Real Estate Investing Blog and Resources

Investing in real estate can be intimidating when just starting out or trying to better understand general industry terms, particularly when it comes to the topic of real estate investing, which covers a wide variety of areas including: property management, banking, land, financing options, budgeting, rental agreements, selling, buying, and so much more. Following a real estate investing blog like this one and reading as many investment advice books as you can will be invaluable in helping you keep up with what’s going on in the market and the latest industry perspectives.

The More You Know

The more information that you have when it comes to a potential real estate investment option, the better. Having more data on the subject will allow you to make smarter, and more informed, decisions. Depending on your short term and long term investment goals, there are a variety of real estate options available today to help meet your needs.

Real Estate Investment Advice

No matter where you are in your investment journey, it is always helpful to get advice and tips from experienced real estate professionals and investors. Whatever your question or area of concern, know that there are resources available to help you augment and enhance your real estate knowledge.

Real estate can be a powerful tool used by passive investors to build massive wealth. Learn more about general real estate investing and explore helpful resources.

How to Dispute Property Taxes on an Apartment Community

Did you know that property taxes are the single most expensive operating expense you will pay as a real estate investor?

Additionally, the annual tax amount is highly variable depending on the purchase price, purchase timing, and the previous owner’s recent business plan.

For example, if you are acquiring an asset that recently went through a value-add renovation program, expect the tax rate to go up significantly at your first assessment. Or, if you perform an extensive value-add renovation program, expect the annual taxes to go up significantly at your first assessment.

However, you don’t have to blindly accept the new tax amount. In fact, after each tax assessment, you are allowed to dispute the new tax amount by filing an appeal. And I’m going to show you how!

After a recent tax assessment, here is the seven step process to determine if you should appeal your new tax amount and, if so, how:

 

Step 1. Calculate Net Operating Income (without Taxes)

In order to determine your tax rate, you need to determine the assessed value, or market value, of your property. Most tax assessors use a modified version of the capitalization/income approach. That is, they use the net operating income excluding the property tax and a loaded cap rate to calculate the market value of the property.

So, the first step is to determine the net operating income excluding the taxes.

But which net operating income should you use? Since you are appealing your recent tax assessment, you should use the current net operating income at your property.

 

Step 2. Calculate the Loaded Cap Rate

Next, you will need to calculate the cap rate the assessor will use to value your property. You can obtain this loaded cap rate by asking the tax assessor. The loaded tax rate is the market cap rate plus the effective tax rate. You can locate the effective tax rate on the county auditor/assessor site. If you want to know the market cap rate used by the assessor, simply subtract the effective tax rate you found on the assessor/auditor site from the loaded cap rate provided by the assessor. Typically, these rates are expressed as mills. Every 10 mills equal 1%.

 

Step 3. Calculate the Market Value

Divide the loaded cap rate by the net operating income excluding taxes to calculate the market value of the property.

If, for some reason, the assessor uses a different method to calculate the market value (i.e., cost approach, sales comparison approach, or something else), then you will need to determine the market value following that approach. But the above method, the modified income approach, is most common.

 

Step 4. Calculate the Total Assessed Value

The total assessed value is what the taxes will be based on. You can find the assessment ratio for your market on the county auditor site. For example, in Hamilton County, Ohio, the assessment ratio is 35%. Multiply the market value by the assessed value to calculate the total assessed value.

 

Step 5. Calculate the Property Tax

To calculate the annual property tax, multiply the assessed value by the tax rate. Again, you can find the tax rate for your market on the county auditor/assessor site. Typically, the tax rate is expressed as mills. 1 mill is equal to 0.1%.

Multiply the tax rate percentage by the total assessed value to calculate your property taxes

 

Step 6. Call the Tax Assessor

If the property taxes you calculated are less than the property taxes you received in the assessment, the next step is call the tax assessor to discuss your computation.

You may be able to resolve your differences without going through a formal appeal process. Most likely, the dispute will be over the net operating income used, as the tax rates and capitalization rates aren’t typically up for negotiation.

 

Step 7. File a Formal Appeal

If you are unable to come to an agreement with the tax assessor’s office, the final step is to file a formal appeal. You can determine the appeal application deadline by either visiting the county auditor/assessor site or by calling the tax assessor’s office

This is the process for determining the tax rate at your property and filing an appeal on your own. Another option is to work with a property tax consultant who specialize in apartments. They will provide you with their opinion on the property taxes. Generally, they will provide you with a report that includes a best case, most profitable case, and a worst-case property tax scenario.

Additionally, you may also want to consider hiring an attorney who specializes in property tax appeals to argue on your behalf.

 

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.

Hud Loan Programs for Apartment Syndicators: Everything You Need to Know

Hud Loan Programs for Apartment Syndicators: Everything You Need to Know

Let’s talk about one of the top loan program providers that apartment syndicators use on their deals: Hud.

Hud can be a great option for apartment deals. We’re going to cover each of their common loan programs, including their permanent, refinancing, and supplemental loans.

Loan 1: 223(f)

The first Hud loan, which is the permanent loan, would be the 223(f). This is very similar to agency loans, except for one major difference: processing time. Plus, the loan terms are actually a little bit longer. So for the 223(f), the loan term is going to be lesser of either 35 years or 75% of the remaining economic life. 

So if the property’s economic life is greater than 35 years, then your loan term is actually going to be 35 years. It’ll be fully amortized over that time period. Whatever the loan term is what the amortization rate will be. If you’re dealing with a smaller apartment community under the $1 million purchase price, then this is not going to be the loan for you.

In regards to the LTVs, for the loan-to-values, they will lend up to 83.3% for a market rate property, and they will also lend up to 87% for affordable. So that’s another distinction of the housing and urban development loans, which is they are also used for affordable housing. There will be an occupancy requirement, which is normal for most of these loans. 

The interest rate will be fixed for this loan, and then you will have the ability to include some repair costs by using this loan program. For the 223(f) loan, you can include up to 15% of the value of the property in repair costs or $6500 per unit. If you’re not necessarily doing a minor renovation, but if you’re spending about $6500 per unit overall, then you can include those in the loan.

The pros of this loan are that they have the highest LTV. You can get a loan where you don’t have to put down 20%; you can actually put down less than 20%. It also eliminates the refinance as well as the interest rate risk, because it is a fixed rate loan, and the term can be up to 35 years in length. You won’t have to worry about refinancing or the interest rate going up if something were to happen in the market. 

These loans are non-recourse as well as assumable, which helps with the exit strategy. There’s also no defined financial capability requirements, no geographic restrictions, and no minimum population. There’s essentially no limitation on them giving you a loan for a deal if the market doesn’t have a lot of people living in it or the income is very low. 

There are also some cons involved when considering a Hud loan. The processing time is much longer than some. The time for a contract to close is at a minimum of 120 days to six or nine months is actually common. Other loan providers have processing times between 60 and 90 days. Hud loans take a little bit longer to process. They also come with higher fees, mortgage insurance premiums, and annual operating statement audits.

Loan 2: 221(d)(4)

The next Hud loan is 221(d)(4). These are for properties that you either want to build or substantially renovate. 

Similar to the 223(f) loan, these loans do have very long terms. The length of the loan will be however long the construction period is, plus an additional 40 years. That is fully amortized. 

This isn’t the loan for smaller deals, because the minimum loan size is going to be $5 million. So if you have a deal that you want to renovate and has got a $1 million purchase price, you’re going to have to look at some other options. 

Similarly, this is for market-rate properties as well as affordable properties, with the same LTVs of 83.3% and 87% respectively. These loans are also assumable and non-recourse as well as fixed interest with interest-only payments during the construction period.

The CapEx requirements for this loan are quite different than the 223(f). For the 223(f), it was up to 15% or up to $6500 per unit, whereas for the 221(d)(4) loan actually needs to be greater than 15% of the property value or greater than $6500 per unit. 

The 221(d)(4) pros and cons are pretty similar to the 223(f) pros and cons. There’s the elimination of the refinance and interest rate risk, because of that fixed rate in a term of up to 40 years. They’re also higher leveraged than your traditional sources. Those longer processing time and closing times can be a pain. There’s going to be higher fees, and you also have those annual operating audits and inspections.

Loan 3: 223(a)(7)

Hud also offers refinance loans as well as supplemental loans for their loan programs. Their refinance loan is called the 223(a)(7).

If you’ve secured the 223(f) loan or you’ve secured a 221(d)(4) loan, you’re able to secure this refinance loan, and it has to be one of those two. You can’t go from a private bridge loan to this refinance loan– that’s not how it works.

The loan term for the refinance loan is up to 12 years beyond the remaining term, but not to exceed the term. If your initial term was 40 years and you refinanced at 30 years, then this refinance loan will only be 10 years, because it can’t be greater than 40 years. 

It will be either the lesser of the original principal amount from your first loan, or a debt service coverage ratio of 1.11 or 100% of the eligible transaction costs. These loans are also fully amortized. The occupancy requirements are going to be the same as the existing terms for the previous loan. These are also going to be assumable and non-recourse with that fixed interest rate.

Loan 4: 241(a)

Hud also has a supplemental loan program available, which is the 241(a). This is only probable if you’ve secured the 221(d)(4) or 223(f). 

The loan term is coterminous with the first loan. Whenever you acquire it, it’s just going to be the length of the remaining loan. You’re essentially just adding $1 million or $5 million to your existing loan. 

Your loan size can be up to 90% of the cost of the property, so essentially a 90% LTV, because you need to have at least 10% of equity in the property at all times. It’s going to be fully amortized. 

They’re also going to base the loan size on the debt service coverage ratio. Because of this, it needs to be 1.45. That’s a ratio of the net operating income to the debt service. Then, the minimum occupancy requirements are going to be the same as whatever the terms are for your existing loan. Like all the loans, they’re assumable, they are non-recourse, and the interest rate is fixed.

And that’s it for Hud loans! What do you think about taking out loans through Hud for real estate purposes? Tell us what you think in the comments below!

Image Courtesy of Pixabay

Two Common Real Estate Scenarios: Communication and Protection

Two Common Real Estate Scenarios: Communication and Protection

In this blog post, we’re going to be looking at two niche real estate scenarios that can happen to just about any investors.

The first scenario involves dealing with older potential clients and original buildings. If you’ve been in this situation before, you know that it can be quite a delicate process getting older owners to sell.

Communication Issues

Imagine this: You just found a potentially amazing off-market apartment building deal. It has 150 units and a $4 billion portfolio. It was purchased back in 1978, just over the 39-year expiration of the depreciation tax benefits law. The owner is in his late 80’s and purchased these buildings when they were first built at the time. You give him a call and ask him if he has any interest in selling, but he has trouble hearing you. He hands the phone to his caregiver, who abruptly says no and hangs up. What solution is there?

What one should do in this situation is to get curious. Start asking yourself some questions, then draft a letter to them. This is how you can learn more about their situation while introducing yourself to them. This is your chance to say, “I’m not sure where you’re at in this stage of owning these properties, but I can tell you that you might be worried about tax liability when you sell them. I have experience purchasing these types of buildings and I’d be happy to talk about some solutions any challenges you might be having.”

Penning a handwritten letter shows care and integrity. Keep in mind that many people of a certain age are struggling to keep up with the constant innovations and growth in the tech and digital world. A handwritten letter could be a breath of fresh air and a means to communicate that potential sellers may appreciate.

Protection From Embezzlement

Now, think of this scenario: You’re embarking on a general partnership in the real estate industry. It is your first time committing to such a project, and you’ve heard horror stories from colleagues involving embezzlement, fraud, and massive loss of funds. The general partner controls the business plan as well as the financial account connected to the project. You’re wondering how you can protect yourself from them embezzling funds from the operational account, and what auditing protocol you can use to protect yourself as a passive investor from theft.

There are several ways to approach this, but we can look at the most tried and true method.

You can have some checks and balances before the deal is done, which won’t be very much. After the deal is closed, though, you can do a lot more. For this scenario, we’ll look mostly at what a beginner real estate investor can do preemptively to stay safe in a general partnership.

There is no money for a potentially untrustworthy or shady general partner to take before the deal, but you can do some due diligence prior to a deal. If a shady partner is going to steal money from the entity itself, then they would have to do it afterward. This is because that is when the money is physically in the bank account.

Before the deal closes, there are a few things you should do. First off, you should absolutely take the time to look at the overall structure of the deal to make sure that there is at least an 8% preferred return. Make sure that the general partner is getting paid an asset management fee if and only if they are actually performing. If they’re proving themselves and they’re returning the preferred return, they can get that asset management fee. Otherwise, they get nothing.

Obviously, these are things that aren’t going to outright prevent someone from stealing money in a general partnership. When it comes down to it, they’re just small things you can do to ensure that the deal itself is set up in the mutual favor of you and your general partner, so that you have an alignment of interest.

Those are some things you can do before the deal. Another thing you should absolutely be doing before signing on anything with a general partner is to check those references. You can absolutely not go into a general partnership blind with no knowledge of who you’re working with. Even if the hearsay is overwhelmingly positive, you absolutely need to still check in with the partner’s references. By doing so, you’re going to get a really good picture of what the partner is all about.

Call their references and listen to what they have to say. We’re talking about past partners, firms, project managers, any business colleagues or people who have worked with this particular partner. Even if you get glowing reviews, you should then Google your partner. Those are things you’re probably already doing, but it really can’t be optional if you’re a baby real estate investor. You can be seen as an easy target because you don’t necessarily know the signs and symptoms of a parasite real estate partner. When you Google them, look for the partner’s name or firm title. And don’t be afraid to dig deep.

This doesn’t directly answer the question of how to make sure they’re not embezzling money, and we’re aware of that. However, there is some prep work that needs to be done on the front end to mitigate the risk of getting in with a group that is known for criminal activity. Sometimes that front end research is really all you need to check out.

What do you think about these two scenarios in real estate? Have you experienced either situation in your career? Tell us your real estate story in the comments below!

Image courtesy of Pixabay

11 Best Markets to Invest in Assisted Senior Living Facilities

If you are a loyal Best Ever Listener and attended the Best Ever Conference 2019, you have heard and seen Gene Guarino of the Assisted Living Academy discuss the power of investing in senior housing.

During my interview with Gene, he explained why he believes that assisted living facilities will be the next mega trend over the next 20 years, in part due to the fact that over 10,000 people turn 65 years old every single day.

To learn more about the business plan for this strategy, check out Gene’s interview or this blog post about how to make an extra $5,000 to $20,000 per month by investing in senior housing.

If you are interested in pursuing this “booming” investment strategy, here are 11 metropolitan statistical areas to target. These are the MSAs with a total population over 500,000 that had the greatest increase in senior population (65 years and old) between 2010 and 2016:

 

11. Colorado Springs, CO

Wikipedia

65 years and older population growth 2010 to 2016: 37%

 

10. Santa Rosa, CA

Shutterstock

65 years and older population growth 2010 to 2016: 37%

 

9. Cape Coral-Fort Myers: 37%

The Florida Living Magazine

65 years and older population growth 2010 to 2016: 37%

 

8. Las Vegas, NV

Wikipedia

65 years and older population growth 2010 to 2016: 37%

 

7. Houston, TX

iStock

65 years and older population growth 2010 to 2016: 39%

 

6. Durham, NC

Livability

65 years and older population growth 2010 to 2016: 41%

 

5. Atlanta, GA

GrandView Aviation

65 years and older population growth 2010 to 2016: 41%

 

4. Charleston, SC

10Best.com

65 years and older population growth 2010 to 2016: 42%

 

3. Boise, ID

Idaho Statesman

65 years and older population growth 2010 to 2016: 43%

 

2. Raleigh, NC

Design Milk

65 years and older population growth 2010 to 2016: 44%

 

1. Austin, TX

65 years and older population growth 2010 to 2016: 51%

 

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.

Source: Census.gov
basketball player slam dunking

March Madness: Ranking Best Ever Show Community Investors as Players

Inspired by March Madness, we asked our Best Ever Show Community of investors, “What was the highest level of basketball you ever played?” Come to find out, we actually have a very extensive range of experience within our group of investors. As investor David Schwan said, “We could put on a real estate investor version of the Harlem Globetrotters vs. Washington Generals.”

We’re not saying we could walk-on to Duke’s powerhouse tournament team, but we do have a few standouts who, with a time machine of course, could make up the BEST EVER Fab Five.

The Best Ever Starting Five based on experience:

Nathan Tabor – The MVP of this list, Nathan dominated Division II teams in North Carolina back in his day. Unfortunately, the shorts back then were borderline NSFW so we can’t see what that kind of dominance on the court looks like, but, fortunately, we can read about it.

John Fortes – The only other college athlete on the list, John was a Division III basketball player in the Northeast. Today, when not focusing on his investments, John is making his way to Division 1 as a referee.

Ben Lovro – Not only was he varsity in High School, Ben’s AAU team won the State Championship three years in a row! Ben has an inspiring life story and is now a big-time real estate investor.

Theo Hicks – If you listen to the Best Ever podcast or have read any of the Best Ever books, you know how smart Theo is with real estate investments. What you might not know is that he might also be the most athletic investor in the group. Just look at those hops! Theo was an All-Conference honorable mention at his high school.

Theo Hicks

Joe Stevie – Joe is a 1,000-point scorer for his high school in Latonia, Ky, with pictures to prove it. Joe also had major ups in his day!

Joe Stevie

Coming off the bench:

  1. Slocomb Reed – Played through high school and then won an intramural championship in college.
  2. Daniel Kwak – Daniel played through his sophomore year of high school.
  3. Kyle Stevie – Joe’s brother. Kyle, played basketball through 9th grade before changing focus to football which he played (or “rode the bench,” as he says) through college. Before retiring his basketball jersey for good, Kyle was MVP on his 8th grade team. Nowadays, he probably can’t beat you on the court, but he’ll beat you on the mat with his BJJ and Muay Thai skills!
  4. Kris Bennett – Played until 9th grade.
  5. Brandon Moryl – Played into high school. Brandon says his highlights can still be found on ESPN.

Reserves:

  1. Grant Warrington – Grant played until 9th grade with the only proof being a picture which fondly entertains his family.
  2. Evan Holladay – An 8th grade intramural league player.
  3. Cody Rubio – Cody played up to 8th grade until the coach politely asked him to focus on anything else. He found inspiration as a relatively short guy to learn and perfect the Kareem Sky Hook and the Dirk fade away.
  4. Jay Helms – Self-proclaimed Uncle Rico of 8th grade
  5. Joe Fairless – Joe made it to the 7th grade C team before retiring from the hardwood. Rumor is he’s been studying apartment syndication since that day.

Maybe next year kid:

  1. David Schwan – He was the last pick in 7th grade.
  2. Eric Kottner – As a 6th grade hooper, Eric says he might have earned a participation trophy.
  3. Grant Rothenburger – Grant says he couldn’t even make the team in 6th grade and is still barely getting picked at the YMCA.
  4. Whitney Sewell – Started playing in 4th grade and played through….. 4th grade! Whitney’s long venture into basketball included not taking the ball out of bounds and running to the other end to score. He figured it out when everyone yelled at him to give the ball back.
  5. Neil Henderson – Played in a mysterious time before camera phones (whatever that means). So, he has no evidence, but swears he was once picked SECOND to last on the third-grade playground once.
  6. David Park – Mostly just as a pick-up basketball player.
  7. John Casmon – John played in multiple leagues, including church, intramurals, and YMCA. John says he only averaged 3.4 points per game but I’ll bet he’s a real journeyman from playing in three different leagues!
  8. Dino Pierce – Self-proclaimed “Bitty Basketball” player. Dino laced them up in the summers as a kid and went from dud to stud in his time on the court.
  9. Vinny Squillace – Played about 10 games of basketball throughout his life but enjoys the team aspect of basketball.
  10. Garth Kukla – Garth says he has a mind for basketball but a body for real estate investing so he chose the right career. However, don’t challenge him to a game of horse, Garth has made 87 free throws in a row.
  11. Chuck Russell – All we know about Chuck’s playing days is that he played it the same way he played football – tackle. Luckily, he chose the field over the court!
  12. Taylor Loht – #27 on this list but top of our martial arts list. LIke Kyle Stevie, Taylor prefers to practice martial arts over basketball and he has his Blue Belt to show for it!

Are you an investor with experience on the court? Tell us about your skills in the comments below or in The Best Ever Show Community.

Best Ever Real Estate Influencers

The Landscaper Turned Real Estate Investor: Best Ever Influencers Alex Holt and Ash Patel

Most people have someone who’s made a positive difference in their life. Real estate investors are no different. This Best Ever Influencer series will take a look at how real estate investors have influenced a fellow investor – and how the act of influencing changes both parties.

The inaugural article looks at Alex Holt, a beginning investor eager to learn the ropes, and Ash Patel, a Cincinnati commercial real estate investor who is showing him the way.

 

Ash Patel (left) and Alex Holt (right)

 

Sometimes one piece of advice – just a tiny suggestion – is enough to profoundly change someone’s life. And like a well-timed crash of cymbals at the symphony, the recommendation must arrive at the precise moment to affect change.

Take Alex Holt and his Cincinnati landscaping business. It was hard work (grunt work, some might say) but his business was doing OK; he even had a couple of employees during the busy season.

Yet deep down Alex knew there was more out there for him than mowing lawns.

It turns out that “more” was right in front of his eyes every day. Literally. “I would say three or four years ago the light bulb went off: ‘Hey, you’re making these houses beautiful on the outside – you should see about the inside,’” Alex said.

After talking with some fix ‘n’ flip investors whose yards he maintained and YouTube-ing real estate investing, Alex decided, “Man, I can do this!”

And that’s how Alex became interested in real estate investing.

But being interested in real estate investing is not the same as having the time to get good at it, as Alex was soon to learn.

 

You Reap What You (Don’t) Mow

Although he didn’t know it at the time, Alex needed some big picture advice, something that would allow him to climb down off his riding mower and chase after his dream. The man who delivered it was commercial real estate investor Ash Patel, who Alex met at a Joe Fairless Cincy Best Ever Real Estate Mastermind Meetup.

Ash is a second generation American from Indian parents. Even though the money was good, Ash grew tired of being in IT, realizing that the only reason he entered the field is that it was expected of him.

Alex is all about the work, the grind to get things done, yet Patel’s first piece of advice to his new mentee was to grind less and know your worth. The suggestion caused him to step back from his landscaping business and reassess it. He realized his value was worth a lot more than being a $12 an hour lawn mower.

So he took Patel’s advice to pay someone else to mow lawns and moved the business closer to more lucrative clients.

Once the duo decided they wanted to work together, the question became how to start the partnership. Should they dive in headfirst and buy a commercial building? Or be prudent and start small? Prudence won out.

Alex and Ash thought they were choosing the easy way to begin their collaboration by buying a $9,000  fix ‘n’ flip opportunity (Ash fronted the money) in a not-so-great area of Cincinnati’s Price Hill neighborhood. What they could not have known that a year-long series of serious issues with the property would cause it to turn into…

 

The Nightmare on Elm Street

The problems that Alex and Ash ran into were so numerous as to be almost comical. Stephen King couldn’t have designed the horrors that the duo had to endure with the seemingly cursed piece of property.

Alex’s tedious game of whack-a-mole with an array of major problems went on for more than year. “It was like every time we fixed one thing in this house, something else broke because it was 100 years old,” Holt said.

Instead of a “For Sale” sign, the house should have come with a “Buyer Beware” warning label. They bought the house knowing it had several code violations and “tons of issues” with inspections, Ash said. Adding to the challenges: the house’s owner was in jail (he was later deported), creating more delays.

Alex, who has an earnest way of speaking and a slight Southern accent despite being Cincinnati born and bred, spent countless hours at the house.

“We ended up pretty much gutting and rebuilding the entire house,” he lamented.

 

 

First came a new roof. Next was a new furnace. And the constant inspections played havoc with their deadlines – and their budget.

The worst part? Since the house was not in a desirable location, a Class D area according to Alex, they probably wouldn’t recoup all of the money they put into the house.

Just when they were about to sell, the unthinkable happened. The incredulity was apparent in Ash’s voice as he explained.

“And then, when Alex had finally sealed the deal and found a buyer, it turns out our house is six inches over the property line,” he said. So instead of being to sell the albatross of a house, the duo was forced to hire a lawyer and try to find a quick solution. The neighbor decided to play hardball, reneging on an agreement to settle the issue for $1,000.

That solution was an easement rights agreement giving Alex and Ash the six inches in exchange for $1,400 cash. “And I had to drive two hours at 10 o’clock at night to meet him or else he was going to be going away and we couldn’t see him for weeks,” Alex said.

With the last obstacle cleared, they were finally able to sell the house for $37,000. Considering everything that happened, losing only $8,000 on the house could be considered a moral victory.

 

 

These things never happen to Jonathan and Drew Scott on Property Brothers. “Yeah,” said Alex. “It was not supposed to be anything long and dramatic.”

That the experience was long and dramatic may have cemented the pair’s future working relationship.

 

You’ve Got a Friend in Me

So after a nightmarish deal on their first try, the million dollar question is why would Ash continue to partner with Alex? One reason could be that Alex’s first stab at real estate reminded him of his own stumble-filled initial endeavor. As a way to offset taxes, he bought a run-down, three-story, mixed use building and discovered it needed major repairs.

“I had no idea what I was doing,” Patel said.

He figured it out eventually, but it was a painful learning experience. The willingness to help others avoid that type of struggle may have had its genesis in that brutal first deal.

“Because of all the mistakes I’ve made and learning things the hard way, and because I didn’t ask for a mentor, I overly exert myself out there and I’m willing to mentor anybody that wants to learn from me,” he said. “One of my rules is I will match your effort.”

He’s found a willing pupil (and partner) in Alex, who yearns to prove his worth to his mentor. Ash hasn’t just influenced Alex’s real estate career – he’s helped shape his life by showing him how to think differently, perhaps more strategically, about the world.

Alex is just sick about how what was supposed to be a quick deal dragged on for more than a year. He’s stunned (and very grateful) that Ash is still willing to work with him.

“It’s one of those things that before you go to bed at night it haunts you – and I mean that literally,” Alex said.

“It’s also a deeper connection,” Alex added. “You know, I would say he’s a friend. I know his family and we’re tied in in different ways so it’s personal.”

For his part, it’s obvious Ash admires the way Alex has managed the chaos surrounding their first deal. Despite the sinkhole of time that the house turned into, Alex never wavered in his commitment to the deal – or to Ash.

“There’s no money to be made anywhere here for him, but the fact that I was willing to take a chance on him and the fact that I’m losing money on this house, he just stayed in there and continues to just work,” Ash said.

So, despite not making anything on their first deal, would Ash do another deal with Alex? Yes, he said without hesitation, but with a “little more oversight. Because I know that he’s already proven that he’ll just continue to work, he won’t give up, and he’ll do whatever it takes to get things done.”

And the next thing to get done is another deal. Alex and Ash are looking at purchasing a 3 bedroom, 3 bathroom house for $60,000, putting another $35,000 into it and hoping for a sale price in the mid $140,000s. This time, with Ash’s influence, the landscaper turned real estate investor thinks that he has learned enough that it won’t take a year to sell it.

 

Written by Robert Springer, an Oregon-based freelance write. He has more than 10 years’ experience writing about real estate investing. Say hi to Robert at rtspringer@gmail.com. 

 

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.

Top 10 US Cities with Largest Proportion of High-End Apartment Buildings

Have you noticed that over the past few years, the majority of the new apartment construction in the market you live in and the market you invest in have been luxury apartment buildings? Massive, thousand unit plus low, mid, and high-rise buildings with all the bells and whistles?

The data supports this observation as well.

In 2017, 79% of all new apartment construction in the US were luxury rentals (defined as class B+ or higher). This number increased to 87% in the first six months of 2018. In fact, 100% of new apartment construction were luxury rentals in many cities across the US.

Here are the top 10 cities in the US with the largest total percentage of new apartment construction being luxury rentals from January 1, 2017 to June 30th, 2018:

 

10. Fort Worth, Texas

City skyline and bridge lit up at dusk

Flickr

 

% New Construction Luxury Apartment Buildings 2017: 100%

% New Construction Luxury Apartment Buildings 2018: 100%

Total Share of Luxury Apartment Buildings: 31%

 

9. Denver, Colorado

Pink sky behind city skyline at sunset

Visit Denver

 

% New Construction Luxury Apartment Buildings 2017: 88%

% New Construction Luxury Apartment Buildings 2018: 93%

Total Share of Luxury Apartment Buildings: 32%

 

8. San Antonio, Texas

Blue, clouded sky above city skyline with lit up buildings

Shutter Stock

 

% New Construction Luxury Apartment Buildings 2017: 85%

% New Construction Luxury Apartment Buildings 2018: 96%

Total Share of Luxury Apartment Buildings: 33%

 

7. Nashville, Tennessee

City skyline and a bridge with river reflections

LVST Global

 

% New Construction Luxury Apartment Buildings 2017: 95%

% New Construction Luxury Apartment Buildings 2018: 92%

Total Share of Luxury Apartment Buildings: 34%

 

6. Dallas, Texas

Purple swirled clouds and deep blue sky above skyline at dusk

Southern Illinoisan

 

% New Construction Luxury Apartment Buildings 2017: 100%

% New Construction Luxury Apartment Buildings 2018: 100%

Total Share of Luxury Apartment Buildings: 35%

 

5. Houston, Texas

Lit up high-rise buildings and deep blue sky at night

Wallpaper Up

 

% New Construction Luxury Apartment Buildings 2017: 98%

% New Construction Luxury Apartment Buildings 2018: 100%

Total Share of Luxury Apartment Buildings: 36%

 

4. Boston, Massachusetts

High-rise buildings and bridge lit up over a river at night

Silversea

 

% New Construction Luxury Apartment Buildings 2017: 100%

% New Construction Luxury Apartment Buildings 2018: 100%

Total Share of Luxury Apartment Buildings: 37%

 

3. Las Vegas, Nevada

Las Vegas hotel pool and hotels lit up at dusk

Las Vegas Review Journal

 

% New Construction Luxury Apartment Buildings 2017: 100%

% New Construction Luxury Apartment Buildings 2018: 80%

Total Share of Luxury Apartment Buildings: 38%

 

2. Austin, Texas

Aerial view of Texas State Capitol building and surrounding buildings

TripSavvy

 

% New Construction Luxury Apartment Buildings 2017: 65%

% New Construction Luxury Apartment Buildings 2018: 88%

Total Share of Luxury Apartment Buildings: 45%

 

1. Charlotte, North Carolina

Night view of lit city buildings behind a fountain

TripSavvy

 

% New Construction Luxury Apartment Buildings 2017: 87%

% New Construction Luxury Apartment Buildings 2018: 100%

Total Share of Luxury Apartment Buildings: 50%

 

The benefit of purchasing multifamily in an area with a large percentage of luxury apartment buildings is your ability to market your buildings as “luxury experience without the luxury cost.”

If you cannot invest in these thousand unit luxury apartment buildings with nearly every amenity imaginable, purchase a smaller multifamily instead. Upgrade the interiors to luxury status and then offer the same types of amenities by partnering with local businesses. For example, partner with a local fitness center, offering a discounted membership fee to your residents. Apply the same concept for all the amenities offered at your competition.

This will allow you to attract the luxury resident demographic because you will offer rental rates lower than the new luxury construction in the area while still allowing your residents to live in a luxury unit and have access to all the luxury amenities they desire.

 

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.

How Important are Cap Rates?

7 Active Real Estate Investor Opinions on the Importance of Capitalization Rates

The capitalization rate (or cap rate) is a specialized aspect of real estate investment. That’s why I posed the following question to several leading real estate investors: How strongly do you consider cap rates when evaluating deals?

Here are seven active investors’ opinions on how important capitalization rates are in real estate investing:

  1. Ryan Groene said “I like to treat (cap rates) like I treat my trash . . . it normally ends up in the garbage.” As a value-add manufactured housing investor, a deal with a low or even negative in-place NOI doesn’t have a cap rate that translated into other important metrics like cash-on-cash return, internal rate of return, debt, and capital required. However, he says that cap rates are more important on the sale of the property. He bases the exit cap rate on the historical cap rates for manufactured housing, which is between 8% and 10%. Overall, he cares about cap rates, but it will not stop him from investing in a deal with a 1% cap rate if the terms are great and he hits his desired returns.
  2. Garrett White is of a similar opinion. He doesn’t place much emphasis on in-place capitalization rates in real estate deals (i.e., the cap rate based on the current net operating income), because, depending on how much value-add is present, he can buy a property at a really low cap rate and still make it a solid deal. Cap rates mean the most to him on the exit. To determine the exit cap rate, he looks at the range of the historical cap rates rather than the 10bps per year expansion rule that is common.
  3. Elisa Zhang only considers the entry cap rate in order to compare it to the exit cap rate. For most of her deals, the exit rate is set to be at least 1.5% to 2% higher than the entry market cap rate of similar deals in the same submarket.
  4. Tyson Cross also agrees with Ryan, Garrett, and Elisa. He said that the capitalization rates in real estate is one of the most misused metrics in commercial deals and is widely thought of as the standard for measuring properties. In reality, the importance of the cap rate is varied based on the property type and location, and you should put more emphasis on the cap rate upside after executing your business plan (i.e., the exit cap rate or cap rate at refinance).
  5. Todd Dexenheimer also believes that the cap rate is a misused metric, but for opposite reasons. To him, cap rates have been downplayed in the current market and are very important when the market shifts to a buyers’ market. Commercial real estate is generally valued based on cap rates, so he says that not considering cap rates when evaluating deals is a mistake. With that said, he also added that you need to factor in many things when looking at a deal and that a good deal varies from investor-to-investor based on their personal goals. These important factors include cash-on-cash return, cash flow, internal rate of return, debt service coverage ratio, the overall business plan, market factors, and the likelihood of being able to achieve the projected results.
  6. Ash Patel also believes that cap rates are important, specifically on non-commercial real estate that is fully leased and triple net leases. If the non-commercial real estate is partially vacant, the cap rate should reflect the current occupancy. For gross leases and value-add, cap rates should be considered more of a benchmark.
  7. Gwyeth Smith, who admittedly is just starting out, fell somewhere in the middle. He understands capitalization rates in real estate shouldn’t be used as the only factor to qualify a deal, but it still has its uses. For example, he used the cap rate as a negotiating tool on a recent deal. However, the most important factor to him is the debt service coverage ratio, because if the deal meets Fannie Mae qualifications, it validates his underwriting to a certain extent.

If you’d like more information regarding entry and exit cap rates, the best real estate investment strategies, and so much more, tune into the Best Ever Show daily!

Joint Venture vs. Syndication Real Estate

What is the Difference Between a Joint Venture (JV) and Syndication in Real Estate Investing?

You’ve completed a handful of real estate investments on your own and are now ready to take your business to the next level by forming partnerships and raising capital to fund larger project.

Congrats!

However, before moving forward, you need to know what type of partnership you are allowed to legally form. That is, you need to know the difference between the two most common partnership structures: joint venture (JV) and syndication.

Before we dive into the differences between these two structures, a quick disclaimer – I am not an attorney and am not offering legal advice. I am offering general information for educational purposes. Ultimately, you need to consult with a real estate and securities attorney to determine which structure is right for you.

 

Is it a Joint Venture or Syndication?

Now that we got that out of the way, to determine whether you are forming a JV or a syndication, you need to take the Howey Test.

The Howey Test was created by the Supreme Court for determining whether certain investments qualify as “investment contracts” (or securities). The four parts of the test are:

1.     It is an investment of money

2.     There is an expectation of profits from the investment

3.     The investment of money is in a common enterprise (that is, investors pool their money or assets together to invest in a project)

4.     Any profit comes from efforts of a promoter or third-party

“It is an investment of money” holds true for syndications and JVs. Same with “there is an expectation of profits from the investment” and “the investment of money is in a common enterprise.” The main distinction comes down to part four – “any profit comes from efforts of a promoter or third-party.” If this is true, then it is an investment contract where you are selling securities and is therefore a syndication. If this is false, then it may be a JV.

 

If it is a Joint Venture…

…then the investors have an active role in the ongoing management of the project. There role must be more than just the right to vote. They must have a defined role and you must be able to prove that they actually fulfilled those duties.

A JV is when two or more individuals or companies pool resources to accomplish a common goal and where all parties involved are managers in the deal. An example would be a general partnership on a syndication. Another example is if two individuals come together and do a fix-and-flip where both members have an active role in the project.

Since everyone is a manager in the deal, all parties have unlimited liability. Also, no single individual can make decisions on behalf of the group. It must be by majority or unanimous rule.

Compared to syndications, JV partnerships are much less expensive to form.

Overall, a JV is a partnership where all members have defined and active roles in the ongoing management of the real estate project.

 

If it is a Syndication…

…you are selling securities and must register with the Securities and Exchange Commission (SEC) and are regulated by securities law.

While the general partnership aspect of the syndication is a JV, the partnership between the general partnership and the limited partnership (i.e., passive investors) is a syndication. Unlike a JV, the syndication adheres to the fourth part of the Howey Test – “any profit comes from efforts of a third party,” with the third-party being the general partnership. The investors do not have an active role in the ongoing management of the project and are completely passive.

Compared to JVs, syndications partnership are more expensive to form since you must register with the SEC and create the supporting documentation with the help of a securities attorney.

Overall, a syndication is a partnership where the investors do not have active roles in the ongoing management of the real estate project.

Here is aguide a created that goes over what an apartment syndication is in more detail.

It is vital that you consult with a securities attorney before forming a partnership to purchase real estate. If you form a JV when a syndication is the proper structure, or vice versa, the resulting non-compliance with securities laws can cost tens, if not hundreds, of thousands of dollars in litigation fees, result in SEC fines, and even jail time.

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.

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

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!

 

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

City view with tall, wavy buildings

Five Ways To Find Your First Off-Market Apartment Deal

Previously Published in Forbes Here.

In a previous blog post, I outlined the benefits of completing an apartment transaction off-market for both a seller and buyer, as opposed to on-market through a real estate broker. Although off-market real estate deals are highly attractive on both sides of the transaction, when it comes to ease, they lose the edge.

 

Finding on-market deals is a fairly passive approach: All that’s required is sending a real estate broker your investment criteria and asking them to subscribe you to their email list. Then, any current or future listing that meets your criteria will be automatically sent to your email inbox. However, you won’t have control over the number of opportunities you receive. Since it’s solely based on the number of owners who happen to list their property with a real estate broker, you could see a bunch of opportunities one week and then go a few months without seeing any.

 

The more active and beneficial approach is to pursue off-market real estate opportunities. Generally, there are two strategies regarding how to find off-market deals:

  • Speaking directly to the owner
  • Speaking to someone who knows the owner.

 

Your prospecting tactics should only target these two groups.Here are five methods you can use, whether you’re buying your first apartment building off-market or your 20th:

1. Direct Mailing Campaigns

One of the most well-known tactics for acquiring off-market real estate deals is through direct mailing campaigns. A direct mail campaign consists of sending out a batch of letters to a list of apartment owners with the purpose of sparking a conversation that results in the acquisition of their property.

 

There are two keys to a successful direct mailing campaign:

 

Mailing List: A high-quality mailing list will only include owners whose apartment communities meet your investment criteria and who show at least one sign that they’re interested in selling. For example, we only mail to owners who’ve purchased their property five or more years ago. They will have likely built up enough equity to sell their property at below market value while still making a sizable profit and/or they could be coming to the end of their business plan. Another option is only mailing to distressed owners. Indications that an owner is distressed is their inclusion on the eviction court, building code violations or delinquent tax list, or living in a state other than the one in which the apartment is located.

 

Mailing Frequency: Decide what frequency you will mail to your list of owners — monthly, quarterly, every six months, etc. — and commit to the system. Sometimes, you may receive a reply on your first mailer, while other times it won’t be until you’ve been mailing to the same owner for a year that you receive interest.

 

Related: The Ultimate Guide to a Successful Direct Mailing Campaign

2. Cold Calling

Part of learning how to find off-market deals is becoming proactive. Rather than sending direct mailers to your list of distressed apartment owners and waiting for the phone to ring, call the owner directly (or follow the unique approach of this apartment investor and cold-text the owner instead!).

 

With cold calling, compared to direct mail, you’ll have more control over the number of conversations with owners. It is also less expensive, as you are avoiding the costs of letters, envelopes, and stamps.

 

Cold calling can also increase your conversion rate. With direct mail, if an owner isn’t interested in selling, they won’t reach out. Whereas, with cold calling, you can follow-up by sending the owner a letter referencing the conversation, providing your contact information, and notifying them that you will call again in X months (2, 4, 6, whatever you decide) to see if they are interested in selling.

 

Related: How to Get a 57% Response Rate on Your Direct Mail Campaigns

3. Thought Leadership Platforms

A thought leadership platform can be a great source for off-market real estate deals. With an interview-based podcast, blog, or YouTube channel, you can form relationships with your guests and build a large audience, conveying to both your interest in purchasing apartment communities. With a meetup group, you can network face to face with attendees and handpicked speakers who are active in real estate investing.

 

Regardless of the platform you pursue, as a thought leader, you will be reaching and cultivating relationships with both apartment owners and the professionals who know the owners, which are the only two ways to find off-market deals.

4. Call “For Rent” Ads

Calling the apartment owners of rental listings on online services such as Craigslist, Apartment.com, Zillow, etc. or on “for rent” signs scattered across your local market to gauge their interest in selling is a great way to find off-market real estate deals.

 

If an owner has a unit listed for rent, you’ve automatically identified a pain point. The unit is vacant, which means they are losing money. You might catch them at a moment in time where they are motivated to sell.

5. Apartment Vendors

Anyone involved in the servicing of apartment communities, including electricians, carpet installers, roofers, plumbers, HVAC professionals, pool repairman, lawn care professionals, etc, is on the front lines and will likely have insider information on communities that are being neglected.

 

First, use their services or refer them to other apartment owners to build rapport. Then, ask them to notify you about potential distressed owners or neglected communities.

 

Related: Lead Generation Blog Category

 

Overall, I recommend selecting two methods from this list and focusing on generating leads for your off-market real estate deals from those for at least six months. We live in a culture of instant gratification where people expect quick or immediate results. In general, that isn’t the reality, and it’s especially true when you’re dealing with million-dollar properties. It takes time to perfect how to find off-market deals and generate apartment leads. It requires constant action, constant tracking, and constant improvement.

 

All of these tactics have worked, but all of them might not work for you because of your market or because of your unique skill set. You’ve got to find a tactic that aligns with what you’re uniquely good at, which may take some trial and error. During your six-month trial period, log your results for each of the marketing methods. If one or both of the marketing methods have poor results, either tweak it or try another tactic. Ultimately, it’s not about having five off-market real estate lead sources. It’s about finding the few that work best for you.

 

If you want advice on buying your first apartment building or you’d like to passively invest in one of my lucrative apartment syndications, contact me. Additionally, discover how you can make money by investing in apartments as part of your own business strategy by reading my new text, Best Ever Apartment Syndication Book.

location circled on a map

How to Find Private Money Regardless of Where You Live

Last week we closed on our 12th property and our company portfolio is now valued at more than $250,000,000 (click here to see the lesson I learned on my last deal). Since this quarter billion dollar mark is sort of a milestone I thought it would be interesting to look at where my potential and current investors live to see if there is anything interesting we could learn from it.

 

Yes. Yes, there is.

 

Before we look at the stats, let’s define a couple things.

 

I define Potential Investors as investors with whom I have a relationship, are accredited and have expressed interest in investing with me but have not invested yet. Current Investors are accredited investors with whom I have a relationship that are currently investing in my apartment deals.

 

Now let’s dig into the stats of my investor database.

 

Top 5 Cities with the most Current and Potential Investors:

  1. New York City: 18%
  2. Dallas-Fort Worth: 10%
  3. Los Angeles: 9%
  4. Houston: 5%
  5. San Francisco: 4%

 

So, out of all my Current and Potential Investors across the United States, 18% live in NYC, 10% live in DFW, etc. This makes sense for a handful of reasons.

 

First, they are large cities (ex. Population of NYC is 8M+).

Second, I lived in NYC and DFW so have family and friends there.

Third, our properties are in Texas so DFW and Houston investors have a level of familiarity with the market they are investing in. They see the same thing we see in terms of population growth, job growth, economic outlook, etc.

 

Now let’s look at the Top 5 cities with the most Current Investors (removed Potential Investors).

 

Top 5 Cities with the most Current Investors:

  1. New York City: 18%
  2. Dallas-Fort Worth: 11%
  3. Los Angeles: 6%
  4. San Francisco: 5%
  5. Tied- Houston, Miami, Austin and Seattle: 4%

 

Ok, still making sense and for the reasons stated above. Large cities, places I lived, have family and friends residing, and, in three cases, are in the same state as our multifamily deals (Austin, Houston and Dallas-Fort Worth).

 

But here’s where the wrinkle occurs.

 

Let’s look at all the equity my investors have invested in my apartment syndications and what % of the total invested dollars is attributed to each city where investors live.

 

Top 5 Cities with % of Investment Dollars in Deals

  1. New York City: 18%
  2. Cincinnati: 13%
  3. Dallas-Fort Worth: 11%
  4. Miami: 7%
  5. San Francisco: 6%

 

…what in the Cincinnati just happened?!?!

 

Cincinnati isn’t a top 5 city of mine in terms of total # of Current Investors and/or Potential Investors.  In fact, to dig deeper Cincinnati only has 2.5% of my Current and Potential Investors living there. And only 3.5% of my Current Investors living there.

 

I am not from Cincinnati and, in fact, have only lived here for approximately 3 years. So, why does it represent 13% of all the equity invested in my apartment deals? The short answer is because I am actively involved in the local community. But that short answer doesn’t do the real lesson learned justice so let me elaborate more.

 

Here’s how I did it:

 

  • Host a local meetup. The first month I officially moved to Cincinnati (because my wife is from here and she’s the love of my life so I followed her to the city and now we’re here for the long-term) I started a meet-up. If you have time to ATTEND a meet-up then you have time to HOST a meetup. It doesn’t take that much more effort to HOST than it does to simply ATTEND and the rewards for HOSTING are exponentially greater. I did this to make friends in Cincy. I didn’t do it necessarily to generate investor relationships but that’s exactly what it did.
  • Host Board Game and Drinks nights at your house. This Friday my wife and I are having friends of ours, some of which are investors, come over to our house for a night of board games, drinks and dinner. Hosting events at your house as couples, along with couples, is fun and goes a long way to continue to build your friendship with those locally.
  • Consistent online presence that has an interview component to it. Or, in short, my podcast. I interview someone Every. Single. Day. on real estate investing and have released an episode for the last 1,197 days. There are multiple benefits for doing this and I won’t get into all of them but I will focus on one of the benefits and that is that every time I interview someone they then want to share it out to their audience which helps expand my reach. And, if I interview people in my local market that introduces new, local connections to me which can then turn into business relationships since I get to have dinner, drinks, etc. with them. Here’s a post I wrote on the step-by-step process to create a real estate thought leadership platform.
  • Volunteer then become a board member for that non-profit. I had no intention to meet investors when I started volunteering for Junior Achievement. But I have since realized that by volunteering for a cause I feel strongly about (Junior Achievement helps kids in underserved communities learn financial and entrepreneurial skills) I was able to connect with like-minded people and then become friends with them. I got on the board for JA in Cincinnati and have built friendships with people on the board which then turned into business relationship where they invest in my deals. You could take the same approach but make sure you genuinely believe in the cause and are doing it for the right reasons (i.e. helping further the cause’s mission) vs trying to grow your biz, otherwise it will fall flat and won’t be fulfilling for you.

 

By doing these simple things, you can build an investor network in your city that is perhaps stronger than any other network. When people personally know you they are more likely to trust you, recommend you to others, and invest larger. The beauty in this is that it’s helpful for you regardless of where you live.

 

Cincinnati is approximately the same size as St. Paul, Minnesota, Toledo, Ohio, Stockton, California and…Anchorage, Alaska. So, if you live in a city that is larger then there’s really no excuse to not having all the capital you need for your deals. If you live in a city that’s smaller than Cincinnati (300k population) then you can still apply these principles although it might require you to host your meetup in the next largest city next to where you live, that way you get better return on your time.  Regardless, apply these principals and you will quickly build a local investor network than can help you fund your deals.

 

In the comment section below, tell me how you will implement these proven money-raising tactics in your real estate business.

 

Make sure you subscribe to my weekly newsletter for even more Best Ever advice: http://eepurl.com/01dAD

                       

If you have any comments or questions, leave a comment below.

 

buying apartment large buildings over conference call

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

Since completing my first apartment syndication (raising money from private investors to purchase 100+ unit multifamily buildings) a little over threes ago, I’ve completed an additional six deals. Currently, my company controls over $400,000,000 in assets, and I’ve learned some key lessons on how to buy an apartment complex.

 

After completing each deal and buying these apartment buildings, I took inventory on the valuable lessons I learned and made sure that I applied any solutions or outcomes moving forward in order to ensure that each subsequent deal went smoother and was more efficient than the last. In total, I have learned and applied 16 invaluable lessons to my syndication process, which I can attribute to my continued success.

 

From my first deal, which was a 168-unit in Cincinnati, OH, and my second deal, which was a 250-unit building in Houston, TX, I had my first two main takeaways:

Lesson #1 – Get the Property Management Company to Put Equity in the Deal

If you are not managing the property yourself, then have the local property management company you’ve hired put their own money into the deal. This is something I didn’t do on my first deal, which was a mistake, but I did apply it to the 250-unit deal in Houston.

It is true that you will have less equity in the deal when buying apartment buildings this way, but the advantage is that, since the management company has their own skin in the game, it is human nature that there will be much more accountability due to an alignment of interests. If the property management company also brings on other investors on top of putting equity into the deal, that adds another layer of accountability and alignment of interests.

 

When following this strategy, it is even more important that you’ve adequately vetted the property management company. If you aren’t completely comfortable with your selection, then you’ll be stuck with them as both a manager AND a general partner – a double whammy.

 

In return for equity, you can try to negotiate with the property management company for the lowering or elimination of certain fees, such as management fees, lease-up fees, and/or maintenance up-charges.

Lesson #2 – Prime Private Money Investors Prior to Finding a Deal

If you have a good deal when buying apartment buildings, money will find you. But, that doesn’t mean you should wait for the deal before starting the money-raising process. On my first deal, I raised over $1 million and did so after finding the deal. It was, shall I say, a character-building experience. As a result, I don’t recommend to others that same approach.

 

Leading up to my second deal, I prepped the majority of my investors so that, once I had a deal under contract, the money-raising process flowed more smoothly. I still brought on new investors after getting the deal under contract, but overall, the process is much more efficient when you prep investors beforehand.

 

Note: I don’t actually receive money before I have a deal. I only speak to investors about a hypothetical deal, or past deals, in order to gauge their interest level in investing.

 

Here is the exact process I use for priming investors before finding a deal and buying apartment buildings:

 

  • Schedule a meeting with investors
  • Ask questions to learn their financial goals and how they evaluate success with their investments
  • Talk to them about your business (What is your real estate background? What do you invest in? Why do you invest? What is multifamily syndication? Etc.)
  • End the conversation with the following question: “If I find something that meets your financial goals, would you like me to share it with you?”

 

When I’ve asked this question at the end of investor conversations, I’ve never had anyone say no.

 

Moving forward, keep the interested investors (which should be all of them) updated as you look at properties. A simple email will suffice. Then, when you find a property, they are already well aware of how your business operates and how multifamily syndication works. As a result, they are more inclined to invest.

 

My third syndication deal was a 155-unit apartment in Houston, TX, where I took away three more lessons:

Lesson #3 – Go farther faster by playing to your strengths

For my first syndication deal (168-units in Cincinnati, OH), I did it all.

 

  • I found the deal
  • I performed the underwriting
  • I raised all the private money
  • I conducted the due diligence
  • I hired all the team members and was the main point of contact moving forward
  • I closed the deal
  • I was the asset manager.

 

While it was a great learning experience on how to buy an apartment complex, doing it all myself didn’t set the deal up for optimal success. Quite frankly, I am not an expert at many of those duties. For example, I am not a proficient underwriter. I am competent and know how to evaluate a deal and determine if it is good or not. However, I haven’t spent hundreds or thousands of hours focusing strictly on underwriting deals. Like most things, the more you do it, the better you get.

 

So on this deal, I learned that I needed to partner with someone who is phenomenal at underwriting large multifamily deals. Actually, I partnered with this person on my second deal – the 250-unit. This third deal only reinforced the need to do it again moving forward because it allows me to do what I’m good at and allows him to do what he’s good at. Again, we’re both capable of doing each other’s job, but we wouldn’t perform as proficiently.

 

As long as no missteps are made when selecting who to partner with, it allows the business to go farther faster because you are both focused solely on your crafts. Yes, there is overlap (for example, I triple check all the underwriting and review it in detail), but it’s better for someone with lots of experience to be the primary underwriter.

 

In good at buying apartment buildings with accredited investors. What’s something you’re really good at? What’s something you’re not good at? Do more of the former and less of the latter because it’s likely that you enjoy doing what you’re good at, which is why you’re good at it, and vice versa.

 

Lesson #4 – Do something consistently on a large distribution channel

If you are a real estate investor, you’re in the sales and marketing business. Fix-and-flippers, wholesalers, multifamily syndicators, etc. are all in the sales and marketing business. Perhaps passive buy-and-hold investors aren’t, but I’m sure there’s a creative way we could connect them to it. Regardless, since we’re in this business, we must have a consistent daily presence in order to gain exposure and build credibility with our customers/clients/leads.

 

Some large distribution channels (with some ideas for each) are:

 

  • BiggerPockets (official BP blogger, being an admin, posting, commenting, adding value, offering assistance, being insightful)
  • Amazon.com (writing books and publishing them)

 

Related: Self-Publishing Your Way to Thought Leadership, Leads, Money, and Much More

 

  • iTunes (podcasting)
  • YouTube (video blog, tips, interviews, make real estate music videos…?)
  • Facebook (create a community around an in-person event you host and then open it up to a larger audience)
  • Instagram (pictures of renovations before & after)
  • Twitter (proactively answering real estate related questions)
  • Meetup.com (host a frequent meet-up group)

 

Related: The 4 Keys to Building Relationships Via Social Media

 

Whatever you do, do it DAILY.

Do it consistently.

And do it on a large distribution channel.

Many people want the shiny object, the golden nugget, the Super Secret Plan that will let them retire on the beach in Tahiti. I think that’s ridiculous. We live in an instant-gratification culture. The truth is that to make a good living in real estate, you MUST be consistent with strategic, proven actions. That’s it, especially when it comes to buying apartment buildings and selling them later for a profit.

Lesson #5 – There is major power in doing a recorded conference call when raising money

This is going to be a super simple lesson, and you might even say “duh.” If you do, I don’t blame you, BUT it’s something I didn’t do on my first two multifamily syndications. I figured, if you don’t do it either, then mentioning this lesson briefly would help you out when raising money.

 

business team brainstorming around a laptop Here’s the tip: have a conference call with qualified investors to talk about your deal and record it!

 

When we were in the middle of raising money for this 155-unit apartment community, my business partner and I decided to have a conference call to present the deal to accredited investors. We did a similar call on our previous deal, but we didn’t record it. For this one, however, I did. It was tremendously helpful with raising money for the deal, mainly for two reasons:

 

  1. Most accredited investors are busy making money rather than going out and actively buying apartment buildings, which is why they actually have money to invest in the first place. This helps them listen to the presentation on their schedule.
  2. The questions being asked are from a group of people, which is beneficial to others who are listening but didn’t think of those questions.

 

Here’s how I record the conference call:

 

  • First, I make sure the attendees have the presentation prior to the call so that they can review it and come up with questions.
  • Next, I used freeconferencecall.com (I have no affiliation with them) and simply set up the call.
  • During the call, I have the attendees email me questions. That way, I know who is asking the questions, and I can follow up with them afterward.
  • At the end of the call, we do a Q&A session, and my business partner or I answer all the questions that are asked.

 

As you’re raising money, I highly recommend this simple approach. I’ve personally seen a benefit, and I’m confident you will too!

 

My company’s fourth syndication deal was the largest deal we’d closed. Around the time I closed this 320-unit deal (and still to this day), many people started to ask me how to buy an apartment complex and, more specifically, how they could break into the multifamily syndication business (i.e. raising money and buying apartment buildings with investors). So, I put a list together for anyone who wants to do bigger deals but doesn’t know how to use their special talents (we all have them) to make it happen.

 

So, as the read these six ways to creatively get into the business, try and think about which of these areas appeal to you the most? Which do you want to do? How do you want to spend your time? Remember the earlier lesson, if you’re going to be a successful multifamily syndicator then you’ll need to choose your primary area of focus. If you try to do it all, then you’re doing your investors and yourself a disservice. Why?

 

We all have special talents. We are all wired differently and process information differently. The key is to have a business where you have team members doing what they love to do and what they are good at (surprise, they go hand-and-hand), while you are doing the same. Yes, I have working knowledge of ALL 6 areas, and I recommend you do too before trying to buy apartment buildings. But, you can break in the business by having a specific focus and being strategic about how you leverage that focus.

So, here you go, the 6 ways to break into the apartment syndication biz:

Lesson #6 – Find an Off-Market Deal

By finding an off-market deal, you can bring it to an experienced investor who can close on it. But, before you actually look for deals or bring one to an experienced investor, figure out WHOM you should bring it to and qualify them to ensure you’re not doing unnecessary work. Your time is valuable.

 

To qualify them, make sure they:

 

  • Have closed on similar properties that you’ll be looking for
  • Are willing to structure the agreement in a way that meets your goals (more on this below)
  • Are trustworthy and provide references – don’t enter into an agreement lightly. Any partnership has major implications because you’re bringing in investor money.

 

Should you ask for a one-time fee or equity in the deal? Well, it’s nice to get a fee for finding a deal, but don’t you want the long-term benefits of being in a deal? I would. So while you might need to get a fee on the first couple deals because, well, you need to eat and have shelter, the more you do it, the more you should transition to being an equity partner for finding the deal. Don’t take a single-family home wholesaler’s approach. Rather, take a buy-and-hold investor’s approach because that is what ultimately sets you up for long-term financial freedom.
Practically speaking, if someone came to me with an off-market deal, then I would think it would be worth about $25k – $100k depending on some of the details (i.e. size, how good of a deal it really is, etc.).

 

Related: 4 Legal Ways to Get Paid Raising Capital for Apartment Deals

Lesson #7 – Conservatively Underwrite Deals

By conservatively underwriting deals, you can get into the business by taking your talents to a group (or person) who is getting tons of deal flow and needs help underwriting deals. My business partner and I get a ton of deal flow, so we brought on a couple MBA students at UCLA to help us with the initial underwriting. After they do the initial underwriting, we then take it from there and complete the analysis. We pay them $10k once we close on a deal, and then there’s long-term potential for them to be in on the deals as we grow our business.

So, if you’re a numbers nerd…ahem…numbers guy/gal, then this is a way to break into the industry of buying apartment buildings using syndication deals. I interviewed a 20-year-old who did this and helped close a $2.3M deal. I mean, come one, if a junior in college can do it, then why not you??

Lesson #8 – Negotiate Terms and Get all Legal Documents in Order

Getting a law degree is another way to get into the business. If you’re not an attorney or don’t want to get a law degree, then skip to the next lesson.

Here are some points to guide you along the way:
Seriously, this isn’t the most practical way into the business, but if you already have a law degree, then it might work. First off, the person responsible for the acquisition is likely the one who negotiates the terms, so really all that’s left are the legal documents.

 

Paying the cost of legal on syndicated deals makes more financial sense than bringing an attorney in on the deal as a General Partner in most cases. However, perhaps you can find a group that has grown to the point where it makes financial sense to have an in-house counsel. It’s likely even if you’re an attorney that you’ll need to combine this lesson with other things you bring to the table in order to make for an appealing partner for someone buying apartment buildings and other real estate deals.

Lesson #9 – Raise Capital for a Deal and Be the Ongoing Point Person for Capital Sources

business moneyBy raising capital for a deal and being the asset manager, you can get into the business by partnering with someone who has a proven track record in the multifamily syndication business. You bring the money, and they bring the deal. If you have a network of high net worth people, AND they think of you as a savvy business person, then this could be your ticket into the business.

Here are some points to guide you along the way:

  • Identify partners that are already buying up apartment buildings and have a successful track record.
  • Get an idea of how much you would make on a past deal of theirs if you raised XYZ amount of money – this gives you some benchmarks for how much you’ll make on future deals when you bring in the money.
  • Make sure the partner has money in the deal – otherwise, what do they have to lose if you bring in your money and your investor’s money and the deal flops? Always have alignment of interests.

 

Remember: if you’re raising money for other people’s deals, you must be on the General Partnership (GP) side. If you are not on the GP side and you are raising money then that’s against the law unless you have a Securities License. Be careful here. Make sure you’re on the GP side if you’re raising money for a deal.

 

I’ve written multiple posts on proven methods successful investors I’ve interviewed are using to raise capital:

 

  1. My Four-Step Apartment Syndication Money-Raising Process
  2. 3 Ways to Raise Over $1 Million for Your 1st Apartment Syndication
  3. A 5-Step Process for Raising BIG Capital For Multifamily Syndication
  4. 4 Principles to Source Capital from High Net-Worth Individuals
  5. 4 Non-Obvious Ways to Raise Private Money for Apartment Deals
  6. How to Overcome Objections When Raising Money for Multifamily Investing

Lesson #10 – Secure Debt Financing

Being a mortgage broker and securing the debt financing is another way to get into the business. If you aren’t a mortgage broker or don’t want to be one, then skip to the next lesson.

 

Even if you are a mortgage broker, similar to lesson #8, you’ll most likely get paid a fee (i.e. commission) instead of being brought on the GP side. That being said, I know of some groups that comprise of mortgage brokers, and they get in the deals by putting in their brokerage fee as the equity in the deal.

Lesson #11 Do Property Management

Become a property manager. As a property manager, you have lots of ways of breaking into the business of buying apartment buildings. Here are some:

 

  • Networking with local, aspiring investors who want to do deals but don’t have the track record. You can bring your team’s track record of turning deals around, and they bring the money for the deal. You have a lot of leverage here because, without you or someone like you, they couldn’t get approved for debt financing (and likely wouldn’t be able to raise the equity).
  • Work with an experienced group, and tell them you’ll exchange your property management fees for being in on their next deal. This could help them sell in the deal to their investors because it shows an alignment of interests. You have less leverage than the above scenario, but you still provide a lot of value.

 

You could even combine a couple methods and raise money for the deal while also trading your property management fees for being in the deal. The more money you raise, the more equity you get in the deal.

 

Or, you could raise money for the deal and get equity but not trade in your property management fees even though you’re managing the deal. Basically, you can slice it a lot of different ways. It’s only limited by your creativity and ability to add value to the deal. Ultimately your ownership should be proportionate to the value you add to the deal.

Bonus Lesson – Some Other Ways to Break into the Business:

  • If you’re a broker then put in your commission to be part of the deal. On my first multifamily deal (a 168-unit), the brokers on the deal put in their commission of $317,500 to become owners with us in the deal. It was a win-win because my group had to bring less money to the closing table, and they got to re-invest their commission into something that had major upside.
  • If you have experience in multifamily investing but don’t want to deal with the headaches of finding deals, you could do asset management for other investors.
  • You could also just do your own deal and all aspects of that deal (i.e. find it, get money for it, get financing for it, get right management partners, do asset management) similar to what I did when I started buying apartment buildings.

My company’s fifth syndication was a 296-unit, as well as our fourth purchase in a 12-month period. For this deal, I had two major discoveries. When I conducted my post-deal analysis, I looked at the investors who invested. More specifically, I looked at if they were new or returning investors, as well as how much each (new vs. returning) investor contributed to the total money raise.

 

For this deal, I found that 69% were new investors, and 31% were returning investors. However, the interesting thing I discovered was that the percentage of capital contributed to total money raise was almost split 50/50 between new and returning investors.

 

  • % contribution to total raise for new investors: 49.6%
  • % contribution to total raise for existing investors: 50.4%

So, here are a couple takeaways for anyone in the biz of raising money for their projects:

 

Lesson #12 – How to Keep Investors Coming Back

Investors new to buying apartment buildings likely won’t invest as much per person as returning investors. On this deal, 31% of my returning investors invested 50% of the total equity raise. However, after the 1st deal, the new investors were no longer new investors! So as long as you deliver and/or exceed expectations, it’s likely the amount invested will increase over time.

Lesson #13 – Top Investor Lead Generation Sources

Always have 3 ways to bring in new investors. Then convert them to returning investors. My 3 largest lead generation sources for new investors are:

Referrals from my current network. I don’t ask for referrals from my current investors or clients, but I do get them. One suggestion is to provide your investors (or potential investors if you don’t have them yet) with content that they can and want to share with their friends. For example, I wrote a book (Best Real Estate Investing Advice Ever: Volume 1) and mailed out TWO copies to each of my investors. I wrote a personal note to the investor on one of the books and told them the other book is for a friend of theirs that they’d like to give it to.

 

My podcast – Best Real Estate Investing Advice Ever Show. My podcast is the world’s longest-running daily real estate podcast. This daily show has provided me with a consistent presence via iTunes and Google searches. Most importantly, it helps people get to know me even though we’re not having a one-on-one conversation.

BiggerPockets. Since joining BiggerPockets, I’ve posted over 2,500 times and have been rewarded 10x over via the new friendships and relationships I have formed.

 

The sixth syndication deal my company closed on was a 200+ unit in Richardson, TX, which is a submarket of Dallas. After adding 200+ units to our portfolio, my company broke the 1,000-unit mark! As for this deal, the lesson I learned is simple. But before I mention it, let me tell you a quick story…

 

I had lunch with someone who asked me to meet with him. He was interested in raising money for fix and flips and was wondering how to go about doing so. He asked me a bunch of questions about where to find investors, what type of paperwork is needed, how to structure the investor conversations, etc., and I gave him answers to all the questions he asked.
He told me at the beginning of our meeting that he also wanted to see what I needed. And, true to his word, at the end of the conversation he asked me, “What can I do to help you out?”

 

I tend to get that question a fair amount of times, so I have three things I tell most people.

  1. Buy my book (all profits are donated to Junior Achievement).
  2. Listen to my podcast and write a review on iTunes
  3. Be on the lookout for off-market deals that are 150+ units

 

I appreciated him asking and was curious which one he’d pick and/or what he would say/do. He said he loved listening to audiobooks and that he would get the audio version of my book after he finished up with two or three other books he was currently listening to. I then had to leave, so we parted ways.
Question: How well did he do at adding value to my life?

 

Answer: To Be Determined. 

 

I sincerely applaud his effort and intention but there was no execution that I could see.

 

Is there a different approach that really impresses the person who you’re attempting to add value to? 

 

Yes.

 

It’s slightly different but has dramatically different results.

 

Here’s how:

 

Even though he’s in the middle of listening to two to three audiobooks, instead of saying “I’ll get to it after I’m done with the other books,” I would say, “I’m going to buy your book and will have it purchased by the time you get in your car in the parking lot!” BOOM.

 

Or, even better, “Joe, hold on one second. I’m ordering your book right now. That way I can write a review by the end of the month.”

 

Holy cow. What a difference that would’ve made from a perception standpoint. Is he spending the same amount of money and time regardless of which approach he takes?

 

Yep.

 

Is there a big ole difference between the perceived value that each of the approaches provides?

 

Oh yeah.

 

THAT leads me to the lesson I learned that was reinforced on this 217-unit deal.

Lesson #14 – Immediately Add Value

people shaking hands over a typewriter and files When you have an opportunity to connect with someone, it’s important you IMMEDIATELY add value to his or her life. It takes the SAME amount of time but generates DRAMATICALLY different results compared to if you wait.

 

The 217-unit deal was a syndicated deal. However, it was only with one investor. I met that investor because he reached out to me after hearing me on someone else’s podcast. I was able to get on that other person’s podcast because when we met, I immediately referred him to people who I thought could help him get more business.

 

It’s simple. But lessons don’t need to be complicated in order to be effective.

 

Please note: I am NOT calling out the person I met with. I applaud him for asking what he can do to add value and saying he’ll do it. I’m simply saying there is ANOTHER LEVEL to go in order to be outstanding. And that level is to IMMEDIATELY add the value in order to stand out. 

 

Tim Ferriss said on his podcast, “Be unique before trying to be incrementally better.” That’s exactly the lesson here. People simply don’t follow through with what they say most of the time. Therefore, instead of saying you’ll do something later, just do it then. You’ll be unique and the results can lead to BIG things.

 

The seventh deal was a 200-unit in Dallas, TX. That purchase put my company at over $100,000,000 in assets under management (1,438 units). And per usual, I conducted a post-purchase analysis to uncover any lessons or takeaways.

 

I realized that there’s a way to communicate with investors about deals that really resonates. I boiled it down so I could use it during my investor communications moving forward, and so that others can use it during their deals when they are raising private money.

 

But first, I need to provide some backstory.

 

What’s your favorite book? Mine is Crucial Conversations. The book explains how to navigate conversations when opinions vary and when the stakes are high. The main solution discussed is to come up with a mutual purpose, and then, build up from there.

 

What is the central theme of your favorite book? After looking at my bookshelf, I realized most of my favorite non-fiction books have one or, at most, three central themes. Then, the author uses the rest of the book to simply elaborate or add additional context to those themes.

 

Some examples…

 

  • Four Hour Work Week by Tim Ferriss: optimize your time by creating a system for things that you currently do manually
  • Investing for Dummies by Eric Tyson: Stocks, start-ups, and real estate are the three main ways to invest. Pick which path you want to take.
  • Blink by Malcolm Gladwell: You can make informed decisions in a blink of an eye because of what Gladwell calls “thin-slicing”.

 

So, what does this mean for us as real estate investors who are buying apartment buildings using the syndication structure? It means that if we can boil down our main talking points into central themes, then we can communicate more effectively and get more transactions closed.

Lesson #15 – Three Talking Points when Communicating a Deal to Investors

I’ve identified three themes to talk about ANY deal. They are market, team, and deal. Then, I focus on the top 1 to 2 selling points for each of those categories. Here is how I applied this during my last deal I closed – the 200-unit in Dallas:

 

Market

  • DFW is home to 25 Fortune 500 headquarters and has been a top growth market in the country for years

 

Team

  • My company currently controls over $70,000,000 in apartment communities in Dallas

 

Deal

  • Off-market deal being purchased at 26% below the sales comps
  • Projecting the same rent premiums on upgraded units that the current owner is achieving

 

By organizing your conversation talking points with investors into these three themes, it addresses all the relevant aspects of buying apartment buildings. Of course, you’re going to need to elaborate on each of them, but at least you’re making sure you’re covering all your bases and leading with the most important selling points on the deal.

 

This strategy helped me close on this past deal, and I’ll continue to use it moving forward. You get a lot of value from using it as well!

 

For further details on this strategy, listen to JF857: How to Communicate Succinctly through Complex Deals and In General #followalongfriday

 

More recently, I closed on my eighth and ninth deals, both in Dallas, TX. In fact, they are directly across the street from one another. After closing on these two deals, the value of assets under my company’s control was over $175,000,000. After reflecting on these two deals, I had one major takeaway. But before getting to that lesson, I want to provide some context.

 

There was an on-market deal that was highly publicized and marketed by a broker. My partner and I loved the deal. However, due to competition, the price kept creeping higher and higher, so we weren’t sure if the deal would make financial sense.

 

Directly across the street from this on-market deal was another apartment complex. The on-market deal was over 300-units and the majority of units are 1-bedroom. The property across the street was over 200-units and is primarily 2 and 3-bedroom units. Therefore, the two buildings naturally complemented each other.

 

Fortunately, we have a very good relationship with a broker in Dallas who also happened to know the owner of the apartment across the street. The broker reached out to the owner and, since it was an off-market deal, we were able to negotiate and get the property under contract at a significant discount.

 

At the same time, we were in negotiations for the on-market deal. Since we were purchasing the property across the street at a significant discount, we were comfortable bidding higher on the on-market property because we would have the cost savings that come from economies of scale.

 

One of the savings that results from economies of scale, for example, is the lead maintenance person. Instead of having one person onsite and paying them let’s say $50,000/property, you can split that cost. There are also economies of scale for marketing and advertising, leasing staff salaries and commissions, and property management.

 

Also, since one building is primarily comprised of 1-bedroom units and the other is comprised of 2 and 3-bedroom units, we have a natural referral source. If someone is looking for a 1-bedroom unit, we’ve got it covered. If someone is looking for a 2 or 3-bedroom unit, rather than saying “no can do,” we can send them across the street!

 

Now to the lesson I learned.

Lesson #16 – Find Deals in a Hot Market By Creating Opportunities

In order to find deals in a hot, competitive market, create opportunities. Don’t just look at what the brokers are giving you. Instead, get creative. Look at what else is around the on-market property, and maybe you can package two deals into one transaction.

 

I can almost guarantee nobody on the face of this earth was doing that for this deal. Everyone was looking at the on-market deal, but nobody looked across the street (or elsewhere in the surrounding area) and thought to themselves, “Hmm, I wonder if I could buy that property too?” Because if they had, they might have seen the same thing we saw – a natural opportunity to combine the two deals.

 

I can also tell you that this is the first time we’ve ended up buying two apartment buildings simultaneously. We had to self-reflect and say to ourselves, “Okay. If we get this one deal, then we can definitely pull it off from an equity standpoint, but what if we get two deals? We know we can do one, but can we really deliver on two?”

 

We had to have faith based on our track record of delivering on our previous deals. Lo and behold, we had one investor who had invested with us in the past few deals put up all the equity that we needed for both deals (minus the money that we put in).

 

Overall, it was a learning experience across the board, from how to find deals in a hot market (you create opportunities) and also when to strategically stretch yourself based on the situation at hand.

 

Conclusion

In total, I’ve completed seven multifamily syndication deals in a little over 3 years. Currently, I control six different buildings with a value of over $100,000,000. From these deal, I’ve learned 16 invaluable lessons regarding how to buy an apartment complex real estate:

 

  • Lesson #1 – Get the Property Management Company to Put Equity in the Deal
  • Lesson #2 – Prime Private Money Investors Prior to Finding a Deal
  • Lesson #3 – Go farther faster by playing to your strengths
  • Lesson #4 – Do something consistently on a large distribution channel
  • Lesson #5 – There is major power in doing a recorded conference call when raising money
  • Lesson #6 – Find an Off-Market Deal
  • Lesson #7 – Conservatively Underwrite Deals
  • Lesson #8 – Negotiate Terms and Get all Legal Documents in Order
  • Lesson #9 – Raise Capital for a Deal and Be the Ongoing Point Person for Capital Sources
  • Lesson #10 – Secure Debt Financing
  • Lesson #11 – Do Property Management
  • Lesson #12 – How to Keep Investors Coming Back
  • Lesson #13 – Top Investor Lead Generation Sources
  • Lesson #14 – Immediately Add Value
  • Lesson #15 – Three Talking Points when Communicating a Deal to Investors
  • Lesson #16 – Create Opportunities to Find Deals in a Hot Market

 

Did you like this blog post? If so, please feel free to share is using the social media buttons on this page.

 

I’d also be VERY grateful if you could rate, review, and subscribe to the Best Ever Show on iTunes by clicking this link: http://bit.ly/2m2XyM1

 

That all helps a lot in ranking the show and would be greatly appreciated. And if you have any comments or questions related to buying apartment buildings, syndication deals, or anything else investment related, leave a comment below.

When Do You Walk Away From a Deal? When This Happens.


I will always follow the “don’t let a deal die on your side of the table” philosophy. There is really never a reason to not offer SOMETHING to the seller.

Or, at least that’s what I used to think.

This week I was sent a deal for a 351-unit apartment community in Dayton, Ohio. I was told it is a distressed property and only 95 out of 351 are rented. The other units need rehab.

Ok, I’m cool with that. I’ve got team members that can turn that puppy around.

Seller wants 2.8MM for it and it’s been on the market for about a year.

Hmm, ok, something sounds fishy. Why has it been on market so long? But I still moved forward because perhaps it was just an unrealistic seller and now, after having property sit on market for so long, he/she will be more reasonable.

So I offer 1.9MM to get the ball rolling. They counter at 2.3MM.

Hmm, ok, sounds like we’re getting close here. I happen to be in Cincinnati at the time so I decide to take the short trip up to Dayton to view the area and the property. That way I can make a more informed offer.

When I visit areas one of the many things I look for is a McDonalds. And, I want to see how new the McDonalds is. Because if there’s a new McDonalds nearby that tells me some smart Fortune 500 people identified the area as growing. It ain’t the end-all, be-all but it’s a good indicator.

So, where do I begin about this property….

First off, the night before I leave I google the area and there’s a drive-by shooting 2 blocks from the property. And, as I’m driving around the neighborhood of the property there ain’t no Micky D’s anywhere.

So I arrive at the property and notice an iron rod fence that is destroyed. Apparently a drunk driver plowed through it and they haven’t fixed it yet. The most impressive part is the fence is on a 10 foot hill.

Anyway, as I walk up to the leasing office I notice a NO GUNS sign. I’m glad it’s there although later I’d be wishing I was packing some heat. When I tell the leasing agent that I’d like to rent an apartment they tell me point blank “you don’t want to live here.”

Hmm, yeah, you’re right I don’t but I tell her “well, I would like to see what you have available.” They don’t have anything available now but will be able to get me a good deal in about a month. I ask where it would be and they say “we’d put you right next to our office because the closer you are to us the less drama there will be.”

I have a feeling “drama” is code for something.

Still, that wouldn’t deter me from buying the place. As long as the numbers make sense. I know the seller bought it for 1.1MM cash so they don’t have mortgage on it. That means opportunity for me because we could do some owner financing.

Well, turns out they only have 45 apartments leased and none available now because of “renovations.” I tour a “renovated” apartment and…it…is…d.i.r.t.y. They even show me an apartment that just had someone move out – it was TRASHED. I was shocked they would be showing it to a prospective tenant.

The 45 apartments thing is a BIG deal because the 1.9MM offer price was based on having 95 units rented which is what the proforma indicated.

Mentally my offer price just dropped 50%.

At this point I’ve only seen the renovated apartments and still need to get a sense of what the other apartments look like and, specifically, how much work is needed to get them to rentable conditions. While talking to the property manager he lets slip the following bomb:

“The owners live in California and are trying to sell but haven’t been able to yet. They need to figure something out because the City of Dayton just mailed us our last warning on our windows with broken glass. Starting next month we’re getting fined $500 per building for every building with broken glass. There are 49 buildings so that is…(he punches in the numbers on his iphone calculator) a $24,500 fine…per month!”

“Why don’t you just board up the windows,” I ask.

“We’re going to have to but that’s going to cost over $100,000,” he says.

Damn. These owners are in trouble. But still, I’m a glass is half full kind-of-guy, so I see this as opportunity to get a better deal.

So here’s what I know at this point:

–        Super motivated owners who are bleeding money

–        Management staff that’s not good

–        Out of state owners

Sounds like a perfect storm to do creative financing. But, I need to determine one very important thing:

–        How much does it cost to rehab the community and how much will I make after it’s done?

The property looked like a Hollywood movie set where they just shot a riot scene and then excused all the cast members for the evening. It needed everything major. Parking lot, roofs, HVAC and everything in between.

I did a napkin estimate of 4M – 5M renovations.

Ok, fine. So what would it be worth after the rehab?

Well, the property is the largest in its submarket and the submarket’s average occupancy is about 85%. That means the much smaller properties are having a hard time leasing and if I have 351 units ready to be rented I’m going to have a VERY HARD TIME (i.e. impossible) renting them out.

It’s called “absorption”. Yeah you’ve got 351 units but that doesn’t mean people want to live in that area! Plus the rents on the existing 45 units were already very low.

I determined that if we did the 5M rehab then it might, MIGHT be worth 8M IF we could get it 85% occupied. And I just didn’t see any way of making that happen.

So, when do you walk away from a deal?

  1. If the seller isn’t realistic about their property’s worth after you do your due diligence
  2. If the cost and time to rehab the property is more than the after repair value

I scooted out of there having learned a very good lesson.

As far as the property goes? If I were the seller I’d recognize I made a bad investment because I didn’t know the area. Because that’s the key to all of this. If the area was ok or growing then you could make it work with a rehab. But the area simply won’t support the amount of rehab that’s required.

I’d actively market it everywhere and tell people to name their price. I’d take whatever I could get. Including, but not limited to, a 6-piece chicken nugget from the McDonald’s in the neighboring town.

 

 

 

 

 

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Here’s a Dirty Secret

One thing I don’t ever hear talked about is if you stay in real estate long enough then you’ll likely be sued.

That’s what happens when you deal with a lot of people over a long period of time. I haven’t been sued personally but I’m prepared should that happen. Hopefully it doesn’t! But, I am prepared and you should be too. Plan for the worst, hope for the best type thing.

The good news? There are two solutions to protect yourself. This video tells you both of them…

 

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