JF1492: Why Apartment Syndications? Part 1 of 2: Syndication School With Theo Hicks
Purchase Apartment Buildings Using the Syndication Process
Joe and Theo teamed up to make a brand new segment of the podcast called Syndication School to demonstrate how to raise money for real estate investing. Theo will be making two new episodes of this segment each week. These episodes will be focused towards, surprise, surprise – apartment syndication and purchase an apartment building.
This first episode is an introduction to apartment syndication and why you would want to do it. If you enjoyed today’s episode, remember to subscribe to the Best Ever Show in iTunes and leave us a review.
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Do you need debt, equity, or a loan guarantor for your deals?
Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.
I have used him for both agency debt and to help with raising equity to purchase apartment buildings, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him at firstname.lastname@example.org.
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the apartment syndication school, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome to the first ever syndication school episode. I am your host/instructor, Theo Hicks. Joe and I created the syndication school in order to provide you with a free apartment syndication education so that you have the tools to launch your own syndication business.
Each week we will air a two-part series about the apartment syndication process. As an added bonus, for the majority of the episodes, we plan on offering a free resource for you to download. This could be a list or a spreadsheet that will be a companion for the episode that was aired. All the episodes, all of the resources, and the ongoing syllabus for the syndication school are available at syndicationschool.com.
Now, with this being the first episode, we are going to start off by giving an overview of the apartment syndication process. In this episode, we’re going to discuss what an apartment syndication is, as well as discuss this overview of the process in order to give you a glimpse of future episodes and the types of things we’re going to be talking about in the syndication school.
Next, we’re going to have a conversation about raising money for your own deals, versus using your own money to buy apartments, as well as the role you should be playing in a syndication based off of your background, whether that’s as the syndicator, or the investor, or as both.
What is Syndication and How Do You Use it to Purchase Apartment Buildings?
To begin, what is an apartment syndication? The textbook definition of a syndication is a temporary professional financial alliance formed for the purpose of handling a large apartment transaction, that could be hard or impossible for the entities involved to handle individually… Which allows companies to pool their resources and share risks and returns.
In regards to apartments, a syndication is generally a partnership between the general partners, which is the syndicator, and the limited partners, which are the passive investors, to acquire and sell an apartment community while sharing in the profits.
That was a mouthful… Essentially, what an apartment syndication is, is raising money from qualified investors to acquire apartment communities, while sharing in the profits. The high-level apartment syndication process based off of that definition is first you select a target investment market – this is where you’re actually going to invest.
Pick Your Team and Perform Your Due Diligence
Next, you’re going to build your core real estate team, which includes a property management company, a real estate broker, a mortgage broker or a lender, a real estate and securities attorney, and a CPA. Next, you’re going to focus on finding capital and securing verbal commitments for investors.
Once you have the market picked, team in place, and the money, then you’re gonna start looking for actual deals. As deals start to come in, you’re gonna underwrite these deals, which is when you do the financial analysis and submit offers on qualified deals.
Once the deal is under contract, assuming your offer is accepted, you’re going to perform the due diligence and secure financing from your lender, as well as secure actual commitments from your investors to fund the deal, at which point you will close and execute your business plan, and eventually sell the property for a profit.
That’s the high-level overview, and for each of those, later on in this Syndication School, we’re gonna go into a ton of detail, as well as provide you with free documents in order to help you with each of those steps in the process.
How to Raise Money for Real Estate Investing
Now, with an apartment syndication being the act of raising money from qualified investors to acquire apartment communities while sharing in the profits, when you are determining whether or not that’s something you want to do, the two main questions you wanna ask yourself, once you made the decision to actually buy apartments, is do you wanna raise money to buy apartments, or do you wanna use your own money to buy apartments? Or do you want to be the person who actually manages the deal, so do you wanna be the general partner, or do you wanna be the limited partner and be the passive in the deal?
Those are the two main decisions you have to make, again, after you made the decision to buy apartments, which we’ll go over in part two, comparing investing in apartments to all of the other strategies.
So in regards to raising money compared to using your own money to buy apartments, let’s go over a list of pros and cons. For the majority of these comparisons, there really is no objective correct answer. There’s no answer that raising money is good for everyone, and using your own money is bad for everyone. In reality, it’s based off of your goals, and where you’re at in your real estate career, your business career, how much time you have, things like that.
When you’re listening to this, listen to the pros and cons and ask yourself “Do these benefits outweigh the cons for me and my particular situation?” With that said, let’s discuss the pros and cons of raising money, compared to using your own money to buy apartments.
The Pros of Using Syndications to Purchase Apartment Buildings
An obvious pro of raising money has to be the scalability. When you’re buying real estate with your own money, you are limited by the amount of money you make, whether that’s your job, money your parents gave you, money you made from other investments… So you’re limited by that in order to fund the deal. Yes, of course, there’s ways to creatively finance, but you can do creative financing whether you’re using your own money or using other people’s money… So that’s why we’re not going to discuss that.
So, for raising money, your scalability is limited to the amount of money you can raise. If you can’t raise any money, then obviously you can’t scale quickly, but after listening to Syndication School – and in future episodes we’re going to take a deep dive into raising money – you will have the tools and the skillsets to raise money, which will allow you to raise more money from other people than you can save up yourself, which means you could buy more real estate, because you’ll have more money for down payments.
Another pro of raising money versus using your own money is your return on investment. If you’re using your own money investing in a deal – let’s say you’re buying an apartment, you put down 20%-25%, the property makes an 8% return each year, so you’re making an 8% return on your capital. Whereas if you buy that same property using other people’s money, of course you’re going to most likely fund a portion of the investment yourself and be a limited partner, but you’re not funding the entirety of the deal. That small investment you’re making as a limited partner will likely make that same 8% return, but at the same time, since you’re active in the business as a general partner, you’re going to make money in other ways, which we will go over in a future episode. As an example, you’ll make an acquisition fee at purchase, which will be a percentage of the purchase. And you’ll make an ongoing profit from the profit split that you set up with your investors, as well as a large lump sum profit at the sale.
All the money you make as a general partner comes through your effort and time commitment, versus actual capital into the deal… Which means that you’re able to become an apartment syndicator without necessarily having to have hundreds of thousands of dollars to buy apartments on your own. So less money in the deal, plus the higher returns you’ll make, means a higher return on investment.
Meeting the Need to Contribute
A third pro, and one that I think is important and is not necessarily a financial pro, but — it is contribution. If you’re a Best Ever listener, you know that Joe is a huge fan of Tony Robbins, and one of his six human needs is contribution, the need to contribute. When you are using your own money to buy your own deals – yes, you’re making money for yourself, and you can use that money to donate, to helping your family out, but when you’re raising other people’s money, you get those benefits, because obviously you’re still making money yourself, but you’re also helping others to make money, you’re also helping others to achieve their financial goals. And with that, when people achieve their financial goals, they have more time to spend on the things that you’re also spending time on contributing – volunteering, spending time with your family, going on vacations, and just living a better life for yourself and for others.
So again, not only are you contributing to yourself and your family, but you’re allowing others to do the same by using their money to buy profitable apartments and distributing them a solid return on their capital.
And then lastly, the fourth pro that we’re gonna discuss is the prestige, the significance that comes from owning these large buildings. Of course, you can get the same feeling from owning properties yourself, buying properties with your own money, but in combination with the scalability aspect, you’re not gonna be able to have and control as much in apartments as you would be able to use other people’s money, and with that comes the prestige of knowing you control a large amount of real estate; you’ll likely be invited to speak on other people’s podcasts, speak at conferences… Which also allows you to contribute more and add value to other people, and allow you to, for example, make a syndication school and teach others how to replicate your success.
The four main pros of raising money compared to using your own money to buy apartments – again, to repeat those, that’s scalability, a larger return on investment, the ability to contribute more, as well as the prestige and significance that comes from owning a large amount of real estate, as well as contributing and helping other people reach their financial goals.
The Cons of Using Syndications to Purchase Apartment Buildings
Now, what about the cons? Of course, being the Best Ever podcast, we’re not going to just tell you the cons, but we’re also going to mention things that you can do to overcome these cons.
Networking and Navigating How to Raise Money for Real Estate Investing
The first con of raising money compared to using your own money is the fact that you need to have access to other people’s money, which means you have to have a network of people who are liquid and trust you enough to invest in your deals. Of course, raising money is a major aspect of syndications, and there will be a lot of future episodes focused on strategies for raising money. But that’s one con – you need to raise money.
Sharing the Deal with Partners
Number two, another con is that you’re going to be giving up the majority of the deal. If you are buying a 10-unit apartment on your own, you own 100% of the deal, compared to raising money for a 10-unit, and the majority of the profits are going to be going to your passive investors. Now, of course, in combination with the pros, since you’re gonna be able to buy larger buildings, it’s likely that the smaller percentage that you own in a larger apartment deal is gonna be more than you owning 100% of a smaller deal. But again, objectively, you are giving up a percentage of the deal to your passive investors and any other team member you bring on to the general partnership.
Another con of raising money is there is likely going to be more stress, because you are using other people’s money, and if that’s something that you are fearful of or hesitant to do, then you’re likely gonna have some anxiety. But we are going to do a whole episode on how to overcome that fear of using other people’s money, and how to overcome the obstacles and the excuses that we say to ourselves in regards to why we can’t raise money from other people.
I think listening to that future episode is gonna be very helpful for those of you listening who are telling yourselves “Well, this sounds great, but I’m kind of afraid to use other people’s money, I’m afraid to lose other people’s money etc.”
And then the last con, which is something that’s gonna be repetitive throughout the first couple episodes, is this larger barrier of entry or a larger time investment. So when you are buying with your own money, then you can spend as little or as much time on the deal as you want. You should be having frequent reviews with your property management company, overseeing a business plan, finding new deals… But when you are bringing other people’s capital into the mix, there’s some extra duties required. You have to communicate with your investors on an ongoing basis before you find a deal, once you actually have the deal, and also after you close on the deal.
You’re gonna have to do things like build a brand in order to attract these investors to your business. There’s the process of all the paperwork that’s involved with actually securing the commitment from your investors and things like that. But again, at the same time, you’re going to be spending more time on these larger deals, but you’re going to also be making more money on these deals, since they are larger and you’re not gonna be able to buy as large of apartments on your own.
And at the same time, there’s also gonna be a larger barrier of entry, because, in order to raise capital, one of the major things you need to have is trust. One of the ways you get trust is by displaying expertise, which comes from creating a thought leadership platform, but also just having experience in real estate, having expertise on the actual apartment syndication process, having a h3 business background, and then the time investment to actually create a team before you even start looking for deals.
In fact, series number two – so not the next episode, but the next series – will be focused on the experience and educational requirements to become an apartment syndicator.
So those are the four cons of raising money compared to using your own money. Again, as you need access to the capital, you’re gonna be giving up a majority of the deal, there’s gonna be that potential anxiety from using other people’s money, and also there’s gonna be a larger time investment ongoing, as well as a larger time investment before you start buying apartments.
Weighing Your Options
As I mentioned before, you want to take these pros and cons and ask yourself, “Which one of these apply to me?” If you don’t have anxiety using other people’s money, then that con is not very relevant. If you have access to capital, or you know high net worth individuals already, or you’re confident in your ability to expand your network, then that con is not really relevant to you.
If you’re okay giving up the majority of the deal because you know it’s gonna be a larger deal and you’re gonna be making more money than you would have been otherwise, then again, that’s not very relevant to you, whereas for some people, all four of those cons might be a big deal and might either make them not wanna be a syndicator, or let them know that “Hey, I’ve got a couple of years of work I need to do before I’m ready to start raising money, and maybe I should buy a couple of deals on my own first.”
The next distinction or the next question you wanna ask yourself besides “Do I wanna raise money or use my own money?” is “Okay, so I wanna be an apartment syndicator, I wanna be involved in apartment syndications, but should I be the actual general partner? Should I be an active apartment syndicator, or should I be more passive first and be a limited partner?” First, let’s define what those terms mean.
Limited and General Partners and How They Purchase Apartment Buildings Together
A limited partner – this is a textbook definition – is a partner whose liability is limited to the extent of the partner share of ownership. Essentially, what that means is they’re the ones that fund a portion of the investment and their liability is limited to that investment… Whereas a general partner is the owner of the partnership and has unlimited liability. The general partner is the managing partner and is active in the day-to-day operations of the business, and they’re responsible for managing the entire apartment project from start to finish.
The Pros of Becoming an Active Investor
So what are the pros and the cons of being a general partner, being active, being the actual sponsor or syndicator, compared to being more passive and being a limited partner? The first pro is more control. Since you are managing the entire apartment project, you have control over the majority of the decisions that are made. You get to decide what market to invest in, you get to decide what investment strategy to purse, you get to decide what team members to bring on, the types of deals that you’ll look at, which deals to actually invest in and not to invest in, deal structure, loan structure, the types of renovations, and the list goes on and on. You get to control everything.
Whereas, if you are the limited partner, you only get to control the syndicator you work with. So you can’t decide all those factors, you can just ask the syndicator “Hey, what type of investment strategy do you have? What market are you investing in? Who are your team members?” and then from there decide whether you want to work with that syndicator or work with someone else.
Another pro of a general partner over the limited partner is the financial barrier of entry, which I’ve briefly mentioned before… But you don’t need a lot of money yourself to get started as an apartment syndicator. As you know if you are a loyal listener of the podcast, Joe had less than six figures in his bank account when he syndicated his first deal… So you don’t need a ton of money.
Of course, there is going to be a higher barrier of entry in regards to experience, but you don’t need to have a large lump sum of money saved up… Whereas if you wanna be a passive investor in certain deals, you’re only able to be an accredited investor, which means that you need to have an annual income of $200,000, or $300,000 jointly, or a net worth exceeding a million dollars. Of course, if you have that, then you could be an accredited passive investor, but if you don’t, then there’s gonna be some time involved in building up that net worth and that annual income.
The Cons of Becoming an Active Investor
The cons of being a general partner to the limited partner has to do with, of course, the time commitment. With all that control comes more responsibilities, more duties. All those things you get to pick and choose from, you actually have to do that, as well as execute the business plan on an ongoing basis… Whereas the limited partner just needs to initially screen the syndicator, and then as deals come in, screen those deals to determine if those are worth investing in.
So it’s possible, but it’s gonna be very difficult for you to be an apartment syndicator while having a full-time job. It’s possible if you’re able automate some systems, build a solid team, or if you partner up with someone who does more of the day-to-day operations and you focus more on other aspects of the business in your spare time… But if you’re gonna be doing everything yourself, it’s gonna be very difficult to be the syndicator; it might make sense to passively invest first, until you have the time to be an apartment syndicator.
Then also, of course, there’s gonna be that experience barrier to entry, which we’ll go over in series number two… So again, not the next episode, but the next series – we’ll go over the experience requirements needed before becoming an apartment syndicator. And of course, you’re gonna need education as well, which will take some time.
Comparing Limited and General Partners
Overall, when comparing the limited partner to the general partner, the limited partner is someone who is comfortable giving up control, and are pretty busy with a full-time job, but still want to receive the benefits of owning apartments… Whereas the general partner is going to be someone who wants to create a full-time apartment business, and again, has the time and those experience and educational requirements in order to do so.
When I said that the limited partner wants the benefits of owning apartments – this transitions into part two, which is where we’re going to be focusing on comparing the apartment syndication strategy to other investment strategies.
This episode we focused on kind of defining what apartment syndications are and, based off of your background determining, if it’s the right fit. Now we’re gonna talk about in what situation the apartment syndications are superior to other investment strategies, and we’re gonna be talking about single-family rentals, we’re gonna be comparing it to smaller multifamily, which is up to 50 units, we’re gonna be comparing it to REITs and other stock-like investments, as well as comparing it to development.
Thank you for listening, and I will talk to you again in part two.