add value to apartment deals.

In part 3, we discuss step 4a of the underwriting process – setting assumptions.

In part 4, we discuss step 4b of the underwriting process – setting the remaining underwriting assumptions.

In part 5, we discuss step 5 – determining an offer price.

In part 6, we discuss step 6 – performing a rental comparable analysis.

In part 7, we discuss step 7 – confirming the rental comps over the phone or in-person.

In part 8, we discuss step 8 – visiting the property and market in person.

Free Resources:

Series #15 – How to Submit an Offer on a Syndicated Apartment Deal

In this Syndication School series, we will discuss the process of submitting an offer on a syndicated apartment deal.

In part 1, we discuss how to create a letter of intent.

In part 2, we discuss what happens after you submit a letter of intent.

Free Resource:

Series #16 – How to Secure Financing for an Apartment Syndication Deal

In this Syndication School series, we will discuss the process of securing the financing (i.e., debt) for your apartment syndications.

In part 1, we discuss the types of debt and financing available.

In part 2, we discuss the first two most common financing programs.

In part 3, we discuss the other common loan programs and what you need to provide to the lender to secure financing.

In part 4, we discuss how to select the ideal apartment loan.

Free Resource:

Series #17 – How to Perform Due Diligence on an Apartment Syndication Deal

In this Syndication School series, we will discuss the process of performing due diligence on your apartment syndications.

In part 1, we discuss the first 5 due diligence reports.

In part 2, we discuss the last five due diligence reports.

In part 3, we discuss how to interpret the results of the first 4 due diligence reports.

In part 4, we discuss how to interpret the results of the last 6 due diligence reports.

Series #18 – How to Secure Commitments From Your Passive Investors

In this Syndication School series, we will discuss the process of securing financial commitments from your passive investors after putting a deal under contract.

In part 1 and part 2, we discuss how to create an investment summary.

In part 3, we discuss how to create an email to notify your investors about your new deal.

In part 4, part 5, and part 6, we discuss the process of a successful new investment offering conference call.

In part 7, we discuss the last step in the process of a successful new investment offering conference call and how to follow-up afterward.

In part 8, we discuss how to finalize investor commitments by sending the correct legal documentation.

Free Resource:

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.

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resident appreciation parties

51 Resident Appreciation Event Ideas to Retain High-Qualify Residents

In the blog post “How to Become an Award-Winning 5-Star Apartment Syndicator,” I explained how an apartment syndicator won two back-to-back Rental Owner of the Year awards by hosting frequent resident appreciation events. In this blog post, I want to expand upon this strategy by providing a list of 30 more resident appreciation event ideas.

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

  1. Valentine’s Day Card Making Event: Set up a card making station in the clubhouse.
  2. Speed Dating Event: For the single residents only!

 

Mother’s Day Event Ideas

  1. Flowers for Mom: Free flower pots in the clubhouse for residents to give to their moms.
  2. Mother’s Day Card Making: Set up a card making station in the clubhouse.
  3. Gift Wrapping Station: Set up a gift-wrapping station in the clubhouse.

 

Fourth of July Event Ideas

  1. BBQ: Pool party with hot dogs, burgers, chips and drinks.
  2. Fireworks: Most likely firework viewing, unless you want to do your own fireworks (depending on the local laws).

 

Halloween Event Ideas

  1. Costume Competition: Host a costume party and have everyone vote on the best costume, with the winner receiving a Halloween themed gift.
  2. 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.
  3. Caramel Apple Bar: Set up a caramel apple making station in the clubhouse.
  4. Trick-or-treating: Door-to-door trick-or-treating.

 

Christmas Event Ideas

  1. 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.
  2. Pictures with Santa: Have someone dress up as Santa and take pictures with the children.
  3. Cookie Frosting: Set up a cookie frosting station in the clubhouse.
  4. Cookies and Hot Cocoa Party: Host a party where you offer cookies and hot cocoa.
  5. Ugly Sweater Party: Everyone dresses up in their ugliest sweater and offer refreshments in the clubhouse
  6. Movie night: Watch It’s a Wonderful Life, A Christmas Story or your favorite Christmas movie.
  7. White Elephant: Host a gift exchange party in the clubhouse.

 

Free Food Ideas

  1. 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.
  2. Sip-N-Sweet Mondays/Fridays: Set up a coffee and donut station in your clubhouse.
  3. Wine Tasting: set up a wine tasting station with cheeses in your clubhouse.
  4. 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.
  5. Pops(icles) by the Pool: Hand out popsicles on a hot day at the pool.
  6. Snow Cones in the Shade: Hand out snow cones on a hot day at the pool.
  7. Sundae Sunday: Set up an ice cream sundae making station in the clubhouse.
  8. Taco Tuesday: Set up a taco making station in the clubhouse.
  9. 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

  1. Back to School party: Host a pool party for the kids on the weekend before school starts.
  2. Froyo Friday: Set up a frozen yogurt station in the clubhouse.
  3. Egg hunt: Host an egg hunt on Easter Sunday.
  4. Back to School Bingo Bash: Winners get free school supplies.
  5. Teddy bear picnic: Picnic for the kids with their favorite stuffed animal.
  6. Game night: Have the kids bring their favorite games to the clubhouse for a game night.
  7. Legos and Eggos: Serve waffles and offer Legos for the kids.
  8. Water Balloon War: Dodgeball, but with water balloons.
  9. 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.
  10. Arts and Crafts: Set up craft making or finger-painting stations in the clubhouse.
  11. Chalk Party: Provide children with sidewalk chalk to write on the parking lot or sidewalks, have a hopscotch competition with prizes.
  12. Superhero Party: kids dress up as their favorite superheroes.
  13. Princess Party: kids dress up as their favorite princesses and have a small fashion show.
  14. 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.
  15. Cupcake decorating: Set up a cupcake decorating station in the clubhouse.

 

Competitions with Prizes

  1. Trivia Night: Host a trivia night in your clubhouse with prizes.
  2. Game Night: Host a game night in your clubhouse with prizes.
  3. Chili cook off: Host a chili-making competition. Offer prizes (and maybe even a trophy) for the annual winner.
  4. Poker night: Host a Texas Hold’Em tournament.

 

Other Event or Party Ideas

  1. 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.
  2. Yard Sale: Host a yard sale in the parking lot by the clubhouse. Residents can sell stuff and buy stuff from other residents.
  3. Pool Party: Host a pool party with a DJ.
  4. 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.
  5. Nacho Average Tailgate: Set up a nacho making station in the clubhouse on gamedays.

 

For more event ideas, a great resource is www.apartmentlife.org.

 

What about you? Comment below: Have you hosted a resident appreciation event at your apartment community that isn’t on this list?

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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aerial view of real estate market

Ultimate Guide to Selecting a Target Real Estate Market

A well-known and widely accepted dictum in real estate investing is “it’s all about location, location, location.” That’s because the exact same property in two different cities can have drastically different rents, quality of residents, and values. And the same is applicable for two submarkets in the same city, or two neighborhoods in the same submarket, or two streets in the same neighborhood.

With this being the case, how do you determine which city, submarket, neighborhood, or street to target?

That’s where a market evaluation is performed in order to select a target market for real estate deals. A target market is the primary geographic location in which you search for potential investments.

How to Select a Target Market

Specifying a target market is important for more reasons than location. If your target market is undefined or is the entirety of the United States or a certain state, the number of opportunities will be so large that your deal pipeline will be unmanageable. If it is too large, it will be extremely difficult to gain the level of understanding required to make educated investment decisions. If it is too small, you’ll have problems finding enough deals that meet your investment criteria. Like the porridge in the story of Goldilocks and the three bears, your target market must be just right.

When attempting to select a target market for real estate, for both my clients and for my business, I advocate a three-step process. First, identify 7 potential target markets. Then, evaluate those markets using 7 variables. Finally, analyze the results and narrow down to 1 or 2 target markets.

Step #1 – Identify 7 Potential Target Markets

First, identify at least seven potential markets to evaluate. There are a few strategies for selecting these initial markets. One method is simply choosing the city in which you live, especially if you’re just starting out or are uncomfortable with the prospect of investing out-of-state. But even if you’re fearful of out-of-state investing, it is still important to select additional markets to evaluate so you can compare your city’s data to that of other cities to ensure that your city has a strong real estate market.

A second strategy is to Google “top real estate markets in the US.” If you’re an apartment investor, search “top apartment markets in the US.” Or substitute “apartment” with whichever investment niche you’re pursuing.

A third option is to review detailed real estate reports and surveys, created by different companies, about the condition of the markets. Even if you are selecting a target market for real estate at random or are using the Google approach, I would still recommend reading these reports for a deeper understanding of the overall real estate economy.

If you’re an apartment or multifamily investor, the reports I recommend are:

Step #2 – Evaluate 7 Markets

Next, once you’ve selected seven, you will perform a detailed demographic and economic evaluation of each. What follows is each of the seven market variables I analyze, including what to look for, where to find the data, and how to log the data.

1 – Unemployment

Specifically, you want to calculate the unemployment change over a five-year period. This will require the unemployment percentage for the city for the last five years. This data can be found on the Census.gov website under the “Selected Economic Characteristics” data table. A decreasing unemployment rate within your target market for real estate is ideal. A low, stagnant rate is acceptable. A high and/or increasing rate is unfavorable.

2 – Population

Calculate the population growth for both the target market city and metropolitan statistical area (MSA). This will require the population data for the last five years. An increasing population is ideal. A stagnant or decreasing trend is unfavorable, especially if supply and/or vacancy is on the rise. Both the city and MSA population data can also be found on the Census.gov website. The city data is located in the “Annual Population Estimates” data table. The MSA data is located in the “Annual Estimate of the Resident Population” data table.

3 – Age

Similarly, calculate the population change for the different age ranges, which can be found under the “Demographic and Housing Estimates” table on Census.gov. This will require the population age data for the most current year and the previous five years. The increasing or decreasing of specific age ranges within your target market for real estate will dictate the property types that will be in the most demand. For example, an increasing population of 25-to-34-year olds will put luxury apartments with nicer amenities in demand, while an increasing retirement age population will put assisted living facilities in demand.

4 – Jobs

Determine how diversified the job market is. This will require the employment data for the different industries for the most current year. A market with outstanding job diversity will have no one industry employing more than 25% of the employed population. Twenty percent is even better. That is because, if a certain industry is to dominate, the market will struggle or even collapse if that industry were to be negatively affected. This data can be found on the Census.gov website under the “Selected Economic Characteristics” table.

5 – Employers

Additionally, figure out who the top 10 employers are in the target market for real estate. Similar to job diversity, a market with one company that employees the majority of the city is unfavorable. Also, understanding who the top employers are will allow you to track developments with that company (i.e. are they creating a new facility, cutting jobs, etc.). This data can be found by Googling “(city name) + top employers.”

6 – Supply and Demand

Discover the change in rental vacancy rates over a five-year period and the number of buildings permits created for 5 or more unit buildings. A low, decreasing vacancy rate is ideal. A high vacancy rate that is decreasing is also a positive sign. A stagnant rate is okay too, but an increasing one is unfavorable. If the vacancy rate is decreasing, you will likely see an increase in new building permits, and vice versa. A high volume of building permits and an increasing vacancy rate is a huge red flag. The vacancy data can be found on the Census.gov website under the “Selected Housing Characteristics.” The building permit data can also be found on the Census.gov website. Locate the MSA annual construction page and select the data table for the most current year.

7 –Insights

Based on the “what to look for” standards outlined above, you will analyze the data and create “market insights” for each of the six market factors based on the following questions:

  • Unemployment: Has the unemployment rate increased or decreased over the last five years? Is it currently trending upwards or downwards?
  • Population: Has the city population increased or decreased over the last five years? What about the MSA population?
  • Age: What age range has the largest population increase? Largest decrease? Based on the largest increasing and decreasing age range populations, is your target investment type in demand? For example, if the largest population increase is the 45-to-54-year old range, assisted living facilities would be an attractive investment type.
  • Jobs: Which industry employees the largest portion of the population? Does that percentage exceed 20%? 25%? 30%?
  • Employers: Does one company employ a large percentage of the population? Are the top employers in similar or different industries?
  • Supply and demand: Are there a large or small number of new buildings permits? Is the trend going up or down? Is the vacancy rate increasing or decreasing? Is it higher or lower than five years ago?

Step #3 – Narrow Down to 1 or 2 Target Markets

Finally, after logging the data for all seven potential target market for real estate, analyze and compare the results and determine the top one or two best/ideal markets. Keep in mind that the markets you select will depend on your investment criteria as well.

A simple analytical approach is to rank each of the seven markets 1-6 for each of the variables. Then, add up the scores, and the market with the lowest total ranking is the “best.” For markets with similar rankings, use the market insights to determine which is superior, again, based on your investment criteria.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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raw cotton land

Advice for Raw Land Investing: How to Sell Raw Land at 300% to 1000% Profit

 

Last week, Mark Podolsky, who has completed over 5,000 raw land transactions in his 14-year investment career, taught us how to consistently buy raw land for $0.20 to $0.30 on the dollar. Here’s a recap of his raw land investing advice, which he calls “The Best Passive Income Model”:

 

  • He purchases the lowest hanging fruit, which is land that’s owned by investors who live out-of-state or owe back taxes.
  • He sends the owners an offer for $0.20 to $0.30 on the dollar.
  • A small percentage of those people accept the offer.
  • Once an offer is accepted, Mark conducts due diligence, purchases the property, and quickly resells it at 300% to 1000% return on investment.

 

Now, Mark is back for part 2 where he explains how to sell the land at a price that is 3 to 10 times higher than what he originally bought it for.

 

Mark has 5 main methods for finding potential buyers for his raw land investing deals, which are ranked from highest to lowest in terms of the number of overall deals closed:

1. The Neighbor

“We have a built in best buyer, the neighbor,” Mark explained. “The neighbor is going to give us a lot of good information on that property.” There are three typical scenarios when approaching a buyer, Mark said.

  • “Number one: they’re going to want to buy the property because [they’ll think] ‘hey, I don’t know who my neighbors going to be, so I want to control it.’”
  • “Number two: they’re like ‘hey I don’t want my property either’, and they want to sell it. Now we’ve got a larger asset to sell to somebody outside or to another neighbor.”
  • Number three: the neighbor isn’t interested in buying the land or selling theirs.

 

This is the most effective method for selling during raw land investing deals.

2. Buyer’s List

If the neighbor isn’t interested, the next best option is to go to your buyer’s list. “What I like to do every single day,” said Mark, “is [to] do something to create some value or educate people on the benefits of owning raw land.” Then, he will end the content with a call-to-action. Two example of calls-to-action would be, “If you want to learn more, just opt-in here” or “Get $250 off your first land purchase.”

 

This opt-in function is how Mark builds his buyer’s list. Then, he said “every week, I send them a promotion on a piece of raw land. Every week, I sell land to my list.”

3. Craigslist

If Mark has more than one piece of land to sell per week, or if he has exhausted his buyer’s list, he posts raw land investing deals to Craigslist. “Craigslist is the 10th most trafficked website in the US,” he said. “We use a program called Posting Domination. I’m able to automate 124 postings a day, all at the click of a button. It’s unbelievable. So we sell everyday on Craigslist, and we are building our buyer’s list everyday on Craigslist.”

4. Buy/Sell Facebook Groups

If, for whatever reason, you don’t want to use Craigslist, another option is Facebook. Mark said, “right now, people are selling all day long on buy/sell groups on Facebook.” However, these are not the typical raw land investing or real estate buy/sell groups. “They’re going to Craigslist buy/sell groups, recreational vehicles buy/sell groups, hunting buy/sell groups, or fishing buy/sell groups.”

 

This, like the previous methods of selling raw land investments, can be automated as well. “Using a tool like Buffer, which is free, or Meet Edgar, you can automate your Facebook postings in these buy/sell groups.”

5. The Lands

If the free platforms, like Facebook and Craigslist, don’t pan out, you can go to what Mark refers to as The Lands. “We can go to landfarm.com. We can go to landofamerica.com. WE can go to landflip.com. We can go to landwatch.com. We can go to landhub.com… There’s no shortage of them, and these are people looking for raw land.”

The Secret to Raw Land Investing

raw rural land

According to Mark, he has never been stuck with a piece of raw land. Every time he buys land, he is able to sell it. How has he accomplished this, selling 5,000 pieces of property and never getting stuck with a single one? Because Mark says, “I make it irresistible.”

“Just like a car payment, if it’s a car payment that everyone can afford – a low down [payment], a low monthly [payment] – it’s irresistible.”

 

Mark continued, saying, “I’m in the pulling business, not the pushing business. I’m not sending people [opportunities] or advertisements to get traffic. I’m going to places where people are already telling themselves a story that it’s very valuable to own raw land, even if they aren’t going to use it one day. It’s just a good asset to have.”

Example Raw Land Deal Structure

The reason why Mark calls his raw land investing strategy the “Best Passive Income Model” is because “it’s a one-time sale. Then you get recurring income without having to deal with a renter, rehabs, renovations, or rodents.”

 

How does he get recurring income? Let’s say that Mark has a 40-acre parcel in Nevada that he purchased for $25000 and is selling it to you for $25,000. You likely won’t have $25,000 in cash lying around. Therefore, at that point, here is a simplified example of a conversation that will occur:

Mark – “Hey, why don’t we do owner financing on a land contract.”

You – “Great. Let’s do it.”

Mark – “How much do you want to put down?”

You – “Well, I’ll put 10% down.”

 

At a 10% down payment, Mark will get his original $2500 back at closing. Then, you’re going to make payments to Mark over the duration of the loan, which is the passive income aspect of the raw land investing strategy. He gets monthly income without having to maintain or protect the property, because, after all, it’s just a piece of dirt.

Conclusion

Mark’s investment strategy is to purchase raw land at $0.20 to $0.30 on the dollar and quickly resell it at 300% to 1000% profit.

 

Mark’s top 5 sources of buyers are:

  • The neighbor
  • His buyer’s list
  • Craigslist
  • Facebook
  • The Lands

Mark has never been stuck with a piece of raw land because he always makes the deal irresistible. When selling the land, the typical deal structure is seller financing. Mark gets an initial down payment, which will usually cover his current out-of-pocket costs. Then, he gets monthly passive income in the form of a payment based on the seller financing terms.

Raw land investing can be hugely profitable, with few risks to you. If you have any questions or feedback about Mark’s model, please post them in a comment below.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

 

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TOP 10 Most Popular Best Ever Episodes

(Updated: July 30, 2019)

The Best Real Estate Investing Advice Ever show is the longest running daily real estate investing podcast on the planet! It is ranked in the Top 100 “Business” podcasts and Top 3 “Real Estate” podcasts on Apple Podcasts.

With over 1500 interviews with real estate pros, here is a list of the 10 most popular Best Ever episodes of all-time. Whether you are a loyal best ever listener and experienced investor or someone who is just looking to get started, you are guaranteed to find value – both educational and inspiration – in these episodes.

 

#1: JF1228: Two Unique Ways To Find Your First Off Market Apartment Deal #FollowAlongFriday

Joe and Theo tell us a couple surprising and proven ways to find an off market apartment deal. You might be surprised how easy it is for you to add these techniques to what you are already doing in your real estate business.

 

#2: JF1231: Leveraging Technology To Automate The Money-Raising Process with Craig Cecilio

With nearly $1 billion in real estate assets financed, Craig has been quite successful with raising money. One thing that sets him apart from other groups doing the same thing is he leverages technology. His offerings are still 506c but he uses a crowdfunding platform rather than doing one-off syndications for each deal. Using the crowd funding platform allows him to cut out the some of the middle-men and automate much of the process.

 

#3: JF1230: Find An Asset Class With Less Competition And Dominate It #SkillSetSunday with Tyler Sheff

When Tyler is looking for deals, he loves to find 5-50 unit deals. This is an interesting space because it cuts out the smaller investors who are intimidated by multifamily, simultaneously you cut out the bigger investors because the deal is too small for them. The biggest contributor to Tyler’s success he says is not assuming anything anymore, rather always asking questions. We get to hear great tips on how Tyler negotiates hs deals, be ready to take notes.

 

#4: JF1229: Hard Money Lending & Business Consulting All-In-One with Doug Fath

Doug and his company Legacy capital lend to investors and they also help them look to the future and grow their businesses. They work with their clients, not only funding deals, but also setting up one and three year plans. Doug says that even successful investors will not have one or three year plans, and are instead being ran by their businesses, rather than the other way around.

 

#5: JF1227: 3 Apartment Buildings Closed In Just 12 Months with Mark Yuschak

According to Mark, he was “fortunate enough to get laid off”, which allowed him to focus on real estate full time. Now Mark is a residential real estate broker and investor. He’s done 50+ flips has 20-25 rental SFR and now he owns 3 apartment buildings.

 

#6: JF1217: 2018 Market Predictions From An Expert Economist with Peter Linneman

Peter is with us for the first episode of 2018, and that is not by coincidence. An economist by trade, we get a TON of great advice when it comes to how we look at the economy and markets. Some of his best advice is to take a step back and look at the bigger picture, don’t just focus on your business or you’ll never see the full picture. At the end of the interview Peter gives us a 2018 economy prediction. You don’t want to miss this one!

 

#7: JF1221: Your Guide To Evaluating An Apartment Community Before Making An Offer #FollowAlongFriday

Follow Along Friday is back for the New Year! Today Joe and Theo tell us mistakes they have made when evaluating deals and what they do differently now. If you’re in the market for any property, especially apartment buildings or communities, this is definitely an episode you want to listen to.

 

#8: JF1486: From One SFR To Owning 100+ Units in Just Three Years While Working Full Time with Powell Chee

Powell bought his first property in 2015, which was just a single family home that he rented out. In the 3 years since then, Powell has acquired some bigger deals, for a total of over 100 units. Oh yeah, he’s also been working full time during this time!

 

#9: JF1212: Leaving A Comfortable Job To Pursue Investing Full Time with Pat Flynn

With the birth of his daughter, Pat needed a change. He didn’t want to miss out on his daughters life and with an offshore job, he would have missed 8 months per year. After weighing pros and cons, Pat took the leap, quit his job and began investing full time. Tune in to hear an inspiring story of chasing a goal, and succeeding while improving your life.

 

#10: JF1330: BRRRR 101: Real Life Example Of Scaling Using This Famous Method Of Investing with Joe Cornwell

Joe is a police officer in the Cincinnati, Ohio area. He’s also a very savvy investor and agent who has tackled three deals in his short time being an investor, with plans and goals to do more and more. Today Joe gives us details of his first BRRRR deal, a duplex that he renovated, rented, and refinanced. He was able to use that equity created and use it to buy a 6 unit, which is the beauty of doing BRRRR deals.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

 

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11 Questions to Ask When Buying Apartments

 

Anytime you evaluate an apartment community you need to know the income, expenses and debt service. You also need to get answers to these 11 questions…

  1. Why is the seller selling? 1031 exchange sellers have a completely different motivation level than sellers looking to “entertain offers”. Estate sales are different from someone who wants to retire and move to Florida. This is a critical piece of info that you’ll want to ask at least 3 times because the answer could change the more you ask.
  2. How long as it been on the market? Tells us more about the motivation factor and perhaps if there’s anything glaringly wrong with it
  3. Will owner do seller financing? Ahh, the two most beautiful words in the English language “seller financing.” Get this for every deal if you can. Make the terms so it’s a win-win for both sides.
  4. What is the screening process for new residents? Do they take people out of homeless shelters and give them an apartment? I’ve come across this. It’s ok to do but you just know what you’re getting into beforehand. Or do they have rental history, income requirements, work history, credit score and criminal background check qualifications.
  5. What is the effective occupancy? You and I can fill ANY apartment building so it’s 100% occupied. That doesn’t tell us squat. We need to know effective occupancy which tells us how many of those residents are paying.
  6. What is market rent? What do similar apts rent for in that area.
  7. What is market occupancy? You can get this from the property mgmt. company or broker.
  8. What type of work is needed on the property? Take with a grain of salt. There will be plenty more they don’t tell you that you discover during due diligence.
  9. When was the last time the ac units were cleaned? This question is for when you meet in person. It’s a silly question to ask over email but when you meet in person at the property ask it. If they don’t have an answer that’ll tell you they likely don’t have regular, ongoing maintenance as a priority. That means more money to be allocated in deferred maintenance.
  10. When did they buy the property and what did they pay? Find this out by asking your broker. Tells you what the seller is thinking in terms of what they will get out of the deal.
  11. What kind of financing is currently on the property? If their loan is set to mature in a year then that might mean there’s more motivation for them to make a deal happen vs. a loan maturing in 4 years.

Happy investigating!

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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