Statue of liberty

Real Estate Investing Lesson From Amazon’s New York HQ2 Cancellation

In a statement released today, Amazon announced that they will not move forward with their original plan to build their HQ2 in Long Island City, Queens in New York.

For more information on the logic behind their decision, click here to read Amazon’s full statement.

This decision is going to cost the region up to 25,000 new high-paying jobs, is a major revenue loss for the city and the state, and is a missed opportunity for New York to further transform itself into the tech capital of the world.

As real estate investors, we closely followed the Amazon HQ2 competition between cities and states. We knew that the city chosen for the HQ2 would benefit in many ways. More high-paying jobs in an area means lower unemployment, higher median income, more migration, increased likelihood of other business moving to and investing in the area, etc. All of these benefits also result in a greater demand for real estate – both rentals and owner-occupied homes.

Once Amazon announced the location (it actually ended up being multiple locations – New York, Northern Virginia, and Nashville), I am certain that many real estate investors began to look in those markets for deals. And some proportion of those investors actually invested in deals based on the expected future benefits to the real estate market once the HQ2 project was completed.

With Amazon’s announcement today that they are backing out of the New York location, the major lesson for real estate investors is don’t invest based on a business announcing its intentions to move to an area.

The first law of my Three Immutable Laws of Real Estate Investing is “don’t buy for appreciation.” Buying for appreciation is like gambling. Sometimes you win, most of the time you lose. A variation of this rule is “don’t buy for new headquarter announcements,” not until they physically move to the market.

Those who “gambled” on New York and underwrote their deals based on the Amazon HQ2 project will ultimately lose money on those deals, while those who “gambled” on Northern Virginia and Nashville may still ultimately end up winning. However, Amazon could have just as easily (and they still might) pulled out of both of those locations. We won’t know until the red ribbon is cut on opening day.

Don’t leave the preservation and growth of your or your investors’ hard earned money up to chance. Follow the Three Immutable Laws of Real Estate. Don’t get sucked into a new market for the sole reason that a major company announced plans to move their headquarters to that location. Wait to see if they actually move and then enter the market. Sure, you will pay more for the same piece of real estate than you would have before or directly after the announcement. But, you are completely eliminating the chances of losing most, if not all, of your money because you speculated on a deal and then the company ultimately reneges on their decision.

Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

unique apartment building architecture

Top 9 Cities with the Largest Increase in Renter-Occupied Units

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%.

 

Those 9 cities are:

 

9 – Glendale, AZ

AZ Sedans

  • 2006 % renter-occupied: 34.6%
  • 2016 % renter occupied: 44.9%
  • 10-year % change: +30.0%

 

8 – Mesa, AZ

desert scenery

Hotpads

  • 2006 % renter-occupied: 31.6%
  • 2016 % renter occupied: 41.2%
  • 10-year % change: +30.1%

 

7 – Virginia Beach, VA

Virginia Beach real estate

Unpakt

  • 2006 % renter-occupied: 28.6%
  • 2016 % renter occupied: 37.4%
  • 10-year % change: +30.9%

 

6 – Fremont, CA

Elegant cityscape

City of Fremont

  • 2006 % renter-occupied: 32.1%
  • 2016 % renter occupied: 42.1%
  • 10-year % change: +31.0%

 

5 – Toledo, OH

International Cash Systems

  • 2006 % renter-occupied: 38.3%
  • 2016 % renter occupied: 50.3%
  • 10-year % change: +31.3%

 

4 – North Las Vegas, NV

North Las Vegas sign

Review Journal

  • 2006 % renter-occupied: 33.4%
  • 2016 % renter occupied: 46.2%
  • 10-year % change: +38.5%

 

3 – St. Petersburg, FL

beach apartments

St. Pete Rising

  • 2006 % renter-occupied: 28.6%
  • 2016 % renter occupied: 39.8%
  • 10-year % change: +39.4%

 

2 – Plano, TX

Plano Texas apartment real estate

Cross Country Moving Companies

  • 2006 % renter-occupied: 24.2%
  • 2016 % renter occupied: 33.8%
  • 10-year % change: +40.0%

 

1 – Gilbert, AZ

Street Scout

  • 2006 % renter-occupied: 19.9%
  • 2016 % renter occupied: 30.6%
  • 10-year % change: +53.4%

 

Source: US Census

 

 

 

wholesale real estate in the city

Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction

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?!

Yep.

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.

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).

That said, the number of overall owners in the US still exceeds the number of renters (63.8% owners to 36.2% renters). However, the gap is closing. Because the number of big cities where more than 50% of the population choses to rent increased from 20% to nearly 50% during that same period. In other words, more and more people are choosing to rent over buying in big cities.

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?

Well, there are many reasons, including:

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.

That said, you want to always make sure you are adhering to my Three Immutable Laws of Real Estate Investing to maximize your real estate portfolio during any part of the market cycle.

 

Take the first steps towards passive investing.

Are you an accredited investor who is interested in passively investing in an apartment community?

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lightbulbs hanging from the ceiling

5 Proven Ways to Attract Passive Apartment Investors

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:

 

1 – Thought Leadership Platform

A thought leadership platform is an interview-based blog, YouTube channel, or podcast on which you publish valuable content for free on a consistent basis.

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.

Best Ever Podcast guests

Top Best Real Estate Investing Advice Ever Shows of 2018

Here are the most downloaded Best Real Estate Investing Advice Ever Show episodes of 2018, which were listened to over 200,000 times!

 

Top 5 Regular Shows of 2018

JF1231: Leveraging Technology to Automate The Money-Raising Process with Craig Cecilio

JF1227: 3 Apartment Buildings Closed in Just 12 Months with Mark Yuschak

JF1217: 2018 Market Predictions from Expert Economist with Peter Linneman

JF1225: Deal Machine Helps Investors Find Property Owners Faster with David Lecko

JF1330: BRRRR 101 – Real Life Examples of Scaling Using This Famous Method of Investing with Joe Cornwell

 

Top 5 Follow-Along Fridays/Friday Shows of 2018

JF1228: Two Unique Ways to Find Your First Off-Market Apartment Deal

JF1221: Your Guide to Evaluating an Apartment Community Before Making an Offer

JF1291: What Is the Best Apartment Investing Strategy?

JF1305: The Psychology of Success: Why Your Mindset Will Make or Break You with Rod Khleif

JF1340: Can Your First Investment Be An Apartment Community?

 

Top 5 Situation Saturdays of 2018

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

JF1306: He’s Got Capital For Your Deals with Dan Palmier

JF1313: Making the Move From Single Family to Multifamily Investing with Anna Simpson

JF1362: Make $500k in One Year with BRRRR with Adam Kitchener

JF1299: Finding a Niche, Creating & Executing a Business Plan with Nathan Tabor

 

Top 5 Skillset Sundays of 2018

JF1230: Find an Asset Class with Less Competition and Dominate It with Tyler Sheff

JF1244: FBI Negotiating Strategies for REI Deals with Chris Voss

JF1223: How to Professionally Generate & Convert Leads with Scott Corbett

JF1314: Raising Capital & Finding Funding with Lee Arnold

JF1307: Apartment Due Diligence – How to Evaluate the Mechanics of a Deal with Nathan Tabor

 

Comment below: What was your favorite episode of 2018?

Joe Fairless Top Blog Posts 2018

Top 8 Best Ever Blog Posts From 2018

Happy New Year everyone!

To start the new year, I wanted to share the most viewed Best Ever blog posts from 2018 with the purpose of creating a one-stop shop for your favorite blog posts from the past 12 months:

 

8 – Apartment Syndication School

Syndication School is a weekly, two-part podcast series focused exclusively on providing aspiring and active apartment syndicators with the knowledge and the tools (we provide FREE documents and spreadsheets for each series) needed to launch, scale, and maintain an apartment syndication business. We update this page each week with new podcast episodes and documents, so be sure to bookmark this page!

Read this blog post by clicking here.

 

7 – 6 Creative Ways to Break into Multifamily Syndication

The two main requirements before becoming an apartment syndicator are experience and education. You’re a loyal Best Ever follower, so you should have the education piece covered. However, if you are lacking in the experience arena, here are 6 ways to get hands-on apartment syndication experience in preparation for venturing off on your own.

Read this blog post by clicking here.

 

6 – BRRRR Strategy: Formula to Buy 5 Rental Properties in 2 Years and Payoff in 7

This 2:5:7 strategy implemented by Andrew Holmes is one of the fastest strategies to achieve financial independence that I’ve ever come across. A variation of the renowned buy, rehab, rent, refinance, repeat aka BRRRR strategy, follow this strategy to purchase a minimum of five properties every two years and pay off the debt in seven years to set yourself up for long-term success and debt-free wealth.

Read this blog post by clicking here.

 

5 – 16 Lessons On Buying Apartment Buildings From Over $400,000,000 in Apartment Syndications

This blog post is a beast. Coming in at nearly 6,000 words, it covers nearly every lesson I’ve learned since doing my first apartment syndication deal in February 2014.

Read this blog post by clicking here.

 

4 – Best Ever Apartment Syndication Book

In 2018, Theo and I released a 450 page textbook on how to launch an apartment syndication empire from scratch. We’ve received a TON of positive feedback about the immense value provide by the Best Ever Apartment Syndication book for which my team and I are eternally grateful. Head on over to Amazon today and pick up a copy. Be sure to leave a review and send a screenshot to info@joefairless to receive a free package of additional apartment syndication resources and have the opportunity to be featured on Follow-Along Friday.

Read this blog post by clicking here.

 

3 – Success Blueprint: How to Find Tax-Delinquent Properties & Contact The Owners Via Direct Mail

Written over 2 years ago, this article, which summarizes the Best Ever advice of wholesaler, fix-and-flipper, and buy-and-hold investor Mikk Sachar, is one of our all-time most popular blog posts. Learn everything there is to know about conducting direct mailing campaigns to delinquent tax lists.

Read this blog post by clicking here.

 

2 – The Top 14 Best Ever Apartment Investing Books

Remember the two requirements to becoming an apartment syndicator? That’s right – education and experience. Read the books on this list and you will cover that education requirement, and then some.

These are the 14 books that I attribute in part to my ability to go from making $30,000 a year in a corporate 9 to 5 job to controlling over $400,000,000 in apartments in less than 5 years.

Read this blog post by clicking here.

 

1 – Passive Investor Resources

The most popular page from 2018 is our passive investor resources page. If you are a sophisticated or accredited investor who is interested in learning more about investing in apartment syndications or a syndicator who wants to learn more about why a passive investor choses one general partnership over another, this is the go-to, comprehensive resource created specifically for you!

Read this blog post by clicking here.

 

Again, Happy New Year and I wish you continued success in 2019!

 

Comment Below: What is a topic you want to see us cover in 2019?

single family homes

What is Wholesaling Real Estate Investing & How to Get Involved

Want to build wealth sooner rather than later? You generally can’t go wrong with real estate investing, as long as you know what you’re doing. In fact, research shows that 90% of millionaires across the globe achieved their financial success as a result of real estate investing.

 

Of course, breaking into the real estate field can be a daunting task. Fortunately, that’s where wholesaling real estate investing comes in!

What is Wholesale Real Estate?

This refers to properties that are drastically discounted — or significantly under market value. If you choose to take part in wholesaling, you’ll essentially look for a discounted property that you can control via a purchase agreement. Then, while you’re under contract via this agreement, you’ll look for a buyer who wants to buy the contract.

What Else Is There to Know about Wholesaling?

As a wholesaler, when you decide to sell contracts, you’re not actually selling properties themselves. Rather, you’re selling to other buyers your right to purchase these properties. Basically, you’re looking for deals and then passing them along to end investors. The benefit of the wholesaling process is that it helps you to avoid risk and also avoid tying up your capital for as long as it would take to complete a rehab.

Steps for Wholesaling Real Estate Investing

To get started, it’s critical that you first research the local market in which you plan to find deals. For example, you should take a close look at what housing prices are there to see how low they go (the lower, the better). Then, you should start working on your list of buyers.

The buyers list is one of the most important tools you’ll use when wholesaling, or serving as a middleman between sellers and buyers. A practical way of building your buyers list is to attend local real estate networking meetings or to even going on real estate investing podcasts. The more individuals who know you in the industry, the more likely you are to get leads regarding properties you can pursue as a wholesaler.

The Capital Angle

It’s also paramount that you line up the capital you need to bring your deal to fruition. This is possible by aligning your wholesaling service with a hard money or private seller right away. In this way, you can purchase the house if you end up needing to do so.

Get Started!

If you are eager to create more wealth for yourself and your loved ones, wholesaling real estate investing is a smart place to start. However, failure to make the most of each step of this process will prevent you from experiencing the level of profitability your competition is quickly realizing. Take your time and review as many resources as humanly possible to learn all you can about wholesaling.

small neighborhood with lots of homes

New Year’s Resolutions Every Real Estate Syndicator Should Have This Year

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.

Here’s a look at a few New Year’s resolutions and real estate investment strategies that every syndicator like you should have:

 

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.

Niche-Related Diversification: 

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.

Geography-Based Diversification: 

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.

Special Contingency: 

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!

Top 4 Real Estate Market Trends & Red Flags to Look for For Before Investing

You no longer have to sip your cup of joe on your way to your 9-to-5. Instead, you’re sipping coffee as you browse the Internet from home, looking for the next piece of real estate to flip for a profit. All of a sudden, you shake your head and snap back to reality. You were daydreaming. But who says your dream of becoming your own boss as a real estate investor can’t become your reality?

 

Research shows that investment in commercial real estate in particular increased 17% between the fall of 2017 and the fall of 2018, and residential real estate also remains attractive to investors. So, if you’re asking yourself, “What is the best long-term investment?”, now appears to be as good a time as any to seriously explore investing in single-family homes, apartment communities, or even business spaces as your next career move.

 

Of course, just like the greater economy, the real estate market goes through various highs and lows, so it’s critical that you assess the current market before simply diving in. Here’s a rundown on the top four real estate market trends or red flags to look for before investing in a deal.

1. The Demand for Property

If you notice a slip in property demand and/or you see businesses folding in a real estate market, this is a sign that you should not invest your money in the area right away for two reasons.

 

First, if companies are shutting down rapidly, this means that property values overall may start to decline as people move away and seek new job opportunities. Second, if business owners are avoiding the area, this might mean that the demand for properties in that area is low for one reason or another. If you ignore these signs and move ahead with a property purchase there, you may not get much return on your investment when you decide to sell. Or it might take a while for you to unload it.

 

Reasons for Low Interest in an Area

If a certain area is not piquing the interest of buyers, the culprits could be increasing crime rates, new developments close by, subpar school systems, or a less-than-stellar economy. No matter what the situation may be, it’s a good idea to select locales that are established or are rising in popularity if you want to avoid profit loss in the future.

2. The Job Market

In a similar vein, before purchasing real estate in a certain market, you should take a detailed look at your target area’s current job trends. For instance, are hiring volumes climbing and what kinds of positions are available?

 

This is critical because job market trends have a correlation with real estate market trends. For instance, if jobs in an area are not high-paying and don’t offer much growth potential, there will be fewer reliable renters or buyers available to you.

3. The Commercial Sector

A commercial sector that is stagnant in an area is a major red flag for investors. If businesses in a locale haven’t been there very long or if there aren’t many new companies moving in, this area might not be the wisest place to pursue an investment property. Many companies invest in their communities, so areas with lots of industry or other businesses are likely more financially sound.

 

Also, see if any major employers are planning to close their doors or downsize in the near future. If it appears that large employers plan to stay put long-term, this is good news for you. You can find information about which companies are planning to stay or go by reviewing local newspapers or even city council meeting and zoning board meeting minutes.

4. Community Planning

If the community you’re targeting for your investment property has a solid master plan in place, it’s likely a good one to stick with. That’s because master plans essentially lay out communities’ visions for themselves, and visionless communities will likely end up fizzling out at some point.

 

Elements of a Solid Master Plan

 

A strong master plan at the community level should explain not only how the community sees itself but also how it plans to turn its vision for itself into a reality. This plan outlines truly realistic and relevant changes, and it also focuses on actual solutions. Furthermore, it fosters innovation and promotes problem-solving. If there is little evidence that a community’s master plan is being executed, you may want to bypass that community when it comes to looking for a real estate investment property.

Start Real Estate Investing Today!

If you’re asking, “What is the best long-term investment?” and you are interested in getting your feet wet in real estate investing, I can help. In no time, you can experience the unique monetary potential that real estate has to offer. Get in touch with me today to find out more about the current real estate market trends and to start earning money as a real estate entrepreneur.

Basics You Should Include in Your Real Estate Investment Strategies

One of the smartest moves you could make as you search for streams of reliable revenue (both passive and active) is to get serious about real estate investing. That’s because research shows that real estate is among the safest types of investments you could make.

 

The question is, how exactly can you get started? Here’s a rundown on the basics you should include in your real estate investment strategies.

Active Strategies: Rental Properties

When it comes to investing in property, you have a couple of avenues that could lead to real profits for you: active real estate investing and passive real estate investing. We’ll first take a close look at active strategies, which include rental properties.

 

Investing in rentals—which is among the most frequently used strategy—basically involves buying homes or apartment communities, advertising for tenants on social media or rental websites, and then renting out your properties for amounts that will cover your mortgage payments and operating expenses with cash flow left over. As an investor, you can choose to manage your properties on your own, but the process may be easier if you hire a property management company to oversee them instead. The property management company can locate and interview potential tenants, collect rent payments, and address complaints that might arise.

 

Real Estate Investment Strategies for Beginners: Who Should You Target with Your Rentals?

 

Note that research shows that millennials should make up around 30% of the pool of buyers over the next decade. In addition, nearly 50% of them live in the suburbs. Therefore, purchasing rental properties in the suburbs versus urban areas may be a smart move for your business.

Vacation Rentals

Buying vacation rental properties is another excellent component of some real estate investment strategies. After all, many people around the world prefer to stay in homes that are privately owned versus hotel rooms these days. You can simply purchase either a turnkey property or one needing repairs and get it ready for guests. Afterward, you can list your short-term rental on a website such as VRBO or Airbnb. The particular booking agency you use will likely handle correspondence and payments on your behalf for a portion of the profits you receive.

 

Vacation rental properties can be especially invaluable investments if you live in a location that receives many tourists. At the same time, you’ll need to be okay dealing with constant tenant changes, repairs, money handling, and cleaning, for example.

Property Flipping

If you are interested in fix and flip properties — perhaps because you’ve seen it done repeatedly on television — you are in good company. Research shows that home flips reached their highest number in 11 years in 2017 at more than 200,000.

 

If you decide to flip a house, you’ll need to look for properties that need multiple repairs. The great thing about these homes is that you can generally get them for very low prices. You can oftentimes find them on online real estate listings or even via word-of-mouth through local real estate investing clubs. Then, you can fix up the property and sell it for a larger amount than you poured into it. The process can no doubt be daunting, which is why many investors hire professionals to help them with it.

How Quickly Can You Sell Your Property?

Research indicates that homes featured on the Multiple Listing System (MLS) are selling much faster today than they did years ago. In fact, homes’ median length of time on the market was 91 days back in March 2012 compared with 34 days in March 2017. This is great news for investors like you who are interested in flipping and selling homes in the coming months!

Passive Real Estate Investment Strategies: Real Estate Investment Trusts (REITs)

Passive real estate investing is generally a good option if you don’t have much experience with managing rental properties or if you have significant funds and would like to diversify your income. For starters, you can invest in REITs—companies that finance or own commercial properties via equity investments or debt. REITs usually offer real estate portfolios, rather than single properties, to investors.

 

These companies will basically sell REIT shares to you and you’ll earn dividends on them. The benefit of this strategy is that you can earn money from various properties in a less risky manner than you might with rentals.

Online Real Estate Investing Approach

With today’s increasingly popular real estate investment platforms online, you as an investor locate portfolios that align with your interests and needs. In this way, you can choose which portfolios to invest directly in. Then, the team associated with the platform will identify, acquire, and manage real estate assets on your behalf.

 

These online platforms are a lot like today’s in-demand crowdsourcing platforms. One of the benefits of this approach is that it doesn’t have to cost you a lot of money. In fact, you can begin online real estate investing with a site such as Fundrise, which requires just $500 to get started.

Real Estate Limited Partnership (RELP) Approach

A RELP is a group of people who invest in properties together. Joining these types of partnerships is yet another one of today’s many promising real estate investment strategies.

 

RELPs usually have development firms or property managers as their general partners. Once they are formed, they seek extra financing from investors like you for their real estate–related projects. In exchange, they’ll give you ownership shares, and you can be a limited partner. In this role, your influence on real estate decisions might be limited, but you also limit your liability. Therefore, if your RELP ends up facing a hardship, you won’t be liable for anything beyond your own capital contributions.

Start Implementing these Real Estate Investment Strategies Today!

If you are eager to boost your income or even quit your 9-5, now couldn’t be a better time to start tapping into the above-mentioned strategies. Get in touch with me today to learn more about the many real estate investment strategies that can help your company financially.

investment plan written in notebook

What it Means to be an Accredited Passive Investor & the Requirements to Become One

Being an accredited passive investor gives you the ability to make and participate in a wide variety of real estate investments. These may include single-family homes, commercial spaces geared towards businesses, and even apartment syndications.

According to federal securities laws and the Securities and Exchange Commission (SEC), an accredited passive investor is defined as a person or entity that is able to invest in securities, such as apartment deals, and non-registered investments. Both securities and apartment syndications are an extremely lucrative way to build sustainable passive income. Whether you’re looking to build your investment portfolio or simply want an additional stream of income, becoming an accredited investor is the first step to making that a reality. So what are the accredited investor requirements and how can you ensure that you become one?

Your Income and Net Worth

In order to qualify as an accredited investor, you must meet at least one of the following requirements: have an annual income of $200,000 or more ($300,000 if you have a joint income with your spouse) for the last two years or have a networth that exceeds $1 million, either individually or joint. Basically, this ensures you can manage the risk inherent in investing.

When determining your net worth, be sure to exclude the value of your primary residence. Add the value of all your other assets (investments, bank accounts, vehicles, vacation homes, etc.) and subtract any liabilities (various loans, home equity line balance, etc).

Verifying Your Claims

Once you have met the accredited investor requirements, then you are considered an accredited passive investor. There isn’t a certificate or formal process to recognize you, but the SEC does require that individuals or entities selling to accredited investors verify that these requirements are met.

This process is known as due diligence and is taken incredibly seriously by all investors. Before you are able to make any investment, due diligence will be done to confirm all of your information. This means that you may be required to submit W-2 forms, tax returns, and any additional documentation that further confirms your financial standing.

Benefits of Accreditation

There are many benefits to becoming an accredited investor, particularly when it comes to real estate investing and building sustainable wealth through real estate. If you are able to meet the accredited investor requirements, then you will be able to meet with apartment syndicators, venture capitalists, hedge fund managers and more to further discuss your investment opportunities.

As a passive investor, it is possible to eventually live on cash flow brought in by your investments. When buying into an apartment deal, for example, you will get a portion of the rent from the residents, as well as the eventual sale of the property. This means bringing in money for bills and leisure while making time for the activities and people you love.

For more detailed information on becoming an accredited investor and to learn more about investment opportunities for accredited investors, check out my comprehensive Passive Investor Resources guide.

commercial real estate with unique architecture

How to Increase Your Return on Investment for Apartment Real Estate

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.

Increase Rent

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.

house decorated with Christmas lights

Tips for Balancing Real Estate Investment Deals with Family During the Holidays

The end of the year and the holiday season can be an exciting time for many reasons. While this is a great opportunity to focus on your real estate investment deals and planning real estate investment strategies for the upcoming year, it is also a time to spend with friends and family. It can be tough finding a balance between work and family any time of year, but this is especially true during the holidays. So what can you do to ensure that your deals don’t fall through as the end of the year approaches? Here are my top 3 tips for balancing business with family during the holidays.

Prioritize What Really Matters

With so many different things going on at the end of the year, the most important thing to do is prioritize your responsibilities. Make of a list of your top 5 to-dos for the end of the year and only focus on those specific things. Whether that means closing your last real estate investment deal, finalizing your new marketing plan, or making sure to spend every Saturday with your family and friends. These are the top things that you want to focus on in order to finish the year strong.

Expert Time Management

Time is the most valuable asset that you have. If you are able to properly manage that, you will be able to better manage a hectic holiday schedule. Having a career in real estate can be incredibly time-consuming if you don’t manage your time effectively.

Break down your day into sections that focus on your top priorities. For example, if you know that you’re most productive in the mornings, block those off to work solely on your real estate investment deals or completing research. You can save responding to emails, calling investors, and any meetings for the afternoon. Having clear sections for your day will make it that much easier during the holidays to plan time away from work and celebrate with family.

Set Actionable Goals

Goal setting is a technique that many of the world’s most successful people use to stay ahead. An actionable goal is something that is specific and clear for you to work towards. Setting actionable goals you can accomplish before year end is a great way to stay ahead this holiday season and ensure that you have a strong start to the next year.

To get the best real estate investment advice ever, visit my blog to learn more about creating wealth and financial freedom through real estate investing.

a row of homes in a neighborhood

Top Trends in Real Estate Investment

Real estate trends and investment opportunities are always fluctuating and changing along with the market. This year has been no different. Being aware of recent patterns will help you to better navigate the market and to make better investment decisions overall. Whether you’re looking to start investing in real estate or are an experienced, accredited investor already, here are some of the movements to pay attention to.

Single-Family Homes

Single-family homes have continued to be a real estate trend as the market continues to grow. This property type is defined as a single unit structure that is detached from anything else. As more and more individuals are looking to rent more than just apartments, this is creating a growing market for rental homes. As a result, investors are increasingly becoming more active in building this market segment.

Single-family homes can be a great long-term investment option depending on your individual financial goals. But there are a variety of important considerations that should be made before investing in a single family home. First and foremost, location is a huge factor that must be considered. Is the property located in a good area? What is the local school district like? Particularly since this property type attracts families, you want to ensure that you are taking that into account when developing an investment strategy.

Interest in Texas

It’s no secret that Texas is a state that continues to generate huge opportunities when it comes to real estate trends and investments. This year in particular, the industry has seen continued interest and growth in Texas. With the growing and profitable oil and businesses, there are more and more companies that are flocking to the Lone Star State. This growth is creating more and more real estate investment opportunity in the state, including commercial spaces.

A Rise in Rentals

Another trend that has been steadily growing over the last few years is the increase of rental rates, particularly in cities. As cities continue to boom and grow, so does the number of people looking to rent property. What this means for real estate investors is that there will likely continue to be more and more opportunities to invest in apartment syndications. This means making passive income from monthly rental fees and the eventual sale of the property!

If you’re interested in learning more about investing in apartments, I created an entire FREE apartment syndication school to give you a solid foundation on the subject and the basics you need to be a successful investor.

New Construction

Another real estate trend that has been sweeping the country recently is a rise in new construction. This property type is defined as a building or home that is brand new and has never been occupied before. As the population grows, there is a need for new houses or rental spaces. As a real estate investor, purchasing a new construction property or apartment complex in a stable area could be a great addition to any investment portfolio.

Use of Technology

All aspects of the real estate market have been impacted or updated due to the continued use of technology, and this especially applies to marketing and online listings. More and more, the use of online marketing is helping to build awareness of what’s going on in the real estate industry. With the popularity of apps continuing to grow, you can now search for property listing, check housing prices, and see what realtors are active in your area all at your fingertips. This access to information is also making it easier to meet and connect with other investors that are also interested in purchasing or investing in real estate.

But the technological impact has not just be limited to apps. This includes the use of professional photographers and videographers, as well as staging floor plans and designs. This means that, when looking at a property online or via an app on your phone, the quality and level of both photography and interaction has improved. This continued use of technology will raise the bar for investors and buyers alike. Technology is truly shaping the way that all stakeholders in the real estate industry interact.

Last Thoughts

Real estate trends and markets will continue to grow and develop with time. As you become more and more familiar with real estate investment trends you will be able to better recognize what opportunities you can capitalize on. Being aware of the trends and regularly keeping up with the latest market regulations will help you to be a more informed and successful investor.

To learn more about real estate investing and to get detailed advice on how to grow as an investor, check out my blog.

investment deal and handshake

Raising Real Estate Investment Funds

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:

  • Larger Deals
    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.

red and white apartment building

What Every Passive Investor Should Know About Apartment Syndication Deals and Income

Apartment syndication is becoming an increasingly popular real estate investment strategy for many reasons. Being a passive investor who is involved in apartment deals gives you the flexibility and freedom to use your time to pursue other ventures while still generating income.

While this is definitely a trending strategy today, apartment syndication is by no means simple. Learning the ins and outs of investing is crucial to becoming a successful real estate investor, particularly when it comes to closing deals. Here’s what every passive investor should know about apartment syndication:

The Basics

To start, gain a brief overview of apartment syndication from the perspective of a passive investor. Your role during an apartment syndication deal is to provide the general partner (GP) with capital to invest in the purchase of apartment complexes. This investment is similar to other investments in stocks or bonds but typically offers a much better return.

Essentially, you help fund the deal, which does not require that you be actively involved in the day to day management of the project. Most apartment syndications will require a minimum investment amount, so it is important to do your research and know exactly how much you are able to invest. Additionally, how often investors are paid depends on the general partner and overall business strategy. However, most investors are typically paid on a monthly basis.

How to Make Money

There are two kinds of passive income investments when it comes to apartment syndication. You would be either an equity or debt investor. There are advantages to both investment types and which option you choose depends on your financial goals and risk preference. For equity investments, a passive investor is able to make money through 2 different aspects: preferred returns and profit splits.

  • Preferred Returns
    A preferred return is defined as “the threshold return that limited partners receive prior to general partners being paid”. This amount is typically between 2-12% per a year, depending on the investment.
  • Profit Splits
    Profit splits involves sharing the profit of the investment between general partners and passive investor or limited partners (LP). This could mean a 50/50 split or 80% to the LP and 20% to the GP. Typically most deals will involve a mix of both preferred returns and profit splitting.

For debt investments, a passive investor makes money from interest payments. The interest rate is typically set by the general partner and will vary depending on the deal structure. Debt investors will also usually get their investment capital back before the apartment syndication is complete and the property sold.

Becoming an equity or debt investor depends on your individual investment goals. All passive income investments are different and will require you to thoroughly research and review the deal in order to determine if it will make sense for you financially.

Types of Apartment Syndications

Every passive investor interested in apartment syndication should be aware of the two key types of deals that are available: a distressed property or value-add property. Each property type has its own specific opportunities and risks. A distressed property is defined as a non-stabilized apartment complex. This type of property likely suffers from poor operations, problems with tenants, outdated facilities, and more, which all contribute to an economic occupancy rate that is lower than 85%.

In comparison, a value-add property is defined as a stabilized apartment complex that is well maintained but is either outdated or operating inefficiently. This type of property is stable with an economic occupancy rate that is more than 85%.

Know the Business

Regardless of what deal you are considering as a passive investor, it is always important to know how the real estate business works. This includes understanding both the opportunities and risk associated with a particular apartment syndication deal. Take the time to really analyze and discuss the benefits of the deal with the general partner before making any decisions.

Some key terms to know and study:

  • Accredited Investor
  • Net Operating Income (NOI)
  • Cash Flow
  • Breakeven Occupancy
  • Internal Rate of Return (IRR)
  • Profit and Loss Statement
  • Exit Strategy

Here is a full list of important terminology, with definitions and examples, that will help when reviewing any apartment syndication.

Every general partner should be open and transparent when it comes to any potential risks involved with the deal. Every investment has risks, so don’t believe anyone that tells you otherwise.

Having experience in the real estate business, and particularly apartment syndication, is incredibly valuable when looking for new passive income investments. Be sure to discuss with the general partner all of the previous deals they have worked on and how they performed based on the business plan. This will give you an idea of the level of risk, particularly if the rest of the team is inexperienced.

The Bottom Line

When it comes to passive income investments it is important to work with the right group of investors and general partners in order to make sure that you are meeting your financial goals. Part of being a passive investor is giving your control to other partners who ultimately make decisions on how your money is invested. Having the right team of people will limit the amount of risk in your investment.

For more information about this type of investment, check out my comprehensive passive investor resources!

$100 bills in a wallet

How to Earn Tons of Extra Cash-Flow While Still Working Your 9-5 with a Real Estate Passive Income

Most people know what it’s like to sit at a 9-5 job everyday and wish there was a way to simultaneously make more money. Real estate passive income is one of the best ways to not only generate passive income while still working your day job, but also to build wealth to one day not have to actively work at all. Investing in real estate doesn’t have to just be a dream. With the right tools and training, you can begin investing in real estate and turn your dream into a reality.

So how do you get started in real estate and set yourself up for financial success? Passive income through investing will take some time and research to set up but is well worth it in the long run. Doing the research to determine which investment strategy is right for you will allow you to make decisions that align with your overall financial goals. Having clearly defined goals is also important in guiding the entire investment process.

One of the first steps to getting started with real estate passive income is figuring out exactly how much money you have to invest in a particular strategy or deal. Once you know how much you can spend, you will be able to identify your target market. After that, you will then be able to explore which passive investment option is best for you.

Rental Properties

One of the most common ways to create real estate passive income is by owning a rental property. By renting out an apartment or home every month, you have the ability to generate significant income. As long as the price of rent exceeds the amount of the mortgage, maintenance, and management of the property, you will actually make money every month. That revenue can then to used to expand your investment options, retirement fund, or savings.

Having the right tenant and being able to easily attract tenants is also an incredibly important factor that should be taken into consideration when deciding to rent. With the right tenant who pays on time and cares for their space, investing in a rental property is one of the best sources of passive income.

Apartment Syndication

Apartment syndication is another profitable option for creating real estate passive income. This will often require you to partner with a syndicator who brings together capital from multiple investors like yourself to purchase an entire apartment complex. The process can be complex and is considered an advanced real estate investment option.

However, the complexity of the process is often well worth it. One of the biggest advantages of being a passive investor is being able to get the benefits of owning an apartment complex without having to commit all of your time like active investors. This option is similar to investing in stocks or bonds and is a long-term investment strategy.

Diversify Your Investments

One of the key rules to investing in real estate is to diversify your portfolio. This is particularly true as a passive investor just starting out because diversification helps to mitigate risk and increase profitability.

As an example, this may mean investing in both rental properties as well as single family homes or investing in rental properties in multiple states to expand your investment to a variety of different markets.

Learn More About Passive Investing

The more you learn about real estate investing and passive investment options, the better you will get at identifying the right opportunities. Take advantage of all the information available regarding becoming an accredited passive investor by taking online courses, attending training programs, and diving into as many books on the top as you can. Having a solid understanding and knowledge of real estate will give you the ability to make the best decisions for your financial situation.

Earning tons of extra cash flow while still working your 9-5 job is possible with real estate passive income. With the right preparation and research, you can start investing and work toward financial freedom.

contemporary apartment complex

Investing in Apartment Complexes: What It Takes to Become an Apartment Syndicator

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.

Business Savvy

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
  • Negotiating
  • Business plan development
  • Problem-solving
  • Communication skills
  • Marketing
  • Networking
  • Finance

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.

10 Fastest Appreciating Housing Markets in the US

Veros recently released it’s third quarter VeroFORECAST, which predicts property value trends in metropolitan statistical areas (MSA) across the US between September 2018 and September 2019.

According to the report, the top 100 most populated MSAs will appreciate 4.5% over the next 12 months. Of all MSAs, Vero predicts that 97% will appreciate and 3% will depreciate. The VP of Statistical and Economic Modeling at Veros, Eric Fox, said “This is the 25th quarter in a row where this index has forecasted overall appreciation.”

VeroFORECAST predicts that seven MSAs will experience depreciation over the next 12-months:

  • Torrington, Connecticut: -0.2%
  • Texarkana, Texas-Texarkana, Arkansas: -0.2%
  • Ocean City, New Jersey: -0.4%
  • Peoria, Illinois: -0.7%
  • Danville, Illinois: -1.2%
  • Vineland-Millvilee-Bridgeton, New Jersey: -1.6%
  • Farmington, New Mexico: -2.2%

Now, that doesn’t mean that you should invest in these markets, because when we follow the Three Immutable Laws of Real Estate Investing, we don’t take appreciation into account. It is just a bonus. However, if you want to increase your chances of receiving this appreciation bonus, you should consider looking into these 10 markets that are predicted to experience the most appreciation in the next 12 months.

 

10. Seattle-Tacoma-Bellevue, Washington

Belkins Northeast

 

Projected appreciation between 10/1/18 and 10/1/19: +9.3%

 

9. Denver-Aurora-Broomfield, Colorado

Denver.org

 

Projected appreciation between 10/1/18 and 10/1/19: +9.5%

 

8. San Francisco-Oakland-Fremont, California

Lonely Planet

 

Projected appreciation between 10/1/18 and 10/1/19: +9.6%

 

7. Reno-Sparks, Nevada

Think Stock

 

Projected appreciation between 10/1/18 and 10/1/19: +10.0%

 

6. Carson City, Nevada

Flickr

 

Projected appreciation between 10/1/18 and 10/1/19: +10.1%

 

5. Olympia, Washington

Wild Tales Of

 

Projected appreciation between 10/1/18 and 10/1/19: +10.3%

 

4. Bellingham, Washington

Wikipedia

 

Projected appreciation between 10/1/18 and 10/1/19: +10.6%

 

3. Las Vegas-Paradise, Nevada

Time Out

 

Projected appreciation between 10/1/18 and 10/1/19: +10.8%

 

2. Boise City-Nampa, Idaho

OneClass

 

Projected appreciation between 10/1/18 and 10/1/19: +11.2%

 

1. Bremerton-Silverdale, Washington

Wikipedia

 

Projected appreciation between 10/1/18 and 10/1/19: +11.7%

 

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.

SFRs Vs. Apartment Syndications: Which Is The Better Passive Investment?

We’ve weighed the pros and cons of passive apartment investing versus investing in REITs, but what about another type of real estate — single family residences? To passively invest in single family residences (SFRs) is to purchase an SFR with the purposes of holding it as a rental property from a turnkey provider who handles every aspect of the transaction. To passively invest in apartments is to invest in an apartment syndication — a partnership between a sponsor who handles every aspect of the transaction and the passive investor who funds a portion of the down payment — and share in the profits.

 

Related: What is Apartment Syndication?

 

Since both strategies are passive, they’re equal in regard to control (or lack thereof). However, being two distinctive types of real estate, the benefits and drawbacks of each are different. So, in order to determine which passive investment strategy is better, let’s compare and contrast them based on three categories: time commitment, returns and risk.

 

1. Time Commitment

There is no such thing as a 100% passive investment. There are similar time commitments for both strategies: You must initially qualify the sponsor/turnkey provider, qualify their deals before investing and stay up-to-date on the progress of the deal after close.

There are also differences.

Because it is a one-unit residential property, understanding and evaluating an SFR is not that complicated. You likely have the education to acquire a passive SFR investment. On the other hand, apartments are a more complex asset class. Before becoming a passive investor, you’ll likely need to educate yourself on the apartment syndication process.

It’s easier to scale by passively investing in apartment syndications. After you’ve qualified the sponsor, it’s as simple as they send you a deal, and you decide whether to invest. For each SFR investment, you’ll select from a menu of deals. It can take months until you find one that meets your investment goals, at which point the process repeats itself.

Additionally, since you’re limited to the number of residential loans you can obtain, you’ll eventually have to either purchase SFRs with all cash or with creative financing, both of which take more time than traditional financing. For apartment syndications, you can usually invest any amount — although a minimum investment of $25,000 to $50,000 is common — an unlimited number of times without having to worry about securing or qualify for financing. This reduces your ongoing time commitment and increases your ability to scale.

 

2. Returns

In regard to returns, the two factors to address are cash flow and equity. Cash flow is the profit distributed to the passive investor on an ongoing basis, and equity is the profit captured at sale and/or refinance.

As a passive SFR investor, you have 100% ownership of the property, which means you receive 100% of the profits. Since an SFR has one rentable unit, the returns are more fragile. If you have one vacancy, you’re 100% vacant. If you have one maintenance issue or expensive turn, your cash flow for a few months to a few years can be wiped out.

As a passive apartment investor, you only have partial ownership of the property, which means you receive a smaller percentage of the profits. But, since apartments have hundreds of units, a few vacancies, evictions or maintenance issues have a lower impact on the cash flow. At the same time, you are typically offered a preferred return, which is a threshold return distributed to investors before the sponsor receives payment. A greater number of units combined with a preferred return results in more certainty as it relates to cash flow.

The value of SFRs is dependent not on the rents but on the market, which is out of your control. Sure, in an appreciating market, you could double the property value. But you could also get unlucky with a stagnating or depreciating market.

The value of an apartment is dependent on the revenue, not the market, which is in your — or technically, the sponsors’ — control. The sponsor can increase the rents through renovations and increase the revenue by offering certain amenities (i.e., coin-operated laundry, carports, storage lockers, etc.). Luck is removed and replaced with skill. If the sponsor executes the business plan and increases the revenue, the property value, and thus your investment, is increased.

 

Related: 27 Ways to Add Value to Apartment Communities

 

3. Risk

You have 100% ownership as a passive SFR investor, which means you participate in 100% of the upside and 100% of the downside. You hold all of the risk. Since you sign on the loan, you are responsible for 100% of the debt. Default on a payment, and you are the one who is impacted.

Again, the SFR cash flow is more fragile due to having one rentable unit. However, this risk is reduced once you’ve scaled to a certain number of SFRs. But having a passive portfolio of 100 SFRs is different than passively investing in a 100-unit apartment community. The SFRs are scattered across the market, which means you don’t benefit as much from economies of scale. Management and contractor (i.e., landscapers, maintenance people, etc.) fees are costlier. The benefit, however, is that you have 100% ownership of the 100 SFRs as opposed to partial ownership in the 100-unit apartment community, which means you’ll have a greater long-term upside potential.

Passively investing in apartment syndications is less risky because you aren’t signing on a loan. The risk is also reduced from day one because you are investing in multiple units right away as opposed to having to scale to hundreds of units. And with hundreds of units in one centralized location comes economies of scale, which means lower management and contractor costs.

 

Related: Active vs. Passive: Which is the Superior Investment Strategy?

 

The Winner?

Apartment syndications have a lower time commitment, more certain returns and less risk. SFRs have less scalability, more risk and fragile returns in the medium-term with a greater long-term upside potential.

Ultimately, the best strategy comes down analyzing the pros and cons of each and determining which one aligns the best with your risk tolerance, time commitment and return goals.

 

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.

real estate thanksgiving

What 16 Real Estate Investors Are Grateful For This Thanksgiving

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “what is a property or deal, person, experience, book, video, conference, etc. that has been influential to your business’s success and you are grateful for?” 

Thank you to the 16 active investors who responded. Read on the learn about the people, books/podcasts/videos, and events/moments have been influential to active, successful real estate entrepreneurs:

 

Best Ever People

  1. Theo Hicks – “Joe Fairless. Would have never gotten the confidence to pursue my first apartment syndication deal if I had never met Joe!”
  2. Holly Williams – “I would say this really smart kid named Joe Fairless from Texas in the Big City. Happy thanksgiving to the Growing Fairless clan my friend.”
  3. Whitney Elkins Hutten – “Lane Kawaoka and Chris Miles. Future Apartment Syndication Goals: Joe Fairless.”
  4. Mike Knudstrup – “1. My local real estate investors group where a few presenters owned MHP’s (mobile home parks). 2. Parents of friends and acquaintances who owned parks and it worked for them.”
  5. Julia Bykhovskaia – “My man Tony Robbins! It was at the right place at the right time for me 2 years ago. All I’ve heard is ‘you have to burn the boats,’ have to ‘make a decision and have absolute certainty’, and ‘you don’t need to know how. The how will come.’. 3 months later I read Rich Dad Poor Dad and got even more convinced that being an employee is not the way to go. 15 months later I left my J.O.B.! ‘The how’ of course became real estate.”

 

Best Ever Books/Podcasts/Videos

  1. Grant Rothenburger – “Mine is lame but honest. Rich Dad Poor Dad for opening my eyes to real estate in the first place.”
  2. Trevor McGregor – “Think And Grow Rich by Napoleon Hill has been a game changer throughout my entire Real Estate Journey. I highly recommend it to anyone who hasn’t read it, or if you HAVE read it, pick it up again or be sure to listen to the Audio Version (When you’re not listening to the Best Real Estate Advice Show Ever – Podcast with Joe). Happy Thanksgiving Everyone!”
  3. Glen Sutherland – “Long time listener of the show (Best Real Estate Investing Advice Ever). Appreciate all you time you put into it.”
  4. Michael Collins – “The Strangest Secret; Earl Nightingale. Time less advice. 31 minutes long on YouTube, loaded with great information.”

 

Best Ever Events/Moments

  1. John Jacobus – “The first Best Ever Conference in Denver in 2017. This was a game changer in terms of forming new partnerships, sparking new actions, and building momentum.”
  2. Adam Adams – “Best Ever Conference
  3. Charlie Kao – “A lot of moments but being on my very first podcast which happened to be BiggerPockets. I kept getting asked to be on other podcasts and had a lot of people reaching out to me for advice and it dawned on me how much more I was really capable of. I have doubled or tripled our business every year since the podcast.”
  4. Cory Boatright – “1. My first short sale that I stumbled into with negative equity and created a Short Sale Empire that made millions in revenue. 2. The first time I sold 6-figures in one hour from stage in front of 500 people. 3. My experience at the end of 2012 with thyroid cancer. 4. I am grateful it happened because of GratefulProject.org and the many miracles that came from waking up and being aware of life in a new way. 5. Meeting my wife and two step kids. Skydiving to overcome my fear of heights?
  5. Dustin W. Miles – “I wouldn’t say it was any one experience/book/conference, but a collection. One of the first memories I recall is from childhood. I played soccer on a team with a kid (we were around 10). His parents owned many skyscrapers around Fort Worth. I would say that first opened me up to the idea of “why not me.” I would ride my bike around Fort Worth wondering who owned all the other buildings. Fast forward to today, we are working on syndication #9 in the past ~5 years.”
  6. Jason Stofer – “For me this is easy…I just came from it! Adam Triple A Adams event Raising Money Summit!! I have already re-written my business plan, reworked my website and am know working on my mind-map.”
  7. John Fortes – “Grateful for communities and networks such as these and all educational platforms whether it comes from books, podcasts, videos, and conferences as you mentioned. At the end of the day I’m just happy and grateful to be here breathing this beautiful air and sharing this earth with my loved ones. Thank you for asking. Happy Thanksgiving & God bless!”

 

What about you? Comment below: What is the one thing you are grateful for this Thanksgiving?

 

 

12 US Cities Experiencing the Most Explosive Rent Growth

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 October 2017 to October 2018, the average national change in rent was +1.1% (compared to +2.8% and +2.6% over the same time period in 2016 and 2015 respectively). This would indicate that rent growth is 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.

Here are the top 12 US cities where rents increased the most from October 2017 to October 2018:

 

12. Richmond, Virginia

Sean Pavone/Shutterstock

Median 1BR rent: $891

Median 2BR rent: $1,028

Year-over-year change: +2.6%

 

11.Tampa, Florida

Shutterstock

Median 1BR rent: $1,011

Median 2BR rent: $1,258

Year-over-year change: +2.6%

 

10. Jacksonville, Florida

Shutterstock

Median 1BR rent: $881

Median 2BR rent: $1,078

Year-over-year change: +2.7%

 

9. San Jose, California

Silicon Valley Stock

Median 1BR rent: $2,102

Median 2BR rent: $2,634

Year-over-year change: +2.7%

 

8. Arlington, Texas

Kid101

Median 1BR rent: $990

Median 2BR rent: $1,230

Year-over-year change: +2.8%

 

7. Riverside, California

Flickr

Median 1BR rent: $1,064

Median 2BR rent: $1,330

Year-over-year change: +3.0%

 

6. Mesa, Arizona

Redux

Median 1BR rent: $865

Median 2BR rent: $1,078

Year-over-year change: +3.0%

 

5. Phoenix, Arizona

Phoenix New Times

Median 1BR rent: $846

Median 2BR rent: $1,054

Year-over-year change: +3.0%

 

4. Corpus Christi, Texas

Expedia

Median 1BR rent: $846

Median 2BR rent: $1,057

Year-over-year change: 3.1%

 

3. Knoxville, Tennessee

Mapio

Median 1BR rent: $776

Median 2BR rent: $953

Year-over-year change: +3.6%

 

2. Las Vegas, Nevada

Visit Las Vegas

Median 1BR rent: $927

Median 2BR rent: $1,149

Year-over-year change: +3.6%

 

1. Orlando, Florida

iStock

Median 1BR rent: $1,063

Median 2BR rent: $1,273

Year-over-year change: +4.4%

 

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!

 

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 quiz

Test Your Knowledge with the Apartment Syndication Quiz

One of the two key requirements before becoming an apartment syndicator is education. You must comprehend the important apartment syndication terminology to execute the apartment syndication business plan and communicate with your team and passive investors.

There are many ways to gain this education: real-world experience, studying the glossary of apartment syndication terms, reading the Best Ever Apartment Syndication Book, hiring a mentor, etc.

But the question is, how do you know if you are educated enough?

 

Enter the apartment syndication quiz!

 

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…

And there is only one way to find out…

 

CLICK HERE TO START THE APARTMENT SYNDICATION QUIZ

 

Good luck!

 

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.

foggy forest of trees

10 Real Estate Tours Turned Haunted House Experience

When you attend a haunted house or haunted trail leading up to Halloween, you expect to be frightened – in fact, you want to be filled with fear! That’s because you know that the experience is pretend.

Unlike haunted house, when you attend a property tour at a prospective deal, you typically do not expect to be surprised, let alone terrified. However, every once in a while, you will enter a property and walk away more frightened than you would coming out of even the most intense haunted house.

Here are 10 investors who expected an uneventful property tour but who instead walked into an unmarked haunted house.

1. The Nudist: During Michael Beeman’s strangest property tour, he knocked on the door and was greeted by a screaming naked man. The property was sold through a real estate auction. Michael won the auction with a bid of $7500 – because he was the only bid, which likely had something to do with the screaming nudist. But, the bank decided to hold onto the property in order to sell it at a higher price in the future. 5 months later, the property is still for sale, and the screams of the nudist still echo in Michael’s mind!

2. Bloody Babies: When Jordan Moorhead walked into the living room during a property tour, he was confronted with baby doll heads covered in fake blood strung up on the ceilings.

3. Fried Racoon: While touring a vacant duplex, Chuck Darling approached the furnace in the basement and discovered what looked like a furry towel hanging from one of the panels. Upon further inspection, the towel transformed into a racoon tail, with the remainder of the raccoon, cooked medium rare, inside of the furnace.

4. Adult Cartoonist: During a tour of a multifamily building, Tyson Cross walked into a unit that was covered in little kid cartoons. The weird part was that no children lived there. And the weirdest part was when a grown man walked out of the closet and said “hey, I’m filming in here.” To this day, no one knows why the unit was covered in cartoons or what was being filmed…

5. It’s Hammer Time: Robert Lawry II toured a REO property that had a bloody handprint on the wall. And it wasn’t a prank. It was because someone had been murdered in the unit with a hammer, which explained why the doors and windows were covered in police seals and tape.

6. Wow, What a Hole!: A wholesaler sent Whitney Elkins Hutten a deal and mentioned that there was a hole in the roof. No big deal, right? Well, when Whitney arrived at the property, the hole turned out to be caused by the neighbor’s large tree falling on the home. The damage was so severe that the entire second story needed to be replaced.

7. Scratch and Sniff Cat Picture: Dave Roberts toured a home that was previously inhabited by a cat hoarder. The staple of the home was this beautiful scratch and sniff masterpiece (the picture wasn’t actually the source of the urine and feces smell. That was coming from the carpet below…).

8. Wigs, Masks, and Chalk: At an REO listing, Lisa Rush found a chalk outline of a person who had died in a fire. All of the content remained in the home, including the previous owner’s wig and scary mask collection.

9. Leaning Tower of Feces: I think this picture taken by Colin Smith during a property tour speaks for itself…

10. Black Cats: Matthew Mesick bought and flipped a house that had over 150 black cats who were terrorizing the neighborhood. It was such an ordeal that it made the local newspaper, which you can see by clicking here.

 

What about you? Comment below: What was the scariest thing you’ve come across during a property tour?

 

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.

scary carved pumpkins

20 Tenant Horror Stories

Halloween is about binging on Reese’s Peanut Butter Cups (or Almond Joys if you’re a weirdo), attending costume parties, screaming your way through haunted houses, and re-watching the Halloween movie series from start to finish.

However, as real estate investors, the horror of Halloween isn’t limited to October 31st, especially if you are a landlord. A landlord has the potential to receive a phone call about an outrageous problem with a tenant 365 days out of the year.

Here are 20 shocking horror stories from active real estate investors who are a part of the Best Ever Show Community on Facebook involving a tenant that would make the plot of the next Halloween movie.

  1. The Couch and a Python: This story comes from Daniel Holmund’s grandfather. A tenant moved out of a unit and all that remained was an ugly couch and a cage…that held a massive 6-foot-long python.
  2. Breaking Bad: Jay Helms just bought his first investment property from a tax deed auction. When he went to visit his new asset, he expected the property to be vacant. Instead, he found someone squatting in the house. They were an aspiring Walter White (more like Jessie Pinkman) who was stealing his mother’s disability checks to purchase supplies for his meth lab.
  3. Rats and Needles: Julie Fagan inherited a tenant who filled the unit with caged rats and used needles in every room. The day she purchased the apartment building, she sent the tenant a 7-day eviction notice, and the rats and needles were gone within a week.
  4. The Wrong Type of Thirst Quencher: Josh Levine found around 100 lemon-lime Gatorade bottles inside one of his apartment units. Upon further inspection, he realized it wasn’t lemon-lime Gatorade, but urine…
  5. The Service Dog of Doom: A tenant at one of Linda Weygant’s rentals got a new “service dog.” Once Linda found out, she allowed the tenant to keep the service dog without charging them extra pet rent or a pet deposit. In return for her generosity, Linda was sued for discrimination, with the tenant claiming that Linda wasn’t allowed to even ask about the service dog. The tenant overstayed the lease and was subsequently evicted. But, for the next year, Linda received threats against her life and the property from this tenant while going through a State of Colorado Discrimination investigation. The situation resolved itself in Linda’s favor eventually, but talk about a nightmare!
  6. Pitbull: Mitchell Drimmer had a tenant skip out in the middle of the night, leaving an aggressive looking pitbull behind.
  7. The Worst Arsonist Ever: Todd Dexheimer had a tenant who was a mother taking care of one of her cousin’s kids. The husband was in jail at the time and the mother lost custody of the child due to drug issues. Once her husband got out of jail, he found the address of Todd’s property. He tried and failed to kick down the door at which point he escalated to attempting to burn down the house. Luckily, this attempt failed too. He ended up destroying the vehicle in the garage and did some minor damage to the house. Todd received a call from the police explaining the situation and that his tenant was in protective custody. They said most of her belongings were removed and whatever was left could be gotten rid of.
  8. Orgy Gone Wrong: The oddest horror story goes to Heidi Nelson. One of her tenants was having a sex-capade that went wrong and the tenant ended up losing their life in the process.
  9. More Breaking Bad: Jay Helms isn’t the only person who had an aspiring Walter White/Jessie Pinkman as a tenant. Garrett White received a call from the fire apartment about one of his duplexes catching fire. When he arrived at the property, he was met by seven police cruisers. He finds out that the fire was caused by an exploding lithium battery. Lithium is a precursor to meth, so the tenant’s meth business went up in flames, literally.
  10. The FEDs: One morning, Joe Ely received a call from his handyman, who lived across the street from one of his rental properties. The handyman said that Federal US Marshalls battering rammed his door open and pulled 9 suspects out of the house who were now laying spread eagle on the front lawn.
  11. Fire!: Greg Jeanfreau had a fire at one of his duplexes. The fireman showed up and put out the fire. However, due to the strength of the fire, the fireman’s attempts to fight the fire resulted in the collapsing of all the ceilings. Fortunately, his tenants were safe and insurance covered the damages.
  12. Fraudulent Rent: Krishan Singh had seemingly great tenants who paid their rent with a credit card online for the first two months. That is until the bank realized that the transactions were fraudulent and Krishan received a chargeback for the entire rental amount.
  13. Why You Don’t Rent to Friends: Adam Adam’s rented out one of his rental units to a friend without a written lease. A downturn in the economy and a drive by shooting later (which fortunately didn’t result in loss of life), Adam no longer considers this person a friend because they still owe him $7,500 in back rent.
  14. Why You Don’t Rent to Your Contractor Either: Matthew Mesick’s cousin was managing a fix-and-flip project. He hired a contractor and let them live in the house during the rehab process. The contractor ended up overdosing on heroin and his body wasn’t discovered for over a week. The costs to clean up and repair the damages caused by the body cost $26,000. On top of that, Matt’s cousin nor the investor had insurance, so the $26,000 was out-of-pocket.
  15. Don’t Hire SWAT to Remodel Your Home: After Jack Petrick completely renovated a single-family rental property, it was remodeled by a SWAT team…(click here for a video of the “remodeling” process)
  16. Why You Don’t Rent to Escorts: Muriel Brisson-Jackson received multiple phone calls from neighbors about a lot of traffic in and out his rental property at all times of the day and night – with all the traffic being different men. The tenant was gone within a day and Muriel was left with a chair riddled with hole marks from stiletto heels.
  17. Fire, Drugs, and Poo: Tamar Mar provided three horror stories. First, there was a fire at one of her properties that, 10 months later, is still being rebuilt. Then, she walked in on one of her tenants who was in the process of doing drugs. Lastly, she is turning a unit now that is covered in human feces. On the brightside, she has some great ideas on how to create the ultimate haunted house!
  18. Lover’s Quarrel: Ryan Gibson had two of his tenants get into a lover’s quarrel, which escalated to the point where the man stands outside of the trailer, fires a gun into the air, and says, “the next one’s for you!”
  19. Two Week Flood: One of Justin Fraser’s tenants left the water running in a clogged sink during a two-week vacation. The neighbor called him, saying that there is water coming into their basement from Justin’s basement. The result was $112,000 worth of damage and counting. Click here for a video Justin made when he saw the damage for the first time.
  20. Lord of the Flies: A tenant in one of Larry Abramowitz’s condo rentals had a dog with flies that invested the entire unit. The infestation was so bad that the first exterminator refused the job.

 

What about you? Comment below: What is your best tenant horror story?

 

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.

 

 

why I don't care about cap rates

Why I Don’t Care About Cap Rates as an Apartment Syndicator

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.

 

Related: 27 Ways to Add Value to Apartment Communities

 

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.

 

Related: What is Apartment Syndication?

 

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.

 

 

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 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.

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.

 

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.

 

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.

 

 

people bumping fists

4 Leadership Qualities to Maximize Growth learned from the Global Leadership Summit

I attended the Global Leadership Conference this summer in Chicago, where emerging and experienced world-class leaders, such as John Maxwell, share their fresh perspectives on leadership and success.

Here are my top 4 takeaways from the event:

1 – The Abundance Mindset

How can I get a bigger picture? Seeing more was everything, always looking at the bigger picture. But today it is also about seeing that vision before others. I want more before and more more in the bigger picture mindset. We have to know that there is more more. Essentially think abundantly!

In order to think abundantly there are two things that help develop this mindset: Creativity and Flexibility.

Creativity thinking is where there is always an answer.

Flexibility is the acknowledgement that there is sometimes more than one answer.

There is more BEFORE in front of you and more BEYOND ahead of you.

 

2 – Finding a Process

It is important to dissect success. John Maxwell discusses this 5 step cycle of action to create such a process. Those 5 things are:

  1. Test
  2. Fail
  3. Learn
  4. Improve
  5. Re-Enter

This autopsy of success allows you to have a mindset that he refers to as an advance attraction mentality.

 

3 – Intentionally grow every single day

The “how long will it take” mind frame for growth should change to “how far can I go” with my growth. When you grow and keep expanding your mind INTENTIONALLY every single day. Put yourself in places where people will inspire you. Intentionally put yourself in places where your mind expands.

 

4 – The Vision Gap

Always have a vision gap. Well what does that really mean? This vision gap refers to the space between what you ARE doing and what you COULD be doing. It is about seeing more than you are doing and seeing it before others see it, which will allow you to bring out the best in leading others. A key factor to this is having the right people in your circle.

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.

 

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 School

Apartment Syndication School

Last Updated: 2/15/19

 

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 apartment syndication 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.

 

Related: What is Apartment Syndication?

 

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.

Part 1: On-Market vs. Off-Market Deals

What you will learn:

  • 7 thing you need to do before you are ready to find your first deal
  • The differences between on-market and off-market deals
  • How a buyer and seller benefits from an off-market transaction
  • 6 factors that will win or lose you a deal

 

Click here to listen to Part 1: On-Market vs.. Off-Market Deals

 

Part 2: How to Find Apartment Deals From Real Estate Brokers

What you will learn:

  • How a top commercial real estate broker will qualify you
  • How to win over a broker before closing on a deal

 

Click here to listen to Part 2: How to Find Apartment Deals From Real Estate Brokers

 

Part 3: The Main Way to Find Off-Market Apartment Deals

What you will learn:

  • The only two ways to source off-market deals
  • Guide to conducting a direct mailing campaign

 

Click here to listen to Part 3: The Main Way to Find Off-Market Apartment Deals

 

Part 4: 9 More Ways to Find Off-Market Apartment Deals

What you will learn:

  • 9 more ways to find off-market apartment deals

 

Click here to listen to Part 4: 9 More Ways to Find Off-Market Apartment Deals

 

Part 5: Off-Market Deal Case Study #1

What you will learn:

  • 7-step process to find off-market deals via cold texting

 

Click here to listen to Part 5: Off-Market Deal Case Study #1

 

Part 6: Off-Market Deal Case Study #2 and #3

What you will learn:

  • The secret to finding deals in a hot market
  • How to eliminate 99% of the competition in your market

Free Document

  • Deal Finding Tracker: Use this spreadsheet to track the progress of your on-market and off-market lead generations strategies. Click here to download for free.

 

Click here to listen to Part 6: Off-Market Deal Case Study #2 and #3

 

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.

 

Part 1: Setting Your Investment Criteria

What you will learn:

  • Introduction of the three-step process for evaluating apartment deals: (1) investment criteria, (2) underwriting, (3) due diligence
  • How to set your investment criteria to initially screen incoming deals

 

Click here to listen to Part 1: Setting Your Investment Criteria

 

Part 2: Top Underwriting Tips and Due Diligence

What you will learn:

  • Top 10 tips for underwriting apartment deals
  • Introduction of the apartment due diligence phase
  • We will go into more detail on underwriting and due diligence during future Syndication School episodes, so stay tuned!

 

Click here to listen to Part 2: Top Underwriting Tips and Due Diligence

 

 

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.

 

Part 1: How to Structure GP Compensation

What you will learn:

  • The five duties of the GP, and the responsibilities and ownership percentages of each

 

Click here to listen to Part 1: How to Structure the GP Compensation

 

Part 2: How to Structure LP Compensation

What you will learn:

  • The differences between debt and equity investors
  • The LP compensation structure decision tree

FREE DOCUMENT

 

Click here to listen to Part 2: How to Structure LP Compensation

 

 

Series #9 – How to Raise Capital From Passive Investors

In this syndication school series, we will discuss the process for raising capital from passive investors.

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

In part 2, we discuss the differences between the different 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 for 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.

 

Part 1: How to Overcome the Fear of Using Other People’s Money

What you will learn:

  • What your current money-raising mindset is
  • How to overcome any fears or limiting beliefs you have about money-raising
  • Why someone will invest in your deals

 

Click here to listen to Part 1: How to Overcome the Fear of Using Other People’s Money

 

Part 2: Syndication Vs. JV & 506(b) Vs. 506(c)

What you will learn:

  • The differences between joint syndications and joint ventures (JV)
  • The differences between a 506(b) and 506(c) offering

 

Click here to listen to Part 2: The Process for Hiring a Property Management Company

 

Part 3: 3 Ways to Find Passive Investors

What you will learn:

  • How to find passive investors via your thought leadership platform, BiggerPockets, and meetup groups

Free Document

 

Click here to listen to Part 3: 3 Ways to Find Passive Investors

 

Part 4: 9 More Ways to Find Passive Investors

What you will learn:

  • How to find passive investors via volunteering, referrals, advertising, your current network, building relationships as a couple, and partnerships

 

Click here to listen to Part 4: 9 More Ways to Find Passive Investors

 

Part 5: How to Court Prospective Passive Investors

What you will learn:

  • How to set up introductory phone calls with prospective investors
  • Three keys to a successful introductory call
  • Two main questions to ask on the introductory call

 

Click here to listen to Part 5: How to Court Prospective Passive Investors

 

Part 6: How to Overcome Passive Investor Objections

What you will learn:

  • How to overcome passive investor objections via experience and education, alignment of interests, partnerships/mentors, and your thought leadership platform

 

Click here to listen to Part 6: How to Overcome Passive Investor Objections

 

Part 7: 14 Commonly Asked Passive Investor Questions

What you will learn:

  • The two main types of passive investor questions: team-related and business-plan related
  • How to proactively be prepared to answer the commonly asked passive investor questions
  • The first 14 commonly asked passive investor questions and how to answer them

 

Click here to listen to Part 7: 14 Commonly Asked Passive Investor Questions

 

Part 8: 35 More Commonly Asked Passive Investor Questions

What you will learn:

  • The next 35 commonly asked passive investor questions and how to answer them

 

Click here to listen to Part 8: 35 More Commonly Asked Passive Investor Questions

 

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

In this syndication school series, we will discuss the process for 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 for hiring team members #1 and #2 – partner and mentor.

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

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

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

 

Part 1: Do I Need a Partner and a Mentor?

What you will learn:

  • The seven team members you need to hire
  • How to find these seven team members
  • The process for selecting a business partner and a mentor

FREE RESOURCE:

 

Click here to listen to Part 1: Do I Need a Partner and a Mentor?

 

Part 2: The Process for Hiring a Property Management Company

What you will learn:

  • Primary and additional services offered by a property management company
  • How a property management company makes money
  • How to qualify a property management company
  • How to win over a property management company

FREE RESOURCE:

 

Click here to listen to Part 2: The Process for Hiring a Property Management Company

 

Part 3: The Process for Hiring Real Estate Brokers

What you will learn:

  • Primary and additional services offered by real estate brokers
  • How to find real estate brokers
  • How real estate brokers make money
  • How to qualify real estate brokers
  • How to win over real estate brokers

FREE RESOURCE:

 

Click here to listen to Part 3: The Process for Hiring Real Estate Brokers

 

Part 4: The Process for Hiring Attorneys, a Mortgage Broker, and an Accountant

What you will learn:

  • The process for hiring a real estate and securities attorney
  • The process for hiring a mortgage broker
  • The process for hiring an accountant
  • What are to hire the seven syndication team members in

FREE RESOURCE:

 

Click here to listen to Part 4: The Process for Hiring Attorneys, a Mortgage Broker, and an Accountant

 

Series #7 – The Power of Your Apartment Syndication Brand

In this syndication school series, we will discuss the process for 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

 

Part 1: Why You Need an Apartment Syndication Brand

What you will learn:

  • The five primary benefits for creating a brand
  • The 2,000 true fans concept
  • How to select your primary target audience
  • How to create a company name, logo, and business card

FREE RESOURCE:

 

Click here to listen to Part 1: Why You Need an Apartment Syndication Brand

 

Part 2: How to Create a Spectacular Website

What you will learn:

  • Why the website is the most important aspect of your brand
  • How to create your first website
  • What information to include on your first website and your more advanced, future website
  • 8 ways to increase traffic to your website

FREE RESOURCE:

 

Click here to listen to Part 2: How to Create a Spectacular Website

 

Part 3: How to Design Your Company Presentation

What you will learn:

  • The primary benefits of creating and designing a company presentation
  • The 7 components of a company presentation

FREE RESOURCE:

 

Click here to listen to Part 2: How to Design Your Company Presentation

 

Part 4: Guide to Launching a Thought Leadership Platform

What you will learn:

  • The primary benefits of creating a thought leadership platform
  • How to select your first thought leadership platform
  • Five keys to a successful thought leadership platform
  • Five step process for developing your thought leadership platform
  • How to overcome your objections to starting a thought leadership platform

FREE RESOURCE:

 

Click here to listen to Part 4: Guide to Launching a Thought Leadership Platform

 

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 for 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.

 

Part 1: The Immutable Laws of Real Estate Investing & 200-Property Analysis

What you will learn:

  • The Three Immutable Laws of Real Estate Investing
  • The 5-step process to understanding your target investment market – the 200-property analysis exercise

FREE RESOURCE:

 

Click here to listen to Part 1: The Immutable Laws of Real Estate Investing & 200-Property Analysis

 

Part 2: Bonus Market Analysis Strategies & How to Create Market Summary Reports

What you will learn:

  • 7 other strategies to implement in addition to the 200-property analysis to gain a neighborhood-level understanding of your target investment market
  • How to create the two most common forms of market summary reports

FREE RESOURCE:

 

Click here to listen to Part 2: Bonus Market Analysis Strategies & How to Create Market Summary Reports

 

Series #5 – How to Select a Target Apartment Syndication Investment Market

In this Syndication School series, we will discuss the process for selecting a target apartment syndication investment market.

In part 1, we introduce the concept of a target market and the overall process for selecting a target market.

In part 2, we cover the process for selecting 1 or 2 target markets.

 

Part 1: What is a Target Apartment Syndication Market?

What you will learn:

  • What is a target market?
  • What comes first – the deal or the market?
  • How important is selecting the right target market?
  • The overall process for selecting a target market?

 

Click here to listen to Part 1: What is a Target Apartment Syndication Market?

 

Part 2: How to Select 1 or 2 Target Apartment Syndication Investment Markets

What you will learn:

  • How to narrow down the US to 7 (or so) potential target markets to evaluate
  • The 6 market factors to analzye
  • Additional market factors to consider
  • How to rank your 7 (or so) potential target markets to select 1 or 2 target markets to investigate further

FREE RESOURCES

 

Click here to listen to Part 2: How to Select 1 or 2 Target Apartment Syndication Investment Markets

 

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 apartment 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.

 

Part 1: Know Your Outcome

What you will learn:

  • Tony Robbins’ Five-Step Ultimately Syndication Success Formula
  • The Apartment Syndication Money Question: How do you make money as an apartment syndicator?
  • How to set your first 12-month apartment syndication goal

FREE RESOURCE: Annual Income Calculator

  • 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 listen to Part 1: Know Your Outcome

 

Part 2: Know Your Why

What you will learn:

  • Why you need to create a compelling vision for your future as an apartment syndicator
  • A six question exercise for how to create your syndication vision
  • Mindset strategy for how to approach not achieving your specific, quantifiable goal
  • How to follow through and persist with your goals

FREE RESOURCE: Tony Robbins Goal Setting Exercise

  • Click here to download your free resource, Tony Robbins Goal Setting Exercise. Watch the 35-minute goal setting video by Tony Robbins and complete four-step goal setting exercise for your apartment syndication business.

 

Click here to listen to Part 2: Know Your Why

 

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 apartment syndication industry 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.

 

Part 1: 4 Ways to Break Into The Apartment Syndication Industry

What you will learn:

  • The catch-22 of becoming an apartment syndicator
  • The first four ways to overcome the catch-22 and break into the apartment syndication industry

 

Click here to listen to Part 1: 4 Ways to Break Into The Apartment Syndication Industry

 

Part 2: 5 More Ways to Break Into The Apartment Syndication Industry

What you will learn:

  • 5 more ways to break into the apartment syndication industry
  • The three consistent themes between the 9 total ways to break into the apartment syndication industry
  • How to know which strategy is right for you

 

Click here to listen to Part 2: 5 More Ways to Break Into the Apartment Syndication Industry

 

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.

 

Part 1: The Experience Requirements

What you will learn:

  • Why a successful background in real estate and/or business can translate to a successful syndication business
  • Questions to ask yourself to evaluate your business and real estate background
  • Rank your “experience” on a scale from 1 to 10
  • Based on your ranking, determine whether you can move onto the education phase or if you need to focus on building a track record in business and/or real estate first

 

Click here to listen to Part 1: The Experience Requirements

 

Part 2: The Education Requirements

What you will learn:

  • The obvious and not so obvious benefits of an apartment syndication education
  • The first step in your apartment syndication education process – memorizing the important terminoloy
  • Three other creative ways to obtain an apartment syndication education

FREE RESOURCE: Master the Lingo

  • Click here to download the 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.

 

Click here to listen to Part 2: The Education Requirements

 

Series #1 – Why Apartment Syndications?

In this first series, we will discuss the benefits and drawbacks of the apartment syndication strategy so that you can determine if it is the ideal investment strategy 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 and being a passive investor or active sponsor in apartment syndications.

In part 2, we will compare and contrast apartment syndications to other  popular real estate strategies, including single family rents, smaller multifamily, REITs, and development.

 

Part 1: What is an Apartment Syndication?

What you will learn:

  • The definition of an apartment syndication
  • The high-level 10 step process for completing an apartment syndication from start to finish
  • Pros and cons of raising money vs. using your own money to buy apartments
  • The pros and cons of being a general partner (i.e. active syndicator) and a limited partner (i.e. passive investor) in an apartment syndication

 

Click here to listen to Part 1: What is an Apartment Syndication? 

 

Part 2: Apartment Syndication vs. Other Investment Strategies

What you will learn:

  • The pros and cons of apartment syndications vs. single-family rentals
  • The pros and cons of apartment syndications vs. smaller multifamily rental (2 to 50 units)
  • The pros and cons of apartment syndications vs. REITs
  • The pros and cons of apartment syndications vs. apartment development
  • Based on the pros and cons of apartment syndications vs. other investment strategies, determine if apartment syndication is your ideal investment strategy

 

Click here to listen to Part 2: Apartment Syndication vs. Other Investment Strategies

 

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

free MBA

How To Get An MBA-Level Education For Free (Or Even While Getting Paid)

As detailed in a ThoughtCo article, the average tuition to obtain an MBA degree exceeds $60,000 and can be more than $100,000 for a top U.S. business school. Obtaining an MBA degree online can be cheaper, but expect to pay at least $7,000 to $120,000 or more on a top online program. Then add to that the costs of books, boarding and supplies.

Of course, you can obtain financial aid, but then you’ll have to pay back your initial loan balance with interest, leaving you in debt for years — maybe even decades.

But what if I told you there’s a way to obtain an MBA-level education for free or, even better, while making money? This can be accomplished by creating a thought leadership platform.

A thought leadership platform is an online networking tool where you produce valuable content about a specific business niche and share it with the world. Typically, an entrepreneur creates a thought leadership platform in order to build a reputable brand and/or promote their business. However, for the purposes of gaining an MBA-level education, the same thought leadership platform can be used to curate a customized educational program while also allowing you to network with business professionals who are currently working in the industry you want to enter. All of this can occur without having to go into debt — or even while collecting a paycheck.

Examples of thought leadership platforms include podcasts, YouTube channels and blogs. Regardless of which option you pursue, I would recommend having the platform be interview-based. That means you conduct interviews with business professionals who are currently working in your desired industry.

 

In my mind, this avenue offers four main advantages over an MBA degree:

 

1. You can build relationships with active professionals in the industry. For example, instead of going to business school for two years and sitting in a classroom, you could conduct one interview a week for two years with people who are active and already successful in the real world. That’s over 100 conversations or “lessons.” Or you can do what I do, which is to conduct daily interviews. That’s over 700 “lessons” in two years as well as over 700 networking opportunities to find a potential employer or business partner.

2. It can be significantly cheaper. Creating a thought leadership platform can be low-cost. If you decide to create a podcast, you only need a laptop and a microphone to get started — or for the most economical approach, all you need is a smartphone. Additionally, once you’ve built a large enough following, it provides you with the opportunity to make money through paid sponsorships.

3. You can add value to the interviewee. Since they work in or run a business, they’ll get free exposure. Also, you add value to the listeners because they’re getting the same real-world education from the people who are actually working in the industry.

4. You can position yourself as an expert in the industry. You can become known as the go-to resource for the best information and strategies for a specific industry. As your audience and reputation grow, you’ll attract better, more successful guests, which in turn can increase your audience, reputation and quality of business opportunities. Then, as an expert with a large following who is known to attract big-name guests, you can monetize your thought leadership platform by bringing on sponsors.

 

So, how do you get started on your MBA-level education?

 

1. Select a thought leadership platform. Choose a platform based on what you enjoy doing. For example, if you like speaking but are camera shy, create a podcast. Also, make sure you’re able to tap into a large built-in audience. Consider iTunes, YouTube or WordPress.

2. Set a consistent publishing frequency. Just like business school, you need to set a schedule. Weekly or daily is ideal.

3. Create a content calendar. This is like your business school syllabus that outlines a plan for the year. You should have your content planned at least a month in advance, which starts with scheduling interviews.

The type of person you’ll interview will depend on the specific industry you enter. The more specific you are, the better. For example, if you want to become an apartment syndicator (which is what I do), don’t just interview anyone who is involved in real estate. Instead, focus on the professionals who specialize in apartments, like other syndicators, commercial lenders and multifamily property managers and brokers.

Once you’ve specified an industry, find people in that industry to interview. Search for individuals or groups related to the industry on social media (Facebook, Twitter and LinkedIn). Find other thought leaders in the industry on iTunes, YouTube, Google and industry-specific blogs and forums. Search Amazon for authors who write about the industry.

When you reach out, state that you’re interested in interviewing them on your platform. Tell them you created it to educate yourself on the industry, as well as to provide valuable content to others who may be interested in entering the industry.

 

I don’t have an MBA. But I’ve hosted a daily real estate investing podcast for nearly four years, which means I’ve had over 1,400 conversations with real estate professionals that have been listened to over 7 million times. As a direct result of the education I’ve received and relationships I’ve formed, I’ve gone from making $30,000 a year at a New York advertising company to controlling $400 million in apartment communities, as well as earning revenue from podcast sponsorships.

That’s the power of a thought leadership platform.

 

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

joe fairless jordan peterson

4 Things I Learned at a Jordan Peterson Seminar

I went to a seminar to hear Jordan Peterson talk and have been obsessively watching his videos on YouTube ever since. Here are my top 4 takeaways from the seminar I attended with my wife.

 

1 – Make dangerous things useful.

Fire is dangerous. Or it is lifesaving. It depends on how it is directed. Emotions too. Emotions can be dangerous or they can be lifesaving. Not only lifesaving but life sustaining. So don’t judge the emotions we have. Use them.

Feeling scared? What does that really mean? Well it could be a healthy feeling. Perhaps we need to watch out for something ahead. But ultimately it likely means, get prepared.

 

2 – Just write the damn thing down.

When something big and scary is in your head, write it down. If you are worried about something, write it down. Why? Because once you write it down it becomes real. And real things have flaws, have vulnerable points. When writing it down you can then do the exercise of identifying where the vulnerabilities of this thing are. Otherwise, it is something that seems strong and bulletproof.

 

3 – Voluntarily confront what you’re afraid of.

Find what you’re are afraid of. Well, let’s be honest, it already found you, didn’t it? Now that you have identified it, voluntarily confront it. Because when you voluntarily confront it, it makes it a challenge not a threat. And you don’t become less afraid. You become brave.

 

4 – Compare yourself to who you were yesterday. Not who someone else is today.

Micro improvements are the key here. Be focused on improving yourself every day. Ask yourself, what can I do today that will make me a better version of myself than yesterday? And do it. And set yourself up for success.

Want to be a successful real estate investor but don’t have the time to be active on BiggerPockets? Then just make a commitment to post one time a week.

Don’t have time to do that? Then just post one time every two weeks. Just do something. Then, that will build momentum.

The Matthew Principle states that every success you have will increase the probability to have a future success. But be aware, the inverse is true. Every failure will increase the probability to have a future failure. So set yourself up to win by creating micro habits that you can and will do. Then build on it.

 

If you are new to Jordan Peterson and want to learn more, a great place to start are the links above or his interviews on the Joe Rogan podcast, with this interview here being the most popular. Or just search “Jordan Peterson” on YouTube as there are thousands of videos to choose from.

 

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

 

 

 

 

supplemental apartment loan

How to Secure a Supplemental Multifamily Loan

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.

In apartment syndication, the supplemental loan is typically utilized to return a portion of the limited partners’ initial equity investment without refinancing into a new loan or selling the property.

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:

Fannie Mae Freddie Mac
Loan term 5-30 years 5-30 years
Loan size Minimum $750,000 Minimum $1 million
Amortization Up to 30 years Up to 30 years
Interest rate 100 to 125 bps above standard pricing 100 to 125 bps above standard pricing
LTV Up to 75% Up to 80%
DSCR Minimum 1.30 (1st and supp. combined) Minimum 1.25 (1st and supp. combined)
Recourse Non-recourse w/ standard carveouts Non-recourse w/ standard carveouts
Timing 45 to 60 days from application 45 to 60 days from application
Costs -$10,000 application fee
-1% of loan amount origination fee
-$8,000 to $12,000 legal fees
-$15,000 lender application fee
-Greater of $2,000 or 0.1% of loan amount Freddie Mac application fee
-1% of loan amount origination fee
-$8,000 to $12,000 legal fees

 

How to Secure a Supplemental Loan?

If securing a supplemental loan is a part of the terms on your initial loan, you can request one any time after your original loan has been seasoned for 12 months.

Reach out to the mortgage broker or the lender who provided the original loan and ask them what they need in order to size out a supplemental loan. Typically, they will request:

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:

  • Supplemental loan year
  • Projected net operating income at supplemental
  • Projected capitalization rate at supplemental
  • Balance of first loan (plus other supplementals) at supplemental
  • Supplemental loan length
  • Supplemental loan amortization schedule
  • Supplemental interest rate
  • Supplemental max loan-to-value (LTV)
  • Closing costs

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

 

 

apartment syndications with no experience

Three Ways To Break Into The Apartment Syndication Industry With No Experience

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 over $400 million in apartment communities, 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.

 

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

 

best ever apartment syndication book

A Sneak Peek of the Best Ever Apartment Syndication Book in 4 Interviews

The Best Ever Apartment Syndication Book is officially available for purchase.

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!

 

“The Best Ever Advanced Multifamily Strategies For Raising Money At Scale” – Apartment Building Investing w/ Michael Blank Podcast

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.

Listen to my interview with Michael Blank here.

 

“From W2 Job to Controlling $400,000,000 of Apartments” – The Cashflow Hustle Podcast w/ Justin Grimes

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.”

Listen to my interview with Justin Grimes here.

 

“How Joe Fairless Analyzes Markets, Purchases Apartments, and Raising Millions” – Cash Flow Connections Podcast w/ Hunter Thompson

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.

Listen to my interview with Hunter Thompson here.

 

“From Zero to 3,000 Units In 5 Years” – Unbelievable Real Estate Stories Podcast w/ Ellie Yogev

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.

Listen to my interview with Ellie Yogev here.

 

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

 

 

build a business from scratch

How to Create a $400,000,000 Apartment Syndication Business from Scratch

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:

  1. Implement the business plan by adhering to the income and expense budget
  2. Conduct weekly performance reviews with your property manager
  3. Send the correct distributions to your passive investors
  4. Provide monthly recap emails to your passive investors
  5. Manage the renovations
  6. Maintain economic occupancy
  7. Plan trips to the property
  8. Frequently analyze the competition
  9. Frequently analyze the market
  10. Resolve issues as they arise

Here is a blog post where I go into more detail on these 10 duties.

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.

 

This was a brief overview of the entire apartment syndication process. For more in-depth information on raising money to buy apartments, you can purchase my book, Best Ever Apartment Syndication Book, visit my apartment syndication blog here, or email me questions at info@joefairless.com.

trust a broker's rent comps

Should You Trust a Listing Broker’s Rental Comps?

You receive a call from your real estate broker about a hot apartment deal that they’ve just listed. You quickly review their offering memorandum and, using a current rent roll and T-12, you populate your underwriting model. Before you can calculate an offer price, you need to perform a rental comparable analysis to determine your stabilized market rents. Luckily, the real estate broker has already conducted the analysis, so you should just use their results, right?

WRONG!

You should never unquestionably use the information in a real estate broker’s offering memorandum. The offering memorandum is only to be used as a guide, and this applies to their rental comparable analysis as well.

I’ve reviewed my fair share of offering memorandums. As a result, I’ve developed a keen eye for identifying instances where a listing broker tricks a buyer with incorrect rent comp information (whether it is intentional or unintentional is up for debate). Since the results of rental comparable analysis will be used to calculate a stabilized market rent, which will have a direct effect on the cash flow, using the correct properties is a must.

Now, a good starting place for finding rental comps is the offering memorandum. But, there are three main things to look out for when reviewing the comps that the real estate broker provided.

 

#1 – How far are the rent comps from the subject property?

First, see how far the comps are from the subject property. Distance is important, because a rent comp that is 30-miles away will not give you accurate results. But the neighborhood in which the comp is located is even more important.

For example, I was looking at a property and the rent comps provided by the listing broker were nearby (within a few miles) but were in a completely different neighborhood. I was local, so I knew that the comp was located in a neighborhood of college graduates while the subject property was not. But if I wasn’t local, I’d have to investigate the neighborhoods in which the rent comps are located to confirm that they are similar, especially in regards to demographics. A neighborhood with college students will demand different rents than a neighborhood with young professionals or blue-collar workers.

Key takeaway: The rent comps need to be close enough to the subject property to be in the same or a very similar neighborhood with similar renter demographics.

 

#2 – When was the rent comp renovated?

The second thing to look out for is the year the property was renovated, over what period of time, and how that relates to your business plan. As a value-add investor, we will often purchase apartment deals from owners who have already initiated a renovation program. Maybe they’ve renovated 25% of the units over the last 6 months. In that case, our plan would be to upgrade the remaining 75% of the units over a 12 to 18 month period, projecting to demand the same rental premiums they received on the 25%. When that is our business plan, we need to find rental comps that were upgraded to a similar quality and with a similar renovation timeline.

For example, I was looking at another property that had proven rental premiums but the renovations had been performed over two years to only 25 units. That’s about one unit per month. Our renovation timeline moves faster than that, so that is not a good comparison, because the renovations were too slow. A better rent comp would have those 25 units renovated over a few months.

Another red flag would be if the units weren’t renovated recently. If the units were renovated over 6 months ago, you cannot trust the accuracy of their rental premiums, because they’ve likely changed.

Key takeaway: The rent comps need to be renovated recently and over a period of time that is similar to the speed at which you will perform your renovations.

 

#3 – Do the operations at the rent comp match those at the subject property?

Last, look at the operations of the property to see whether they match up with the subject property.

For example, I was reviewing an offering memorandum that had a mixture of rental comps where the owner paid for all of the utilities and rental comps where the owner paid for some of the utilities. If the subject property has the owner pay for all of the utilities, all of the rental comps need to be the same, because this impacts the rental rates.

Another example would be the rent specials offered. If a rental comp is offering concessions to new applicants, then they can likely demand a higher rent. Unless you plan on offering a similar amount of concessions, that rental comps should be eliminated (or the rents need to be adjusted downwards). If all of the rent comps provided by the listing broker are offering a lot of concessions, that may also indicate a market with low demand.

Key takeaway: The operations at the rent comp must match those at the subject property.

  

If the listing broker’s rent comps adhere to these three factors, great. But you should still verify that information provided is correct. If they don’t, however, you’ll need to find your own rental comps (and here’s how you do that).

 

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

 

 

Labor Day greetings

Happy Labor Day! Five Investors Who Hustled Their Way to Success

In honor of Labor Day, and for some education on your day off, tune in to these five Best Real Estate Investing Advice Ever podcasts about five investors who labored and hustled their way to success:

 

#1 – Melanie Bajrovic, From Bartender to Millionaire Real Estate Investor and Entrepreneur

Melanie was lucky enough to have parents who taught her about money, and how to save it. By the time she was 22 she had a “nice nest egg”. Looking for guidance with what to do with her cash, her dad suggested investing in real estate. Starting with single family homes, she hustled her way into the commercial real estate industry and opened her own business in a piece of property she bought. Listen to what it takes to improve your quality of life substantially through real estate investing here.

 

#2 – David Moadel, Conventional and Unconventional Ways to Earn More Passive Income

David has been a market expert for years, nailing a ton of different key topics including precious metals, cryptocurrency stocks and real estate crowdfunding. He teaches you how to hustle on the side to earn more passive income. Listen to his episode here to hear some ideas that you’ve heard before, and more ideas that you probably have not. When you have a chance to learn from an expert like David, you listen up!

 

#3 – Evan Holladay, Hustle Leads to Dream Job as an Affordable Housing Developer

Evan was in the medical field in college before realizing that it was not for him. He noticed a student housing development being built close to his school and wanted in. He blew up the development company until they gave him a task, get 100 students to the ground breaking. Evan got 800! Now working for a large development company, hear how he was able to get his dream job and how they use tax credits to build affordable housing here.

 

# 4 – Stash Geleszinski, How to Leverage Brokers to Hustle for Deals

Real estate brokers are the gatekeepers to many deals whether they are single family or multifamily. Stash is a multifamily broker and has discovered clever ways to incentivize brokers, organize leads, and covert them over time. All it takes is a little hustle. Listen to Stash’s advice here or read a summary of his Best Ever Advice here.

 

#5 – Giovanni Isaksen, How Success Will Follow Persistence and Hustle

He lost on a condo conversion deal at the last second all because the bank changed the terms the day before close. Giovanni didn’t give up after a hard loss! He continued to crunch numbers and familiarize himself with larger deals and met some key players along the way. Now he is in the private equity space finding large transactions and putting them together. Tune in here to learn how he did it.

 

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

worst real estate investment

5 Lessons Learned from the Worst Real Estate Investments

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “what is your worst deal ever and why?”

 

You don’t just want to learn about people’s worst deals ever. What you really want to know is why it was bad and how you can avoid making the same mistakes!

That said, here are five lessons active real estate investors learned from their worst deals ever:

Lesson #1 – Rental Properties are Better Wealth Builders Than Fix-and-Flips

Garrett White learned two valuable lessons from his worst deal ever. It was his first attempt at a fix-and-flip in 2017. Up to that point, he had only purchased rental properties. Garrett purchased the property for $77,500 from a burned-out landlord, put in $18,500 in renovations and sold it for $120,000 three months later.

While he was able to make a profit on the deal, the first lesson he learned was that, compared to fix-and-flips, rental properties are much better wealth builders. On fix-and-flips, the main benefit comes from the short-term forced appreciation. Whereas for rental properties, you’ll benefit from short-term forced appreciation, long-term natural appreciation, ongoing cash flow, tax advantages and the principal paydown. He made quick profit with fix-and-flips but to build long-term wealth and use his time more effectively, he believes rental properties are a much better option.

 

Lesson #2 – Time is Your Most Valuable Asset

Another lesson Garrett learned from his worst deal ever was the importance of time. He said the amount of time, hustle and stress involved during those three months spent on the flip were greater than the four years of owning six rental properties combined. The large time commitment involved in identifying a fix-and-flip opportunity, evaluating and closing, managing or doing the renovations, and selling the deal weren’t worth the stress and short-term profit. Instead, Garrett would have rather spent his time cultivating relationships with brokers, owners and passive investors so that he could syndicate deals and buy rental properties.

 

Lesson #3 – Consider Creative Financing Before Passing on a Deal

Robert Lawry II’s worst deal ever was a deal he didn’t do. It was a 2-bedroom condo with an oceanfront view listed for $30,000 in 1993. Robert was 19 and couldn’t fund the purchase price, so he passed. Today, the condo is valued at $800,000…ouch!

But Robert learned a valuable lesson. Rather than passing on the deals he cannot fund alone, he now knows that he should brainstorm creative financing options first. For example, he could have raised private capital to purchase the condo. Or he could have implemented the house hacking strategy, bringing on a roommate or two to cover the acquisition costs and to pay rent to cover the mortgage payments.

Don’t pass on the deal just because you cannot fund the acquisition costs. If the return projections are truly strong, you shouldn’t have an issue finding someone to help you purchase the deal.

 

Lesson #4 – Don’t Deviate from Your Investment Criteria

Eric Jacobs’ worst real estate deal was a home he purchased in the Bahamas. He knew it wasn’t a good deal but he bought it anyways. Eric lost a fair amount of money on this deal, but he fortunately realized the error is his ways and didn’t pursue any more deals in the Bahamas.

His error was that he fell in love with the property. As a result, he deviated from his investment criteria and ignored the results of his underwriting. We’ve all been there, but we must remember that we set our investment criteria the way we did for a reason. If the deal doesn’t meet our criteria, no matter how much we love it or try to bend the numbers, we have to pass.

 

Lesson #5 – Hold Partners Accountable

On Roman Bulgakov’s worst deal ever, he was betrayed by his business partner. He trusted that his partner had the best intentions of the company in mind when the reality was that his partner was only looking out for himself.

Roman partnered with a contractor who agreed to finish the project in six months at an agreed upon price. However, the contractor ended up taking twice as long and charging twice as much. By the time the deal made it to the closing table, Roman only made $1500.

Roman’s lesson is to keep partners accountable. He failed to create accountability checks along the way, which the contractor took advantage of. Moving forward, Roman has a defined process with his partners in which he has frequent check-ins to receive status updates on his projects. That way, he can catch timeline or budget deviations before it’s too late!

 

What about you? Comment below: What was your worst deal ever and why?

 

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 compensation

How to Structure the GP Compensation for Apartment Syndications

The two main parties in an apartment syndication are the general partners (GPs) and limited partners (LPs). Essentially, the LPs fund the deal and the GPs manage the deal and each party is compensated accordingly – the most common compensation structure is an 8% preferred return to the LP and a 70/30 profit split of the remaining profits to the LP and GP respectively.

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.

 

4 – Investor Relations

Another GP duty is investor relations. Investor relation responsibilities include generating interest from passive investors prior to finding a deal, securing commitments for the passive investors in order to fund the equity investment and ongoing communication with the passive investors while the business plan is executed.

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, the 35% allocated based on how much each individual raise. For example, if the equity investment is $1 million and two people raise $500,000, they will each receive 17.5% of the 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.

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

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

 

skeptical of real estate deal

5 Reasons to be Skeptical of a Real Estate Deal

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “what is the biggest red flag for you when evaluating a potential deal?”

Depending on your business plan, the entire underwriting process – which includes gathering the required data, building a financial model, performing a rental or sales comparison analysis and visiting the property in person – can take anywhere from a few days, to a few weeks to even a few months. Then, once the property is under contract, you’ll have 30 to 60 days to perform additional due diligence to confirm your underwriting assumptions and create a business plan. When you add to that the costs associated with both underwriting and due diligence, the deal evaluation process requires quite the investment, of both time and money.

Therefore, the earlier in the process you can identify potential red flags or disqualifiers, the better, as you will save yourself both money and time.

In fact, I created a series about the top 10 tips for underwriting a deal (click here to listen to part 1). In addition, here are five more tips on things to look for when evaluating a potential real estate deal.

 

1 – Errors in the Offering Memorandum

The offering memorandum (also referred to as the OM) is a sales package created by the listing real estate broker that is used to market and provide a summary of the deal. The key word here is “sales.” The purpose of the OM is to help the real estate broker sell the property for the highest price possible, because the higher the sales price, the higher their commission.

While the OM will include a rent roll, T-12 and proforma, you should NEVER use that data when evaluating a deal. It should, at most, be used as a guide. The reason is because the information provided in the OM may not be 100% accurate.

For example, Youssef Semaan comes across many deals where there is a discrepancy between the OM and the actual rent roll. On one deal, he discovered that the rents listed on the OM were $50 to $100 higher than what was listed on the rent roll. That’s a huge problem! On a 100-unit property in a market with an 8% cap rate, that is a difference in value of $750,000 to $1.5 million! To make matters worse, on that same deal, the OM listed an occupancy rate of 100% (a red flag in and off itself) while the actual rent roll occupancy rate was significantly lower. This is why you must always use the actual historical profit and loss data and a current rent roll when evaluating a deal.

Another error you might find on an OM is a calculation error. Taylor Loht came across a deal where the internal rate of return was calculated incorrectly. Other examples of miscalculations I’ve seen are an incorrect cap rate, net operating income, capital expenditure budgets, and results of a rental or sales comparable analysis. While it may seem like these calculation errors are a moot point (we’re supposed to use the actual rent roll and T-12s and create our own cost assumption, right?), if the owner or listing real estate broker made mathematical mistakes on the OM, how can you trust the other information that they provide?

 

2 – Indications of an Unethical Owner, Listing Broker or Property Management Company

A discrepancy on the OM compared to the rent roll or T-12, or a calculation error on the OM might have been an honest mistake. However, there are other things that cannot be seen as anything other than unethical behavior.

For example, Todd Dexheimer caught a property management company forging the certified rent roll, P&L statements (i.e. T-12) and leases. They also claimed an occupancy rate of 90%, but the actual rate was 81%. The only reason they uncovered these forgeries was because the management company accidentally sent out the actual rent roll and then tried to recall the email.

Another example of unethical behavior happened to Eric Jacobs. Usually, in the terms of the purchase sales agreement, the owner is required to provide the buyer with the property’s financials, including a certified rent roll, T-12, leases and bank statements. However, Eric had a deal where the owner refused!

Unfortunately, we live in a world with dishonest people. And since the real estate industry is a part of world, you may come across a deceitful person during your career. My advice? Run at the first sign of unethical behavior

 

3 – Unrealistic Profit and Loss Statement

The profit and loss statement (also referred to as the T-12) is a document or spreadsheet containing detailed information about the revenue and expenses of the property over the last 12 months. Generally, when underwriting a deal, the T-12 is used as a guide for determining the stabilized income (i.e. loss-to-lease, bad debt, concessions, other income, etc.) and operating expense amounts. For example, if the other income was 13% of the gross potential rent (also referred to as GPR) and the contract services were $250 per unit per year, then it is safe to assume those same amounts when you take over the property. However, there are other times where the T-12 data is unrealistic, which means adjustments are necessary.

For example, on the income side, Ajit Prasad said that an other income amount that is greater than 20% of the GPR is a red flag. The “incomes” included in other income are late fees, lease termination fees, lease violation fees and damage fees, which are all associated with a poor resident base. Therefore, a higher other income can indicate a poor resident base, which may disqualify the deal or is something that will be reduced after you take over the property.

There may also be unrealistic amounts on the operating expenses side. For example, Joseph Gozlan said that this can occur when the owner has economies of scale in the same area. If the owner controls thousands of doors in one submarket, they may have a carpet cleaner, garbage person, painter, etc. on staff rather than on contract, which drastically reduces certain operating expenses. Or, they may have a family or friend who owners a service company (like a landscaping or pest control company) and provides their services for free or at a reduced price. However, once you take over the asset, those economies of scale and/or family and friends discounts go away.

One way to identify an unrealistic T-12 is to calculate the expense ratio. The expense ratio is calculated by dividing the total operating expenses by the total income. While it varies from market-to-market, if you see an expense ratio of less than 40%, that is an indication that the income and/or operating expense data is unrealistic.

The best way to overcome an unrealistic T-12 is to base your underwriting assumptions on how YOU will operate the property, not how the current owner is operating the property. And hiring a great property management company can help you with this.

 

4 – Bad Market

Another factor that may disqualify a potential deal is the market. Ryan Gibson performs market studies for all of his deals. If the results of his market study indicate a lack of demand or a market that is not strong enough to expand in, raise rents or execute a value-add business plan, he passes on the deal.

Last week, I posed a question to the Best Ever Community about the red flags that disqualify a real estate investment market. Here is the blog post that outlines the top six responses.

 

5 – Issues Identified During the In-Person Visit

Even if everything looks good on paper, I always recommend that you visit a property in person before moving forward with a deal. There are certain red flags or disqualifiers that cannot be uncovered until you see the actual property.

For example, Joseph Gozlan said that too many cars in the parking lot on a Tuesday around [11:00]am is a red flag because it indicates a high level of unemployment. Also, Adam Adams visits the property and the surrounding neighborhoods to look for indications of crime.

Visiting the property in person may also change your exterior renovation budget. For example, Theo Hicks was reviewing an OM that stated the property only needed new roofs and new window A/C units for an exterior renovation budget of ~$500,000. At that point, the deal made financial sense. However, after visiting the property in person, the exterior renovation budget increased to over $1.5 million. At that point, the deal did not make financial sense.

 

What about you? Comment below: what is the biggest red flag for you when evaluating a potential deal?”

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

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

 

raise apartment rents

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

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…?

Wrong.

Among your many duties as an asset manager is to frequently analyze the market to confirm that you are maximizing your profits by keeping up with the market rental rates.

How is this accomplished?

The short answer – perform a rental comparable analysis (commonly referred to as the rent comps), which can be done by you and/or your property management company, using the results to determine if you should raise the rents and by how much. Here is a blog post on how to perform the rent comps over the phone.

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.

 

4–The Competition

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?

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

6 Red Flags That Disqualify a Real Estate Investment Market

We post a new question to the Best Ever Show Community on Facebook every week. The Best Ever Show Community is where real estate entrepreneurs of all experience levels can come together and network with each other, me, and the guests featured on my real estate investing podcast. The idea is that everyone can help one other reach the next goal in their businesses and personal lives.

 

This week, the question was “what is the biggest red flag for you when evaluating a market?

 

We’ve all heard the investing cliché “real estate is all about location, location, location.” While I believe the ability to execute the business plan is more important than the real estate investment market, the quality of market comes in close second. So, what factors should you analyze in order to determine the quality of an area? First, I recommend reading my ultimate guide to evaluating a real estate market. Then, read on to learn the 6 red flags active real estate investors said will disqualify an area when conducting real estate market research.

1 – No Job Diversity

If the dominant industry employs too large of a percentage of the population and that industry collapses, many people will likely become unemployed. And when people become unemployed, their ability to pay their rent or purchase a home is reduced, which will reduce the amount of rent you can demand or price you can sell a property at as an investor.
When I evaluate a market, I want to see that no single industry employs more than 25% of the population – 20% or lower is ideal. Then, if any major industry is negatively affected, the damage to the real estate market is minimized. Visit the US Census website for job diversity information.

 

Similarly, Garrett White would disqualify a real estate investment market that lacks a diverse economy or has major employers leaving the area. A quick Google search of the real estate market research already completed will show you if any major employers have left or are expected to leave the market.

 

John Jacobus puts a small spin on the job diversity question. He will disqualify a market if one or two dominant employers derive their revenue from highly cyclical sources. This is determined by finding the business sector (i.e. manufacturing, technology, medical, etc.) of the top employers in the market and seeing how that sector fairs during the high and low points of the economic cycle.

2 – High Rent to Income Ratio

People can only spend a certain amount of their yearly salary on home expenses. Therefore, if the ratio of the median home expense to the median income exceeds a certain threshold, housing expenses are too high or the median incomes are too low for the population to afford housing expenses in the long-term.

 

When Theo Hicks evaluates a real estate investment market, if the annualized median rent is more than 35% of the median income, the market is disqualified. Matt Skog has a similar approach – if the annualized median rent is more than 40% of the median income, he won’t invest.

 

Both the median rent and median income data can be found on the US Census website.

3 – Population Decline

The most basic and obvious red flag to look for during your real estate market research is a decline in population. A declining population likely indicates a declining overall economy, which includes a declining real estate market.

 

There are a few factors that indicate a population decline. Hai Loc and Neil Henderson look are the overall population trend, with a negative trend disqualifying a market. Garrett White looks at the trend of the number of households, with a negative trend disqualifying a market. And Youssef Seamaan looks at the net migration, with a negative net migration disqualifying a real estate investment market.

 

Population, household and migration data can also be found on the US Census website.

4 – No Job Growth

Another basic and obvious red flag is no job growth. Again, if fewer people have jobs, the lower the demand for real estate. Hai Loc and Neil Henderson look at both the population and job trends. A lack of population and/or a lack of job growth will disqualify a location during initial real estate market research.

 

Yearly job and employment data can also be found on the US Census website.

5 – High Inventory

“Supply and demand” is one of the golden rules of economics. The higher the supply, the lower the demand and vice versa. And the lower the demand, the lower the price. Therefore, markets with high inventory indicate a low demand.

 

Harrison Liu analyzes the supply of apartments in within real estate investment market. If there is an oversupply, he disqualifies the market.

 

Luke Weber also analyzes the supply of real estate in a market, using the factor “months of inventory.” Four to six months of inventory is bad, while six or more months of inventory is even worse.

 

The number of apartments in a market can be found on the US Census site or on the local county auditor/appraisal site. In order to determine the current “months of inventory” factor, reach out to your real estate agent.

6 – Local Regulations

Something that some investors may forget to think about during their real estate market research is the local regulations governing the real estate market. But not Blaine Clark. As a note investor, he says local government processes and regulations trump the economic environment.

So, prior to putting time and money into a real estate investment market, obtain a basic understanding of the local regulations governing the real estate market and how they positively or negatively affect real estate investors.

 

What about you? Comment below: What is the biggest red flag for you when evaluating a real estate market?

firing a property management company

How to Approach Firing a Property Management Company

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.

Hiring a qualified, experience and credible property manager should be done prior to looking for and ultimately purchasing a deal. However, what happens if are acquiring a deal, the property management company is unable to execute efficiently?

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.

 

1. Staffing

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.

 

2. Financials

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).

 

3. Renovations

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.

 

4. Vendors

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.

 

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chic living room with hardwood floors

Seven Ways To Attract High-Quality Residents To Your Apartment Community

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.

 

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rental comparable analysis on phone

How to Perform Your Own Rental Comparable Analysis Over the Phone

The rental comparable analysis is the process of analyzing similar apartment communities in the general area to determine the market rents of the subject apartment community.

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.

 

Conclusion

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?

 

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closed doors in an empty room

What is Possible in 9 Years as a Real Estate Investor?

“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.

Thanks,

Joe Fairless

 

Fortunately, it worked! They approved me for the loan and I was the proud owner of this, ahem, beauty!

 

street view of a single-family home

 

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:

 

Closed on 250-units in Houston, TX…2 Lessons Learned

Closed on 155-units in Houston, TX…3 Lessons Learned

6 Ways to Creatively Get into the Multifamily Syndication Business

Investor Analysis After Closing on a 296-unit Apartment…2 Lessons Learned

Closed on a 200+ Unit Multifamily Syndication…1 Simple Lesson

I Just Reached Over $100,000,000 in Apartment Communities…Lesson Learned

How to Find Deals in a Hot Market

How to Find Private Money Regardless of Where You Live

 

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:

  1. Nothing in life has meaning until I decide to give it meaning.
  2. Challenges are a gift. Life happens for me, not to me.
  3. Help enough people get what they want and I’ll get everything I want.
  4. Richest people in the world build networks. Everyone else looks for work.
  5. The secret to living is giving.
  6. Work harder on yourself than you do your job.
  7. Best way to get out of a funk is to move and be grateful.
  8. Have perspective by remembering that I will die.
  9. Be proud of who I am when nobody is looking.

 

Here are 9 habits that have helped me be consistent with my progress:

  1. Immediately think of one thing I’m grateful for when I wake up.
  2. Drink a liter of water with a scoop of wheatgrass in the morning
  3. Do cardio and weights (not just cardio)
  4. Volunteer at least once a month
  5. Think about life in terms of # of experiences remaining, not years remaining
  6. Journal my thoughts, feelings and whatever else comes in my head daily
  7. Always have a vision board prominently displayed everywhere (wall in office, phone, computer background)
  8. B.R. (always be readin’)
  9. 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.

 

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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?

 

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first real estate deal

How 28 Real Estate Investors Completed Their First Deal

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “after you first became interested in real estate, how long until you had your first deal under contract?” 

Of course, being the Best Ever Community, the majority of the members are active real estate investors. However, if I had to guess, only 1 out of every 10 people who become interested in real estate actually pull the trigger. And an even smaller number of people pull the trigger within a year! That being said, if you are interested in real estate but haven’t completed your first deal, let this blog post be a motivator. Because, of the 28 responses, 24 investors acquired their first deal within 1 year. That is over 85%! And if they can do it, so can you.

That being said, thank you to everyone who responded. The poll is closed, the responses are in and here are the answers:

 

Less Than a Week

Two investors had their first deal under contract within a week of becoming interested in real estate. When Shannon Feick was browsing the local newspaper looking for a place to rent, he came across a potential candidate. Within 3 days, rather than renting, he purchased the property using a lease-option.

Theo Hicks had his first property under contract within 48 hours of learning the power of real estate from a friend. He learned about real estate investing on a Tuesday; he had a meeting with a real estate agent on Wednesday, setting up an MLS automated email; he received an email with a listing that met his investment criteria that same Wednesday; he toured the property the next day and had a signed contract by Thursday night, utilizing the house-hacking strategy.

While closing a deal within a week of becoming interested in real estate is a possibility, especially with the use of creative financing, it is not without its risks. Shannon said that she ended up losing the property after two years. And, due to a lack of experience and education, Theo had a nightmarish experience on his first deal. Fortunately, that didn’t stop them from as they are both still active investors to this day.

 

1 Week to 1 Month

Two more investors had their first deal under contract between 1 week and 1 month of becoming interested in real estate. Dan MacDuffie bought his first fix-and-flip project within 14 days, and Adam Adams acquired his first deal for only $100 within three weeks. Reach out to Adam on the Best Ever Community to learn how he was able to accomplish such a feat!

 

1 to 6 Months

The most common timeline between becoming interested in real estate and putting a deal under contract is 1 to 6 months, with half of the responses falling within that time range.

Whitney Sewell has a very inspiring entrance into the real estate industry. While working every night of the week, as well as weekends, as a police officer, he came across “Rich Dad, Poor Dad,” and knew he needed to make a career change. Within 3 months, he purchased two 3plexes, using private money for the down payment, which meant that he had none of his own money in the deal. He eventually sold the properties without making a profit, but he gained a lot of knowledge and experience that he still applies to this day.

Matt Skog spotted a seemingly vacant house but one month later, he discovered that the owners were actually just out-of-state for the winter. However, the owners were downsizing into a smaller home, which allowed Matt to acquire the property with a 0% interest seller financing loan. A few years later, he sold the contract and has tripled that profit in just over 7 years.

Two investors become interested in real estate and made the smart move to educate themselves prior to purchasing a deal. Brandon Abbott acquired his first deal after spending 45 days reading 6 real estate books and listening to countless podcasts. And Michael Rafales read “Rich Dad Poor Dad” and “How to Invest in Real Estate With No and Low Money Down” in February and bought his first investment in June.

Other investors who fall within the 1 to 6-month time range were Peter Eiseman (1 month), Brian Trippe (45 days), Devin Elder and Cody Dover (2 months), Julia Bykhovskaia, Davi Brown, Hai Loc and JP Sayers (3 months).

 

6 Months to 1 Year

The next most common timeline between becoming interested in real estate and putting a deal under contract is 6 months to a year. In fact, this is where I fall – I had my first deal under contract (a single family residence) within 10 months.

Similarly, it took Garrett White 9 months before purchasing his first investment – a single family residence. Tom Lipps was in the research phase for 6 months (reading blogs and books and listening to podcasts) before finding the right property 3 months later, for a total of 9 months. Kris Bennett had two apartment deals fall through, continued on his search and eventually succeeded in closing on a self-storage deal 12 months after starting his search.

Other investors who fall within the 6 months to 1-year time range were Sean Morrissey (9 months), John Jacobus and Kurt Schuepfer (11 months) and Justin Silverio (12 months).

 

1 to 5 Years 

Two investors had their first deal under contract 1 to 5 years after becoming interested in real estate investing.

Chad Althaus became interested in real estate investing while he was still in college. After saving up the money for a down payment during his remaining two years until graduation, he purchased a property within a year of commencement.

It took Lucas Miller a couple of years before acquiring his first property for reasons to which I am sure everyone can relate: he was confused about which investment strategy to implement, so he went through a multi-year trial-and-error phase.

 

5 or More Years

The last two investors are a case study in patience and long-term determination, because they purchased their first investment after being interested in real estate for over 5 years!

Darrin Carey had a casual interest in real estate for 15 years, at which point he made the decision to become a serious investor. Two years later, he closed on not one, not two, but four deals in quick succession.

It also took Greg Gaudet 15 years to invest. He fell in love with real estate and decided to become an investor in 2003 while working as an appraiser. However, he said he made up for his procrastination by purchasing two properties in Maui over a three-month period and is currently on the hunt for his next deal.

 

At the end of the day, whether it takes less than a week or 15 years to acquire your first deal, what matters most is entering the game! My recommendation for those who are in the process of purchasing their first deal: reach out to one of the investors in this blog post on the Best Ever Community on Facebook. They’ve all completed at least one deal, and maybe they can offer you the advice you need finally pull the trigger.

 

What about you? Comment below: How long did it take you to acquire your first property after initially becoming interested in real estate?

 

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how passive investors make money

How Do Passive Investors Make Money in Apartment Syndications?

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.

 

Equity Investor

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.

 

Debt Investor

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!

 

Want to learn more about passively investing in apartment syndications? Visit the Best Ever Passive Investor Resources page, the only comprehensive resource available to passive investor.

 

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How to Become an Award-Winning 5-Star Apartment Syndicator

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.

Conclusion

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?

glossary of apartment terms

Glossary of Apartment Syndication Terms

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.

 

A

 

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.

 

B

 

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.

 

C

 

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.

 

D

 

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.

 

E

 

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.

 

F

 

Financing Fees: The one-time, upfront fees charged by the lender for providing the debt service. Also referred to as finance charges.

 

G

 

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.

 

H

 

Holding Period: The amount of time the general partner plans on owning the apartment from purchase to sale.

 

I

 

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.

 

J

 

K

 

L

 

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.

 

M

 

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.

 

N

 

Net Operating Income (NOI): All the revenue from the property minus the operating expenses. Also referred to as the NOI.

 

O

 

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.

 

P

 

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.

 

Q

 

R

 

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.

 

S

 

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.

 

T

 

U

 

Underwriting: The process of financially evaluating an apartment community to determine the projected returns and an offer price.

 

V

 

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.

 

W

 

X

 

Y

 

Yield Maintenance: A penalty paid by the borrower on a loan is the principal is paid off early.

 

Z

 

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apartment investing offer

How the General Partner Submits an Offer on an Apartment Deal

Generally, the general partner (referred to as GP hereafter) in an apartment syndication has certain investment criteria to determine which deals to submit offers on. This criteria could be as sophisticated as requiring a projected internal rate of return and cash-on-cash return above a certain threshold, which is what my company does, or as basic as a cash flow per door.

 

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.

 

To learn more about the apartment syndication process from the perspective of a passive investor, visit my passive investor resources page here.

 

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REIT vs. Apartment Investing

Apartment Vs. REIT: Which Is The Better Passive Investment?

Originally Featured on Forbes.com here.

 

In real estate investing, there are two major strategies to choose from, and each can be used to pursue a variety of different opportunities. In passive real estate investing, two of the most popular investment opportunities are apartment syndications and real estate investment trusts, or REITs.

 

REIT is a company that owns, operates or finances income-producing real estate that generates revenue, which is paid out to shareholders in the form of dividends. An apartment syndication is when a syndicator (i.e., the general partner) pools together capital from passive investors (i.e., the limited partners) to purchase an apartment community while sharing in the profits.

 

In both cases, the passive investor is investing in real estate. However, the investment structures differ, which means that there are distinct pros and cons for each strategy. From my experience syndicating over $300,000,000 in apartment communities, when compared to REITs, I’ve found six pros and cons of passively investing in an apartment syndication.

 

1. Liquidity

 

With REITs, you have the ability to buy and sell like a standard stock. If you find yourself needing to pull out your capital, you can do so relatively quickly. Conversely, a passive apartment syndication is less liquid. Your initial investment is locked in until the end of the projected hold period. However, depending on the syndicator, there may be exceptions to this rule.

First, the syndication may have a clause that allows you to sell your shares of the company with the written consent of the general partnership. It is not as fast or as simple as selling shares of a REIT, but if an emergency were to arise and the syndication has such a clause, there is a process for reclaiming your investment. But overall, the passive apartment syndication is less liquid than a passive REIT investment.

 

In regards to liquidly, REITs win. REITs 1, apartments 0.

 

2. Barrier To Entry

 

To invest in a REIT, a large sum of capital isn’t required. Most REITs have no minimum investment, although they may require that you purchase blocks of 10 or 100 shares. That means you can invest in a REIT with less than $1,000, whereas apartment syndications have a higher barrier to entry.

 

First, you may need to be accredited, which means having an annual income of $200,000 or $300,000 for joint income for the last two years, or an individual or joint net worth exceeding $1 million. Additionally, apartment syndication may require a minimum investment. For example, my company requires a first-time minimum investment of $50,000 and then $25,000 thereafter. You can find syndicators that don’t require a minimum investment or for which you meet the accredited investor qualifications, but regardless, the financial barrier of entry is higher for apartment syndications than REITs.

REITs 2, apartments 0.

 

3. Diversification

 

With REITs, you invest in a diversified portfolio of properties that provide a blended return. Because the risk is shared across a pool of assets, you will not see major fluctuations in your returns and portfolio value. With a passive apartment investment, your return is directly tied to the performance of a single asset. If something negative happens to the property or the submarket in which the property is located, your projected returns will be reduced accordingly. However, the same logic applies to the upside as well.

Of course, this risk can be greatly reduced by only investing with apartment syndicators who follow the Three Immutable Laws of Real Estate Investing. Additionally, you can make up for the lack of diversification by investing in multiple apartment syndication deals, essentially creating your own personal REIT.

 

I’m calling this one a draw. So, the score remains: REITs 2, apartments 0.

 

4. Returns

 

The major benefit of passively investing in apartment syndications is the higher average returns. The total REIT return over the last five years (May 2013 to 2018) is 25.213%, including dividends and distributions. If you initially invested $100,000 in May 2013, your total profit by May 2018 is $25,213. As a comparison, my company does not purchase an apartment community unless the average annual return exceeds 9% and the five-year internal rate of return exceeds 16% to our passive investors. On a deal we purchased in 2015, we projected a 13.5% average annual return and a 20% five-year IRR to our passive investors, which would result in a total five-year profit of $102,805. As of this writing, not only are we on pace to exceed these projections, but we were able to refinance the property into a new loan and return about 40% of our passive investors initial capital. That is the power of apartment syndications.

 

Money is the crux of why people invest in real estate at all, so I’m giving apartments three points on this consideration. REITs 2, apartments 3.

 

5. Ownership

 

When investing in an apartment syndication, you also benefit from having direct ownership of the underlying asset. The major benefit of direct ownership is transparency — you see the actual asset you are investing in. As the general partnership progresses through the business plan, you will receive updates where, again, you can to see the actual asset, along with pictures of the updates and a variety of KPIs (rents, occupancy, etc.).

 

Another — and essential — benefit is having the direct contact information of the person calling the shots. If you have a question, you won’t have to worry about speaking with customer service or an automated phone service. Instead, you have direct access to the general partner who is managing the asset.

 

Another point for apartments: REITs 2, apartments 4.

 

6. Taxes

 

From a tax perspective, both REITs and apartment syndications will pass the depreciation benefits through to the passive investor. However, where these two strategies differ is with the profit at sale. For a passive apartment syndication investment, you have the opportunity to utilize the 1031 exchange tax instrument, which allows you to defer the taxes on your profit at sale by reinvesting in another deal with the same syndicator.

 

The final tally: REITs 2, apartments 5.

 

While the returns on both REITs and apartments have historically exceeded those of regular stocks as long as you are financially qualified and willing to tie up your capital for five to 10 years, passively investing in apartment syndications is, overall, the superior strategy.

 

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“tax” written in check book with pen

The Five Tax Factors When Passively Investing in Apartment Syndications

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.

Depreciation

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 Segregation

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

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.

Bonus Depreciation

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.

Capital Gains

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.

Secure Passive Investor Commitments

5 Step Process for Securing Passive Investor Commitments for Apartment Syndications

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.

 

3 – New Investment Offering Call

A few days to a few weeks after sending the notification email, my company hosts a new investment offering conference call. Here is a blog post I wrote that outlines my 7-step approach to preparing and conducting a successful new investment offering call. Read this post for more details, but the 7-step approach is:

  1. Get in the right mindset
  2. Determine your main focus
  3. Introduce yourself and your team
  4. Provide an overview of the deal, the market and the team
  5. Go into more detail on the deal, the market and the team
  6. Questions and answers session
  7. 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.

 

  1. 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.

 

  1. Operating Agreement

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.

 

  1. Subscription Agreement

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.

 

  1. 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).

 

  1. ACH Application

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.

Direct Mail Guide

The Ultimate Guide to a Successful Direct Mailing Campaign

So, you want to find an off-market deal? There are countless ways to generate off-market apartment leads, but one of the most common strategies is the direct mailing campaign.

 

A direct mailing campaign is when you send out a batch of letters to owners with the purpose of negotiating a sales price and putting their property under contract.

 

The two main aspects of the direct mailing campaign, which will be the focus of this guide, are the list and the letter. Read on for all of the tools you need to create a successful direct mailing campaign from scratch.

 

Creating a List

 

Before creating your list, you need to define your investment criteria. Your investment criteria should include factors like the market, property type, number of units and the construction date. Setting your investment criteria prior to creating your list will save you a lot of time, because you will know that every single owner on your list owns an apartment community that aligns with your business plan.

 

With your investment criteria set, it is now time to create your list. There are many sources that you can use to build your list. Listsource and CoStar are great tools for creating larger lists but they do not send out the letters for you. Postcard Builder and Open Letter Marketing are two full service direct mailing companies where you can create a list, draft your letter and send out the direct mailing campaign all in one place. Local title companies are also a good resource for obtaining a list. And if you are lucky and found the right real estate broker, they can create a list on your behalf, and maybe even send out the letters too!

 

Regardless of which resource you use, you will create a custom list of properties that meet your investment criteria. And, if you want, you can customize your list even further using hundreds of other factors like the amount of equity the owner has in the property, the demographics, the owner type or status and much more.

 

Additionally, to increase the chance of finding a seller that is interested in selling, you want to identify motivated owners. These are owners who are motivated to sell their apartment because they are distressed (i.e. have maintenance or capital expenditure issues, tenant issues, management issues, financing issues, tax issues, etc.), they are at the end of their business plan or they implemented a different business plan (i.e. they purchased the apartment for cash flow but didn’t add value to increase the rents).

 

Depending on your investment strategy, you may or may not be able to create a list of motivated sellers by solely using Listsource or similar list making services. Therefore, here is a list of additional ways to locate motivated apartment owners:

 

  1. Driving for dollars: If your target market is local, you can drive around the market and look for apartment communities that are showing signs of distress. Examples would be poor landscaping, obvious deferred maintenance, offering rent specials, broken windows, peeling or fading paint, or an apartment that stands out from surrounding properties. Find the owner’s contact information and give them a call or send them a direct mailer.
  2. Eviction Court: Locate your local eviction court and obtain a list of apartment owners that are evicting residents. Evictions are a major headache for real estate owners in general, so they may be extremely motivated to sell. Typically, the eviction list is located on the local county’s Clerk of Courts website.
  3. Building Code Violations: Locate a list of apartment owners who recently received a building code violation from the city.
  4. Delinquent Taxes: Locate a list of apartment owners who are delinquent on their taxes. Unless you are building a list from scratch, most of the automate direct mailing list providers will allow you to set “delinquent taxes” as a criterion. If you are building a list from scratch, information on the apartments with delinquent taxes can be found on the local county’s Clerk of Courts or Sheriff’s Office website.
  5. Out-of-State owners: Owning an out-of-state apartment community won’t necessarily indicate a motivated owner. However, there is a higher chance that an out-of-state owner hasn’t maintained the asset or managed the property management company effectively compared to an in-state owner whose apartment community is right around the corner.
  6. View the Profile Picture on Apartments.com: A creative way to identify motivated sellers of value-add apartments is by looking at the profile picture on the www.apartments.com listing. If the apartment was newly renovated, the owner would show off those updates online to attract residents. If there is only one picture available, that may indicate that the interiors and/or exteriors are outdated. If there are pictures of the interiors and exteriors available, scroll through them to see if the apartment is updated. If the interiors are old, you’ve identified a potential value-add deal.

 

Those are the six main methods, but other creative strategies include:

 

  1. Property owners whose tax assessments went way up this year: Search for an apartment on the local county auditor or appraiser site and locate the annual tax data. Most auditor or appraiser sites will list the annual taxes paid each year. If the taxes paid in the most recent year is significantly higher than the previous year, the owner most likely had a tax assessment. Taxes is one of the largest expenses paid by the owner, so if they had a significant increase, they may be motivated to sell
  2. Expired apartment listings: Expired apartment listings were listed for sale by a real estate broker and weren’t sold by the end of the period specified in the contract between the owner and the real estate broker. The best way to locate apartment listings that expired is on the MLS. Ask your real estate broker to send you a list of expired listing for the past 12 months.
  3. Properties that are owned without debt (purchased 20 to 30 years ago): Owners who own apartments free and clear may be willing to sell their property for a lower price, or may be willing to accept creative financing terms, like seller financing. There are a few ways to locate apartments that are owned free and clear. If you are creating a list with a service like CoStar, an automated direct mailing provider or the MLS, you will have the option to apply a filter for apartments that do not have a mortgage. Another approach is to locate the property on the local auditor or appraisal site and compare the “own name” to the “mailing name.” The mailing name is usually the name of the company that holds the debt. So, if they mailing name is the same as the owner name, the property is owned free and clear. Also, you can search for properties that were purchased over 20 years to 30 years ago, because the owner will have likely paid off the debt.
  4. Health code violators: The local Clerk or Courts website will have a list of all the properties in the county with health code violation.
  5. Owners facing foreclosure: The list of apartment owners facing foreclosure can be found on the local Sheriff’s Office website.
  6. Owners late on loan payments: The list of apartment owners who are late on their mortgage payments can be found in the same location as the delinquent taxes list, which is the local Clerk of Courts website.
  7. Section 8 approved properties: Locate the local city’s HUD website to obtain a list of section 8 approved properties. These properties are likely rented below market rates and, depending on the local regulations, can be converted into regular apartments.
  8. Properties with liens: A list of apartments with liens can be found on the local Clerk of Courts website. You might be able to use the criteria on ListSource to identify these types of distressed opportunities. But some of these strategies will require extra research – both online and in-person – on your part. If you are struggling to find the owner’s contact information, skip tracing is an effective solution. The top skip tracing services are TLO (the best and most expensive), Locate Plus and Whitepages Premium (least expensive option)

 

Creating a Marketing Piece

 

Next, you will create a marketing piece to send out to your list. There are nearly an infinite number of approaches to a direct mailing campaign. Variables include the message, frequency, letter type and color and envelope type and color. The most successful direct mailers A/B test different mailer types to determine which is the most effective. Therefore, select a few different mailer types, send them out to owners and record the success rates of each. Whichever one performs the best, continue sending. For the ones that perform poorly, change a variable and continue to send out and log the success rates. As time goes on, you will find the best combination of variables that results in the highest success rate.

 

For starters, here are two direct mailing templates:

 

  1. Template #1

 

Dear Recipient Name,

 

I am the acquisition coordinator for __________. Our portfolio consists of over ______ apartment units, all acquired within the last _______ months. With one of our principals based in ________, we are looking to expand to this area. We are familiar with your apartment complex, (name complex) and we would like to discuss purchasing this property. Please reach out if you would like to discuss further. My email is ______ and my cell phone number is ________.

 

Sincerely,

____________

 

  1. Template #2

 

Dear Recipient Name,

 

I am interested in purchasing your apartment community. Are you interested in selling?

 

I currently hold a portfolio of apartments similar to yours and am looking to add more.

 

Please contact me at your earliest convenience so we can discuss the sale of your apartment community.

 

Call me directly at _________ or email me at _________.

 

If you are not interested in selling at this time, please accept this inquiry as the highest compliment to your investment.

 

I look forward to hearing from you.

 

Sincerely,

____________

 

The important point you want to get across to the owners is that you are interested in buying their property and that you are an experienced investor who is able to close. If you don’t currently own any properties yourself, leverage the experience of your team. For example, “my property management company manages 1,000 units in the market,” or “my partner (who can be your mentor) controls 1,300 units across the country.”

 

Screening Calls from Owners

 

Once you’ve sent out the campaign, (hopefully) your phone starts ringing off the hook. Rather than freestyling, I recommend creating a script that outlines exactly what you will say when an owner calls. An example script is provided below:

 

Hi. My name is (your name). Thank you for responding to my letter. As I said, I work for a group of investors, (your company name). We were driving your neighborhood and wanted to know if there would be any interest in selling?

 

Now, you would think that because they called you, they are interested in selling. Unfortunately, some of the callers will, politely or aggressively, tell you that they aren’t interested in selling and/or ask to be removed from all future mailing campaigns.

 

If the caller is aggressively asking to be removed from the list, politely thank them for their time, hang up and remove them from their list.

 

If the caller is polite but says that they aren’t interested in selling at this time, find out a little bit more information as to why they won’t sell. Figure out why they aren’t interested in selling with the purpose of trying to identify a trigger or pain point of things that are holding them back. This will help you identify ways that they will benefit from selling the property. One example is to visit the property or perform some online research and make a note of something that stands out, like signs of distress. Then, leverage this information to identify a potential pain point.

 

For example, maybe you discover that they are an owner-operator who doesn’t like being a property manager. Or they won’t want to incur a capital gains tax by selling. Or maybe they aren’t interested in selling now, but they may be interested in six months. Depending on their response, there may be a creative way to structure the deal so that you can solve their problem.

 

If they still aren’t interested or you cannot identify any pain points, thank them for their time and hang up. However, you aren’t done yet. Unless they specifically asked you to remove them from future mailing campaigns, the next step is to mail them a follow-up letter saying:

 

Thank you for your time when we spoke on (date you called). As I said, I work for (your company name). I will follow up on (date) and I look forward to speaking with you then.”

 

Now, the next time you call them, you can start the conversation by referencing your previous call and the follow up letter.

 

If they are interested in selling, congratulations. But, you’re only partway there. Now, you need to extract more information from them about the property. At this point, the goal of the conversation is to get the owner to provide you with the trailing 12-month income and expense statement (T12) and the current rent roll. That is the information you will need in order to underwrite the deal and determine a fair offer price.

 

Regardless of whether the owner says is or isn’t interested, focus on building rapport. During the course of the conversation, make sure you talk in terms of their interests in order to begin building a relationship. If they are interested, this will help you during the negotiation process. If they are not interested, they will remember you when you call back.

 

Also keep in mind that this is an iterative process. If you’ve never spoken to an owner on the phone before, don’t expect to be perfect at first. Practice, specifically in regards to overcoming their objections, see what works and what doesn’t work, and adjust your script accordingly.

 

10 Reasons Your Direct Mail Isn’t Working

 

I asked Justin Silverio, the founder of Open Letter Markeing, “what are the main reasons why a direct mailing campaign would fail?” Based on his experience sending out his own campaigns and working with hundreds of other investors, there are 10 reasons why a direct mailing campaign isn’t working:

 

  1. Bad Messaging: Your messaging should be clear and concise. Otherwise, your content will not be read or will be confusing to your prospects, thereby reducing your response rates. Additionally, avoid using messaging that is the same as most other investors in your market; you want to set yourself apart. Finally, make the messaging about the seller, not you. Talk to them about how you will solve their problems.
  2. Low Quality Lead List: One of the most important aspects of a successful direct mail campaign is the quality of the lead list. If you are mailing to the same prospects as your competition, expect your response rates to be very low. Instead, seek out niche markets that no one else is marketing to. The general rule is that if it takes time to build a particular list, you will have less competition because most other real estate investors won’t take the time to create it.
  3. No Branding on Mailers: Branding is the number one most important thing that you should be doing and in many cases it’s a missed opportunity in direct mail. People can recall a logo much easier than a name so your chances of a seller remembering you is much higher. It’s a simple detail, but the payoff is big.
  4. Not Building Trust: One of the most important aspects of closing a deal is to build trust and rapport with the seller. Aim for this from the start with your direct mail by sending professional looking mailers with letterhead and company information. This shows your prospects that you are an actual company and not a fly-by-night operation.
  5. You’re a Copycat: If you’re mailing the same mail piece as everyone else, what makes you think you’re going to stand out from them? Step away from the copycat syndrome and use something else besides yellow letters or generic postcards. Use a mailer that will stand out and get noticed.
  6. Only Using Handwritten Letters: When sending handwritten letters, your messaging should be short and to the point. When you only send handwritten letters, you can’t fully explain how you’re able to help your prospect. Therefore, you should always incorporate longer, professional letters into a mailing campaign.
  7. Handwriting Doesn’t Look Authentic: Using handwritten fonts that don’t look realistic could have a negative impact on your response rates. Most people will read that as being deceptive and not call you back. Be sure to either handwrite your letters OR use a realistic looking font.
  8. Bad Campaign Sequence: A bad sequence will have a negative impact on your results. It’s important that you stack your letters in a way that build off of each other and create a conversation with your sellers. Provide more information as your campaign moves forward so they can learn more about how you can help them.
  9. Inconsistency: This is, by far, the worst mistake you can make. Direct mail takes time to build momentum because your prospects need to see you multiple times before most will start to call. You should budget to mail 5-6 times before expecting to see consistent results. Also, buying real estate is mostly situational so if you are not mailing your prospects consistently you may likely miss out on a deal when your prospect’s situation suddenly changes.
  10. Bad/No Follow Up: I can guarantee you are losing deals if you don’t have proper follow up. Many deals will come from consistent follow up with your prospects who weren’t ready to sell the first time you spoke with them. Make sure you have a system in place to remind you to follow up. A good solution could be as simple as a spreadsheet or calendar or as robust as a CRM.

 

If you avoid these 10 pitfalls but still aren’t receiving many responses from owners (say after 3 to 4 mailers), another strategy is rather than asking to purchase their property, invite them to your meetup group (or if they are out-of-state, a webinar).  Tell them you will be presenting information relevant that will add value to their business. For example, 10 ways to increase the NOI on your apartment building.  From there, build a relationship with them so that when they are ready to sell, you are the first person they reach out to!

 

Direct Mail Case Studies

 

Click here to read about a six-step direct mailing campaign with a twist – rather than only sending out letters, this investor will text the owner. As a result, he’s been able to accumulate a portfolio of over 300 units!

 

Click here to learn more about selecting a mailing service, creating a list and the best practices for creating an attractive marketing piece.

 

Click here to learn about how a fix-and-flip investor created a direct marketing strategy that results in a 57% response rate.

 

Finally, click here to learn about an direct mailing campaign with a twist – rather than only sending out letter, this investor cold-calls the owners on his list.

 

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luxury apartment building

How a Syndicator Secures Financing for an Apartment Deal

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.

Bridge Loans:

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.

Closing Thoughts

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.

person opening the door of a hotel room

18 Creative Ways to Market Apartment Rental Listings

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:

 

  1. Create a landing page, either standalone or as a part of your website, that captures the information of potential residents
  2. 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
  3. 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
  4. Create a resident referral program where you offer current residents a flat fee ($300 is standard) if they refer someone that signs a lease
  5. Set up an open house and invite members of the local community to attend. Having a model unit and offering refreshments is helpful
  6. Offer special pricing to soldiers, police and first responders, like 50% off the first month’s rent
  7. 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
  8. 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.
  9. Purchase advertisements in the local newspaper
  10. Post “for rent” listings to Craigslist, Zillow, Realtor.com, Apartments.com and other free online rental listing services
  11. Partner with a real estate broker or agent and advertise your apartment community on the MLS
  12. Create a Facebook advertisement, which allows you to select criteria to hyper-target your preferred resident
  13. Create a Facebook page for your apartment community, posting weekly content to generate a following and posting your rental listings
  14. Pay close attention to the nearby landmarks to cater to that audience, like colleges, military bases, large corporations, etc.
  15. 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
  16. 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
  17. Send marketing material or gift baskets to businesses and employers surrounding your community
  18. 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?

 

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Hustle or Knowledge: What’s More Important for Real Estate Success?

We regularly post a question to the Best Ever Show Community on Facebook. This community is for real estate entrepreneurs to interact and help one another reach their business goals. A recent question was “which is more important for success as a real estate investor: hustle or knowledge?

 

Hustle beat out knowledge with 15 votes to 9 votes, while 4 others said both and one rebel said neither are important (although their response was my favorite one!). However, the margin was much smaller than I expected. While the majority of the active, successful real estate investors think that hustle is more important than knowledge, which I believe as well, the knowledge voters made a strong case for their side.

 

That being said, the poll is closed, the responses are in and here are the results:

Hustle is More Important

Personally, I am of the belief that hustle trumps knowledge for the same reason as Slocomb Reed. He said that hustle will naturally lead to knowledge, but knowledge will not naturally lead to hustle. Similarly, Ryan Groene said that knowledge can be acquired while hustle is hard to teach. Anyone can become knowledgeable of real estate through books, blogs, podcasts, seminars, consultant/mentors and various other educational means. However, I don’t know of any course that teaches you how to hustle and persist when the going gets tough. You either have it or you don’t.

 

The other camp of successful real estate investors who think hustle is more important than knowledge came to that conclusion because taking action is the only thing that brings you closer to achieving your goals, period. Grant Rothenburger said all the knowledge in the world means nothing with no action or hustle. Evan Holladay provided a powerful quote from a book he is reading, Born to Build by Gene Glick, on the importance of hustle: “Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education alone will not; the world is full of educated derelicts; persistence and determination alone are omnipotent.” If you are the most educated, talented genius in the world, without hustle, persistence and determination, it’s all for naught. And we see this time and time again when we hear the stories of the college or high school dropout who built a real estate or business empire or the athlete who was cut from their high school sports team (Michael Jordan comes to mind) and become a professional sports legend through hustle and grit alone.

Knowledge is More Important

I still believe that hustle is more important than knowledge for many successful real estate investors, but some of the active real estate professionals in the Best Ever Community made a strong case for knowledge being more important. One of the most common arguments is that hustle without knowledge is like a sailor without a compass or a driver without a map. Dan Handford said you can have all the hustle in the world but if you don’t have knowledge, then the hustle is just busy work without results. Glen Sutherland said he has friends with no knowledge but plenty of hustle. They don’t know what to do or how to create a business for themselves, so they end up working for someone else who has the required knowledge.

 

The other common argument is that hustle is only important in the short-term, while knowledge is vital to long-term success. Nathan Nuckols said hustle is temporary and applied knowledge is long-term, which is the difference between active and passive investing. He would take passive (which comes from knowledge) all day. Charlie Kao said hustle is important at the beginning but knowledge is important later on because you hustle to acquire the knowledge and use the knowledge to work smarter, not harder. Lastly, Michael Beeman said, with knowledge and no hustle, you can grow slowly over time. He buys real estate from mom and pop landlords who built a portfolio of 20 to 25 units over the course of 30 years and who are all financially free in their retirement years. Also, Michael voted for knowledge because he’s seen investors who lack knowledge but have a lot of hustle make horrible mistakes which lead to burn outs or quitting entirely.

 

In summary, for the knowledge argument, Curtis Danskin said knowledge is power.

Both are Important

Of course, as you can see from the previous two sections, both are important. Julia Bykhovskaia said knowledge without taking action is useless and hustle without knowledge is like a high-speed, rudderless boat. It will just run aground. Chibuzor Nnaji said to have knowledge and add hustle to it, because you can know everything you need to know but what good does that do for you if you sit on your hands.

Neither are Important

I think my favorite response to this question was Adam Adams, who said that it is impossible to be a successful real estate investor without both. However, if you have knowledge, you can partner with hustle and if you have hustle, you can partner with knowledge. I am a firm believer that everyone has a unique talent and skill set, and that they should focus on applying that to their business while finding team members and partners who complement them.
What’s you take on this question? Post your answer in the comments below.

thee laws of investing

The Three Immutable Laws of Real Estate Investing

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

 

apartment building during fall

The Ultimate Guide to Performing Due Diligence on an Apartment Building

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:

  1. Financial Document Audit
  2. Internal Property Condition Assessment
  3. Property Condition Assessment
  4. Market Survey
  5. Lease Audit
  6. Unit Walk
  7. Site Survey
  8. Environmental Site Assessment
  9. Appraisal
  10. Green Report

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
  • Roof insulation
  • Programmable thermostats
  • 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:

  • Low-flow showerheads: 1-year payback, $16,827 annual savings
  • 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.

win over apartment broker

4 Ways an Apartment Syndicator Can Win Over an Experienced Broker

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.”).

 

Once you’ve found a qualified property management company, send the real estate broker their biography.

 

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?

 

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The Two Massive Benefits of Written Goals for Real Estate Investors

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “on a scale of 1 to 5, how important is it to have written goals for your real estate business?

 

Step 1 of Tony Robbins’ Ultimate Success Formula is to know your outcome. He says clarity is power because, where focus goes, energy flows. Once you define and write down a desired goal or outcome and make it your main point of focus, you will begin to – almost automatically – take the right action to achieve it. Therefore, writing down our investment goals and real estate strategies gives us something to focus on, which allows us to narrow down the actions required to achieve our desired outcome.

 

I can tell that we have a lot of Tony Robbins’ fans in the Facebook community. Not only did the overwhelming majority (46 out of 51 responses) of active real estate entrepreneurs say that writing down real estate investing goals is very important, but they also believe that they benefit from having written goals because it allows them to focus and take the right action that will lead them to achieve their goal.

 

That being said, the poll is closed and here are the results:

Written Goals = Focus

I think the quote that sums up the benefits of written investment goals in regards to focus is from Youseff Semaan, who said “If I don’t write my goals down, they remain thoughts in my head. By writing them down, they become tangible!”

 

A commonly referenced survey of Canadian media consumption by Microsoft in 2012 concluded that the average attention span fell to 8 seconds in 2012 from 12 seconds in 2000. Or to put it another way, humans have a shorter attention span than goldfish! So, focusing on our thoughts (and a goal that is only a thought) just isn’t realistic. Whereas, if we’ve written our real estate investing goals down, we can review them and refocus. Because, like Mark Ferguson said, “not only do [goals] need to be written down, [but] you need to have set times [when] you review those goals! It is too easy to lose track of what you really want.”

 

When we review our written goals, we become more and more focused as real estate entrepreneurs. In regards to regularly reviewing our written goals, Michael Bishop quoted Napoleon Hill saying “repetition puts thoughts into your subconscious mind, and your subconscious mind has power to transmute desire into its physical equivalent.” Similarly, Nathan Nuckols said, “what you [focus on] daily will eventually come to fruition.”

 

Even Mr. Miyagi and horse trainers understand the power of focus. Jay Helms said that investment goals are very important “for the same reason horses run with blinders on and the same lesson Mr. Miyagi kept trying to teach Daniel son – focus.”

 

There is a caveat, however, to focusing on your written goals. Curtis Danskin gave a warning, saying “if you fail to understand that real estate investing goals are meant to morph and grow and change, you will surely experience disappointment. Goals are guides, a roadway with unexpected twists and turns, so keep up on them.” In other words, focus on your goals as a real estate entrepreneur, but don’t become so focused that you pigeonhole yourself. Which leads us to the second benefit of written goal setting, which is that it allows us to take the right action steps towards achieving our desired outcome.

Written Goals = Right Action

Staring at a piece of paper with our goals written on it is a good start, but we also need to get out there and take action. Which is why Harrison Liu, who actually thinks that written investment goals aren’t very important, said, “I have a goal that’s financial independence. After 17 years investing in real estate, I achieved that goal but never wrote it down. Taking action is a lot more important than writing on a piece of paper.” Looks like Harrison has been able to maintain his attention span while the rest of us are going the way of the goldfish!

 

Someone else who doesn’t write down their goals, but thinks they are very important is Eric Kottner. He said, “as someone who doesn’t write down their real estate investing goals, I have a lot of open time not know what to work on and [I] just wing it.” That is why we, as real estate entrepreneurs, need to go a step further than just writing down our goals and regularly focusing on them. We need to also create a plan of action for how we will achieve them.

 

This includes determining the higher dollar tasks that make the biggest impact on our businesses. Micki McNie said, “if I don’t have my investment goals written out along with specific action steps, I get stuck working on low dollar activities or distracted by shiny objections.”

 

It also means breaking own our long-term goal into smaller goals. Matthew Ryan said, “without goals, you have no tasks that tell you what to execute on a quarterly, weekly and daily basis.” And Matt Anices said, “I always write them down, long-term, short-term and daily.”

 

To tie the “focus” and “right action” together, I will end with a quote from a fortune cookie that Justin Grimes has taped to his car speedometer: “A dream is just a dream. A goal is a dream with a plan and a deadline.” So, without writing down your real estate investing goals, focusing on them regularly and creating a plan of action, it is just a dream.

 

What do you think? Comment below: Why do you think it is important to have written investment goals as a real estate entrepreneur?

 

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working team bumping fists

How a Passive Investor Qualifies an Apartment Syndicator’s Team

One of the three main risk points associated with passively investing in apartment syndications is the syndication team (the other two are the deal itself and the market). The best deal, from a projected returns standpoint, in the best market in the country may result in failure if the team cannot successfully execute the business plan. Therefore, prior to committing to a particular apartment syndicator or to a particular deal, a passive investor should qualify the main team members involved in the deal.

 

Before asking these questions, however, you need to qualify the actual apartment syndicator. Click here for a blog post for how a passive investor qualifies an apartment syndicator.

 

There are the 7 team members involved in syndication process: property management company, real estate broker, CPA, mortgage broker, real estate attorney, securities attorney and a consultant (optional). But the main team member is the property management company.

 

The property management company is the boots-on-the-ground force that is responsible for overseeing the ongoing, day-to-day operations of the apartment community. This includes marketing efforts to attract new residents, resident relations (like hosting resident events), managing turnovers, fulfilling maintenance requests, maximizing rents and occupancy levels, etc. If the syndicator is following a value-add or distressed investment strategy, the property management company will also oversee the renovation process.

 

Prior to investing with an apartment syndicator, you want to determine the credibility of the property management company, which you can accomplish by asking the following 8 questions:

 

  1. How long have they been in business?

 

A relatively new property management company might not have enough experience managing certain sized or types of apartments. Generally, the longer they’ve been in business, the better. For example, the property management company that we use has been in business for over 75 years.

 

  1. What geographic areas do they cover?

 

The property management company MUST have a presence in the market in which the apartment syndicator is investing. That means the company must be local to the market or, if they are a national property management company, must have a regional office located in the market.

 

  1. How many units do they manage?

 

Similar to the question 1, the property management company should manage multiple apartment communities in the same market. However, bigger isn’t always better, because if they manage too many units, they might not be able to provide the highest quality service. Also, if they have been in business for decades but only manage a handful of communities, that could be a red flag.

 

  1. How many units do they own?

 

If the property management company owns other apartment communities in the same market, it could be a conflict of interest. If the syndicator’s property and their property have a vacant 2 bed, 1 bath unit at the same time, which one are they likely to fill first? Not a deal breaker, but this is definitely something that you want to be aware of.

 

  1. What asset class do they specialize in?

 

The property management company MUST have experience implementing the same business plan that the syndicator is pursuing. For example, If the syndicator is following a value-add investment strategy, the property management company must have experience with value-add apartment communities.

 

  1. What are some of the names of nearby properties they are currently managing?

 

This proves that they are actually managing apartments in the local market. But it will also allow you to perform some research to see how the apartment communities are maintained. If you are local to the market, you can visit these properties in person. If not, you can perform online research by looking at the website and by looking at the property on Google Maps. Also, you can look up the apartment community on Google or Apartments.com to read resident reviews and see the overall rating.

 

  1. Have you worked with this company in the past?

 

Since you are ideally investing with a syndicator who has previous apartment experience, this shouldn’t be the first time they used their property management company. If the property management company doesn’t manage the majority of their portfolio in their target market, that could be red flag. So, if that is the case, a follow-up question would be to ask them why this management company doesn’t manage the majority of their portfolio.

 

  1. Is the property management company showing alignment of interests?

 

Alignment of interests are always important, but they are especially important if the syndicator doesn’t have a long, successful track record with apartment communities. There are five main ways that the property management company can show alignment of interest.

 

The lowest level of alignment of interests is the management company has a proven track record managing apartment communities that are located in the local market, has worked with the syndicator in the past and has followed the same investment strategy that the syndicator is implementing. Regardless of the experience level of the apartment syndicator, this level of alignment of interest should be shown.

 

The next level up is when the property management company has an equity stake in the general partnership.

 

The third level of alignment of interest is when the property management company invests their own capital in the deals.

 

The fourth level of alignment of interest is when the property management company invests their own money in the deal AND brings on their own passive investors.

 

And the highest level of alignment of interests is when the property management company signs on the loan.

 

Again: it is ideal that the syndicator has previous experience with apartments, but if they don’t, having alignment of interests with the property management company – or with other team members, like the real estate broker or a local apartment owner/consultant – can offset their lack of experience. If the syndicator does have experience, then the level two to five alignment of interests are less important.

 

 

Over the course of your communication with a prospective apartment syndicator, these are the eight questions you want to ask in order to determine the credibility and experience of their property management company.

 

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person pulling out their empty pockets

4 Ways to Acquire Real Estate with No Money Out-of-Pocket

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “how much money do you need to do your first deal?

 

Overall, the responses fell into two camps: no money down and money down, with the former camp winning out by four. 13 investors said $0 was needed for the first deal while 9 said some form of capital was required for the first deal.

 

I think the most interesting and educational aspect of these responses was from the winning camp (the $0 downers), who offered up their creative strategies for acquiring real estate with no money down. A common theme between all of the investors who believe that one can acquire their first deal with no money down is that one’s own money needs to be substituted with something else. There is no such thing as a no money down strategy that doesn’t require a high level of effort to offset the lack of capital.

 

That being said, the poll is closed, the responses are in and here are the four substitutes to your own money that can result in the acquisition of real estate with no money down:

 

1 – Knowledge

 

The first substitute is knowledge. Brandon Moryl said that it is a balance between money and knowledge. If you don’t have the money, you need to compensate with knowledge, and vice versa. Similarly, Harrison Liu said that getting started with no money is the easy part. The difficult part is having a profitable first deal. In both scenarios, the investor who wants to acquire their first deal with no money out-of-pocket is required to invest in their education. That means reading books and articles, listening to podcasts and picking the brain of experienced investors who are actively and successfully pursuing the same investment strategy they plan on implementing.

 

2 – OPM

 

The most popular substitute for your own money is OPM (other people’s money). In regards to fix-and-flip projects, Eric Kottner said you can go in with $0, but you’ll need to have access to funds to cover the down payment and rehab costs. And for rentals, you’ll need to make sure that you have at least one-years’ worth of rent in reserves and the down payment money. But for both of these scenarios, the funds can be OPM.  Ryan Groene said that you can partner up with a private money investor to purchase real estate with zero dollars out-of-pocket, but you will need a little bit of cash to pay for gas to visit properties and to pay for coffee or lunch when meeting with potential partners. Adam Adams says that you need as much money as the deal costs but it doesn’t need to come from you. Finally, Nathan Tabor says you can enter a deal with zero money down by partnering with a private money investor or partnering with the current owner in the form of seller financing. However, most of you won’t be able to snap your fingers and, poof, has access to OPM. But as an apartment syndicator myself, I have documented proven tactics for finding OPM, which you can learn about here.

 

3 – Leverage

 

Another substitute for your own money is leverage. Glen Sutherland purchased his first investment property by leveraging the existing equity in his personal residence. Elliot Milek financed 100% of his first investment property with a line of credit from a local bank. Hai Loc said that you can leverage credit cards. And Robert Lawry II said the someone can acquire their first investment property with $0, especially when all they have is $0. All it requires is leverage, learning and strategy.

 

4 – Resourcefulness

 

The final substitute for your own money is resourcefulness. For example, click here to learn how someone was able to acquire a property with a paperclip in one year! Similarly, Ash Patel said that sometimes hustle is better than money.

 

 

In reality, all four of these strategies require resourcefulness. But what is great about resourcefulness, creativity and hustle is that – unlike money – they are essentially unlimited. As long you are willing to put in the time, anything is possible.

 

 

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qualify an apartment syndicator

How a Passive Investor Qualifies an Apartment Syndicator

The syndicator, also referred to as the sponsor or general partner, is an individual or a group of individuals that puts an apartment syndication together. And, this entails a lot of responsibilities.

 

Their main responsibilities include creating the syndication team, selecting and evaluating a target market, finding a deal, qualifying or disqualifying the deal through underwriting, submitting an offer and negotiating the purchase price and terms.

 

Once a deal is under contract, their main responsibilities are to manage the due diligence process, confirm the underwriting assumptions, create the business plan, arrange the debt, secure the equity from passive investors and coordinate with the real estate and securities attorney to structure and create the partnership.

 

Once the deal is closed, they are responsible for the ongoing asset management of the project, which includes implementing the business plan, distributing the returns to the passive investors, communicating updates to the passive investors, visiting the property and frequently analyzing the competition and the market.

 

Essentially, they are responsible for managing the entire process from start to finish. Because of their heavy involvement in the process, the success or failure of the deal rests mostly on their shoulders. Therefore, rather than investing with the first apartment syndicator you find, you need to qualify them by asking questions.

 

The Business Plan

 

One of the first things you want to know is the general business plan they implement. Click here to learn more about the three apartment syndication options. This will segue into the next question, which is what is their past experience with this particular business plan? In particular, you want to know if they have taken a deal full cycle (from acquisition to sale) following this business plan and whether or not they were successful (which is determined by how the projected returns compared to the actual returns distributed to the passive investors).

 

Alignment of Interests

 

If the syndicator does not have previous experience implementing the business plan, that is not an automatic disqualifier. However, their lack of experience must be made up for by having a credible team and strong alignment of interests. And for the experienced syndicator with a proven track record of successfully implementing their business plan, having a partnership structure that promotes alignment of interests is the icing on the cake.

 

There are many other team members that are involved in the syndication process, but the three team members with the most involvement in the deal are the property management company, the real estate broker and – if the syndicator doesn’t have previous apartment experience – a consultant. And each of these team members bring different levels of alignment of interests to the deal. Generally, an experienced property management company results in the most alignment of interests, followed by an experienced syndication consultant or local owner who is active in the apartment industry, followed by an experienced real estate broker.

 

The syndicator themselves can also promote alignment of interests. For example, one of the common fees the syndicator charges in an ongoing asset management fee. If they put that fee in second position to the preferred return, that promotes alignment of interests. If you don’t get paid, they don’t get paid.

 

Additionally, they can promote alignment of interests by investing their own capital in the deal, whether that’s is their personal funds, company funds or by allocating a portion or all of their acquisition fee into the deal. By not having money in the deal, the syndicator isn’t exposed to the same level of risks as you are. If the deal performs poorly, they won’t get paid but they also won’t lose any capital either. Whereas, by having their own skin in the game, they are incentivized to maximize returns.

 

Another way to promote alignment of interest is for the syndicator, or a member of the team, to personally guarantee the loan as a loan guarantor.

 

Transparency

 

Another characteristic of a good syndicator is transparency. To determine the level of transparency, ask them about their ongoing communication process. How often do they send updates on the deal? Will they provide you with financial reports so you can review the property’s operations?

 

You also want to ask them what the communication process is when you have a question. Will they provide you with their cell phone number or direct email address? And if you do have a question, what will be the turn-around time?

 

You are trusting the syndicator with your hard-earned capital, so having transparency in regards to what they are doing with your money and how the deal is progressing is a must.

 

Credibility

 

A good question to determine the syndicators track record is to ask them how many of their passive investors have invested in multiple assets. Syndicators who have investors that continue to come back deal after deal is an indication that they have a proven track record of meeting and/or exceeding the projected returns. While the opposite may be true if the syndicator has a poor investor retention rate.

 

Similarly, ask the syndicator what percentage of their new investors come in the form of referrals. If they have a lot of referrals, that indicates satisfied investors who are motivated to share their success with friends and colleagues.

 

You can also gauge the reputation and credibility of a syndicator by their online presence. Are they easily found when you perform a Google search? Do they have a website? Do they create content in the form of a podcast or blog? You can learn a lot about a syndicator by performing online research prior to actually speaking with them.

 

 

The syndicator’s past experience with the apartment business plan, level of alignment of interests, transparency and credibility are important factors to understand when determining whether or not to passively invest in their deal.

 

If you are a current passive real estate investor, what do you think? Comment below: what do you look for when qualifying an apartment syndicator?

 

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strategy as part of a business plan

Should You Focus on One or Multiple Real Estate Investment Strategies?

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “is it better as a real estate investor to focus on one strategy or more than one?”

 

Most, if not all, investors begin their real estate careers by focusing on one investment strategy. Although, some investors will start out with multiple strategies, like fix-and-flipping and wholesaling, or fix-and-flipping and rentals, or a combination of passive and active investing, or acting as a real estate professional (i.e. real estate agent, property management, etc.) while investing on the side. But, since the majority of first-timers focus on one strategy, the question really is, “is it better to continue to focus on your initial investment type or do you expand or transition into another?”

 

Another distinction to make before getting into your responses is between the types of focus. For example, I personal own three single-family homes and have syndicated over $300,000,000 in apartments. Even though I am technically involved in two distinct investment strategies (SFR rentals and apartment syndications), I wouldn’t say that my focus is on SFR rentals. However, for someone who completes 100 fix-and-flips per year while also wholesaling 30 to 50 properties is an example of an investor who focuses on more than one strategy.

 

That being said, the poll is closed, the results are in and here are the responses:

 

Of all the responses, three individuals were of the belief that investors should focus on a single strategy. Brie Jazmin advises that you focus on one strategy and know it very well. Eric Kottner thinks that investors should be highly specialized in one investment strategy. Randy Ramadhin has sampled a few different strategies, found the one that worked best for his particular situation and focuses solely on that. So, it took trying multiple strategies before he came to the conclusion that one great strategy is the best approach.

 

All of the other responses were one the side of focusing on multiple strategies. Although, they did not believe that ALL investors should focus on multiple strategies at ALL the times. For example, Danny Randazzo thinks that, assuming you know your market and you selected a market that has really good growth potential, it I better to expand to more strategies in one solid market instead of expanding into other markets using the same strategy.

 

Two investors think that, before expanding into other investment strategies, you need to master one strategy first. Kris Ontiveros said to focus on one and automate by creating systems (or hiring great team members) before you consider moving onto or expanding into another strategy. And Neil Henderson advises that the average person should only focus on one strategy. But once they’ve mastered it, they can consider branching out from there.

 

Julia Bykhovskaia thinks that, in theory, focusing on and understanding one investment strategy makes sense. However, that is not the case in practice. If real estate is all that you do, you will have multiple goals that one investment strategy cannot achieve (or at least not easily). You need money to both live off of in the here and now, as well as to use to invest in your longer-term strategy. So, if the longer-term strategy is apartment investing, for example, then you might need to supplement your apartment investing strategy with another one, like flipping, wholesaling, short-term rentals, etc., in order to accomplish your shorter-term goals of generating profit to pay the bills and to invest in apartments with. However, on the flip side, the difficult part with this approach is avoiding the real estate “shiny object syndrome” to stay focused and not overextend yourself.

 

Similarly, Ryan Groene thinks that it also depends on your investment goals. Some people see opportunities across many asset classes while others focus on one and still make money. Sam Zell is a rare exception, because he was a top investor across many asset classes for a long time and is still the top owner of mobile home parks.

 

Finally, Ash Patel discovered, due to his experience living through two market crashes, that it depends on the timing. In terms of real estate, single family, multifamily, commercial, industrial and medical all have someone different cycles. Additionally, if you can trade in several non-real estate related investment types, like energy, equities, currency, commodities and – his favorite – startups, you can attempt to exploit those markets too.

 

What do you think? Comment below: Is it better to focus on one or multiple real estate investment strategies?

 

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building with open windows

How the General Partner Makes Money from an Apartment Syndication

The types of fees and the range of each fee will vary from syndicator-to-syndicator. But every fee that is charged should be directly tied to a task that is explicitly adding value to the apartment deal.

 

In order to identify the fairness and reasonableness of the GP compensation structure, you need to understand 1) the types and standard ranges of the general partnership fees for the industry, 2) what tasks they are performing in return for those fees and 3) if each of those fees promotes alignment of interests between the LP and GP.

 

There a lot of different fees that the syndicator could charge, but here is a list of the seven fees that you will come across most often. An important disclaimer to make is that this is not a list of the fees that every syndicator will charge every single time. Rather most syndicators will mix-and-match the types of fees that charge, depending on the project.

 

1 – Profit Split

 

Depending on the type of LP compensation structure, the general partnership may earn a portion of the remaining profits after the preferred return is distributed.

 

For example, the LP may receive an 8% preferred return and the profits thereafter are split between the LP and GP. This split can be anywhere from 50/50 to 90/10 (LP/GP)

 

If the LP invested $1,000,000 into a property that cash flowed $100,000 for the year, assuming an 8% preferred return and a 50/50 split thereafter, the LP would receive $80,000 as a preferred return, plus another $10,000 as a profit split. Then, the GP would receive the remaining $10,000.

 

The profit split promotes alignment of interests because the GP is financially incentivized to operate the apartment community such that the annual return exceeds the preferred return. Because if they don’t, they are missing out on an opportunity to make money. Then for the passive investor, when the annual returns exceed the preferred return, the LP receives a higher annual distribution and – since the net operating income is directly tied to the property value – a higher distribution at sale.

 

On a related note, you want to confirm that at sale, the profit split is calculated based on the remaining profits AFTER the LP’s initial equity is return. Also, when the GP is outlining the LP return projections, you want to confirm that those projections are net of the GP fees. This means that you want to make sure that the projections they show you are AFTER the GP has taken their fees, because if not, the actual returns will be less than what they are showing you.

 

2 – Acquisition Fee

 

Nearly every apartment syndicator will charge an acquisition fee. The acquisition fee is an upfront, one-time fee paid to the GP at closing. The acquisition fee ranges from 1% to 5% of the purchase price, depending on the size, scope, experience of team and profit potential of the project.

 

Think of the acquisition fee as a consulting fee paid to the GP for putting the entire project together. It is a fee that pays the GP for their time and money spent on market research, creating a team (lawyers, CPAs, real estate brokers, etc.), finding the deal, analyzing the deal, raising money, securing financing, performing due diligence and closing.

 

3 – Asset Management Fee

 

The asset management fee is an ongoing annual fee paid to the GP in return for overseeing the operations of the property and implementing the business plan. The asset management fee is either a percentage of the collected income or a per unit per year fee. The standard percentage range is 2% to 3% while the standard per unit per year is $200 to $300.

 

The range of the asset management fee is usually based on the business plan. If the plan is to perform interior renovations and exterior renovations/upgrades, a higher asset management fee may be justified, because the GP will be heavily involved in ongoing oversight of the business plan. But the opposite is true if the property is already stabilized and up-to-date from day one. In other words, the more effort and time required by the GP, the higher the asset management fee. And since the asset management fee is directly tied to the collected revenue, if the business plan isn’t implemented effectively, the GP doesn’t maximize what they could make, which helps with alignment of interests.

 

Additionally, there is a higher alignment of interests with the percentage-based fee as opposed to the unit-based fee. Since the percentage-based fee is tied to the actual collected income, the lower the collected income, the lower the asset management fee. So, the GP is incentivized to maximize the income, which in turn will maximize your returns. Whereas the unit-based fee is a flat fee that remains the same regardless of the amount of collected income.

 

For another level of alignment of interest, the GP will put the asset management fee in second position behind the preferred return. That means that if the preferred return isn’t distributed, they won’t receive the asset management fee. Not every GP will have a compensation structure with the asset management fee in second position. So, for the ones that don’t, the alignment of interests is lower than that of the GP that does.

 

4 – Refinance Fee

 

A refinancing fee is a fee that is paid to the GP for the work required to refinance the property. Of course, if the business plan doesn’t include a refinance, the GP will not charge such a fee.

 

At the closing of the new loan, a fee of 1% to 3% of the total loan amount is paid to the GP. However, to promote alignment of interests, this fee should only be charged if a specified equity hurdle is reached. For example, the return hurdle may be returning 50% of the LP’s initial equity. If only 40% is returned, while that is still beneficial to the LP, the GP will not collect the fee. Therefore, this type of refinance fee structure incentivizes the GP to maximize the property value such that they will hit the equity return hurdle at refinance. And the LP benefits by receiving a large portion of their equity back and – again, since the property value is directly tied to the net operating income –  higher ongoing returns.

 

5 – Guaranty Fee

 

The guaranty fee is typically a one-time fee paid to a loan guarantor at closing. The loan guarantor guarantees the loan. The GP may bring on an individual with a high net-worth/balance sheet to sign on the loan to get the best terms possible. Or, the GP may sign the loan themselves, collecting the fee or deciding to forgo it.

 

At close, a fee of as low as 0.5% to 1% and as high as 3.5 to 5% of the principal balance of the mortgage is paid to the loan guarantor. The riskier or more complicated the deal, the higher the guaranty fee. If the GP doesn’t have a good relationship with the loan guarantor, that individual will charge a higher fee as well. In some instances, the GP will offer the loan guarantor a percentage of the GP (10% to 30%) in addition to the one-time upfront fee.

 

Also, the size of the fee depends on the type of loan. Generally, there are two types of debts: recourse and nonrecourse. Recourse debt allows the lender to collect what is owed for the debt even after they’ve taken collateral. Nonrecourse debt does not allow the lender to pursue anything other than the collateral (with a few exceptions or “carve outs,” like in instances of gross negligence or fraud). So, the guaranty fee will be higher for recourse loans compared to nonrecourse loans.

 

Since the loan guarantor is personally guaranteeing the loan, this promotes alignment of interests. Because if they project fails, the GP is personally liable.

 

 

6 – Construction Management Fee

 

The construction management fee is an on-going annual fee paid to the company overseeing the capital improvement process. If the GP has a hands-on role in the renovation process or if the GP has their own property management company, they may charge a construction management fee.

 

This fee ranges from 5% to 10% of the renovation budget, depending on the size and complexity of the improvement plan.

 

For some syndicators, this fee will be built into the asset management fee, while others will charge a construction fee on top of the asset management fee. When a GP charges both an asset management and construction management fee, it may reduce your ongoing returns, especially while renovations are being performed.

 

7 – Organization Fee

 

The organization fee is an upfront fee paid to the GP for putting together the group investment. This fee ranges from 3% to 10% of the total money raised, depending on the amount of money raised.

 

For some syndicators, this fee will be built into the acquisition fee, while others will charge an organization fee on top of the acquisition fee. When a GP charges both an acquisition and organization fee, your overall return may be reduced.

 

 

These are the seven type of fees you will most commonly come across as a passive apartment investor.

 

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pineapple wearing sunglasses

The 3 Types of Real Estate “Retirement”

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “how much do you need/want to retire?”

 

Of course, this question implies that real estate investors actually WANT to retire, and based on the responses, this is definitely not the case. In fact, real estate investor’s views on retirement can be broken into three categories: 1) I will never retire for investing, 2) I want $X in order to retire and 3) If I reach my financial goals, I will shift my focus to other work.

 

When I asked the Best Ever Community why they initially became interested in real estate, only one response was loosely associated with retirement, which was the desire for financial freedom. Besides the correlation between early retirement and death, I think this is because individuals with a strong entrepreneurial spirit are attracted to real estate, and this spirit seems to never taper off or disappear. In fact, once people get a taste of real estate success, this entrepreneurial drive may even intensify!

 

That being said, the poll is closed and here are your responses:

 

Death is My Retirement

 

The most common response was that the investor planned on NEVER retiring. Dan Hanford sarcastically quipped that he didn’t even know what “retire” meant. Matthew Seaton, while wanting a bare minimum of $1 million by the age of 57, would prefer to continue working indefinitely, as the concept of traditional retirement sounds boring and outdated.

 

Dave Roberts needs 10 gazillion dollars in order to retire. This, I assume, implies that he doesn’t plan on ever retiring either – as a gazillion isn’t a real number J.

 

Jeremy Brown kind of specified a dollar figure that he wants to retire, which is three times what he is making now. However, every time his income increases, his goal of “three times what I am making now” remains the same. Scaling in real estate investing and achieving your targets will definitely do that to you!

 

For both Charlie Kao and Stone Teran to retire, it will have to be over their dead bodies – LITERALLY. Charlie envisions himself eventually reducing his working hours, but he will remain in the real estate game until his children bury him. Stone doesn’t have a magic number either. He plans on working until he dies, but with the expectation of working less hours and less strenuously as he gets older.

 

I’ll Take the Cash

 

One investor specified a dollar figure he would need in order to retire. Eric Kottner wants a net worth of $2.5 million and $250,000 per year in passive income by the time he turns 45. However, he didn’t specify if he would continue expanding from there, shift his focus to other entrepreneurial endeavors or enjoy a traditional retirement.

 

Shift in Focus

 

The third category of retirement is when an investor hits a specified “retirement number,” but rather than setting off into the sunset, they give themselves the permission to shift their focus to something else.

 

Melvin Music wants $1,000 per day for the rest of his life. It is more than he needs, but he wants that amounts so that he can “do a lot of good and help out a lot of folks.”

 

Neil Henderson’s bare minimum number is $700,000, assuming his personal residence is paid off and he doesn’t hold bad debt. At that point, he would work to maintain his business, but it would also open up a world of possibilities that would allow him to take greater risks.

 

Lia Martinez wants $5,000 per month, which she is on pace to achieve by August 2018. Outstanding! Then, her plan is to move to Peru and shift her focus to other work while maintaining her current real estate portfolio.

 

Julia Bykhovskaia, having a go big or go home mentality, wants a net worth of $20 million and a passive income of $500,000. Her reasoning for this goal is not to achieve it and be idle. It is because she wants the freedom to do what she wants (personally and work-wise), when she wants and with whoever she wants. Also, to be able to help people that she loves and to contribute to the causes she cares about.

 

What about you? Comment below: How much money do you need/want to retire? Or do you fall into one of the other two retirement categories?

 

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stacks on American money in a briefcase

How 5 Real Estate Investors Turned Mistakes Into Cash

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “what has been your biggest learning opportunity (or mistake as some say) in your real estate career and what did it teach you?

 

I think Jonathan Twombly, who provided an outstanding answer to this question, said it best: “The only way to gain experience is by making mistakes.” Of course, mistakes are not the ONLY way to learn, and you should never TRY to make mistakes. But the point he is trying to make is that if all of your real estate endeavors go off without a hitch, you may begin to feel like YOU are entirely responsible for that fact. In reality, if you’ve never made a mistake in real estate, not only have you probably been lucky, but a sticky situation WILL arise eventually. When it does, if you have this sense of infallibility, it may be your downfall.

 

Whereas if you have made and successfully overcome mistakes in the past, you have gained the experiential knowledge that will allow you to avoid making that same mistake again or, if you are faced with the same or similar issue, to navigate it successfully. In some cases, facing and overcoming an obstacle may be the best thing to ever happen to your real estate business, as it forces you to reevaluate what you have been doing and determine if you need to alter your approach or entire strategy!

 

That being said, the poll is closed, the results are in and here are the responses:

 

Jonathan Twombly made two big mistakes. The first was not promoting his real estate business early enough and aggressive enough. The market is saturated with real estate entrepreneurs, so branding and promoting of your business is a must if you want to stand out from your competitors. For promotional tips, here are 8 ways to promote your real estate brand.

 

Jonathan’s second big mistake early on in his real estate career was allowing the property management company to put a manager on his property who lacked experience with that asset type, which caused a ripple effect of problems for YEARS, even after they were fired, replaced and long gone. Having one bad year, or even a few months, of management will negatively affect the operations for a long time. A large dip in occupancy results in a dip in revenue, which means you get behind on payables, investor returns, your returns and liquidity. And to make matters even worse, when you have liquidity problems, if an unexpected maintenance or capex issue occurs, you may not have the liquidity or cash flow to cover it, which results in out-of-pocket expenses, capital calls or even foreclosure!

 

In regards to the property management issue, this is overcome by properly screening the property management company prior to hiring them. Here are the best practices for interviewing and screening property management companies. In regards to the vacancy and liquidity issue, Jonathan always ensures that the cash flow on the property is high starting on day one and that he has a large reserve fund on hand to deal with unexpected issues.

 

Similarly, Ryan Gibson’s biggest mistake was hiring the wrong people in general. He learned that good people are what make your business and the world go ‘round. For the best hiring practices, check out our blog category on building your real estate team.

 

Jason Buzi is prime example of someone who realized he was making a mistake, completely changed his business model and benefited greatly as a result. In 2011, he and a friend wholesaled a property to a fix-and-flipper and made $12,5000. The buyers ended up rehabbing the property and netted $400,000. This deal made him realize that he was leaving MILLIONS of dollars on the table, so he started rehabbing properties himself in addition to his wholesaling. Based on this shift, he had his first seven figure year in 2013 and bought a personal residence worth over $1 million free and clear. If you are interested learning how you can net over $1 million per year as a wholesaler, click here.

 

Micki McNie’s biggest mistake was working with and trusting someone she didn’t know. She gave this person $40,000 to do a rehab without having looked at the house herself. As a result, she had a hard time selling the final product because this person didn’t prioritize the repairs and upgrades that actually attract buyers. Projects like updating the mechanicals or installing new windows were not performed. The lessons she learned were to always perform her own due diligence rather than trusting a partner, even an experience partner, to do it. Also, she learned to be much more cautious of new markets that she’s never worked in before. Another solution to the market problem is to use the ultimate guide to evaluating a target real estate market!

 

Lastly, Cheryl Oliphant’s biggest mistake was not buying based on positive cash flow, but for appreciation only. She learned that buying for appreciation is not investing, it’s speculation. In fact, not buying for appreciation is one of the three fundamentals to thrive in ANY real estate market. Click here to learn the other two.

 

What about you? Comment below: What has been your biggest learning opportunity (or mistake as some say) in your real estate career and what did it teach you?

 

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high rise apartment community

27 Ways to Add Value to Apartment Communities

Last Updated: January 2019

 

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.

Simple Opportunities

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.

 

Advanced Opportunities

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.

active vs. passive

Active Vs. Passive: Which Is the Superior Real Estate Investment Strategy?

 

Originally featured in Forbes here.

 

When the average person thinks of real estate investing, they might imagine a billionaire who develops massive commercial properties, or an HGTV fix-and-flipper who turns a profit by converting a run-down property into someone’s dream home. With this mental representation, it’s no wonder more people aren’t real estate investors.

 

Obviously, this isn’t the case in reality. There are thousands of different real estate investing strategies from which to choose. The difficult part — aside from shedding the false belief that real estate investing is only for the rich —  is identifying the ideal investment strategy that fits one’s current economic condition, abilities and risk tolerance level.

 

Generally, entry-level investment strategies fall into two categories: passive and active investing. The question is, which one is best for you?

 

For our purpose here, I will define active investing as the acquisition of a single-family residence (SFR) with the goal of utilizing it as a rental property and turning over the ongoing management to a third-party property management company. Alternatively, passive investing is placing one’s capital into a real estate syndication — more specifically, an apartment syndication — that is managed in its entirety by a sponsor.

 

In order to determine which investment strategy is best for you, it is important to understand the main differences between the two. Based on my personal experience following both of these investment strategies and interviewing thousands of real estate professionals who have done the same, I’ve discovered that the differences between passive and active investing fall into three major categories: control, time commitment and risk.

 

Control

 

As a passive investor, you are a limited partner in the deal. You give your capital to an experienced sponsor who will use that money to acquire and manage the entire apartment project. You have no direct control over any aspect of the business plan, so you are putting a lot of trust into the sponsor and their team. However, this trust is established by not giving your money to a random, unqualified sponsor but through an alignment of interests. For example, the sponsor will offer you a preferred return, which means that you will receive an agreed-upon return before the syndicator receives a dime. Therefore, the syndicator is financially incentivized to achieve a return above and beyond the preferred return.

 

As an active investor, you can directly control the business plan. You decide which investment strategy to pursue. You decide the type and level of renovations to perform. You decide the quality of tenant to accept and the rental rate to charge. You determine when to refinance or sell. With for passive investing, all of the above is determined by the apartment syndicator.

 

Time Commitment

 

As an active investor, the advantage of more control comes with the disadvantage of a greater time commitment. It is your responsibility to educate yourself on the ins and outs of single-family rental investing. Then, you have to find and vet various team members. Once you have a team in place, you have to perform all the duties required to find, qualify and close on a deal. After closing, as long as you have a good property management company, it should be pretty hands-off. Although, if (really, when) something unexpected occurs, you’re responsible for making those decisions, which can come with a lot of stress and a lot of headaches.

 

Of course, it is indeed possible to automate the majority, if not all, of the above tasks. But that requires a certain level of expertise and a large time investment to implement effectively.

 

Passive investing is more or less hassle-free. You don’t have to worry about any of the actions described above. You just need to initially vet the apartment syndicator and vet the deal. From there, you simply invest your capital and read the monthly or quarterly project updates.

 

Risk

 

You are exposed to much less risk as a passive investor. You are plugging into an already created and proven investment system run by an experienced apartment sponsor who (preferably) has successfully completed countless deals in the past. Additionally, there is more certainty on the returns. You will know the projected limited partner returns — both ongoing and at sale — prior to investing. And assuming the syndicator conservatively underwrote the deal, these projected returns should be exceeded.

 

Active investing is a much riskier strategy. However, with the higher risk comes a higher upside potential. You own 100% of the deal, which means you get 100% of the profits. But, you also have to bear the burden of 100% of the losses. For example, a turnkey rental will likely cash flow a few hundred dollars a month depending on the market. The costs associated with one large maintenance issue or a turnover could wipe out months, or even years, of profits. A value-add or distressed rental has a huge upside potential. However, a common tale among distressed or value-add investors, especially the newer or less experienced ones, is projecting a certain renovation budget but finding an unexpected issue during the rehab process that drastically increases their budget, resulting in a lower or negative overall return.

 

Additionally, failing to accurately calculate a post-renovation unit’s rental premium will also result in the reduction or elimination of profits. While these profit reduction or elimination scenarios could technically occur with a passive investment, the risk is spread out across many investors, and a sponsor with a proven track record and a qualified team will mitigate these risks.

 

Real estate investing is for everyone, not just the moguls of the world. However, not all investment strategies are the same. It’s important to understand the pros and cons associated with each to determine which strategy will set you up for success.

Empire State Building from the ground

Do You Want Financial Freedom or to Build a Real Estate Empire?

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “would you rather a) spend minimal time per week (5-10 hours) maintaining your business that makes $500,000 per year or b) work 50+ hours per week on your business making $2 million per year and growing?”

 

I really like this question because it is a reflection of the two main reasons why people are attracted to real estate investing: financial freedom or empire building.

 

Real estate investing allows you to build a portfolio that generates enough cash flow to cover your living expenses so that you can quit your corporate 9 to 5 job and do whatever you want with your free time. Real estate investing also provides you with the opportunity to build a multimillion or multibillion dollar company, which allows you to create jobs, donate MASSIVE amounts of money, build a legacy and pass on your wealth for generations to come, and ultimately automate the business over time to gradually increase your free time.

 

Whatever financial or lifestyle goals you have, there is a real estate strategy for you.

 

That being said, the poll is closed, the results are in and here are the responses:

 

Overall, option A (the 5-10 hours per week for $500,000 per year) defeated option B  (50+ hours per week for $2 million per year) 46 to 32.

 

The majority of the people who selected option A did so for similar reasons. They would use the $500,000 per year and the extra 30 to 40+ hours per week to generate more capital.

 

Scott Bower would take the $500,000 and spend some of his free time to learn how to put that money to work to get to the $2 million per year without having to work 50+ hours per week.

 

Similarly, Charlie Kao would select option A because if he was able to generate $500,000 per year while only working 5-10 hours per week, he’d likely have great systems and processes in place that would allow him to scale, if he wanted, in the future. Kimberly Banks Fawcett agreed because she couldn’t help but imagine all the other ideas she’d have time to make a reality with all of her free time.

 

Ryan Groene would select option A, but it would only be his side hustle. He would still work 50+ hours per week in total, with the remaining 35+ hours spent on creating a business that would generate $1.5 million or more per year.

 

Jamie L. Ware likes option A because his time is more valuable than money, and he would use that time to work on other ventures that could potentially add to the pot.

 

Others selected option A because their real estate goals are to achieve financial freedom and enjoy their free time however they want. Eddie Noseworthy would take the $500,000 while working 5-10 hours per week because even though money is important, it isn’t the most important. Finally, Eric Kottner’s whole point in starting a real estate business is to eventually make enough passive income to become lazy, which is achieved with option A.

 

A few people provided a hybrid answer. Joshua Ibarra would start with option B ($2 million for 50+ hours per week of work). But, after 10 years and automating the business, he would reduce his time commitment to 5-10 hours per week while still making $2 million or more per year.

 

Similarly, Ben Steelman would put in the 50+ hours now. Then, he would work towards ensuring that he was the “dumbest” person in his organization by building a great team. This will allow him to achieve his real estate goal, which is to create a business that thrives without him being the day-to-day driving factor so that he can eventually reduce his working hours.

 

Michael Beeman selected option B because if he just maintained a business, he would feel like he is dying. Additionally, he already works 50+ hours 6 to 7 days a week between his full-time job and real estate business and doesn’t have an issue with it.

 

Finally, Carolyn Lorence would go with option B because she loves her real estate business and enjoys creating. That’s because she doesn’t work “in” her business, she works “on” her business. Also, if she is growing her business, she will be able to provide opportunities for others in the process. She’d have a blast with this and make time for all the fun stuff by putting the right systems in place.

 

Overall, people selected the $500,000 per year working 5-10 hours per week so that they could use their free time to generate additional income or just be lazy. And people selected the $2 million per year working 50+ hours per week so that they could work towards automating the process and reduce their work hours.

 

What do you think? Would you rather a) spend minimal time per week (5-10 hours) maintaining your business that makes $500,000 per year or b) work 50+ hours per week on your business making $2 million per year and growing?

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

people having a casual meeting

How to Create the Largest Real Estate Meetup in Your Market

In a previous blog post, which you can read here, I provided meetup three case studies that can be used as a guide, or replicated entirely, for creating your own meetup group in your market.

 

However, at the 2018 Best Ever Conference, I had an insightful conversation with Adam Adams, who created the largest meetup group in Denver. I walked away from that conversation with the four creative tactics he uses to quickly and continually grow his meetup group.

 

If you’ve already established a meetup group, no problem! Because these can be applied to both starting a meetup group from scratch or massively scaling an existing group.

 

1 – Host a Weekly Meetup

 

The first tip was to host a weekly meetup group, as opposed to monthly or bimonthly. The main assumption behind this tactic is that the more meetups you host, the faster it will grow. Therefore, by hosting weekly meetups, your group will grow 4 to 5 times faster!

 

This tactic is most effective when you are starting a meetup from scratch. The exception would be to ask the members of your existing meetup group for their thoughts on increasing the meeting frequency. Or, if you are in a larger market, you can continue hosting your monthly meetup group, but also start hosting three other meetup groups at different submarkets or neighborhoods across the city.

 

Also, this tactic is most effective when your meetup structure either involves inviting a speaker or is such that people have a reason to attend more often than once a month.

 

For example, one of the meetup case studies I outlined in a previous meetup blog post was on an investor who hosts his meetup more frequently than once a week (4 times a week). Even though most of the members only attend a few meetups per week, his success proves the weekly meetup concept.

 

On the other hand, each of Adam’s weekly meetups feature a guest presenter. Since you need to book a new speaker each a week, this structure requires a little more effort on your part. However, the reason why putting forth his extra effort is worth it ties into tactic number 2…

 

2 – Invite a Speaker

 

Inviting a guest speaker to present valuable information to the group is not only advantageous because it will naturally attract more people, but also because you can leverage the speaker to proactively attract even more attendees.

 

Out of all the tactics, this is Adam’s most creative. Let’s say you invite a multifamily investor to give a presentation on five ways to find off-market apartment deals. Once they’ve confirmed, go online, find local multifamily groups/networks and personally invite members of those groups/networks to that specific meetup.

 

On Meetup.com and Facebook, find the local multifamily group and message the most recent 30 to 50 members. On LinkedIn, either follow a similar approach or search for local individual professionals that are involved with multifamily and send them a message. On BiggerPockets, perform a search to find members who are local and involved with multifamily and invite them to your meetup.

 

Regardless of which approach you follow, you will send the same message. If you have a multifamily speaker, the message should say, “Hi. I host a real estate investing meetup group in (insert your city). At our next meeting, we have a multifamily investor that will be presenting on how to find off-market deals. I saw that you are involved in the multifamily niche and thought that you would find value in attending. Do you want me to send you a link so you can sign up for the meeting?”

 

Don’t just send them a link. Instead, ask them if they want you to send them the link. Adam has tried both strategies and found that messages where he asks to send the link have a higher response and conversion rate.

 

3 – Cap the Event Size

 

Another minor, yet extremely effective, strategy is to place a cap on the number of people who can attend the meetup. If you are posting your meetup on Meetup.com, you will have the option to limit the number of available spots.

 

The purpose of capping the event size is two-fold. One, it promotes scarcity. When someone visits the meetup page and sees that there are only a few spots remaining, they are more likely to sign up.

 

The other reason is to have a meetup that always reaches capacity. Now, you may be asking, “Well how do I determine the number of spots to offer in order to reach capacity?” Adam’s answer is that you don’t have to! Let’s say you are hosting your first meetup group. Once you create the invitation, set the number of available spots to 10. If the event sells out, you can manually move the people on the “waitlist” to the “attending list” or you can increase the number of spots. However, on the day of the meetup, before leaving your house, edit the number of available spots so that it equals the number of people attending. In doing so, you will technically always reach capacity.

 

The reason why you want to always reach capacity is so you can leverage that fact when inviting guest speakers. What invitation sounds more attractive, A or B?

 

  1. “Hi. I host a weekly meetup group. We currently average 10 members per meeting. Would you be interested in being our featured speaker next week?”
  2. “Hi. I host a weekly meetup group. Every meeting has completely sold out! Would you be interested in being our featured speaker next week?”

 

Positioning your meetup as always reaching capacity will increase its desirability in the eyes of potential speaker, which will also increase the chances of them accepting your invitation.

 

4 – What Happened and What Will Happen?

 

The last tactic is to continuously contact the members of your group. However, this doesn’t mean bombarding their inbox with useless emails. Only contact the members when you have a new piece of information to share. Adam broke down the times that it’s relevant to contact members of your meetup group into two categories: what has happened and what will happen.

 

For example, at each meetup group, take a lot of pictures. The next day, post those pictures to your social media page, tagging those in attendance and thanking them for coming. Or, if you had a presenter, write a quick blog post that recaps the top takeaways.

 

When you book at new speaker, send a message out to the meetup members, notifying them on who the presenter is and what they will be speaking on. Send a reminder a week and a day before an upcoming meetup. If you come across a piece of real estate content that will add value to your members businesses, send them a link.

 

The purpose of these messages is to create a sense of community. Because with a strong sense of community, members are more likely to continue coming back and are more likely to invite their friends or business colleagues.

 

 

Huge thanks to Adam Adams for providing these tips, and I am looking forward to hearing your success stories after you’ve applied these tactics to your meetup!

 

entrepreneur mentorship

The 12 Greatest Mentors of All-Time

We regularly post a new question to the Best Ever Show Community, which is where real estate entrepreneurs come to share experiences and advice, including how to find a mentor in real estate investing who can both understand your strategy and teach you more about theirs. In fact, we recently asked, “you can choose ANYONE to mentor you, dead or alive. Who would it be and why?”

 

To attain your ultimate real estate or business goals, interacting with an actual business mentor is vital – or, at the very least, it will aid in increasing the probability of succeeding or expediting the speed in which you achieve massive success.

 

However, an alternative or complementary strategy is to study the unique individuals, past and present, who accomplished greatness. By analyzing the lives of such people, we can determine the habits and strategies that resulted in their success and apply those to our businesses. And what better way to compile a list of history’s greatest minds than by learning about the mentors of active, successful real estate entrepreneurs?

 

That being said, the poll is closed, the responses are in, and here are the answers:

 

If you know me, you already know my answer – Tony Robbins. He distills complicated psychological and mindset advice into simple and digestible tidbits and is an AMAZING motivator. If you haven’t yet, I highly recommend reading his best-seller, Awaken the Giant Within.

 

Though he is not a business mentor, Tim Rhode chose Gandhi because he quietly led a successful movement and did not lose his soul in the process. External success is important, but internal success may be of equal or even greater importance. Click here to purchase Gandhi’s autobiography to learn about how he developed his philosophy that changed an entire country.

 

Grant Rothenburger chose Napoleon Hill for his psychological and mindset advice. A “Tim Ferriss” of his time, Napoleon compiled the principles of the multimillionaires of the 19th and 20th centuries into his world-famous book, Think and Grow Rich, which you can purchase by clicking here. Although, I am sure you’ve read it at least once in your life!

 

Dylan Borland provided a unique answer. He selected Nikola Tesla so that he could get his hands on the plans for Tesla’s perpetual energy device. Of course, I am sure Dylan would reinvest the billions of dollars in profit back into real estate. Nonetheless, click here to purchase a copy of Tesla’s autobiography for a glimpse into the mind of a creative genius.

 

Devin Elder chose Jesus Christ, as he couldn’t think of a more impactful figure in history.

 

Mitchell Drimmer chose Winston Churchill, a Prime Minister of the United Kingdom during the 20th century, because he was resolute. Click here to purchase his autobiography in which he explains how he overcome adversity and major setbacks during the first 30 years of his life.

 

Lennon Lee selected a mentor who is still living – Tim Ferriss. Through Tim, he would get curated bits and pieces of advice from a tribe of mentors. I think Lennon was implying that Tim’s newest book, Tribe of Mentors, is a must read!

 

Eddie Noseworthy picked Rob Dyrdek, who is probably most commonly known for his successful reality TV shows like Rob & Big, Rob Dyrdek’s Fantasy Factory, and Ridiculousness as a potential business mentor. Eddie chose him because Rob seems to squeeze every inch of fun out of the day while being a super successful entrepreneur. Eddie also likes that fact that he has been successful in multiple industries that most people might say he has no business in, which is a testament to his drive and determination.

 

Paul Hopkins chose Richard Branson, because he has started multiple billion-dollar companies and he lives life on the edge. In his autobiography, Losing My Virginity, Richard provides a blueprint to how to balance achieving massive levels of business success and living life to the fullest.

 

Amber Peel went with Beyonce because of her admirable authenticity and legendary work ethic.

 

Going back to the grave, Ryan Groene selected John D Rockefeller. Even though many see him as a negative oil tycoon, Ryan selected him because, to amass such an empire, you must know a little something (or a lot of something) about business. Rockefeller’s biography, Titan, is very popular amongst entrepreneurs and others seeking an experienced business mentor.

 

Lastly, we have Randy Ramadhin, who chose John Willard Marriott because his legacy is worldwide and will endure for generations. In his autobiography, he shares both the story of and the recipe for the success of Marriott International, one of the world’s leading hotel companies.

 

On a related note, if you are interested in learning more about real estate, I have three books I wrote that are full of actionable advice! Check them out on my site.

large apartment community

8 Step Process For Selling Your Apartment Community

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!

 

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$1 million

The 6 Best Uses of $1 Million as a Real Estate Investor

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “you’ve just been given $1,000,000. What’s the first thing you do?”

 

Thank you to everyone who responded. While most of us won’t be handed $1 million any time soon, I do believe this is a good thought experiment. How we answer this question can shine a light on our top priorities or help us clarify our real estate goals.

 

That being said, the poll is closed, the responses are in and here are the answers:

 

1 – Invest

 

The most common response was to invest the $1 million into some sort of real estate product.  Some answers were general, like finding another deal that adheres to a current investment strategy (Craig Hyson), upgrading from single-family or smaller multifamily investing to apartments (Barri Griffiths, Mark Alexander Davidson) or investing in real estate to live off the interest (Andrew LeBaron).

 

Others had more specific action plans. Justin Shepherd would grow the $1 million to $10 million by investing in a deal with 30% cash-on-cash return, and then rinse and repeat. Justin Kling would use the $1 million for a 25% down payment on a $4 million apartment complex at $50,000 per door. The 80-unit ($4 million / $50,000 per unit) would ideally cash flow $200 per door, which is $16,000 per month or $192,000 per year. That’s enough cash flow to live off of if you ask me. Iqbal Mutabanna would take half and reinvest in his real estate business by purchasing an asset that produces a 10% cash-on-cash return

 

Spencer Leech’s strategy would result in the largest investment. He would find a cash flowing C-class apartment community in a secondary market that is stabilized or required light rehabs. At 75% LTV with 20% of the down payment being private equity and 5% being his $1 million, he’d acquired $20,000,000 in apartment assets.

 

Two other active investors would also invest, but in a non-real estate related product. Deren Huang would lock into a 1-year CD. Glen Sutherland would go to a lender to secure a larger loan to invest with. And Eric Kotter would invest in other real estate investors by offering private lending and transactional funding.

 

2 – Pay Off Debt Obligations

 

Another popular use of $1 million is paying off existing debt obligations. Craig Hyson and Deren Huang would pay off the mortgages on their current investment portfolio, which would drastically increase their cash flow and leveraging abilities. Eric Kotter and Amy Wan would pay off their personal debts. Eric would eliminate all personal debt, while Amy would pay off her and her husband’s student debt. By paying off their personal debt, they can redirect those monthly debt payments into real estate investments.

 

3 – Save

 

One of the less aggressive approaches is to save the $1 million. Eric Kotter would set aside a portion of the $1 million for taxes, and Iqbal Mutabanna (who used $500,000 to invest with) would add $200,000 to a rainy-day fund.

 

4 – Gratitude and Contribution

 

The most altruistic first step after receiving $1 million is to express gratitude or donate a portion of the proceeds. Since someone just gave you $1 million, it only makes sense to pass that on, right?

 

The first thing Jason Scott Steinhorn and Dave Slaughter would do is say thank you to whoever gave them the money. In terms of contribution, Andrew LeBaron would pay tithing, Justin Kling would give away 10%, and Iqbal Mutabanna would use his remaining funds for tithing ($100,000) and donating to charities ($200,000).

 

5 – Strategize

 

A very rational first step after acquiring $1 million is to take some time to strategize and come up with the most effective use of the money.

 

Neil Henderson would make an appointment with his accountant to discuss tax strategies. Nick Fleming would hire a world-class mentor/business coach and start hiring really talented employees, both of which will 10x his business. Charlie Kao would refocus by creating new goals and a new business plan, working towards growing his money long-term. And Deren Huang would make sure he remained level headed and didn’t make any impulsive decisions, because he doesn’t want to live out the reality of many lotto-winners who end up bankrupt after a couple of years.

 

6 – Minor Adjustments to Business or Life

 

Two investors wouldn’t make a massive change. Tyler Weaver would hit up the gym, get a good night’s sleep and have a reasonable breakfast, because he needs a solid state of mind to take good care of his money. Devin Elder wouldn’t make any fundamental changes either. He would just put the money in the operational account of his house flipping business. The only changes he would consider making is to discontinue using private money lenders on a few deals or expedite a few fix-and-flip projects with the extra capital.

 

 

I think all 6 of these strategies are great ways to use $1,000,000, but what do you think? Comment below: If someone gave you $1 million, what is the first thing you would do?

 

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black and white image of apartment building

What is Your Ideal Passive Apartment Investment?

Last Updated: February 2019

 

After reviewing the differences between active and passive real estate investing, assessing your current economic condition, ability and risk tolerance level, you’ve decided to passively invest in apartment syndications. Great! You are one step closer to investing in your first deal. So, what’s next? Read on to learn how to make passive income from real estate.

Similar to determining your ideal general investment strategy (i.e. active vs. passive), you need to establish your ideal situation for investing in rental properties. And, in order to establish your ideal passive investment, you need to know what your options are first. In particular, you need to learn about the different types of apartment syndications in which you can passively invest your money and the benefits and drawbacks of each. Generally, apartment syndications fall into one of three categories: turnkey, distressed, or value add.

 

Turnkey Apartment

Turnkey apartments are class A properties that require minimal to no work after acquisition. These properties are fully updated to the current market standards and are highly stabilized with occupancy rates exceeding 95%. Therefore, the turnkey business model is to take over the operations and continue managing the asset in a similar fashion to the previous owners. No renovations. No tenant turnover. Nothing fancy.

Of the three apartment syndication strategies, investing in rental properties that are turnkey has the lowest level of risk. The property is fully updated and fully stabilized at acquisition. The risks associated with performing renovations, which include overspending, unexpected capital expenditures, bad contractors, incorrect rental premium assumptions, etc., and turning over a large percentage of tenants are minimized. Additionally, the asset will achieve the projected cash flow from day one, because the revenue pre- and post-acquisition remains the same.

The drawbacks of the turnkey apartment syndication strategy are the lower ongoing returns and the lowest upside potential compared to the other two apartment types. Because the property is fully updated and stabilized, there isn’t room to increase the revenue of the property. Therefore, the ongoing returns are and remain in the low to mid-single digits. Additionally, since the value of the asset is calculated using the net operating income and the market cap rate, unless the overall market naturally appreciates, the property value will remain relatively stable. As a result, there is little to no upside potential at sale. Most likely, you will receive your initial equity investment back with minimal to no profit.

 

Distressed Apartment

On the opposite of the end of the spectrum is the distressed apartment. Distressed apartments are class C or D assets that are non-stabilized with occupancy rates below 85% and usually much lower due to a whole slew of reasons, including poor operations, tenant issues, outdated interiors, exteriors, common areas and amenities, mismanagement and deferred maintenance. Generally, apartment syndicators will take over and, within a year or two, stabilize the asset by addressing the interior and exterior deterred maintenance, installing a new property management company, finding new tenants, etc. Then, they will either continue their business plan to further increase the apartment’s occupancy levels and/or rental rates or they will sell the property.

The major advantage of investing in rental properties that are distressed is the upside potential at sale. Once the asset is stabilized the revenue – and therefore the value – will increase dramatically, resulting in a large distribution at sale.

The drawbacks of distressed apartments compared to the other two types are being exposed to the highest level of risk and receiving the lowest ongoing returns. The high upside potential at sale also comes with the risk of losing ALL of your investment. There are a lot of variables to take into account with a distressed apartment, which means there are a lot more that could go wrong. Additionally, since the asset is not stabilized at acquisition, there will be little to no cash flow – and maybe even negative cash flow. That means you won’t receive ongoing distributions unless the syndication structure is such that you receive interest on your investment before the sale.

 

Value-Add Apartment

Lastly, we have value-add apartments to consider when investing in rental properties. Value-add apartments are class C or B assets that are stabilized with occupancy rates above 85% and have an opportunity to “add value.” Generally, the value-add apartment syndicator will acquire the property, “add value” over the course of 12 to 24 months and sell after five years.

Adding value” means making improvements to the operations and physical property through exterior and interior renovations in order to increase the revenue or decrease expense. These renovations are different than the ones performed on a distressed apartment. Typical ways to add value are updating the unit interiors to achieve higher rental rates, adding or improving upon common amenities to increase revenue and competitiveness (like renovating the clubhouse or pool area, adding a dog park, playground, BBQ pit, soccer field, carports or storage lockers), and implementing procedures to decrease operational costs like loss-to-lease, bad debt, concessions, payroll, admin, maintenance, marketing, etc.

Compared to the other two apartment types, value add apartments have a lower level of risk, the highest ongoing returns, and a high upside potential at sale. At acquisition, the property is already stabilized and generating a cash flow. So, at the very least, the property will continue to profit at its current level and your passive investment is preserved. That also means that you will receive an ongoing distribution (typically around 8%, depending on the syndication partnership agreement) during the renovation period. Once the value add projects are completed, the ongoing distribution will increase to the high single digits, low double digits and remain at a similar level until the sale. Additionally, the increase in revenue and decrease in expenses from the value add business plan will increase the overall value of the asset, which means there is the potential for a lump-sum distribution at sale.

 

What’s Your Ideal Passive Investment?

Your ideal passive investment will be in an apartment type with the benefits and drawbacks that align most with your financial goals.

Are you content with tying up your capital for a year or two with minimal to no cash flow and willing to risk losing it all in order to double your investment? Then I would consider passively investing with an apartment syndicator that implements the distressed business plan.

Are you more interested in capital preservation and receiving a return that beats the inflation rate? Then I would consider passively investing in rental properties with an apartment syndicator that purchases turnkey properties.

Are you attracted to the prospect of receiving an 8% to 12% cash-on-cash return each year with the prospect of a sizable lump sum profit after five or so years? Then I would consider passively investing with an apartment syndicator that implements the value-add business model.

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.

dart in the bull's eye

Do Real Estate Investors Need Good Sales Skills?

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “is it important to have good sales skills as a real estate investor?”

 

Thank you to everyone who responded.

 

The poll is closed, the responses are in and here are the answers:

 

An overwhelming majority (26 out of 30) active investors said good sales skills are very important as a real estate investor.

 

One of the dissenting views was Harrison Liu, who believed good sales skills were somewhat important. In particular, he believes location trumps sales skills. Someone with zero or minimal sales skills will have more success investing in a good location with a good school district compared to a sales superstar that invests in a challenging neighborhood. Here is a blog post with a guide to evaluating and finding such a location.

 

However, he does believe the marketing skills are required in the current market in regards to finding, renting and selling deals. Whether marketing and sales are two-sides of the same coin is a conversation for another day.

 

Joe Cornwell held an opposing opinion for slightly different reasons, using Donald Trump as an example. He said “Trump doesn’t have to sell any of his units anymore, and he is arguably one of the most ‘famous’ real estate investors ever.” In other words, once you build up a large enough portfolio of cash flowing rental properties, buying new assets or selling off parts of your portfolio are no longer a requirement. Therefore, sales skills are not always needed.

 

However, as a counterpoint, does an investor need good sales skills to generate leads and find qualified buyers and/or renters to acquire enough properties to reach the point where their portfolio is so large that they no longer need to utilized those sales skills? In my opinion, and in the opinion of 26 other active investors that responded to the poll, the answer is yes.

 

For example, Nick Armstrong said “I think building your sales foundation builds your negotiation skills, which is obviously a must in my opinion.” Negotiations occur more often than just at the offering table. If you are performing renovations, you are negotiating with contractors. If you are a passive investor, you are negotiating with a syndicator. If you are a small rental or apartment investor, you are negotiating with your tenants and/or property management company. And as a real estate investor in general, you will negotiate with lenders, brokers, city officials, business partners, among others – property even your significant other as well.

 

To put it another way, in the words of Dale Archdekin, “I think that true sales skills are really people skills. The ability to hear and be heard. So, if you as an investor are dealing with people, then YES, it’s a good idea to have sales skills.”

 

In regards to raising money for apartment syndications, I commonly hear a similar question: “Can I raise money if I’m not good at sales?” My short response to the question is STOP BEING SELFISH! Watch this YouTube video for my full reasoning behind this answer.

 

Want to learn how to hone your sales skills? Here are over 25 blog posts on that topic.

 

What do you think? Comment below: Is it important to have good sales skills as a real estate investor?

 

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house key in door lock

Why Did You Become a Real Estate Investor?

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

 

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was what was the first thing that piqued your interest in real estate investing?

 

The polls are closed, the responses are in and here are your answers:

 

1 – Taxes

 

Mark Slasor became interested in real estate investing because of the various tax benefits. More specifically, because of the tax write offs allowed against his W2 income.

 

However, tax write offs, also referred to as deductions, are just one of many tax benefits that come from investing in real estate. Brandon Turner over at BiggerPockets wrote an in-depth article on the tax benefits that come from investing in real estate, which include deductions but also long-term capital gains, depreciation, 1031 exchanges, no self-employment or FICA (Federal Insurance Contributions Act) tax and “tax free” refinances. For more details on these six tax benefits, you can read his post here.

 

2 – Control

 

When compared to other investment avenues, like a 401k, stocks, bonds, money market account, etc., investors have more control over real estate.

 

The investor decides which of the many strategies to pursue. They select the property. They pick the type of financing. They control the entire business plan. Etc. Because of all of this control, the investor has the ability to directly influence the profitability of their investment project.

 

Jeremy Brown became interested in real estate because of this control factor. He realized the stock market was a lot like gambling. Generally, the value of the stock is tied to factors over which the individual investor as little to no control. Conversely, you have the ability to directly affect the returns of a real estate project.

 

Chris Mayes became interested in real estate for similar reasons. Not only did he love the thought of passive income and an early retirement, but also his ability to be actively involved in the investment in order to directly impact the returns.

 

3 – Opportunities

 

There are such a variety of opportunities in real estate, whether it’s different investment strategies, property types, business plans, etc., that investors frequently suffer from shiny object syndrome. “I want to fix and flip houses. But oh look, what if I kept the house as a rental? Or I could just skip single-family investing in general and jump straight to apartments. Hmmm. Maybe I should just take my capital and privately invest in a syndication…WHAT SHOULD I DO?!”

 

For the past 50 or more years, investors have reached the highest levels of success using every investment strategy and investing in every asset type, which far outweighs the drawbacks of shiny object syndrome

 

Stevie Bear became interested in real estate because of this abundance of opportunities. He was attracted to the innumerable potential avenues to pursue for profitability in nearly any market or economy.

 

4 – Friends or Family

 

Some investors were lucky enough to be born into the real estate business. Leilani Moore was a property manager for her family’s business, learning the value of real estate investing over the years. Similarly, Barbara Grassey’s father was a real estate investor, and she enjoyed hanging around the properties he was renovating.

 

Another personal relationship that leads investors into real estate are friends. Harrison Liu became interested in real estate because of a close friend who had been investing for years. In fact, this friend helped Harrison find his first deal and he’s been investing ever sense.

 

Theo Hicks also became interested in real estate through a friendship. One night, over pizza and videogames, two of his buddies mentioned the value of real estate investing. In particular, they said “sometimes, I forget I even own the property until I receive a check at the end of the month.” He was intrigued and ended up putting his first property under contract in less than a week.

 

5 – Infomercial

 

Infomercials may be a fading industry, but many active investors became interested in real estate from these flashy 30-second advertisements. Robert Lawry II is a perfect example. He saw guru Tom Vu’s infomercial when he was 14 years old. He learned that once he bought his first investment, he could drive fancy cars, go on expensive boats and, most importantly, meet beautiful girls in bikinis! How do you say no to that?

 

6 – Financial Independence

 

Lastly, one of the main reasons why people are attracted to real estate is due to the prospect of financial independence. Purchase enough cash flowing real estate to replace your corporate income and you’re FREE. Stone Pinckney became an investor to pursue financial independence. Dave Van Horn wanted a way out of a dead-end job and a life of mediocrity. Eddie Noseworthy wanted the ability to create his own epic life and have more time to do the things he loves to do.

 

How about you? Comment below: Why did you initially want to become a real estate investor?

 

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Flowchart planner

What’s the Superior Investment Strategy – SFR Rentals or Apartments?

Real estate is the most exciting investment vehicle because there are nearly an infinite number of way to get started, achieve financial freedom and/or launch a business to create generational wealth.

 

There are many investment types to invest in, but which one is the most conducive to long-term success?

 

Today, I want to determine the answer to this question by looking at two investing strategies in a particular – single family residence rentals and apartment investing.

 

I will define SFR investing as purchasing a single-family home using your own capital and renting it out, and apartment investing as purchasing an asset with 50 or more units and raising capital from passive investors and renting it out.

 

For the purposes of this blog post, I will assume that an individual has set out to achieve a goal of $10,000 per month in cash flow (or $120,000 per year), which will replace their current corporate salary.

 

So, based on this goal, which strategy is superior? Let’s compare both across three important factors: scalability, barrier to entry and risk.

 

Scalability

 

Scalability is how efficiently one can grow their real estate portfolio. The more difficult it is to scale a business using a certain investment strategy, the longer it will take to attain a cash flow goal.

 

Both SFR and apartment investing will allow you to generate $10,000 per month in cash flow, but which strategy will reach this goal the fastest while reducing the number of headaches?

 

For SFR rentals, the average cash flow per property per month is in the $100 to $200 range (depending on the market of course). Therefore, 50 to 100 SFRs are required to make $15,000. We immediately run into a few problems. First, you can only take out a limited number of SFR loans. Once you’ve purchased 4 to 10 homes (depending on the bank use and if they use Fannie Mae or Freddie Mac), you no longer qualify for a standard residential loan. However, a simple solution is to find a local community bank, who – once you’ve established a successful track record – will provide ongoing financing for your deals.

 

Although, you haven’t completely solved your financing problem. How will you afford the 20%, 25% or 30% down payments required to purchase 50 to 100 SFRs? This is the biggest drawback of SFR investing in terms of scalability. If you’re buying all $100,000 properties, that’s $1,000,000 to $2,000,000 in 20% down payments. Even if our sample individual saved up half their corporate salary to cover these down payments, it would take them 17 to 33 years to purchase 50 to 100 SFRs, and that’s assuming everything else goes according to plan. This timeframe can be reduced through refinancing, lines of credit or other creative financing strategies, but it will require a large amount of capital for down payments nonetheless.

 

For apartment investing, since you’re receiving commercial financing, you can obtain an unlimited number of loans (as long as the numbers pencil in for the lender). However, you will run into the same funding problem if you plan on using your own money. That’s where raising private money and syndicating an apartment comes in to save the day!

 

As an apartment syndicator, one of the ways you make money is from an acquisition fee, which is a percentage of the purchase price paid to the syndicator at closing. The industry standard is 2%. Therefore, to make $120,000 in one year, you would need to syndicate $6,000,000 worth of deals. To break it down even further, since an apartment deal generally required 35% down, you must raise $2.1 million from private investors to achieve your annual goal. And that’s not even accounting for the other ways you’ll get paid as a syndicator (i.e. asset management fee, a portion of monthly cash flow, a portion of the sales proceeds, etc.), which you could then use to purchase your own properties or reinvest into future syndications.

 

Technically, you could also raise private capital for SFR investing. However, the problem is that you’ll need to find multiple cash flowing deals at the exact same time in order to attract private capital or make the same amount of money compared to an apartment community. It’s possible but much more difficult to find 50 to 100 SFRs than finding an equivalent sized apartment community.

 

Unless you believe it will take you multiple decades to raise a few million dollars or you win the lottery, apartment investing is more scalable than SFR investing.

 

Winner: Apartment investing

 

Barrier to Entry

 

Barrier to entry means how easy it is to get to the point where you are capable of investing in your first deal. From a personal finances perspective, the barrier to entry is lower for apartment investing than SFR investing. To syndicate an apartment deal, investing your own personal capital will promote alignment of interests with your investors. However, this alignment of interests can be achieved in a variety of different ways (having your property manager invest in the deal, having your broker invest in the deal, having an experience syndicator as a general partner, etc.). Therefore, it is possible to syndicate a deal with zero dollars out of pocket. Although, I always recommend investing some of your own money in the deal for alignment of interest purposes but to also benefit for the profits! Whereas for SFR investing, as I outlined above, you will need to save up millions of dollars to afford the number of down payments required to generate $10,000 a month in cash flow.

 

From an educational and experience perspective, apartment investing has a much higher barrier of entry. No one is going to invest with you if they don’t know who you are or if you haven’t proven yourself to be a credible apartment syndicator. The solution to the former is creating a thought leadership platform. The solution to the latter, however, is more difficult (although, establishing a name for yourself through a thought leadership platform will not happen overnight). From my experience, before you can even entertain the idea of becoming an apartment syndicator, you must have a successful track record in real estate, business, or preferably both. Once that’s established, you need to educate yourself on apartment investing and syndications, which requires a lot of reading and research (but that’s what this blog is for!). Then, you need to surround yourself with credible team members who have an established track record in apartment investing. Only then will you be ready to search for your first deal, which could take anywhere from a few months to a few years! Whereas for SFR investing, as long as you have the money, you can buy a deal.

 

The barrier to entry for apartment syndication is easier from a personal finances perspective, but much more difficult from an educational and experience perspective compared to SFR investing. And there isn’t a way to fast track this process. It will take time.

 

Winner: SFR rentals

 

Risk

 

Investing, in general, will always have risks. However, not all investment strategies are the same in that regard.

 

As I mentioned in the section on scalability, the typical monthly cash flow generated by a SFR is $100 to $200 per month, or $1,200 to $2,400 per year. However, those low margins are very vulnerable to being drastically reduced or wiped out completely. One unexpected maintenance issue (let’s say a broken HVAC system) will cost thousands of dollars. Even minor maintenance issues of a few hundred dollars (replace an appliance, plumbing problems, electrical problems, etc.), when added up over time, will cost thousands of dollars. The same goes for turnovers. Some turnovers are relatively smooth and cost a few hundred bucks. However, if you have to repaint walls or replace carpet/refinish hardwood, those expenses add up quickly. An unruly resident may stop paying rent or violate the lease, and the resulting eviction process can be quite costly. Any one of these scenarios will eliminate months or even years of profits! Some of these risks can be mitigated with proper due diligence, but most of them are just the costs associated with investing in SFRs.

 

For apartments, these risks are spread across tens or hundreds of units. One maintenance issue, one turnover or one eviction has a much smaller impact on your profit and loss statement. Unless you are hit with a large amount of these problems at the same time, the apartment will cash flow. Whereas for SFR investing, you will not be able to benefit from this risk reduction until you’ve created a portfolio of at least 10 to 20 properties.

 

An apartment community is susceptible to risk when you don’t have a soli