JF1849: How To Instantly Gain Credibility With Passive Investors On Your First Deal | Syndication School with Theo Hicks
Finding deals is one thing, closing the deal and bringing the required capital to the table is another. One thing we have hammered home with Syndication School is the need to gain credibility with investors. Theo will cover more ways you can accomplish this in today’s episode. 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, every Wednesday and Thursday, we release the Syndication School series, on the podcast as well as on YouTube, and we will focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer some sort of resource for you to download for free, whether it be a Word document, PowerPoint presentation, Excel template etc. The free documents, as well as all of the past Syndication School series episodes can be found at SyndicationSchool.com
This episode is going to be a standalone episode, entitled “How to instantly gain credibility with passive investors on your first deal.” So we’re gonna focus on how to increase your credibility in the eyes of your investors, as well as your other team members as well – real estate brokers, mortgage brokers, attorneys… Anyone that you are trying to work with, anyone who you are trying to convince that you’re the real deal, and that you are serious about closing on an apartment community, if you haven’t done so already… Because as we’ve talked about before at Syndication School, one of the biggest barriers of entry into apartment syndication is going to be your credibility… Or in this case the credibility that you lack.
There’s lots of different ways for you to build up your credibility, but some of them take some time. For example, you can create a thought leadership platform, which is what you’re watching right now. So you can create a YouTube channel, a blog, a podcast, and you can either talk about things that you know, and your expertise, or if you don’t have expertise yet, you can interview people in order to gain that expertise, as well as transmit the guest’s expertise out to the world, with the purpose of gaining a following, and with that following comes credibility in the eyes of potential investors.
You can say “Hi, I’ve got this podcast.” In our case, the world’s longest-running daily real estate investing podcast. We’ve been doing it for 5+ years, we’ve got thousands of episodes; here’s our metrics. That will give you some credibility with investors, and they’ll have more confidence investing with you. But it’s not gonna happen overnight. It’s gonna take months, most likely even years to build up a thought leadership platform. That’s just one example.
You can do a conference, a meetup group, but still, those things take some time. So I wanna talk today about something you can do in order to instantly gain credibility in the eyes of your investors, as well as, again, in the eyes of other team members as well… And that is to create a partnership. Now, not just any partnership; I don’t mean go out and find a friend to partner up with, or find someone you’ve just met to partner up with who also hasn’t done a deal…
The purpose of this strategy is to partner up with someone that you know will instantly give you credibility in the eyes of your passive investors, and there’s really two different types of people or groups that will accomplish that.
Number one is going to be the property management company who is going to be managing the deal, and number two would be some sort of other apartment professional. Someone who’s already proven themselves in the industry. This could be a local owner in your market, this could be a consultant or a mentor, or it could be someone that you met that is not necessarily in that particular market, that’s not a mentor or a consultant.
Now, when it comes to the level of credibility, the property management company will give you more credibility than the local owner, just because the property management company has more skin in the game. Unless the local owner is themselves investing – which we’ll talk about that in a second – the property management company is the boots on the ground, the party responsible for the day-to-day operations of the property… So if you follow this strategy that I’m going to outline, you wanna focus on trying to get it with the property management company first, and if that doesn’t work, then your second option would be a local owner, a mentor or consultant, or some other apartment professional.
Now, the strategy overall is to partner with them, but what do we mean by that? So there’s four different ways for you to partner with the property management company or the apartment professional in order to instantly gain credibility on your first deal. Number one is going to be the property management company signing on the loan. The property management company essentially guaranteeing the loan. When they do this, they will officially become a general partner in the deal. They’ll be on the GP side, hence that’s why they are your partner.
Now, this is the ideal strategy if — of course, all of these strategies are if you don’t have the credibility, but this strategy is ideal if you don’t have the liquidity, or the net worth, or depending on the type of loan that you’re getting, the experience requirements in order to qualify with that commercial mortgage broker.
Now, if you have the property management company signed on the loan, then you can leverage the property management company’s liquidity, the property management company’s net worth, and the property management company’s experience in order to get approved for that loan. And since it’s a property management company, if it’s large enough, it will most likely have that. Of course, that’s something you’re going to need to determine before you have them sign on the loan, because it’s not gonna be worth it if you can’t qualify with them signing on the loan.
Now, in order to compensate them for signing on the loan – they’re not doing this just for free – you can either offer a one-time fee called a guarantee fee, that you can distribute to them at the purchase; so once you close on the deal, you can send them anywhere between 0.25% up to 2% of the loan balance to them at closing… Or you can offer them an ongoing ownership interest in the general partnership, anywhere between 5% to 10%, to maybe even upwards of 30%, depending on how badly you need them to sign on the loan in order to close on the deal… Because 70% of the GP is better than 100% of no GP at all.
Or you can do a combination of the two. You can offer maybe a smaller fee upfront, and then you can offer an ongoing chunk of the GP as well. So that’s number one, and again, this could be the property management company or the local owner, but for this we’re gonna focus on the property management company… So if your property management company is not on board with this, just in your mind interchange property management company with another apartment professional, someone who has experience doing whatever types of deals you plan on doing.
So number one, sign on the loan as a loan guarantor. Number two way to partner with your property management company to gain instant credibility on your first deal is to have them invest in the deal themselves. If they invest in the deal themselves, they are a limited partner. So they’re not a GP in this case, they’re just a limited partner, because all they’re doing is bringing capital to the deal. If this is the case, the conversation is pretty simple. You just compensate them in the same way you would compensate the passive investor. So whatever your structure is, whatever your preferred return or profit split is, that’s what will be offered to the property management company. So that’s number two, have them invest in the deal.
These are going up in levels of credibility. The lowest level of credibility is just having them sign on the loan. The next is having them invest in the deal. The third and the highest would be for them to bring on their own investors. So the third way to partner with a property management company is to have them bring on their own investors. This could be done in combination with them investing in the deal.
If they’re bringing on their own investors, they’re most likely gonna be investing in the deal themselves, so you’ve kind of got the double credibility going on here… But the benefit of them bringing on their own investors is that it just adds another level of credibility, obviously, to you, because you can present to your investors and say “Hey, not only is our property management company investing in the deal, but the deal is so great that they’re bringing on their own investors as well.” But it also adds another level of alignment of interests with the property management company.
So the property management company has their own money in the deal – there’s obviously alignment of interests there, because they’re a passive investor, so if the deal doesn’t perform well, then they won’t make as much money, so they are motivated to make sure that they’re maximizing the income and minimizing the expenses, making sure the operations run smoothly, the value-add business plan is being implemented properly, so that they can get paid.
But there’s another level of alignment of interests, because not only is their money on the line, but their investors’ money is on the line. And since their investors’ money is on the line, their own credibility is at stake as well. So if the deal doesn’t perform and their investors don’t get paid, maybe those investors won’t invest with that property management company in the future.
So if you’re able to get your property management company to invest and bring on investors, there’s a very high level of alignment of interests, which is kind of a side effect o also credibility that is gained.
Now, the fourth way to partner with a property management company if those first three ways don’t work — and again, number one is to have them sign on the loan, number two is to have them invest in the deal, and number three is to have them bring on their own investors… Number four, if all else fails, is to just give them an ownership interest in the GP. Just give them an ownership percentage, without investing themselves, without bringing on investors, without signing on the loan. You’re just giving them a stake in the general partnership.
Again, this creates credibility, because you’ve got an experienced party who is also on the general partnership side. So it’s not just you, who has never done a deal before; you’ve also got a property management company who (list off their statistics) owns as many properties, has done this many deals, is this sized etc. and they’re also a partner on the deal… So you can leverage their experience and in return you’re gonna give them a small percentage stake in the GP.
So one of these four methods should work. Ideally, you can do methods one through three, but if all else fails, you’ve got method four in your back pocket, which is to provide them with an ownership interest.
Now, just to quickly go over the benefits, again, of this way to instantly gain credibility with your passive investors by partnering with a property management company and/or a local owner/consultant/mentor/other apartment professional… Number one is it establishes credibility right out of the gate for all parties, since the experienced property management company is a part of the GP. So they’re your partner, they’ve got experience, you can leverage that experience when discussing your deal with your passive investors.
Number two, the first-time investor is able to leverage not only the experience, but also the financials, so the liquidity, the net worth of the property management company in order to qualify for the loan. And then number three is that since the property management company is gonna be investing in the deal and/or bringing on their own investors, that is less money for you to raise yourself. So technically speaking, you could do a much larger deal if you get your property management company on board.
Now, you can just do one of these methods, or you can do a combination of these methods, or you can do all four of these methods. So you can have the property management company sign on the loan, so that they’re on the GP side, have them invest on the deal, and bring on their own investors, and then obviously give them an ownership interest in the GP in return for signing on the loan. It’s really up to you and what your property management company agrees to.
Now, there is one downside to this strategy, and that is if you’re doing one of the strategies/methods that results in the property management company getting a chunk of the GP, meaning that they are a partner in the GP, well then you’re essentially in a sense stuck with that management company. You’re married to that management company for the duration of the deal.
So in the event the property management company is not doing a good job, or even worse, kind of just disappears and you can’t get a hold of them, and completely forsakes the property, or if they turn out to be bad people – there’s lots of different things that can go wrong with property management companies – you’re in a very sticky situation… Because you can’t just fire the property management company. You can, but at the end of the day you can’t fire them from the GP unless you buy them out, which they have to agree to… And if you’re going through all these issues, that’s highly unlikely. And even if it is, it’s going to be a headache for you to go through the process of firing them, buying them out, finding a new management company, finding the money to buy them out, things like that.
So if you are going to approach this strategy, make sure you’re doing adequate due diligence on that property management company upfront. We’ve got some Syndication School episodes where we discuss this, how to find the property management company, what questions to ask them, what questions they should be asking you in order to gauge whether or not you should bring them on as a partner. But as long as you do your due diligence, this strategy is a great way to gain credibility with your passive investors, especially if it is on your first deal.
That concludes this episode. In the meantime, check out some of our other Syndication School episodes on the how-to’s of apartment syndication, download some of our free documents. All that is available at SyndicationSchool.com.
Thank you for listening, have a best ever day, and we’ll talk to you tomorrow.