Sarah is based in Denver and has purchased a 100 unit apartment community in there. She learned how to be a syndicator by investing passively in other syndications, and seeing first hand how to properly do syndications. There are a lot of nuggets for us to pick up in this episode. If you’re wanting to put together a syndication, Sarah has excellent tips for completing your first deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Sarah May Real Estate Background:
- Managing Partner at Regency Investment Group
- Built up a rental portfolio of 125 actively and over 600 passively
- Helping people move their money out of the stock market and into real estate. When not looking at deals
- Former aerospace engineer who became passionate about real estate investing
- Based in Denver, Colorado
- Say hi to her at https://www.regencyinvestmentgroup.com/
- Best Ever Book: ABCs of Real Estate Investing by Ken McElroy
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Sarah May. How are you doing, Sarah?
Sarah May: Good, Joe. Thanks for having me on your show.
Joe Fairless: Yeah, my pleasure. Nice to have you on the show. You and I met in Denver; I was in town for my conference, and I also spoke at a local meetup, and you and I were both on the same panel. I really enjoyed what you were talking about, and invited you to be a guest on the show, so I’m grateful for that.
A little bit about Sarah – she is a managing partner at Regency Investment Group. She initially was investing passively in syndications, and now is an active multifamily syndicator. She’s built up a rental portfolio of 125 units actively, and she is invested in over 600 units passively. She is a former aerospace engineer who became passionate about real estate investing. Based in Denver, Colorado.
With that being said, Sarah, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Sarah May: Sure. I’ve started out while working a full-time job; I mainly bought two to four-unit properties. I tried to buy a couple a year with traditional financing; I did that for five or six years. Then a couple years ago I wanted to scale our side-gig into more of a business, so I started Regency Investment Group and got involved with syndication, and partnering with other people to do bigger deals. Last year we purchased a 100-unit apartment building here in Denver with our partners, and we’re looking for the next deal.
Joe Fairless: You started investing passively – what did you learn from that experience that then you applied towards your 100-unit that you syndicated?
Sarah May: Passive investing is great for getting all the benefits of real estate ownership without the hassle. There’s really minimal ongoing management of the investment as a passive investor. You can diversify your portfolio outside of your local market. I’d say what I learned from being a passive investor was just how important the communication was from the sponsor. I was in several different deals, and every sponsor did things a little differently, but I really appreciated the ones who communicated on a monthly basis, gave simple financial summaries, and then kept to their business plan that they presented initially. So that was big for me – I knew I wanted to communicate with our investors for the deals we put together as efficiently as possible, so we’ve put some tools together to make it very efficient… Monthly newsletters for our investors letting them know how we’re performing; not just the management report, but also comparing that to our proforma that we presented when we first raised the capital.
Joe Fairless: What are some of those tools that you mentioned you’ve put together?
Sarah May: Most of this is done in Excel, but I take the key data from the 300-page property manager financial report, I plug it into Excel which runs some basic calculations to get metrics on income performance, expense for performance, how we’re tracking to our budget, capital expenditure, rent per square foot… Things like that.
Joe Fairless: You identified an opportunity to then go from passive to active. You said you started out while working your full-time job as an aerospace engineer… Did you close on your 100-unit while you had your full-time job?
Sarah May: No, I actually was on a leave of absence. I didn’t immediately resign from my position. I took a 12-month leave of absence to essentially test out real estate. I’m an engineer, so I hedged my bets [unintelligible [00:04:24].28] being risk-averse. This was over a year and a half ago now, and I was able to essentially educate myself while still working a full-time job, and go to lots of conferences, and then I think the biggest piece was finding a mentor who I felt confident would be able to help me meet my syndication goals, and then also finding business partners who had a depth of experience doing what I wanted to do and partnering with them.
Once I had those pieces of the puzzle together, I felt a lot more confident leaving my job to focus full-time on real estate.
Joe Fairless: So you basically had income, then you didn’t have income for 12 months. What did you think about that? Are you married?
Sarah May: I am, yes.
Joe Fairless: And what did your significant other think about that? “…income to no income, and now I’m gonna just see what happens over 12 months.”
Sarah May: I think the income part was tough, but we had those passive cashflows from our other investments, so it wasn’t going to be a pinch, which was — we were grateful for that… But it was more of an identity crisis, because when you tell people “Oh, you’re an aerospace engineer and you work on spacecraft”, people kind of get the idea you don’t really have to say much else… But then when you tell someone “Oh, you buy apartment buildings and work with investors”, it’s something most people haven’t heard of, and it takes a lot more explaining; my identity for 10+ years had been an engineer, so it was kind of a reinventing myself a little bit, which I think was the scariest in the beginning.
Joe Fairless: Any tips for someone who has a significant other who they want to propose this to, where they leave their job and don’t make money, but they wanna pursue this?
Sarah May: I would just say make sure that you’re passionate about the business and wanting to stick with it in the long-term. I thought things were going to happen immediately after I quit my job. I thought I had everything together, but it still took almost a year before we bought our deal with our investors, so… Hard work and persistence are key, and if you know your own investor DNA and know that multifamily is where you wanna be, you know that you want to raise capital and be the ringleader for this sort of deals, go for it. I think that your passion and determination will win over your significant other.
Joe Fairless: You said you had an identity crisis… People knew you as an aerospace engineer, and you said that’s a pretty simple thing where people understand it – you talk to smarter people than me; I have some follow-up questions for you on that, but now is not the time or place for that follow-up line of questioning… As far as changing the perception that people have about your from an aerospace engineer to someone who partners with investors and buys apartment communities, how did you do that?
Sarah May: I think a lot of it was just networking, as I got more and more connected with the local real estate industry… That’s how I started to be viewed by others, and that’s how I started to view myself. In real estate syndication, as we know, there’s a large team of people that you have to build around you to be successful, so you know, talking to the brokers, the lenders, the attorneys, the investors, and kind of putting together that team around myself.
As I did that, it felt like just a natural transition into being a real estate investor full-time. I think that was the biggest — it eased the transition the most for me.
Joe Fairless: Let’s talk about the 100-unit. What were you personally risking by putting that deal together?
Sarah May: I think the biggest difference between these large commercial deals and smaller multifamily deals is putting down hard money at the beginning of the contract period… But that’s not like a hard money lender, but hard money is essentially non-refundable earnest money, where even if you discover a major defect in the property or the financials, the seller gets to keep the money.
I personally had $50,000 on the line for the deal that we were syndicating, and that was my money, that was investors’ money… And the first time you do that it’s a little intimidating; I did things to mitigate the risk, but that felt like a big risk at first, as well as it takes a lot more upfront costs for due diligence, and application fees, and things like that. So financial risk felt a little bit more extreme, but actually managing the property and seeing it go really well – it’s been a really non-stressful experience, thankfully.
Joe Fairless: Yes, I’m knocking on wood for you right now, by the way. We do non-refundable earnest money day one as well, and there’s three scenarios where it would become refundable. One is something wrong with the title; two is something wrong in the environmental, and then three – seller default. Did you have those three in there, or is it just non-refundable?
Sarah May: We did. We had the title defect and the seller default language in there. I don’t remember about the third one, but we did have that.
Joe Fairless: But otherwise, if it’s 95% physical occupancy and you go in and you do a lease audit and it’s 60% economic occupancy, you got 50k in and you’ve gotta figure out what to do, right?
Sarah May: You’ve gotta make the deal work somehow.
Joe Fairless: What gave you the confidence to put $50,000 on the line? And I know $50,000 is a lot of money at any point in time in life, to Warren Buffett or to a high school student who has never had a job, in those savings account, but how significant was the $50,000 to you at that point in time in your financial wealth standpoint?
Sarah May: It wasn’t gonna change our financial situation one way or the other if we had lost that money, but we just had never done an investment where it was that easy to lose your money if one thing went against your favor. But still, it’s a lot of money, but the deal size that we were doing – it really was not unreasonable at all to put that much in. I think some deals that size – it’s more like $150,000 non-refundable earnest money, so in that sense we were getting a good deal, only having to do 50k…
But how I got the confidence to move forward with that was just knowing I have the team, knowing I have the business partners who were experienced, knowing we had a great lender lined up and had done our due diligence beforehand. We had an early access agreement on the properties, which means we had our HVAC technician, a roofer, a plumber, a general contractor – all go out to the property and inspect the major systems before we signed the contract. That at least gave us a little more confidence on the physical condition side.
Joe Fairless: Will you elaborate on that, in case that’s a new term or clause, to a Best Ever listener?
Sarah May: Sure. I don’t think it’s very common in residential real estate, but when they’re putting down this hard earnest money on day one (at the contract signing), usually you’ll have a couple weeks beforehand where you’re negotiating the contract. During that two-week period, sometimes you can get the seller to agree to let you go on the property for a day, poke around, and see if there’s anything wrong with the property before you both spend a lot of money drafting up the full contract and moving forward… So they let us do that.
We weren’t able to do unit-by-unit inspections during that early access day, but we were able to get access into a few units and look at the general structure.
Joe Fairless: What’s the incentive for the seller, besides the initial legal fees, which would be pretty nominal, when drafting the PSA over the first couple days? What’s the motivation for a seller to allow you to do that?
Sarah May: In my perspective, I think it’s just the surety of closing the deal. If they’re willing to let you do that and you get comfortable with it, there’s that much more probability that you’re gonna go see the contract through the entire way and buy the property. If they didn’t let you do that, you might find something day 30 into the contract and still be within your right to terminate. And yes, they get to keep your $50,000, but now they have to start from scratch and find a new buyer, so to them I think it’s just more assuring a successful close later on.
Joe Fairless: You’ve been passively investing in over 600 units… Have any of those sold?
Sarah May: The first one is probably gonna sell in about a month.
Joe Fairless: Okay. So you’re still in all of those deals. What have you seen that’s gone wrong?
Sarah May: There’s always things that go wrong. On the multifamily side, I think most of the deals I’ve done have been value-add deals, so it can take longer to get the riff-raff tenants moved out of the property, it can take longer to find a good, reputable contractor to renovate the units, property manager issues, getting inspectors on one property… All they wanted to do was renovate the office, but apparently, the city had some very stringent codes, that they had to do it all to code, and it took months just to get the inspector to agree to let them remodel the office.
Other issues – I think the biggest one honestly is the physical condition of the property. It’s tough to know what the plumbing lines look like, what the electrical system’s condition is, how long the boilers are going to last, if there’s foundation issues… I mean, there’s a whole laundry list of items that can go wrong, and some of them are not easily seen. So I think that’s the biggest pitfall in somebody’s passive deals – the sponsors have done the best they could, but there’s an issue with the boiler or the [unintelligible [00:14:22].14] and we have to fix the issue.
Joe Fairless: As a passive investor, what type of communication — I know we talked about things like monthly simple financial summaries, keep the business plan etc., but specifically when something goes wrong, what have you seen as a communication approach that has worked, and what have you seen that is a bad approach?
Sarah May: I think the best tactic that sponsors can take is just being completely transparent with the investors. If something major happens that is $10,000 or more in unexpected costs, just let them know right away, and ideally let them know the plan to take care of the issue and how you’re gonna pay for it.
On the opposite side of the spectrum, I think the worst approach is just not communicating problems, or not communicating at all with the investors, leaving them to wonder what’s going on. I definitely over-communicate, even on the negatives, and I really have a plan of action to address the problems.
Joe Fairless: You’ve got 125 units; 100 you syndicated, 25 your own portfolio… What’s next for you?
Sarah May: Right now our major focus is finding another apartment deal that we can syndicate. We have lots of investors anxious to get another property in the Denver area. It’s tough finding deals with the market being so tight, so that’s our number one priority; simultaneously, I’m still running our other rental portfolio and managing the business plan for our Fairview Apartments that we’ve syndicated, and making sure that everything stays on track there.
Joe Fairless: You said you’re running your other rental portfolio – does that mean you’re self-managing?
Sarah May: No, no, but we’re always doing projects. We buy B and C class properties, so we’re always renovating a property, renting out a property, trying to find new properties, selling properties… The asset management side.
Joe Fairless: Okay, I’m with you. How did you find the 100-unit deal you closed on?
Sarah May: That was really traditional to begin with. It was a listing that one of the large apartment brokers in town had out, and it was a journey getting the property. We did the open market competition – this was right at the end of 2016, when the elections happened and interest rates spiked… And I think some of the would-be buyers also got cold feet, but unfortunately the seller also got cold feet and decided he wanted to hold on to it for a little while… So even though at that point in time we had been the highest bidder, we kind of had to wait on the sidelines, and then five months later just by keeping in touch with the broker and asking about the property, we found out that the seller had wanted to sell again, and we were able to make an offer without any other competition from other groups.
Joe Fairless: Hm, the story of perseverance… What tactics are you using to find deals right now?
Sarah May: Mainly through brokers. Also, going [unintelligible [00:17:24].25] looking at tax-distressed properties and potentially reaching out directly to owners, that might be one way of doing it… And then just networking, a lot of networking. I go to several meetups every month, maybe every week… I do apartment associations, and then I’m also part of another investment group based out of Dallas, where my partners are located. So lots of networking, and we can find good deals that way, too.
Joe Fairless: What is your best real estate investing advice ever?
Sarah May: I will answer that in a few different ways. I think it depends what stage you are in investing. I’d say step number one – make sure you know what you want to be doing; you might call this your investor DNA. Do you wanna be an active investor or a passive investor? Do you wanna be flipping houses, wholesaling, in multifamily? Does it meet your lifestyle and financial goals with what strategy you want? Let’s say that’s step one, and in my case, we want to syndicate large multifamily apartment buildings.
Then step two, make sure that you have that passion for the business, because like I was saying, it does take a while to build up the team, and the reputation in your local market to get started.
Then number three, once you are doing deals, just trust but verify everything that you see. For instance, brokers do a great job putting together the OMs and all the property details, but the way that they analyze properties is different than how you as a syndicator should analyze properties. There’s additional cost for closing costs, we have dollars in working capital, and things that brokers don’t usually list because they can fluctuate based on the investor’s business plan and what they wanna do with the property… So trust but verify, and be passionate for the business.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Sarah May: It sounds great!
Joe Fairless: Alright. First, let’s hear from our Best Ever sponsors.
Break: [[00:19:23].23] to [[00:20:05].08]
Joe Fairless: Best ever book you’ve read?
Sarah May: On real estate I love The ABCs of Real Estate Investing, by Ken McElroy. It’s a great introduction to syndication and how to put together bigger deals. And on personal development, I’ve just read the book The Power of Habit, by Charles Duhigg, which is a great book that kind of explains why we do what we do and why society has certain ones as well. It’s really interesting.
Joe Fairless: Best ever deal you’ve done that wasn’t your first and wasn’t your last?
Sarah May: A deal we did was downtown Denver, a little bit of a C/D neighborhood, but close to where things were happening; it was a three-unit, a long time ago. We bought it right before the 2008 recession, but what we learned from that was we still were making money every month from the cashflow, and the market went up over time, and we sold with a 200%-250% profit just on the equity gains… So buy markets with sound fundamentals, and multifamily will decrease your risk in times of economic downturn.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Sarah May: I would say having conflicts of interest with other people. The one and only fix and flip I did, the contractor was the same as the contract with the broker – he sold us the property he was using – and he was also a fix and flipper, and we found out that the contractor wasn’t working on our property, because he was working on our broker’s property all the time… So yeah, avoid conflict of interest and have strong contractual language; that actually would have saved us in the deal… We could have taken the contractor to court for every day he was late, for $250, but he decided to eventually get his act together and finish the project.
Joe Fairless: Best ever way you like to give back?
Sarah May: I love Junior Achievement; I’ve volunteered with them before. Their mission is essentially to educate young people in financial areas. Our school system doesn’t really do a good job educating students, and the fact that 75% of Americans live paycheck to paycheck means that most adults aren’t able to educate their children on financial matters. I would love to see more financial education in the schools, and Junior Achievement has been doing that for a long time.
Joe Fairless: I share your love for Junior Achievement. Best ever way the Best Ever listeners can get in touch with you?
Sarah May: Sure, the best Ever listeners can contact me probably the easiest through my website, www.regencyinvestmentgroup.com, on the Contact Us page. Or you can just reach out directly, and my email is Sarah@regencyinvestmentgroup.com.
Joe Fairless: Sarah, thank you so much for being on the show, talking about the evolution of your real estate ventures, from the 2-4 units to syndicating 100-unit apartment communities, how you started investing passively… You learned how important communication is as a deal sponsor, and the different aspects of that communication – certainly, helpful for the Best Ever listeners who are looking to eventually syndicate deals. If they’re investing passively, they’ll want to invest with a syndicator who is a good communicator, and a way to test that is perhaps asking for reports on other properties that they’ve recently sent out, just so you get a sense of how they communicate; that way, you can verify that, since that is such an important aspect for when you eventually do become full-time doing this.
Congrats on the 100-unit being not an issue. Again, I’ve knocked on wood for you on that one, and I’m really grateful we got to meet in Denver, and looking forward to staying in touch.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Sarah May: Thanks, Joe. Great being on.