JF1459: Raising Private Money | Best Ever Apartment Syndication Book (Part 2 of 4) #FollowAlongFriday with Joe and Theo
Follow Along Friday is back and we’re talkin’ the latest book release again. Joe and Theo are going to tell us about part 2 of the Best Ever Apartment Syndication Book, which is all about raising money. Get an insight to the value this book will bring you by listening in on this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Mentioned in this episode:
- JF1353: How To Win Over An Apartment Broker (From An Apartment Broker) with Thomas T Furlow
- The Three Immutable Laws of Real Estate Investing
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Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
We’ve got an episode today that will help you attract private capital by aligning yourself with the right team members, especially if you have little experience and little credibility in the industry. Last week we talked about the experience component and how important that is, so this week we’re talking about the ways to attract private capital, as well as to attract the right team members who then help you attract private capital.
It’s a four-part series, and this episode is inspired by the book; it’s not out yet, but it’s available to pre-order. So you can go to ApartmentSyndicationBook.com, pre-order it… You’ve got a bunch of goodies when you pre-order it. Just e-mail the receipt to info@JoeFairless.com and you’ll get all those goodies.
Last week we talked about experience, this week we’re talking about credibility and attracting private money. Let’s get rockin’.
Theo Hicks: As Joe mentioned, last week, the first part, we talked about making sure you have the experience requirements before becoming a syndicator… So it’s having preferably both – past business experience and past real estate experience, but if you’re attempting to do your first apartment syndication, you’ve never done one before, you’re still gonna face a credibility problem in the face of potential passive investors, because if you’ve never done apartment syndication before, they’re gonna want to be confident that you’re gonna be able to return their capital.
So before you even find private money investors, you’re gonna need to address that credibility problem, and that’s where finding experienced team members comes in. That’s why one of the parts of the money part of the book is building your actual team. There’s a lot of different team members you need – you need a property management company, a real estate broker, you need attorneys, a mortgage broker, accountants…
In this episode we’re gonna focus particularly on the real estate broker, and we’re gonna go over some ways to win them over.
Joe Fairless: That is the challenge at the beginning; I know I had it at the beginning whenever I had broker conversations… I thought I was riding on my high horse with four single-family homes that I had at the time, and I thought for sure they would all just fall over and fight to talk to me, since I had these four single-family homes. Not at all… At all, at all, at all. [laughs] They were not very interested in talking to me, because I had four single-family homes, since I did not have experience with apartment communities.
So I personally came across this challenge. I wish I had this episode to listen to whenever I was going through this challenge, because it would have made it a much more seamless transition, and I would have been able to attract brokers quicker, I would have been able to grow faster, in a more effective way… But I didn’t. However, you do, so here are four tactics you can use to attract the best brokers in the market that you selected.
Theo Hicks: Yes. And the idea behind these four tactics is to put yourself in the mind of the broker and ask yourself “What do they want?” and based off what they want, how can you show them that you can get them what they want? At the end of the day, they wanna make their commission; in order to make their commission, they have to be confident that once they find a deal, the person they send it to has the ability to close. So since you’ve never closed on a deal before, you can’t leverage your past experience; instead, you can do these four things to prove to the broker that you are going to be able to close on a deal.
The first one, kind of obvious, but just pay them a consulting fee. So instead of waiting to pay them after closing on a deal, offer to pay them a couple hundred dollars an hour for their time. So if you are visiting properties with them, if you’re having conversations on the phone with them, log that time and offer to pay them a consulting fee.
Joe Fairless: I actually don’t think that’s obvious at all. I didn’t know of anyone who had offered that, and I forget the guest – maybe you remember the guest who mentioned this. He’s in the Carolinas, I believe.
Theo Hicks: Yeah, his name was T.
Joe Fairless: T, yes. He’s a broker. When he mentioned that, I’d never heard of it, and I’ve mentioned in a couple presentations when I’ve spoken at some conferences, and I hadn’t heard of anyone who had heard of it whenever I spoke about it… So I think that’s great, and it’s such a quality investment of a thousand dollars. A thousand dollars is a lot of money, but so is the rapport that you build with a top broker in the market, because you’re likely going to be making more than the thousand dollars; you’re likely gonna be making a hundred times more than that, or ten times more than that, or whatever size your deal is. So it’s a really good investment, in my opinion.
Theo Hicks: Number two is when you’re having a conversation with a broker, one thing you wanna do is ask them “How many properties have you sold in the past year?” and when they tell you that number, ask them for the actual addresses of these properties, go visit them in person, and take a look at the condition of the property, the location, the size… Anything that can let the broker know whether that specific property aligns with your business plan.
So you’ll visit the property and then you’ll follow up with your broker – either a phone call or an e-mail – and say “Hey, I went and visited your property at ABC Street. Really good deal. Here’s what I liked about it, here’s what I didn’t like about it.” Number one, it’s showing them that you’re proactively going out there and looking at deals, but two, it also gives them a better idea of the type of deal you’re looking for… Because some brokers might specialize in a specific type of deal, where other brokers might just look at any deal that comes in, no matter what the size or the asset class. So it’ll give a better understanding of the type of deals you’re looking for.
On a similar note, kind of a hybrid of this, is to do the same thing, but when they send you deals. So when they send you deals and you underwrite it, instead of just disqualifying the deal because it doesn’t meet your return goals, instead of just saying nothing, e-mail the broker and tell them what you liked about the deal and what you didn’t like about the deal, and why it was disqualified.
Essentially, look at the deals they’re sending you or the deals they previously sold, and tell them what you did and didn’t like about those deals as it relates to your business plan.
Number three is to provide them with information on how you’re going to fund the deal. Once you find your mortgage broker and you’ve had a conversation with them, reach out to your broker and say “Hey, I talked to ABC mortgage broker.” Once you fill out the personal financial statement or once they’ve told you you qualify for a deal, tell your broker that “We qualified for financing.”
Also let them know how you’re gonna actually pay for the down payment, so explain to them how you’re having conversations with passive investors, tell them how much money in verbal commitment you’ve had… Then also, since you’re probably not gonna be able to qualify for the loan yourself, let them know that you’re having a conversation with people who are verbally interested in signing on the loan and being a loan guarantor.
Essentially, anything that has to do with how you’re going to fund the deal or how you’re gonna qualify for financing, follow up with the broker and let them know and keep them updated.
Joe Fairless: And I would push this into number 1, or 1.b, because if they don’t have the confidence that you’re gonna close, none of this stuff matters unless you’re paying them the consulting fee, or by the hour.
My suggestion is to proactively address how you have access to capital or how you have capital yourself. That way it addresses the 10,000 pound gorilla in the room… Or elephant! I almost said monkey, and I was like “That’s a really heavy monkey…” Because they’re gonna be thinking about it the whole time you’re talking, “Can this person close? This is a great conversation, they’re nice, but can they close? Can they close? Can they close?” So just proactively address that one.
Theo Hicks: Exactly. I’m actually in the process of having real estate broker conversations. We actually talked to a guy yesterday, and that’s exactly what we do. When we give them our background, we mention exactly what we’ve done – not only our real estate background and our business background, but what exactly we’ve done in regards to syndications… So do we have a financing lined up? Do we have private capital lined up? Who do we have on our team so far? And just mention all that stuff up front, and then follow up with updates as you go.
As Joe mentioned, if you don’t address that from the beginning, they’re not gonna take you seriously at all, because they’re not gonna know if you have any of those things lined up.
So that’s kind of leading into number four, which is constantly follow up with your broker. You’ve got two ways – number one, drive to their properties and let them know what you liked about the properties, and number two, provide them with information on how you’re funding the deal… And any other update that you can provide to them that will show you you’re getting closer and closer to being able to close on a deal, you want to send that to them.
Every week or every two weeks make sure you’re constantly in contact with these brokers, letting them know that you’re taking action.
Joe Fairless: And there’s certainly a fine line there, with being a nuisance to being someone who’s proactively following up… And my suggestion is it’s what Theo mentioned at the beginning of our conversation – put yourself in their shoes; would you want someone e-mailing you weekly, saying “Hey, got a deal? Got a deal? Got a deal? Got a deal? Got a deal?” No, you don’t want that.
But would you want someone who you’ve told that you’ll follow up with them when you have a deal, and you also introduced them to some team members – would you want someone to follow up with you and say “By the way, thanks a lot for the recommendation, for introducing me to so-and-so. I spoke to her, and I’m likely gonna be bringing her on my team as well. Do you happen to have any recommendations for XYZ?” Maybe it’s a title company, maybe it’s something else. And the answer is yes, the broker would be usually totally good with that, because the broker knows that this is a relationship business, so when he/she is referring other team members of theirs out to potential clients, then they look good too to the title companies, to the attorneys etc. And it’s good to know their contacts are being actually contacted by the person…
So add value when you follow up. It’s important. Otherwise, it’s gonna have the opposite effect of what you’re intending.
Theo Hicks: Exactly. So these are four ways to win over the real estate broker that we’re gonna talk about today. In the book we follow a similar process and provide a similar explanation for the other team members, so how you win over the property management company, how do you find the correct accountant, and how do you talk to mortgage brokers – all that is also covered in the book. On this episode we’re touching on the real estate broker aspect.
Joe Fairless: Cool. And in ten seconds or less, what are the four things again?
Theo Hicks: Consulting fee, number one; so pay then. Number two is drive to their recent sales and tell them what you do and don’t like about that property. Number three is provide some information on how you’re going to fund the deal, and number four is constantly follow-up with new information and added value.
Joe Fairless: Cool.
Theo Hicks: So once you have the team lined up, and you have the credibility that comes from the team, now it’s time to find private capital.
Joe Fairless: Yup. And the challenge with private capital initially is your track record (or lack thereof). I’ve mentioned this multiple times, but the disclaimer one more time is I’m not suggesting that everyone should raise private capital. I am assuming at this point that you have the experience and the knowledge in order to safely navigate a deal to as what would be expected for the industry.
So if you’re just starting out, I don’t recommend raising private capital. But assuming that you’ve got some sort of knowledge, then this will help you gain that alignment of interest with team members so that you can attract the private capital.
Whenever I was starting out, that was a big challenge that I had, too; four single-family homes doesn’t amount to much from an experience standpoint, so instead, on the first deal, what I did is I had the brokers put in their commission into the deal, and they were part owners with us in the deal. What that allowed me to do is to speak to my private investors and say “Yeah, I don’t have the experience, but the brokers have four decades, five decades (or whatever it was) of experience, and they’re partnering with us on the deal because they like it so much. That went a really long way.
Essentially, what you’ll need to do is you’ll need to find some people who can address that experience challenge that you’re ultimately gonna come across when you’re starting out, and you will give up a portion of the deal – that’s just how it is – or a whole chunk of the deal, but who cares, because you’re getting that track record. So it’s important to have that mindset of “Yeah, I’m gonna give up a decent amount of the deal, but it’s gonna get me in the door.” This is a temporary challenge, and once this is addressed, after a couple deals or maybe even one deal, then I won’t have to do that, or I won’t have to do it as much as I used to.
Theo Hicks: These are all things that you can leverage when having the conversation with your passive investors, and saying “Hey, you’re investing money in the deal, I’m investing my own money in the deal, and I’ve got alignment of interest with my team members” based off of the five things that I’m going to explain right now, of how you can have alignment of interest with your team members.
These start from the lowest to the highest level of alignment of interests, and you can do this with different team members. The first level or the lowest level of alignment of interest is just bringing on the qualified team members. As you’ve mentioned before, bringing on a qualified real estate broker, bringing on a sponsor or a mentor, or bringing on a qualified property management company on your team.
Joe Fairless: Or all of them.
Theo Hicks: Of course, you need all those people… So that’s number one – bringing on a qualified team member. But that’s the lowest, because they don’t really have any skin in the game whatsoever; they’re just helping you manage the deal.
Number two is you bring on this qualified team member and then you give them a percentage of the general partnership. So you bring them on and you offer them a percentage of the general partnership; this is number two. The reason why it’s not higher is because they still actually don’t have skin in the game. Yeah, the amount of money they’ll make is based off of the success of the deal, but they’re not gonna lose any money… Which is why the next tier up, number three, is bringing on a qualified team member, giving them a percentage of the general partnership because of their investment of money in the deal. So just giving it away to them, and now they’re gonna invest their money in the deal for that chunk of the general partnership, so now they actually have skin in the game.
Joe Fairless: But the money is treated as limited partnership money… But as part of the negotiation, you say “Yeah, if you also invest in the deal, then you can be in the GP because of your track record.”
Theo Hicks: Exactly. So now they have skin in the game. The fourth level is the previous three levels, but they’re also having other people that they know bring money into the deal. So they’re having their own investors invest in the deal.
Actually, when you’re having initial conversations with your real estate broker or your property management company, that’s a question that you can ask. You can ask them “Do you have investors who would be interested in investing in apartment deals?” I’ve asked every property management company and real estate broker I’ve talked to that question, and much to my surprise, they all said they do have people who are willing to invest in these types of deals. I was actually surprised when they said that, because I didn’t know. I figured that maybe it’d be 50/50, but all of them have said it so far.
Joe Fairless: Wow, it’s interesting…
Theo Hicks: So again, number four is bring on the team member, having them invest and having someone on their team or someone that they know invest as well. And the fifth is having them actually sign on the loan, so having them be a loan guarantor. That way, they’ve got a lot of skin in the game – they’ve got their money in the game, they’ve got their personal finances in the game…
So if you tell your investors that “I’m investing in the deal. I’ve got qualified team members who are investing in the deal, they’re bringing on people to invest in the deal, and they’re signing on the loan”, that’s pretty impressive.
Joe Fairless: You just locked it up, yeah. You just locked it up, the credibility, absolutely, when you do that.
Theo Hicks: So for these five levels, as I’ve mentioned, they’re going from lowest to highest alignment of interest, but there are three team members that can do any of these five. You’ve got your real estate broker, a sponsor or a mentor, a consultant, and your property management company.
For those three, the property management company would result in the highest level of alignment of interests, because there’s not only alignment of interest through bringing on money, bringing on other people’s money, signing the loan, but they’re also involved in the day-to-day operations of the deal.
The next would be a sponsor, because they’re not gonna be involved in the day-to-day operations of the deal, but they do have experience, so you can leverage that and tell your passive investors “Hey, I’ve got this sponsor who’s got 1,500 units in this area. They’re investing in the deal and they’re gonna allow me to ask them questions if anything were to come up.”
And then the one that is the lowest is the real estate broker, just because they’re obviously signing off on the deal up front, but once they get their commission, they’re not necessarily involved in the deal any longer, besides making the money based off of which tier of alignment of interest they’ve decided to pursue.
Joe Fairless: And a bonus one, number six, would be to give the property management company a little bit less than what they were wanting on a monthly basis, but then back-load that once you achieve your metrics that are in the proforma, and give them a bonus that is twice as much as what they would have made with that whatever you lowered it by.
Let’s say you lower it by $100,000, because they were gonna make a certain percentage, but now they’re gonna make 100k less over five years as a result of the fees; however, when they help you achieve the metrics by effectively managing the property, they receive a bonus of 200k in five years, or in two years when you do a refinance, or a supplemental loan.
That will show alignment of interests with the deal, because the property management company gets a bonus, and it also does not give them any equity in it; you just have to have some sort of contract drafted up that shows those terms.
Theo Hicks: Exactly. And then also, it’s essentially a value-add opportunity, because when you underwrite the deal, if you’re lowering that property management expense, your expenses are going down, so the ongoing cash-on-cash return is going to be higher, and then instead of paying that off each year, you’re just paying off that big chunk of equity you make at the end.
Joe Fairless: Yeah. It can actually help you on the acquisition front too, because you can underwrite it a little bit differently than what other people are underwriting, because your expenses are lower than what other people’s expenses are. You just don’t have as much upside on the back-end, because you’re giving them a bonus… So as long as the numbers work on the back-end, that could be a way to get a deal that perhaps you wouldn’t have gotten otherwise, because you were underwriting it differently.
Theo Hicks: Exactly. So that’s the approach you wanna go with how to have that conversation with the property management company up front during the interview process. To quickly summarize, the six different ways to create alignment of interest with your team members, going from lowest to highest, is number one, bring on a qualified team member with a property management company resulting in the highest, followed by a sponsor or a mentor, followed by the real estate broker.
Number two is to give them a percentage of the GP. Number three is to have them invest as limited partner in the deal. Number four is to have them bring on other people to invest as limited partners in the deal. Number four, have them sign the loan, and number six, reduce their ongoing payment and double or triple it at sale.
Joe Fairless: Or some sort of capital event, if you do a refinance or supplemental loan. Great stuff. Got any updates this week?
Theo Hicks: I don’t. What about you?
Joe Fairless: I decided to sell the three homes, but there’s a wrinkle in the plan, and that is I looked at the leases. They expire this coming summer, so we’re basically 12 months away… Therefore what we’re doing is we are sharing the deals with our property management company, who said they might have investors who are interested… So there you go.
If you look at the 1% or 2% rule, they’re 0.7% across the board… So it wouldn’t be as much cashflow. I’m not sure if an investor would want it… Who knows, we’ll see. I really don’t care. If not, then I’ll just sit on them for 8, 9 months and then sell them retail next summer.
Theo Hicks: Yeah, that’s an advantage of having the single-family rentals, unless of course the lease isn’t expiring for a while.. But you can sell it to live there as a regular homeowner, or you can sell it to an investor, so you kind of have a larger market.
Joe Fairless: Yeah. The only reason I’m doing it I’ve got 349k trapped in those homes in equity, and I make like $250/month maybe, in total from those three homes, because if there’s repairs, or a tree falls on a car or something like that… And plus the liability of having those homes… It’s time to take those and put that money into our deals.
Theo Hicks: Are you allowed to 1031 into a passive investment?
Joe Fairless: Technically, yes, you are… For our group, we don’t accept 1031’s unless it’s 3 million or more, because we’ve gotta restructure the whole kit and caboodle, and it’s just not worth all that brain power from attorneys and us, and coordination, logistics… So if one of our investors asks us if they can 1031 into our deals, the answer is if it’s 3 million or more.
However, we do 1031’s from one deal to another, and we have, but we just don’t accept outside 1031’s that are not our deals. So I could not 1031 my proceeds from these homes into one of our deals, because it’s missing one zero at the end.
Theo Hicks: It makes sense. Okay, I hope you sell those puppies and get to invest that money into the next deal. If not, then I guess [unintelligible [00:26:27].03] opportunity to sell them in the next year.
Joe Fairless: Yup.
Theo Hicks: Alright, so before I conclude, make sure everyone listening, guys and girls, goes to the Best Ever Show community on Facebook. That’s BestEverCommunity.com. We’ve got over 1,000 active real estate investors asking questions, posting content and responding to our Best Ever Community questions of the week, where we will take your answers and create blog posts.
This week’s question is what year do you think the next downturn/recession/market correction will happen, and why? I’m looking forward to reading your responses and your predictions on when the next correction/recession/whatever terminology you prefer to use, is going to happen. We will take all the responses and create a blog post next week.
Joe Fairless: My favorite so far has been — I can’t remember who it was, but he said something like “I don’t know, it’s just speculation. No one knows.”
Theo Hicks: Yeah… It’s all speculation.
Joe Fairless: Yeah, and then someone said “Amen!” and I liked that, because… Who knows? More importantly, make sure that our investments, your investments are set up to handle a market correction. That’s more important. Why try to time it? It’s fun to talk about it, I guess, but why not just set it up so you’re gonna mitigate risk as much as possible along the way?
Theo Hicks: It was Julia, and she said “No one knows, and it’s a futile exercise.”
Joe Fairless: There you go, Julia… [laughs] I love Julia, she’s a character. Yup.
Theo Hicks: Everyone knows every single year, every single month, every single day there’s someone writing an article saying the crash is coming tomorrow, it’s gonna be the biggest crash of all time. People have been saying that ever since there was a market to crash, so… As she said, probably a futile exercise; make sure you’re set up for success no matter what the market is.
Joe Fairless: It’s a good conversation, and perhaps that’s why we posted it, but I agree with Julia, who knows…? But just set yourself up the right way so you mitigate risk, and we’ve talked about that – you just google “three immutable laws of real estate investing joe fairless” and that’s how you do it.
Theo Hicks: Exactly. Alright, and then lastly, everyone, guys and girls, please subscribe to the podcast on iTunes and leave a review for the opportunity to be the review of the week. This week’s review comes from Shae Carr, with the title “I’m a fan.” Their comment was:
“Informative, short and to the point. This podcast is enjoyable and truthful. Thanks for sharing your tips with the world.”
Joe Fairless: Well, thank you, Shae. I appreciate you spending some time and investing that into writing the review, and thank you for listening, and I’m glad you’re getting a lot of value from it. Please everyone leave a review; that will help us get high-quality content, and help you out ultimately.
Thanks for listening, thanks for hanging out, and we’ll talk to you tomorrow.