JF2361: The Importance Of Having An Exit Strategy At The Start | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will discuss the importance of thinking about the exit strategy before entering a deal. In a way, this is not the topic that gets covered often since most investors are not thinking ahead far enough. However, selling the asset is a vital part of the investment process.

Travis gives an example of how something that looks like a great buy at first can turn out to be a lemon if nobody wants to take it off your hands. And just because a property is at a great acquisition point, it doesn’t mean that you should jump into the deal.

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening!

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to another edition of the Actively Passive Investing Show. As always, I am your co-host, Theo Hicks, with Travis Watts. Travis, how are you doing today?

Travis Watts: Hey, Theo. Hey, everybody. Happy to be here.

Theo Hicks: Thanks for joining us. Thanks for tuning in, everyone. Today, we’re going to be talking about how to plan for the end. Very ominous, but we’re talking about the exit strategy. A lot of real estate podcasts and content are really focused on the upfront – finding deals, finding GPS from a passive investor perspective, analyzing the deal, understanding the team, and then how to fund the deal, how to get the ongoing evaluations and recaps… But there’s not a lot of focus on the end of the game, what happens at the end of the business plan.

A very common truism in real estate is that you make money on the buy, but in reality, they’re saying is that when you buy it, whatever the price that you buy that is going to impact the amount of money you make at the exit. So really, what we’re talking about is the exit. So what we wanted to do today was go over some of our thoughts based off of a blog post that someone on our team wrote… Our thoughts on how to understand the exit strategy, why it’s important, the different types of an exit strategies, the pros and cons of each… Because if you do make the most money at the exit, that’s probably the most important thing to actually know. And since people don’t talk about it a lot, Travis thought it’d be a good idea to talk about it today. With that said, Travis, do you want to, as usual, introduce in more detail why we’re covering this topic and give some background from your perspective as a passive investor, maybe when you realized that the exit strategy was actually one of the most important aspects of passive investing?

Travis Watts: Absolutely, Theo. I was skimming through joefairless.com the other day, and I just came across this mere coincidence… I just had one of those light bulb, epiphany moments… Being that I’m the director of investor relations, and I talk to investors all the time, I got to thinking of the questions I get asked all the time, and this is certainly not one of them… And I thought, why is that? Everyone’s so concerned with what’s the year one projection, and the cap rate, and the purchase price, and all these things, and analysis paralysis upfront… But what about your ability to sell the asset in general?

I just thought of this just now as you were doing your intro… I remember when I first got started, I was maybe a year into real estate, it was like 2010 or something. I went to this conference and they had an opener, someone that came up before the main act, which was about fix and flips and stuff… And they were trying to sell this tax lien investing software platform or something like that. And I got duped, I bought it. It was a couple grand. It was free information I could have found online. But the funny thing was, I got into this platform they were selling and I started searching for things, and a lot of this stuff was more or less swampland. I’m thinking, “Yeah, it’s cheap. You might be able to acquire this land. It’s very inexpensive. How cool is that? But who wants swampland? Who are you going to sell that to?” So you really could get yourself screwed in something like that, and it was a little bit scary. I did a little bit of a step back, thinking about the bigger picture there and the exit.

When it comes to value add deals – this is why I really want to bring up this topic today. Value add deals, for those that may not be familiar – we talked about this on our last episode, but it’s a strategy where you’re buying a pre-existing asset that’s got some problems of whatever type, you’re going in and fixing those issues, and you’re raising the rents over time. I’m simplifying the strategy, but basically, if I had to put a percentage to it, roughly 50% of your return is coming from cash flow and collected rents as you hold this asset. The other half comes from the equity upside, which is the forced appreciation when you go to sell. So really what we’re talking about is your exit strategy could be 50% of the equation, yet nobody’s talking about this. So I thought we have to bring this up on the show.

I’ll share one more story. I’m in a lot of investor meetup groups and there was this one in particular that I was at… It was kind of this newer syndicator, and he’s up there presenting to the group, and he says, “I tried to chase these 100 unit properties, give or take; anything from 75 units to maybe one and a quarter, somewhere in this sweet spot.” He said “Because I’m above the threshold of a lot of mom and pop operators”, which is true “and I’m below the radar of the institutional buyers.” And I got to thinking, “Then who are you going to sell to?” You’re really limiting your potential and who’s going to buy this asset. Maybe another syndicator, maybe they’re looking for bigger deals, too. So it’s great from the acquisition standpoint, but it might end up biting him later when he goes to sell, and maybe he doesn’t hit the returns, because there’s just not a big buying pool for it. So anyway, it’s certainly something to think about, certainly something to ask a general partner if you’re going to be like me, a limited partner, as to what is your exit game plan? Your strategy? Who have you sold to in the past? You may be able to answer that question yourself, which we’ll get into later. But that’s kind of why we’re covering it. I’ll turn it over to you, Theo, if you’ve got any thoughts so far on that.

Theo Hicks: Yes. I think one important thing to realize as a passive investor, what we’re saying is true – if you’re investing in a deal where value is being forced up, then you’re going your make money via cash flow. That depends on what type of investing you’re doing. Last week or seven episodes before this one, we talked about the four different types of investments. Some of them are more focused on cash flow, and less on the upside. On the other end, it’s development where it’s all upside, no cash flow, and then value-add falls in between there. So if you’re looking at a deal — obviously, when you’re investing you want to make money. So for the value of the property to increase, the value of your investment to increase, so understanding how that calculation is done is important.

There are two metrics that are used to calculate the value of the property. It’s going to be the market cap rate; that’ll be based off of recent sales of similar apartment communities. Then there’s going to be the net operating income. Its net operating income, divided by the market cap rate, equals the value of the property. So those are the two metrics that can be changed in order to increase the value of the property. So when you are investing in a deal, the goal, obviously, is to increase the value, so you want to know which one of those two are they banking on? Are they banking on the cap rates in [unintelligible [00:09:49].01] the lower it gets, the higher the value is… So are they banking on the cap rate going down and they’re just going to keep the net operating income the same or just have it go up with inflation? Do they plan on making the market cap rate the exact same, and increasing the NOI? Or is it going to be a combination of each?

So that’s why on the one hand, the sales comps are going to be important when they’re buying. Ideally, they’re buying below market rates, because when they do that, then that’s just going to be free equity. If the market cap rate is 5% and they’re buying it at 6%, then they have free equity of 1%, based off of the NOI, for free. That’s obviously one thing that’s important. If they buy it at the market rate, that’s fine. But being the highest price, buying a deal at three cap and a five cap market – probably not the best idea; but at or above is better.

And then what’s even more important, which is rarely talked about, is the exit cap rate, because that’s what’s going to determine the value of the property at the exit. So how are they determining the exit cap rate – some call it the reversion cap rate – is very, very important. That’s one of the most important questions you want to know, that’s probably hidden or not thought about. So there are lots of approaches. Some sponsors will just set it equal to what it is today, and some of them will assume that’s going to go lower.

The best approach is to actually assume the market is going to be worse at exit than at buy. So if they buy it and the market cap rate is at 5%, and they plan on selling in five years, the best practice is 0.1% or 100 basis points every year of the hold. So they’ll assume an exit cap rate of 5.5%. That way if the market is the same, then point 5% free equity. If the market gets better and the cap rates go down, then even better. But if the market does worse at sale – maybe a recession happens, something happens that changes a market cap rates in the area – then the return projections are going to be met depending on how far up the cap rate went.

But as Travis said, it is something that is super important and maybe not thought about… Not like hidden knowledge, but it’s something that you wouldn’t really think about; asking about an exit cap rate or reversion cap rate seems like it’s not that big of a deal, but when you’re talking about millions of dollars or hundreds of thousands of dollars in NOI, a 0.1% difference in the cap rate is going to change the value of that property by a lot. So just some of the things to keep in mind. Ultimately, the question here is, are they banking on NOI, cap rate, or both? If they’re banking the cap rate, what evidence do they have to support that this cap rate is going to go where they say it’s going to go, if they’re assuming it’s going to get better?

Travis Watts: Yeah, that’s a great point. All great points. But let’s talk about the hidden knowledge thing that you brought up. I was watching a webinar… I look at a lot of deals, for anyone who’s not aware; I look at a ton of deals. And I was on this crowdfunding platform, because someone asked me a question about it, and I was checking it out… I’m watching this webinar presentation on this deal; it was out in Florida. Everything looks great; projections look great, cash flow looks great, the exit looks great… I’m thinking “Wow, this seems like a pretty solid deal.” Well, the thing they left out was the reversion cap rate. No one talked about it in the presentation, no one asked about it in the Q&A… So I circled back with that sponsor afterwards and I said, “I only have one question, because I didn’t hear it. Maybe I missed it. But what’s your projected exit cap?” They were buying at five cap, basically, and they were projecting a four cap on exit.

Theo Hicks: Oh, no…

Travis Watts: I thought, ” Man, right out, I’m done.” There’s no way. I wouldn’t touch that thing. To your point, if they were buying at a five cap, the answer I was looking for was 5.5, maybe six; some conservative approach, assuming that the market had softened. Then those projected returns I’m looking at would then become a lot more conservative. But instead, they were taking a very aggressive approach, to try to make that deal look good. So this needs to be part of your criteria, anybody listening who’s a limited partner, like I am. I’m such a big advocate for self-awareness, writing down your goals, your criteria on these deals… That has to be one, is to look at cap rates. That’s my little rant on that.

But at the end of the day, Theo, and everybody, all of what we’re talking about, it’s a balancing act of risk. What we’re really talking about is what’s the risk. So you have asset classes, property ties, business plans, leverage, the time horizon… But really, at the end of the day, you’re trying to answer two questions. Is it likely that I’m going to make money? How much money? And am I okay with those projected returns? But more importantly, the feasibility of that. So I’m always trying to stack up when I’m listening to presentations or when I’m on calls with general partners… What I’m trying to figure out is, “Okay, I understand what you’re telling me. I understand that you’re saying it’s going to be this kind of percentage, this kind of return this kind of whatever. But what do I have to go by to give me certainty around that?” That’s why track record and experience are so important. How many times have you done this? Is this your typical business plan and business model? Is this your typical hold period? Typical underwriting structure? All these kinds of things. I like to know about the good, bad, and ugly of past performance. Do you have deals struggling right now? Have you lost money? Have you had capital calls as a company? I could go on and on. All I’m really talking about though is assessing the risk in all of this. So those would be my thoughts on that. I’ll turn it back to you, Theo.

Theo Hicks: Exactly. Assessing the risk and then what you’re comfortable with. As Travis mentioned, there’s a lot of different types of syndications you can invest in, with different types of exit strategies, and there isn’t really one that’s objectively better than the other, always, at all times. It just comes down to what your goals are. Sometimes there are syndicators who will buy a property, and they don’t really have an end date. They’re going to sell at some point, but they don’t really have a set number of years when they’re going to sell the property. It might just be they buy a core asset that’s already fully completed, and they might just hold it for a while. So if your goal is to have a very low-risk investment and make a return, and you’re not necessarily worried about making a large chunk of capital at an exit, then that might be a good strategy for you.

Another long-term hold strategy would be they might do a value-add play, but then rather than selling once they’ve completed the value-add, they might refinance, or do a supplemental loan, and then refinance. That way you might get, maybe not as much money back as you’ve gotten if they would have sold it, but you’ll still get a sizable return, assuming that the GP gives the LPs refinance proceeds. But then they’ll keep holding on to the deal and you’ll keep making cash flow. The cash flow might be the same, it might go down, it might go up, depending on how big the refinance was, and things like that. Other ones might plan to fully reposition and sell after three to five years. When that happens, you get all your money back, plus 50% or so profits. Again, everything depends. These numbers aren’t an exact science.

Then you’ve got a development deal, where there’s no cash flow at all, and then they exit after two or three years, or maybe they refinance and they hold… So there are all these different exit strategies, so you want to kind of ask yourself, what do you want? Do you want to double your money in five years and then get it all back? Do you want to just make a cash flow, and then that’s it? So understanding what the exit is, is going to determine which type of syndication you invest in… Because if you want that equity upside, but you also want to get the equity, you don’t want to sit there and be bigger, then you’re going to want to invest in a deal where they’re going to fix it up, force that value up, and then sell and get you your money back. You’re not going to want to invest in a core turnkey asset that is going to cash flow.

Travis Watts: Exactly. Another one that just came to mind too is a REIT roll-up. Sometimes these syndicators, they’re buying portfolio deals, which means maybe two or three properties, and they’re putting them in one small portfolio, and then they have lots of these portfolios. Then they’re going to find a REIT, maybe a pre-existing, real estate investment trust, or maybe a newly formed REIT, who’s going to acquire all of those properties in one big package. I’m using the term REIT roll-up. Maybe it’s a jargon term in the industry, but basically, you’re wrapping up all of your assets and selling them all off either to Wall Street, or it could be a private REIT. But that’s another exit strategy. But here’s how I look at it… There are really four common exits; I’m not saying this is all-inclusive here, but you could sell, like I just said, to a real estate investment trust, to a REIT, publicly traded or private. That’s one thing. You could sell to institutions, so pension funds, insurance companies, etc. That’s institutional capital, in layman’s terms. Again, not all-inclusive. Syndicator groups, and then individuals, and/or family office, things like that. It just kind of depends.

Let’s talk about that. Institutions and REITs, typically… Again, I have to use a generalization here, and that’s the disclaimer… But typically, they’re investing for cash flow and for yield, and newer properties, or recently renovated properties. I would say they’re mostly in the A class and the B to B plus categories of assets. They’re not in the business, usually, of value-add and doing lots of heavy turnaround and repositioning. They don’t want to buy assets that have leaking roofs and HVACs going out and under-market rents. They just want a turnkey asset; they want to place their capital, and they want to have virtually no worries for 5, 10, 15 years, whatever their business plan is. Now when you’re talking about syndicators and individual buyers – again, as a generalization – they’re typically looking in the B and the C class space for what these institutions are basically offloading… Because now they have problems, they need work, the rents are unable to be pushed anymore, because it’s an older asset that hasn’t really been kept up. Maybe it’s got outdated amenities… All these kinds of things. So typically, they’re looking to go in with a value-add play, and renovate, and bring things back up to the market level, and then sell back oftentimes to REITs and institutional capital and things like that. It’s just different business plans.

To your point, Theo. There isn’t a right and a wrongm and a lot of people, they prefer core assets where they’re looking for just that natural inflation, if you will, to kind of lift the values over time. They’re not looking for that forced appreciation in the deal. So those are the four exits, in my opinion, that are most common. Those are my thoughts on that. If you have any final thoughts, Theo?

Theo Hicks: Yeah. I think we went over a lot of information here. [unintelligible [00:20:46].05] condense it down… So just as a passive investor, what questions do you want to have answered based off of the exit strategy? So the first question, arguably the most important question about the exit strategy is, what is that exit cap rate assumption? What is that reversion cap rate assumption that will determine how conservative or aggressive they are being? And again, the best practice is to have an exit cap rate that is higher than the current cap rate. How higher that is, it depends, but it shouldn’t be lower than. Travis gave the story of the 4% exit cap rate, 5% in-place cap rate – probably not the best idea.

Then the other question based off what Travis just talked about is who do you typically sell to on the back end? Or who do you expect to buy this property on the back end? And then based off of what Travis said, was their answer aligned to what Travis just talked about? So are they planning on buying a B or C asset and doing a value-add play, fully renovating it and then eventually selling it? Then they should say that they plan on selling it to an institution, or if it’s like a fund, a REIT. But if they are going to buy a B property and just kind of hold it and not do anything, and then claim they’re going to sell it to an institution – well, that’s probably not going to happen.

I think those are the two most important questions – what’s the exit cap rate, and their justification for how they came up with that? And then two, who’s your typical buyer? Who do you expect to sell to on the back end?

Travis Watts: Yep. Those are great points. That’s a great way to phrase it, too – who is your typical or ideal buyer in this situation? What type of individual, or institution, or what have you. Because the answer, quite frankly, is that nobody knows. Five years down the road who’s going to buy this deal? I don’t know. Nobody knows. But the point is, you’re looking for competence. You’re looking for “Well, we’ve thought this through”, let’s put it that way. “In the past, we’ve sold to three institutional buyers and one syndicator.” Well, that kind of answers your question there. To your point, Theo, you just want to make sure all this stuff aligns with what you’re wanting. Does that help you accomplish your goals? Are they being realistic with their business plan and approach? That’s it.

Theo Hicks: The competence thing is huge [unintelligible [00:22:55].14] trap them or trick them… But these are important things to think about, and you can kind of gauge the sophistication of the GP by asking them some of these questions that they probably aren’t asked a lot. If they don’t really have an answer… They can say, “I don’t know, I can figure that out for you, and get back to you.” But if they start making things up or sound like they don’t know what they’re talking about, that could save you. Something as simple as that could save you from potentially losing your capital.

Travis, going back to your example, which was perfect – if you didn’t know to ask that question because it wasn’t presented to you, you would have invested in a deal with the return projections based off of a very aggressive cap rate assumption. You’re just asking that question, and they’re getting their honest answer, which we’re assuming the markets going to get way better when they sell, or them saying, “Well, I never thought about that,” or whatever. It just kind of gives you an idea of who you’re working with here. So is there anything else you want to mention, Travis, before we wrap up?

Travis Watts: No, I think we hit it. So for anybody listening, feel free to reach out to us with any additional questions or leave a comment. We’re happy to answer those.

Theo Hicks: Yes, any questions? Just email me at theo@joefairless.com. We’re also doing a new shorter segment called 60 Second Question. So you submit your Actively Passive Investing questions. You can email those to me at theo@joefairless.com. If you’re listening to this on YouTube, you can also leave it in the comments section. Completely up to you. Just leave your name and your question, and we will read the question and we will answer it in 60 seconds or less. 60 Second Question, email theo@joefairless.com, and we post those on our YouTube channel. So as always, Travis, thank you for joining me today. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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JF2360: Best Practices For Converting More Passive Investors| Syndication School With Theo Hicks

In today’s Syndication School episode, Theo Hicks shares some of the best practices used by Ted Greene, the Investor Relations Manager of Spartan Investment Group.

Theo shares several techniques that’ll help you build trust and form a relationship with potential passive investors. Many syndicators have been in the business for such a long time that it’s hard for them to put themselves into the shoes of someone who’s looking to become a limited partner for the very first time. And while numbers are of immense importance, one shouldn’t underestimate the power of human connection when sealing the deal.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening!

Click here for more info on groundbreaker.co


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners, and welcome back to another edition of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks.

Each week we air a Syndication School episode that focuses on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes, we’ve given away some free documents. Free PDF how-to guides, free PowerPoint presentation templates, as well as Excel calculator templates. All of these free documents, as well as the previously released episodes, are on syndicationschool.com.

In this episode, we’re going to focus a little bit on investor relations. We’re going to talk about some of the best practices when you are taking a person who is interested in investing, but hasn’t invested before, or at least hasn’t invested with you, so a non-current investor, and then ultimately converting them into a current investor, someone who’s passively investing in your deals.

Most of the information that I talk about today is going to come from a conversation I had with the investor relations manager at Spartan Investment Group. His name is Ted Green. He essentially talks to investors all day, talks to potential investors, educating them on what they do, and obviously talking to current investors as well. So here are some tips, some things to think about.  A lot of these, at least when I heard them, they seemed counterintuitive… Because most people when they think of converting customers, they think of hot or hard sales techniques, whereas Ted’s approach is a lot more passive and educational, and less aggressive and constantly bombarding them and asking them to invest in deals.

It seems that when you’re dealing with smaller, cheaper widgets, or you’re selling knives, or pens, or something, then that more aggressive approach works, because you’re able to get to a larger audience. So if you have a 1% conversion rate, that’s okay because you’re talking to tens of thousands of people. Whereas when it comes to accredited investors, the conversion rate is going to be more important, because there are less people to talk to. It seems like that an aggressive approach might turn people off… So that’s why maybe these longer-term approaches work. Plus, acccredited investors are definitely more sophisticated as well and they can probably see straight through those hard sales techniques. But anyway, so these first best practices are how the conversation goes on the phone.

What you’re going to want to do, according to Ted, is you’ll start off by obviously doing the traditional standard, “Here’s who we are. Here’s what we do.” But the purpose of the call is to explain to the potential investor the benefits of investing in your apartment syndications. In Ted’s case, it’s self-storage facilities… But investing in apartment syndications compared to whatever else they’re currently investing in. So you give a background of your company, you ask them information on who they are, what they’re up to, what they’re investing in. You find out what they’re investing in – stocks, bonds, 401Ks – and then to have enough knowledge to explain to them why investing in say value-add apartments syndications is more advantageous than investing in the stock market, or investing in bonds, or focusing on a 401k only.

For value-add apartments syndications, obviously, the main selling point, so to speak, would be the consistent cash flow, as well as the forced appreciation. A lot of these stocks, and bonds, and 401 Ks, their value is driven by the market, natural market appreciation. Whereas for value-add syndications, we benefit from that, but if that doesn’t happen, then we also have the added benefits of the forced value through these renovations, through increasing the rents, doing operational improvements to optimize the expenses, to ultimately increase that net operating income over time… Which will not only result in a higher ongoing cash flow, but also results in growth in your actual investment, so you cash out in say five years. We then go off based off your historic track record, we project that you make this much of equity multiple at the exit…

As opposed to if we talk about the standard stock market returns or what happened at the recession, things like that. Ultimately, the goal of that conversation is to position why investing in your deals with your company is better than investing in whatever they’re investing in right now.

Now, something else that I asked Ted about was common objections that come up. He said that about half the people he talks to, sometimes even more, it’s their first time speaking with a syndicator, so you might get a lot of questions that might seem to you to be basic and simple. But to this person, since this is their first time looking at something like this, are not so basic and not so simple. The conversation is most likely not going to be super advanced, so you don’t need to know the specifics on securities law or to tell them different risk disclosures that are listed in the PPM or anything. But more simply, why should I invest in this, how does the process work, type of questions.

This is probably the most fascinating thing that he said. He said that when he talks to investors and they ask him how much they should be investing or how much their portfolio should be in passive real estate investment, and should they transition all their money from their investments into real estate, or half, or a smaller amount, and he always tells them to max out at 10% on their first deal. You don’t necessarily need to go all-in on your first deal. It’s not good to go all-in on your first deal. Make sure it’s something that you’re comfortable with, you like the returns, you understand it first before you slowly, in a ladder approach, increase your investment.

I’m sure when you talk to investors, they’re really going to appreciate that, because it’s a more softer technique. You’re not telling them “Oh, yes. You invest 50% or 100% of your retirement into my deal, and I promise you that I will double your money in five years.” Instead to make them more comfortable, say “You can do 2%, or 5%, or 10% of your investment money into this deal, make sure you like it, make sure you’re comfortable.”

Then what people usually do is they’ll do a ladder approach. They’ll do one deal, and then once they’re comfortable with that, they’ll do another deal, then maybe they’ll do up to five deals at once, and then they’ll wait until one deal sells, and then once that one deal sells, they’ll invest in other deals. Lots of different strategies, but overall, I recommend that you start off with a lower investment amount, and then once you get comfortable, gradually increase that over time.

And for some other common objections, we have a whole Syndication School series, I think. I think it’s like four episodes on the 50+… I can’t remember exactly how many objections there are. 51 objections that you’re going to get from passive investors, so make sure you check that out. If you search on joefairless.com, “Common Passive Investor Objections”, those episodes will come up. So obviously a lot more than that, but “How much I should invest?” is something I don’t think is on the list of questions I answered on that Syndication School episode.

And something else kind of on the same note is that if this might be the first time they’re talking to a syndicator, they’re not going to invest immediately. They might, but they also might not invest immediately. It might be a month, or six months, or a year, or multiple years. The idea of value-add apartment syndications and passive investing in real estate, if it’s new to them, it needs to germinate in their mind. The way to expedite that germination process and to speed up the growth of that apartment syndication tree in their mind is to have a good follow-up process.

One of the best things you can do – we always talk about the benefits of a thought leadership platform on this show – is that when we have a conversation with someone and they say it’s their first time talking to a syndicator, and they ask a bunch of questions about the asset management process or questions about what IRR means or what the returns are… Now, whatever questions they ask, kind of keep a mental list or literally type out the question that they have and at the very end of the conversation, mention that you have a podcast, or a YouTube channel, or a blog, where you do a deep dive into various apartment syndication topics. Based off of the conversation, say, “Hey, there’s actually these two or three playlists, or these two or three videos, these two or three blogs, or these two or three podcasts that will be very helpful based on the questions that you asked. I’m going to send you those links after the call.” That way, you just send off the information to them. Now they have access to your YouTube channel, your blog… And they probably did already, but this way you’re at least directing them to specifically what they should be viewing.

And then really, at that point, put the ball in their court. You don’t want to pressure them , again, because the goal is to not only invest you one time, but to invest with you continuously over the next five, 10, 20 years, however long you plan on doing this for. So put the ball in their court, and then whenever you get a deal, they’ll see it because, they’re on your list. Explain to them what the process is when they’re ready to commit, and maybe you can follow up with them — like, ask them if you can put them on the newsletter list that you have, or things like that.

But Ted really said that the ball is in their court. They don’t constantly call people on a weekly or monthly basis. They had that conversation with them, they direct them to more content, and then if the person is interested, they’ll invest, they want to learn more, they’ll reach out to learn more, or they’ll do a deep dive in that YouTube channel. If you don’t have a YouTube channel, or a podcast, or a blog, then obviously this is not going to work, and you should probably start making a thought leadership platform, or at the very least, maybe make a 10 page PDF FAQ that hits on all the commonly asked questions you get, that you can send to them afterward. Or have some sort of content that you can give to them so that they remember you by. So they don’t just talk to you, and then completely forget about you.

The reason why the YouTube channel is really good is that, well, depending on how much content you have, you might have 10, 20, 30 plus hours of content that they can listen to over a period of a couple of months. As you release new content, they’ll get notifications, and they will continuously have you at the top of their mind so that when they’re finally ready to take that jump into apartment syndications, you’re the first person that they think of.

So those are some tips, some best practices. Just to summarize what we talked about during the conversation, make sure you open up by talking about your company, what you focus on. Learning about what they are currently investing in, that way you can tee up the conversation to explain to them why investing in your deals is more beneficial than investing in what they’re currently investing in.

This might be the first time that this person has talked to a syndicator, so this is a new concept to them, so they might not be asking super-advanced questions, but it’s going to need to germinate in their mind before they make a decision to invest… Again, usually.

A good way to disarm them is to explain that they don’t need to go all-in, they can just do a very small percentage of their investment money, 2%, 5%, 10% in their first deal, just to make sure that it’s something that they like and that they’re comfortable doing. From there, they can do a laddered approach. They can maybe set a limit on the number of deals they want to invest in at a time, or the amount of capital they wanna have invested in syndications at that time, and as they become more mature in the process, they might invest more money, invest in more deals.

Encourage them to take a deep dive into your thought leadership platform. After the call, send them a video or two, or a piece of content or two, or three, that you know will be helpful to them based off of the conversation. Try your best not to pressure them, and just give them information that puts the ball in their court. That’s the best way to get them to invest; not only invest, but also come back after they’ve invested, and then make sure you have an easy way for them to commit once they are ready to invest in your deal.

Also, you can put them on your email lists, your newsletter list, any other stuff you send out, new deal list… That way, when they’re ready, if a deal comes across their table, they can just invest and they don’t have to reach out to ask you for your deal information; they already have it.

So those are some best practices for communicating and converting investors. We’ve got a lot more episodes on investor relations, so make sure you check those out as syndicationschool.com. I think we have like an eight-part series on securing commitments from passive investors, plus four hours of content, plus this, plus some of the other videos we’ve done before on this. So yeah, check those out. Those are at syndicationschool.com.

Until next week, thank you for listening and have a Best Ever day.

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JF2332: Balancing W2 Work and Real Estate Investing with Kevin Galang and Adam Ulery

While working full-time, Kevin Galang and Adam Ulery are active real estate investors. Adam prefers to build his portfolio by being a syndicate partner, while Kevin primarily focuses on notes.

Prioritizing and finding a balance is the key when pursuing multiple directions. Kevin works from home, and Adam has a lot of flexibility as a consultant. They both utilize their free time to tackle and execute their real estate objectives and share their knowledge on a podcast show of their own.

Kevin Galang and Adam Ulery  Real Estate Background:

  • Kevin is a full-time software sales engineer and Adam is a business agility coach
  • 6 years of combined experience in real estate
  • Kevin’s portfolio consists of 4 performing notes and 1 nonperforming note
  • Adam’s portfolio consists of 308 doors across 6 properties
  • Based in Tampa Bay, FL
  • Say hi to them at: www.dreamstoneinvest.com and www.notenuggets.com 
  • Best Ever Book: Can’t Hurt Me

Click here for more info on groundbreaker.co

Best Ever Tweet:

“You need to understand how you want the system to run. A system isn’t just magically going to make your life better.” – Kevin Galang.


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with two guests. We have Kevin Galang and Adam Ulrey. Adam and Kevin, how are you both doing today?

Kevin Galang: Doing fantastic.

Adam Ulrey: Awesome. Thanks so much for having us on the show, Theo.

Theo Hicks: No problem. Thank you for joining us today. So a little bit about Kevin and Adam’s background. Kevin is a full-time software sales engineer. And Adam is a business agility coach. They have six years of combined experience in real estate. Kevin’s portfolio consists of four performing notes and one non-performing note. And Adam’s portfolio consists of 308 doors across six properties. They’re both in Tampa Bay, Florida, and the websites are dreamstoneinvest.com and notenuggets.com. So starting with Kevin, and then going to Adam, do you mind telling us some more about your background and what you’re focused on today?

Kevin Galang: Yeah, so as you mentioned earlier, I have a full-time job. I’m sure many of your listeners do. And outside of that, I focus primarily on mortgage notes. I like note investing for a number of reasons. I like the protection aspect. What I mean by that – if the borrower ever defaults, you could take back the property, you’re protected by that asset. From the non-performing note perspective, I love the ability to help solve a problem. Let’s face it, Theo, you know that the average American is kind of one crisis away, as COVID is showing us, from not being able to afford their mortgage. But that doesn’t mean they’re bad borrowers. So I want to be able to come in there, solve the problem, and make a difference in somebody’s life, but at that same time, you’re able to make a return.

Adam Ulrey: Yeah, that’s great. And my background is I work in primarily the software space in the tech industry as an enterprise business agility coach. I help transform businesses. What I invest in real estate wise is multi-family, focusing on large multi-family. I’m a syndicator, and we focus primarily on value-add apartments in the Southeast. I really like that asset class and that focus, because it’s in my opinion the best way to grow your wealth very rapidly. That’s the primary reason why I kind of focus in that area.

Theo Hicks:  So Adam, you’re an active investor? You’re actively on the GP as a syndicator?

Adam Ulrey: That is correct. Yes. My team is Dreamstone Invest, and I’m a partner with those guys.

Theo Hicks: Perfect. So you guys both mentioned that you work full-time jobs. Kevin, would you consider notes passive? Or do you still consider that active investing?

Kevin Galang: I personally am the active investor. So I’m the one finding notes, talking to my borrowers, talking to sellers… But it can be a passive investment. One way that people do it is through partnerships, where I’m be the active person, where I find the note, work with somebody to work with the borrower, and the financial friend is more passive, for lack of a better way of putting it. But there are other passive options, like investing in funds out there that are with notes, and things of that nature.

Theo Hicks: Perfect. Okay, so you both have full-time jobs, and you’re both active investors… So my question for both of you is, how much time are you spending on your real estate business? When are you doing this? What happens if you need to do something and you’re at work? How do you decide what’s given a priority? And anything else you can think of that is a challenge working full-time, as well as being an active investor?

Kevin Galang: Well, sleep is a friend that I’m not familiar with anymore. Just kidding. I really focus on prioritizing. So the nine-to-five during the daytime takes precedence because I have that obligation to the company that I’m working with, to maintain my value as an employee. And I take lunch — for example, I’ll schedule calls to take lunch calls. I work from home, so it’s a bit easier… And then I try to schedule things in the morning. So before eight o’clock, I’m working on stuff, reading about the mortgage industry, writing and creating podcast episodes. And then at night, same thing, I go back to analyzing notes, and Adam and I will record podcast episodes on the weekends… So it’s really a finding that balance; you just kind of make the time for it and figure out what is the most important thing that you need to tackle, and just execute.

Adam Ulrey: Yeah, that’s exactly what I do. You just hustle and make it happen. As a consultant, I’ve got quite a bit of flexibility in my schedule, so I let Kevin put the client’s priorities first, and then I just kind of work around that and fill in. So if I’ve got little pockets of time where I can do something, take a call, or perform an activity, I’ll do that, and then just make up for it later in some way. Fortunately, my work schedule doesn’t need to be like that traditional nine to five. I can work a little earlier or work a little later, or kind of fit work in where I need to, as long as I’m not in front of a client. And when I am, of course, I’m dedicated to that.

Also, systems are a big help. You’ll see social media posts coming out for me at different times during the day – I systematized that; it’s automated. So it’s not always me scheduling the post. A team is a huge piece of how I’m able to achieve that. So I’m partnered with other people at Dreamstone Investments, and they’re working on things during the day while I’m at work, and then I can work on things at night when I’m not working.

Theo Hicks: It sounds like you guys are just working all the time. So on the–

Adam Ulrey: That wouldn’t be wrong… [laughter]

Theo Hicks: I just want to say, what time in the morning are you guys getting up, and then what time are you guys done working at the end of the day?

Kevin Galang: I wake up at around five or 6am, and that’s part of the routine. I’ll meditate, do some journaling, get some workout in, and that for me helps set the momentum, to allow me to figure out, “Alright–” Part of my journal, I kind of future-set, saying “This is what I will accomplish that day.” Then I execute according to that. But I also have the vision of how it connects to everything else. And as far as when I stop working, my girlfriend and I love to watch Jeopardy and compete with each other, so at [7:30] – I’m done by them.

Adam Ulrey: Nice. I also get up early, usually, sometime between six and [6:30] on most mornings. I have a morning routine as well. I use that SAVERS routine that Hal Elrod created in Miracle Morning; that really helps me stay focused during the day. And weekends, I work quite a bit, actually quite a lot.

In the evenings, it just kind of depends. I’m usually trying to wind down sometime around nine to 10 on most evenings. It just kind of depends on what’s going on. And Theo, I’ll say, I just consider this paying my dues. I didn’t learn about real estate investing until later in life. And I’m just trying to make up for lost time and get something going. I do not intend to go like this forever. But I just have to pay my dues right now. And then once things start to level out, I won’t be working like this.

Theo Hicks: I’ll just say really quickly, Kevin, I know someone – I think she won either two times or three times on Jeopardy.

Kevin Galang: Oh, you know her personally? That’s awesome. That’s so cool.

Adam Ulrey: That’s one way to create wealth.

Kevin Galang: Yeah. Exactly.

Adam Ulrey: Did she get some real estate with that earnings?

Theo Hicks: I don’t think so. I think she said that she won 60k, something like that. So anyway, so both of you have mentioned, and if you’re watching on YouTube, you can see the little emblem they have next to their heads – Tech Guys Who Invest, which is the podcast. So not only are you working full-time jobs and actively investing, but you’re also, as Adam kind of mentioned, doing other types of thought leadership things, maybe social media or podcasts. Maybe walk us through what all you’re doing in that realm for thought leadership, why you selected those, and then what benefits it’s having to your businesses.

Kevin Galang: So Tech Guys Who Invest was founded because Adam and I connected in a mastermind group and we realized we had great chemistry. We also realized that we both love educating people, and the Tech Guys Who Invest was just a natural title that we came up with, like, “Hey, you’re investing, you work in tech. We’re the tech guys who invest.” And it’s our way of really giving back and sharing information about how to take control of your financial journey, how to invest wisely and safely from the experienced advice of guests we bring on, the mistakes that we’re making, the wins that we have – we share all of that. We try to be as transparent as possible because if we can do it, we firmly believe that other people can as well.

Adam Ulrey: And we have found we just love this so much more than we thought. Part of the reason we did it is to not only educate people and give back in that way, but to attract people to us. They could be people that we would potentially invest with, or partner with in some way, or add value to. So we just wanted to do it for that reason. But it’s ended up becoming more than that. We actually just really love doing it now. We’re learning a ton, we’re having fun, it is attracting people to us, and it’s definitely paying back.

Theo Hicks: Do you guys do all of the bookings, the editing, the posting, the writing of the descriptions yourselves? Or is that outsourced to someone else?

Kevin Galang: So we’ve recently just started outsourcing the podcast editing and posting the show notes. And to Adams point, talking about systems, eventually we would love to graduate, to be “Alright, we recorded it; push it out to the team”, and that’s it. Because we love the podcast recording aspect, and the editing just kind of comes with it and it’s paying our dues.

And another point about systems is you need to understand how you want the system to run. A system isn’t just going to magically make your life better. You can get a system without figuring out how you want the system to operate and just end up with a really big problem. So now that we have the comfortability of almost two years of it, we can say, “Hey, this is how we want it to sound, please do X, Y, and Z,” to our editor.

Adam Ulrey: Yeah, we’ve got our processes down now. We understand them well enough to be able to standardize them and then outsource it at some point.

Theo Hicks: Are all the episodes with a guest, or sometimes just you two?

Kevin Galang: It’s a combination of both. We try to keep a cadence of an episode with a guest, an episode of us, and maybe two of us in a row, or two guests in a row. But we like to mix it up.

Theo Hicks: How do you find the guests?

Adam Ulrey: We like to find guests that mostly focus on real estate, but occasionally put in someone who’s just interesting or does something that not a lot of people know about. So an example is the guy we had on who invests in ETFs. He had started a gold fund in his past, and it was just super interesting. So every now and then we’ll throw someone like that in there, just to kind of share with people there are different things to think about when it comes to investing. And to answer your question about how do we find them – a lot of it is networking and just discovery, and then we’ll just reach out to them. We’ll just take action and invite them on.

Theo Hicks: Is it like an email, I’m assuming?

Kevin Galang: Exactly, yeah. Send an email, send them a Calendly link, that way we don’t have to go back and forth with “Oh, we’re free at this time. Are you free at this time?” “This is our updated calendar. If this works with your schedule, pick any time there.”

Theo Hicks: What’s the conversion rate you guys have? Is it most people say yes or most people say no? I’m just curious.

Kevin Galang: I would say most people do say yes. And I think that’s a cool thing about having a podcast, I think it’s a low barrier to entry. And selfishly, you can use it to learn from experts that are out there. So if anybody’s kind of on the fence of whether or not they should start a podcast, I would highly recommend it.

Adam Ulrey: Yeah, it’s been very rewarding. And we’ve had some people we reached out to you who are really popular, and we were not sure if they’d even respond to us, and they came on the show.

Kevin Galang: Yeah, the worst somebody says is no.

Theo Hicks: What was your best episode so far? In number of views.

Kevin Galang: For a while, the one with Gino Barbaro was one of our highest-performing ones. I have to double-check which else is out there. But that was a big one.

Adam Ulrey: Dave Van Horns was big too. His was…

Kevin Galang: Oh, yeah. Dave Van Horns was a high performing one as well.

Theo Hicks: I recognize both of those names, so good for you guys. Alright, starting with Kevin, and then going to Adam – what is your best real estate investing advice ever?

Kevin Galang: I would say you need to get focused. So figuring out your investor identity early is huge, because there’s a book out there, there’s an expert out there, there’s a podcast out there for every niche in real estate. And every niche in real estate can make money. But there’s a component I feel not a lot of people talk about, where you have to enjoy it. If you don’t enjoy investing in real estate, you might as well just continue to work your job because you’re going to burn yourself out so much faster by trying to grind everything out in an asset class you’re just absolutely miserable with. So get focused and figure out what you really want to do with your time and how you want to invest in real estate.

Adam Ulrey: Yeah, I love that, Kevin. And clarifying your goals is really important. So you focus on what is the right thing for you. That’s really important. Be honest with yourself about what those look like, so that what you’re working on is in alignment with what you really want to achieve deep down inside. But I think at the end of the day, taking action is super important. It’s one of the things that we see a lot of people just stall out on; they let themselves be held back by self-limiting beliefs or fears, and they get stuck in different modes like education forever, analysis paralysis… And at the end of the day, at some point, you have to take action.

Theo Hicks: Perfect. Okay, are you guys ready for the Best Ever lightning round?

Adam Ulrey: Oh, yeah.

Kevin Galang: Yes, sir.

Theo Hicks: Alrighty. Well, first, a quick word from our sponsor.

Break: [00:16:48][00:17:33]

Theo Hicks: Okay, so starting with Kevin and then Adam – what is the Best Ever book you recently read?

Kevin Galang: Best Ever book I’ve recently read… I would say, Can’t Break Me by David Goggins. I know it’s not real estate related, but it is one of those things that it shows you how capable you are as a person, and that mental shift that you need to make to continue to work even though you’re tired, it’s been a long day from your nine to five, but you know you have podcasts or record or something like that… That helps you really dig deep. So it’s not real estate related, but I really like that book.

Adam Ulrey: Also not real estate related, but I think it can be applied… Late Bloomers by Rich Karlgaard. Fantastic book, especially for people who are a little bit older, or think they’re too old to start this thing – read that book, it’s amazing. It explains that you’re not too old, no matter how old you are.

Theo Hicks: In Late Bloomers, I know one of the big examples people use of that would be the KFC guy. Do they talk about him in that book?

Kevin Galang: Right, Colonel Sanders.

Adam Ulrey: Yeah, he even talked about it in the book.

Theo Hicks: Yeah. I figured. Nice. If your business were to collapse today, what would you do next?

Kevin Galang: Podcasts all day. And that’s what I would turn into, I guess, a business. But the idea of being able to just connect with people in different areas of life, doing different things, being able to converse and share that story with the hopes of inspiring somebody else to take action and achieve their dreams – that to me is what would be really cool to do.

Adam Ulrey: That’s awesome.  I’m with you, podcasts all day. That would be great. Definitely learn from the experience. I’m a big inspect and adapt guy, continuously improve, I love to take feedback and learn from that. So I would learn from why did I fail, and take that, roll those lessons into my next venture. And I think it’s important to never give up. That’s super-important to be successful. It’s just don’t stop. So I wouldn’t stop.

Theo Hicks: Yeah, you guys both have the voice and a cadence for podcasting, so that could work.

Adam Ulrey: Appreciate that. Thank you.

Theo Hicks: Okay, what is the Best Ever deal you have done?

Kevin Galang: So one of the performing notes that I recently did, I was super happy about it because I had zero money in; almost negotiated an equity deal. And as a performing note goes, you wouldn’t write home about the amount of money you get, $50 a month from it… But the fact that I had no money in, and it was the first one that I did, I was really excited to do it. Because for me, the first one was the hardest one. Once you get over that hump, you’re like “Okay, proof of concept. I can do this. Let’s just keep taking swings of that bat and see where it goes.”

Adam Ulrey: Yeah, I feel like the mastermind class I invested in might be the answer, because I wouldn’t have met Kevin, I wouldn’t have the Tech Guys Who Invest podcast if I didn’t. And a lot of people don’t think about an investment in yourself is an investment, but I really think it is.

Real estate-wise, we bought a 56-unit Class B here in the Tampa Bay area. It was our second deal as Dreamstone Investment as it’s known today… And it’s a great one, because the class B properties have low delinquency. It’s really weathered this COVID storm very well, and the numbers are strong. It’s been low hassle due to the higher class of residents we have in there, so that’s been a fantastic deal.

Theo Hicks: What is the Best Ever way like to get back?

Kevin Galang: I would have to say the podcast, a great way to get back that I personally love and I’m passionate about it. But I’m always available if somebody wants to reach me and has a question. I won’t turn anybody down if you want to book a time on my calendar. So many people have done that for me, and I want to kind of pay forward in that regard. So being out there as a resource I think is one way that I give back.

Adam Ulrey: Tech Guys Who Invest podcasts for sure is one of my favorites. Sharing lessons learned with others, so they can grow and learn from my experiences. That’s awesome. And as kind of a follow-up, I volunteer with my daughters at Metropolitan Ministries, which is kind of like a homeless mission in the Tampa Bay area. It’s just really great to pass that along to them as something they’ll carry for the rest of their lives.

Kevin Galang: We also host a meetup – that was pre-COVID – where we would use the cash flow game to kind of educate people… And the look on people’s faces when they realize that “Wait, you can do that in real life?” Or “There’s no way people are doing what the game is teaching you in real life”, and having that look on their face of realization is so fulfilling.

Theo Hicks: And then lastly, what is the Best Ever place to reach you?

Kevin Galang: Come take a listen to Tech Guys Who Invest podcast. We share our experiences, wins losses, you get awesome guests on that show… And we have an investor identity canvas that we have created. And it came about because I jumped from various different asset classes – Airbnbs, mobile home parks, multi-family, house-hacking… I looked into all of those things for a few months at a time, but never really got focused. And I wish I had something like the canvas we created to help me narrow down that list. If you want to check that out, it’s canvas.tgwipodcast.com.

Adam Ulrey: Awesome. So dreamstoneinvest.com. You can email me, adam@dreamstoneinvest.com. Find me on LinkedIn, Adam Ulrey. As Kevin mentioned, tgwipodcast.com. You can email either one of us at techguyswhoinvest@gmail.com. And the canvas he mentioned, once again, it’s canvas.tgwipodcast.com.

Theo Hicks: Well, thank you so much for taking the time out of your busy, full-time, all-day-working schedules to talk to me for half an hour today. I really appreciate it. Just to kind of summarize some of what we talked about – we talked about how you guys are able to balance the full-time job and active investing… And it’s just a grind, and as you said, hustling, and automating, and prioritizing things.

You also both briefly went over what you guys do with each morning to prepare for your day. Specifically, Kevin said he’ll set a goal each day, and then everything he does kind of based off of that, and then Adam talked about the Sabres routine. You both talked about your thought leadership with the podcast, why you do it, how it’s benefited you, and then more tactics on how it’s done. And then the Best Ever advice from Kevin – I really liked when you talked about how in reality you can make money and be successful in really any niche. So just find out which one you like, because if you don’t like it, then just keep working, because you’re going to burn yourself out, as you said. And then Adam said kind of similar to the same thing, focus on what’s right for you,  be honest on what you’re good at, what you like as well. Then also you added taking action is also very important. And I couldn’t agree more.

So thank you both for joining me again today. Appreciate it. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Adam Ulrey: Thanks, Theo.

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JF2179: Three Ways to Save Money Like The Wealthy | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be sharing three different ways the wealthy save money to maintain their wealth. Travis did research on the three main categories that most Americans spend their money on; housing, transportation, and food. He compares how the typical American spends vs the wealthy on these three main contacts 

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.

 

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JF2172: Why You Need To Be Healthy Before You Can Be Wealthy | Actively Passive Investing Show With Theo Hicks & Travis Watts

Today Theo and Travis will be diving deeper into one of Travis’s recent blog posts on celery juice. Being healthy is important to your wealth because while you’re building your wealth you will need to have high energy to be able to push forward through the hard times when you are growing and once you finally reach “wealth” status, you want to be able to enjoy it and live long afterward with your family and pass down the lessons you have learned.

We also have a Syndication School series about the “How To’s” of apartment syndications and be sure to download your FREE document by visiting SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on PropStream


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, I’m back with Travis Watts for the Actively Passive Show. We got the show titled down, and it’s the Actively Passive Investing show. So Travis, how you doing?

Travis Watts:  I’m doing great. You messed up the title on the first episode.

Theo Hicks: What did I say?

Travis Watts: I don’t know. Actively Passive – that’s hard to say, but I think it’s a great title. So excited to finally have a name and a theme to this, even though going away from the theme today on our topic, I think.

Theo Hicks: A little bit, but we’ll connect it back.

Travis Watts: Yeah, alright.

Theo Hicks: We’re gonna start off by discussing the article that Travis wrote about celery juice. I really like how it starts out because he says, “What’s a celery juice have to do with real estate?” Well Travis, what’s the celery juice have to do with real estate? Let us know.

Travis Watts: And then the next line says, “Well, really nothing”. [laughter] So I guess we could take it from there. So let’s back up a second. So the reason that I wrote this particular blog is – for those who read my blogs and content, I’m a big advocate for going out there in the world, finding the experts, and finding a multitude of them, whatever we’re talking about, whether this is multifamily or active or passive investing or whatever, and what I’m trying to do is jump inside the brains of these folks, and then find the commonalities, and then extract those commonalities, and then form an opinion or a philosophy around something. So when it comes to health, I’m obviously no medical professional, no doctor here, but really, this is my wife’s research topic for the most part. I’m the finance guy and she’s the health advocate, but what we’ve done over the years is find all these health gurus, so to speak, and find the commonalities and what they say folks can do to health hack, if you will, find a shortcut into health, in a sense.

So over the years, we’ve done juicing, we’ve done water fasts, we’ve done smoothies, we’ve been on raw vegan diets, we’ve done all of this crazy stuff, and exercise routines is a whole other story… But one thing that’s really stood out lately is finding out, what I would call, the proper way to digest, if you will, celery juice straight. So I’ve found a lot of health benefits to that, not just on paper and by research studies in science, but just in my own body, in our own lives. So I just want to take the quickest, easiest, simplest thing that folks can do to find that health hack. So I put a quote in there to answer your question, Theo; I think is at the end. “If we don’t have our health, then what use is our wealth?” I mean, obviously, we can do some things with wealth, but as far as being self-centered, not a whole lot.

So that was my purpose of writing it, is at the end of the day, what’s really more important? We talk all the time about investing and passive income and active stuff, but really, if you don’t have your health, what use is any of that anyhow?

Theo Hicks: Yeah, that’s true. Thanks for sharing that. So do you think that it’s a step further in that? Because when I hear that quote, I say, “Well, first you need to be healthy, and then you can become wealthy,” they’re not necessarily — is it required to be healthy? It’s more like, “Hey if you’re unhealthy, what’s the point?” Do you think that being healthy is actually beneficial towards being wealthy, or you think it’s just the prerequisite just because of this quote – If you’re sick, then you’re not going to be able to enjoy the wealth. Does that make sense?

Travis Watts: Yeah, exactly. So you think about the process of building wealth or aka becoming wealthy… Let’s assume that the person we’re talking about is not just going to inherit their wealth; this is somebody starting from scratch and building up. It takes a lot of work, we all know that. You’re gonna have to network and find mentors, you’re gonna have to read books, you’re gonna have to study… Well, all of this stuff takes your time and energy, so what you’re looking to do is maximize those resources to give you the energy to push forward and make that happen. So yes, I would argue– well, not argue; I would agree that health comes first, and as you feel good and you’ve got the energy and the capacity, you can go out there and much more efficiently, build wealth and do fix and flips and do whatever you’re going to do out there to do your thing. So, absolutely.

Theo Hicks: One thing I was thinking about when I knew we were gonna do this topic is — I used to be in amazing shape. I became obsessive over working out, and I did this for about a year and a half; it was through CrossFit. And one thing I noticed is that it is possible to take your health too seriously. Let me give an example. A lot of people that I worked out with, working out was their centerpiece, their entire existence. So they’d work out and that’d be the highlight and the main thing that they did all the time, as opposed to using working out– using being healthy as a springboard to something else. So I have a note here of it. It does give you, as you mentioned, discipline, I can be very disciplined to work out, but it is possible to take it too far, like I did, where I was spending four hours every single day in the gym. I went to work, I worked out, and then that’s how I did it for a year and a half. So it is possible to overkill, which is why I really like this simple idea. It sure is possible to overkill a diet too, but this is just one really fast, simple way to right away improve your health.

Travis Watts: Absolutely, and for those who read these guru health hackers out there, Tim Ferrisses or even the Tony Robbins, they’re so into trying to take the four hour gym time down to a 30-minute segment, and maybe do that three times a week and get the same results. Sometimes that’s possible, sometimes it’s not; it depends on what we’re talking about. But the idea is who really wants to go spend the rest of their life in a gym just for the sake of staying healthy?

So we’ve got two sides of the coin and you brought it up beautifully there that you’ve got the physical side in the gym and the weightlifting and the exercise, and then there’s the diet. So we focused most of our attention on the diet piece, and I’ll tell you an example of going overboard. Please, nobody do this that’s listening. We started with just a simple smoothie, one that tasted great, which is called Sugar. So like fruit smoothies. And then we migrated our way into 100% vegetable smoothies, which tastes pretty awful in general. And from there, we thought, “Hey, if this already tastes like crap, let’s start researching the best possible things that we could put in a smoothie,” and we got carried away with this. We were putting four or five garlic cloves and papaya seeds and all these weird supplement things, and it’ll gag you; it’ll make you throw up.

Anyway, we were in the middle of that, and I went to pick my dad up from the airport, and I was about two weeks into doing these smoothies, and I get in the car and we’re driving, he’s like, “You smell garlic?” I said, “What?” He said, “I smell garlic,” and my body was just radiating garlic, but I was so immune to it, I didn’t even notice… Anyway, we took it too far. So yeah, do a smoothie or some juice, but come on.

Theo Hicks: That’s funny. So one secret for the garlic – because I used to garlic smoothies too, and surprisingly, the one fruit that I’ve came across that mask the taste of garlic when you’re eating it – because it is really gross – is pears. So if you want to make a smoothie with garlic and get the benefits of the garlic, if you do a pear and garlic smoothie, it’ll take– it just feels like nothing, which is surprising. They sort of cancel each other out; at least it did for me. But something else I think you talked about last week maybe — or I know I was interviewing someone else last week on the podcast who mentioned it, so maybe it was her. But I was asking her questions about morning routines and various different ways to improve your mindset, which you consider being part of your health as well… And she mentioned that when you’re first starting something or when you’re trying to figure out what’s the best morning routine, what’s the best workout routine, when you’re doing it, don’t tell yourself, “I’m going to do this for a year. I’m gonna do this forever,” but tell yourself, “I’m gonna test this out for a week, two weeks a month.”

So reading your blog post, all the various things you talked about, you mentioned that “I tried it for a little bit, I experimented it, and then I analyze the results, and sometimes it didn’t work. Sometimes, it did work, but it sucked. It was horrible, I didn’t like it, so I’m not doing it anymore.” I think that’s something important, too. You don’t want to start, for example, doing the celery juice – don’t tell yourself that you’re going to do it every single day for the rest of your life, because you’re probably not going to start if it’s too overwhelming of a task.

Travis Watts: Health is tricky, too. Everybody’s body is different. There’s some folks who could just, say, eat fruit all day and they would thrive, and there’s others who would feel sick and weak. So you should never just say, “I’m gonna do 12 months of eating fruit all day,” and then three days in, you’re on your deathbed. I mean, you gotta– we’re usually doing experiments, anything from three days probably being the minimum, to maybe, three months being the maximum, and depending on what we’re talking about… Because we can all persevere. We’ve got a little self-discipline, a little willpower, we can push through, but you want to be safe, too. Obviously, you wouldn’t want to do a three-month water fast. That might be catastrophic for you.

So to your point, it’s just any goal setting. Isn’t this just like goal setting 101, to go from scratch and say, “I’m gonna be a billionaire.” How about you shoot for a millionaire first, and then you can step up from there? But it’s a little overwhelming to try to go 0 to 100. So yeah, I love that; great point.

Theo Hicks: Yeah, especially when it comes to health, you’ve got the standard, traditional New Year’s resolution curse, where every single person on the planet is in the gym in January, and then they’re gone by February, because they set that goal of “I’m going to lose 200 pounds in 2020” or whatever.

Something else we got out here is that we’ve got all of your examples, all of your adventures, you say… And one of them, it says, “Lots of exercise routines in various programs, and this is still a work in progress.” So obviously, one side of health is the eating aspect of it. The other side is the physical moving aspect of it. So do want to let us know?

Travis Watts: Yeah. I mean, just through and through with the physical side, I’ve really got nothing to share that I feel like the masses would benefit from on that side. We’ve done way more experimenting with diets and food than we have with the exercise. So what I meant by that was, we’ve done all these little online programs or these 30-day things, the orange theories of the world, all those stuff. And some are great and some are terrible, and I don’t know, I haven’t mastered that side of it. So like I said, back to the philosophy here is just picking the brains of so many people, finding the commonalities and then making it simple and efficient and effective… So I’m trying to find almost the minimum viable product for the most bang for your buck, if you will, and to me, that’s what the celery juice has been. But I really don’t have an example on the physical side. You might possibly have something to share on that, but yeah, I don’t.

Theo Hicks: Yeah, I’ve got some notes here. So obviously, as Travis mentioned, there’s one thing people need to realize. I think it’s very personal, and what works for one person is not gonna work for someone else, especially where you’re starting at. If you haven’t even worked out in 20 years, it’s gonna be a lot different than someone who hasn’t worked out in a year or hasn’t worked out in a month.

One starting point thing, a little quick hack that– I’m not necessarily sure how much this will help you long-term health-wise, but a quick way to get a boost of energy that’s also, in some sort, beneficial to your health – and this is something I know Joe does and he got it from Tony Robbins, and it’s that mini trampoline. Have you ever seen that?

Theo Hicks: Yeah. We haven’t tried it. I know exactly what you’re talking about, but no haven’t yet.

Theo Hicks: I have one in my closet. I haven’t used it in a while, but essentially, if you buy this mini trampoline– I think Tony Robbins has one on his website, but it’s really expensive. You can go to Amazon and get one for $10 maybe, and literally whenever you’re feeling tired, around 1:0 or [2:00]… You guys get coffee, which I don’t see a problem with that, but a quick way to get a very fast, natural energy boost is to bounce on the trampoline for a minute. You’re not really going to be tired afterwards, but something about it, I’m not sure what the science is behind it, but it gives you a quick energy boost. That was one thing I wanted to mention.

Travis Watts: Yeah. And speaking of Tony Robbins, he’s a huge advocate of physiology. So just something you can do if you don’t have one of those trampolines too, that I do sometimes just to get my blood going again maybe after lunch, are just jumping jacks. You can do that anywhere. So simple. Do 60 seconds and all of a sudden, your heart rate’s up. It’s like the equivalent of going on a quick jog. Things like that can be effective. Obviously, that’s not the one thing you do to become healthy, but it gets your body back in check.

One more thing that just came to mind as you said that is I remember reading in — I think it was Men’s Health or something, years ago. Kenny Chesney, the country singer, when he goes on tour — he’s touring half the year in stadiums on a bus, and then half the year, he spends on his boat in the Virgin Islands. So he goes one extreme to the other. He goes from not drinking alcohol and exercising all the time and touring and just crazy amounts of energy, to sitting on a boat, eating whatever he wants to eat and just drinking all day, that kind of stuff. So pretty big swings. But something he does that was cool is this push up routine. So it’s real simple; I’ve been doing it since COVID because gyms were all closed, but it’s ten push-ups, and then ten seconds off as a break, nine push-ups, nine seconds off as a break, then 8, 7, 6, 5, 4, 3, 2, 1, and that’s 55 push-ups in a short amount of time, and that’s another thing that just gets your body going real quick. Again, you’re not going to become a bodybuilder, but it’s free, it’s cheap, and it’s easy. So stuff like that is what I’m all about are these little hacks here and there that you can implement, that are easy to do and effective.

Theo Hicks: Yeah, actually another one I had on my list was another really easy way to get a full-body workout in every single day, similar to what Travis just said, but you add in other movements as well. So using Travis’s example, what you would do– because again, the whole purpose of this is to do it quickly. So let’s say in the morning, right when you wake up, you do push-ups, you do 10, 9, 8, 7, down to 1, and then maybe before you eat lunch, you do the same thing, but for sit-ups, or some variation of an ab workout, and then before you have dinner, you do air squats. So you got abs, you got legs, upper body. It’ll take you, I don’t know, ten minutes total all day to do that, and do that every single day for a month and you’re going to see a difference in tone.

Now, one of the biggest things if your goal is to actually lose weight– so we’re talking about energy, and if you want to lose weight, the best way to lose weight I found is just running. I haven’t ran in a long time. I hit a 5k a month ago and I couldn’t walk for a week; so that’s depending on where you’re at right now. You don’t want to just go out and run 5k like I did, like a crazy man. You can start with walking. You can start with going on a 15-minute walk. It’s a lot easier to do that right now, especially since everyone’s working from home. So if you have a 15-minute call, just go and walk for your call. And then eventually, the next step from there would be to do some interval training. So let’s say you’ve got your 15-minute block of walking. Next time, you’re gonna walk for a minute, and you’re gonna jog for a minute; a very slow jog. So you alternate that. So 15 minutes at 7 to 8 times, and then eventually you can increase the speed of your jogging interval, until ultimately you’re sprinting. It might take a while, but ultimately, you’re sprinting, if you can.

There’s one investor, I think, his name is Jason Yarusi. I’m not sure if you follow him on Facebook, but he, at least a few months ago, was running hundreds of miles a week. So you can do that obviously and you will lose a ton of weight that way, but a faster way to do that is to do the intervals and just sprint, just like me. I don’t like running at all; I despise running, but sprinting, running for one minute, I know it’s only gonna be over in a minute, for a maximum of 15 minutes. So if you want to lose weight, that’s a really good way to start.

Travis Watts: Yeah exactly, and that’s setting up what we talked about earlier, setting small steps. I’m going to run for 60 seconds. I’m not going to run for 60 minutes, because it’s so much easier to give up on obviously, and not see the light at the end of the tunnel, so to speak. So yeah, absolutely. So you couple that stuff and all these topics with some diet hacks, and then all in all, I think most people will see some pretty rapid results surprisingly.

Theo Hicks: And then let’s see. I’ve got a couple of other things here as well I wanted to mention. So from there, something else you can do — because for me, after I got done doing my whole obsessive CrossFit thing and working out for three to four hours every single day, I was completely burnt out and I did not do a single workout for a long, long time like multiple years. And it was really, really hard to get back into it. So the people who are listening to this saying, “I’ve tried multiple times to get back into working out and I just can’t do it”, and this might not work for everyone, so I’m just gonna go to the top first and work my way down. So I have a personal trainer now, and the purpose of the personal trainer, besides them making the workout routine for me, is the accountability aspect of it. So every week, I have to send him my results. So if I send him half the results or I miss a few days, he definitely lets me know. So the whole purpose there is the accountability. So maybe you don’t have the money or don’t know a personal trainer or are not ready for a personal trainer, so the idea is to get someone to hold you accountable. This can be a friend, or a significant other, maybe you can start doing a workout together. Something we mentioned today – maybe you can just start doing the celery juice hack together and have them be your accountability partner. So you text them at the end of the day or end of the week and say, “Hey, here’s what I did this week. What did you do this week?” If they didn’t what they’re supposed to do, you can make fun of them. They can make fun of you. So use that as motivation to get started.

Honestly, there’s lesser personal trainers that you can do, some app on your phone or a P90X type of video thing, which definitely helps, but if you don’t have the accountability factors, you need to add in a level of accountability.

Travis Watts: Yeah, that’s true. And I can attest to that, that P90X; that was one of our experiences. This stuff dates back as far as Tae Bo, VHS tapes. We’ve tried it obviously, that was before we were married. It was a long time ago, I was a kid, but I’ve always been into those ideas. I was the kid who bought the ab belt. I was the kid that got the ab roller.

Theo Hicks: The one that electrocutes you? Is it that one?

Travis Watts: Yeah, it electrocutes you. Spoiler alert.

Theo Hicks: Was that in the ’80s that thing where it was like — it’d rub their backs, you seem to be talking about…?

Travis Watts:  Oh, yeah, yeah, yeah. Exactly. It’s a big conveyor belt making you shimmy. So goofy.

Theo Hicks: That pretty funny. We’ve trying to hack our health for a while. It seems like we’re making progress, right?

Travis Watts: Well, that’s the point of this episode, what I was trying to entail is that my wife and I’ve gone through a lot of these trial and error things, but there’s a few that have a lot more benefit to them than a lot of the others. So if you don’t want to go waste your next decade, getting ab belts, then we can share some tidbits that actually are effective and in a lot of cases they’re free to or cheap.

Theo Hicks: Yeah. And then the last tip that I had on here was actually diet, and this is– not only is it free, but it actually makes you money. You’ll make money by doing this and it’s really fast, and that’s not eating out. I’m talking to myself here as well. Not only does it cost money to continuously– especially now work from home, doing UberEats or DoorDash constantly, but I feel horrible afterwards. I feel absolutely horrible after eating out. So again, two benefits there, and it’s really fast. Just in the morning, instead of ordering Starbucks, just have coffee at home and make two eggs and put them on a piece of toast instead.

Travis Watts: Yeah, the way I look at that, too– this is the way I frame that, in my mind, which is true to me, is… You can have the short-term satisfaction of, say, the fast food or the alcohol or whatever it is, something bad for you, and it feels great in the moment, but then you’re suffering so much longer than that with the repercussions of that choice, and if you’re talking about doing something healthy, like “Yeah, I don’t want to do the push-ups. I don’t want to drink the celery juice” – okay, well, a short-term trade-off for an all day effect is a lot more worthwhile. So if you can just zoom out to a 24-hour period, you start to see that a lot of this health stuff is actually a lot easier and makes a lot of sense. So that’s how I try to look at that.

Theo Hicks: For me, mine’s a little bit different. So what I’ll do is I’ll try my best to do well all week, and then Friday night is when I get to do my gorging, my UberEats, whatever I got from UberEats… And then next morning I feel horrible, and then I start it over again. That helps me. I’m not saying to do that, but it helps me.

Travis Watts: You’ve got the dinner table laid out like the Talladega Nights with the Kentucky Fried Chicken and the Pizza Hut… [laughs]

Theo Hicks: Yeah, well, I think it’s The Rock who also does that, where he’s got that famous picture of him with a bunch of pancakes decked up, and a pizza, and a big pop, and he’ll do cheat meals every once in a while.  I don’t think he does it every week, but that’s the gist. I don’t think it’s 100% necessary to be perfect all the time. You just need to do it in moderation. I can’t be doing Uber Eats every single day and then not working out every single day, but at the same time, I don’t want to measure out all my food for every single meal and then go from there to the gym for five hours.

Travis Watts: Yeah, I love that philosophy too, and there’s different ratios, but I hear that 80-20. What matters is what you’re doing 80% of the time, but that 20% is flexible, and even Tony Robbins talks about it. He never deprives him permanently of anything like, “I’m never eating chocolate again. I’ll never have ice cream.” It’s like, he’ll have it, but in small limited portions here and there, not every single day after dinner, all that kind of stuff. So yeah, it certainly makes sense.

Theo Hicks: Alright Travis, is there anything else you want to say before we wrap up?

Travis Watts: Let me just explain this celery juice; we didn’t get too much into it. So we’re talking about juicing, number one. If you have only a blender, you can do it, but you’ll need one of those nut milk bags, like a strainer for the juice… And we’re talking about literally just straight celery juice. A stock of salary, ideally organic; if it’s not organic, make sure you wash it thoroughly… But just putting that through to have 16 ounces of great celery juice. No ice, no dilution, no water; don’t mix it with cucumber juice or any other fruits or veggies, and you drink that in the morning separated from food. So ideally, about an hour apart from other foods and breakfast. That gives it a chance to circulate through your body, cleanse your liver. It can reduce brain fog and acne, eczema, acid reflux, headaches, migraines, inflammation… I mean, the list goes on and on and on. In my blog, I put four links at the bottom to four completely unrelated sources where they go into the science behind it, the case studies, the true advocates behind all this stuff… And again, I’m no doctor or health expert, but check out those links, and it’s really that simple. Buy some celery stocks, 16 ounces, once per day minimum. We try to do two per day if possible, my wife and I, but it’s just crazy. And you’re talking about eating and weight loss for those looking to do that, a little bit of jogging, running cardio plus this equals a lot better results than what a lot of people try to do for weight loss… But that’s really it.

I wanted to share that because that one thing has had the biggest impact on energy and health and the things I just listed, and the list goes on and on and on. You’ll have to look it up yourself. But that’s just what I wanted to share with folks out of all these crazy adventures, as I call them. That’s one that I think everybody can do that everybody can benefit from, that’s cheap and easy and simple.

Theo Hicks: Great, Travis. Well thanks for telling us about this, thanks for joining me again today on our first ever – I’m gonna get it right – Actively Passive–

Travis Watts: Show. Podcast. I don’t know. Episode.

Theo Hicks: Actively Investing something. We’ll figure that last part out, but the Actively Passive is [unintelligible [00:27:17].09].

Travis Watts: Today was the actively portion. Next time, it’ll be the passively portion.

Theo Hicks: Exactly. So again, Travis, appreciate it. Best Ever listeners, as always, thank you for listening. Have a best ever day. Make sure you try out some of these tips and we will talk to you tomorrow.

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The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

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Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2171: | 3 Steps to Hiring An Underwriting Analysts Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks, will be going over 3 steps to hiring an apartment underwriting analysts.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

Click here for more info on PropStream


TRANSCRIPTION

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: Hello, 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’m your host, Theo Hicks. Each week, we air a syndication school episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, especially the ones in the past, we’ve released free resources for you to download. All of these free resources as well as past syndication school series episodes can be found at syndicationschool.com.

The subject of today’s class is going to be how to hire an underwriting analyst. So an underwriting analyst is someone on your team whose main responsibility is to evaluate the incoming apartment leads. So that is their main responsibility. Sometimes depending on where you’re at in your business, you might have an underwriting analyst fulfill other secondary roles as well, like helping with due diligence after a deal is put under contract and creating the investment summary to present to investors, performing any market research required during the underwriting and due diligence process, or really any other analytic responsibility like reporting in the asset management phase.

So when you are deciding to hire a underwriting analyst, the first thing you need to do is define the role that is what do you want them to focus on. Do you want them to focus only on underwriting, or do you want them to focus on other aspects of the due diligence or the asset management process as well? Once you’ve defined the role and the responsibilities, you can define the requirements of a prospective candidate. So you need to have a background an individual will need in order to be a successful, effective underwriter. So ideally, they have previous underwriting experience, or at the very least, have experience using financial models in Excel.

Now, a great way to get a free underwriter – because you’re gonna have to pay this person if they’re experienced; so the more experience they have, the more expensive it’s going to be… But a great way to get multiple free underwriters is to find someone who is interested in becoming an apartment investor or an apartment syndicator, but doesn’t have the experience or the capital or the network to do deals themselves, and they’re still in the education phase. Well, you can offer to educate them by giving them a free cash flow calculator, a financial model, how-to guides and videos of how to actually underwrite deals, and then in return, they will underwrite deals for you for free as long as you give them feedback on their underwriting. So the underwriting is obviously not going to be perfect, and you yourself are going to need to have underwriting experience if you’re going to train people, but we’ll get into that a little bit later, of how to do this without having any expertise yourself.

The analyst is also going to need a high level of proficiency in Excel at minimum. So even if they don’t know how to do financial modeling, they don’t know how to do underwriting, they need to know how to use Excel. It’s a lot easier to teach someone how to input data into the cash flow calculator than it is to teach someone literally how to input data, how formulas work in Excel. So they need to have some level of proficiency in Excel, since they’re going to be required to pull data from various reports – T12s, rent rolls, OMs, rent comp analyses, market analyses.

In order to avoid making really simple operator error mistakes, they need to also have a very high level of attention to detail, as well as strong financial, quantitative and analytical skills. Sometimes you’re going to allow them to send you deals within a few days, maybe even a week. Other times, you might need to get a completed underwriting model within the next 12 hours. So ideally, they also have the ability to work under tight timeframes, which means they might have to work on weekends and nights as well… And of course, if they’re going to do something else besides simply underwriting, they’re going to need skills in that area as well. For example, if they’re creating investment summaries, well then, they’re gonna have to know how to use PowerPoint as well. They’re going to need to know how to multitask if they’re going to be bouncing additional roles in addition to the underwriting, and then depending on how your business is set up and the role you want the underwriting analyst to play, they might actually need to live in a specific location. So we’ve got skills and we also have physical locations. So if you have an office, well, they’re gonna need to live in the general vicinity of the office if they’re required to come into the office, which isn’t as important right now, since we’re all stuck at home, but eventually, when people return to offices, if you have an office or you want to have an office in the future, you might want to consider hiring an underwriter who lives in the area. Also, let’s say that you have them involved in the due diligence process, well then they’re gonna need to live near the property, so they can go there and perform that.

So once you actually know the requirements you need for your underwriter, which I just laid out –  it might be a little bit different for you, but essentially, this is what you want in the underwriter – then when you screen applicants; you ask them questions to determine whether or not they meet these requirements. But before we get to that, you need to find applicants. So after you define these responsibilities, after you’ve defined these requirements and you’re ready to generate prospects, you need to create a professional job listing. You should include biographical information about you and your company, as well as the responsibilities and requirements that we just discussed. And then once you have the job posting created, then you go ahead and post it to various job listing websites. You can post it to LinkedIn, you can post it to BiggerPockets, you can talk about the analyst role on your podcast or other thought leadership platforms to promote the job listing. You can share on social media, you can promote the job at local meetup groups once we get back to local meetup groups, you can create a landing page on your website for the job [unintelligible [00:09:52].22], you can hire a recruiter, you can put it on one of those recruiting websites… There’s countless ways to generate leads. It depends on where you’re at in your career. If you don’t know anyone at all, well you’re probably not at the point where you’re ready to hire an underwriting analyst anyway, so the other option would be essentially, anywhere in your network; wherever you’re currently at, is where you can generate interest in your position.

Once you generate interest, you want to go ahead and screen the applicant. So the best screening processes are done in two phases. The first will be an initial interview probably over the phone or in a Zoom meeting, and that’s just to determine if they actually meet the requirements that you have listed in the job posting. So here are some questions that you’re going to want to ask. So general questions – ask them what their current day to day tasks are, ask them how much time in their day is spent underwriting deals, ask them who they currently report to, how big is the current analyst team, and what do they like about multifamily investment. Just general background, what they’re doing now, what they have done regarding underwriting.

Obviously, if they haven’t done underwriting in the past, they’re not going to have answers to these questions, and one of the important requirements is previous underwriting experience.

Next is going to be questions related to market knowledge. So ask them what markets have they worked in, what markets are they experts in. Next, you can ask them what markets do they think would be good multifamily markets to invest in, to gauge their expertise. And then the last question you can ask about markets is what are your thoughts on the state of multifamily sales prices at the moment, and where do you see them headed? So again, just gauge their knowledge on the market, as in the market that you’re gonna invest in, but also the real estate market as a whole.

Next are gonna be questions about underwriting. So ask them on a scale of 1 to 10, 1 being a complete noob and 10 being an expert underwriter, what is your level of financial modeling? So how good are they at modeling deals from their own perspective? Can you create your own model from scratch? Please give a few examples of advanced formulas you would use in a model. We’ll get into how to gauge their answers in a second. Let’s just get through the questions. Can you please explain your underwriting process of a recent deal you underwrote? What was the business plan? …to kind of gauge, “Hey, do you have experienced underwriting value add deals like what you’re doing or turnkey deals or distressed deals, condo conversion?”, whatever types of deals you’re doing, they need to have experience underwriting those types of deals. So you want to ask them, “Please explain your underwriting process on a recent deal,” but also ask them, “Hey, what’s your experience on our business plan, the value add business plan, the turnkey business plan?”

Last underwriting process-related question would be, “Are you involved at all with presenting the deal to senior members of the company or investors?” Next, you can ask them about their understanding of debt. So have they ever worked on obtaining new debt, refinance, supplemental? If I referenced the term ‘agency lender’ or ‘bridge lender’, do you know what that means? A due Diligence question – describe what type of due diligence you have performed and what typically goes on. Do they know what typically goes on during the due diligence process? And then your general employment information, employment in the future outlook, where do you see yourself in five years, ten years? Why are you looking for a new job? Describe a challenge you faced at your current or past position and how you overcame it. How do you think you can create value with this company? What is your salary expectation for this position? What do you like to do outside of work?

Now some of these are, as I mentioned, general questions you’d ask about any role, but the answers that are most important are going to be the ones relating to the market knowledge and relating to the underwriting process. And then if you want them to do due diligence or help with that, then obviously the debt due diligence questions are important as well, but let’s focus on the market knowledge and the underwriting process.

So they need to have market knowledge in order to perform the rent comp analysis and sales comp analysis during the underwriting process. So if they don’t work in your market or they don’t have a good answer to what markets they think are good to invest in and why, or they don’t have an answer as to their thoughts of the sales prices, they’re not going to be able to perform rental comp analysis effectively. They’re also gonna need a high level of financial modeling. So ideally, an 8, 9 or 10. They’re going to need to be able to create their own model and understand the complex Excel functions such as the ‘lookup’ and ‘if’ formulas, and you’re gonna want them to understand the various terminology like renovating units, rent premiums, agency debt, as well as experience with the business plan.

Now, here’s what’s important – what if you are not good at underwriting? What if you don’t like underwriting, but if you’re not good at underwriting, and that’s why you’re hiring underwriting analysts? Well, if you just listen to their answers in the interview and you hire based off of that, how do you know that they’re telling the truth? So you hire them and they start underwriting deals and you don’t really know if they’re underwriting the deals properly or not. That’s why the second step of the interview process is for them to actually underwrite a sample deal, so you can confirm that they actually know what they’re doing. So you want to send them a sample deal, including a rent roll, a T12 and the offer memorandum, as well as a financial calculator, and so this has to be something that you have filled out already… And you send them a blank cash flow calculator, you send them the how-to guide, you send them how to fill the calculator out, you send them the sample deal, and you ask them to send it back within a certain timeframe, and then once they send you back the model, you compare the inputs to the accurate, filled out model, to determine if they told you the truth or if they don’t know what they’re actually doing. Now they don’t have to perfectly underwrite the deal, but the results need to be close. So if a few inputs are off, if their term projections are close, but a little bit off by less than a few percentage points, then it’s fine, they made a simple mistake. But if it’s way off, we’re talking 6%, 7% return difference, a bunch of inputs are wrong or they didn’t input everything properly, then they probably aren’t gonna be a good fit for the role.

One sneaky thing you can do to test their attention to detail skills would be to make one change on the rent roll, the T12. So maybe make a bunch of units vacant on the rent roll or make one maintenance expense very, very large, and then see–  when they come back, you can say, “Hey, this deal looks really good, except there’s this really weird thing, that all these units are vacant or in the revenue on the rent roll, the master revenue and the T12,” or, “Hey, I saw that there’s a one time maintenance expense of $100,000; that’s weird,” just to see if they catch that, or if they just mindlessly input data. So that’s a great way to catch the attention to detail.

Then at that point, depending on how they do with the interview and the financial modeling practice, you can go ahead and decide whether or not you want to hire that person. If you’re still unsure, you can do a test period where you say, “Hey, I’m gonna send you deals for the next month, and then we’ll further evaluate your skills to see if it’s worth hiring you full-time.” So that could technically be a third step in the process, which is, first step is to interview you, second step is to do one sample deal, and the third step is to do a month worth of deals to see if you’re able to stick to the time frame, if you’re able to multitask, if you’re able to have good, solid attention to detail and underwrite these deals properly. So ideally, you know what you’re doing, you know how to underwrite deals, but if you don’t, the way to overcome that is to have a sample deal filled out already, and then test to see how close their underwriting is to that sample deal.

So that concludes this episode on how to hire an underwriting analyst. I guess the last thing we didn’t really talk about is when do you decide to hire an underwriting analyst… And like all things, it depends. You can start right away, or you can wait until you’re further along in your business and you don’t have time to do it anymore… Because really, they’re a time thing or a expertise/don’t like thing. So it’s either where you don’t have time to underwrite anymore, it’s a job that you can outsource for $10, $20 an hour and your time is worth $100 an hour at this point, and you’d rather talk to investors, do other things than spend time underwriting all day. Or if you just don’t like it and you’re really bad at it; then if you’re really bad at it and don’t like it, then you should probably hire someone, especially if you’re really bad at it and you don’t know what you’re doing, you need to hire someone. If you don’t like it, it’s up to you. But again, it’s either your timing, you don’t like it or you lack the expertise or the skill.

So that concludes the episode. Thanks for tuning in. Make sure you check out some of the other syndication school episodes, as well as our free resources at syndicationschool.com Thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2137: The Two Types of General Partner Catch Ups | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks will be teaching you the two different types of General Partner Catch Ups. 

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

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: Hello, 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’m your host, Theo Hicks. Each week, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer some free resource. These are free PDF how-to guides, free PowerPoint presentation templates, free Excel calculator templates, something to help you along your apartment syndication journey. All these free documents, all of these past free Syndication School series are available at syndicationschool.com.

Today, we’re going to talk about how you, as a general partner, make money in apartment syndications. More specifically, we are going to talk about the GP catch-up. We’re gonna talk about everything you know about the GP catch-up. So the general partner catch-up is a distribution that goes to the general partner such that they have received their full portion of the deal’s profits.

So this GP catch-up is only going to be relevant when the compensation structure of the partnership between you, the GP, and your investors, the LPs, includes an overall profit split. So let’s say, for example, that you have a structure such that the LPs are offered a 7% preferred return, and then the profit split is 70% to the LP and 30% to the GP. Well, at the conclusion of the partnership, which means once everything’s said and done and you’ve had all of your cash flow, the property’s sold, all the money’s been distributed, at this point, then 70% of the total profits, again, ongoing cash flow and profits from sale, must have gone to the LP, and 30% of those profits must have gone to the GPs. So the catch-up will happen when there is a preferred return, which means that the LPs are receiving 100% of the first portion of the profits, and the GP catch-up will offset– allow the GP to catch up to their 30% portion at this point depending on the structure. Maybe the LPs have gotten 80%, 90%, 95% of the profits because of that preferred return. So we’re gonna go over some examples, but that’s overall what the GP catch-up is.

Now, there’s going to be two main types of GP catch-ups. So the one that is the most common is going to be the GP catch-up at sale, and the other one, which is a little bit less common, but you can still do, is going to be an ongoing GP catch-up. Now as we’ll see in our example, the advantage of the ongoing GP catch-up is that the GPs can receive distributions immediately, or at the very least, higher distributions immediately, rather than having to wait to receive the biggest distribution at sale. So whatever GP catch-up you decide to use, you’re gonna want to make sure that it’s properly defined in your waterfall that’s in the PPM, which explains how available cash is distributed and how cash at capital events are distributed. So we’re gonna go over examples for those two GP catch-ups.

I’m gonna try my best to have all this make sense by going over an actual example of numbers, but it might be easier if you have this blog post open that says “Everything You Need To Know About The GP Catch-up.” So if you’re listening to this on July 9th or later, then this blog is on the website which is called joefairless.com, or you can Google it. You can just type in ‘everything you need to know about the GP catch-up’ and all these data tables with an example cash flows that I mentioned in this episode will be there. But I’ll say it slowly; that way, it should make sense without having to see the actual blog post.

So for both GP catch-ups examples, we’re going to assume a 7% preferred return and a 70-30 profit split. We’re going to assume that the limited partners, in total, invested $1 million, and then the year one through five cash flow is going to be $71,000, $77,000 year two, $84000 year three, $93,000 year four, and $130,000 year five. You don’t need to memorize those ones for now, but just memorize 7% pref, 70-30 split, $1 million investment, and then the assumption after the $1 million in equity is returned at the sale, the remaining profits to be split is $1.5 million. So how would the cash be distributed to the LP and the GP if there was only a GP catch-up at sale? So when there is a GP catch-up at sale, the way that the waterfall works is that LPs receive their preferred return first, and then any profits above the preferred return are split 70-30, and then at sale, the LP receives their equity back. But before the remaining profits, that $1.5 million, is split 70-30, the GP will receive a catch-up distribution until they have received 30% of the cumulative cash flow up to this point.

So based off of that waterfall, in this blog post, there’s a breakdown of the cash flow to the LPs and GP. So year one, again, the total cash flow is $71,000, the preferred return amount for that 7% off of a million dollars is always gonna be 70 grand. So of that $71,000, the LP get $70,000. There’s $1,000 left; so 70% of that or $700 goes to the LP bringing their total year one cash flow to $70,700 and the GP gets 300 bucks, and the same thing happens in year two. So in year two, total cash flow is $77,000. So the first $70,000 goes to the LP as a preferred return, the remaining $7,000 is split 70-30, which is $4,900 to the LP, bringing their total year two to $74,920, and then $21,000 goes to the GP, and then same thing year three, same thing year four, same thing year five. So year five, for example, is $130,000; the first 70 grand goes to the LP and then the remaining $60,000 is split between the LP.

So the LP gets $42,000 bringing the total to $112,000 for the year and the GP gets $18,000. Now based off of the total year five cash flow to the LP and the GP, is $423,500 to the LP and $31,500 to the GP, and the total cash flow is $455,000. So based off of the LP’s portion of those profits, they’ve received 93.08% of the profits and the GPs have received 6.92% of the profits. Therefore at sale, the first portion of the $1.5 million goes directly to the GP until that allocation is 70-30.

Now in order to calculate that, you want to do a formula. So the formula is 70 over 30 – so 70 over 30 is the profit split – equals the $423,500, which is the LP divided by x – we’re solving for x – plus $31,500. So what we’re saying is that we want to force that $423,500 to be 70%, and they want to force the GPs receive 30%. They’ve already seen $31,500. So we’re solving for x, and so when you do the formula – and this is just using algebra – x equals $150,000. So the first portion of the $1.5 million goes to the GP as the catch-up and that amount is $150,000. When you add that to the $31,500 you already received, that brings our total to $181,500. LPs still received the same $423,500. So that ratio is at 70-30, so the 70-30 split is achieved.

So for that formula, if that didn’t make sense, you’re gonna want to check out that blog post. It’s whatever the LP profit split is divided by the GP profit split equals whatever the LP have received so far, divided by x, plus whatever the GP has received so far, and when you solve for x, that is what the GP catch-up is going to be at a sale. So at this point, now that $150,000 has been removed from the $1.5 million, you’re at $1.35 million that’s left to be split, and now since the overall split is at 70-30, now you can split this 70-30 which equates to $945,000 to the LP and $405,000 to the GP. That way, we need to do the updated cash flow model; year one, two, three, four to remain the same; year five, you add in the profits at sale, and you have a total cash flow of $1.955 million with 70% or $1.3685 million going to the LP, and then $586,500 going to the GP, but again, which is 70-30. So that’s the first one.

The second one is going to be the ongoing GP catch-up. So for this waterfall, the LPs still received their preferred return first. However, before the remaining profits are split 70-30, the GP is going to receive their catch-up distribution, and this distribution is going to be equivalent to, in this case, 70-30 split. So you calculate this catch-up distribution similar-ish to how you calculated the catch-up distribution at sale. So you’re gonna want to solve for x again. So this time, it’s going to be the profit split to the LP divided by the profit split to the GP equals the preferred return to the LP divided by x. So in this case, it’ll be 70 over 30 equals 7, which is the preferred term, over x and we solve for x. This one’s pretty simple because it’s 70-30, 7-3. But if it’s an 8% preferred return or a 10% preferred return, the calculation wouldn’t be as simple. So what that means is that the GP receives a 3% return based on the total LP equity investment.

So the waterfall is 7% preferred return to the LP, 3% preferred return to the GP, 70-30 split thereafter. Any unpaid GP catch-up is accrued and paid out when possible. So what that means here is that since you got a million-dollar investment, 7% that is $70,000, which that’s the annual distribution to the LP, and then 3% of a million is gonna be $30,000. That’s what’s annually owed to the GP, which means that in order to pay out both preferred returns, in a sense, the deal is a cash flow, a $100,000.  Remember, in our sample deal, it does not cash flow $100,000 until year five, which means that year one, year two, year three, year four will have an accrued GP catch-up which won’t get paid out until sale. So in year one, the cash flow is $71,000. The LP receives their $70,000 and the GP receives the remaining $1,000, but since they’re owed $30,000, the extra $29,000 accrues. Now in year two, the cash flow is $77,000, which means that the LP receives their 70 grand and the GP receives $7,000. However, since they’re owed $30,000, that extra $23,000 is accrued, and that is in addition to the $29,000 that was owed previously, which means the total accrual is $52,000. So you follow the same logic. At the end of year five, the cash flow is $130,000, which means LP gets $70,000 and the GP finally gets their full $30,000. Now there’s $30,000 that is left over, but this does not get split 70-30 because the GP is still owed their preferred return that accrued during years one through four.

So that full $30,000 goes to the GP and that will pay down their accrued amount by year four. Based off of the sample numbers the total accrual was $75,000, so the GP is now only owed $45,000. So in year five, the LP is receiving $70,000 and the GP is receiving $60,000; so very close. Every single year, since this deal did not exceed the combined distributions owed to both LPs and GPs, the LPs receive $70,000 every single year. Now at sale, after the LP equity is returned, the next step in the waterfall is to pay out the accrued amount owed to the GP which is a $45,000. Then the remaining $1.455 million is split 70-30. This is $1,018,500 to the LP and $436,500 to the GP. Now, just because the LP only received a $70,000 each year ongoing, because of that, they received a much larger distribution at sale.

What you’ll find is that the total distribution to the LP and GPs are the exact same for the ongoing catch-up or the catch-up at sale because the split is still 70-30. The only difference is how that money is distributed. So since the GP catch-up at sale allows the LP to make more money faster compared to the ongoing GP catch-up, the cash on cash returns are obviously going to be the same, but the IRRs are going to be a little bit different. So for this specific example, it’s not that big of a difference. The IRR for the catch-up at sale is 7.39 and the ongoing IRR is 7.32. So not that big of a difference, but there’s still a difference in the IRR. But overall, the GP catch-up at sale is gonna be a lot better for the LPs and the ongoing GP catch-up is going to be much better for the GPs. Even though at the end, the LPs and the GPs make the exact same.

So keep in mind that the views and opinions expressed in this document that you can look out for the data table as well as this episode are for informational purposes only and should not be construed as an offer to buy or sell any securities or consider any investment or course of action. I’m just here to tell you how the GP catch-ups work. So that concludes this episode. Again, that blog post with the data tables is everything you need to know about the GP catch-up. So definitely check that out. Check out some of our other syndication school episodes, as well as the free documents we have available. Those are available at syndicationschool.com. Thank you for listening. Have a best ever day and I’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2136: Syndication With Family Offices | Syndication School with Theo Hicks

Theo Hicks will be sharing with you other ideas to help raise money from institutions and more specifically family offices. Typically you will raise money through family, closest friends, and outside investors, but through the time you will need to branch out and raise money to outside individuals. Theo shares different ways you will be able to go about this in the future when you are looking to raise money with institutions. 

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.


TRANSCRIPTION

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: Hello, Best Ever listeners. 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, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer free resources. These are free PDF how-to guides, free Excel template calculators, free PowerPoint templates; these are all free resources that will help you along your apartment syndication journey. These free documents, as well as past syndication school series episodes are available at syndicationschool.com.

Today, we are going to talk about raising money. More specifically, we are going to talk about a more advanced money-raising strategy, which is raising money from institutions and more specifically, raising money from family offices in order to buy your apartments.

So the typical progression for raising money for apartments goes like this – for your first deal, 99 times out of 100, every single one of your investors is going to be a combination of family and your closest friends. So people you’ve known for years, people who trust you as a person, those are gonna be the ones that invest in your first deal. Maybe those are the people that invest in your second deal or your third deal, but eventually, you’ll get to a point where you will continue to raise money from those family and closest friends, but people who are less familiar with; maybe you’ve known only for a few years, or six months, will begin to invest in your deals. So these could be friends that are a little bit less close, these could be work colleagues, these could be people you’ve met through your journeys to meetup groups and conferences, these could be people you met at volunteering. We got some blog posts and syndication episodes about how volunteering is a great way to attract investors. Essentially, you’d raise money from more people, but that aren’t necessarily people you’ve known for decades.

And then eventually, you might decide after you’ve built up a strong enough track record, then next, you will start to raise money from referrals. So those are people who are connected to close family, close friends, then there’s less close friends, work colleagues, things like that. So then you start to get more investors coming in through referrals, and of course, the best way to increase quickly the number of investors you have is through word of mouth referrals, because you’ve already got that social validation factor in play.

Then eventually, you may decide that you are going to transition from doing the 506(b) or you need to know everyone that invests to 506(c); that way you can advertise your deals to a larger audience. Now, the common thread between those four steps in the progression is that you’re still raising money from individual investors or jointly couples, so one or two people at most. So family, friends, work colleagues, referrals. Even through advertising, so you’re raising money from individuals.

Now, the next step in the progression, that not everyone necessarily gets to, is to raise money from private institutions, and one of the most popular private institutions that you’ll find that people are raising money from are family offices. So family offices are private wealth management advisory firms that serve ultra-high net worth investors. They are different from your traditional wealth management shops, in that they offer a total outsource solution to managing the financial and investment side of an affluent individual or family.

So essentially these are– think of when you go to a bank – PNC, for example, is my bank – and they’ve got the personal finance person there who you’ll talk to, they’ll help you set up your bank account, maybe they’ll help you with some other programs for people who have a little bit more money, maybe six figures in their bank account, but typically you’re only meeting with them, I don’t know, maybe once a year, and they’re pulling together a bunch of money to invest in something that gives you a little bit better of a return, but they’re working on behalf of hundreds of people, most likely thousands of people.

The difference with the family office is that they are working full-time for one family. So imagine if you had an entire PNC Bank working on your behalf, that is what a family office is. So family offices can be a great source of equity for advanced apartment syndicators. So you connect with a family office and they will use some of the ultra-high net worth of their family to invest in your apartment syndication deals.

Now, I actually interviewed someone, his name’s Seth Wilson, on the podcast which is not going to air until September. So you’re gonna get a sneak preview at some of Seth’s tips for raising money from family offices because that’s what he does for his company. So he gave us five things that you need to do in order to maximize your chances at attracting family offices.

So the first one is that you need to have relevant experience. So before you even consider raising money from a family office, you need to have experience. So if you’ve never done an apartment deal before or you’ve never done a large apartment in the past, a family office isn’t gonna take you seriously. Even if you’ve done a handful of large apartment deals in the past, maybe you’ve been actively doing syndications for a few years, a family office still likely is not going to take you serious. So when I talked to Seth, he said it took him 12 years and $65 million worth of real estate in order to begin raising money from family offices. So this is an advanced money-raising strategy.

We talked about the progression in the beginning. You’re going to need to do a lot of successful deals and have them be successful over a long period of time before a family office entrust you with their capital. So if you want to raise money from family offices, then your first step is to have years of experience successfully buying, managing and selling apartment buildings.

Next is that you must be an expert as well. So if you meet the experience requirement, you likely meet the expert requirement as well, but you need to be educated on the process. So the reason why you need the relevant experience and you need to be an expert on a par with syndication — so there’s two reasons. The first one is that these family offices are entrusted by an individual or a family to invest on their behalf, and then more importantly, preserve, conserve their net worth. So this individual or their family did a lot of due diligence on the family office prior to using their services, if not creating one from scratch, and then the family office themselves did a lot of due diligence before hiring their employees. So the family hires a family office with a ton of experience managing family wealth. The family office, in turn, hires a bunch of individual employees who have a lot of experience at family offices that have experience managing family wealth. So you are with the third person in the chain who is also going to have a lot of due diligence done on you and your business. So if you don’t have experience, then you’re not even gonna get in the door. If you don’t have the education to get you in the door, you’re not going to be able to win them over.

Secondly, and because of reason number one, the individual or families themselves depending on– we’ll get to that in a little bit later, because sometimes these offices are set up a little differently. So the family office or the actual family or individual are going to be most likely more sophisticated than the people you’re used to raising money from. They’re gonna be more sophisticated than your parents or your siblings who are investing in your deal, your good friends and other people you’re raising money from. Not all, but it’s likely that they’re going to be a lot more sophisticated. So they’re gonna ask you a lot more complex and detailed questions about both you and your business plan. So when you’re an expert that you’re able to hold your ground when these questions are asked, which means that they must have confidence in your ability to conserve and grow their clients’ investment. So if able to answer all their questions and you check all their boxes, then you should be good to go.

So what happens when you are good to go? What happens when you have the experience and you have the expert? So there’s really three things you need to do to, in a sense, court family offices. The first one is or number three in this episode is that you need to put together the right look. So Seth says that whether you like it or not, whether you agree with it or not, in this industry, a book, you, are going to be judged by your cover, how you actually look. So a family office is likely not going to invest in your deals, thus seeing you in person or as you might have a lot of investors now or in the future who have never seen you invest. Therefore, you need to understand what the proper attire is going to be when you go to these business meetings, and there’s not going to be a one size fits all approach.

So this is what Seth was saying – that the acceptable attire when visiting a family office based out of Denver is going to be a lot different than the one in Manhattan. So he said that in Denver, it’s a little more casual, people are wearing Patagonia type of clothing. So if you go in there with a three-piece tuxedo, probably not gonna go over very well. Whereas in Manhattan, at the very least, you need to wear a full suit with a tie. So Seth says the best way to learn the dress code is by asking. So if you have a meeting with a family office in Denver or a family office in Manhattan or somewhere else, give them a call, speak with the receptionist and ask them what the dress code is, and once you know the dress code is, dress with one notch higher.

So once you’ve got the look down, the next part is to know who to speak with at the family office. So how do you get in contact with a family office? Speaking with the right person is going to maximize your chances of success. So if you’re reaching out to a family office who manages the wealth of a second-generation or later families– so this means that the wealth created by the parents or the grandparents, the great grandparents, but the family office is working on behalf of the kids or the grandkids or the great grandkids. So the person that the family office is representing is not the person or the generation that made the actual wealth, and the best person to speak to there would be the Chief Investment Officer.

So most of these established family offices will have an investment committee who must sign off on all investments and a Chief Investment Officer is someone who sits on that committee. So be able to win over the Chief Investment Officer, you will have them on your side, you will have your inside person to argue your case on your behalf. Then if you’re reaching out to family offices who manage wealth for a first-generation family, which means they’re managing the wealth for the actual person or generation that created the wealth and that person individual’s still alive, then the best approach would be to speak to the actual patriarch or matriarch of that family, because since they are the ones that made the money, they’re likely going to be heavily involved in the investment decisions.

So once you know who to speak to, once you dress right, once you talk to them, step five, which is really the tip for anything that you do, which is to take massive action. So like all things in real estate, raising money from family offices requires lots and lots of action. So Seth recommends having at least one to two great phone calls with family offices every single day, and then use resources that you already have to add value and take care of them. Focus on building a business relationship as well as a personal relationship. For example, if you come across something that you think they would personally be interested in, like some news article that you can text that to them. You also want to make sure you are physically meeting them in person, which we’ve already mentioned. So Seth says that he has no issue flying out in the morning, having an hour or so meeting with a single-family office in the afternoon and then flying home in the evening.

So once you’ve got your foot in the door, you have to stay in front of them. You don’t want to be constantly calling them for business-related things, you want to constantly be reaching out to them, sending them stuff that’s valuable to them personally, and then you have to also fly out there, drive out to the actual physical location and meet with them in person.

So those are the five tips. Again, raising money from a family office is a really good way to take your apartment syndication business to the next level to double the amount of money you’re raising, but it’s a strategy that takes time to work up to. As I mentioned, you need to first establish a relevant experience and expertise before making the jump from family and friends to family offices, and once you have that track record, then you need to make sure you know how to dress the part, you know who to speak with, and that you take massive action. So that concludes this episode. As I mentioned, Seth’s episode airs September; the exact date is September 16th. So definitely check that out. Plus, you could go to his website that he lists out. I think he lists out his website. Maybe he lets out his email, I’m not sure. But however he says to get in touch with him, you can learn a lot more about how to raise money from family offices.

So that concludes this episode. Make sure you check out some of our other syndication school episodes, as well as the free documents that we have. Those are available at syndicationschool.com. Thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2130: 6 Tips For Hiring A Syndicator Mentor | Syndication School with Theo Hicks

Many people preach, find a mentor to show you the way into real estate so you can shorten your learning curve however, how do you know who you should really choose as a mentor? In this episode, Theo goes over 6 tips to help you in hiring an apartment syndicator mentor. 

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPTION

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 another episode of The Syndication School series – a free resource focused on the How-tos of apartment syndication. As always, I am your host, Theo Hicks. Each week, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer free resources. These are free PowerPoint presentation templates, free PDF how-to guides, free Excel calculator templates, some sort of resource, some document for you to download for free. All these free documents as well as past syndication school series episodes can be found at syndicationschool.com.

In this episode, I want to revisit a topic we’ve talked about before, but it’s always good, I think, to bring up topics we haven’t talked about for many years, just in case people did not listen to that episode, but also to expand, to elaborate, to look at it through a new lens, because everyone that’s listening to this is growing, I’m growing as well. So it’s always great to revisit old topics to see if there’s extra information, extra value that we can add.

So I wanted to talk about mentorship today, and what triggered this was a great article that someone on the Ashcroft team, Travis Watts, wrote. So it’s on our blog right now; it’s called, Turn a Decade Into a Year – How to “Knowledge Hack”. So his hack was to consider having a mentor. So in this article, he goes over a few examples of people who are super successful and have mentors, and he also says to refer to them as a coach as well, just in case you have a negative connotation for a mentor. Think of it more like a coach like when you’re playing basketball. Sure, the head coach is maybe a mentor, but the purpose of that basketball coach is he’s way older than you, he has way more experience at basketball than you, so he’s trying to teach you what he knows, his knowledge to help you become a better player. So I think this analogy of a basketball coach is good to be applied to business and real estate. Look at a mentor as a coach instead, and realize that they are there to literally teach you what they know, what they’ve done and the successes that they’ve had.

But anyway, so he goes over a quick story of himself and says that at the beginning of his real estate investing career, he was an active investor, he was doing single-family homes, and he did not have a mentor at the time. And eventually, after trial and error of seven years, he realized that there’s other people out there who were doing the same thing he was doing, but a lot more efficiently. They had a lot more connections that he had, they were finding better deals, they had a broader range of skill sets, and ultimately, they were more profitable than he was.

So he did some soul searching, some self-reflection and took a long hard look in the mirror and asked himself, “Was active investing really the best use of his time and his skills?” and so because of this, he made a decision to start partnering up with firms who had much better skill sets than he did, had a much better track record, much better connections and much better efficiencies, and essentially piggybacked off of their success by, in this case, becoming a limited partner. So he transitioned from doing active investing to doing passive investing, because it fit better with his skill set with what he wanted to do.

He said, “After dedicating some time to networking, reading, listening to podcasts, watching how-to videos and seeking mentors, I inevitably became a full-time passive investor in real estate. I left the active single family strategy, behind because I was tired and burned out from trying to do it all myself, trying to make the right calls and know all the ends and outs. In addition, the hands-on approach was taking too much time away from things that I love doing. I had far less spare time because my real estate projects were consuming more and more of my availability. 2015 was the beginning of an entirely new education process; it has been life-changing, to say the least.” So his was major takeaway was that “Mentors can come in many forms. The best advice I ever received was to seek out a mentor or coach who is doing what you want to do and is successful at doing it… Because success leaves clues.”

So in his case, rather than finding someone who was good at single-family homes, he first asked himself should he be doing this in the first place, and once he decided the answer was no, rather than trying to passively invest on his own, he partnered with people who knew what they were doing, he partnered with syndication business that knew what they were doing and passively invested with them. So they, in a sense, were not really his mentor or his coach, but they were the people that he piggybacked off of to launch his business forward.

So that’s what you can do when you’re an apartment syndicator to launch your business forward, to piggyback off someone else’s success – is to find a mentor. So Travis inspired me to go back and review our post. We did a syndication school episode on this before about how to hire a mentor. So now that Travis tells you why you need a mentor, how it can help you turn a decade into a year, how to knowledge hack just by finding someone who’s doing what you’re doing, let’s talk about how to actually find a mentor.

So before we decide to find a mentor, and Travis did this as well, he sat back and asked himself, “Okay, what is it that I actually want to do?” and he defined specifically what he wanted out of a mentor; he knew exactly what he wanted out of a mentor. So that’s what you need to do when you hire a mentor, is know exactly what you want. But before that, it’s important to understand what expectations do you have for a mentor, and then what expectations you shouldn’t have of a mentor if you really want to set yourself up for success. So Travis already went over what you want to get out of a mentor, but the expectations are key here because coaches can be expensive, you’re gonna spend a lot of time searching them out, so just make sure that you’re in the right mindset before you reach out to a mentor, so you’re not wasting their time, and you’re not wasting your time spinning your wheels for multiple years; and to make sure you’re actually finding and identifying the right mentor. That’s probably the most important, is making sure that you have the right expectations that you’re finding the right mentor.

So there’s four things that you should expect that you are going to get out of a good mentor or a good coach, and the number one is going to be expertise on how to do what you’re wanting to do. The keyword there being “how” which we’ll go into in the next tip.

So the mentors shouldn’t just be and have experience in the same field that you’re pursuing, but they should be active in it as well. So if you are an apartment syndicator or an inspiring apartment syndicator, when you’re seeking out a mentor, obviously, you want to seek out someone who is an apartment syndicator, but you also want to make sure that that person is actually actively still doing apartment syndications. So the best mentor would be someone who is actively doing apartment syndications and has way more deals, way more dollars under management. So the next best thing will be someone who has done apartment syndications in the past that has retired, but again, someone who’s actively doing it is going to be completely up to date on what works, what doesn’t work in apartments syndications. Someone who did apartment syndications– I don’t think they even existed decades ago, but someone who did apartment syndications ten years ago or five years ago – those strategies may not work in today’s market. Things change so quickly these days. You want someone who’s actively doing it, and you want someone who’s obviously way more successful than you are. So not someone who’s done only a handful of deals. So that’s the ideal situation. Obviously, if you have to find someone who is not as successful right now, not a billion-dollar syndicator because you can’t afford it, a mentor is better than no mentor, but this is the ideal situation we’re talking about here.

So number two, is that you should expect a coach or mentor to provide you with a Do It Yourself system for how to replicate their success. Remember, in number one, you need an expertise and a how to do what you’re wanting to do. The “how” there is key and the Do It Yourself system is key. So you should have a system of processes that they follow themselves, and then they should hand it off to you, and then you use those processes to replicate their success, but you are the one that’s doing everything. They’re not doing it; they’re just giving you the blueprint that allows you to navigate this industry without taking any wrong term and falling into any booby traps, but you actually have go out there and do it yourself. I’ll elaborate on that one a little bit more in the next section about what you shouldn’t expect.

So thirdly, and what’s probably the most important, is that a mentor or a coach should be an ally that you can call upon to talk to about yourself and to work out any problem you are facing, whether it be real estate or personal. So the only way this is gonna work is if you pay them. So if you are paying this person, then you are not going to get feel guilty or selfish about only talking about yourself and not asking them any questions. In typical social interactions, I talk and then you talk, and then I talk and then you talk. Maybe on one day, I talk about a problem I have going on; the next day, you talk about problems you’ve got going on in your life; it’s reciprocal. But in this case, since you’re paying them, you don’t have to follow normal social conventions. You can even be selfish; you don’t even need to be interesting. You can talk about whatever you want to, whatever you need to in that moment. So that’s something you should expect out of the mentor in that a mentor or coach should be willing to offer to you.

So I was [unintelligible [00:13:00].20]  this podcast won’t come out for a long time. I can’t even remember what her name was, but she’s a coach, and she was saying that most people she talks to that there’s things holding them back, those obstacles aren’t a lack of real estate knowledge, or a lack of deals, or a lack of raising money. It’s typically some personal problem they’re going through, some mindset block. Maybe they’ve got family issues or other personal problems. Maybe they got certain mindset blocks. So being able to talk through personal problems you got going on in your life, being able to uncover certain mindset blocks that you have is important with a mentor. So you want to find someone that you can talk to about more things than just “Hey, how do I find more deals?” Because maybe you have some sort of block or maybe you’ve got a personal issue that’s taking up a lot of time that’s not allowing you to spend the time you need to actually follow the steps for finding more deals. So number three, it should be somebody you can talk to you about anything.

The fourth thing you should expect – and Travis talks about this in his blog post – is networking, relationships and connections. So this is another reason why it’s important that your mentor is active, because if they’re still doing apartment syndications, if they have a billion-dollar portfolio or a $100 million dollar portfolio or even a $50 million portfolio, they know property management companies, they know brokers, they know contractors, they know mortgage brokers, they know all the movers and shakers in that industry. So they should be able to connect you with people who are relevant to your business, even if they’re not in your same real estate market… Because we live in a national– even from a real estate perspective, it’s very national now because people invest everywhere. A lot of these brokerages, a lot of these property management companies are all over the country. So just because your mentor is across the country from you, it doesn’t mean that they don’t know someone who knows someone that could help you in your market, or the very least, you can always fall back on that Do It Yourself blueprint for how to find the right people in your market based on how they found the people they know in their market.

So those are the four things that you should expect, that you want out of a mentor. Number one is expertise on what you’re wanting to do, which includes being active. Number two is providing you with a blueprint, a Do It Yourself system to replicate the success. Number three is someone you can call upon to talk about whatever you want, without having to be interesting, feel guilty or not want to be selfish, and number four is you should expect a lot of relationships and connections.

Now, on the flip side, what shouldn’t you expect? Obviously, you could just say, “Well, the exact opposite of those four things,” but there’s two things in addition to the opposite of those four things – so someone who’s not an expert, someone who doesn’t give you a blueprint, someone who doesn’t let you talk about whatever you want and someone who doesn’t have any connections. Obviously, those are things that you don’t want out of a mentor, but there’s two other things that you don’t want out of a mentor and that you shouldn’t expect out of a mentor. Number one is a knight in shining armor. The mentor is not going to be your Savior. You’re not going to hire a mentor, and then poof, every single problem you have is going to be solved without effort on your end. So yes, they’re going to offer you expertise, they’re going to be an ally, they’re gonna have connections, but at the end of the day, you are still going to be required to take action. So they’re not gonna do anything for you. They’re not gonna actually go out there and find new deals; they’re not gonna find you money. If they do, then our recommendation would be to run. I’ll go more in detail on why in the second thing you shouldn’t expect, but they’re not going to do everything for you. Instead, they’re gonna give you the tools that you need in order to become your own savior, quite frankly.

So the second thing that you do not want to expect is a Done For You program. So if a mentor does offer you some Done For You program, you pay them and you just sit back and they do everything for you, you want to run. If a mentor or coach ever promises you something that doesn’t require any work or effort on your part and just money, then it’s most likely going to be a scam, and even if it’s not a scam, you’re not gonna learn anything. So you’re gonna be reliant on that person for the rest of your life, and you’re not going to be able to build the foundation of knowledge that’s required to sustain a business. Even if you are able to attain a high level of success using one of these programs, it’s going to be really unstable. Once you lose that program, once that mentor stops mentoring people, stops coaching people, then what are you going to do? You’ve got this $10 million portfolio that you’ve done nothing to create and then you lose your mentor. What’s going to happen? What’s gonna happen when you can’t get your mentor on the phone and some issue goes wrong? He goes on a week vacation and your entire business collapses. So any Done For You program is too risky from a scam perspective. Even if, for some reason, it is not a scam, it’s too risky in a sustainable perspective. So those are the two things that you do not want out of a mentor. Number one, a knight in shining armor and two, a Done For You program.

So now that you know what to expect, what to not expect, what you want and don’t want out of a mentor… When do you hire a mentor? I briefly talked about this in the beginning of the episode, or I guess after I talked about Travis’s blog post. And Travis also mentioned this in his blog post – you can hire a mentor once you know why you want to hire a mentor in the first place. You have a specific outcome that you want to achieve by hiring that mentor. So is it immediate access to expert advice about apartment syndications? Is it you want a system, a blueprint for reaching whatever your financial goal happens to be? Do you need an unbiased person to selfishly speak with? Do you need connections in your industry? What is your exact outcome for finding a mentor?

And then once you have your outcome, you can go out there and actually find the right mentor, the person who can actually help you accomplish that. So if you don’t care about speaking to someone unbiasedly and selfishly, you don’t need to find a mentor who’s a Tony Robbins certified life coach. You don’t care about that stuff; you don’t need that. But if you do want that mindset help then, you’re not going to want to find someone who just does apartment syndication and that’s it.

Lastly, how do you actually find a mentor? At the end of the day, the really only effective way to find a mentor is word of mouth referrals. So find someone else who’s a little more successful than you in apartment syndications. This is syndication school, but obviously, you can apply this to anything. Find someone who’s a little bit more successful than you in whatever niche that you’re in, and then ask them who their mentor is, and then go and find that someone. If you don’t know someone with a mentor or if you don’t know where to get a referral, then you’re probably not ready to hire a mentor. You need to get out there and meet more people and start meeting other apartment investors.

So that concludes this episode. This is information we’ve talked about before, but I wanted to revisit it for those who hadn’t heard it before and to elaborate a little bit more on the mentorship question, especially based off of the blog post that Travis Watts posted recently. So again, his blog post is, Turn a Decade Into a Year – How to “Knowledge Hack”, and then if you want to go back to the blog post about mentorships that I use as the guide for today’s conversation, we wrote it all the way back in 2017 – so nearly three years ago, but just yesterday we were writing this, and that’s how to approach hiring a real estate mentor.

So that concludes this episode. Thank you for listening Best Ever listeners, and make sure you check out the other syndication school episodes and free documents we have from the syndication school episodes; those are on syndicationschool.com. Have a best ever day and I will talk to you soon.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2129: The 5 Year Multifamily Demand | Syndication School with Theo Hicks

Are you wondering what the multifamily market will do in the next 5 years? Theo shares some of the research he has found in regards to the multifamily market and what we should expect to see for the future of real estate investing for the next 5 years.

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.


TRANSCRIPTION

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: Hello, Best Ever listeners. Welcome to another episode of The Syndication School series – a free resource focused on the how-tos of apartment syndication. As always, I am your host, Theo Hicks. As you know, each week, we two episodes of syndication school, and these focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer a free resource. These are free PDF how-to guides, free PowerPoint presentation templates, free Excel calculators, something to help you along your apartment syndication journey.

Today I want to give an update on the market, and more specifically, the update on forecasted rental demand. So as you know, before the outbreak of COVID-19, we were doing some episodes focused on different market factors and different markets, top 10 markets for rent growth, for multifamily pricing, for cap rates, market expanding and contracting, and in a sense, all of that has been on pause or more likely reset, and now people are starting to come out with some more studies, some more forecasts on where they see real estate going.

Before I get into that, when I read this article, it had sparked a memory of an episode that I’m pretty sure we talked about on syndication school. I’m not exactly sure when, but the article that syndication school episode was based on, we wrote back in the beginning of 2019. So this was January 2019, and so over a year and a half ago from the recording of this episode. The blog post was entitled, “Why I’m Confident Multifamily Will Thrive During And After The Next Economic Recession,” and in summary, historically, homeownership rates, so people who are owner-occupying a home, decreases during economic recessions, and then once the economy begins to turn around and expands again, people will start moving back in their homes and homeownership rates increase. So historically, over the past nine or so recession/expansion cycles, that has been the case. Homeownership goes up during expansions and down during the recessions. But this was not the case for 2008.

So during the post-2008 economic expansion, which was from 2008 until very, very recently, in this case, 2019 when this was written, the Dow Jones had tripled, the unemployment rate had been cut in half, and the GDP rose by nearly $5 trillion. So during this massive economic expansion, one would expect the homeownership rate to also increase. However, during that period of that economic expansion, the renter population increased nearly every single year over that ten year time period or so. It grew by more than 25% from what it was at the beginning of the economic expansion. So it grew by more than 25%, so the exact opposite of what has happened historically.

Now, there are a lot of reasons why. At the time, others were predicting why people were deciding to rent as opposed to own during the most recent economic expansion and it is because of things like high student debt, things like poor credit, things like tighter lending criteria after the crash, people began to start families later, so they are renting longer, and the overall inability to afford the down payment for a home. Since, at the time, these reasons weren’t going away, we predicted that when the next economic recession occurs, the same percentage of people or more will rent. We actually thought it would be more, but the very least it’d be the same percentage, and then after the economic recession has ended and the economy begins to turn around and expand again, we made the same prediction that the number of renters would either be the same or more. Fast forward a year and a half, and many experts believe that we have entered the next economic recession due in part to the Coronavirus pandemic. So, as I mentioned before, what are people saying about multifamily?

So there’s a study that was recently released by an apartment properties acquisition and management company called the Middleburg Communities, and there was a GlobeSt article – so I found it in GlobeSt – that’s published on June 17th entitled, “As Homeownership Declines, Demand for Rental Housing To Climb.” So I’m just going to read an excerpt from that article:

“The June 11 report projects a decline in US homeownership to 62.1%, the lowest rate in more than 20 years, before a partial recovery to 63.6% in 2025. Depending on the effects of the recession, the demand for rental housing will increase somewhere between 33% and 49% over that time period, the report concludes.”

So over the next five years, they’re assuming that the homeownership rate is going to continue to drop, because they believe we’re in a recession, and then eventually it’ll start recovering by the end of this five year period to 63.6%, and depending on their worst-case scenario or best-case scenario, because of this drop in US homeownership – now the only other thing people can do besides owning is renting – then they expect the demand for rental housing/rentals to increase a maximum of nearly 50%. So obviously really, really good news for people who are in rentals, very good for you who’s listening who is an apartment syndicator, or aspiring apartment syndicator, because you’ve got a huge increase in rental demand being projected. So the reason why, in the beginning, I went over the previous article – not because we predicted this would happen; it was just based off of looking at the trends. But what’s interesting is the reasons why this group, this company, made these projections; why they believe that the rentals are going to decline.

So let me continue reading. “The analysis points to changing demographics playing a role in the changing demands. Married households are more likely to own homes, and their numbers are declining. The numbers of households with incomes of more than $120,000 is expected to drop while those with incomes of less than $30,000 are projected to rise.” So just right there, they said that people are not going to be able– people are getting married later and forming families later, which is one of the reasons we had mentioned year and a half ago. The second reason was no people’s household incomes are expected to decline, which means we’re not going to be able to afford home payments; they’re not gonna be able to afford down payments, which is another factor that we predicted a year and a half ago.

So let’s keep reading. It says, “But demographics alone are a weak explanation for homeownership shifts, according to the report. Student loan debt, inability to make a down payment and tightened lending standards.” So those are the other three things that we mentioned, or three other things we mentioned a year and a half ago, and then, “High rents and a shift in preferences play a role, too. The report also zeroed in on three variables that offer a reasonable explanation for slumping homeownership: lending standards, as measured by the average credit scores of mortgages, median net worth by age of householder, and the previous year’s deviation from the demographic-based projection.” Essentially, he’s calling this inertia or momentum.

So very interesting to see that data; very interesting to see our article we had written a year and a half ago be essentially repeated with different numbers a year and a half later. And then the study also provided extra variables as to why the homeownership rates are expected to decline, and the demand for rental housing is expected to increase.

The last part that I have in here is that “The report notes that additional stimulus packages from the federal government could bolster homeownership rates.” I do know as recently as last week, there were rumblings of an additional stimulus package being created. So it’s too early to tell for that. So as of now, without that– but I’m pretty sure that– I’m sure that this study had taken that into account and still expects the demand for rental housing to decrease.

So during the economic expansion– so during the previous economic expansion, homeownership decreased because of the fact that people are starting families later, student loan debt, inability to make down payments, tightened lending standards… So the study reinforces our thoughts on multifamily investing. It reinforces our prediction that during this recession, demand for rental housing is going to go up, and that we’ve made a change from being a nation of owning to a nation of renting, at least for now.

Now, next week– because I did come across an interesting article today that was talking about where is this demand going to be because the demand for multifamily housing is not going to be increased by 50% everywhere. In some places it’s going to be– it’s not going to increase at all. Some places might go down, some places might go up a little bit; in other places, it’s going to go up a lot, a ton, because this 50% is just an average. So I found an article recently in The Guardian about where people are moving based off of this most recent pandemic, because this– from my reading of this study, it didn’t necessarily take the Coronavirus into effect. So it’s essentially saying that the recession was started by student loan debt, inability to make housing payments, tightening lending standards, things like that. Not necessarily the– in part, at least, in part by that, but not necessarily Coronavirus. So add the Coronavirus into the mix and that shifts demand for multifamily up more most likely, but to certain areas of the country. So we’ll talk about that next week.

That’s gonna conclude this episode — a little shorter one than usual, but still, I think this is very powerful information in case you have not seen this study or heard of this study or have been keeping your finger on the pulse of multifamily demand, of rental demands, forecasts in the future.

So thanks for listening, and make sure you check out some of the other syndication school episodes about the how-tos of apartment syndications. Make sure you check out the free documents we have available. Those are all at syndicationschool.com Thank you for listening. Have a best ever day and I’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2115: COVID-19 Impact On June Rent | Syndication School with Theo Hicks

COVID-19 has been kind of quiet lately in the media due to all the protesting but today we are going to share with you how it has still impacted the rent collections for landlords in June and we will also be sharing the forecast of future rent collections.

Click here for more info on groundbreaker.co

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


TRANSCRIPT

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: Hello, 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. So each week, we air two syndication school episodes that focus on a specific aspect of the apartment syndication investment strategy, and we give away a lot of free documents with these episodes, as well as our free PDF how-to guides, free PowerPoint presentation templates, free Excel calculator templates, things like that, that’ll help you along your apartment syndication journey. So make sure you check out our previous syndication school episodes, as well as all of those free documents at syndicationschool.com.

Today, we are going to be talking about the Coronavirus again, more specifically, how it has impacted the June rent collections for landlords. So I am recording this on the 10th of June, and we have already talked about May rent collections as well, so those were actually hard data points… Whereas today, we’re going to talk about the forecasts, but also why people are confident that these forecasts are accurate. But first, let’s do a quick refresher, and talk about the May rent collections so we have some context.

So the amount of rent that was collected in May, by the 6th of the month was at 80.2%. The same time in 2019 was 81.7%, so slightly down. However, the rent collected from April 2020 to May 2020 actually went up. So by the 6th of April 2020, the amount of rent that was collected was 78%, and then in May 2020, the amount of rent collected was 80.2%. So it actually went up from April to May, which was obviously a positive sign, because a lot of investors when this first started that I spoke to in April thought that it would gradually get worse before it got better. So it started at the end of March, so they expected April collections to be pretty close to normal, and then May would be lower, and then June would be even lower, and then July would be even lower, and then maybe some people were predicting turnarounds around August, September timeframe. Whereas in reality thus far, April 2020 was actually lower than the April from the previous year by over almost 5%, and then the May collection was only down by 1.5%, and they actually went up from April to May. So again, I think that’s interesting, just to quickly give a refresher on the rent collection for April and May.

Now, what about June? Because in May, it was possible to tell, “Okay, we’ve got two data points. It went up from April to May. May seemed to be close to being in line with what it was in the previous years,” but obviously, it’s only two data points. So what happens in June? Well, the J Turner Research company, what they’ve been doing since– I believe they started in April, or maybe even March, but they started doing a survey where they asked multifamily residents a series of questions, and one of those questions was – do you expect to be able to submit your rent this month? The responses were categorized as either “I might be unable to make the rent payment, I’ll be able to pay rent by the end of the month, I’ll be able to pay rent by the 10th, or I’ll be able to pay rent on time.” So those are the four categories. So on time, by the 10th of the month, by the end of the month, or I won’t be able to make it at all.

Based off of this survey for June, 90.3% of the respondents said that they expect to pay their June rent by the end of the month. So 90.3% expected to either pay their rent on time, by the 10th or by the end of the month. Now of that 90.3%, 84.3% said that they expected to pay their June rent by the 10th of the month. Now compared to May, where they did the same survey, this was a 5% increase. So when they asked people in May the same question – do you expect to be able to pay your May rent? – a little bit under 80% said that they’d be able to pay their rent by the 10th of May, compared to the 84.3%. And then the remaining 6% of that 90.3% said that they expected to pay by the end of the month.

So the vast majority of people expect to be able to pay their rent either on time or by the 10th. Now of that 84.3%, 74.6% said they expect to pay their rent on time. So not by the 10th, but on time. So whatever the terms of their leases are; typically they have a day or two cushion, so it’s due by the 3rd of the month. So 74.6%; in May, that number was at 70%. So again, a 5% increase from May to June in the number of people expected to pay their rent on time, and then the remaining 9.6% of the 84.3% expected to pay by the 10th, and then obviously, you’ve got the 90.3% paying the rent by the end of the month; again, either being on time, by the 10th, or by the end of the month. And then you’ve got the remaining 9.6% saying that they did not expect to make their rent payment for the month of June, which is about 5% lower than the number of people who said the same thing in May.

Now you might be saying, “Well, Theo this is just a survey. This is not actual rent collection data. So how can we trust their forecasts and numbers in such a time of uncertainty?” Well, as I said in the beginning, the reason why a lot of people are trusting J Turner Research’s numbers is because of how their predictions for May compared to the actual collections for May. So just to give one example, because this is really the most important number, is – what did they project to be the rent collections in May? So when they did the same survey in May, and they asked people, “Will you be able to pay your rent for the month of May?” 80.8% of people said that they’d be able to pay on time or by the 10th, and then NMHC has a rent payment tracker where they update the percent of rent collected a few times a week. By early May, they found that 80.2% of rent was collected. So J Turner predicted 80.8%, the actual was 80.2%. So their predictions are very accurate. So assuming that their predictions are going to be accurate again, then we can expect June to be better than May. The president of J Turner Research, the firm that did this study was quoted as saying, “If our numbers are as on target as last month’s, rent receipts will be stronger than May which bodes well for the industry.”

So again, the main key takeaways here is that from this survey, 84.3% of respondents expect to pay their rent either on time or by the 10th, which was a 5% increase from the same time in May, and then if you look back at the numbers that I talked about last month for May, there was a 2% increase from April to May in the rent collected by the 6th. So if again, this survey is accurate, then we’ll also be seeing a trend of 78% of rent collected by the 6th in April, 80.2% of the rent collected by May 6th, and then 84.3% of rent collected by June, keeping in mind that the main reason for the bump in the May rent collection was likely due to the stimulus checks that went out towards the end of April, whereas there has not been a second round of stimulus checks in May. So it seems as if the impact from Coronavirus may potentially be over. However, when I was looking at the actual NMHC rent payment tracker which– I recommend going to that website, just bookmarking it. It’s just NMHC rent payment tracker. If you find it, you can bookmark it so you can keep tracking the rent payment collection tracker for as long as you need to, as long as they keep creating it.

As of this recording, they haven’t updated it for June yet, but I expect them to do it within the next few days. So we can see what the actual collections have been by the 6th, and then see what it is by the 10th to compare that to the projections.

But the President of NMHC said that, “The hardships caused by the outbreak are not ending anytime soon.” So just because these numbers are trending in the positive direction according to this person, it’s important to make sure that you’re staying up to date on any new rental assistance legislation, any changes to the eviction laws, make sure you’re staying in contact with your residents to make sure that they’re still able to pay their rent on time, but continue doing what you’ve been doing in the past to make sure that you’re able to maximize your rent collections, because it’s hard to tell what’s gonna happen. Is there gonna be a second wave? Is this thing actually really over? It’s hard to tell. So just be a smart, conservative investor and expect and prepare for the worst-case scenario.

Now, something else that was interesting, before we sign off, from this J Turner Research survey, that was more of a reinforcement of things that we’ve talked about on  syndication school before, and then most people already know, is how people prioritize their expenses. So another question that was posed in this survey was related to the order in which people planned on paying their expenses. So the four expenses that people were asked about was their rent, their car payments, their utility payments and their groceries, and the number one expense that people said that they’d pay first before anything else was their rent. So more people said they’d pay their rent first, some said they’d say their car payment first, their utilities first or even their groceries first.

So again, as I mentioned, it’s reinforcing the fact that as a multifamily investor, in renting your units out to people, one of the last things they’re going to stop paying is their rent, even before they buy groceries or pay their utilities or car payments. So even during these times of economic certainty, as long as people are making money, the first thing they’re gonna apply it towards is their rent.

So again, the main takeaways here is that it seems as if the collections in June are gonna be stronger than the collections in May, which were stronger than the collections in April, so we’ve got three data points trending in a positive direction. But again, as a disclaimer, we don’t necessarily know exactly what’s going to happen. So this is positive news for now, but it’s important to continue to stay on top of this to continue to stay up to date on any new information surrounding the Coronavirus and real estate, and then also, I highly recommend bookmarking that NMHC rent payment tracker. Just Google it, you’ll find it; bookmark it and maybe check in with it every Wednesday or every Friday or every Monday. I’m not exactly sure when they update the numbers; maybe it’s a daily thing. It just take two seconds to look at it. On the site, it has a thermometer that shows you how much of the rent has been collected thus far, and then it compares it to the previous month. So I think they began tracking in April. So they’ll have April, May, and then pretty soon June numbers for the rent collected. In this case, the first one would be 6th, because that’s the first data point they collect.

And they also have the full month results for previous months. So it says, for example, April 2020, for the month, 94.6% of people paid their rent, and then in May, it was 95.1%. So trending in the positive direction. And then they compare that to the 19th as well, and also– so it does say here which data points they look at. So on the 6th of the month they have the data, on the 13th of the month, on the 20th of the month, the 27th of the month and the end of the month. So I’m sure right after the 6th, it looks like– today’s the 10th, so maybe we’ll have it today or tomorrow. So it’s a four-day delay. So if you look at it every week, you should have new data to look at. Again, that’s NMHC Rent Payment Tracker, and NMHC is National Multifamily Housing Council.

Alright, so that concludes this episode. Quick update on how the June rent collections are expected to go, and we should have hard, concrete numbers here in the next few days, maybe even by the end of day today. Until then and until our next syndication school episode, make sure you check out some of our other syndication school episodes, as well as those free documents at syndicationschool.com Thank you for listening. Have a best day and I’ll talk to you tomorrow.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

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The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

 

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JF2060: Coronavirus and Commonly Asked Passively Investor Questions | Syndication School with Theo Hicks

 

In this episode, Theo goes over a recent blog post written by Evan an Investor Relations Consultant at Ashcroft Capital called “Coronavirus and Commonly Asked Passively Investor Questions”. Theo goes over the entire blog post and adds additional value by adding additional commentary from his point of view.

Coronavirus and Commonly asked passive apartment investor questions

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

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“Your investors are more focused on you not losing their money.” – Theo Hicks


TRANSCRIPTION

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 another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes, we offer a free resource or document. These are PowerPoint presentation templates, Excel template calculators, PDF how-to guides, things that will help you along your apartment syndication journey. All of those free documents for past Syndications School episodes as well as the past Syndication School episodes can be found at syndicationschool.com.

In this episode, we are going to be talking about some of the common questions that passive investors are either proactively asking or most likely thinking about as it relates to their apartment syndication investment and the coronavirus. So the investor relations person at Ashcroft Capital, Evan, wrote a nice blog post about some of the questions he’s been receiving from investors, and this link was included in the Ashcroft investor email updates this month. I wanted to go over the blog post on Syndication School today and add my thoughts to the post and go into a bit more detail on some of these questions… Because most likely, your investors are thinking about these questions, and if you are sending out monthly emails, then it might make sense to include some FAQ documents, or in the body of the email address, some of these questions that your investors asking, so that you’re not feeling a lot of one-off questions to save both you and your investors some time. So if you want to follow along, you can.

The blog post’s entitled “Coronavirus and the Commonly Asked Passive Apartment Investor Questions”. So I’m just going to read the blog post and then stop whenever I want to add in my own thoughts. As everyone knows, the world has changed dramatically in a very short amount of time. It started with some warnings about a respiratory disease spreading across the Pacific Ocean, but quickly jumped coasts and ground our economy and country to a halt. When I am speaking to our investors – again, this is Evan, not me saying this – my goal has always been to understand their goals and problems first, and then offer solutions for those goals and problems.

So as I mentioned, you’re gonna want to proactively address these things to your investors, as opposed to waiting for them to come to you and asking you questions. It’s your job to think ahead, understand their goals, what they want, and have the questions that they’re going to want to answered; not things that you want to have answered, but what they want to have answered. Back to the blog post.

However, as Coronavirus and the economic fallout has become the only news reported, those goals and problems have shifted from optimistic (retire early, passive income, doubling money) to conservative (how are you protecting my money?). So as I mentioned in the previous Syndication School episode to this one about communicating with investors, sure, your investors care about making money, but in reality, when push comes to shove, they’re more focused on you not losing their money. So I talked about this all the time, about the principle of loss aversion – people are more affected by losing money than by making that same amount of money. So I have a stronger reaction to losing $5 than I do to making $5. Obviously, their reaction’s even more strong if it’s $100,000 or a million dollars. So based off of the Coronavirus and knowing that your investors are focused on you not losing their money, what types of questions do you think that they’re thinking about? So back to the blog post.

So what questions are investors asking: “How has your business model changed?” First and foremost, Ashcroft and our property management partners are abiding by all CDC, WHO, and local jurisdiction guidelines. We are cleaning common areas and model units more frequently, maintaining more distance during showings, and allowing for work-at-home for our employees when feasible. Additionally, on the asset level, we are doing far more virtual showings through tools like Zoom, Skype and FaceTime.

As I mentioned, I’m gonna reference the communicating with investors Syndication School episode a lot. So if you haven’t listened to that one, make sure you listen to it. It’s the one just before this one. So I’m going to call it the  communicating with investors Syndication School episode, without having to say “the one before this one” every single time. But in that episode, I mentioned that for these virtual tours, these YouTube tours, Ashcroft included the links to those in their email updates. So anything special that you’re doing, make sure you’re including the links, so your investors feel as involved as possible. And then obviously, I think it’s pretty obvious that people are following CDC and WHO guidelines, but you can mention that too if you want to. So back to the blog post.

On the investment front, we have always maintained an extremely conservative underwriting standard. Typically, our exit cap rates assume a 10-bps increase in rate per year over our initial cap rate. For example, if we assume that we hold a property for 5 years, the exit cap rate is generally 0.50% higher than our initial cap rate. This makes the conservative assumption that the markets will be worse when we sell than when we purchased the property. So that’s one very important point to make.

So if you did not conservatively underwrite your deals, then those people are having a lot more difficulty right now that people who did conservatively underwrite deals. So a lot of the guys that I’ve talked to in the Best Real Estate Investing Advice Ever show, the regular show, a lot of the people that I talked to about the coronavirus that were obviously facing issues, but were confident that they’d be able to weather the storm was because of their conservative underwriting.

So one example of that would be to not assume that the market is going to be better or the same at sale. Assume it’s going to be worse, which is a higher cap rate, so that’s worth a bet. So even if the in-place cap rate is 5% and then when you sell, it’s an 8%. so it’s 3% higher, if you assumed that 5.5% or 6%, sure, your projections aren’t gonna be accurate, but they’re going to be a lot more accurate than the person who assumed that it’d go from a 5% cap to a 4% cap, or a 5% cap to a 5% cap. Now, the people who conservatively underwrite their deals are looking like geniuses right now. So that is one example, is the cap rate. Evan’s got a few other examples in here, so back to the blog post…

When researching market rents for our renovated units, we historically underwrite rents that are below competitive properties, in order to create projections that we are very comfortable that we can obtain. So what he’s saying here is that when you’re doing a market rent comparable analysis — well, let’s take a step back really quick. So if you have not been conservatively underwriting deals, then this is going to be a great lesson to make sure you’re conservatively underwriting deals in the future. So rather than– if you are facing difficulties right now because of the underwriting, rather than giving up, just take this as a learning experience. Get through it and come out of the other side literally stronger, because now you understand exactly what mistakes were made, underwriting or something else, and just make sure you use all that in the future.

So back to the blog post and talking about the renovated rents. So when you are doing rent comp analysis, the best practice is to determine what the average rent per square foot is for the competitive properties that are obviously close to the subject property, assuming you’re in a major metro area. So let’s say that you look at ten properties that are all fully updated to the same degree that you plan on upgrading your property, and you’ve determined that the dollar per square foot is $2. So rather than assuming that you’re going to get $2 per square foot at your property, you can assume something that’s slightly less than $2 per square foot. That way, not only are you trailing the market leader, but you’re also trailing the average. So if you do that and the projections still net whatever return your investors want, if you buy the deal, then if it is below average compared to the market, then you’re still hitting your projections. If it’s average, you’re exceeding your projections, and if you are one of the market leaders, you’re far exceeding your projections. So that’s huge.

So if something like this happens and rents go down, then you already underwrote lower rent in the first place. So, sure, the rents might go below your projections, but you’re gonna be in a lot better spot if you assumed a below-average rent than if you assumed an average or above-average rent. Back to the blog post.

Additionally, the loans that we place on our properties are generally very flexible and help get us through slower periods. This is why we always stress in the Three Immutable Laws of Real Estate Investing to get a loan that is equal to or greater than the hold period. So if you plan on holding on their property for five years, the loan should be five years or greater. So if you’re doing bridge loans, that’s okay, as long as you have the ability to extend the bridge loan once the three-year period is over. So back to the blog post…

As the markets adapt to a post-COVID-19 world, we will continue to use conservative assumptions when underwriting new potential acquisitions. Depending on the market and property, we may decide to further adjust vacancy, bad debt, rent growth, and renovation premiums to more accurately reflect the recovery of the markets.

So yeah, just– not just continue to underwrite deals the exact same. So sure, you can be a conservative underwriter now, but the conservative underwriting from a year ago might be considered aggressive underwriting in three months from now, especially if vacancy is really low or bad debt is really high, rent growth is really low. So just make sure you’re staying up to date on the market vacancies, the market bad debt rates, and the rent growth projections, so when you begin to look at deals again, you are not just using the same standards as before, because those might be out of date, or are most likely going to be out of date. Back to the blog post.

Finally, for the investments we’re looking at, we have not changed. These Class B assets in Class B neighborhoods have historically shown to withstand recession pressures best. With median household incomes in the $80,000 range, our tenants tend to not be the first hit when economic downturns arise. They have savings and can withstand a short period of uncertainty. If those economic pressures spread and begin to affect our tenant base, it is also affecting the Class A tenants. At which point we get the stepdown effect. When we lose tenants, we are gaining the tenants coming from the Class A properties, since a Class B property has many of the same amenities as Class A – pool, workout facility, in-unit laundry – and are still located in good school districts and near employment bases. These step-down tenants do not need to make as big of a lifestyle change, while saving money on rents.

So what he’s saying here is that if you’ve got Class A, Class B, and Class C… Let’s say, everyone is financially impacted by some events like the coronavirus. Then the people who are Class A are no longer gonna be able to afford Class A, so they’re gonna have to be forced to either stretch themselves to continue to pay rent on their Class A, or take a property that’s maybe not as new, but still has all the same amenities as their Class A property, but the rent is lower and more manageable for them. So they decide to move in the Class B property which is the property that Ashcroft Capital holds.

Now, the people who have a Class B are also financially affected, but the change from Class B to Class C is a lot different than the change of Class A to Class B. So you’re more likely to get a higher percentage of people going from A to B, then you would from B to C, depending on how large of a financial impact it is. But even if the percentages are the same, the people that you lose that go to Class C properties, you’ll gain the same amount from Class A properties. Alright, so that was question number one. Back to the blog post for question number two.

“With all the uncertainty, how are you protecting my investment?” It starts with our conservative underwriting. Then we take it a step further. We run a detailed sensitivity analysis to understand how far off we can slide on rents, occupancy, and cap rates. On a typical deal, our breakeven occupancy in NOI is in the high 60% to mid at 70% range. When looking back at previous recessions, these markets’ occupancy rates bottomed out at 87%-89%. This allows us a certain level of comfort and certainty to maintain positive cash flow and distributions, thereby allowing us to ride out any downturn and never forcing a sale.

So I think that plenty of investors know what the breakeven occupancy is. That is the occupancy rate such that the NOI is equal to the debt service. I think letting them know what that is will relieve a lot of stress or uncertainty that they have about you losing their money… Because if you tell them that, “Hey, we can cover our expenses all the way down to a 65% occupancy rate. In the past recessions, the occupancy rate has never dipped below 85%. We’re always going to be able to cover our expenses, unless something insane happens that’s never happened before.” And then you can show them, “Hey, our current occupancy is this. Our trending occupancy is this, and our current occupancy is 88%. Our trending is 88%, breakeven occupancy is 65%. So you don’t have to be worried until you see occupancy rates in the low 70%, and then it might be time to panic.” I mean, obviously don’t say that, but that’s something in their minds. It’s like, “Oh, okay. Well, breakeven occupancy (explaining to them what that means) is 66%, and the current occupancy rate is 88%, and oh, in past recessions it has never dropped below 85%. So okay, I’m more confident in your ability to protect my investment.” Back to the blog post.

“What are your thoughts on how things will play out?” We do not have a crystal ball, but we do have data from the 2008 recession, which was not only kicked off by the credit crisis, but additionally, we had the H1N1 global pandemic spreading in the spring of 2009. Multifamily as an asset class faired the best of all real estate during the last recession. After their grocery bill, the second bill consumers pay is rent. In the near term, we understand that consumers and our tenants will feel some pain, as everyone is, and we are adjusting our underwriting in assets to account for this with increased vacancy, bad debt and lower market rents. So I’ve already talked about that in previous answers.

Last question is, “Is real estate a good investment in these uncertain times?” We continue to be bullish on multifamily real estate. While people may choose to not open a new retail store or expand their company, needing more office space, people will always need a place to live. When we provide a clean, modern space with all of the amenities of the newly built complex, but at 30-40-50% less in monthly rent – compared to Class A, he’s talking about – we will continue to see strong leasing momentum. Additionally, we are not relying on market appreciation for our investments. We view each property as a standalone business; one which we know how to grow income, regardless of the market cycle. We can add more income by implementing our value-add investment strategy and force appreciation. And that stronger income stream will always have a value to a future buyer, even if the cap rates relax.

So here’s one of the three immutable laws of real estate investing – don’t invest for natural appreciation. So if you invest and assume that cap rates are just going to keep going down, then cap rates go down, [unintelligible [00:17:25].15] to the same value goes up. Well, once cap rates don’t go down anymore, then your projections are way off.

On the other hand, the value-add business model is about forcing appreciation by focusing on the other variable in the equation, which is income. So rather than assuming that the cap rate’s gonna keep going down, the cap rate is kept the same, or in fact even goes up, but the income goes up through the value add program.

So again, as I mentioned earlier, sure, there’s gonna be an increase in vacancy, bad debt, but all those things are assumed based off of the current market and the projections for the market. So using those, you determine, “Okay, well, I might be able to invest $8,000 per unit to increase rents by this much money.” Obviously, the expenses might be a bit higher, but you’re still increasing the income.

As we’ve mentioned, that stronger income stream will always have a value to a future buyer, so even though the cap rates go down – so people are gonna want to buy a property that the income is going up, as opposed to from an owner who just was betting on the cap rates going down.

Basically, what he’s saying is that as long as you’re doing what you’ve already been doing, if you’re underwriting conservatively and not attempting to gamble and buy on natural appreciation, then it might make sense to eventually, buy more properties in the coming months. So again, if you want to read that in full – I basically read it in full – but it’s Coronavirus and Commonly Asked Passive Apartment Investor Questions. I think that me reading it and expanding on it a little bit more, I think this episode will be valuable enough by itself, as opposed to having to read the article.

So make sure you guys check out some of the other Syndication School episodes we have about the coronavirus; these are the more recent ones. We’ve also got a coronavirus landing page. It’s joefairless.com/coronavirus. You can check out our blog posts. Syndication School of course at syndicationschool.com. We’ve got free documents on there as well. Thank you for listening and I will talk to you soon.

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JF2059: SOS Approach to Managing Your Investment During Coronavirus Part 2 | Syndication School with Theo Hicks

In this episode, Theo continues the series on the SOS approach to managing your investments during a pandemic from episode JF2033. The SOS approach is a three-step process to guide you on what you should do during a crisis event, and after it passes. SOS acronym stands for Safety, Ongoing Communication, and Summary. Theo will be breaking down each step so you can have a better idea of what you should do during today’s pandemic. 

 

Part 1 of SOS: JF2033

 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

 

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JF1997: Markets With The Most Job Growth in 2019| Syndication School with Theo Hicks

Theo Hicks shares the top states and cities with High Job Growth Markets in 2019. The information in this report is important to you because more jobs equal more demand for rentals. Listen to see if you are in one of the top job growth markets, and if you are, please let us know how this has impacted your business.

Best Ever Tweet:

“We also like to end our emails with some sort of market-related update whether specific to the neighborhood, city, or state-specific, so if you’re investing in the market that I mentioned today then this is great information you can include in your emails” – Theo Hicks

The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell. 

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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, and 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’m your host, Theo Hicks.

Each week we air two Syndication School podcast episodes – they’re also available on YouTube in video form – and these focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes and overall series we offer free resources for you to download. These are PDFtemplates, Excel calculator templates, PowerPoint presentation templates, something that accompanies the episode that will help you on your apartment syndication journey.

This week we are going to do our second-ever Best Ever market report. This time we are going to focus on the markets with the most job growth in 2019. If you wanna check out the first market report that we did, it was last week, or if you’re listening to this in the future, about six or seven podcast episodes ago. We focused on the markets with the most rent growth.

So rent growth, job growth other economic factors are indications of the demand for real estate in a market. And since we are apartment syndicators, we care about the demand for real estate in particular, and we care about the demand for rentals. So it’s pretty obvious, but people need jobs in order to pay for their overall living expenses… And the largest living expense that people have is their homes. I think on average people spend around 30% of their income on their home or renting expense. So the more people that have jobs in a particular market means the more potential customers for you as an apartment investor. More potential renters, more people who have the ability to pay their rent on time and be high-quality tenants.

So each month, the Bureau of Labor Statistics releases a whole slew of economic news releases. If you wanna check those out, go to BLS.gov and go to their News section. I’ll include a link to their main page, with all of their monthly and quarterly and annual economic press releases… But the one we’re gonna focus on today is the one that focuses on the labor force growth in the metropolitan statistical areas, as well as the unemployment. Those are included in one news release. Basically, in this release it’ll have a few paragraphs just talking about some of the major highlights of the report, and then at the bottom they’ll actually have a full data table that has all 50 states, and the labor numbers and unemployment numbers. Then below each of those states they’ll have the MSAs (metropolitan statistical areas). I’m gonna say MSAs moving forward, instead of saying metropolitan statistical areas… They have the MSAs for each of those different markets below there.

So it’s very easy to just copy and paste that data table into Excel, and then you can filter it and see which states or MSAs have the most total jobs, most job growth, most number of new jobs added, and then unemployment numbers and change.

Here I want to focus on some interesting highlights from this report. The report I’m focusing on is from December 2018 to December 2019, so it covers basically  all of 2019, and we can see which markets had the most job growth. And again, more jobs equals more demand for rentals.

So the first thing that was interesting was the top two states for the total number of jobs added was 1) Texas, 2) Florida. And again, similar to what I talked about in the first market report about rent growth, just like that, you’ve got the markets that Joe invests in – Texas and Florida – topping this list as well.

Let’s go to the top ten states… Number one was Texas; they added 250,000+ new jobs. Florida was 178,000 at number two. Number three was New Jersey at 164,000. Washington was number four, at 140,000… But that was interesting, Washington state… Virginia – number five at 133,000. Tennessee – number six, at 113,000. North Carolina – number seven, at 112,000. Maryland – number eight, at 103,000. And Pennsylvania and Arizona was basically the same, at 102,000, for nine and ten.

But again, top two states – Texas and Florida. Texas is the only state that added over 200,000 jobs over the last 12 months, basically covering 2019.

For the unemployment numbers, all of those top ten markets, with the exception of Tennessee and Pennsylvania, saw a reduction in unemployment, so that’s another positive sign. So you wanna see the number of jobs going up, but you also wanna make sure that the total number of unemployed population is also going down. Those are a comparison of the unemployment rate for December 2018 to 2019.

The greatest reduction was actually in Washington, of 0.9%. Florida also had a pretty large reduction of 0.8%. Then the ones that went up was Pennsylvania, which went up 0.7%, and then Tennessee went up 0.1%. So if you’re investing in any of those top ten states, then you are in a market that’s experiencing a lot of job growth, as well as most of them are enjoying a reduction in the unemployment. But the majority of states and a majority of markets also saw a reduction in unemployment.

Something is interesting too, moving on to the markets – a lot of the big markets actually experienced more job growth, more total number of new jobs added that a lot of states. So the number one MSA, with the most number of new jobs, was the Washington-Arlington-Alexandria MSA. It added a total of 106,000 jobs. So only seven states – North Carolina, Tennessee, Virginia, Washington, New Jersey, Florida and Texas actually added more jobs in that 12-month period than Washington.

And then similarly, number two MSA was Dallas-Fort Worth-Arlington, and the total number of jobs added in that MSA was greater than all states except for those top ten states. So the total number of jobs added in Dallas-Fort Worth-Arlington was greater than the number of jobs added in 40 states as a whole, including all MSAs and all non-MSAs.

The same applies to Phoenix-Mesa-Scottsdale, which was number three, and Seattle-Tacoma-Bellevue, which was number four.

Then the number tenth, just because I like top ten lists – the number tenth market was the Orlando-Kissimmee-Stanford, and that market added more jobs than about 34 of the states as a whole. That’s pretty impressive, that you’ve got a total number of jobs added to MSAs that are greater than the numbers added in a state, making it seem like those MSAs are many states themselves.

The unemployment numbers are a little different, because most of the MSAs and most of the states experience a reduction in the unemployment, and all the unemployment rates are hovering around 2,5% to 3,5%, with some minor exceptions.

Now, something else – because obviously, the total number of jobs added is just an absolute number… Let’s take a look at the percent change in the jobs. Looking at this, the first major MSA that comes up would be West Des Moines, who experienced a 5% growth. They went from 354,000 to 370,000.

The next large(ish) one would be the Nashville market. It experienced a growth of approximately 4%. Then the next one after that would be Richmond, with 3.75%, and then we’ve got Baltimore at 3.6%, and then we’ve got Phoenix at 3.3%. So a lot of smaller MSAs were able to see a job growth of greater than 3%.

Why is this important? I’ve already mentioned the fact that people need jobs to pay for it, but this is also very relevant information that you can include in your investor updates. As I mentioned in the Syndication School series about the ongoing communication process with your investors, in those emails you include things like occupancy rates, and month-over-month changes in occupancy rate, you wanna include information on the number of new units you’ve renovated since the last month, any changes in the rental premiums you’re demanding… Ideally, you’re at least meeting your rental premium projections; ideally you’re exceeding them.

Then we also include things like capital expenditure project updates, as well as updates on any community engagement events that are being hosted… But we also like to end our emails with some sort of market-related update, whether it’s specific to the neighborhood, or the city, or something that’s state-specific. So if you’re investing in any of the markets that I mentioned today, then this is great information that you can include in your emails.

So you can go to the BLS.gov website, download these reports on a monthly basis – or on a quarterly basis – determine where your market ranks on the list… Obviously it helps you stay up to date on the economic growth (or maybe decline) of your market, but it also gives you relevant information to include in your investor email.

For example, if you’re investing in the state of Texas, then in your next email update to your investors you can include the fact that the state of Texas was the number one state in the country for total number of new jobs added. And it is the only state that added more than 250,000 jobs in 2019.

Then if you are investing in Dallas-Fort Worth-Arlington area, for example, then you can say that the specific market that we’re investing in is number two in the country for MSAs and the number of new jobs. Then if you’re investing in Houston, that’s also ranked very high. It’s actually ranked number five on the list for total number of new jobs added.

If you’re investing in maybe a little bit of a smaller market, then maybe the total number of new jobs might not be the most relevant factor to use… So you can focus on the percent change. So if I’m investing in a market like Austin, then I can say that the job growth was 2.5%. So it’s not necessarily in the top ten, but it has experienced a very large job growth overall, just because the market itself might be a little smaller. Or Des Moines, as I said earlier, was number one for percent growth for a large(ish) MSA.

There’s lots of different things you can do with this data, and this is just one report that the BLS has. There’s countless other reports on there that you can focus on to pull data from, to reinforce the strength of your market with your investors.

So again, I’ll have a link to a page where all of the reports are. You can also see on that page if they have an Archive link, so you can look at archived historical data. So if you’re focusing more on doing market research to see maybe which market to expand to, or you’re focusing on what market to pick in the first place, then the historical data might be a little bit more relevant, because you can track longer-term changes, as opposed to just one-year at a time.

So I’ll make sure I include that link in there, and I definitely recommend checking that out and downloading the data into Excel and then manipulating it with filters and things like that to determine which data best supports your market.

Thanks for listening. Make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications, and check out all the free documents we have available on there as well. All of that is at SyndicationSchool.com.

Again, thank you for listening, and I will talk to you soon.

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JF1996: Communicating With Your Investors When Selling Your Deal | Syndication School with Theo Hicks

In this episode, Theo explains the communication process with your passive investors when you decided to sell your deal. Theo first gives you the outline of the process and then dives into each step into detail with you to make sure you are prepared to communicate with your investors when you are selling your own deal. He also explains the email templates Joe uses when he has sold his own deals and makes them available to you.

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“Now it’s going to be a little different if you decide to do a 1031 exchange. That means the investor has the option to A. Cashout Profits, or B. Exchange their initial investment plus their profits into a new deal.”  Theo Hicks

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TRANSCRIPTION

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, and 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’m your host, Theo Hicks.

Each week we air two podcast episodes, that are also released in video form on YouTube, and they focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, including this one, we offer free resources for you. These are free documents, PDF how-to guides, PowerPoint presentations, Excel template calculators, things like that that will help you on your apartment syndication journey.

This episode is going to be about the communication process with your passive investors when you’ve decided to sell your deal. We’ve already done a Syndication School series on the process on your end, how to prepare and execute the backend sale of your property. This episode is going to focus more on the communication process with your investors… So how you let them know you’re selling, what information to include in those, and then we’re also going to provide you with a free document that has some email templates. Obviously, deal-specific information is removed, but the overall templates are what Joe has used when he has sold a few of his deals.

Overall, the process works like this – once you’ve gotten a deal under contract with a buyer, then you want to notify your investors, announcing the sale. After that, you want to limit your ongoing communication and only send them something if there’s some sort of update on the deal – if the closing is pushed back, if the contract is canceled… And then if you’re doing a 1031 exchange or not, you’ll have additional communication, which I’ll talk about in a second.

Then it’s up to you, but if you want to, you can send an email notification about a week before the scheduled closing date, just to let your investors know that you are on schedule to close, and then remind them of your process at close.

Then you wanna send them an email once you’ve received notification that the deal has actually closed, whether you’re there in person or it’s an email from someone letting you know “Hey, the deal is closed.” Then you will also want to send follow-up emails after that if you decided to do a 1031 exchange.

That’s the overall process. Let’s dive into the specifics. The first email will be sent, as I said, once you’ve gotten a deal under contract. You don’t wanna do it once you’ve listed the property for sale, you don’t wanna do it once you’ve received an offer; you wanna do it only when you’ve gotten a signed contract and the buyer has entered their due diligence. Just because someone sends an offer doesn’t mean that you’re gonna be able to negotiate a contract, and also just because you list it for sale, it might take a few months to get it under contract, and you don’t want to send things to your investors that are gonna confuse them and result in unneeded extra email sent to you.

So once the deal is under contract, you want to send them the sales announcement. In the free document we have, there are two templates that you can use when the deal is under contract. The first one is gonna be a general disposition email that you will send, and this is an email you will use if you are not doing any sort of 1031 exchange; your plan is to sell the property and then distribute the proceeds to your investors, and then that’s it, the deal’s done.

In that email – I’m not gonna read the exact template. You can see that by downloading it in the show notes of this episode, or at SyndicationSchool.com… But the information you wanna include in it is 1) letting them know that you have actually got the deal under contract; you wanna let them know what the projected closing date is. If the buyers have some sort of extension, then you wanna mention that… For example, “We’re projected to close on April 1st, but the buyer has two 15-day extensions that require an additional 100k each in earnest deposit, so the latest we would close would be May 1st.”

So just letting them know “Hey, we’re expecting to close on this date, but it could be pushed back.” So setting all the expectations upfront.

Another piece of information you’re gonna want to include are the projected returns to them. You want to let them know how much money they should expect to make on the sale. Typically, what we do is we’ll say a percentage, and then we’ll say the overall IRR for the project projected, and then we’ll give an example of what they would make at sale. So we’d say something like “At sale, expect to make a 30% profit for the entire deal. That equates to a 20% IRR. For example, if you’ve invested $100,000, at sale expect to receive your initial $100,000 investment back, plus an additional $30,000 on top of that.”

Then you can also let them know when to expect to receive that distribution. If you plan on sending it after closing, and then say “Hey, we’re sending it after closing. Expect to receive it within five business days.”

Now, it’s going to be a little bit different if you decide to do a 1031 exchange. That means the investors have the option to either a) cash out and get their profits, or b) exchange their initial investment plus their profits into a new deal. If you want to do that, you’re gonna want to present that option to your investors. So you can either say “We’re doing this. If you’re interested, let us know”, or you can say that you are trying to determine if it makes sense to do a 1031 exchange based on the interest from your passive investors.

In that disposition email you wanna include the same things you included in the other email, let them know the deal is under contract, let them know the projected closing date, let them know the expected profits to be received at sale, and then ask them to let you know if they want to participate in the 1031 exchange or not.

Then obviously, from your end, if you have enough people who are interested, then you can go ahead and send another follow-up email, mentioning that you are going to do a 1031 exchange. “If  you haven’t done so already, please let us know if you want to either a) cash out, or b) do the 1031 exchange.”

From that point, you can split the investors into two buckets. One would be the people who are participating, and the other one would be people that aren’t participating, just because the information they’re gonna receive moving forward is gonna be a little bit different.

Now, if you’re not doing a 1031 exchange, then I’ve already explained what to include in that email. The next email you would send would be if there’s any sort of update. If the contract is canceled, you wanna let them know. If the closing date is pushed back, you wanna let them know. You can send them an email the week before you close if you want, and then obviously the last email you’ll send them will be the closing email.

In that closing email, basically just reiterate what you said in the announcement video. You’ll say “We’ve just closed. This is how much money you should expect to make, and here’s when you should expect to receive that distribution check.”

For the 1031 exchange – a little bit different. If you decided to do the 1031 exchange, you split your investors into two buckets, you really can technically send the same email to all of them, and just say (in bold) “If you’re participating in the 1031 exchange, here’s what you need to know. If you’re not participating in it, here’s what you need to know.” For the ones that are not participating in it, the process is similar to if you weren’t doing one in general. You’ll let them know, “Hey, here’s the day we’re closing. Here’s how much money you’re gonna make, here’s when you’re gonna get it.” There’s a little bit of an extra step that they need to do for the 1031 exchange, but you can work with that with whatever consultant you’re using, and your lawyers.

For the people that are participating in the 1031 exchange, then you’ll obviously still notify them when the deal has closed… But in that email, rather than letting them know when they should expect to receive their distribution, you should let them know the projected timeline for that 1031 exchange. So let them know how long you have until you are required to identify a property, how long it is until you have to close on that property… There are specific rules for the 1031 exchanges; you’ve got a certain amount of time to identify a new property from the time of close, and then you’ve got another timeline, which is longer, where you need to actually close on the property. If you’re comfortable, you can let them know that these are just the maximums, but we expect to identify a property within a shorter timeframe.

Now, once you’ve actually identified a  property, then you’re going to want to let them know. Depending on how you are notifying your main investor list about new deals, you can mention in there that “This is the deal that investors who invested in ABC Property will be automatically invested in via the 1031 exchange.” Then you might also want to send a separate email to those 1031 investors, letting them know that this is the deal that their money will be exchanged into.

There’s a lot of different ways to approach it, but overall you  wanna make sure that you are providing your investors with the relevant information. If you aren’t doing a 1031 exchange, let them know that the deal is under contract, let them know when the projected closing time is, let them know if there’s any potential extensions for the closing time to be pushed back, and then what’s required on the part of the buyer to get those extensions, and then let them know how much money they should expect to make, making sure that you tell them that (if this is what you’re doing for your deals) this includes the return of their investment, plus the additional profits, and then let them know when and how they will receive those profits.

Then for the 1031 exchange, if you’re doing that, again, you can keep it in one email and send it out to all the investors in that deal… Or you can split them apart, but — you wanna make sure that you are asking them if they wanna participate, so that you have a list of the ones who are participating, the ones who aren’t participating… Just because, again, there’s a few extra things you need to do on the back-end after sale to make sure that the people who aren’t participating are officially exited from the deal and no longer have any obligations… And then the ones who are participating, that you are able to continually update on the status of the exchange. So the ones who are not, your disposition email will be very similar to the disposition email if you weren’t doing a 1031 exchange at al. Again, “We’ve closed. Here’s how much money you’re gonna make, based on a sample investment. We plan on sending it out on this day. Here’s how quickly you’ll get it (five business days etc.) It will be a check in the mail.”

Then for those who are not, you’ll be updating them when you’ve identified a property, and then again, when to close on the property. Then from there, you just add them to the ongoing update list for that new property that their funds were exchanged into.

Overall, that is the process for notifying your investors of the intentions to sell, as well as going all the way through the closing period. And then if you’re doing that 1031 exchange, the communication process you’ll have with those investors afterwards.

So again, we’ve got a free document that has the disposition closing email templates. The first one, again, is that general disposition email for when you’re not doing a 1031 exchange. The second one would be a disposition if you are doing a 1031 exchange, but you haven’t split the investors into two separate lists, you’re just sending out one email to people who are and aren’t, and you’ve just made sure you’ve highlighted the sections that are relevant to those who are and aren’t participating.

The third template would be if you decided to split off and you wanna send one specific email to those who are participating… And then template four would be the other side of the coin, which is those who aren’t – this is the email you’d send to them.

So again, you can download that for free at SyndicationSchool.com, and it’s also in the show notes of this episode, or in the description, if you’re watching this on YouTube.

Until the next Syndication School episode, make sure you check out some of our previous Syndication School episodes and series about the how-to’s of apartment syndications, and download today’s free document, as well as check out some of the past free documents.

Thank you for listening, and I will talk to you tomorrow.

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JF1990: The Cities with the Largest Rent Growth in 2019 | Syndication School with Theo Hicks

Theo dives deep into the top cities with the highest growth in rent. Everything being equal, a higher rent growth should mean higher payouts to your investors over time. Of course there are multiple factors to take into account, as Theo explains by giving an example of how some towns will have high growth rent but the other important factors are missing so it would not be a good fit to invest in. The states with the most cities listed are Texas, Nevada, and Phoenix.

Best Ever Tweet:

“You always want to be conservative in your annual income growth assumption, if its 5%,10%, 4%, 3%, whatever it is you want to assume it’s going to grow less than the previous historical rate” -Theo Hicks

The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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, 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’m your host, Theo Hicks. Each week, we do two Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes and series, we offer free documents. These are free PDF how-to guides, PowerPoint presentation templates, Excel template calculators, things like that, that will accompany the episodes and help you on your syndication journey. All of the past syndication school series and past free documents are available for you at syndicationschool.com.

In this episode, I’m going to try something new and we are going to talk about the state of the apartment multifamily market in terms of rent. So we’re going to talk about the cities with the largest rent growth in 2019.

Obviously, the rents are going to be important for multifamily investors and apartment syndicators as well as for your passive investors, because the rents are the income side of the equation, and all things being equal, the higher the rent, the more cash flow you can distribute to your investors, as well as the higher the value of your property. So it’s an indication of the demand of apartments in a market, if the rents are continuing to increase.

An increase in these rents, in a sense, can be directly correlated to an increase in demand for rental property. So when you’re selecting a market to invest in or analyzing the current market that you’re in, you’re going to want to see an increase in rent. In particular, what’s going to be more important is that not only is it increasing, but it is increasing at a rate that is greater than the national average and greater than inflation, really. So just because it’s going up by 0.1% each year, doesn’t necessarily mean it’s a good market. Now, even if it’s going up by 0.7% each year, it does not automatically means a good market, but it means that that market should warrant further investigation.

This is going to be data for January 2019 to January 2020, so very timely information… My plan is to do further conversations like this on other important supply and demand, and multifamily metrics, and then continue to do them on an ongoing basis as the data is updated. So I’ll do this again in 6 months, or in 12 months with the new data.

So for that timeframe of, again, January 2019 to January 2020, the national average change in rent was 1.6%. Now comparing this to the same time period in 2008, it also increased by 1.6%, so pretty flat… However, in 2017 it increased by 2.6%. So on the surface, this seems to indicate that the rent growth is continuing (based off of last year’s numbers) to be sluggish on a national scale compared to previous years. Because I think in 2016 it was also around 1.6%, then the years previously it was greater than that. So it looks like in 2016 it was also 1.6%, but in 2015 it was greater than 3%.

So on the surface, it seems like, okay, well, it looks like rents are slowing down. However, because it is an average, there’s going to be markets that are performing way worse than the national average, but there’s also going to be markets that are performing a lot better than the national average. So you as a an apartment syndicator need to not take this as something that says, “Okay, well, I probably shouldn’t invest,” but instead take it as a positive and say, “Okay, well, where can I go that is experiencing rent growths that are greater than this national average?”

So overall, and this is just again for 2019, out of the 720 U.S. cities that the data was collected for – and this is coming from Apartment List Rentonomics – of those 720 cities, 217 experienced rent growth of 2% or more. So again, greater than that 1.6%. 96 had a rental growth of 3% or more; 36 had a rental growth of 4% or more, and 12 had a rental growth of 5% or more, and these are going to be the cities of all sizes. I think they put a limit on them. I don’t think we’re talking about cities with four people in them, because you know, not a big enough sample size.

The city that actually had the greatest rental growth is the city of Madison, Alabama, which I’ve personally never heard of before, but it’s got a population of 50,000 people, and it increased by 6.9%, so significantly five times greater than the national average. Now, you’re probably not going to go invest in Madison, Alabama, because it might not meet the other important metrics for a target market, which you can learn about those by going to joefairless.com, or you could probably just google “Joe Fairless target market” and there’s some blog posts, as well as past Syndication School episodes that have talked about how to analyze a market and all the important metrics.

But I wanted today to focus on some of the large U.S. cities that experienced the most rental growth from, again, 2019 January to 2020 January. So we’re going to talk about medium one-bedroom rents, medium two-bedroom rents, and then that year over year change. So nationally, the medium one-bedroom rents were $952 and then medium two-bedroom rents were $1,193. Again, that year-on-year change was +1.6%.

Coming in number ten is going to be Arlington, Texas, with a medium one-bedroom rent of $1,016 and medium two-bedroom rent of $1,262. So both greater than the national averages, plus a year-on-year change of 2.6%, so 1% greater than the national average. What’s interesting here is that being large cities the rents are going to be higher than the national average. So not only you’re benefiting from the rental growth, but you’re also benefiting from the higher rents.

Coming in at number nine is another town in Texas, more specifically Dallas-Fort Worth area, and that is Plano, Texas. Medium one-bedroom rents are $1,186; two-bedroom, $1,474; year-over-year change is 2.8%. Joe, in his business, invests in both of these markets, so it looks like they are on the right track and those markets are continuing to do well and be strong investment markets.

Next, we’re moving into number eight, and we’re going across the country – at least from where I’m from – to California. So Stockton, California is coming at number eight. The medium one-bedroom rent is $994; two-bedroom, $1304. So a pretty big gap between those two compared to the gap between the national averages for one and two beds. That’s something else that’s interesting, that it seems like two beds make more sense in this market than the one-bedrooms do… Unless these one-bedrooms are obviously very small, and you had to know what the square footage was to be exact, but I’m assuming that they’re probably proportionate… And the year-over-year change is 2.8%.

Moving in number seven, we’re getting to the cities that have a year-on-year rental growth greater than 3%, to Las Vegas, Nevada, which has been a very strong market for rental growth for quite some time. I think the last time I did an analysis of this was 2017, and Las Vegas was in the top five, for sure. One-bedroom rent, $963; two-bedroom, $1,193, which is very close to the national average. So $1,193 is the national average, and then $963 is $1 greater than the national average. So right on point with the national average in terms of rents. However, the year-over-year change is two times greater than the national average, at 3.2%.

Number six, we’re going back to Texas, to Austin, Texas, where the one-bedroom is $1,191; two-bedroom, $1,470; year-over-year at 3.3%.

Five, we’re moving a little bit to the North-East, to Nashville, Tennessee. One-bedroom at $947, a little bit less than the national average; two-bedroom, $1,163. Also, slightly below the national average. However, the year-over-year rental growth was 3.3%.

Coming in at number four is Colorado Springs, Colorado, which is also another strong market. It has been a strong market over the past few years. Medium rent for one-bedroom is at $986; two-bedroom, $1,272; year-over-year change is also 3.3%.

Now, the last three are going to be all in the West – two are in the same state,; they’re basically right next to each other. We’ve got three, Phoenix, Arizona. One-bedroom rent, $883; two-bedroom, $1,101. So both below the average. However, year-over-year change is 3.7%. The top two are the only major cities that break the 4%, and number one actually breaks 5%.

Number two is going to be Henderson Nevada. One-bedroom rent, $1,127; two-bedroom, $1,397. Both greater than the national average, and of course the year-over-year rental growth is also greater than the national average, at 4.2%.

Then coming in at number one is Mesa, Arizona. One-bedroom, $915; two-bedroom, $1,140. Again, both below the national average. However, the year-over-your increase is 5.1%.

So going back to those top 10 cities, we’ve got three cities in Texas, we’ve got two in Nevada, two in Phoenix, and then randomly, one in Colorado, one in Tennessee, and one in California. But lots of West Coast cities, and then obviously Texas is the most dominant in the top three, and two of those are actually in Dallas-Fort Worth. So two locations are close to each other. In fact, Mesa and Phoenix are actually very close to each other as well, and Henderson and Las Vegas are also very close. So kind of just two big cities by each other, but Texas seems to be very dominant on this list. Then obviously, Arizona is twice in the top three.

So if you want to get more information on the rental growth, you want to go to apartmentlist.com, check out their National Rent Data Rentanomic section. They update this data every month, so you can get the year-on-year rental growth from whatever the current month is to the previous month. They’ve got data up to the month after. So they add the January data, and by the end of January [unintelligible [00:13:18].05] February. So the next update will probably be late February, early March. We’ll also include data on some of the previous years as well, comparing some of the big cities with a lot of rental growth, to the five year average to the previous 12-month period.

It’s nice to have a little data table that you can look at that has every city that they analyze and get the medium one-bedroom and two-bedroom rents. You get the month-over-month rent change, as well as the year-over-year rent change. Then they also have rental reports on some of the biggest cities. So Denver, Atlanta, Charlotte, Chicago, Colorado Springs, San Francisco, things like that.

So I hope you enjoyed this breakdown. I plan on doing more in the future, and if you have a recommendation on a certain metric you want me to analyze, let me know at theo@joefairless.com. I’m opening up the email inbox, so feel free to reach out for a specific metric – vacancy, occupancy, cap rates, anything specific you want me to go over. And if not, I’ll choose, and hopefully it is going to be helpful for you and your syndication business… And it should be.

Now one last note before we sign off is – let’s say you decide to say, “Well, Mesa, Arizona sounds amazing. 5% rental growth?” [unintelligible [00:14:31].24] analyze and say it’s been 3% plus over the past five years, so you decide, “I’m going to move my investment business there/ I want to start my investment business there.” Then you start looking at deals, you start underwriting and you get to the point where you make your rental growth assumption, your annual income growth assumptions. And you say, “Oh, well, the past five years it has been increasing by 5%, so let’s go ahead and assume it’s going to continue to increase by 5%, and then I sneakily buy a deal for more than what other people can because I’ve got stronger projections.” You don’t want to do that, because you cannot predict that it’s going to continue to grow by 5% each year, which is why you always want to be conservative in your annual income growth assumption. So if it’s 5%, if it’s 10%, if it’s 4%, if it’s 3% – whatever it is, you want to assume it’s going to grow at less than the previous historical rate.

For our deals, we do 2% to 3%, depending on the market. So if we’re looking at Mesa, we’d probably be closer to 3%. If we’re looking at a place like Stockton, California, we’re looking at closer to 2%. So you do not want to assume that it’s going to continue to grow at that same rate, when you’re underwriting. Now, in your mind you can say “Well, I think it’s going to continue to grow by 5%.” So if it does grow at 5%, and you’re only assuming 2% – well, you are just getting extra meat on the bone for yourself.

So that’s gonna be my parting note when  talking about these rents – you don’t want to assume that the income is going to grow at the year-over-year change, the month-over-month change, the five-year change, the ten-year change; you want to be conservative in that assumption.

That concludes this Best Ever market report. To listen to other syndication school series in the meantime until we come back next week, and to learn about the how-to’s of apartment syndication, you can go to syndicationschool.com. Also, again, those are where our free documents are located. Thank you for listening. Have a good day and I will talk to you soon.

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JF1989: Learn the Difference between Preferred & Cash On Cash Return | Syndication School with Theo Hicks

Theo explains in detail the difference between Preferred Return and Cash on Cash Return. At the end of this episode you will be able to communicate with your investors in a way that will make them comfortable enough to trust you as an expert GP. You will also walk away with examples on how Joe handles his deals and the creativity he utilizes between Series A and Series B investors.

Best Ever Tweet:

“Depending on how the math works out the class B investors are definitely not going to receive their entire preferred return for that year, and the class A investors depending on what % of the  LP they make up, may also not get their full preferred return.” – Theo Hicks

The Best Ever Conference is approaching quickly and you could earn your ticket for free. 

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell. 

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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 and welcome back to another edition of The Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks. Each week, we air two podcast episodes, also released in video form on YouTube, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes and series, we offer some free resource to you to download for free. These are PowerPoint presentation templates, Excel template calculators, PDF how-to guides, something that will accompany the episodes that will help you further your apartment syndication business. All of these free documents, as well as the past syndication school series episodes can be found at syndicationschool.com.

In this episode we are going to focus on the differences between preferred return and cash-on-cash return. So obviously, there are two different return factors that you are going to be presenting to your passive investors. It’s important for you to understand the differences between these two, so that if your passive investors were to ask you any questions on “Why is the preferred return 8%, but you’re telling me that my cash-on-cash return is 10%? How does that work?” Well, after listening to this episode, you will have an answer to provide them that makes sense in their eyes.

Of course, the way that the preferred return and the cash-on-cash return work is going to be based off of the types of offerings that you offer to your investors. In a previous syndication school series, we talked about the pros and cons, the differences between Class A and Class B investors. If you’re going to decide to offer two different structures to your passive investors, or you might just offer one different tier– so if you’re offering two, you’re gonna have different answers to offer to each of those investors, depending on which tier, which structure they’ve decided to invest in.

So first, some definitions. The preferred return is going to be the threshold return that is offered to the limited partners that is received before you, the general partner, receives any profits. If you structured the partnership such that the asset management fee that you charge is in a position behind the preferred return, then you don’t get paid at all until they make their preferred returns. You don’t get a part of the profits, nor do you get your asset management fee.

That’s one thing you can do to create a stronger alignment of interest between you and your investors by putting an asset management fee in second position, which we’ve talked about on the syndication school series in the past.

The cash-on-cash return is going to be the overall actual returns to the limited partners over the lifetime of the project. So those are the definitional differences, but it’d be better to explain it to your investors in terms of some example, because they can look up the definitions themselves. Just providing them with the definition isn’t necessarily answering their question because they want to know what that means to them in actual dollar amounts.

For example, for Joe’s deals they distribute returns on a monthly basis. So the preferred return is going to be prorated. So when we tell an investor that they’re going to make a 10% preferred return that’s going to be distributed monthly, that doesn’t mean that they’re going to get 10% each month, or 120% for the year. The preferred return is typically going to be in terms of an annual number.

Also, for Joe’s deals there’s the Class A and the Class of B structure. Based off of the way that deals are structured, Class A investors get their preferred return first, and then once all Class A investors have received their preferred return, then the Class B investors will receive their monthly return secondly. So if you just have Class A investors, then they’re the ones that get paid, and then once they get paid; you, the GP, which might be considered Class B, you then get paid. If you have the Class A and Class B structure, then you’re Class C and you get paid last.

So if you do have the Class A and the Class B structure, let’s say that one investor invested $100,000 as a Class A investor, another investor invested $100,000 as a Class B investor. In Joe’s deals, he offers a 10% preferred return to the Class A investors and a 7% preferred return to the Class B investors. Therefore, each year, the Class A investors will receive $10,000, which equates to $833.33 per month in distributions, assuming that number is met because B investor will get their 7% preferred return, which would be $7,000 per year, or $583.33 per month. So that’s just the preferred return portion.

So assuming the deal hits the projections, and assuming you projected at least a 10% preferred return to your Class A investors, and at least a 7% preferred return to your Class B investors, that is the distribution they’re going to get each month. So you’ve got the definition of preferred return, and then you can explain to them based off of a sample investment… If they’re a Class A investor, here’s how much money you’ll be distributed as a preferred return each month. As a Class B investor, here’s how much will be distributed to you each month. So that covers the preferred return portion.

So what about the cash-on-cash return? Is it going to be higher, lower, different than the preferred return? So first, finishing up the preferred return, they’re gonna want to know, well, is that guaranteed? Am I guaranteed to get that $800+ per month as a Class A investor or $580+ dollars per month as a Class B investor? Or are there situations where I will not receive that distribution each month? There’s actually two scenarios where the investors would not receive their monthly distribution.

The first scenario would be if the general partner projected a return for year one – maybe year two, but let’s just stick with year one – if you projected a return in year one that is less than whatever that preferred return is. So if you offer a 10% and a 7% to your passive investors, and that total preferred return equates to, let’s just say, $100,000 per year, but your year one projection is going to be $80,000 per year, and then maybe year two you get above $100,000 and you’re projecting $120,000 per year… Well, year one, depending on how the math works out, the Class B investors are definitely not going to receive their entire preferred return for that year. The Class A investors, depending on what percentage of the LP they make up, may also not get their full preferred return. But if it’s only off by that much, it’s likely that the Class A investors will see their full preferred return, especially since, at least for Joe’s deals, the Class A investors make up a smaller portion of the pot; so I think it’s a maximum of 25%. But the Class B investors get their full preferred return because the projected returns are less than the return needed to distribute all the preferred returns. That’s one scenario.

The second scenario would be if the return projections are equal to or greater than the preferred return. So projection-wise you should be able to distribute everything, but when the actual returns come in, it comes in at less than the preferred return. So continuing with our previous example, you need a 100k to hit the full preferred return distribution to your investors, just  100k. And then you projected $110,000, so $100,000 plus $10,000 leftover – we’ll talk about what to do with that 10k in a second – but in reality, you only are able to get $90,000. Then again, Class B is not going to hit that full preferred return.

So if that happens, well, the process will depend on how the partnership was structured in the PPM. So for Joe’s deals, for example, the difference between whatever the preferred return is supposed to be and whatever the actual return was, assuming it’s a negative number, assuming there’s a difference, then the preferred return would accrue and then be paid out in the future.

Now, some syndicators will have a structure where the preferred return accrues, other ones won’t. Some will have a structure where the preferred return will be paid out in the next year or next month, or whenever the cashflow supports the distribution, or it’ll accrue until the sale. So it really depends on the structure; you can be anywhere in between, and it’s really up to you. So you’re gonna want to let your investors know, “Okay, well, here’s what the preferred term is, here’s an example. But if we don’t hit that number, here’s what happens.”

So now let’s talk about the cash-on-cash return portion of this, and this is what Joe does for his deals. You’re going to approach this differently, but at some point, if you’ve structured a deal such that there’s a profit split– so if you’re just offering a preferred return, then the preferred return is going to be equal to the cash-on-cash return. So for Class A investors, for Joe’s deals, they do not participate in the upside. So the preferred return is equal to the cash-on-cash return. Class B, on the other hand, do participate in the upside, so the preferred return is not going to be equal to the cash-on-cash return. That’s why I said in the beginning, it’s different for Class A and Class B investors.

For Joe’s deals, in particular, every 12 months – so 12 months, 24 months, 36 months, etc. – they will reevaluate the performance of the deal. So after 12 months, they’ll take a look at the cashflow and see if the deal cash-flowed more than the preferred return. If it did, then that extra cashflow will be distributed in a one-time payment at the end of that year, based off of whatever that profit split structure is.

As I mentioned, for those deals, these types of structures, the Class A investors are not going to get a profit split. In return, they’re offered a higher preferred return that’s paid out first before the Class B investors get paid. Whereas Class B investors are offered a lower preferred return, and they do receive a profit split. So any of the profits that are determined at the end of the 12-month cycles will be split between the Class B investors as well as the general partners.

Now, there’s two cash-on-cash return metrics that are going to be important to your investors, and those are the ones that include the proceeds from sale and do not include the proceeds from sale. So for the Class A investors, these two cash-on-cash return metrics are going to be the same, because they are not participating in the upside, and therefore they’re not participating in the ongoing profit split, and they’re not participating in the profit split from the sales proceeds. So the preferred return is 10%, the annualized cash-on-cash return excluding profits from sale is 10%, and the average annual cash-on-cash return, including the profits from sale, is also 10%. So 10% across the board; pretty simple to explain the differences between the preferred return and the cash-on-cash return to Class A investors, because there is no difference; they’re going to be the same.

Class B is going to be a little bit different, again, because they are participating. So the preferred return and the two cash-on-cash return metrics – all three of those are going to be different, unless you’ve magically only hit the preferred return number, and then at sale there is no profit, there is no loss, it’s just even; which is not going to happen. So they’re going to be different, even if it’s just a few decimal points off.

Let’s do an example for the Class B. We’ve got a Class B investor who invests the $100,000 into an apartment syndication and they’re offered a 7% preferred return, and the predicted hold period is going to be five years. You honor the deal and you determine that the cash-on-cash return projections, excluding the profits from sale, is going to be an average of 8.2% each year. So year one, you’re assuming you’ll make 7% cash-on-cash return; year two, 7.4%; year three, 8.2%; year four 9.1%; year five, 9.4%. The average of that is 8.2%, therefore the average cash-on-cash return to Class B investors excluding the profits from sale is going to be 8.2%.

So we’ve got a 7% preferred return, assuming that projections aren’t hit. Assuming that it accrues, the preferred return is going to be 7%. Their cash-on-cash return excluding profit and sales is going to be 8.2%, so now we’ve already got a difference of 1.2%. Again, at the end of year one, when the deal’s analyzed, it’s determined “Okay, there is no profit to split, so there’s no extra distribution. Oh, end of year two, we determined that we can distribute an extra 0.4% investors to give them a total return of 7.4% for the year; 7% being the preferred return, 0.4% being the profit.” Those two combined are going to be the cash-on-cash return. Same for year three, year four and year five.

Now let’s say that the goal is to sell the deal the end of year five, because you may have this conversation upfront with them. The projected profits at sale is determined to be approximately at 59% of the Class B investors’ initial investment. So for year five, they’ve already received the 7% preferred return, they’ve received the 2.4% profit projected, so 9.4% cash-on-cash return excluding the sale that we mentioned before, plus the additional 59% that they’re going to get at the end of year five when the deal is sold. So the total return for year five is going to be 68.4%. So going back to the other cash flows of year one through four, of 7.4%, 8.2%, 9.1%… Now year five, including the profits on sale, is going to be 68.4%. You average those numbers and you get the average return of 20%, including the profits from the sale.

So again, 7% cash-on-cash return, excluding profits from sale, is 8.2% per year, and the cash-on-cash return, including the profits from sale, is going to be 20%. So a little bit more difficult, a little more complicated than just simply saying, “Oh Class A investors, it’s just 10% across the board.”

Now, logistically, how will this work? Well, from the investor’s perspective, month one through month 12 they’re going to receive, assuming projects are hit, that prorated 7%. So if they invested the $100,000, they’re going to get that $583.33 per month. Then at the end of those 12 months it was determined that there are not profits, so they’ll just get the $580+ distribution. Months 13 through 24 – same thing, prorate is 7%. At the end of year two it’s determined that the projections were hit, we can distribute that extra 0.4%, so they’ll get the same $583.33 plus 0.4%, so an extra $400 in that distribution, assuming they invested $100,000.

Same thing for year three, they get an extra 1.2%, so $1,200. End of the year four it’s gonna be 2.1%, so $2,100. End of year five it’s going to be 2.4%, so $2,400 plus the distribution from the sale.

Depending on how you structure it, you don’t have to wait until the end of 12 months; you can do it on a monthly basis. You can wait until the sale, you can really do whatever you want. But that is the explanation for the differences between the cash-on-cash returns and the preferred return… Keeping in mind that there are two cash-on-cash return metrics.

To quickly summarize– so this is what you can put into emails, is that the preferred return is going to be the threshold return that’s offered each month. It’s a percentage, and assuming that the projections are hit, you’re going to receive that percentage. If that percentage is not hit, then fill in the blank; it’ll accrue, or it won’t accrue.

The cash-on-cash return is a return metric that includes the preferred return plus the extra profits you receive. So if you don’t receive profits, the preferred return and the cash-on-cash returns are going to be the exact same. If you do participate in the profits, the cash-on-cash returns are going to be higher than the preferred return.

There’s gonna be one that excludes the profits from sales, so that’ll just be your yearly preferred return plus your yearly profit, and there’s one that includes a profit from sale, which is the same plus the additional split of the sales proceeds. So those are the differences between the cash-on-cash return and the preferred return in practical terms, with examples.

Until tomorrow, make sure you check out some of the other Syndication School series and episodes about the how-tos of apartment syndications and make sure you download those free documents we have available as well. All those are at syndicationschool.com. Thank you for listening and I will talk to you tomorrow.

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JF1983: The Apartment Syndicator’s Guide to the Best Ever Conference Part 2 with Theo Hicks

Theo concludes this series with his final tips for aspiring syndicators who are planning to attend the Best Ever Conference in Keystone, CO on February 20-22, 2020. You know what to bring, what to wear, and have defined an outcome… now what? Theo explains how to set your schedule and get quality face to face time with high-demand speakers.

 

Best Ever Tweet:

“You’re going to want to implement any lessons you learned from the Best Ever Conference immediately because that’s when you’re going to have the most motivation.” – Theo Hicks


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell. 

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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 another episode of The Syndication School series, a free resource focused on the How-to’s apartment syndication. As always, I’m your host, Theo Hicks. Each week, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, sometimes they’re series, we offer a free resource. These are free PDF how-to guides, Excel template calculators, PowerPoint presentation templates, things that will help you in your apartment syndication journey. All of the previous Syndication School episodes, as well as these free documents, are available at syndicationschool.com.

Well, this is part two of a two-part series entitled, “Apartment Syndicator’s Guide to the Best Ever Conference.” So I recommend checking out part one, which was yesterday. Or if you’re listening to this in the future, the episode directly before this one. In that episode, we focused on how to prepare for the Best Ever conference. So we talked about what to wear, what to bring. Then we focused on making sure you have a defined outcome for attending the meeting so that when you’re there, you can make sure you’re spending your time efficiently. Then we went pretty in-depth into the Whova app that you can download, and definitely going to want to take advantage of before attending the conference and while at the conference. So I talked about some of the things you can do with it before you’re at the conference.

We’re going to talk about a little bit more today about how you can use it during and after the conference. But before we move on to the second aspect of this guide, I wanted to finish up the preparation section, which is to read up on the speakers. So you can do this on the app, or you can do it on the website. So you can go to bec20.com, and then go to the Speakers tab, and it will go through a list of all of the speakers who are presenting at the conference. Then for each of those different speakers, you can click on their picture on their name, and it will give you some biographical information about them. So for example, the first speaker on the list is Jilliene Helman, who is the CEO of RealtyMogul. It says, Jilliene is the founder and CEO of RealtyMogul, a private equity firm focused on investing in commercial real estate. In this capacity, Miss Helman has invested in over $2 billion worth of real estate and is a pioneer in real estate crowdfunding. She’s a certified wealth strategist and holds FINRA Series 24, 7 and 36 licenses; recently named FinTech Woman of the Year, Jilliene has been featured in several media outlets, including CNBC, The New York Times, Yahoo! Finance, Forbes, Entrepreneur, and Bloomberg. So, essentially the exact same thing for every single speaker.

So depending on what your specific outcome is for the conference, it may include either attending the presentation of a specific speaker, or it may involve actually speaking with, one-on-one, with a speaker. So again, this is also available in the Whova app. What’s nice about the Whova app is that you can go to the attendees, you can click on the speakers, we can go ahead and find Jilliene on here. We can click on her name, and then it will actually tell me when she is giving her presentation, what time, what day and then what it will be on. So I click on Jilliene Helman, it says she’s on a panel, The Age of Data. She’s on that panel with three other individuals.

I could also do the same thing on the website. So on the website, I could go to the schedule, and then I can scroll down until I find the day that she is speaking. I already know that it’s on the 20th, I know it’s on The Age of Data. So we’ve got Panel: The Age of Data. We’ve got Jilliene Helman, Jeff Adler, Michael Cohen, and Samuel Viscovich. I click on it, and it gives me a little bit more information on the presentation.

Now, if you’re interested in learning more about The Age of Data – maybe that’s one of your outcomes, is to learn how to automate your business more, how to get more out of using the various datasets that are available out there, then that’s definitely going to be a presentation that you want to go to.

Then you’re also going to want to actually attempt to speak with that person while you’re at the conference. So before you go to th