JF1765: How To Secure Commitments From Your Passive Investors Part 5 of 8 | Syndication School with Theo Hicks
Theo gave us the steps one through five for hosting a successful conference call with your passive investors. Learn two more steps to that process today, steps six and seven will be broken down for you. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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“While you are securing commitments from passive investors, you should also be securing debt and doing due diligence on the deal”
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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 focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.
Each week we air two podcast episodes, every Wednesday and Thursday, and these podcast episodes are a part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer a document, resource, spreadsheet, something for you to download for free, that accompanies the series. All of these free documents, as well as past Syndication School series can be found at SyndicationSchool.com.
Right now we’re doing a series about how to secure commitments from passive investors. This episode will be part five, so if you haven’t done so already, I highly recommend listening to parts one through four. Again, those can be found at SyndicationSchool.com. The entire process for securing commitments – we’ve broken it down into five steps. Right now we’re on step number three. In parts one and two of this series we’ve talked about step one, which is to create the investment summary. Now, again, this is after you have a deal under contract… And while you are securing commitments from your passive investors, you should also be securing debt from a lender or mortgage broker, as well as well as performing due diligence on the deal.
So step one, create the investment summary – this was discussed in parts one and two, and we also gave away a free investment summary template for you to use in order to create your own investment summary.
Then in part three we moved on to step two, which was how to create an e-mail to your investor database. So you’ve got your investment summary created, and now it is time to present the deal to your investors, or at least let them know that you have a deal, and some high-level details about that deal… And then invite them to the conference call, which is step number three.
So in part four we began to discuss the eight steps to a successful conference call. We went through steps one through five, which to quickly summarize, are:
- Get your mind right prior to the call.
- Determine what your main focus is going to be on the call.
Those first two are more for you to prepare for the call.
- Welcome the investors on the call.
- Provide a table of contents or a high-level summary of what you’re going to be discussing on the call.
- Introduce yourself and your business partners.
Most likely, we’ll get through parts six and seven, and maybe parts of step eight; we shall see how it goes. Let’s just jump right back into it.
This is step six of the eight-step process to ensure you have a successful conference call to investors. And again, listen to parts one through four to catch up to where we’re at today, for more details on what I’ve just summarized in the first few minutes of this episode.
So how should you structure your conference call? Syndicators, sponsors will start their conference calls differently. This is what we do, so you can either follow this exactly, or you can just pick a few, depending on the deal, and what markets you’re in, and your team, and your experience level, and things like that… But typically, what we’ll do is we’ll structure our calls around three main categories. The deal itself, the market, and the team.
Essentially, the entire purpose of the call is to explain how we have found a great deal, in a great market, that’ll be managed by a great team. The reason why we use these three categories is because these are the three major risk points in the deal. Risk number one is the deal, risk number two is the market, and risk number three is the team.
If the project were to fail, it would fail because of the deal, it would fail because of the market, and it would fail because of the team. So during the conference call, we attempt to answer any and all questions proactively that a potential investor might have about the risks associated with each of those three categories.
So for each of those three categories, here are some questions to think about on your end, that you’re going to want to include at some point during the conference call conversation. After you provide a summary and explain that you’re gonna have a Q&A, you can jump into this part and explain “Here is why this is a good deal, in a good market, that will be managed by a good team.” Then, obviously, you’re not gonna be like “Why is it a conservative deal?” “Well, this, this and this.” “What stands out about this deal?” “Well, this, this and this.” These are just questions you wanna ask yourself prior to the call, write out some answers, and then use those answers as a guide to how you’re gonna present the deal.
So here are some things to think about for the actual deal. I’m just gonna pose the questions, and we’re actually going to go over how to answer these questions yourself, and the type of information you’re gonna want to present a little bit later, when we get into the Q&A.
For the deal, a few questions you wanna think about is “Why is it a conservative deal?” Well, I guess I’m gonna go into the answers. Is it conservative because you bought the deal under market value? Maybe an off market opportunity that you’ve secured for 20% below market value, so that’s making it conservative, because it automatically has equity built in. Maybe your rent premiums are below the competitors, so maybe you did your rent comp analysis to determine that you can most likely demand a $100 rental premium, but to be conservative, you’re doing a $75 rental premium.
Maybe it’s conservative because of the debt, maybe it’s conservative because of insane rent growth in that market, but you’re only predicting a rent growth of a few percentage points… Again, it really will vary from deal to deal, but ultimately, you want to make sure you’re conservatively underwriting these deals, and then when you’re conservatively underwriting those deals, make sure you communicate that to your investors.
Number two, what stands out about this deal – so what are the one or two main highlights, main selling points about this deal? You should already have the answer to that in your investment summary. Maybe it’s that this particular property — maybe not a single unit of that property is updated yet, so it’s 100% value-add deal. And then maybe you identified some operational improvements. Maybe you can reduce the expenses by 500k, or 100k, or 50k without having to invest any additional capital into the deal.
Next, “Has the business model that you plan to implement been proven?” Not only has it been proven by you, so have you and/or members of your team – your property management company in particular, or maybe your consultant, or your business partner – have they implemented this business plan before? If you are a value-add investor, have you, your business partner and/or your property management company taken a value-add deal full cycle? Did you identify the opportunity, underwrite it, create return projections, bought the deal, were able to implement the renovations maybe faster than you expected, maybe at a higher rental premium than projected? Did you stabilized the property, held on to it for a few years and then you sold it, and then you can explain how that compared to your projections? …ideally, since you were underwriting that deal conservatively, you exceeded your projections.
Next, what is the upside potential? What is the value-add play? How are you going to increase the income and/or reduce the expense to add value to the property?
And then lastly, what will you be doing from an upgrade perspective? What are some of the upgrades you plan on doing, both interior and exterior, and then how is that going to affect the bottom line? Maybe you’re going to invest $6,000 /unit on the interiors, and are able to raise rents by $100, and then maybe you’re going to install some new amenities that might bring in additional income, or maybe you think that you can get $25 extra per month per unit by upgrading or renovating the clubhouse, or maybe you can get a higher occupancy rate by renovating the clubhouse… Things like that. Those are the things to think about when you are presenting the deal aspect. So that’s category one, the deal.
Number two is the market. Some things to think about for the market is how well do you know the market? If you remember, back in earlier Syndication School series we went over the in-depth process for evaluating a market, and selecting a market. Here you can explain why you picked that market overall. That’d be the MSA. If you’re investing in Richardson, Texas, then you could explain “Okay, well we selected Dallas, Fort Worth because of these reasons.”
The next thing to think about is how does the submarket that you are investing in compare to other submarkets in the area? So within that larger MSA, you’re selecting a street, so why is that street better than other streets? Why is that neighborhood better than other neighborhoods? Why is that submarket better than other submarkets? It could be demographic information, job information, or maybe a new company just moved there, maybe there’s a lot of investment going on there… Things like that. Maybe it’s a C property in a B market… Again, it just depends on the deal.
Something else to think about is what makes this submarket in particular a good location to invest in? 1) Why is it better than other submarkets, but 2) just in general, why is it a good submarket to invest in?
And then something else to think about is what is the demographic that will live in the property. Things like where do they work, where do they go to school, where do they shop… And then based on that demographic and what they want to do, how close are those things to the property?
If you’ve got a demographic that enjoys going to bars and restaurants, what’s the closest bar and restaurant hub to the property? That could be a good selling point. Or maybe the majority of the people that live there work for a particular company – how far away is that company from the property? What’s the state of that industry in general? Things like that.
Then something else you wanna think about in the market is do you own any other properties in the area? Either do you own other properties in the area, or does your management company own other properties, or manage other properties in that area? The reason why this is beneficial is because of economies of scale.
If you own three properties within a one square mile radius, you have the economy of scale of maybe having one maintenance team, maybe you’re able to have a leasing agent cover multiple properties, which ultimately reduces your expenses. Those are some things to think about for the market.
Then lastly is the team. You wanna go over who is a part of the team – who is on the GP side, who’s your business partner, and what are they doing; who is your property management company, do you have any consultants or mentors that you’re working with? Next, you wanna explain if and who on the team is actually investing in the deal. If you, your business partner, the management company, maybe even the broker who found the deal are all invested in the deal, it promotes an alignment of interests with your investors, because you and others have skin in the game.
Next, what is their track record with apartments? For you, your business partner, maybe your consultant or mentor, your property management company – for each of those people, what is their track record in apartments, and how many deals have they completed before? That means how many deals have they taken full-cycle. How many units do they currently control? And then how do the actual business plan and the actual returns compare to the return projections?
Then lastly, have you worked with them in the past? Your investors are gonna be a lot more comfortable if you’ve worked with your business partner and you’ve worked with your property management company in the past, as opposed to it being your first deal. If it is your first deal, this is not a disqualifier; you’re just gonna have to focus on other positives of the deal, that are gonna offset the fact that you’re lacking in that area. There’s gonna be additional risk when you’re working with people for the first time.
Overall, the purpose of this portion of the call is to address any risks in your investors’ mind proactively about the deal, about the market and about the team. This part right here should take approximately 10-15 minutes. You’re not gonna go into extreme detail, going over numbers and financials. The goal here is just to introduce these concepts, introduce the risk points of the deal, introduce the risk points of the market, and introduce the risk points of the deal, but more specifically how you plan on addressing those risk points. Then later on in the investment call you’ll go into a lot more detail on all three of these points.
That brings us into step seven of the eight-step process for securing commitments from your passive investors, and that is to go over the business plan in details. For Joe, at this point he passes the hypothetical mic to his business partner, who is the one that goes over this aspect of the deal. Depending on how your partnership is structured, if you’ve got one person who’s focused on the underwriting and is doing the due diligence, you’re probably gonna have them be the person that is discussing the detailed business plan, just because they know it a lot better… Whereas if you’re more focused on finding the deals, you’re more focused on the equity raising or the back-end asset management, obviously you would be able to talk about this… So if your business partner for some reason can’t be there, then you should be able to cover this adequately. But it’s much better if the person who actually did the underwriting does this aspect of the presentation.
Now, again, when you’re going over the business plan, the entire point is to tie everything back to those three main selling points, those three main highlights. Or how you’re gonna address those three main risk points, which are the deal, the market and the team.
For this particular section, here are some questions to ask yourself, some questions to answer on your end, and to make sure that you include all this information in your presentation. I wanna pause here for a second and mention that you don’t want to script out everything. You can, but it’s better to have bullet points or just highlights that you wanna discuss, and then use those to guide the conversation.
This isn’t a back and forth, so yeah, you could technically script it, but it’ll flow better and it’ll sound less robotic if you just speak extemporaneously, but you’ve prepared adequately, so that you’re not missing anything, you’re not pausing, getting nervous, or anything like that. So again, it’s up to you, but we recommend not scripting out everything.
Okay, so in this section you first wanna go over the overall plan in detail. First, what is your overall business plan? For example, you plan on adding value through renovations in order to increase the rents. In this case, what are those renovations, and what are going to be those rental increases, how did you determine those renovations, how did you determine those rental increases?
Next you’re gonna explain how the specific deal fits into that strategy. Your overall business plan is to add value, and through renovations, increased rents – this is the point where you go into detail. “For this particular deal we’ve identified these ways to add value, and these ways to increase the rents.”
Next you can discuss your target market, so what are your target markets, what are your target submarkets, and why are you deciding to invest in those specific markets?
Then for that market, this is where you’ll wanna go into a lot more detail on why you selected that market. Talk about the overall economy, the jobs, the rent projections in that market, the vacancy projections in that market… Here again you can mention if you own any additional properties in the area, and go into details on why that is going to be advantageous… And again, that’s because of the economies of scale.
You can then go over any other location advantages. Include information about maybe the property is really close to a highway, maybe it’s really close to downtown, maybe to some other public transportation nearby… Maybe, again, based on the demographic, there’s a new retail hub being created that you know your residents are going to go to… Things like that.
Then you wanna discuss what is the competition like in the area, and how does your property quality-wise compare to the competition, and rent-wise compare to the competition. You can go over the demographics in more detail, and then at this point you’re also gonna wanna go over your rental comps in detail… So “Here are the rental comps that we used, here’s the average rent per square foot that we discovered from these rental comps, and here’s the average square foot per [unintelligible [00:19:48].06] for our properties. They are X amount of dollars below the average rental comp, because we stay conservative on our deals.”
Next you wanna go into a lot more detail on your exterior and interior renovations… That is if you are doing exterior and interior renovations. First of all, you can start off by saying what the current condition of the property is, how many units have been renovated so far, is there any deferred maintenance that you’re gonna need to address…
Also, you can explain what – if any – recent upgrades have already been performed at the property, because a lot of times on these value-add deals the owner, in order to increase their sales price and make their deal a little bit more attractive, they’ll implement a value-add program on a small percentage of the units. Maybe 10%, maybe 25%. If that’s the case, you could mention what percent of the units are already renovated, what types of upgrades were performed, and how much these upgrades actually cost. Then if you plan on doing the same level of upgrades, or if you plan on going above and beyond their upgrades.
So what specifically do you plan to upgrade? What specifically do you plan to fix, and what specifically do you plan on replacing on the exteriors? Then explain how this will have a positive impact on either the expenses or the income.
Then same thing for the interiors. What specifically do you plan on upgrading, fixing or replacing in the interiors, and then explain how this will have a positive impact on the income or expenses. And then any other projects that aren’t covered in those two categories.
I guess this is more focused on the amenities – are you going to renovate or install an exercise room, a pool? Do you plan on repaving the parking lot? Do you plan on implementing a RUBS program, or a water conservation program? Then explain how these other projects will have a positive impact on the income or the expenses at the property.
And these last ones kind of fall into the category of Miscellaneous or Others. So these are some other things that you wanna think about before your call, and then provide the relevant information to your investors… So what aspects of the exterior/interior business plan make you attracted to that property? How do you plan on mitigating risk overall, whether it’s the economy risk, the market risk, the deal risk, the team risk? What are some of your underwriting projections? What’s your annual rent growth number that you’re using? What vacancy rate are you projecting? Is vacancy rate different while you’re doing renovations versus after renovations? What’s the exit cap rate that you are using to determine your sales projections? Not only providing them with the actual number, but also why you picked that.
You can say “Well, the historical rent growth of the past five years in Richardson, Texas has been 5%, but to stay conservative we’re gonna project a 2% rent growth each year. The average vacancy is about 5%, so we’re projecting an 8% vacancy during renovations and a 6% vacancy after renovations. The in-place cap rate (the cap rate you’re buying the property at) is 6%; we plan on holding on to the property for five years, so we underwrote a 100 basis point increase in the cap rate, so we’re expecting the cap rate to be 7% when we sell.”
Then something else you wanna think about is to discuss the debt. What is the debt situation? Are you assuming the loan, or are you getting a brand new loan? What type of a loan is it? Is it agency debt or is it a bridge debt that you’re gonna convert to agency debt? What are the terms? What’s the amortization, what’s the actual term of the loan? Is it a 5-year loan, 10-year loan, 12-year loan, 13-year loan? Are there gonna be balloon payments on the loan? Are there any prepayment penalties on the loan? What about the interest rate? Did you buy a lock on the interest rate? Is it a floating interest rate or a fixed interest rate? And then any information about projected refinances or supplemental loans, always remembering to not include the refinance proceeds or the supplemental loan proceeds in your return projections, because that will throw everything off. If you have a year three return of, say, 40%, and then you don’t do a refinance year three, or you don’t do a refinance at all, and now you are drastically below your return projections for the deal.
And then lastly, what’s your exit strategy? What year do you plan on selling the property? Who do you expect the buyer to be? Things like that. This should be the second-longest aspect of the call, and it should take approximately 20 minutes to present this portion.
That’s step seven, the meat of the conversation. At this point, hopefully you’ve covered 99% of any questions investors have. As you do more and more deals, you’ll get more comfortable and confident during this section. You’ll know specifically what information your investors are going to want to know, but if it’s your first few deals, maybe you’ll only hit half of what your investors wanna know, which is why you wanna conclude the call with a Q&A session.
If you remember, back when you summarized the call, you explained the Q&A section at the end of the call, how they can fit their questions. At this point, you will move on to the Q&A section. So this concludes the formal part of the presentation, and now we’re gonna move on to the Q&A, and then begin that process… Which we will go over tomorrow.
We actually are gonna go over a list of the 30 most frequently asked questions on these investor calls based on the 10, 20+ investor calls that Joe has done thus far… And we’re gonna go over as many of those as we can tomorrow, and then most likely that will leak into next week’s episode.
Until then, I recommend listening to parts one through four on how to secure commitments from your passive investors. Make sure you download that free investment summary document, and we also provided you with a free link to download an actual email to our investor database, that you can use as a guide to create your own e-mail.
And then of course, listen to the past Syndication School episodes, and you can download those free documents as well. All of those can be found at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.