JF1884: When To NOT Work With A Passive Investor On An Apartment Deal | Syndication School with Theo Hicks
Obviously we talk and write a lot about finding private investors, but we don’t talk so much about when you shouldn’t work with them. Priority number one is having an alignment of interests with your investors, and ideally they treat you as a partner rather than a vendor. Theo will explain that and more in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Theo Hicks: Hi, Best Ever listeners, and welcome 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, every Wednesday and Thursday, we release two podcast episodes on the Best Real Estate Investing Ever Show, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, especially the earlier series, we will offer some sort of resource for you to download, whether it’s a PowerPoint Template, Excel calculator, PDF how-to guide, some sort of resource for you to download for free, that accompanies the episode or series. All of these free resources, as well as the free past Syndication School series, can be found at SyndicationSchool.com.
In this episode we are going to talk about when to not work with a passive investor on an apartment deal. A lot of content is geared towards how to find passive investors, how to retain passive investors, but there’s not much content on when to actually not work with a particular individual.
Now, when you are first raising money for deals to purchase apartment communities, most people as long as this person is interested in investing and meets the accredited investor qualifications – if that is one of the criteria you have for your investors – then typically their capital is accepted into the deal, really without any other hesitation. “Are you qualified and do you wanna invest? Alright, come on and invest in this deal.” But maybe something you wanna do starting out, or most likely this will occur when you’ve gotten a few deals under your belt, and you’ve got a large list of investors, maybe you have a waiting list at a few of your deals, or it fills up really quickly, you might wanna consider potentially not working with certain passive investors if there are some red flags from the get go.
It’s important to be aware of these red flags right away, when you’re first starting out, but obviously – and again, this is up to you, but if you really need this person to invest and there are red flags, that decision is up to you… But eventually, you’ll want to only work with passive investors who do not have these red flags.
Before I go into these red flags, this is gonna be important for you to first define what the ideal relationship will be between you and your passive investors. Typically, your syndication deals are gonna be anywhere from five years to ten years. Maybe you sell early, maybe you hold on later, but generally speaking, the business plan is going to be five years. So you buy it and then you sell it within 5 or 10 years. In that case, you’re gonna have a relationship with your passive investors for at least the period of the business plan. Obviously, ideally it will be longer, because they’re coming back for multiple deals, but the very least, the relationship is going to be five years, or whatever the length of your business plan is going to be.
So if you’re gonna be in a relationship with someone for that long, then it’s best if you have a passive investor who trusts you as a person, personally, but as well as a businessperson, and also treats you as a partner in the deal.
Now, the opposite of that would be if they were looking at you as more of a vendor. So think of how you would treat a partner, compared to someone for example that you’re buying some commodity from one time; like you’re buying internet, or something.
So based off of Joe’s experience, having conversations with hundreds of accredited investors, thousands of accredited investors, having hundreds of accredited investors invest in his deals, completed upward of 20 apartment syndication deals, there are two major re flags or factors that indicate to him that the relationship between him and that passive investor is not gonna meet these requirements. It’s not gonna meet the requirements of the passive investor trusting him, and the passive investor treating him as a partner rather than as a vendor.
The first red flag is contempt. There was a famous study that was published in the 1990 by a marriage researcher named John Gottman, and he videotaped newlywed couples discussing a controversial topic for 15 minutes. The purpose of this study was to measure how these newlyweds fought over this controversial topic. Then, 3-6 years later Gottman and his team checked back in on these couples to see what their marital status was. Were they together, or were they divorced?
As a result of this study, they determined that they could predict with an accuracy of 83% if newlywed couples that they interviewed would be divorced. And based off of their analysis, they’ve found four major emotional reactions that are destructive to marriages, and of the four, contempt is the strongest. So if there is contempt in a marriage, which they measured by “Was there contempt during this back-and-forth argument over a controversial subject?”, then that marriage is most likely not going to last.
Now, you may be saying to yourself, “Theo, what does marriage have anything to do with apartment syndications?” Well, marriage is a partnership, and since the ideal relationship between you and your passive investor is also a partnership, then marriages and business partnerships obviously are not the exact same, but the same concepts that apply to whether a long-term marriage is gonna last can also be used to apply to business partnerships.
According to Dictionary.com, contempt is the feeling that a person or a thing is beneath consideration, worthless, or deserving of scorn. So how do you identify if there is contempt between you and a passive investor? The best way to do that is going to be having to trust your gut. So do you get the feeling that this person sees you as an equal and as a partner, or do you get the sense that they look down on you and see you as more of a vendor, that you’re there to simply serve them and that you are not at the same level as them?
For example, Joe received an email correspondence from a potential investor who had led off the conversation by saying “My standards are high. My patience for slick marketing is low.” So Joe responded by providing him with some information about the company, which included past case studies of the returns he was able to provide to some of his investors, to which this individual replied “So, what I need to hear is why do some deals with you, as opposed to doing deals with the company that I currently invest with?”
Now, based off of this interaction, Joe got the sense — based on the interactions and these replies, Joe got the sense that there were traces of contempt coming from this person. He started off by saying that he has very high standards, he doesn’t wanna see slick marketing, “Why should I invest with you over someone else?” Joe got the sense there that this person thought that he was beneath consideration. Maybe not necessarily completely worthless, but definitely below the worth of him himself. So Joe politely explained to this individual that they would not be a good fit for his money.
Now, if Joe was earlier on in his career, he said that he would have likely brought this individual on as a partner, because he didn’t have a lot of access to money, so really any dollar coming in was worth any sort of contempt that he received. But now that he has already created strong relationships with his current investors, he didn’t find the potential issues that could come from this individual worth pursuing the relationship any further.
Of course, maybe this person was having a bad day, maybe the emotions couldn’t get communicated properly through email, but Joe sensed that there might potentially be a chance that this relationship would not work, and the potential issues that could have arised from this relationship just weren’t worth it for him.
So if you are having a conversation with an investor and your gut is telling you that this person might potentially hold you in contempt, then our recommendation is to pass on this relationship. Instead, you wanna make sure you’re setting up relationships for success from the get go by only working with investors who treat you as an equal and who want to have a mutually beneficial partnership, as opposed to only talking about what’s in it for them. And again, this is going to be something that you’re not going to be able to quantitatively measure. It’s going to be a subjective gut reaction.
Sometimes you might be wrong, but again, if there’s a chance that this person holds you in contempt, there’s a chance that there’s going to be potential issues with this individual in the future, you have to ask yourself “Is it worth bringing on that capital, as opposed to working with investors who are looking for a long-term partnership?” So that’s red flag number one, “Does this individual hold you in contempt?”
Red flag number two is going to be the individual asking you a lot of accusatory questions that don’t convey that they trust you. Again, we’ve already covered the partnership aspect of the ideal passive investor. The other characteristic is trust. So do they trust you? One way to determine if they might not have a high-level of trust in you is if they ask you a laundry list of questions in an accusatory tone.
For example, Joe has an investor who literally sent him a list of over 50 questions that are written in an accusatory fashion for every single new deal that he sends out. So every time he sends out a new deal email, this person sends him a massive list of questions that aren’t asked in good faith. After Joe is taking the time to answer all these questions for multiple deals, this person has yet to invest in any of these deals… Because since they are asking these questions in an accusatory manner, no matter how Joe responds, they are always still suspicious of Joe, Joe’s company and his deals.
Now, an important distinction to make here is that you – and Joe, obviously – does not have an issue with investors sending him a list of questions. Joe doesn’t have an issue with investors sending him a list of 50 questions, of 100 questions, of 1,000 questions. It doesn’t matter how long. In fact, he encourages that investors ask him questions, because the more information that he can provide to them about the deal, the more confidence they’re gonna have in the investment overall. At the end of the day, that’s important, because these people are trusting Joe with his hard-earned money, and he wants them to be confident that they will be taken care of.
So the red flag here isn’t a long list of questions, but it is the tone in which the questions are asked, so the questions being asked in an accusatory manner… Because that conveys that they don’t have trust in Joe and his team. Plus, since they don’t have trust – that’s the main reason people invest, is if they trust you – then they’re not going to invest in the deal.
At the end of the day, the key to a successful relationship, as I mentioned, is going to be that trust factor. So if your instincts are telling you that there is a lack of trust, which one example is conveyed through a list of accusatory questions, but there’s other ways that people can convey that they don’t trust you, then Joe no longer decides to pursue that relationship.
Again, this one is also going to be something you’re not able to quantify with numbers, but it’s more of a gut feeling. So if you’re reading through questions and they aren’t asking them in good faith, they’re not asking them to get information to determine if they wanna invest or not, but they’re asking them to trip you up, then that is an indication that they do not have trust in you. And if they don’t trust you, they’re not gonna invest in the deal. And if they do, there’s going to be issues that arise.
In conclusion, you do not wanna work with every single passive investor who is interested in investing and who has the qualifications to invest. The two main red flags that if you see them you should consider not partnering with this individual, is going to be 1) contempt, and 2) asking a lot of accusatory questions. Again, the contempt is an indication that they are not looking for a partnership, and the long list of accusatory questions indicates that they do not trust you.
And then again, I know I said this multiple times, but just to finish off the episode I wanna say it again – both of these factors are very, very subjective. Each syndicator and each investor has a different personality, and each syndicator and each investor will get along with the different types of people. So just because you get the feeling that someone holds you in contempt, or get the feeling that someone sent you a list of questions in an accusatory tone, does not mean that they are a bad person, but it does indicate that you will have an issue connecting with this individual in such a way that builds a strong relationship that is capable of surviving the course of a syndication deal.
So overall, if you see either of these red flags, and you feel (subjectively) that these red flags are present, make sure you’re polite in your way of declining to work with this individual, but we strongly consider not working with that particular passive investor.
That concludes the episode of when to not work with a passive investor on an apartment deal. Until next time, make sure you check out some of the other Syndication School series or Syndication School episodes about the how-to’s of apartment syndications, and make sure you also download all of our free documents. All those are available at SyndicationSchool.com.
Thank you for listening, and I will talk to you tomorrow.