JF1758: How To Secure Commitments From Your Passive Investors Part 3 of 8 | Syndication School with Theo Hicks
We learned how to create a quality investment summary to show to our investors with the two Syndication School episodes from last week. Now we’ll start learning more about emailing our investor database. How to build a list, when to mail to them, what to send them, etc.. So grab your notebook and hit play, get ready to learn more about the apartment syndication process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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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 back to another episode of the Syndication School series, a free resource on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.
Each week we air two podcast episodes that are typically a part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, spreadsheet, template, some sort of resource for you to download for free, that accompanies the series. All of these free resources, as well as the free Syndication School podcast series can be found at SyndicationSchool.com.
This episode is going to be a continuation of a series we began last week. This will be part three, and that series is entitled “How to secure commitments from your passive investors”. If you haven’t done so already, I recommend listening to parts one and two, which were aired last week, or if you’re listening to this in the future, the episodes that were seven and six episodes ago, where we introduced the five-step process for securing commitments from your passive investors.
Now, at this point in the process you should have a deal under contract, and if you remember from the previous two series, there are three things that you should be doing concurrently, after you place a deal under contract. Number one is to secure financing on your deal, number two is to perform due diligence on the deal, and then the third is to secure commitments.
At this point you really need to have listened to all of the Syndication School series, or at the very least the previous two episodes. Or if you’re just interested in learning specifically how the process of actually funding the apartment deals happen, then this episode and the series is good for you as well.
As I mentioned, this is the continuation, part three. In parts one and two we focused on step one of the commitment securing process, which is to create that investment summary. Now we’re gonna talk about step two, which is to e-mail your investor database. Once you have your investment summary created, and you created that long 20+ page PowerPoint presentation that highlights the entire deal – the numbers, the financials, the property description, your business plan, the market, things like that – then the next step is to actually let your investors know about the deal you have under contract. Logistically, the best way to do this is to create some sort of automated e-mail.
When Joe first started out, he actually sent each of his individual investors an e-mail. So he went into Gmail and then he had his list of investors, and so he made 10, 20, 30+ different e-mails and e-mailed all of them individually. Obviously, this is technically possible if you’re doing your first deal and maybe only have a handful of investors, but eventually when you get to Joe’s level and you’ve got thousands of investors, that’s gonna take an entire day to write e-mails, to send out the e-mails. So again, if you wanna do that, more power to you, but in order to save yourself a lot of time, and also to make your new investment offering e-mails more professional, then you can create a nicely-designed e-mail using an automated e-mail service. The one that we use and that we obviously recommend is MailChimp.
If you go to MailChimp.com and create an account, I believe it is free up to a certain amount of people on the list – maybe 50 – and after that you have to pay a monthly fee… But MailChimp allows you to import a list of as many people as you want, and then they have a process that guides you through creating your first e-mail campaign, and there’s a lot of built-in templates and things you can drag-and-drop to make your e-mail look very professional.
I think I’m going to a link for this episode that is an example of one of Joe’s e-mails, just so you can see how it flows, how it’s designed. Obviously, when you take a look at that, it’s something that you can’t do using something like Gmail, for example.
So MailChimp isn’t the only one, but that’s just the one that we use, and so for the rest of this conversation today I will go ahead and assume that you’re using MailChimp.
The goals – there’s actually four goals of this initial e-mail to your investors. Now, at this point, unless you’re doing a 506(c) offering, your investors should know who you are; they should have received a few e-mails from you already, and you should have had conversations with them on the phone… So this e-mail is not gonna be completely out of the blue. If it’s your first deal, then all these investors have been anxiously awaiting this first e-mail, so they can invest in your first deal.
The four goals of this e-mail is to 1) notify your list of investors that you have a deal under contract; 2) provide your investors with a summary of the investment; 3) send them or offer to send them the investment summary; 4) invite them to a conference call.
I’m gonna go ahead and actually use an example e-mail – this is actually the most recent e-mail Joe has sent out for one of his deals – just to walk you through exactly how to accomplish those four goals, and to talk about a few other things as well.
Obviously, number one, to notify your investors that you have a deal under contract – that’s really just accomplished by you sending the e-mail… But what’s important is how you actually label the e-mail. The e-mail comes in, and what does the e-mail say? Does it just say “Hey, you’ve got a new deal”, or does it grab their attention?
In a sense, you want to use some of your branding expertise that you learned in some of the earlier Syndication School episodes, in order to create a title that grabs their attention.
An example would be “Off market opportunity under contract at 25% below recent sales.” Someone sees that and they’re like “Okay, this is an off market deal”, which obviously comes with another perception, that it’s a better deal. And not only that, but we have the deal under contract for 25% below recent sales, which tells the investor that we’re automatically going to have essentially 25% of equity in the deal the second we actually close on the opportunity.
Another example would be “Significant value-add opportunity in an A+ location”. Again, it’s letting them know that this is a value-add deal. According to this title, there’s a lot of opportunity to add value, so I’m expecting there to be a large increase in rental premiums, which lets me know that the cashflow and the equity [unintelligible [00:08:49].13] is going to be very high… But also it’s in an excellent location, it’s in an A+ location.
Essentially, when you’re creating the title, you want to include one or two of the most important highlights of the deal. In the first example it was the fact that it was off-market, and that it was under contract at 25% below the recent sales comps. In the second example, it was 1) a significant value-add opportunity, and 2) in a very strong market. Again, that makes me think “Okay, maybe this current asset is like a B or a C, that we’re gonna convert into an A, and it’s already in an A+ market, so it’s a huge opportunity to add value.” That’s one.
Not only do you want to notify your investors that you have a deal under contract, but you want to grab their attention right away with the most important one or two highlights of the deal.
Number two is to provide your investors with the summary of the investment, or some of the investment highlights. This is when your investment summary comes in handy, which we created last week, because if you remember, the executive summary of the investment summary package listed out seven (really depending on the deal) highlights of the deal that you wanted to get across right away, and then everything else in the actual deal package… It went into more detail on why it’s an A+ market, or why it’s a great value-add opportunity.
Essentially, what you wanna do is you wanna go back to that investment summary, and even while you’re creating the investment summary, you wanna keep in mind that you’re going to be including this information in that first e-mail to your investors. So go ahead and grab a few of the main highlights and include them in the beginning of the deal package. So I guess that’s step 2.a) to include those highlights.
Step or goal 2.b) is to obviously include the specific returns about the deal. For the example that we have here, it says “We are purchasing this property, this many unit apartment community located in this market.” So we kind of described the characteristics of the deal, but now this is where we go into the highlights. “All the unit interiors are inferior compared to the surrounding competition.” That’s where the significant value-add comes into play. “The asset is located in an A+ location, which has one of the most desirable school districts in the state, is a top market in the nation for jobs, and has an average household income of $100,000.”
Again, right away in that first paragraph we address specifically what we mean by “Significant value-add opportunity in an A+ location.” So why is it a significant value-add opportunity – well, because every single unit is inferior to the competition. And then why is it in an A+ location? Well, it’s because it has the most desirable school district in the state, it’s a top market in the nation for jobs, and it has an average household income of $100,000.
In the next paragraph we go into the business plan. Okay, this is the description of the deal; now, what do we plan on doing? Well, our business plan will be to renovate 100% of the units, to bring the interiors up to the higher standard demanded by the upscale demographic. Our projected rental premiums will be up to $400/month, less than properties that have undergone similar interior renovation programs in the surrounding area.
If you remember back to the series about underwriting, you perform your detailed rent comp analysis in order to determine what is the average rent per square foot for each unit type after it’s gone through its renovations, and then you take the average, and that is going to be the rent premium that you can demand at your property.
I mentioned that in order to be conservative, you kind of wanna round that number down. If you indeed get the average, then it’s more power to you and your investors and your returns… But if you don’t, you’ve already projected it conservatively, so you’ll still be able to hit your returns.
So the fact that you did that, that’s definitely going to be a highlight of your deal, and you wanna include that. So whatever that reduction is, you want to mention that. In this case, the reduction was up to $140/month; I think it was something between $60 and $140, depending on the unit type.
After that, we actually include a few other things. Those are the two main selling points that we included in the title, so we had to go ahead and explain those right away. The other two highlights of this deal – going into more detail on the market, as well as the type of debt that was secured.
In the e-mail we say “Other notable aspects of the deal – the market. This market has been the epicenter of job growth in the Dallas-Fort Worth market. Fortune 500 corporations who have recently relocated or expanded to Plano include Toyota, Mutual Liberty…”, and we go on with the 5-6 other Fortune 500 companies. “Dallas-Plano-Irving was named the number one best market for jobs by Forbes two years running. Additionally, Plano’s 5-year projected population growth is 14.1%, compared to a 3.9% national average over the same period.”
So all that information is included in your investment summary, or at least it should be somewhere in the investment summary, and you wanna go ahead and pull it out, because those are very important highlights for saying “Hey, the market we’re locating in is not only in an A+ location because of the school district and the average household income, but look at all these Fortune 500 companies that not only are there currently, but have either relocated there or have expanded there because of how powerful the job market is.”
Also, it was named number one best market by Forbes, so that’s why I mentioned in the investment summary episode who you want to include information about the market being included in any top lists. Then we also mentioned the population growth, because if you remember back to the podcast series about market analysis, one of the things you want to track is the 5-year population trend – the previous five years compared to now. You also wanna take a look at the projected population growth. Again, this is not something that’s set in stone, but it is based on a pretty detailed calculation. And the fact that this particular market is expanding at a rate almost four times greater than national average is a great sign for the demand of rentals in multifamily in this market.
And the other one was debt. For the debt we said we’re assuming a low-leverage loan, with a certain amount of time remaining on the loan, and at a historically low interest rate, and we mention what the remaining time is and the interest rate. Why is this good – because this loan will provide investors with a limited risk, given the low interest rate, and our ability to hold the asset long-term.
“Although this has not been modeled in our projections, once we’ve implemented our value-add renovation program, we’ll focus on obtaining a supplemental loan to return significant equity to the investors.” Two big things there. Number one – it’s describing how great the loan is that they’re getting on this deal. It’s assumed, it’s got very low leverage, which reduces the risk; it’s got a remaining loan term that is greater than our projected hold period, so we won’t be forced to refinance or sell, and the interest rate is extremely low compared to how it is currently today if we were to be securing a regular loan. Essentially, another value-add opportunity at this property, because the debt service is gonna be a lot lower than it would have been if new debt was secured. And then additionally, we also mentioned the fact that we plan on securing a supplemental loan, so that the investors will be receiving a portion of their equity back… But most importantly, that was not included in the actual projections.
I also said this during the episode about underwriting – if your plan is to refinance or get a supplemental loan, you do not wanna include that in your projections, because… Let’s say for example your plan is to do a refinance at year three, and based on your projected NOI at the end of year three and your projected cap rate at the end of year three, you project that you’re gonna return 40% of your investors’ capital. Well, if you did that, then the five-year returns to your investors would look like 8%, 9%, and then 48%, and then back down to maybe 10% and then 11%.
So that annualized cash-on-cash return is gonna be extremely high, and it’s not necessarily a realistic reflection, just because 1) that’s technically a return OF their capital, it’s not a return ON capital. So they’re essentially going to receive 40% of their initial equity back at year three, and they’re only gonna get 60% at the end of the actual business plan. And also, because you might not actually do that. If you don’t do that, then your projections are gonna be off and your investors are gonna be disappointed, because they’re not getting that 40%+ return year three.
And I guess thirdly – and this is why we have the two different cash-on-cash return factors, one including the profits from the sale and the other one is excluding the profits from the sale… Just saying “Okay, this is how much cash I’m actually making on my equity, and then here’s how much I will get at the sale.”
Long story short, if you do refinance/do a supplemental loan, do not include that in your projections.
Now, this is just one example of a deal that we present to investors, where we talked about the market and the debt… But what you include here depends on the deal. Another example could be any sort of operational improvements you’ve identified. Let’s say you’ve determined that you can decrease the expenses by 20%, or 15%, or whatever. Then your title would be “100% value-add opportunity” or “Off market deal with significant operational upside.” And then in your description of the deal, those first few paragraphs, you mention “Hey, we’re gonna be able to reduce our expenses by 15% because the current owner is doing this, and we’re not going to do this.”
So again, you wanna go through your investment summary and pick out those top 2-3 highlights and include those here.
Now, the second goal is to provide your investors with a summary of the investment highlights. So I guess goal 2.a) was to describe specifically why this is a great deal, and then goal 2.b) is to actually describe their returns. So at this point you want to provide some additional information about the returns and the maximum investment amounts, the closing date, the funding date, so when they can actually submit money, and then what they need to do if they want to actually invest.
For this particular deal we’ve got a bullet point that says “We’re projected to exit in 5 years, so we’ve got our exit strategy, with the following returns. Here’s the cash-on-cash returns to the investors excluding the proceeds from the sale, here are the cash-on-cash returns to the investors including the proceeds from the sale, and here is the IRR during those five years.”
We also list out information about the maximum investment. For the minimum investment, that’s completely up to you. It could be 25k, it could be 50k. We talked about the logic behind that in the episode when you were actually gaining verbal commitments; essentially, it takes time to raise capital, to answer questions. If you’ve got no minimum and someone wants to invest five bucks, it’s not necessarily worth your time to go through the process with them, answering the questions, if they’re only investing five dollars, when you could be spending that time with a person that’s investing a million dollars.
So $50,000 is pretty standard for a first-time investor. You might wanna make it 25k depending on who you’re raising capital from, and eventually you might wanna raise it up to 100k, 500k, a million dollars once you’ve become more established.
For the maximum investment, the reason why you want to include a max investment is because if one individual is accounting for more than 20% of the equity raise — so if you have a million dollar equity raise and one individual is bring $200,000 or more, then the lender will perform additional due diligence on that person, just because they’re the ones that are bringing most of the down payment… And a lot of investors don’t want to go through that; they don’t wanna send in their bank statements, and tax returns, and things like that.
So in order to make it easy on your investors, just set a max investment amount equal to 19% of the capital raise. If you’ve got to raise a million dollars, then mention that your max investment amount is $190,000… Just to keep things simple and just to keep your investors from having to go through that additional due diligence, and you not having to inundate them with extra sentences, explaining “Hey, if you invest more than this, then you’re gonna have to go through this process with the lender.” Instead, just say “Max. investment – this amount.”
You’ll also wanna include an approximate closing date, because of course, it might change, especially if you put in some contingencies in your contract. “Okay, our closing date is 60 days from now, but we’ve got two 30-day extensions.” So you don’t want to say to your investors “Hey, we’re definitely closing on this date” and then you end up closing 30 or 60 days later, because again, that’s just going to confuse them and frustrate them. So you wanna be as transparent as possible and say “Hey, this is the approximate closing date. That’s subject to change.”
And then a funding date… Typically, you’ll want to set a date where you’re gonna begin accepting funds. We do this the day after the conference call, and then up to three weeks later. It really depends on the close and when the lender needs proof of funds by. So you kind of wanna determine that from your lender, and then base your funding date off of that.
We’re gonna go over this I think next week, when we talk about how to actually secure the commitments after the conference call. You wanna include in your e-mail something along the lines of “If you’re ready to commit to this deal, here’s how you should go about doing it.” For us, we say “Please reply to this e-mail with your investment amount, and if you are investing as an individual or as an entity. If you’re investing as an entity, please let us know the name of that entity.” We’ll leave it at that for now, and we’ll talk about how to actually follow up on this once you’ve actually done the conference call. Because for Joe, he’s in so many deals that once he sends out this e-mail, people will begin to reply and say “Hey, we wanna invest”, whereas if it’s your first deal, you might not necessarily be able to fill up the entire equity raise just by sending out this e-mail.
So that covers goal number two, provide your investors with your summary of the investment highlights. Three is to provide them with the investment summary. Now, when Joe first started out, he didn’t actually include a link to the investment summary. He asked for them to reach out if they want an investment summary. I believe the reason he did this was something along the lines of if someone actually e-mails you and reaches out, asking for more information about the deal, increases the likelihood of them investing. Plus you know exactly who requested it, whereas if you do a link, you don’t really know who clicked on it, or you don’t know if someone just clicked on it by accident, or if they actually wanted to look at it… The only way to know for certain is if you send it to them. However, if you’ve got – as Joe does – thousands of investors, then it’s not realistic or time-efficient to manually send out all those e-mails, just like it’s not time-efficient to manually send out overall e-mail.
Instead, we now include a link to the investment summary package, so they can just click on it and they can download it themselves, and we can technically see on the back-end because of a functionality on MailChimp, we can determine who exactly clicked on it… But again, this is more of a time-saver both for us and the investors, to make sure that every single investor who wants the investment package can see the investment package.
And then the fourth goal is to invite them to a conference call. So you don’t want to just send out an e-mail and that’s it, and have your fingers crossed that people will actually invest. You also want to set up a 60 to 90 (minutes) to two-hour conference call, depending how long it takes, to actually present the deal in much more detail, and investors can call in. Then you can conclude the call with an FAQ section, where investors can ask you questions. We’ll go over exactly how to prepare for this call, how to execute the call, and then obviously what to do after the conference call, starting — actually, tomorrow we’re gonna start discussing the actual conference call, and we’ll complete that next week.
Essentially, what you wanna do — again, you can technically use whatever service you want, but we use freeconferencecall.com, just because it’s free. It gives you a call-in number that you continue to use for every single deal, and it records the call. We’ll discuss why you wanna record your call starting tomorrow, or likely next week.
The last part of this e-mail says “Because I anticipate a high level of interest, we are hosting a conference call to go over the deal and answer any questions you might have. Here are the call details. Here’s the date of the call, here’s the time of the call, here’s the phone number to call and here’s the pass code to enter once you actually call.”
That accomplishes the fourth and final goal, and then you wanna end it up by just kind of closing it out… We say “Either way, I hope you’re doing well, and if I can help you out in any other way, please let me know.”
Essentially, that is how you create your new investment offering e-mail. And again, you want to 1) notify your investors that you have a deal under contract, and you wanna do that with a very strong subject line. 2) You want to provide your investors with the summary of the investment, so you want to first explain in more detail why you created that particular subject line. 3) You want to go over any notable aspects of the deal, and 4) you want to include information about the returns, the min and max investments, the closing data and the funding dates.
Goal number three is to offer to send them the investment summary. We include a link in our e-mails, but you can either do that – upload it to Dropbox and then copy that Dropbox link and hyperlink that in your e-mail, or you can just say “If you want to read the investment package, send me an e-mail and I will send that to you.”
And then number four is to invite them to your conference call. We use freeconferencecall.com. You wanna include the date, time and the call-in information at the end of the e-mail.
That concludes part three, which is discussing the second step of the five-part process for securing commitments from your investors, and that is to send an e-mail to your investor database.
Tomorrow we’re going to begin to discuss step number three, which is that conference call where you go over the deal in more details. Probably we won’t get through that entire process tomorrow, so we will finish that off next week, and then go over the final two steps of the commitment-securing process.
Until then, I recommend listening to parts one and two of this series. I recommend listening to other Syndication School series about the how-to’s of apartment syndication, and make sure you take a look at that link that we provided, that has an example of how our new investment summary e-mail flows. Also, download the template we provided last week for how to create your investment summary package. All that can be found at syndicationschool.com.
Thank you for listening, and I will talk to you tomorrow.