JF1835: Syndication Tips #2 Two Lessons Learned From A 250 Unit Deal | Syndication School with Theo Hicks
We’re hearing a couple of lessons from a 250 unit apartment syndication deal that an investor completed. The two lessons are, getting your property management company to put equity in the deal, and priming private money investors prior to finding a deal. 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 to 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 episodes; you can find those on our podcast, as well as on our YouTube channel. Typically, these episodes are 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 also include a link to download a free resource, whether it’s a Word template, PDF, PowerPoint presentation template, Excel template, something for you to download that accompanies that series. All of these free documents, as well as past Syndication School episodes can be found at SyndicationSchool.com.
This episode is going to be another syndication tip episode. It’s a standalone episode, and we will be going over two things that a syndicator learned after completing an actual syndication deal.
As I mentioned in last week’s episodes, we’re going to be doing some standalone episodes where we focus on either going back over some of the previous tips we’ve talked about on this Syndication School series in more details, or we’re gonna go over some case studies. Right now we’re gonna be focusing mostly on case studies, and then we’ll move into going into more details on some of the past steps.
This episode we’re gonna learn two things that were learned from an actual deal. It was a 250-unit deal in Texas. The two things were – first, one way to create an additional alignment of interests with your investors and with your team, and then the second tip is talking about whether you should raise money before you find a deal or after you have a deal under contract.
Let’s jump right in. Lesson/tip number one is to get your property management company to put equity in the deal. I’m gonna talk about this specifically, and then we’ll take a step back and talk about how this could be used more broadly.
Most likely, especially if you’re doing a 250-unit deal — maybe if you’re doing a smaller syndication deal, 4 or 12-unit, maybe even up to a 20-unit, you might manage it yourself. Now, when you are considering doing a syndication in that deal size, you have to remember all of the added legal costs that are associated with putting together a syndication, and the increase in down payment will likely push the deal below your return expectations.
So if you think about it, if you’re buying a four-unit deal, and you’re gonna have to put $15,000 extra down just to make the legal documents, it probably doesn’t make sense. Most likely, you’re going to have some sort of property management company managing your deal… And if you’re just starting out, the highest probability is that it will be a third-party management company.
Now, at some point you might get big enough where you wanna bring management in-house, but when you’re first starting out, it definitely makes sense to have a third-party property management company, because they’re the experts… And unless you have previous property management experience, you aren’t the expert. Of course, once you become an expert by doing a few deals yourself, you could bring management in-house.
Long story short, you’re gonna have a third-party management company, and one way to create an additional alignment of interests between you and that management company is to have them put money in the deal, and bring them on as essentially a limited partner. That way, they have skin in the game. If you remember, on a previous Syndication School series – I believe it was series number 8 – we talked about creating alignment of interests with your team members, and how one of those tiers of alignment of interests was having a team member invest money in the deal.
Those team members could be the management company, some sort of local owner, or the actual real estate broker that brought you the deal, or who you were working with. In that case, since they have their own money in the deal, then they want the deal to be more successful than if they didn’t. So from the property management perspective, of course, they get paid their ongoing management fee, which means they want to make sure they’re maximizing income, because their fee is based on the money that’s brought in. But if at the same time they are also going to be compensated based on the cashflow, which takes expenses into account, then it also behooves them to reduce the expenses… Whereas before all they really financially cared about is maximizing the income. So since they’re the ones that are going to be doing the day-to-day operations, if you can get them to invest in the deal, and their compensation is based on the cashflow, then you will have a better chance of them working harder to reduce those expenses, because of course, they want to make more money.
Now, of course, you always want to make sure you’re doing your due diligence on anyone you’re bringing into the deal investor-wise, and you also wanna do due diligence on any team members you bring on, like the property management company. For more details on questions to ask the property management company before hiring them just to manage a property in general, you can check out Syndication School series number 8.
Something else that you could do as well is rather than just give the management company a stake in the LP, you could also negotiate a reduction in fees. So rather than them investing actual in the deal, you could just give them a piece of equity, and in return for that equity, you can ask them to reduce their management fee by a few percentage points. Or they can forego or eliminate certain fees, like lease-up fees, or construction fees, maintenance up-charge fees… So you have to do some calculations and determine “Okay, so I’m giving you this much equity, so you’re gonna make this much money, so let’s reduce the ongoing fees by whatever.” That way they’re still making more money than they would if they just were charging out those fees, but you’re able to reduce the ongoing fees, which helps you increase the net operating income, which in turn helps you increase the value of the property.
And then of course – this is obvious anyways – if you are just doing a smaller syndication deal, you’re still gonna wanna bring on other investors. You don’t want the property management company to be the only investor in the deal. You still wanna bring on other investors, because that adds another layer of accountability and alignment of interests.
So that’s tip number one. Specifically for this deal, it was bringing on the property management company as an equity partner… But more broadly, you can bring them on and just give them equity and in return reduce some fees. You could also replicate the same strategy with other team members – your real estate broker, or some local owner, or mentor, or a consultant that you have. Because the more experienced team members you have, the higher likelihood you have of success, especially when you’re first starting out, and you are also going to increase the likelihood of success if those experienced team members have their own money in the deal, or at the very least are compensated based on the overall performance of the deal. So that’s lesson number one.
Lesson number two is about whether you should find investors before you have a deal under contract, or after you have a deal under contract. The lesson was the former, which is to make sure you have investors before you put a deal under contract. This particular investor did the opposite; he had to raise a million dollars for a deal, and did not have that money lined up before putting the deal under contract, and it was a scramble. Of course, he was able to do it, because if he didn’t, he wouldn’t have been able to do the deal… But it was a character-building experience, and he decided to never do that again, to always have investors lined up before finding a deal.
This doesn’t mean that you’re gonna have hard commitments from them, it doesn’t mean that you’re gonna have their money in your bank account. The entire point is to get them to verbally commit to a hypothetical future deal if it were to meet a certain set of return parameters. Essentially, what you wanna do is you’ll want to have conversations with your list of passive investors and get them to agree to invest in a deal if you were to come across one. More specifically, things that you can do to prep your investors is to schedule phone calls with them; talk with them on the phone and talk to them about a hypothetical deal. Ask them questions to learn about their financial goals, and how they evaluate the success of investments, so you know the type of investment that they would likely invest in, and the type of investment that they would not invest in. Talk to them about your team specifically, about your background, your experience, what types of deals you invest in and why you picked multifamily syndications. Give them the whole rundown of your team and why you picked this particular investment strategy.
Then at the end of the conversation an important follow-up question to ask is “If I find something that meets your financial goals, would you like me to share it with you?” If the answer is yes, then they’re primed and ready to go. That way, once you find a deal, all you need to do is create your new deal email, send it out to your list of investors; maybe half of them said yes to this. That way they already know and they’re expecting the deal to come, and they’re not going through this entire process once you have the deal under contract. [unintelligible [00:12:46].17] while you’re trying to perform due diligence and secure financing, and secure investor commitments; you’re having to do all these phone calls and asking all these questions, talking about yourself to these investors and getting them to agree. You’re much more likely to set yourself up for success if you do all of this before you find a deal. That way once you have a deal, you send it out, all the legwork is done; all they need to do is review it, make sure that it meets their financial goals, and they can either decide to invest or not to invest. So those are the two tips that were learned from this 250-unit apartment syndication deal.
Again, to reiterate, number one is to create alignment of interests by having team members invest in the deal, and number two is to make sure you have your investors primed before you have a deal under contract. If you wanna learn more about alignment of interests, check out series number eight, which is “How to build your all-star apartment syndication team”, where we go into how to screen potential team members, and then how to create alignment of interests with those potential team members.
And then to learn more about raising money – just in general how to raise money – check out series number 9, “How to raise capital from passive investors.” Then learn more about securing commitments once you have a deal under contract – so you do the upfront legwork, but it’s not as simple as just sending them an investment offering and then expecting them just to say yes to invest. There’s other follow-up things you need to do – conference calls, follow-up emails… So to learn all about that, you want to listen to series 18, “How to secure commitments from your passive investors.”
That concludes this episode. I know it’s a short one, but in these case studies we’re talking about quick-hitting tips on how to effectively do apartment syndications, especially when you’re first starting out.
In the meantime, until we come back for tomorrow’s episode, I recommend listening to the other Syndication School series about the how-to’s of apartment syndications, and download some of those free resources that we have available. All that can be found at SyndicationSchool.com.
Thank you for listening. Have a best ever day, and we will talk to you soon.