JF1745: How To Perform Due Diligence On An Apartment Syndication Deal Part 4 of 4 | Syndication School with Theo Hicks

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Time to get into more details about the remaining five documents of the 10 that you will need to be familiar with in your apartment syndication due diligence. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. 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 am your host, Theo Hicks.

Each week we air two podcast episodes – every Wednesday and Thursday – that are a part of  a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. And for the majority of these series we offer a document, spreadsheet, some sort of resource for you to download for free.

All these free documents and free Syndication School series podcasts can be found at SyndicationSchool.com. This episode is going to conclude a four-part series entitled “How to perform due diligence on an apartment deal.”

As I mentioned in yesterday’s episode, the three things you’re going to be doing concurrently after you’ve put a deal under contract – that is you signed the purchase and sales agreement – is 1) you’re going to secure financing from your lender or mortgage broker. Two is what we’re talking about today, which is due diligence, and the financing was the previous Syndication School series; I believe it was series 16. Then the third thing, which we’ll talk about next week, or at least the series will start next week, is securing the equity from your investors.

So far, in parts in one and two, we introduced the ten due diligence reports that you’re going to need to obtain during the contract to close period. We described what each of these reports are, we described how to actually obtain these reports, so who actually does these reports and how to find those individuals, we talked about the estimated costs of each of these reports, and then I walked you through example reports from actual deals that Joe has done, just to give you an idea of the flow and the size of these reports.

Then yesterday, or if you’re listening to this in the future, the episode preceding this one, we began to discuss how to actually analyze the results of these due diligence reports, and we got through the first four. We got through 1) the financial document audit and the adjustments that will be made from that are any of your income and expense assumptions; 2) was the internal property condition assessment, which the adjustments would be made to your capital improvement budget, specifically the exteriors; 3) we went over the market survey report, and these adjustments that might be made as a result of that report would be your renovated rent assumptions, so the rents that you believe you’ll be able to get after you’ve implemented your value-add business plan and your capital improvements. And then number four was that lease audit report, which really depending on the current management company and how they created their leases, you shouldn’t have any issues with this; but if there are any issues, the adjustments would be made to the current rents, or maybe some of the revenue items, like vacancy or concessions or the units that are being used for other purposes.

Something that I didn’t mention is that if there are crazy issues with the leases – maybe the terms aren’t up to the legal standard – then that’s something that you’re gonna have to address before taking over the property, because you don’t wanna inherit a bunch of (in this case) 256 leases that are technically void, because they weren’t initially created properly.

In this episode we’re gonna go over those remaining documents before we move into discussing step three, which is securing commitments from your investors.

The fifth report you’re going to obtain is that units walk report. As a reminder, the unit walk report will summarize the current interior conditions of each unit. It’s going to outline the exact number of units that require upgrades, they’re gonna outline what type of upgrade they need, as well as any maintenance or replacement of certain items that needs to be addressed, and they’re also going to look at any resident issues as well.

Literally, you and/or your property management company are gonna walk through every single unit, you’re gonna have an iPad out with some sort of unit walk software, or you’re just gonna have a notebook, or maybe you’ll have a printed out Excel template, and you’re gonna say “Based on my upgrade my plan, maybe (just to keep it simple) one of the things we plan on doing is to upgrade the appliances to stainless steel.” You’re gonna walk through every single unit and you’re gonna say “Okay, which units have stainless steel and which ones don’t?” Because before, when you’ve made your assumptions, maybe you thought that none of the units has stainless steel appliances, and you assumed it would cost $1,000 per unit to put into stainless steel appliances, 256 units, that’s $256,000.

Well, let’s say you do your unit walk report and that’s not the case. This is one example of one thing that could be discovered during the unit walk report. So once you receive the unit walk report, you’re gonna wanna go ahead and compare that data with your interior renovations assumptions to determine the accuracy of your business plan.

The first thing that you’re gonna look at is does the number of units that require interior upgrades from this unit walk report match your business plan? Again, if you think you need to upgrade the appliances in all 256 units, but in reality 50 of those units already have stainless steel, then that’s a $50,000 decrease in your budget. So you wanna do that for all your upgrades. Any flooring, countertops, cabinets, anything in the bathroom, any lights you’re installing.

Next you’re gonna wanna see if there were any unexpected deferred maintenance that wasn’t accounted for in your budget. Maybe your entire budget was focused on everything being in perfect condition, but maybe during the unit walk report you realized that 10% of the units have peeling paint, or have holes in the walls, or water damage in the bathroom… Maybe you didn’t think that  you need to replace the cabinets, but once you actually got into all the units — maybe you only toured the model unit, and you assumed every unit was like that, but then you realized that half the cabinets need to be torn out completely and you can’t just replace the cabinet doors, and things like that.

Then you’re gonna wanna go ahead and see if your property management company made any notes about residents. For example, maybe the current lease states that they can’t have pets in the units, but you find 10% of the units have dogs, and you can tell that there’s animals in there, and because of that, all the carpets need to be replaced. This is at the discretion of you and your property management company, but maybe there’s some tenants that you believe will need to be evicted once you’ve taken over operations.

Those are the three main categories you wanna look at. One, do the actual number of upgrades match the number of upgrades in my business plan? Two, are there any extra deferred maintenance items that I missed? And then three, what is the tenant situation?

Using that data, you can 1) no matter what, create a much more detailed unit-by-unit interior renovation plan, which will allow you to create a more accurate budget. So instead of just continuing with the example from the last episode, where I said that of that 1.5 million dollar capital improvement budget on that simplified cashflow calculator, let’s say half of that is going to the interiors… And you said, “Okay, this much is gonna go to the kitchens, this much is gonna go to the bathrooms, this much is gonna go to the rest of the house”, whereas now you can literally have an Excel document with 256 rows for each unit, and you can say “Okay, in this unit, what do I need to do in the kitchen? What do I need to do in the bathroom? What do I need to do in the rest of the house?”, whereas before you might assume that you needed to do everything to all units, whereas after the unit walk report maybe you only need to do everything to half the units, and the other half of the units only need appliances, or new cabinets.

For the deferred maintenance, hopefully you put in a contingency, which we highly recommend 15% of your budget should be contingency. Ideally, they did not identify deferred maintenance that would cost you more than 15% of your cap ex budget. Ideally, they didn’t find any at all, so that 15% is just built-in equity… Or you need to just raise less money.

And then for the unruly residents, you will want to have a conversation with your property management company on how to move forward with that.

Now, going to our simplified cashflow calculator, which again, you can download for free at SyndicationSchool.com under series 14… The adjustments to this we made in that cap ex improvements. So the internal PCA is where you make your exterior adjustments, the unit walk report is where you make your interior adjustments.

Number six is the site survey. The site survey report is basically a map, and it will list any boundary, any easement, any utility, any zoning issues for the apartment community. Typically, if a problem is found during the site survey, then the bank is just not going to provide a loan on the property. So if there’s some easement unaccounted for, if there’s some boundary issue, some utility issue, some zoning issue, then that is going to need to be resolved before new debt can be secured on the property.

So if you’re assuming the loan, not necessarily a disqualifier, but definitley something that you’re gonna have to worry about when you sell the property, if your loan isn’t gonna be assumable. So if something does come up, unless again you had that assumable loan but there’s still issues with that, then your options are really limited, and they need to be addressed on a case by case basis, depending on the severity of the issue. But ultimately, if the problem cannot be resolved, then you’re gonna have to go ahead and cancel the contract, which is why when we talked about submitting your LOI, you wanna make sure that you have the proper contingencies in place. So you wanna have your inspection contingency, your title, survey, loan contingency, things like that.

Number seven is the other property condition assessment. This is the PCA that is performed by a third-party that your lender selects. Essentially, this is going to be the exact same as the internal PCA you performed. The goal is the same, which is to determine the quality of the exteriors, and then go ahead and give you the immediate repairs, recommended repairs, and then the contingency replacement items. And you’re gonna wanna go ahead and approach that the same way you approached your internal PCA. You’re gonna wanna look at all of the different immediate repairs that the lender requires, because in this case the lender might require you to make those immediate repairs… So your general contractor might have categorized a certain repair as recommended, whereas your lender might have categorized the repair as immediate, which means you’re gonna have to adjust your budget because you’re gonna have to those right away in order to qualify for that loan.

Then for recommended and continued, you’re gonna wanna see if the lender included anything in addition to the things included by your general contractor. So essentially, you’ve got two PCA’s, and you’re gonna wanna combine those together and make any adjustments to your cap ex budget.

Going back to the simplified cashflow calculator, that adjustment will be made at C14, Capital Improvements.

Number eight is the environmental site assessment. The environmental assessment report will list out any potential or existing environmental issues at the property. Similar to the site survey, if the person that performs this environmental site assessment identifies an environmental problem, then you’re gonna wanna get with your lender to make sure that that is something that won’t disqualify you from financing. Because if it does, then you’re not gonna be able to secure a loan on that property.

Maybe even find a different lender, who will overlook that issue, but again, like the site survey, these issues should be addressed on a case by case basis, and if there’s major issues found, you might have to cancel the contract. Because again, even if you were able to qualify for financing somehow, the rules might change, or another lender might not provide financing to someone who wants to buy that property at the end of your business plan.

Number nine is the appraisal report. The appraisal report will provide you with an as-is value of the apartment community. Once you receive the appraisal, obviously you should compare the appraised value of the property to the purchase price. Now, as I mentioned in part two (I believe), there are a few different ways the appraisal will determine that as-is value. Number one, they will calculate the value using the income approach, which is dividing the net operating income by the market cap rate.

Second, they will determine the value using the sales comparison approach, which compares this property with comparable properties that were sold within the last 6-12 months, or even longer, depending on the market; if you’re in a really small market, then they might have to find a property thta was sold more than 12 months ago, or if you have some very unique property that’s one of a kind in that market, they might need to expand out into another market.

The example that I was giving in my real estate agent classes was if there’s some waterfront property in Cincinnati that’s very unique, then they might have to go to some place like Pittsburgh to find a similar comp for the sales comparison approach.

And then the third way they calculate value is by determining the replacement cost of the property, so literally how much will it cost to replace this property – that’s the value of the property.

Now, the lender is going to use this appraisal to determine how much money they’re willing to provide you with, how much debt they’re willing to put on the property. They’re not gonna base it off of the contract price. So just because you have the property under contract for a certain price and the lender told you they’re gonna give you 80% LTV does not mean that, for example, for a ten million dollar property they’re gonna loan you eight million dollars. They’re only gonna loan you eight million dollars on that ten million dollar purchase price if the property value determined by the appraiser is indeed ten million dollars.

So if the appraisal comes back at that ten million dollar mark, good on you. What’s even better is if the appraisal comes back at a higher number. Let’s say you have a property under contract for ten million dollars, and the appraisal comes back at 12 million dollars. Well, if you’re still getting that 80% LTV loan, essentially if you’re getting an 80% LTV loan or the same LTV loan at a higher value, then you’re gonna have built-in equity from the front. For example, following the 12 million dollar appraised value, since you’re under contract at 10 million dollars, you’re putting down 2 million dollars, the bank is putting down 8 million dollars, that extra 2 million dollars is essentially equity that you have for free. So if you were to refinance it in a year, you’ve got 2 million dollars of equity built in without even implementing your value-add business plan in the first place. That is fantastic.

But if the appraised value is lower than the contract price, then you will either need to make up for that difference by raising additional capital, or you’re going to have to renegotiate the purchase price.

For example, if the property is under contract at 10 million dollars and you’ve got that 80% LTV loan, but the appraised value comes back at 8 million dollars, then 80% of 8 million dollars is 6.4 million dollars, which means rather than putting down that 2 million dollars initially, you’re gonna have to put down an additional 1.6 million dollars. Obviously, that’s going to throw off your returns, so if you are unable to renegotiate the purchase price, or if you didn’t have amazing returns at that initial purchase price, then you’re gonna have to go ahead and cancel that contract.

Now, the only exception to that is if you are implementing a very strong value-add program, so you’re raising the rents a lot, raising the income a lot, or decreasing the expenses a lot, and the appraisal comes back a little low, then you might be okay. The lender might say “Okay, I know the as-is value now is 8 million dollars; however, based on your business plan, the value is gonna increase to 15 million dollars by the end of year one, so we’ll go ahead and loan based on that 10 million dollar purchase price, or we’ll go ahead and increase the loan-to-value that we’ll give you.” That means that your down payment for that loan might not necessarily change, it might not be a reflection of that lower appraised value.

So on your cashflow calculator the appraisal might change your purchase price, which is C13, but it also might change the terms of your loan, which are all the way down in rows 61 through 64. That’s your LTV. Maybe they might give you a different interest rate, amortization, and the loan term might not change unless you’re getting a completely new loan based off of that lower appraisal value.

Let’s say for example you’re wanting to get just your standard agency Fannie Mae loan, and they have a minimum loan amount, and that appraised value drops to below minimum loan amount, then you’re gonna have to go and change to that small balance loan instead, and those terms are a little bit different.

Number ten, which is the optional report, is that green report. The green report, which is really the only report that is not going to disqualify a deal, unless you made the assumption that you were gonna be able to decrease some expense because of what you expected the green report to come back as, it shouldn’t disqualify the deal.

The green report outlines all of the potential energy and water conservation opportunities. So it’s gonna list out all of the opportunities that were identified – among other things, but these are the things that are important to you – the estimated costs upfront to implement that opportunity, and then the associated cost savings, as well as an ROI.

Deciding which opportunities to move forward with will be based off of the payback period and your projected hold period. For this cashflow calculator, it automatically assumes you’re holding on to the deal for five years. If you want to change that, you’re gonna have to go in there and do some manual manipulations… Because again, this is simplified, it’s not super-detailed. We just wanted to give you a base model to start with, and customize it from there. For this model, if you get a green report back and the payback period is greater than five years, then you probably don’t wanna do it, unless it’s some safety issue… And if it’s under five years, the obviously, you’re gonna wanna move forward with that.

So here’s an example of the energy-efficient opportunities, the energy water conservation opportunities that were identified on a 216-unit apartment community that Joe had assessed a few years back. They identified about seven different things. Number one was installing dual pane windows. Number two was installing a wall insulation and leakage ceiling. Three was installing roof insulation. Four was installing programmable thermostats. Five was installing low-flow shower heads and toilets. Six was installing LED lighting on the interiors and the exteriors, and then seven was the energy star rated refrigerators and dishwashers.

After looking at the initial investment amount and the cost-savings with all seven of those, Ashcroft decided to move forward with three of those seven. Number one was the low-flow shower heads, which had a one-year payback, and after that it was annual savings of about $16,000. They also went ahead and moved forward with the exterior LED lights, which actually had a 14.4-year payback, and then after that about $3,200.

As I mentioned before, you wanna base your decision of off 1) the ROI and 2) the safety. This was a safety issue, and the LED lighting was better for safety and security, so they went ahead and decided to install those, even though it didn’t technically make financial sense. And then three, which I guess I didn’t mention in my list of seven, so there’s actually eight… They went ahead and put a cover on the pool, which had a 1.5 year payback period. After that, $400/month in savings. It’s small, but it’s still $400/month.

As I mentioned, the reason behind implementing the low-flow shower heads and the pool cover was because of the five-year plus hold period, so they were able to pay that back; for the shower heads it was one year, for the pool cover it was 1.5 years, which means they had about 3-4 years of extra capital coming in due to the fact that they don’t have that capital going out. So that was purely for profit, whereas technically they ended up losing money on the exterior LED project, but the lights were installed, again, for the safety.

So in the green report they’re literally gonna list out everything. Anything that could potentially save you energy, no matter how long the payback period is, it’ll be listed out. Going back to those seven from the 216-unit example, if they were to implement all of those opportunities, the overall payback period would have been 92 years, and the longest payback period would have been 165 years, for the energy star rated dishwashers.

So unless they decided to hold on to the building until they were dead, or some sort of immortality serum was created, then stick to the opportunities that result in a payback period that is lower than your projected hold period, or if it is going to address a safety concern. The really only other exception I can think of is if you’re trying to position your property as a green, environmentally-friendly property. In that case, you might be able to get higher rents by saying that all of our appliances, our energy star rated, we’ve got dual pane windows, we’re doing all these different things to be eco-friendly. That might help, but again, it’s gonna be depending on your renter demographic.

Those are all ten reports for the green program going to the cashflow calculator. The reduction will be in your utilities, so that is the stabilized utilities in cell F48. That is where you will see those reductions. So if you are having, for example, a reduction of $16,000 per year after the payback period, you can go ahead and reduce that.

And of course, since you are going to be putting up extra equity to complete these projects, you might also have to change the capital improvement budget in cell C14.

At this point you should have made all the updates to your cashflow calculator based on these ten reports, and either made a decision to move forward at the same purchase price, to renegotiate the purchase price, or to cancel the contract in general. If you stay at the same purchase price or you’re able to renegotiate a new purchase price, then the next step is going to be to start raising money for the deal, which we will begin to talk about next week.

This concludes this series about how to perform due diligence on an apartment community. I recommend listening to parts 1-3, as well as the other Syndication School series about the how-to’s of apartment syndications, as well as make sure you download that free simplified cashflow calculator under series 14 about how to underwrite a value-add apartment deal. All those can be found at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

JF1744: How To Perform Due Diligence On An Apartment Syndication Deal Part 3 of 4 | Syndication School with Theo Hicks

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In the first two parts of this series, Theo broke down 10 financial documents you’ll need to be familiar with for you apartment syndication due diligence. Today Theo will be explaining how to analyze the first five of those 10 documents. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. 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 am your host, Theo Hicks.

Each week we air two podcast episodes that are typically a part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we will offer a document, spreadsheet, some sort of resource for you to download for free, that accompanies that series. All of these free documents, as well as past Syndication School series can be found at SyndicationSchool.com.

This episode is a continuation of a series we started last week. This is part three of the series entitled “How to perform due diligence on an apartment syndication deal.” At this point you have a deal under contract, and you are beginning the three things that you need to do before closing, which is 1) secure financing, which was the topic of discussion in the previous series. This series is number two, which is to perform due diligence on the apartment community, and then number three, which will be the series we begin next week, is to actually secure the commitments from your investors.

So 1) fund the majority of the deal with that, 2) make sure all of your assumptions are actually accurate, and that there aren’t any disqualifiers of the deal, and then 3) fund that debt with equity from your investors.

If you haven’t done so already, I recommend listening to parts one and two, where we introduced the ten due diligence reports that you’re going to need to get during this due diligence period. In those two parts, first we described what each report was, we talked about how to obtain these reports, so who you need to get them from, we talked about the estimated costs based off of it being a 150+ unit deal, and then I opened up some example reports from an actual deal that Joe has done, and kind of just walked you through how the report flows.

And as I mentioned last week, parts three and four we’re gonna go back over those ten reports, but this time we’re going to discuss how to actually analyze those results. In this episodes we’re gonna get through as many as we can, just because the six through ten are more of disqualifiers; so if the report comes back clean, you’re good to go. If it doesn’t, then you need to renegotiate with the owner a new price. They need to complete whatever needs to be done, or you back out of the deal.

I recommend when you are — just taking it back high-level, when you’re going through these due diligence reports, you’re gonna wanna have your cashflow calculator open and then if you did your rental comps on a different document, I would have that open as well. That’s how we’re gonna talk about the due diligence reports in this episode; I’m gonna go through and say how you should analyze the results, and then we’re actually gonna look at the simplified cashflow calculator that you can download for free at SyndicationSchool.com. It’s under series number 14, where we’ve talked about how to underwrite a value-add apartment deal… So I’m gonna tell you exactly where in that model you would need to change things based on the due diligence report.

Let’s jump right in, starting with number one, which is the financial document audit. So you use the results of the financial document audit, which as a reminder is the audit of all of the financials, bank statements of the owner, and then a contractor will create their proforma and what they believe the income and expenses will be based off of that. So you’re gonna use that report to confirm or adjust our income and expense assumptions.

When you underwrote the deal, if you remember, these were the assumptions that you based off of the Trailing 12 months of profit and loss and the rent roll that was provided to you by the seller. Then you also based these assumptions on the market cost per unit, per year raise for the expenses. Or you had a conversation with your property management company and they helped you determine what those stabilized expense and stabilized income assumptions should be.

As I mentioned with this report, you’re gonna go ahead and open up your model and go through each of the stabilized income and expense line items, and you’re gonna want to compare those with your results of the financial audit. Or what’s also likely or possible, depending on the contractor who performs the audit, they might even have created a summary tab that has one column that’s all their income and expense assumptions, in this column it’s your income and expense assumptions, the next column is any deviations, so a positive or negative number, and then they might put a little comment there saying “Hey, I know you had $1,000 per unit for payroll, but based on our evaluation it’s actually gonna be $1,100/unit/year for the payroll.”

So if you need to make any adjustments, or if any discrepancies were found, then before you go ahead and just make those changes in your model, you’re gonna go ahead and discuss those with your property management company first, just to confirm that you need to change those income and expense figures in your model. So run the audit via your property management company.

Depending on the number of discrepancies or the size of the discrepancy, there might be a change in your projected returns. If you are telling your investors that you’re gonna find deals that result in a 15% IRR and a 10% annualized cash-on-cash return, when you first underwrite the deal and put it under contract maybe you’re at 11% cash-on-cash return annualized and a 16% IRR… But then you get your financial document audit back and you realize that the maintenance and repairs are gonna be way higher than you first expected, and those returns dip below at 15% IRR and 10% cash-on-cash. Well, then you might need to actually go back and renegotiate a different purchase price, or you might need to back out of the deal entirely… Because again, you don’t wanna buy a deal just because; it needs to make sense.

On the actual cashflow calculator, the things that might change as a result of the financial document audit are gonna be those revenue and expense line items under the stabilized column, so vacancy loss rate, loss to lease, concessions… In this cashflow calculator they’re labeled as [unintelligible [00:08:38].19] discounts given to employees living on site; those are units being used as a model unit, so it’s technically a zero rent… Maybe a maintenance room…

You’ve got bad debt and other income, so those are the revenues that might change based on this financial document audit. And then all of your expenses: payroll, maintenance and repairs, contract services, turn make-ready costs, advertising, administration costs, utilities… The management fee probably won’t change, just because that’s something you negotiate with your property management company. Taxes probably won’t change, unless you did the calculation incorrectly… Insurance – that might change. And then lender reserves and asset management fee should stay the same. The lender reserves is something you negotiate with the lender, and the asset management fee is something you negotiate with your property management company.

Again, if you change those, you’re gonna wanna go ahead up to — on this cashflow calculator it’s the projections data table, and it starts in row 7, column K. You’ve got your projected cash ROI, your project cash 5-year IRR, your LP cash ROI and your LP 5-year IRR. You wanna make sure that those are still above that threshold that your investors want.

Number two is that internal property condition assessment. The internal PCA is something that is also created by a contractor, and essentially they will provide you with a document that has different priority levels of repairs that need to be made – immediate repairs, recommended repairs, and then ongoing repairs. You’ve got your immediate repairs, your immediate replacements, which are things that need to be addressed immediately after closing, and depending on the type of loan you’re getting, they might even need to be addressed before you close on the deal.

Then you’ve got your recommended replacements, which indicate maintenance issues that were identified, that aren’t necessarily required to be replaced, but the things that are kind of like “Hey, you should replace these, but you don’t have to replace these for the property to be in working order.” Then the third category, as I said, was the continued replacement, ongoing replacement.

Those are things that don’t need to be replaced right now, but they will need to be replaced at some point during the business plan. For example, let’s say the roof has about five years of life remaining, and your business plan is to hold on to the property for ten years… Then the roof is not gonna be an immediate replacement, because it still has some life left, but at some point during the business plan you’re gonna have to replace that roof.

Now, in addition to just listing off these three different categories of repairs, this report will also list out the preliminary costs, because this is gonna be provided by a contractor of your choice, ideally your contractor… So they’re gonna review the costs of the interior items and maybe even the exterior items that require repair.

If you remember, during the underwriting process you created your renovation and upgrade plan for the interior and exteriors of the apartment community, and then you also put in some projected costs. Maybe you yourself have a background in construction, so you just came up with those costs yourself, maybe you based them off of another deal you had done, maybe you based them off of a deal your mentor or consultant has done, or maybe you just had a conversation with your management company and they gave you some ballpark numbers. But again, these are assumptions, so you want to confirm that these are actually accurate with this report.

Once you receive this internal PCA, you’re gonna want to go ahead and compare 1) the costs, and 2) the actual items that need to be repaired, and make sure that they align with your assumptions. For the exteriors, how do the contractor’s findings compare with your budget for the exterior renovation?

You’re gonna wanna look at those immediate repair(s) that need to be done in the future and see “Okay, what did I think needed to be repaired immediately, and what did I think needed to be repaired at some point in the business plan, and how do those compare to what my contractor said.” If you didn’t include something in there that your contractor did, then you’re probably gonna have to adjust your number. Then do the same thing for the interiors as well. If there was some deferred maintenance that they were able to identify that this contractor didn’t identify, you’re gonna  wanna know that.

Keep in mind that these are gonna be preliminary costs, so they’re not gonna be the exact costs. These aren’t quotes; these are just contractors saying “Hey, based on our experience and what we saw, we’re thinking this is gonna cost about this much.” However, these are preliminary costs that are created by a contractor, so depending on how you did your assumptions, unless you did a full inspection of the property, these assumptions are likely going to be better than the assumptions that you made during the underwriting process.

So if there are discrepancies between the contractor’s estimated repair costs and your budgeted costs, then you’re gonna have to change the renovation figures on your model, so that they reflect the results of the PCA.

Now, hopefully, I guess best case scenario is that your assumptions were right on the point; all the deferred maintenance, immediate repairs, continued replacements that were found by the contractor are all included in your cap ex budget, and the costs are the same. And ideally, since you should be conservative in the first place, they might even go down. You might discover that you thought it would cost $25,000 to repair the parking lot, whereas the contractor said “Oh, this is only gonna cost you $15,000 to do.” That’s the ideal situation.

However, if something comes up that wasn’t accounted for, or if your expenses are too low, then you’re gonna have to make adjustments in your cashflow calculator, and just like the adjustments you made based on the financial audit report, this might push your returns below that threshold, and outside the range of your investors’ goals, at which point you either need to renegotiate the purchase price, renegotiate some other expense on your cashflow calculator, or you’re gonna have to back out of the deal.

Moving to our cashflow calculator, since this is a simplified cashflow calculator, you are just going to have one little cell where you can input your capital improvement budget. That’s gonna be cell C14. It says Capital Improvements. It’s under the Uses category, along with Purchase Price, Operating Account Funding, Acquisition Fee, Closing Costs and Financing Fees.

I believe I’ve mentioned this in the series about underwriting, but since this is a simplified cashflow calculator, you’re gonna want to utilize the comments function on Excel. For example, in that cell C14 about capital improvements don’t just put in a number. You’re gonna want to create a comment and say “Okay, for the interiors [unintelligible [00:15:44].05] cashflow calculator is about 1.5 million dollars.” Let’s say we plan on spending $750,000 on the interiors. Then you wanna say below that “Here’s exactly how much money we’re spending per unit on the countertops, the kitchen, the bathrooms”, and then same thing for exteriors.

Spending the remaining $750,000 on the exteriors – “I have to restripe the parking lot, we’re gonna renovate the clubhouse, we’re going to go ahead and buy new pool furniture, we’re gonna revamp the fitness center…” That way you can send that budget to your contractor, so they can go ahead and give you preliminary costs for those upgrades, but also you can have a clear picture in your mind of what the costs actually are, because this report – you’re probably not gonna get it for a few weeks, or maybe a month or two after you initially underwrite the deal; so if you just plugged in a number based on a calculation you did on your notebook and you’ve lost that notebook, then you’re not gonna know how that number was calculated.

Overall, number two is the internal PCA. You’re gonna wanna review that and make any adjustments to your cashflow calculator based on those results, and those adjustments will be made in cell C14, next to Capital Improvements.

Number three is the Market Survey Report. The Market Survey Report is created by your management company, and they’re gonna go ahead and compare the subject apartment community, the apartment community that you’re buying, with the direct competitors in your market, and we discussed how to find good rental comps in that series on how to underwrite a value-add deal.

Ultimately, they’re gonna provide you with the market rents, or in the cashflow calculator they’re labeled as renovated rents… That you’ll be able to achieve after you’ve completed your business plan. So your property management company knows the upgrades you’re planning on implementing at the property, they’ll take the information, they’ll find other properties with those upgrades already completed, determine a rent per square foot, and then based on your square footage of your units or the same unit type they’ll go ahead and give you an estimated renovated rent. Obviously, to determine the accuracy of your renovated rent assumptions you’re gonna wanna compare the average rents for each unit type from this market survey report with the renovated rents you have in your financial model.

Now, this report is created by your management company, as I said, so you can trust that these are the rental premiums you should be comfortable with, because since they are going to be managing the property and they’re telling you “Hey, based on what we can do, these are the rents that we can get”, you can go ahead and trust those. Maybe just review and make sure that the amenities line up; maybe you changed your upgrade program based on the results of the PCA that came in, so that might have some adjustments… But overall, you can trust the numbers sent to you by your management company.

Again, like all these reports, if there is a discrepancy between the results of this market survey report and the assumptions that you made on your financial model, then you’re going to want to make those necessary adjustments. And then again, review those projected returns to make sure that they are still above that threshold.

Going to the cashflow calculator – any changes made from the Market Survey Report are gonna happen under that Unit Mix data table. Specifically, you’re gonna wanna make the changes to cells G10 through cells G15. Or if there’s more than five unit types or six unit types, then obviously you’re gonna have to expand that data table and you’ll have to change more renovated rents… But right now we’ve got six unit types – A1, A2, B1, B2, B3 and C1. And we’ve got our renovated rent assumptions based on our rent comp analysis, and then we’ve got our rent premiums compared to the current rents at the property.

Maybe you have to change all six of these, maybe you have to change one or five of them, or maybe you don’t have to change any of them. Again, depending on how good your initial rent comp analysis was… And if you wanna know how to perform your own rent comp analysis, rather than just trusting the numbers listed in the offering memorandum, we also discuss that in this series on how to underwrite a value-add apartment deal, and we also gave away a free rent comp template that allows you to perform a rent comp on the phone, by calling these actual properties that  are comps.

We’ve got the Rent Comp Detailed, which is what you discover from your online investigations, and then we have that amenities checklist that you wanna use first, just to determine that the comps you’ve found are actually truly comp properties.

Next is the Lease Audit Report. That’s number four. The Lease Audit Report compares the data obtained from the actual leases with the information provided in the rent roll. When you’re underwriting a deal, the owner is not gonna send you – for this particular deal it’s 256 units – 256 leases. What they will send you is the rent roll, which is a summary of those leases. Each unit has its own row, or maybe a couple of rows, and then you can take that and determine, “Okay, so for all 48 A1 units the market rent on average is $973. For the A2 unit type, the current rents on average are $978.” And then maybe there’s some vacant units, so the vacancy loss for this property is $150,000 per year.

Mostly what you get from the rent roll is gonna be that economic vacancy loss, as well as — well, I guess technically you’ll get the units from there as well; any units that are being used as models, office units, things like that. And obviously, as all the information you had, those are what you used as your underwriting assumptions. Once you get the Lease Audit Report, your property management company is actually gonna look at all 256 leases. They’re gonna look at the rents on those leases, they’re gonna look at the terms, they’re gonna look at the actual lease start and end date, and things like that.

Then in that report, any discrepancies found between that rent roll and the actual leases will be highlighted. So unless the current property management companies are completely incompetent and aren’t tracking things properly, there shouldn’t be any discrepancies at all. If there are, they should be minor… But even if there are minor discrepancies, you need to make sure that you update your model. More specifically, in the cashflow calculator the cells that might change are gonna be those current rents under the unit mix, so H10 through H15.

Then you’re also gonna wanna take a look at that vacancy. Maybe the rent roll was from six months ago, and the current market rents have gone up  or they’ve gone down, or there’s more vacancies than you initially thought, which is why it’s important to look at the historical 12-month vacancy, as well as the current vacancy, to see “Okay, did they just fill this property up to sell it, or is this indeed the actual average vacancy that they’ve had for the past 12 months?” So those changes will be made to those current rents and those vacancies.

Now, you maybe ask yourself “Why do I care how the property is currently operating? What really matters is how it WILL operate.” Well, the appraiser is gonna base the value of the property on the current net operating income, as well as other methods – the replacement approach, as well as the sales comparison approach… But any changes to those rents, up or down, is gonna affect the value of the property; and the value of the property is gonna impact the type of loan you can get.

If you underwrote at current rents that were incorrect, and when you put the new rents the NOI goes (let’s say) way down, then you’re not gonna be able to get as high an LTV loan. Of course, it’d be better if the rents were actually up. That way the value of the property will be higher than hopefully the purchase price, and you’ll have some free built-in equity at purchase. That’s number four, the Lease Audit Report.

I think we’re gonna stop there for today, and we’re gonna go through five through ten on tomorrow’s episode.

In this episode we went through how to review the results of the first four due diligence reports. One was the Financial Document Audit, two was the Internal PCA, three was the Market Survey Report, and four was the Lease Audit Report. And then again, I  actually had the cashflow calculator open, the simplified cashflow calculator which you can download for free at SyndicationSchool.com, under series number 14, “How to underwrite a value-add apartment deal.” I went through exactly where in that model the adjustments will need to be made for each of those reports.

Until tomorrow, I recommend listening to parts one and two of this series, “How to perform due diligence on an apartment deal.” I recommend listening to the previous other 13 Syndication School series about the how-to’s of — sorry, not 13; we’ve got more than 13. We’re in series number 17 right now, so I recommend listening to the 16 other free Syndication School series about the how-to’s of apartment syndication… And go ahead and download that simplified cashflow calculator if you haven’t done so already. All that can be done at SyndicationSchool.com.

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

JF1738: How To Perform Due Diligence On An Apartment Syndication Deal Part 2 of 4 | Syndication School with Theo Hicks

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Part two of Theo’s due diligence series will teach you about five more documents you’ll need to be familiar with in your apartment syndication due diligence. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. Welcome back to another episode 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, every Wednesday and Thursday, that are part of  a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort if document, spreadsheet or resource for you to download for free. All of these free documents, as well as free Syndication School series can be found at SyndicationSchool.com.

This episode is part two of what will likely be a four or six-part series entitled “How to perform due diligence on an apartment syndication deal. If you haven’t done so already, you’ll need to catch up to get to this point, because this is the process that you perform after you put a deal under contract, and in order to put a deal under contract you need to underwrite the deal. In order to underwrite the deal you need to find it, and there’s also additional foundation you need to create to find a deal in the first place… So if you haven’t done so already, I highly recommend starting from series number one and working your way through these Syndication School podcast episodes.

But if you have a deal under contract, the three things you do is 1) secure financing, 2) perform due diligence, and 3) secure investor commitments. In the previous series we discussed number one, which is secure financing, and right now we are continuing our discussion on how to perform due diligence.

Now, in part one of this series we talked about the first five reports. Those are the financial document audit, which is essentially an audit of the owner’s historical income and expenses, as well as the bank statements and the rent rolls. Two is the internal property condition assessment, which is essentially an assessment of the exteriors of the property to determine the priority of repairs, so things that need to be repaired immediately, things that don’t necessarily need to be repaired now, but are recommended, and then any ongoing future repairs, as well as the estimated costs of those repairs.

That is performed internally, whereas the one we’re gonna talk about today is one that’s performed by the lender. And then 3, 4 and 5 are usually combined into one report, and that is the market survey report, which is a detailed rent comp analysis performed by your management company, a lease audit report, which is the auditing of all of the leases and comparing the terms of the lease to the actual rent roll provided… And then five is the unit walk report, which is essentially the property condition assessment of the interiors of the units.

We talked about what each of those reports are, we actually walked through an example of a report that we received for a deal that we did, we also discussed how to obtain each of those reports, and approximately how much those reports will cost.

Today we’re gonna do the exact same thing, but for the reports six through ten. Then, as I mentioned yesterday, or if you’re listening to this in the future, in part one, next week we’re going to go through all ten of these reports again, and this time we’re going to talk about how you should review these reports once they’ve been received, what to look for and what adjustments need to be made based on the results of these reports.

I know we’re gonna talk about this next week, but reports one through five – the results of these reports will have you either confirm or adjust your assumptions, whereas these next reports, if the results of these reports are bad, then you might not even be able to do the deal. So these are deal-breaker reports; most of them are, the last one isn’t. But six through nine could potentially be deal-breaker reports.

Really quickly, the next five reports we’re gonna discuss are 6) the site survey, 7) the property condition assessment, 8) the environmental site assessment, 9) the appraisal, and 10) the green report.

Number six, the site survey. The site survey is going to be a map of the apartment community and its grounds, that indicates the boundaries of the community, as well as the lot size. Then included in this report will likely be a written description of the community. The site survey needs to be performed by a third-party vendor that specializes in site surveys. So like any other third-party, you can either find them via Google, or you can get a referral from your consultant, your mentor, your property management company, a local owner, a meetup group – really anywhere or from anyone that has bought an apartment community before; because if they did, they had to get a site survey performed.

We recommend getting a few bids, just because the approximate cost of the site survey will be around 6k. So if you can find one for cheaper than that and they actually get the job done, then by all means take that cost savings.

When you’re looking at an actual site survey, it’s gonna be essentially a black and white map of the property. Right in the middle you’re gonna have a 2D drawing with the outside being the actual boundaries of the lot, and then somewhere around there it’ll say exactly what the lot size is. For example for this property, the lot size is 8.29 acres. It’ll have any streets that are on the boundaries that are surrounding the property, so in this case it’s right on an intersection.

Then on the actual map within the boundaries it will show you exactly where all the buildings are, and the actual sizes of those buildings, the actual type of the buildings… For example, right here it says “Two-story brick and frame, 3,600 sq.ft, height 2,600.” Then it’s got actual dimensions of the right-hand side, the left side, the back, the front, any patios or doorways, what is the length and width of those. It does that for every single building. You also see the actual parking spots and the number of parking spots. For example, it says “Here’s 14 covered spaces, here’s 6  covered spaces, here’s 7 regular spaces.” You can also see any type of amenity that’s there… For this property there’s a pool, there’s a playground… Again, this map is very detailed.

They also go into where the electrical lines are running, where the water lines are running, it talks about any sidewalks, it’s got actual coordinates… It’ll tell you essentially what is surrounding the property; if it’s a road, it’ll be  a road, and if it’s another apartment, it’ll tell you another apartment is out there. So there’s a lot of detail.

On the left-hand side or somewhere around there there’ll be a legend that explains what the abbreviations mean. For example, “AE” means an aerial easement. There’s a W with a circle around it, which means a water well. There’s a C with a box around it that means cable box… So you’ll likely have to zoom in if you want to actually read this entire document, because it’s so detailed and the fonts are really small.

In the bottom there’s going to be some notes on the actual map. Right here it says, “Okay, here’s how many parking spots there are.” There’s 69 regular parking spots, there’s 222 covered parking spots, there’s 5 handicapped parking spots.

Then there’s some overall notes, for example “The surveyor did not abstract the property survey based on legal descriptions supplied by the title company. The survey as shown in the legal description as per and on the ground survey. Easements, building lines etc. shown are identified by GF number blah-blah-blah of Chicago title insurance company.”

It’ll also have any flood notes. For example, this property is within flood zone X, and it says the date when that classification was determined. It’s also got a legal description, so for example beginning at a [unintelligible [00:09:38].00] So it’s basically saying how they actually did the survey.

Then there’s something called a schedule of B items, which is just more explanation of how they performed the survey. Then there’s the surveyor’s certification saying that “Hey, I’m a certified surveyor.” So that is number six, the site survey.

Number seven is the property condition assessment. I’m not gonna spend too much time on this one, because I’ve already explained what the property condition assessment is when we talked about the internal PCA in part one. The only different here is that rather than being performed by a third-party contractor of your choosing, this PCA is performed by a third-party vendor selected by the lender. So you’ll have two PCAs, and ideally you will compare and contrast the results of these two PCAs. For example, maybe the lender caught something that your inspector didn’t, or vice-versa. Expect to pay around 2k for this PCA.

Again, the PCA is an inspection of the exteriors of the properties, and it gives you the overall condition of the different exterior items, any recommended repairs that are prioritized based on immediate, recommended and future, and then also the approximate costs to fix those.

This PCA from this lender is actually 136 pages long, so even longer than the internal one. As I mentioned, these are all gonna be different, based on who’s performing it. This one, just looking at the summary section, it kind of goes through the actual description of the property first, it says who did the assessment, so you have their contact information… And then this one actually has a summary of all historical repairs and replacements from 2013 to 2016, so any repair that was made over the past three years – in this case four years – were logged here.

Then it just goes through the overall results of the actual report. They have a property useful life table, where they go through all the different site components and says “Here’s the average life and here’s how old it actually is.” A summary of recommended repairs and replacement cost estimates… For this one right here it says “Immediate repairs – life safety items. May impact health or safety. Costs: $2,250”, and then there’s a reference for how they determine that later on in the actual document.

They’ve got a summary of known problematic building materials, for example fire retardant plywood; identified no action recommended, so for this building, all of these are actually no. Then it goes into the actual needs of the document, which is essentially all the raw data that they use in order to create that summary.

Number eight is going to be the environmental site assessment. The environmental site assessment is an inspection that identifies potential or existing environmental contamination liabilities at the property. It looks at the underlying land, as well as the physical improvement to the property, so the actual building, and then the report will offer conclusions or recommendations for further investigations if an issue is found. Similar to the PCA, this report is created by a third-party vendor selected by the lender, and the approximate cost is about $2,500.

Now, this environmental site assessment, this ESA, is actually 648 pages long. So they do not mess around with these. Obviously, it starts off with the executive summary, where it goes through all the different things  that they looked at, and then they’ll have their findings, so anything that they believe needs to be done, anything that’s fine, the historicals… Very, very detailed, and it ends with their conclusions and opinions and recommendations. For example, on this one they didn’t identify any REC (recognized environmental conditions), so no further action is needed.

Next, number nine is the appraisal. Most people know what an appraisal is. It determines the as is value of the apartment community. A certified appraiser will inspect the property and then calculate the as is value of the apartment community using the three appraisal methods, which are the sales comparison approach, where they compare the subject property to similar properties that were recently sold, the income capitalization approach, which is using the net operating income and the market capitalization rate… So that’s the net operating income divided by the market cap rate, in order to determine the as is value. And then the cost approach, which is the cost to replace or rebuild the property.

The appraisal report is created, as I mentioned, by a certified appraiser who is selected by the lender, and the approximate cost will be about $5,000.

Like most documents created by the lender, they’re pretty long. This one right here is actually 166 pages. In the beginning it’s got a summary tab saying “This is the property, this is the size of the property, here’s the occupancy of the property. The property is under contract for this price. The as is price is this”, so for this example the contract price was 13.3 million dollars, the as is was 13.7 million dollars. So there’s a free equity of $400,000 at the purchase.

Then it says “As the date of the inspection, the property was operating slightly below a stabilized occupancy level, at 89.3%, but the rent roll that was provided said the occupancy was 92.3%.” So they’re saying that we would only need to add a few tenants in order to reach a stabilized occupancy. So they haven’t made any adjustments based off of that; they assume that the occupancy was 92.3% with their appraisal.”

Like all of these reports, it starts off with a summary tab, and then it provides the pictures of the property, and then it talks about any assumptions or limiting conditions that were made. Then it goes into the meat of it, which is the analysis of the metropolitan area, as well as the apartment market, and the smaller market, the neighborhood that the property is in… There’s a site analysis, a zoning analysis, an approvement analysis, it does a highest and best use analysis, a real estate tax analysis, and then it talks about their appraisal process, and then they go into how they did the sales comparison approach, the income stabilization approach and then the ensurable value, which is another word for the replacement approach. Then any final value conclusions that they have for the actual deal.

Lastly, number ten is the green report. The green report is not really required, it’s more options, but it evaluates any potential energy-saving or water-conservation measures for the apartment community… So is there any way to essentially save money overall by installing something that decreases ongoing utility expenses.

The report is gonna include a list of all measures that were found, any recommended changes that are found, along with the associated cost savings and the initial investment amount to actually implement that measure. This report is created by a  third-party vendor, also selected by the lender, and the approximate cost is about $3,500.

If you plan on implementing the RUBS (ratio utility billing system/service) program, which essentially evaluates the usage of utilities and then reports the amount that you can bill back to your residents, you wanna consult with a RUBS company in a local market to obtain a few quotes. So that will technically be an eleventh report if you wanna do the RUBS program… But let’s take a look at the green  program…

What’s interesting – because as I mentioned, obviously you’ll have the summary of all the information, all the raw data below, and the summary will have all the different energy and water conservation measures that they’ve found, they’ll talk about the location of the measure installation; typically it’s either in the common unit or the tenant unit. And it’ll say “Here’s the estimated annual electric savings for this” and whatever the energy measure is; right here it’s kilowatt/hour.

And then it says the estimated gas savings in therms, then it says the estimated total energy shavings… I don’t even know what that measure is – kBTUh. Then it says the estimated total energy shavings as a percentage, and there’s the same thing for water as well. So there’s for energy, for electric, for gas and for water. Then it does the same thing for the tenants. If you were to implement, for example, windows, dual pane, vinyl frame, then you’ll end up saving 4% total energy in the common areas, and then for the residents, they’ll end up saving some large kilowatt/hour amount.

Then it’ll have the actual costs associated with each of those, as well as the cost savings. With the windows, the estimated cost to install would be $19,000 for the common areas, and it’d be $425,000 for the tenant units. The actual cost saving to the owner will be $626; the actual savings to the residents will be $13,000… So the payback period for installing windows in the common areas is actually only 31 years. So unless you plan on holding on to the property for 31 years, you probably don’t wanna do that…

But here’s a better example – low flow shower head in the tenant units. The initial cost would be $16,000 and the estimates cost saving would be $16,000. That’s to the actual owner. So the ROI is actually one year.

There’s another one – put a cover over the pool; initial investment is $600, cost saving $409. 1.4 years ROI.

That’s really what’s the most important – to take a look at that data table and you can determine the energy savings, the initial investment and the cost savings associated with each measure identified. Then below that it just goes into all the details on how they figured all that out. So that’s number ten.

As I mentioned, number eleven could technically be a RUBS report, where you find a RUBS contractor who goes through the RUBS program with you and determines how much water is being used, or how much other utilities are being used by the residents that you as the owner pay for, and then you can determine how much money you can bill back to the resident.

That covers due diligence reports six through ten, so now we’ve gone through all ten due diligence reports. We described what the report is, how to obtain the report, how much it costs, and then we walked through an example document. Then again, since they were for live deals, I cannot share those. I guarantee you can find some of these documents by just googling them… But I think I did justice by explaining them, so once you actually see these reports,  you’ll be able to at least recognize and be somewhat familiar with the actual report.

Next week we’re gonna go over all ten reports again, and this time we’re gonna talk about how to analyze the results. So after listening to this entire (what will likely be) a four-part series, you should have all the knowledge you need to perform due diligence on an apartment-syndicated deal.

In the meantime, if you haven’t done so already, go back to yesterday’s episode and listen to part one. Also, check out the other Syndication School series about the how-to’s of apartment syndications, and download some of our free documents. All those can be found at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

 

JF1737: How To Perform Due Diligence On An Apartment Syndication Deal Part 1 of 4 | Syndication School with Theo Hicks

Listen to the Episode Below (00:24:53)
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Last week Theo covered financing options for apartment syndication deals. For this week’s series, he’ll be covering the due diligence process as it pertains to large apartment communities. Today we’ll hear details about five documents you’ll be reviewing, tomorrow we’ll cover five more documents. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“All of this is very important information for you to know and impossible for you to know going into the deal because you don’t have your hands on all these leases”

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


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 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. As you know, each week we air two podcast episodes – every Wednesday and Thursday – that are part of a larger podcast series, where we discuss and focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these series we offer some sort of document, spreadsheet, resource for you to download for free, that accompanies that overall series. All of these free documents, as well as the free Syndication School podcast series can be found at SyndicationSchool.com.

This episode is going to be part one of a series entitled “How to perform due diligence on an apartment syndication deal.”

As I mentioned in  last week’s episode, once you place a deal under contract, there are three things that you’re doing concurrently. Number one is you start the process of securing your financing, and that was the focus of a previous series, so if you haven’t done so already, I highly recommend listening to that series. Again, that’s at SyndicationSchool.com. We discussed the overall process for securing financing for your deal.

The second thing you’ll be doing during the contract to close period is you’ll be performing due diligence, and that’s going to be the focus of this series. Then, of course, in order to fund the debt, you’re gonna need to raise capital from your passive investors, so that’s the third thing you’re doing – securing those commitments – and that will be the focus of the next series.

In this episode, part one, we are going to discuss the due diligence reports you need to obtain during the due diligence period. It’s actually ten documents, and the goal is to review documents one through five in this episode, and review documents six through ten in tomorrow’s episode.

Now, when I mean review, what I’m going to do is I’m going to describe what the report actually is, and I’m actually going to pull up an example and I will walk you through and discuss what the document looks like. These are reports from an actual deal that we did, so unfortunately we can’t share those, but hopefully I do the description justice; I’m sure if you googled it, you could find examples of each of these reports.

I’m also gonna discuss how to obtain each of these reports, and then I’m gonna discuss generally how much these reports cost. Now, what I’m not gonna talk about is what you actually do with these reports once you get them. That’s going to be the focus of next week. Next week we’re gonna go through (in part three) due diligence documents one through five, in part four due diligence documents six through ten, and discuss what you need to look for when reviewing these documents, and how that could potentially impact either your underwriting model, or your ability to even take down the deal in the first place.

As I mentioned, there are ten due diligence reports you need to obtain. Due diligence reports one through five are the financial document audit, the internal property condition assessment, the market survey report, the lease audit report, and the unit walk report.

As I said, we’re gonna walk through and describe what each of these documents are, I’m going to describe what they look like with an example, how to obtain the report, and then also how much the report costs.

Starting out, the financial document audit. This is going to be an analysis of the apartment’s historical operations, and then the actual report will compare the historical operations to your projected income and expense figures. If you remember in the episode about the LOI, one of the things that you’re going to want to collect are the current owner bank statements, their rent rolls, their three years income and expenses, and these are going to be used to conduct this audit.

For this audit, typically they’ll provide the consultant with detailed historical financial reports, the leases, the last three years of income and expense data, bank statements, rent rolls… Essentially, anything they need in order to perform this audit. And they’re going to do their thing in the end and at the end they’re going to provide you with a report in the form of a detailed spreadsheet that essentially is where they logged all the information that you sent them. That includes historical income, operating expenses, non-operating expenses, and then net cashflow. Then they’re gonna compare this with the budgeted figures that you provided, that you created during the underwriting phase. Then there’s also gonna be a lot more tabs that actually has the raw data that was used to create the summary tab.

The summary is gonna take a similar form to a proforma. It’s gonna look similar to the five-year, seven-year, ten-year proforma that you created during your underwriting process. So you’re gonna have the individual income and expense line items broken down for easy comparison purposes on your end… And also it’s ideal that the consultant will also provide you with a second document which is an executive summary, which will essentially explain to you how to interpret the audit that they’ve performed, as well as what data was used to create the spreadsheets. They’ll say “Hey, I used the rent rolls you sent me, the leases you sent me, the historical expenses and incomes you sent me, the bank statements you sent me…” And then they’ll also ideally have a written explanation of any figures that deviate from your budget. Essentially, anything that they believe you are budgeting incorrectly – they will mention that in that summary.

Now, to obtain this document, you are going to need to hire a commercial real estate consulting firm that specializes in creating these financial document audits. So either through your mentor, your consultant, your property management company, or a quick Google search, or even your broker, you should be able to find a consultant that can perform this analysis for you… And the approximate costs for this is going to be around $6,000. Now, keep in mind that all of these costs are gonna be for, say, a 200+ unit building, so if you’re looking at a 20-unit building, it might not be $6,000, it might just be a couple thousand dollars less.

It’s also possible that your property management company can perform this audit for you, so that’s something that you can ask them and see if they will do it and what the cost will be. But we use a third-party outside group to perform these analyses.

So just quickly going through the actual example – there are 10+ different tabs. The first tab is entitled Input, so it says “This is how to actually read the document”, and then they’ve got the Summary tab, which again, looks very similar to a proforma, so it’s got the previous three years ago summary, two years ago summary, and then the previous year, and then the budget, and then any adjustments that the analyst made that was actually performing this analysis. Then it has any adjustments that we would make on our end. Then it explains in the comment section why the analyst made that adjustment, and then why we as a client made that adjustment.

And then essentially every other tab is just the raw data that was used for the summary. For example, it’s got the T-12 monthly breakdown, it’s got the prior year monthly breakdown, the prior two year monthly breakdown, it’s got the scheduled base rents, which is just the market rents, and all the other income losses – loss to lease, delinquent rent, rental concessions, vacancy loss… It’s got any non-commercial rental revenue, it’s got a list of a rent roll for non-commercial revenue, it’s got a bank statement analysis, so it goes through each of the deposits for the bank statements that were provided… There’s another income tab that breaks down all of the other income… It’s essentially got over 20 tabs. It’s got a payroll tab, it’s got a management fee tab… Essentially, every single category that’s on that summary page has its own tab.

On the summary page, for example, for payroll it just says Payroll, or Other Expense, so on these other tabs it’ll have a breakdown of “Okay, so under Utilities, here are what the actual costs were. Here’s water, here’s sewer, here’s trash.” So again, very detail.

Of course, this is something that you can make yourself pretty easily, except obviously you’d have trouble with the adjustment aspect of this. So that’s number one, the financial documents audit.

Number two is the internal property condition report, or the internal PCA. The internal PCA is a detailed inspection report on the overall condition of the apartment  community. A licensed contractor will inspect the property from top to bottom, so they’ll look at all the interiors, all the exteriors, and then based on this inspection, this contractor will prepare a report with not only their recommended repairs, but also they will break that down into immediate repairs, recommended repairs, and continued replacements. So they’re not just saying “Hey, you need to repair these things”, they say “Here are the things you need to repair right now, here’s some things that you don’t necessarily need to repair, but you probably should, and then here are some things that you need to repair now, but you’ll definitely need to repair in the future.”

For all of these different priorities of repair items they’re also going to provide you with some recommended or preliminary costs for these repairs, as well as accompanying pictures of the interiors or exteriors or whatever else they deem to be an immediate repair, a recommended repair, or a continued replacement.

Now, since this is the internal property condition assessment, you are also going to need to find a third-party licensed contractor to perform this assessment on your behalf, and the approximate cost is $2,500. Now, the PCA report could be anywhere from 10 to 15 pages, up to 100 pages, depending on how many repairs were identified, and it’ll start off most of these documents with a summary, so you can technically just read that and they’ll summarize the information that’s in the actual body of the report… And then they’ll do an introduction just explaining themselves and their methodologies.

Then you’re gonna have the property photos and descriptions, preliminary costs for the repairs, and then some closing comments. For example — I’ll just do the summary; for example, it’ll say “The balconies and private patios are found to be in fair condition. Common areas are in good condition. The swimming pool is in fair condition”, and it goes through all the different line items – fences, pavement, landscaping, foundations, things like that. Then below that it says “Okay, based off what we saw, here’s what we think you need to do, and here are the costs. Exterior paints will cost $93,000. Carpentry for the siding and the trim, $160,000. Parking lot restriping, $8,500.” And this particular PCA is focused strictly on the actual exteriors for the costs, so they’re not providing you with the costs for the interior on this one, but that’s obviously something you can request.

Then below the summary it just goes into details on where they got that information from. “The balconies and private patios are in fair condition, so here’s some pictures of the patios.” Same with the parking lot, the fences, HVAC, things like that. So that is the internal property condition assessment, and in fact, the reason why we put that “internal” name upfront is because the lender is actually going to perform their own property condition assessment as well, so it’s nice to have two separate ones just for comparison purposes.

Now, the reports three through five are actually going to most likely — again, really depending on your property management company, it should be all in one document that your property management company creates. That’s the market survey report, the lease audit report, and the unit walk report. So I’m gonna go through each of those and then I’ll go through the actual report and walk you through what the report looks like and what you should expect to see. But of course, since this is created by your property management company, it’s likely going to vary based on their design and how they approach the actual reports.

Number three is the market survey report, and this is a more formal and comprehensive rental comparison analysis than the one you performed during the underwriting phase. If you remember, during the underwriting phase – this is also a Syndication School series we’ve done – we discussed the detailed rent comp analysis that you perform online, which is essentially you looking up properties on apartments.com, collecting those rents, creating your amenities spreadsheet to make sure they’re actually like properties, and then ultimately getting an average dollar per square foot in the market for your stabilized property, so that’s how your property will be after it’s renovated. And then using the square footage and unit types at your subject property, you’re able to determine what the new rents will be. Then you confirmed all that by actually visiting these properties in person.

This one’s a little bit different, because your property management company is going to do that, and they’ve got access to better softwares than we do. Your property management company is going to locate direct competitors of your apartment community, and then they’re gonna compare your apartment community with each of the direct competitors over all the factors we discussed during the rental comp analysis, and they’re gonna use those to determine the market rents on an overall and a unit type basis.

Number four is the lease audit report. The lease audit is the process of examining the individual leases at the apartment community. Essentially, your property management company will collect all of the leases of the current residents at the apartment community and perform an audit. During this audit, they’re gonna analyze each lease and they’re gonna record things like the rents, the security deposits, any concessions that are being offered and the overall terms, and then they’re gonna compare that information gathered from those leases with the rent roll. So they’re gonna make sure that all of the rents are aligned, all of the security deposits, all of the concessions are aligned, all of the lease starts and lease end dates are aligned. Then they’re also gonna look at some of the legal terminology to make sure that the leases were created properly.

Now, just because once you take over that property you’re going to be inheriting all those existing leases, you can’t change those leases until that lease ends. So if there’s something wrong with those leases, and if it’s something that would be risky to you, from a legal standpoint, or if just the numbers aren’t aligned, then obviously that’s something that you need to know.

And then number five is the unit walk report. The unit walk report is the inspection of each individual unit at the apartment community. The internal PCA is for the exteriors, the unit walk report is for the interiors. During this unit walk, your property manager or a representative from your property management company will inspect each individual unit. I’ve actually done one of these before, and it’s an all-day affair where you literally go to every single unit and have a pre-made checklist – and of course, everyone’s checklist is different, and they approach it differently. Maybe it’s very detailed, or they write down a sentence or two about the kitchen, the bathroom, or it could be a checklist of appliances, one through five, one being in terrible condition and needs to be replaced, and five being we can leave them alone.

The purpose of the unit walk is to determine the current condition of each unit. While they’re doing the unit walk, they will, as I mentioned, take notes, and they’ll wanna look at this like the condition of each individual room – kitchen, bathroom, living room, dining room, any other rooms that there are in the house. They’re gonna want to look at the type and the condition of the appliances… Because again, a unit that has white appliances won’t rent as much as a unit that has stainless steel appliances. So you need to know not only what type of appliances are in there, but also what is the condition of those appliances, a.k.a. do they actually function, and are they dented up, are they really dirty…?

They’re also gonna look at things like the presence or absence of washer/dryer hookups, because maybe some of the units have washer/dryer hookups, others don’t… They’re gonna look at the condition of light fixtures, they’re gonna look at missing GFCI outlets… Anything else that really stands out as a potential maintenance issue or a potential resident issue. So maybe it’s a very messy unit, or the unit is completely destroyed compared to other units because of the resident – well, that’s something you’re gonna wanna know if you have a problem resident at the property. You’re gonna wanna know how long their lease is.

As I mentioned, these three reports – the market survey report, the lease audit report and the unit walk report – will likely be all consolidated into one long due diligence report sent to you by your property management company… And ideally, the property management company will do these three reports for you for free, as long as you close. So a question you’re gonna wanna ask is “Will you perform the market survey report, the lease audit and the unit walk as long as I close on the deal, and if I don’t close on the deal and you perform these, how much money will that cost?” Of course, you could also hire a third-party to perform this analysis and create these three reports, and the cost of that will be approximately $4,000.

Again, this report is gonna vary from property management company to property management company, but just running through the one that I have right now – it’s actually 88 pages long, and it starts with a lease audit, and then it goes to the unit walk, then it goes to the market survey. For the actual audit, literally it’s a screenshot of all the rent rolls, and then any discrepancy is gonna be highlighted. For example, on this it’s a lot of security deposit discrepancies that are highlighted, which means that the security deposit listed on the rent roll is not the security deposit that was listed on the actual lease.

Then it’s gonna do the same thing where it’s gonna take a screenshot of the rent roll, and then it’s going to have an additional column with comment sections. So the highlighting is kind of a quick “Okay, what’s wrong”, and the next section or the comments are saying “Okay, well what exactly is wrong.”

For example, one of the comments says “Rent roll lists $150 security deposit, whereas the lease is actually $100.” Or this one right here it says that the credit results for this lease says a guarantor is required for this person, but the comment is there’s no guarantor on file.

Another example, the rent roll lists a rent of $975, when in reality the leased rent is $960.

All of these things are very important information for you to know, and it’s impossible for you to know going into the deal, because you don’t have your hands on all the leases, which is why it’s really important for you to make sure you’re requesting all of these things upfront. So that is essentially what the lease audit is.

The unit walk, again, will vary, but typically there’ll be some sort of summary tab. It will have a summary data table of all the different factors you’re looking at. For example, on this report we were looking at the living room flooring condition, the appliance type, the washer/dryer connections, the number of GFCI outlets, and then the light fixture condition.

For each of those data tables there’s all the unit types. For this particular property there are four unit types. Then there is a Good, Replace or Updated column header for each of those. For the first unit type there’s a total of 42 units, 24 of those units – the living room flooring is in good condition, in 12 of those units it needs to be replaced, and in 6 of those units it needs to be updated.

Now, obviously they have the same thing for appliances, washer/dryer, and then below that they actually have the raw data, where each unit has a row. If it has multiple things going on, it could have a total of five rows. If the living room, the appliance color, the washer/dryer, the GFCI and the living room are all out of whack… And then it just has a description of what we’re talking about, and then comments.

For example, unit 1, in the kitchen, the description is “Dishwasher condition”, and it says “The dishwasher in this unit is white, whereas all the other ones are black.” For unit 10 the description is “Pets” and it says that there’s dogs there. Another example is unit 94. It says “The master bathroom”, description “Bath light fixture condition” and the comment is “It needs to be reattached to the wall.”

Essentially, what the property management company did is they went to every single unit and they marked down for the living room and the flooring, whether it was good, needs to be replaced, or needs to be updated. For the appliance color – were the appliances all black, were the appliances a mixture of black and white, or were the appliances white. For the washer/dryer connection a simple yes or not. For the GFCI it was “How many are in the bath/ How many are in both the kitchen and the bath/ How many have GFCI in the kitchen only/ How many don’t have any GFCI at all.” Then for the living room – light fixture condition. Was the condition good, does it need to be replaced, or does it need to be updated.

Now, of course, you can do this for anything. You can say “I wanna know something about the bathroom, I wanna know about the kitchen flooring, I wanna know about the living room flooring. I wanna know about all of the light fixtures in the entire property. I wanna know about the windows, I wanna know about the front door.” It can really be anything. The data table below that actually isn’t the raw data for those summary data tables; I actually misspoke… It’s just overall comments on the units. So when they walk through a unit, if anything stood out, if it needs to be rehabbed, if there’s water leaks, if there’s pets, we’ll record it there. We’ll discuss how you use this information next week.

And then lastly is the market survey. Again, this is very similar to the market survey you see in an offering memorandum, but this time it’s actually done by your management company.

That concludes this episode, where we went over due diligence documents one through five. Tomorrow we’re going to discuss six through ten, before we go through all ten documents again and discuss exactly how you need to analyze these documents once they are received.

In the meantime, to listen to other Syndication School series about the how-to’s of apartment syndications and to download the free documents for the previous Syndication School episodes, visit SyndicationSchool.com.

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

JF1716: How To Submit A Syndicated Apartment Deal Offer Part 1 of 2 | Syndication School with Theo Hicks

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Get ready for some more syndication knowledge bombs from our resident apartment syndication instructor, Mr. Theo Hicks. He’ll be taking another step forward in the syndication process, explaining step-by-step how to submit your apartment offers. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. 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 am your host, Theo Hicks.

Each week we air two podcast episodes, on Wednesday and Thursday, that will focus on a specific aspect of the apartment syndication investment strategy. Usually they’ll be two-part series, up to eight or ten-part series. I think the longest one we’ve done so far was eight parts. For the majority of these series we will be offering some sort of document or spreadsheet or resource for you to download for free, based on what we discussed in that series. All the free documents for the previous Syndication School series, as well as the Syndication School episodes, can be found at SyndicationSchool.com.

This episode is going to be part one of  a quick two-part series, so just today and tomorrow, entitled “How to submit an offer on a syndicated apartment deal.” As the title implies, by the end of this episode you are going to learn how to begin the process of submitting your offer, which starts with creating a letter of intent (LOI).

At this point you should have already essentially completed the steps outlined in series one through fourteen. This is series number fifteen, so in the previous series, number fourteen (eight parts), we discussed the process for underwriting a value-add apartment deal. If you haven’t listened to that episode, I highly recommend that you listen to that first, because we went into extreme detail on how you get to the point where you can determine whether or not to submit an offer, as well as at what price.

As a refresher, after you’ve inputted all the information into your cashflow calculator, which we gave away a free, simplified cashflow model, and you can download that at SyndicationSchool.com under series number fourteen – at the very end of that, one of the last steps was to determine an offer price. That offer price is based on the return goal of you and your investors.

Let’s say for example your investors want an internal rate of return over five years of 14%, and let’s say you are offering them an 8% preferred return. That means that you need to essentially through an iterative process (trial and error) input purchase prices into the cashflow model until that five-year IRR is 14% or higher, and since you’re offering 8% preferred return, you’re gonna want a cash-on-cash return each year of at least 8%. Once you have that inputted, then you have essentially your best and highest offer.

Once you get to that point, before submitting an offer, something that you’re gonna want to at least consider is how much the owner wants for the property. Usually, as I’ve mentioned before on these larger apartment deals, if we’re talking like 20 units or below, or maybe even 15 units and below, there might be a price listed… So when you’re underwriting, you can input that price initially, and then see what the returns are based on your assumptions. But if there isn’t a price listed, there are a few ways to at least get an idea or a ballpark estimate of what the price is going to be. There are two ways of doing this.

One is, if you remember the series about underwriting, one of the things you wanna do while you’re filling out the cashflow calculator, those first few steps where you’re inputting the rent roll, inputting the T-12 and you’re reading through the offering memorandum, you’re gonna want to create a list of questions for the broker. So “Hey broker, why is the vacancy on the T-12 10%, whereas on the offering memorandum it says it’s 5%?”, for example. Or “Hey, I see that the maintenance and repair expense for the previous 12 months is really high. I noticed that one month there was a really high expense for a boiler repair. What was that? Was it an issue that came up, or was that more of a cap-ex expense?”

Something else you might wanna ask them is “What price do you expect this property to sell at?”, or “Is there a whisper price that the owner wants for the property?” Essentially, ask them in some form or fashion what the owner wants to sell that property for.

They might say “Well, it’s gonna be dictated by the market”, so at that point you can ask “Well, based on your expertise, what cap rate do you expect this property to trade at?” Typically, what they’ll say is “I expect it to trade at 5.5%, based on recent sales etc.” Or you can look at the OM and see – sometimes they’ll include a rent comps and a sales comp, and you can take a look at the price per unit of the comps that they used. That’ll give you an idea of maybe what the owner is expecting for a price per unit.

But if they tell you what they expect the property to trade at from a cap rate perspective, then you can go to the OM and see what they listed as the current net operating income. You can take net operating income, divide it by that cap rate, and determine (give or take a few percentages) what the property is going to sell for.

Now, if you are underwriting the deal and you determine that your best offer would be ten million dollars, for example, and you ask the owner what the whisper price is and they say 20 million dollars, then it’s really up to you, but you might not want to really proceed any further. It’s not gonna hurt to submit an LOI, but at the same time, it could potentially hurt you in the eyes of that broker… Because if they essentially tell you that the property is gonna sell for 20 million dollars and you submit an offer for 10 million dollars, the broker might not take you as serious. But at the end of the day it’s really up to you whether or not you wanna submit a really low-ball offer.

But overall, once you’re finished up with the underwriting process, if the results of your final calculator, after you’ve asked all of your questions to the broker, they’ve answered it, and you’ve seen the property in person, and then everything I’ve talked  about in the eight-step process, and you’ve got an offer price that is close enough to the whisper price or the price based on the cap rate, or based on the price per unit in the sales comps in the OM, and you’re still able to meet or exceed your return goals, it’s time to submit an offer. The way that you do that depends on the process outlined in the offering memorandum, if it’s an on-market deal.

Generally, on one of the first few pages in the OM they will list out what the offer process is, and typically, there will be a call to offers date. That’s the last date that they’re accepting offers. They will ask you to submit a letter of intent, and they will most likely have a list of things at a minimum that need to be included in that letter of intent.

At that point they might just decide who they’re going to go with and do a call with that person to qualify them. If the person is qualified, they’ll accept that offer. If not, they’ll go back to the next LOI. Or they might accept a handful of LOIs and ask you to come back submit your best offer. After that, again, they might accept the best offer or they might have some best and final call with those top offers to get a little bit more information on the buyer and their business plan to qualify them.

If it’s off-market, you are just gonna submit a letter of intent.

So regardless of whether it’s on-market or off-market, or what the process is, at some point in the process they’re gonna ask you for a letter of intent. In this episode I wanna focus on how create this letter of intent in order to maximize your chances of having your offer accepted.

The letter of intent, or the LOI, is a non-binding letter, so it’s not something that you’re legally bound to. Essentially, it’s something that represents your intent to purchase the property, and it defines what the terms of your offer are. When you’re submitting your LOI, as I kind of already mentioned, you wanna come in with a strong offer that you’d be able to close at, but you don’t want to over-offer to the point where you can’t meet your return goals… But you also don’t wanna give your highest and best offer, because again, if they come back and ask for your highest and best offer and you submit the exact same offer, then that’s gonna be perceived differently.

Also, you don’t want to have to be forced to over-offer, because you gave your best offer and they rejected that, and you’re emotionally attached to the deal, for example. That’s something else you don’t wanna do – you don’t wanna get emotionally attached to the deal, and sacrifice your underwriting to meet your return goals. You don’t wanna go back after they’ve rejected your first offer and say “Okay, maybe I can reduce this expense”, or “Maybe I can increase the rents”, or “Maybe I can find some rent comps that allow me to increase my rental premium. Now the deal makes sense.” You don’t want to manipulate your spreadsheet. You want to essentially base everything on how the property is currently operating, and based on the explanations I gave for setting your assumptions in the eight-step underwriting process series.

For the actual letter of intent, once you’ve decided what offer you’re gonna submit – and again, keeping in mind it needs to be strong, but not over-offer, not your highest and best offer, and not something that you know is gonna be rejected, and not something that is a result of you manipulating your underwriting – here are the things that you’ll want to include in the letter of intent. And again, this is not necessarily at minimum, because the minimum amount of information you need to include in your letter of intent will likely be outlined in that offer process section in the offering memorandum… But these are things that you’re going to want to include to make sure that you are able to obtain all the information you need once you put the deal under contract.

Number one is obvious – the purchase price. The purchase price is going to be what you offer, based on, again, the goals of you and your investors. Next you’re going to want to include information on how you plan on financing the deal.

A specific example, you can say “I’m going to secure an 80% loan-to-value loan from Fannie Mae.” And I know we haven’t talked about loans yet on this podcast; that’ll likely be the next series that we do before we go into the due diligence process after you put the deal under contract. So it’s information about your financing.

Next you wanna set terms for your due diligence. For example, one piece of information you’ll wanna include is when does the seller need to provide you with all of the documents that you need during the due diligence period. Generally, this is going to be defined as a certain number of days after the execution of the purchase and sale agreement. So first you submit an LOI; if it’s accepted, then the seller will send you a formal contract, which is called a purchase and sales agreement (PSA), and ideally that will have the terms you outlined in your letter of intent. For example, you would say that “We request the following documents within 14 days of a signed and executed purchased and sales agreement.”

Now, here’s a list of things that you’re gonna want to list out in the LOI that you want. Because again, if you just say “I want all of your historical financial documents and other reports that you have”, that’s pretty vague. You want to write out explicitly what you want. I’m gonna just run through these things, and these are things you’re gonna want to include in your LOI.

You’re gonna want the past three years of financials, preferably in Excel format. You’re gonna want a current rent roll, preferably in Excel. You’re gonna want copies of all the current leases, you’re gonna want a copy of a blank lease agreement that they have, you’re gonna ask for copies of the current and past three years tax assessment and bills. You’re gonna ask for a current insurance binder or policy for the property, including any casualty and liability and insurance loss runs for the past few years. Anytime they followed a claim, you’ll wanna know about that as well.

You’re gonna want a list of the salaries and wages for all of the employees that work at the property. You’re gonna want copies of all maintenance records and warranties. You’re gonna want a trailing 12 month non operating, below the line expenses – these are the non-operating expenses like debt service, or asset management fees, or anything else that was not included on the initial T-12 that you received. You’re gonna want a 12-month capital improvement budget – any cap ex projects they’ve implemented at the property over the past 12 months, you’re gonna want to know what those are, and the costs.

You’re gonna want complete copies of all records, instruments, contracts and agreements for the property, so all those contract service line items. You’re gonna ask the seller to provide you with a list of all personal property that you will receive at closing. You’re gonna want an updated survey. You’re going to want a current title policy. You’re gonna want a detailed list of all capital improvements, along with the costs, made to the property over the past three years. You’re gonna want a copy of any plans and specifications related to any planned or unfinished interior and/or exterior improvements to the property.

You’re gonna want copies of all service contracts. You’re gonna want copies of the past 30 years utility bills. You’re gonna want a full general ledger, so not just the cash account, and you’re gonna want bank deposit statements for the past year, ideally in Excel.

You’re gonna want a schedule of any write-offs over the previous 12 months, as well as an explanation of their current write-off policy, so their bad debt policy. You’re gonna want to ask for an aged receivable report, including details by each resident. You’re gonna want the 12-month capital improvement budget, so what they plan on doing if they held on to the property for the next 12 months, if they actually have that.

You’re gonna want a historical occupancy report for the past 12 months. You’re gonna ask for the historical environmental reports. You’re gonna ask for a list of their personal property at the property, and you’re going to ask for a breakdown of the SPS income. And finally, you’re gonna ask for any other non-confidential documents; it specifically says “Other non-confidential documents as the buyer may reasonably require, which are in seller’s or in the property manager’s possession.”

So there’s a lot of things to request. I didn’t wanna spend  too much time going through each of those individual items that you’re requesting, but overall, the two reasons why you’re requesting these is 1) it’s gonna be more detailed information that you can use to either confirm or adjust all of those assumptions you made during the underwriting process. And 2) when you’re performing due diligence, you’re gonna get all these reports from various vendors, and your property management company, and you’re gonna want a copy of those same reports that the seller has over the previous 12 months, for comparison purposes.

You’re also gonna want to state in this section that the seller should provide you with access to the property for your physical inspections, because again, you’re gonna need that during the due diligence period. And again, I’m gonna go in a lot more detail on what some of these things mean, not in the next series, but two series from now, when we go over how to perform due diligence on a deal once you have it under contract.

The next section of the LOI will lay out the closing information. Essentially, when is the closing date. Generally, for these apartment deals, the closing date is 60 to 90 days after the execution of the purchase and sale agreement.

You’re also gonna want to include in there when the purchase and sale agreement should be executed by. Typically, you will say that your letter of intent is valid for a certain number of days, and if you don’t have a signed PSA after three days, or five days, or a week, then the LOI is no longer valid.

Lastly, you’re going to want to include any information about your ability to extend the closing date. Will you have the ability to extend the closing date? And if you do, how many extensions do you want? In order to get an extension, is it going to be free, or are you going to provide additional earnest money?

For example, you can say that the closing date is going to be 60 days after the execution of the purchase and sales agreement, and that you want two 30-day extensions. If you extend one time, then you will do an additional — let’s say for example the earnest deposit is a million dollars. Then you can say that “If we extend for 30 days, I will put down an additional $100,000 that will be non-refundable. If I need to extend a second time, I will put down an additional $600,000 that’s non-refundable.” Again, this is an example. These numbers are gonna be completely flexible and negotiable based on the actual purchase price. If the purchase price is $400,000, you’re not gonna be putting down a non-refundable deposit of $400,000.

The next section is going to be the earnest money. Essentially, this is going to be a down payment that you put up at the execution of the purchase and sales agreement, to show your intention and ability to close. You want to outline what that earnest deposit amount will be, which is completely up to you, but generally it’s around 1% to 2% of the purchase price… And then also, the terms of the earnest deposit – is it going to be refundable, or non-refundable? …with the non-refundable earnest deposit making your offer stronger, compared to a refundable.

For example, you can say that the earnest deposit will be due at the execution of the purchase and sales agreement, or that you may offer a portion of the earnest deposit at the execution of the purchase and sales agreement and then another portion of the earnest deposit once you’ve completed the inspection period… And then again, you might also want to talk about the extra earnest deposits if you are requesting an extension.

We could also say that it’s non-refundable regardless, or we could say that’s non-refundable subject to certain things, like a clean environmental survey, or a clean title, or a financing contingency, or things like that.

The next section is gonna be information about the title and survey. Pretty simple… Who’s going to pay for the title insurance – the seller or the buyer? And who is going to pay for the new survey, or recertification of an existing survey?

Next is closing costs, so we’re gonna outline who pays for the closing costs, the buyer or the seller; things like broker commissions, costs to clear the title and the escrow fees to the title company, the cost for recording the deed, any attorney fees, who pays for that.

Next is gonna be commissions, so what parties are involved in the deal that will receive a commission. Typically, this is going to be the broker that’s representing the seller… So a list of who is gonna receive the commission and who pays that. Typically, the seller is the one that pays these commissions.

And a few other things that you can include in the LOI. You can mention that you’re allowed to sign the contract to a single purpose entity. For example, most likely you’re gonna need to buy the property using an LLC, so if you submit your LOI under your name, and you don’t have the ABC Property LLC created yet, then you’re gonna want to have the ability to sign the contract to your LLC.

Also, you’re gonna stipulate that the seller needs to continue normal operations and repairs and maintenance during the contract. Another thing you can ask for is all vacant units need to be make ready at the time of closing. You can also request that the buyer and seller should work to complete the purchase and sales agreement within a certain number of days after executing the LOI (a week, two weeks etc.)

Something else you wanna include is once the PSA is executed, the seller is not allowed to solicit for, or receive, or accept any offers.

Now, once you’ve created your LOI, or at least have an idea of the terms, make sure you talk with either a real estate broker or your property management company to learn about what the generally accepted terms are in your current market. So do you need to have a non-refundable earnest deposit? Do you even have a chance of winning a deal? What should the earnest deposit amount be? How long should you request the due diligence process to be? Things like that.

And then just to reiterate what I said earlier, to kind of conclude this episode, about my final words on the letter of intent – the terms should be strong, and you should be able to have the ability to close. If your LOI is accepted, you should be excited to close at those terms… Which means you don’t want to over-offer, you don’t wanna provide your highest and best offer yet, you don’t want to submit an offer that you know is going to be rejected, and you don’t want to get emotionally attached to a deal and sacrifice your underwriting to fulfill that emotional attachment to the deal.

And finally, a note on the refundable versus non-refundable, besides talking to your management company and/or broker – if you are very confident in your underwriting, and you know it’s conservative, and you know the market really well, then feel free to submit a non-refundable earnest deposit. If you don’t know the market very well, if you’re maybe newer and aren’t 100% confident in your underwriting, it might not be the best idea to go non-refundable.

That concludes this episode. What I’m going to do is I will include a sample letter of intent template based on the information I outlined in this episode, what to include in there… So you can essentially use that, and essentially change the numbers – change the offer price, change the earnest deposit amount; if you want to, you can change the due diligence inspection periods, and refundable versus non-refundable for earnest deposit… But that will be a good starting point for your letter of intent.

Now, in the next episode — so you’ve got the letter of intent created, and then you submit the letter of intent, so what happens next? That’s what we’re gonna discuss in the next episode.

Until then, I recommend going back through and listening to the other Syndication School series about the how-to’s of apartment syndications, if you haven’t done so already… As well as to download that free letter of intent template, as well as the other free documents we’ve got for this Syndication School series. All that can be found at SyndicationSchool.com.

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

JF1710: How To Underwrite A Value-add Apartment Deal Part 8 of 8 | Syndication School with Theo Hicks

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Now that we’ve discussed most of the underwriting process for value add apartment syndication, Theo will cover visiting the property in person. Visiting in person is something you will need to do, regardless of how far away it is. You’re dealing with investors’ money, doing proper due diligence is a requirement. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“One of the first properties I toured, I went with my wife and thought the property did not need much work. The second tour, I brought the property manager, and she pointed things out that I didn’t see”

 

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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. 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 am your host, Theo Hicks.

As you know, each week we air two podcast episodes that are typically a part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of this series we will offer some sort of document/spreadsheet/resource for you to download for free. All of these free documents, as well as these free Syndication School podcast series can be found at syndicationschool.com.

This week is going to conclude the 8-part series about how to underwrite a value-add apartment deal. As a refresher, what we’ve learned so far is steps one through seven of this 8-step process for how to underwrite a value-add apartment deal. In step one we learned how to read through the offering memorandum; in step two we inputted the rent roll into our cashflow calculator, and if you want to have a starting point for a cashflow calculator, you can go ahead and download the free simplified cashflow calculator for underwriting value-add apartment deals at SyndicationSchool.com.

Step three is to input the T-12 into your cashflow calculator, step four  is to set the assumptions for how the property will operate once we’ve taken over. Step five is to determine an offer price based on steps one through four. Step six is to perform an online rental comparable analysis, and step seven, which was yesterday’s episode, we discussed how to perform the phone call or in-person rental comparable analysis.

Now, I highly recommend, if you haven’t done so already, pausing this episode and going back and starting all the way back at part one of this series, and listening from there… Because step eight is going to culminate the entire series, and we’re going to talk about that last step, as well as discuss the overall thought process for underwriting apartment deals.

Let’s jump right into it, with step eight, the final step, being to actually visit the property in person. I know this might be a headache and kind of frustrating to do, especially if the property is out of state, or if you’re looking at 5-10 deals at once and you’ve gotta spend an entire weeks’ worth of time visiting properties. But at the end of the day, since we’re dealing with other people’s money, we’ve gotta just suck it up and make that trip out to the property, because that’s going to be the only true way and the best way to get a clear understanding of the property’s current condition, as well as the surrounding market.

There’s other ways to do it – you can call up the property, you can look up the property’s website, look up the property on Apartments.com, you can even do a Google Earth Street View walk of the property, but at the end of the day, your best bet is to actually go to the property, drive around the area, to get a feel for the area, as well as to get a clear picture of the actual condition of the property.

Now, since most of you either haven’t done a deal before, or have only done a few deals, but none of this largest magnitude, you’re probably gonna want to go visit the property with someone else. And again, someone else is going to be your property management company, or your consultant, or a contractor you’ve met… But you’re gonna wanna go out there with someone who actually knows what they’re looking at.

Let me give you an example – I remember one of the first properties I toured; I went there — I actually drove to the property with my wife, and I thought “This is a solid deal.” It’s got  a little bit of deferred maintenance, but nothing that’s gonna cost an extraordinary amount of money. They’re all gonna be simple fixes, and I’ll be able to focus most of my money on improving the interiors, and then if that’s the case and I’ve got this small exterior budget, I’ll be able to get a great return.

So I set up a formal tour, so I could actually get inside of the units, because I hadn’t seen inside any unit yet… And I invited my property management company to come with me. We pull up, and the first thing she says to me is how she is familiar with the people who own this property, so she knows how they operate their property and what to look for.

By the end of the trip, she had ten things that  she saw that I hadn’t noticed, that were essentially deal-breakers, because I’m looking for a deal that doesn’t have as much deferred maintenance and is not gonna require fixing things that are code violations, and stuff like that. So without bringing my property management representative, I might have purchased that property and not been able to meet the returns on my investors, and maybe even lost their money.

That’s why it’s important to go there with someone that actually knows what they’re doing and has experience actually touring properties, so that you can catch things that you would actually miss.

Now, of course, one of the difficult things you’re gonna face is actually convincing the property management company to actually come out to the property with you, because they’re not necessarily going to want to waste an afternoon touring properties with someone who’s never done a deal before… And we’ve talked about how to overcome that objection in previous Syndication School episodes, specifically the series about building a team.

Now, this is gonna be different than the actual due diligence you do after that property is under contract. That’s gonna be much more intensive and require multiple vendors and contractors to come out to the property and do the inspection, and the appraisal, and the environmental summary, and the property condition assessment, that cost thousands and thousands of dollars. This is different.

Essentially, your goal when visiting the property in person is to confirm your renovation assumptions and determine if there’s any major issue at the property that will disqualify the deal from contention… So allowing you to catch those two things before you put the property under contract, and put up your earnest deposit, and spend all that money on the inspections and the appraisals, as well as all the time of going through that as well, and potentially missing an opportunity to find another deal.

Now, you should probably plan to spend half a day to a full day going through this in-person evaluation of the property and the surrounding market. First part is going to be spending your time at the actual subject property that’s the property that you’re trying to buy, and then the next part of your half day can be spent assessing the surrounding area, as well as – if you haven’t done so already in the previous step – visiting a couple of rental comps in person.

Now, make sure you bring a notepad and your smartphone with you, because these are going to be your external memory banks. If you’re gonna be visiting multiple comps, or if you’re gonna be visiting multiple properties within a few weeks’ span, then you don’t want to get things mixed up… So you’re gonna want to have your notepad to take notes, and your camera to take pictures. That way you’re gonna be able to remember everything that you heard and that you saw, because you have it written down and you’ve got pictures of it.

Next – and again, this is something that’s not necessarily super-important; it won’t necessarily sway whether or not you get the deal or not… But if you’re doing the in-person rental comp analysis, this could sway how convincing your Broadway performance is if you are looking in a C-class area, and you go visit the property in suit and tie, because you wanna impress your property management company [unintelligible [00:09:54].10] you’re posing as a resident at the rental comps and you roll up in a suit and tie and you wanna rent a C-class apartment… They’re probably not gonna take you seriously.

So I’m not saying that you should go there and wear basketball shorts and a T-shirt – which you might be able to do if you want to; I guess that could work – but dress based off of the situation. If it’s C-class, maybe  wear a T-shirt and jeans. If it’s a college town, maybe your college hoodie and some jeans. Suit and tie might not be the best approach regardless, but again, to each their own. This is not a requirement or necessary, it’s just something else to think about.

So that’s kind of the upfront planning.

Once you actually arrive at the property, the first thing you’re gonna want to do is – depending on how large the property is, either drive around or walk around the community and take notes and pictures of the exteriors. Now, the purpose of this exercise is to evaluate the condition of those big-ticket exterior items. So you wanna take a look at the roofs and determine if there’s any visible signs of wear and tear, or the gutters and the fascia. Take a look at the parking lots. Is the parking lot recently restriped or repaired, or is it pretty faded and there’s lots of cracks, and you can’t necessarily see any parking lines?

Something else that’s very important is gonna be the landscaping. Take pictures, look and get a general feel of the landscaping. Does it look like they’re maintained really well? Does it look like they’ve just spent a lot of money to improve the landscaping, or are there lots of dirt patches or dry spots with no grass at all, or dying flowers, or the guard rails around certain parts of the garden are falling over, those little wood planks?

Next you’re gonna look at the overall exterior condition, so take a look at the siding, if it’s brick or whatever is it – is the siding falling off? Is the paint faded or was the property recently painted? Take a look at the clubhouse and see, was it recently renovated? Is it very outdated? What types of things are offered in the clubhouse?

Then you also wanna get a feel for the overall amenities. Is there a pool? And the condition of the pool. Is there a fitness center? The condition of the fitness center. Things like that.

Something else you wanna look at too is the signage. That’s going to be the monument sign that should greet you and should notify you that you are at the property. It should be visible, so is it visible or is it not visible? Because you may need to relocate that sign. Is the sign nice? Is the landscaping around the sign nice? Is it aesthetically pleasing, or is it really ugly and it kind of made you wanna turn away the second you saw it?

More than likely, if you’re doing a value-add business plan and you’re buying a property, you’re probably gonna wanna move away from the current reputation, so you’re probably gonna wanna redo the signage anyways, but it’d be nice to have the option to not have to install a brand new monument sign. Maybe just change the wording on there… But that’ll be determined by the pictures you’ve taken of the sign. And really anything else that’s specific to the property.

Something else you wanna take a look at is the external HVACs. You can kind of eyeball those and say “Oh, those are pretty new” or “Oh my god, those are probably the original units to the property.” And really anything else that would be a  big-ticket deferred maintenance item that wouldn’t necessarily be something that would give you the ROI. Replacement roofs – you’re not necessarily gonna be able to market brand new roofs to your residence and then charge $5 more per month in rent for that. So these are things that aren’t necessarily gonna give you an ROI, but these are just deferred maintenance items.

The whole purpose of this is to confirm that the condition of these big-ticket line items align with your underwriting assumptions. If you didn’t expect to replace the roofs and you go there and the roofs are in really bad condition, then you’re gonna have to go back and figure out “Okay, there’s this many roofs. It’s probably gonna cost around this much to repair or replace all those roofs, so now I’ve gotta increase my exterior renovation budget by X amount.” That’s what you’ll do before, so at this point you wanna make a  not that “Okay, the roofs are in bad condition. I need to make a repair.” Then you go back and look at your underwriting and say “Okay, I said I’m not gonna repair the roofs”, and then make that adjustment.

Once you’ve done that and you’ve done your walk or drive around the property, the next step is going to be to visit the clubhouse and find the property management company. For this, it doesn’t necessarily have to be a formal tour. I’ve done this analysis myself, where I just go to the property without actually talking to anyone; I kind of just show up. I just walk into the clubhouse and I start talking to the property management company, as a buyer, but you’ll also do it, again, as a prospective resident.

It works better if you say you’re actually interested in buying the property, because if it is listed for sale, they know and expect people to come around. And you can ask the better questions… Because if you’re posing as a tenant and you ask them what’s the occupancy rate at the property, they’re gonna be like “Why does that matter to you?”

So for this list of questions that I’m gonna go over to ask the property management company, it’s better to actually either be doing a formal tour, or to do this on your own and actually approach the manager as someone who’s interested in investing in the property.

Now, in some cases there might be something written in the OM against this, so it kind of really depends. It’s up to you how you wanna approach this… But the goal is to go to the property management company and before you tour anything you wanna ask them a list of questions about the property’s operations. Technically, you could do this along the way too, because you don’t wanna sit there with your list of questions and be like “Alright, I’ve got ten questions to ask you”, and just go boom-boom-boom-boom. It could be things that you naturally bring up during the actual tour… So again, just kind of play it by ear, because you don’t want it to be too robotic.

Here’s some of the things that you want to know about. You wanna know how long they’ve been with the property; because a property that’s had the same management company for ten years is gonna be different than a property that’s had management changed every few years… Why are they leaving? Is it because they’re bad? And if they were bad, what negative repercussions are still reverberating from those bad managers? Or is it because the owner didn’t wanna fix anything, and there’s gonna be more deferred maintenance… You’re gonna learn a lot about learning how long they’ve been at the property for.

Ask them what the occupancy rate is currently, because sometimes you’re gonna get a rent roll that’s maybe a month or two old, and it’s not gonna give you a clear snapshot of what the occupancy currently is at the property. Ask them how has the property operated over the past year. Again, not asking for specifics, like “What was the NOI?”, because you have that… But just a general, overall feel, like “Oh, things are getting better” or “We’re renovating units and the occupancy has been really strong.”

Ask them what’s been the lowest occupancy since they’ve been at the property. Ask them how many people are calling in each week to rent a unit, to get an understanding of the demand. Ask if the amenities that you saw or that you’ve discovered online are getting a lot of traffic from the residents. Are residents actually going to the fitness center? Are residents actually swimming in the pool? Ask them what’s the overall demographic of the residents. Are they students, young professionals, blue-collar workers, senior citizens, families? Things like that.

Ask them when was the last time the roofs were repaired, and the last time the parking lots were repaired, and the last time HVAC was replaced, the siding was repaired. Ask them also if there’s any deferred maintenance at the property, and about the bad debt situation. Those two things are more just to kind of confirm what you know already, because you’re gonna be asking the broker for this information; or it could be listed in the OM, but you wanna confirm “Okay, the OM says the roof was replaced two years ago. Let’s ask the management company. Oh, the roof wasn’t replaced two years ago. Alright, what else is not true on the OM?”

You can ask them about the crime situation at the property, because that might mean that you need to install security at the property after you take over. Ask them who their biggest competitor is, and you probably wanna visit them, take a look at what they’re doing better than the subject property.

Ask them why people decide to rent here, instead of at the competition, and see what they say. Ask them what types of units are in demand in the area. Say “You’ve done a great job here. If I gave you $100,000, or $150,000, or a million dollars (depending on the size of the property), besides making sure you are compensated for your work, how would you spend it to fix or improve the community?”

And then lastly, “What did I forget to ask you? What else is going on with the property? Anything else that I need to know before moving forward?”

Now, all these questions are 1) to confirm the information you know already, so see if you can uncover any new pieces of information, but also you are going to want to determine “Hey, this property management company has turned things around here, and is doing really well, and is answering these questions great, and when I asked them what they would do if I gave them a bunch of money, they gave me some great ideas… Maybe I wanna keep them on as managers, rather than bringing in someone else.” So these questions accomplish a lot.

So as you go through this list of questions, the next thing you wanna do is ask if they have a clubhouse, for a tour of the clubhouse. Take notes and pictures along the way, and in your notes and in your pictures you’re looking for things like the condition of the clubhouse, what are the types of amenities that they offer, is there a kitchen, is there a sauna, is there easy access to the pool? Is there a conference room/business center? You’re gonna determine the level of updates or renovations that they have in the clubhouse, to determine you don’t need to do anything, or you need to actually do some renovations.

Again, all of this is to confirm your renovation budget. Going in, you thought that you could just spent $100,000 on the clubhouse; maybe after touring it, you realize you don’t need to spend anything. Or you realize you need to spend five times as much.

Next you’re gonna want to actually tour some of the units. You’re not gonna be able to tour every single unit at this point, nor do you really want to… But typically, they’ll have some set units or a model unit for you to actually take a look at. While you’re touring these units, again, take notes and pictures.

Things you wanna look for are how the conditions of the units, the interiors, compare with the unit type that the property manager said was in demand. If they say that their highly-renovated units are in demand, and all the units they show you are actually the really nice units, then is it necessarily true? Because if the unit is vacant, and you’re looking at one of the nicer units that they claim are in demand, then why is there no one living in there?

Something else that residents like are big closets, so take a look at the closets and see how large they are; if they’re walk-in closets, even better. You also wanna see things like open floor plans. Those are kind of in demand right now.

One of the most important things you wanna see is what’s the level of renovation in the unit, and does that align with your underwriting assumptions? At this point you said “I need to maybe install new appliances, and I need to replace the floors, and I need to install new cabinet doors and new lights”, and you’ve got a budget for that. But you actually see the unit and realize that a lot more needs to be done, then you’re gonna have to make a note of that and go back and adjust your renovation budget.

Then lastly, just write down what’s the main highlight or selling point of the unit, just for your remembering. Like, “Alright, the best thing about the unit is the open floor plan.”

After you tour these units, the actual evaluation of the apartment community is completed.

One more thing about touring the units – again, you’re gonna be seeing a model unit most likely, or a vacant unit that’s recently repaired, or looks really nice and clean… Something you  can do is ask to see the worst unit at the property. That way you can get an idea “Okay, what they’re showing me is probably the best they have to offer, but what’s the worst? Because if I’m basing my renovations off of assuming all the units are like this, and then when I actually do the unit walk, when I put the property under contract, this is really the only nice unit, then you’re gonna be in a little bit of trouble. So something you can ask too is to see the worst unit at the property. Maybe they’ll show it to you, maybe they won’t. If they don’t show it to you, then at least you can ask “How does the worst unit at the property compare to this unit?” It’s probably not gonna be the full truth, but there should be some kernels of truth in there, and you can get an idea of how they respond, and whether or not the unit is decent, needs to be upgraded, or if it’s a complete disaster. And then how many units are like that.

Once you’ve done this tour, thank the property management company, the property manager you’re speaking with for their time, and prepare for the next step of the evaluation, which is going to be to get in your car and drive two miles north, two miles to the south, two miles to the east and to the west from the property. Preferably have this mapped out before you actually go to the property tour, and take notes and pictures of what you see. Ideally, don’t this while you’re driving, because I don’t want anyone crashing their car and then referencing this episode in some sort of lawsuit. So when you’re gonna be taking your pictures, either have someone with you, or stop your car, do it at the red light, or whatever.

Things you wanna look out for is what’s the distance between the apartment and the closest retail center. Is it a new retail center or is it an old retail center? What is the demographic of the people that are walking around this area and does that align with the demographic of people at your apartment community?

Something else you can do too is to find the closest place, like a Starbucks, or a Chipotle, or a Walmart, or a McDonald’s, and see how far that is from the community… And same thing – is it new or is it old? Is the demographic of people that are walking around similar to the demographic of people that are supposed to be in demand at your property?

At the end of the day, Chipotle, McDonald’s and those types of places have done some pretty in-depth market analysis before they opened a new location… Again, you don’t wanna just buy properties by Chipotles; you still have to do your underwriting analysis and your market analysis, but that is a positive sign, if there’s a Chipotle or a McDonald’s or a Starbucks nearby, if that’s a demographic of your property, of course.

And then the last thing you wanna do is, if you haven’t done so already in the previous step, go ahead and visit those rent comps. You’re going to either — again, if you haven’t done the phone call or in-person rent comp analysis yet, then you’re gonna wanna do that there… Or you’re just going to want to drive around the property and take pictures of the exteriors, because you already have an idea of the interiors as well. Just kind of do what you did for the subject property, so look at the big-ticket items, look at the amenities, and determine how those compare to the subject property in order to confirm that it actually is a comp.

Again, if you haven’t done that phone call or in-person rent comp analysis yet, you’re gonna do that and pose as a resident, or pose as someone who’s looking for a unit for their son or daughter, and go ahead and tour some of those units to get an understanding of the interiors, compared to the renovation plan you have for the subject property, to make sure that those are aligned.

After that  you can go home, go through your notes, go through your pictures, and go ahead and compare everything that you actually uncovered to your current underwriting assumptions, and make any adjustments if necessary.

Now, one thing that I like to do, especially if a property management company, or contractor or consultant doesn’t agree to tour the property with you, is to at this point, while you’re actually at the property, go ahead and take a picture of all the things that you think you need to do to the property. When you’re driving around the property or walking the property, take a picture of the roofs, take a picture of the siding, take a picture of the HVAC, take a picture of the parking lot, take a picture of the landscaping, the signage, the siding. Anything that you think you need to do renovations to.

Same thing for the interiors. When you visit that unit, take a picture of the kitchen, take a picture of the bathroom, take a picture of the water heater, take a picture of the floors, take a picture of the closet, the lights… Things like that. Anything that you think you’re going to need to renovate at the unit. Then same thing when you’re walking the clubhouse.

Then when you go home, what I do is I make a PowerPoint presentation… So I do a slide with “Exterior renovations”, and then each of the slides after that are pictures of the roof. Then I say that “There’s this many buildings. The roofs are about this size. I think it’s gonna cost this much to repair. Here’s the siding. There’s this many buildings; I think it’s gonna cost this much to paint. Here’s the parking lot. The parking lot has this many spaces, it’s this big. Here’s how much I think it’s gonna cost to repair.”

Once I exhaust all my exterior items, I do the same thing for the interiors. So I go “Interiors. Here’s a picture of the kitchen. I think we’re gonna put in new countertops, new appliances, new lights, new cabinet fronts. Here’s how much I think it’s gonna cost. For the bathrooms – I wanna put in new vanities, I wanna tile the tub, I wanna put in new floors, and a new mirror. Here’s how much I think it’s gonna cost.”

That way you can send that to your management company (send a video of you walking the unit as well) and say “Hey, I know you couldn’t come, but I wanted to go ahead and put this visual presentation together for you. I’ve got pictures of all the different things that I had included in my renovation budget, as well as my projected costs. Can you please go ahead and take a look at the pictures and let me know a) do I actually need to fix this? And b) am I in the right ballpark with these prices, or am I just way off?

Again, it’s not gonna be as good and as accurate as them actually coming with you in person, because again, you’re only taking pictures of what you’re gonna actually see… But it’s much better than just trying to do the whole thing by yourself.

Once you’ve done that, and you’ve gone home and you’ve confirmed everything, or changed and made your adjustments, the next step is to determine if you’re ready to submit an offer on the property, which is what we’ll talk about in the next series.

So it’s been long overdue, but this concludes the 8-part series on how to underwrite a value-add apartment deal. To reiterate – step one, read through the OM; step two, input the rent roll into your cashflow calculator; step three, input the T-12 into your cashflow calculator; step four, set your assumptions; step five, determine an offer price; step six, perform an online rental comparable analysis; step seven, perform a phone call or in-person rental comp analysis, and step eight is to visit the property in-person. And I guess, technically, step nine is to go ahead and review all the information that you gathered from step six through eight in order to confirm or adjust any assumptions that you have made.

So to listen to parts one through seven, to listen to other Syndication School series about the how-to’s of apartment syndications and to download the free documents for this series, which is the simplified cashflow calculator and that rent comp template, go to SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

 

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JF1625: How To Find Your First Apartment Syndication Deal Part 5 of 6 | Syndication School with Theo Hicks

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Part 5: Cold Texting

Welcome back to syndication school! This week, Theo is wrapping up the series on “how to find your first apartment community”. Today he’ll be covering cold texting owners of apartment buildings and communities. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks: Hi, Best Ever listeners. Welcome back 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 these episodes we will be offering some sort of document, or a spreadsheet or a resource for you to download for free. All of these free documents, as well as past Syndication School series can be found at SyndicationSchool.com, or you can tune in Wednesday and Thursdays to the Best Real Estate Investing Advice Ever Show podcast.

This episode is going to be a continuation of a series entitled “How to find your first apartment deal”, and per the title, the series is focused on explaining exactly how you can find your first deal. Now, I highly recommend that you listed to the first four episodes – this is going to be part five – because in the first four episodes we introduced the differences between the main types of deals, as well as how to find deals from brokers (off-market and on market deals) and then we kind of went over a variety of different ways to find off-market deals, and how you can position it to the owner to not necessarily convince them, but to explain to them how they will benefit by selling their deal to you off-market.

In this part, as well as the next part, we’re gonna focus on a few case studies for how apartment syndicators or apartment investors actually found their deals. So the past episode was focused on more general ways to find deals – direct mailing campaigns, cold calling – but in the next episode I wanted to focus on some real-world examples of how people find deals, just so you can put the theory to reality, in a sense.

So in this episode we’re gonna go over one case study from an interview guest from a past episode, that I briefly mentioned — I think I mentioned it on one of the past Syndication School series, but I didn’t go into detail, so I’m gonna go into detail on that in this episode. Then in the next episode I’m gonna go over three more case studies.

One of the concepts has actually two examples of it, so we’re gonna go over three case studies for how you can find off-market apartment deals, and then at the end – this is going to conclude this series, so it’s gonna be a six-part series in total – we’re going to give away a free resource for you to use to help you in your deal-finding journey.

So let’s hop right into this first case study. If you remember from last week’s episodes, or if you’re listening to this in the future, parts three and four, we discussed ten ways to find off-market deals, and one of those was to send a direct mailing campaign, which involved creating a list and a letter to send to that list, and then you would send your direct mailing letter to that list of owners based on some sort of criteria you’ve set, and then you would screen incoming phone calls with the purpose of eventually negotiating a deal with that owner.

Now, a variant of that strategy is to cold-call. So instead of mailing these owners, you just pick up the phone and give them a call instead. So a very similar approach to direct mailing, except the only difference is instead of mailing a letter to that list, you call the names on that list. Now, a variant of that, which is going to be the case study discussed on this podcast, is going to be cold texting. This is a strategy implemented by James Kandasamy, and he was a guest on the podcast  — if you google “joe fairless james kandasamy”, that episode will come up… But you don’t have to necessarily listen to that episode, because I’m going to go into detail on the advice that he outlined in that episode.

He has essentially a seven-step process for how to find off-market deals via cold-texting, and I believe he said that he has found two of his three or four apartment deals through this method.

Step one is to identify a target market. If you’ve been listening to the Syndication School series in full, you’ve already done that. Back in series number five we went through the process of selecting one or two target investment markets. These are gonna be MSAs or cities that we are interested in learning more about. Then in series number six we performed an in-depth analysis on those MSAs or cities to get a neighborhood, street-by-street level understanding of that market, in order to determine 1) will we continue to pursue that as our target investment market, and if we are, 2) what are the neighborhoods to avoid, and what are some of the neighborhoods that it makes sense to invest in.

If you haven’t identified your target market yet, then you can’t pursue  James’ strategy, and you’ll need to listen to series number five and series number six at SyndicationSchool.com in order to select your target market and to have a deeper understanding of that target market.

Once that’s done, James’ next step is to identify a property class, so what is going to be the property class that you are going to target. Again, if you’ve been listening to the Syndication School, we’ve already done this as well. In series number eleven we went over how to define your investment criteria, and the purpose of defining that investment criteria was to screen incoming deals in the context of on-market deals with brokers. So when you tell your broker your investment criteria, then they’ll make sure that they only send you those types of deals… Which isn’t necessarily going to happen – they’re probably going to send you all of their deals, so you use that investment criteria to screen out the [unintelligible [00:08:40].23] so to speak.

In the context of cold texting, or direct mail, or really any off-market lead generation strategy, you’re going to use your investment criteria to create your list of owners that you’re going to target, and one part of that is going to be the property class. If you are going to be a value-add investor like Joe, then you are going to target class B and class C properties. Now, I’m sure there are going to be some value-add opportunities with class A and class D, but the majority of the value-add opportunities are going to be class B and C.

If you’re gonna pursue the distressed investment strategy, which is to buy a property that’s basically non-stabilized because the property is distressed for some reason, and non-stabilized means it’s got an occupancy level below 85%, then you’re likely going to be focusing on C and D properties, so class C and D are for distressed.

Then if you’re going to pursue the turnkey model, which you probably aren’t, but if you are, then you’re going to focus solely on those class A properties. Again, those are just general guidelines for those investment strategies. As I’ve mentioned, there might be some A’s that are value-add opportunities, or there might be some B’s that can be turnkey opportunities, but in general those are guidelines for the property classes that you will target based on your investment strategy. So that’s number two, identify a property class.

Number three is going to be to define additional investment criteria. Again, if you’ve listened to series number eleven you already know this, but just as a reminder, your additional investment criteria are going to be 1) the number of units, which will be based on how much money you’re capable of raising… Number three — so you’ve got property class, you’ve got number of units, and number three is going to be age of construction, so when was the property built. Those will be your main criteria. Obviously, you’ve got your market, so that’s number four, and then you’re gonna want to determine some other criteria that you want to pursue, that will indicate that the seller is motivated. Because if you remember in part three when we talked about the direct mailing campaigns, in order to increase your conversion rate you’re going to want to send mailers to owners who are more likely to be motivated to sell.

And we went over a whole list of ways to determine if an owner is motivated to sell in part three, and I went into — not extreme detail, but I went over them in detail… So I’m just gonna go over the list quickly right now, just as a refresher, but if you want to know more about what each of these individual strategies are, definitely listen to part three of this series. So in order to find owners who are motivated to sell, you can drive for dollars, you can go to or look up the eviction listings, you can look up the list of building code violations, delinquent taxes, you can contact out-of-state owners, you can look at the property on Apartments.com, and more specifically look at the profile picture on Apartments.com, you can contact property owners whose tax assessments went way up the previous year, you can contact the owners of expired apartment listings, you can contact the owners of properties that are likely owned without debt, you can contact property owners who are facing health code violations, or foreclosure, or they are late on their loan payments. You can target Section 8 approved properties, or you can target properties that have liens on them.

So not an exhaustive list, but those are some ways/ideas to determine if an owner is motivated to sell. And again, if you want to know more about each of those individual strategies, check out part three.

So far we’ve essentially defined our investment criteria, and we have the information we need to create our list. Step four is going to be to obtain a list of properties. You’re gonna want to use your target market, your property class, your additional investment criteria and those things that indicate an owner’s motivation to sell, to create a list of owners to contact.

Now, James uses either the county auditor or appraisal site, which allows you to create a list for free, or he will use a paid service like ListSource.com. Depending on the market that you’re in, the county auditor might have enough information to allow you to create a list based on that criteria, but worst-case-scenario you just have to use ListSource, who is a provider that can definitely create a list for you based on the market, property class, additional investment criteria and those motivated seller indications.

Now, one extra thing that James mentioned about creating his list is that he will typically focus on buildings that were purchased five or more years ago. The reason why he said that he focuses on buildings that were purchased five or more years ago was because he’s found that owners are willing to accept a lower offer price, so it’s easier to negotiate with these types of owners because they’ve owned the property for five or more years, meaning that they’ve got some sort of equity built up in the property, which means that they can sell the property for slightly less than market value and still make a profit. It doesn’t mean they’re always going to do that, but the probability is higher when you’re targeting that type of owners.

Now, from an apartment syndicator’s perspective, if you target owners who have purchased their property five or more years ago, just like you, then they’re likely to be towards the end of their business plan, or at the end of their business plan.

For Joe’s business, they typically target between five and seven-year holds, so if someone happened to go to ListSource and look up all of Joe’s properties, and saw that he bought four of the properties five years ago, and they reached out to Joe, interested in buying the property, as long as the price was right, I’m sure Joe would sell them the property because he’s at that point in his business plan where he’s ready to sell anyways.

So that’s why motivated sellers aren’t necessarily owners of distressed assets. They could just be at the end of their business plan, or they could just be ready to move on to a larger project, or maybe they’re just liquidating for retirement. So it doesn’t necessarily mean that something’s wrong with the property, or something bad is going on in the owner’s life. It could just be something as simple as they’re at the end of their business plan.

But overall, step four is you’re gonna have to obtain your list of properties that meets your investment criteria, which brings you to step five, which is now that you have your list of properties, you’re going to need to find the owner’s contact information. The person who owns that property – you’re gonna need to find their address and their phone number.

Typically, for these larger deals the property is not going to be listed under the actual owner’s name. It’s more likely going to be listed under the LLC name. So if it happens to be listed under the individual’s name, it’s likely gonna be a smaller property [unintelligible [00:16:01].13] self-manage. If that’s the case, it’s gonna be a lot easier to find the owner’s contact information, because the contact information is likely going just going to be on your list already.

So you pull the list from ListSource, you’re gonna have the owner’s name as one of the columns, and if the name is that person’s name, then you can look over to the next column and see the address and phone number of that person. So that’s pretty simple. Now, if he’s listed under an LLC, it’ll take a little bit more effort in order to determine who the owner actually is. So first you can find out the owner’s name on the Secretary of State website. So go to the Secretary of State website for your specific state – I’d go to the Secretary of State website for Florida, and I would go to the section that allows you to look up various entities within that state, and using that search function you should be able to type in that LLC’s name and then click on it, and it should either show you the contact information, or allow you to click on the articles of organization which will include the owner’s contact information on there.

Now, for both of these strategies, whether it’s an individual or an LLC, you might just only find the owner’s address, and not their phone number. Now, you might be able to, for example, on the auditor’s site, download some file, maybe rental registration, with the County – they might have had to put their phone number on there, so you might be able to see that… But if you can’t find the owner’s phone number, then you may need to use some sort of skip-tracing software. That’s not gonna be the focus of this episode, but if you want to learn more about how to find the contact information of property owners, I recommend checking out episode #1065 titled “How to track down property owners of vacant buildings.” In that episode, the guest was an owner of a  skip-tracing company and he explains the best way to find that information.

Now that you have your list of properties, and for each of those properties you have an owner name and an owner’s phone number, the next step is going to be to conduct a marketing campaign. As I mentioned at the beginning of this episode, at this point you can either do direct mailing, cold-calling, or this unique strategy that James implements, which is cold texting. So if you wanna do cold-calling or a direct mailing campaign, then check out part three; we go into that in extreme detail. But if you wanna put a unique twist, as well as potentially increase your conversion rate and stand out from all the other investors who are just sending out letters, you can send them a text.

James send texts to his owners, and the exact text that he sends is as follows:

“Hi, I’m a prominent investor in this specific location.”

I’m gonna read this as if it’s me, just so I don’t have to keep pausing.

“Hi, I’m a prominent investor in Tampa, Florida. I saw your property at ABC Main Street, and I’m interested in buying it. You can sell it directly to me, without any broker’s commission. Would you like to talk further?”

Pretty simple. The only thing that stands out there is the mention of the ability to sell the property directly to James, without any broker’s commission. That could be relieving a pain point, because maybe the person has been interested in selling, but doesn’t wanna fork over six figures to a broker; they’d rather just sell it off-market, but they’ve never gotten around to it. So that is something that you definitely wanna include in your text, and you probably wanna include that if you’re sending out direct mail as well, and if that’s your plan, to buy the property without going through a broker.

So based on that text, the owner is either gonna be interested in selling or not interested in selling. If they’re not interested in selling, they either won’t reply at all, or they will just respond via text, saying “I’m not interested in selling now”, or they would say “I’m not interested in selling any time soon.”

Now, if they are interested, they might say that you can talk to someone on their team, and then send you their contact information. They may ask you for more information about you and your business, at which point you should explain to them — because again, in their mind, they want to sell their property at the highest price and as quickly as possible, so at this point is when you need to prove to them your credibility and your track record, which if you don’t have one, you’re gonna leverage the credibility and track record of your team. If you’ve been listening, you know this already, but just as a refresher; that’s the main theme for any conversations you’re having before you find a deal – they wanna know that you’re credible, they wanna know that you’re serious, and they wanna know that you’re trustworthy, and the best way to display that is through time, through a thought leadership platform and through leveraging the credibility of your team. So those are kind of the main replies you’re going to get.

Based on those replies, the final step is to follow up. If they are interested and they tell you to talk to XYZ team member, then reach out to that person and ask them questions about the property, with the purpose of putting it under contract.

The script for talking to these owners – I don’t wanna go over that right now either, because we’ve talked about that already in part three when we were discussing how to screen incoming calls from direct mailing campaigns, and that’s why it’s important to listen to the first four parts of this series first, because this episode is kind of building off of that.

So talk to the team member and use the strategies discussed in part three of this episode. If they ask for more information about you and your business that I mentioned, that’s when  you wanna display your expertise and leverage your team’s experience. If they ask “What can you offer me?”, well, you don’t really know, because you haven’t seen the financials, so that’s when you want to ask them if they can provide you with the T-12 and the rent roll, so that you can underwrite the deal fully.

Now, if they aren’t interested, just like the direct mailing campaign, they’re not off the hook yet, unless they are vigorously opposed to you reaching out to them again, at which point you can take them off your list. But if they’re not aggressive and angry, and they just either don’t reply, or if they say that “I’m not interested in selling now” or if they say that “I’m not interested in selling any time soon”, the next step is going to be to either mail them a letter, give them a call, or send them a text every 3-6 months to gauge their interest in selling.

You can essentially use a similar text and just say “Hi, this is Theo Hicks. I reached out to you a few months ago, and I mentioned that I’d follow up three months later. I just wanted to see if you’re still interested in selling your property directly to me, without any broker’s commission.”

That way, you are slowly kind of building rapport with this person and you’re still at the top of their minds. So if in a year from now they are prepared to sell their property, and you’ve been sending them texts every three months, then you might be the first person they think of.

Now, James said that for every 500 texts he sends out to this qualified list that he makes, he will receive about a 1% response rate. So every 500 texts he sends, he will get no reply from 495, and 5 people will actually reply to the text, saying they’re interested in selling. So I guess it’s not no replies; 495 people either don’t reply, say that they’re not interested in selling now, or that they’re not interested in selling any time soon. Five people will say “Talk to this person. I wanna know more about your business”, or “What can you offer me?”

And then he says that of those 500, he will end up actually closing on less than 0.1%. Now, that’s not a super-high conversion rate, but this strategy doesn’t necessarily cost you a lot of money, if any money at all. You already have a cell phone, and if you are able to create your list via a county auditor site, then the list is going to be free. You might have to pay some money to create your list on ListSource, but you’re always gonna have that person’s phone number, and you’re not gonna have to create a new letter every single time, unless you decide to pursue a letter for your follow-up.

So just an interesting strategy that someone has used to actually close on apartment deals, that isn’t just waiting for brokerage to send listings to them via e-mail.

That concludes part five, where we went over the seven-step process to find off-market deals via cold texting. In part six we’re gonna go over two more concepts and three more case studies in total for how to find your first apartment deal.

To listen to other Syndication School series about the how-to’s of apartment syndications and to download the free documents we have available, including the free document we’ll have for part six, make sure you visit SyndicationSchool.com.

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

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JF1618: How To Find Your First Apartment Syndication Deal Part 3 of 6 | Syndication School with Theo Hicks

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Part 3: The Main Way To Find Off-Market Apartment Deals

 

Last week Theo began discussing how to find properties for you to syndicate. We heard about on market properties, now it’s time to start talking about off market properties. When it comes to syndicating large apartment communities, you will not be alone in your hunt for deals. Having a few different sources and avenues to explore can only help your business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. Welcome back to another episode of the Syndication School series –  a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks.

Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of the series we’ll be offering a document or a spreadsheet or some sort of resource for you to download for free. All these free documents, as well as the past and future Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part three of what will likely be a six or an eight-part series entitled “How to find your first apartment syndication deal.” If you haven’t already, I recommend listening to parts one and two, which aired last week. In part one we discussed the difference between the two main types of deals, and that is an on-market deal and an off-market deal. Then we quickly din an overview of some of the factors that will ultimately win or lose you a deal.

Then in part two we talked about how to find on-market deals through commercial real estate brokers, as well as provided a few tips on how to eventually have those same brokers send you their off-market opportunities.

In this episode, part three, we are going to talk about finding off-market deals. That’s gonna be part three and part four, and we’re gonna go over ten ways to find off-market deals. In this episode we’re gonna talk about one way, which is probably one of the most popular ways to find off-market deals besides sourcing those through broker relationships.

As a refresher, off-market deals are not massively listed by a broker, so really the only two ways to find off-market deals – not necessarily actual strategies, but just high-level, the ways you find off-market deals are either speaking directly with the owner of an apartment community, or by speaking with someone who knows the owner of the apartment community.

Last week when we talked about finding off-market deals through brokers, the deal is I guess technically listed by a broker, because the owner is represented by a broker… But since the brokers are the ones who know owners, they might send you the deal before they mass-market it to the public. So that is kind of hybrid on-market/off-market, but we’re gonna consider that an off-market deal.

And of course, there’s other people who also know owners, and we’ll dive into that in part four, so tomorrow’s episode… But for now, the main point I wanna make is that really the only way to find these deals are either to speak directly with an actual owner, or to speak with someone who knows owners. All of your off-market lead generation strategies should be focused on reaching out to owners and reaching out to people who have a relationship with actual owners… And that’s really all you should be doing; anyone that doesn’t necessarily know an owner should not be pursued as it relates to finding these off-market opportunities. In this episode we’re gonna focus strictly on, as I mentioned, one of the most common ways to find off-market deals, and that is through direct mail campaigns.

Now, as I mentioned last week, before I get in the strategy, when you’re starting out, if you want to, you can just focus on cultivating relationships with brokers, and underwriting deals that are on-market, and then hopefully after six months to a year after you close on a deal, they can start sending you their off-market opportunities. However, again, it’s based on your preference; you can also pursue off-market deals right away, from the get-go, or you can do a combination of both. At the end of the day it’s really up to  you, and it’s based off of the market. If you’re able to find solid deals that are listed by brokers, then more power to you, but if you’re having difficulty finding off-market deals that pencil in, then maybe it’s time to add in one of these ten strategies we’re going to discuss… And one of those should probably be a direct mailing campaign.

So for those of you that don’t know what a direct mailing campaign is, essentially it is where you send out a batch of letters in the mail to apartment owners directly, with the purpose of having them reach out to you, and ultimately you negotiate and put their property under contract.

The main parts of the direct mailing campaign are gonna be the list, so who you’re mailing to, as well as the actual marketing piece, so what you’re actually sending to these owners, and then how you approach screening their phone calls. Those are the three things we’re gonna talk about in this episode – how to create your direct mail list, how to create your direct mailing marketing piece, and how to screen incoming phone calls.

For the list, if you remember back in series number six, where we selected a target market,  one of the exercises you performed was the 200 property analysis exercise, and I believe there’s actually a free document that we provided that was the template for that exercise. Essentially, what you did in order to have a better understanding of your market on a street-by-street and neighborhood-by-neighborhood level, we had you pull data on 200 actual apartments; not necessarily apartments for sale, but just apartments in the market… And looked at things like the rents, and their occupancy levels, and when they were built, how much they sold for… And one of the things we did was actually record the owners’ information. I mentioned that that list would eventually be used for a direct mailing campaign… So now it’s eventually, and you can start off by mailing to the owners of those 200 properties.

Now, before you actually mail all those properties, you wanna run through that list and make sure that those properties meet your investment criteria, which we talked about in series number eleven. So if  you don’t know how to set your investment criteria or you haven’t done so already, make sure you check out series number eleven at SyndicationSchool.com. But essentially, your investment criteria is what you’re gonna use to initially screen out deals, because obviously there is a ton of cities — you’ve got 50 states in the U.S, you can’t look at every single deal in every single state, so of course, one of your investment criteria is gonna be the market. But then once you actually select the market, there’s gonna be all different types of properties that are listed for sale; some that are class A, super-luxurious, other ones that are class D, very distressed, and it has a lot of problem tenants.

So another part of your investment criteria is gonna be your investment strategy; so are you gonna be buying these turnkey, class A properties, or are you gonna be focused on distressed, class D properties, or are you gonna be somewhere in between? Things like that are what you’re going to want to use to screen out the deals as they come in from brokers, as well as use that criteria to build your list.

In this case, since the list is already created, and at least you’ve got 200 properties, you’re gonna wanna go ahead and make sure that you screen out any of those deals that don’t meet your investment criteria.

Now, once you’ve either exhausted that list of 200 apartments, or if you mail to them in tandem with that list, you can create an additional list — you can either do it yourself manually, going on the appraisal or auditor websites and pulling owner information on properties, but that’s gonna be a little bit difficult, depending on where you live, because you’re not going to be able to easily screen out the properties, because you’re either gonna have to manually go through each individual property, which is gonna take you forever to do, or you’ll be able to download a list – which is ideal; hopefully they let you download a list… If that’s the case, then it’ll be a little bit easier to screen out some deal, but it’s not gonna be perfect, because the data that the appraisal or auditor site holds is not going to be comprehensive, which is why a lot of people who do direct mailing campaigns will build a list using some sort of online service who specializes in building these types of lists.

Examples of such sources are things like ListSource, Direct Mail Tools, Open Letter Marketing… Those are three websites that you can go to and you can essentially input your investment criteria, and it will build you a list of all the properties that meet your investment criteria, including the owner’s name and address. For most of these websites, you can actually send out your direct mailing campaigns through them. So you can create your letter, and the type of letter (envelope), the frequency, and then go ahead and pay them to do that for you.

Another option is to get a comprehensive, full list of the apartments in your market from a local title company, or from your real estate broker. I know for me, I have a very solid relationship with a realtor in Cincinnati, who sends out direct mailing campaigns on my behalf for free, and she sends them to whatever property I want. At the time, I was looking at fourplexes, so I was just sending them out to fourplexes, but if I went back to her and said “Hey, can you start sending them out to 100-unit apartment owners?”, it would just be a couple of clicks in her MLS system and she’ll be able to send those out.

Not every broker is gonna do this for you. I had a personal relationship with this person for multiple years before I even asked that, but that’s just another option… And it’s actually gonna be the cheapest option, because you won’t have to pay for the realtor, or the broker will pay for that.

But your best bet is either going to be to manually create the list if your markets auditor or appraisal site allows you to download a list that has enough information that it allows you to 1) screen out any deals that don’t meet your investment criteria, and 2) obtain the owner name and the actual address.

Now, sometimes the owners of an apartment community is going to be an LLC. If that’s the case, in order to determine who the owner of that LLC is, you can go to the Secretary of State website and look up that LLC. Again, depending on the state, you might have to do a couple of extra steps, but at maximum you’ll have to find the articles of organization and the person’s name and address, and maybe even the phone number will be included on that document.

Now, the types of properties that you wanna mail to, in addition to ones that meet your investment criteria, in order to maximize your conversion rate, will be to reach out to owners who are motivated to sell, for one reason or another.

Now, the reasons an owner may be motivated to sell – the most common reason would be they’re distressed in some form; something’s happening in their personal life, or something’s happening at the  property that makes them no longer want to own it, because it’s too much of a hassle… And if you find them at the right moment, they may be motivated enough to sell you their property off-market.

Other reasons why they might be motivated to sell that aren’t distressed is maybe they’re at the end of their business plan. If  you’re gonna do the value-add investment strategy, then most likely you’re going to have a defined hold period. So maybe the plan is to buy the property, stabilize it by the two-year mark, and then hold on to it for five years in total and then sell. So if for example you are a value-add investor, maybe you’ll buy a property from someone who is a distressed investor. So they buy a super-distressed property, they turn it around after five years, and then they sell it to a value-add investors who does extra renovations and increases the NOI even more.

Also, they might have implemented a different business plan. Maybe they bought a property that you added value to, but they just bought it and cash-flowed it; after five years they’re ready to sell it, and now you have the opportunity to actually implement that value-add business plan.

Or maybe they’re just targeting another investment. I was looking at a deal here in Tampa, and the reason why the owner was selling was because it was one of their last multifamily properties, and they were liquidating all their multifamily properties and moving into some sort of — I can’t remember what it was exactly, but it was some sort of a retail-type property.

So an owner can be motivated for many reasons; what’s important is to determine how to actually find these motivated apartment owners, so I’m gonna go through a list of all the different ways… It’s not gonna be an exhaustive list, but it’s gonna cover most of the different ways to identify these motivated apartment owners.

One is gonna be driving for dollars. When you’re driving through your market, keep an eye out for properties that are showing signs of distress… So with poor landscaping, or poorly maintained in general. Maybe they have a Rent Special sign, because they’re having trouble maintaining their occupancy rates. Keep an eye out for apartments that look like the owner may be interested in selling because of issues with the property. Add those to your list, and send them a letter and see what they say.

Another thing you can do is you can look up apartments with recent evictions. Since evictions are going to be a pretty big headache, maybe they’re motivated enough to sell their property at that time. You can typically find the list of evictions on the county clerk’s website.

Similarly, building code violations or delinquent taxes, people facing health code violations, owners facing foreclosure, people that are late on their loan payments, people that have liens on their properties, people that have tax assessments that went way up that year – these are all things that can also be found on a city website.

Also, out of state owners. This is more relevant to smaller multifamily, that are more likely to be self-managed… But still, if someone is owning a large apartment community out of state, they’re more likely to neglect that property than someone who’s living in state. So if you mail to out of state owners, you’re increasing your chance to finding a motivated seller.

Here’s a pretty cool, creative strategy. Go look up the properties on apartments.com, which you should have done while you were doing your 200 property analysis, and if you remember, one of the columns was about the profile picture. So if you have an apartment that doesn’t have any pictures, or only has a picture of the front, or the pictures look distressed, then you might have had a motivated seller… Because if an owner just did a super high-end, fancy renovation of their property, they’re gonna have a ton of pictures to show off that to potential residents… Whereas if they don’t have any pictures of their units, they’re either lazy, which could be a sign of distress, or the units aren’t very appealing and they don’t wanna show them to people. Both of those are signs the owner may be motivated to sell the property to you.

Another example would be expired apartment listings, which you can get a list of that from brokers. Also, you wanna look at properties that are likely owned without debt. These are properties that are maybe bought over 30 years ago, or on certain of these list-building services (like ListSource) you can specify properties that are owned free and clear. They may be motivated to sell because of the fact that they’ve held on to the property for a long time, and also it’ll increase the chances of them accepting some sort of creative financing.

So for someone who maybe lacks the passive investor capital, they want to reach out to properties that are owned free and clear, so that they can get some sort of seller financing or master lease.

I said owners facing foreclosure already, I believe… Section 8 approved properties are another potential motivated seller. They may be sick and tired of dealing with the residents, or the red tape involved with collecting rent, or it may be an opportunity for you to go in there and change it to non-section 8 to increase the rents.

Again, there’s a ton of different ways to find motivated apartments; that’s just a list to get your mind thinking of different ways to identify these types of opportunities… But once you have your list of motivated owners, the next step is going to be to actually send them a marketing piece. Now, as I mentioned, you can either do this yourself, so literally print off a bunch of letters and put them in envelopes yourself, stamp them, write out the addresses, write out the return address and then stuff them into a mailbox, or you could use one of these list building services who also will send the mailers out for you.

Whichever strategy you decide on, the way to create that marketing piece isn’t really gonna change. There’s a lot of variables for the different ways you can make your marketing piece; you can have a different message, frequency at which you send these letters, the actual type of letter, so the type of paper, the size of the paper, the color of the paper… Same with the envelope – no envelope, or having a big envelope, a small envelope, a black envelope, a white envelope, a yellow envelope… There’s a ton of different variables.

One of the best ways to maximize your direct mailing campaign is to A/B test these different variables. Once you have your list, send out at least three different types of mailers; maybe one’s a postcard, maybe one’s a handwritten letter, and then maybe one typed up letter. Send those out in equal amount; so if you’ve got 1,000 different names, send out 333 of each letter, and then make  sure over the next few months you record the response rate, as well as the conversion rate of each of those letters.

Now, here are two examples of what the actual message on the letter can say, and these have been used by actual apartment investors to find off-market deals. When I read these, you’ll [unintelligible [00:19:11].09] which one you should use will be based on your current experience and background.

Template number one would be:

“Dear _______ (recipient name),

I am the acquisition coordinator for ABC company. Our portfolio consists of over 1,000 apartment units, all acquired within the last ten months. With one of our principals based in your market, we’re looking to expand to this area. We are familiar with your apartment complex ABC Apartments, and we would like to discuss purchasing this property. Please reach out if you would like to discuss further.

My e-mail is ____________ and my cell phone number is ___________.

Sincerely, Theo.”

Obviously, this letter would be used by someone who actually owns apartment communities already. Template number two would be for someone who doesn’t necessarily own any apartment communities yet, but people on their team do. They would say:

“Dear __________ (recipient name),

I’m interested in purchasing your apartment community. Are you interested in selling? I currently hold a portfolio of apartments similar to yours and I’m looking to add more. Please contact me at your earliest convenience, so we can discuss the sale of your apartment community.

Call me directly at___________ or e-mail me at __________.

If you are not interested in selling at this time, please accept this inquiry as the highest compliment to your investment. I look forward to hearing from you.

Sincerely, __________.”

Technically, I guess for both of these templates you need to have a portfolio or someone on your team, your mentor, or someone who’s sponsoring the loan, or your business partner – they need to own some sort of multifamily real estate… But the keys to both of these messages are 1) to express your interest in buying their property, and 2) telling them that “Hey, I am experienced”, which in turn shows them that you are able to actually close on the deal. Because at the end of the day, if they’re going to go through the process of sending you all the financials, talking on the phone, negotiating, allowing  you to view their property, they’re gonna wanna know for certain that you can actually buy the property. So if you’ve never done a deal before, they’re not going to be very confident in your ability to close, which is why you’re gonna need to leverage the experience of your team.

For example, instead of saying “Our portfolio consists of over 1,000 apartment units”, you would say “I have a partner – who technically could be my mentor – who owns this many apartments. Our property management company has been in business for this many years, and manages this many apartments. We’ve got someone who’s sponsoring the loan who has this experience”, and essentially just leverage the team that you built. That’s why you built that team. You can even mention your thought leadership platform if you want to.

Again, the key is the letter, and you can use those two templates verbatim, or tweak them based off of how you talk and how you write, but at the end the day, the keys are to 1) express your interest to buy their property, so they know “Okay, this person actually wants to buy my property. He’s not just reaching out and telling me how great my apartment community is.” And 2) to show them that you are actually experienced and able to close on the deal.

Now, hopefully, after a couple of weeks you start to receive phone calls from interested, or non-interested and angry owners… And you’re gonna wanna put together at least an opening line for once you receive these phone calls.

A good script that has been used by active apartment investors who have closed on off-market deals is to say — they call you and you say “Hi, my name is Theo Hicks. Thank you for responding to my letter. As I said in my letter, I work for a group of investors, ABC Acquisitions. We were driving around your neighborhood and wanted to know whether there would be any interest in selling.”

At this point, the person will respond in a handful of ways. Number one – and you’ll probably tell this before even saying your script – they’re going to be very angry with you for reaching out to them. That will happen, so be prepared. If that happens, then thank them for their time, and when you hang up, just remove them from your list. If they asked to be removed from your list, remove them from your list.

If the caller is polite – and this is probably the most common… They’re gonna be polite, but they’re not interested in selling at this time – then don’t just hang up; try to find out a little bit more about why they won’t sell, to see if you can identify some sort of potential pain point. At this point, you can leverage — if this is one of those properties from your 200 property analysis, you can leverage the picture you took of something noteworthy to leverage during that conversation.

For example, maybe you drove by that property and saw that the roof was really old, or something; you can sort of leverage that as a potential pain point, of [unintelligible [00:23:45].19] about that, but you’d just mention “I drove by the property and saw that the roof was kind of old. When was the last time the roof was replaced?” and asking them questions like that; maybe they’ll be like “I haven’t replaced them in a while. It costs too much money. I’ve had some occupancy issues and we haven’t been able to afford to actually replace the roof. That’s a perfect way to identify a pain point.”

If after finding out why they won’t sell, and finding a little bit more about their property and their business plan – if they’re still not interested, at this point you can thank them for their time and hang up… But don’t give up just yet. You’ll want to send  a follow-up letter thanking them for their time again. Essentially, say “Thank you for your time and thank you for speaking to me on ______ (whatever date they called you). As I said, I work for ABC Acquisitions. I am going to follow up with you on _________ (insert date a few months in the future) and I look forward to speaking with you then.”

Then on that date give them a call again, to see where they’re at, see if they’re still not interested in selling the property, but make sure that you reference that first conversation, as well as that letter when you called them again.

The whole idea with this strategy is to build rapport with them. Maybe they’re not gonna sell you the property on the first call, or the second call, or the third call, or maybe not even the fourth or fifth or sixth call, but eventually, if you keep building rapport with them, maybe they sell you their property eventually, or maybe they say “Hey, I’m not gonna sell you my property, but since I know you so well, I’ve got a buddy over here who owns a property next door who wants to get out for specific reasons. Here’s his phone number.”

This could be called direct or indirect mailing campaigns, because you might not necessarily get a deal directly from the person you  reach out to, but it might be some sort of friend of a friend type of situation, which is why you don’t want to just give up when someone says that they’re interested, you wanna keep pursuing that relationship, building that relationship, and hopefully over time either buy their property or buy a property from someone that they know.

Now, if they are interested in selling their property – slam dunk, congratulations. This is probably gonna be not as uncommon as someone getting angry at you; hopefully that’s the least common… But people are more likely to not be interested that they are interested. But if they are interested, then congratulations, you’ve found a potential deal, and you’ll want to extract some more information about the property.

Four questions to ask them are going to be — and again, you don’t want to ask them on the actual phone conversation, but eventually this is the information you wanna gather from them… 1) What type of cap-ex projects have been completed since they acquired the property? 2) When did they purchase the property? 3) Why do they wanna sell? 4) What is their desired sales price?

Those are the four questions you’re gonna need to help you with your underwriting, as well as how you’re going to present your offer. And of course, in order to actually underwrite the deal, you need your hand on a trailing 12 month profit and loss statement, as well as a rent roll. So ask him for that, have him e-mail that to you and make sure you’re staying in constant contact with him about that deal.

From there, you’re gonna submit an offer, and we’ll discuss the process of that underwriting and sending an offer moving forward, but again, the idea is if they’re not interested in selling and angry, then take them off your list; if they’re not interested in selling and they’re polite, figure out why they don’t wanna sell, hang up, send them a follow-up letter and continuously follow up with them every 3, 4, 5, 6 months, until they sell you the deal, or someone else that they know sells you the deal. And if they are interested in selling at that time, you want to get your hands on a profit and loss statement and a rent roll.

To finish up, just four more things I wanted to talk about as it relates to these direct mailing campaigns – I’ve kind of already mentioned this, but you wanna focus on building rapport with these owners. Unless they instantly say “Yeah, I’ll sell you this deal. I need to sell it, I want out of it as soon as possible”, which again, is gonna be very uncommon, they’re likely not gonna wanna sell for some reason, and it could be because they [unintelligible [00:27:28].02] or because they just don’t know you. So if it’s the latter of the two, then you wanna build rapport with them, so that they trust you enough to send you the information and ultimately sell you the deal.

To build rapport, the best way to do that is to speak in terms of their interests. So figure out what it is they want, and then try to talk in ways that let them know that you’re there to give them what they want by buying their property.

Number two is gonna be you want to consistently send out mailers. You’re not gonna see great results your first mailer. You might, but more than likely it’s gonna take a few months for you to gain momentum and see any promising results. So when you’re first starting out, pick a frequency at which you’re going to send out the mailers, and commit to that system for at least a year. So if the plan is to send them out every week, then send them out every week for 52 weeks. Every month? Every month for 12 months. Every two months, every six months – whatever it is you pick, stick to that for at least a couple of frequencies; if it’s weekly, do it for a year, but if it’s every six months, then you’re probably gonna be doing it for a few years before you see any results. So – consistent mailers, pick a frequency, and commit to that system.

Number three – and this is kind of like a creative twist on the direct mailer – is if you’re finding that a lot of owners are either not responding, or a lot of people are calling up saying they’re not interested in selling at this time, then a tweak on the mailer is instead of asking to buy their property, invite them to your meetup group. We’ve talked about that already in a previous series, about a meetup group being a part of your thought leadership platform… So in the letter or in the phone conversation, after them saying they’re not interested, say something like “Hey, I have a meetup group that’s focused on adding value to apartment investors. The next meetup group is going to be in two weeks, and we’re gonna do a presentation on the ten ways to increase the net operating income at an apartment community. As an owner of an apartment community, I think this would be very valuable; would you be interested in attending?” Again, once they come, build rapport. Hopefully eventually something comes out of that relationship, and if not, you’ve made a new friend, you’ve got a new person attending your meetup group; you will learn from an active investor.

And then overall, the last thing I wanted to  say is that this entire thing is gonna be an iterative process. So you’re gonna try things out, maybe they work perfectly the first time, but more than likely there are gonna be some issues; then you’re gonna tweak it, send out mailers again, see how that goes; maybe it gets a little better. Same thing with conversations – maybe your first script is terrible and everyone hangs up on you after your opening line, so you tweak it a little bit and then maybe you get a little more traction with the owner… Eventually, you’ll have the perfect letter and the perfect script and the perfect list, but it’s gonna take time to actually get to that point.

That concludes this episode, where you learned about the two main ways to actually find off-market deals; that’s either speaking directly with owners or speaking with people who know owners. And we talked about the number one way to find off-market deals, which is the direct mailing campaign. We talked about how to make a list, how to find motivated sellers, how to make your marketing piece, how to handle incoming calls, as well as the overall keys to creating a long-term, successful direct mailing campaign.

That concludes part three. In tomorrow’s episode, part four, we’re gonna discuss nine more ways to find off-market deals. These involve talking to both owners directly, as well as people who actually know the owners.

To listen to the other Syndication School series about the how-to’s of apartment syndications, including part one and two of this series, as well as to download all of those free documents, make sure you visit SyndicationSchool.com

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

JF1612: How To Find Your First Apartment Syndication Deal Part 2 of 6 | Syndication School with Theo Hicks

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Part 2: How to Find Apartment Deals From Real Estate Brokers

 

A very obvious way to find deals: get a broker to bring you on market deals. That being said, it can be a lot easier said than done to earn a good broker’s trust. Theo has covered that in detail before, and will summarize on this episode. Then he’ll discuss how to get on their list for deals, because unlike residential shopping, there is no centralized MLS for large apartment deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. 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 am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we will offer a document, spreadsheet or some sort of resource for you to download for free. All these free documents, as well as the past and future Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part two of what will likely be a six-part series entitled “How to find your first apartment syndication deal.” So if you haven’t already, make sure you check out part one, where you will learn the seven or so things that you need to accomplish before you are actually ready to find your first deal. Those are essentially what the previous Syndication School series have been all about, leading into the point where you’re ready to find your first apartment syndication deal.

Then we also talked about the differences between the on-market and off-market deals, as well as how the off-market deals can benefit both you as the buyer, as well as the person selling the deal. Then we also went over the six factors that the seller will take into account when deciding who to sell the deal to… So these are the five or six things that will ultimately win or lose you a deal.

Now, as I mentioned in the last episode, the two main deals are going to be those on-market and off-market opportunities, and the type of opportunity you pursue really depends on your preference. So you could just work with brokers to find on-market deals, or you can just implement the off-market lead generation strategies to find off-market deals, or you can do a combination of both.

Starting out, you’ll most likely be trying to work with brokers to get those on-market deals, just because of the advantages of forming a relationship with a broker… Because they can send you off-market deals in the future, and that also will give you a lot of practice underwriting deals, analyzing markets, understanding rental comps by doing the on-market deals, because you’re usually gonna be able to get your hands on all of the financials, and you’ve already got an offering memorandum that you can at least in part trust the market info… So it’s definitely helpful to, at the very least, from the beginning, talk to all the brokers in a new market and get sent on-market deals.

For the off-market deals –  we’re not gonna talk about those at all this episode; we’ll be talking about those most likely in the next episodes, because there are a lot of different ways to find off-market deals. We’ll probably just talk about all of them and it might cover two episodes, it might cover four episodes… We’ll see. You guys know I like to talk a lot, so it might be four episodes.

When it comes to finding on-market deals, those will be found exclusively through brokers. In order to maximize the number of on-market deals you get — because for single-family homes, duplexes, triplexes, fourplexes, sometimes 5 to 10-unit properties, you’re likely gonna be able to find those on the MLS. At least for the 2 to 4-units, an agent will list the property on the MLS, and then as long as you’re set up on the automated MLS list and that deals meets your investment criteria – whatever criteria you sent to the agent, so duplexes under 200k in area code 12345 – then you’re gonna get that deal. It doesn’t really matter what agent lists the deal; as long as it meets your criteria, you’re gonna get it.

For apartments it’s not like that. There is no centralized place where every single deal – or at least the majority of deals – gets listed. Now, there are things like LoopNet where a lot of deals go to, but LoopNet is not as detailed or as widely-used as the MLS. Probably a large majority of the 2 to 4-unit deals are listed on the MLS, and I don’t think that’s the case for LoopNet when it comes to apartments.

So instead, you need to actually work with individual brokers to get set up on their list. What you wanna do – and we’ve talked about this before on previous episodes, and we have a blog post about the ultimate guide to find the broker, but just to summarize – is you want to create a list of all the brokers in your market… This is as simple as going to Google and saying “commercial real estate brokers in Tampa, Florida.” The search results will be a list of all the brokers, so you wanna go ahead and open up all those into new tabs. Depending what market you’re in, you might have 5-10 brokers, but if you’re in a place like New York City, you’re probably gonna have thousands of brokers. If that’s the case, then you most likely wanna focus on the ones that have the top results. I’m not saying those ones are always gonna be the best, but if they’re in the top results on Google, then they at least know what they’re doing from an SEO standpoint.

Then you’re gonna wanna go ahead and reach out to all of those brokers. Somewhere on the website should be the contact information of someone at the office in your area. For example, if you find a large place like a Marcus & Millichap, then you’re going to need to find the local Marcus & Millichap office on the website, and then call that office. And you might just talk to an office manager who isn’t a broker at all – you need to politely ask them if they can direct you to someone that represents and lists apartment deals in Tampa, and mention that you’re an investor looking for this type of deal, then tell them your investment strategy, and go from there.

You might be able to get a hold of someone else at the office… I probably wouldn’t go straight for the VP of the company right away, but find someone who’s maybe the head of the local office, and they’ll direct you to someone lower than them to help you out. If it’s a smaller brokerage, you should be able to just contact the owner of the brokerage, and their information will be on the website as well. But overall, in some form or fashion you need to reach out to these brokerages and find the person who’s gonna help you, and that’s going to be the person who actually lists properties for sale.

Once you do that, in your initial conversation with them you’re gonna want to communicate to them your intentions to buy an apartment in whatever market you’re looking at; the more specific, the better, so instead of saying “I’m investing in Tampa, Florida”, say “I’m investing in the markets in between these two highways, all the way up to Temple Terrace”, for example. This will show credibility. You also wanna tell them the size of the property, or at least the amount of money of the property, you’re gonna wanna tell them the age of the property, and anything else that you use to screen out your deals. Once you do that, then they should – again, depending on the brokerage – set you up on an automated list, or at the very least provide you with a link to the landing page where they will list all of their properties… But I’ll probably say 99 out of 100 brokers will have some sort of automated mailing list that once a deal that meets your investment criteria is listed, you will automatically get that deal sent to your inbox.

As I mentioned, you’re gonna want to reach out to as many brokers as you can in your market, because the more brokers you reach out to, the more deal flow you’re going to get… Because one deal is not gonna be listed by multiple brokers, and one deal is not going to be found at some centralized location that you can go back to to find every single deal that’s for sale. At least not that I know of.

And obviously, when you’re first starting out, these are going to be the only deals you get from the broker, but one of the main reasons why you want to focus on reaching out to all these brokers and working with them on their on-market deals is because ultimately you want them to send you off-market opportunities. Because if you think about it, sure, you can do direct mail, cold-calling, cold texting, Facebook ads, things like that in order to find off-market deals, but at the end of the day these brokers – that’s what they’re doing as well. So you’re not only competing against other investors who are going to be doing lead generation strategies to find off-market opportunities, but you’re also gonna be competing against brokers, who more than likely have a lot more money to spend on marketing than you do, plus the owner might want to actually list it with a broker and not go through the process of selling it off-market, for one reason or another.

So yes, again, sure, you can find off-market deals yourself, or you can spend six months to a year cultivating a relationship with a broker who will send you off-market opportunities. So before they actually list the property for sale and go through the process of making the offering memorandum, and having to deal with the headaches of doing multiple property tours, multiple Q&A sessions – all those things that the owner doesn’t wanna do either… Instead, they could send you the opportunity before listing it on the market. That’s one of the main ways Joe finds his deals, through these broker relationships.

Now, of course, the problem is that since you haven’t done a deal before, and you’ve got minimal experience and no one really knows who you are, you’ve got to ask yourself why would a broker send you an off-market opportunity if they have a list of four other investors who they’ve closed 100 million dollars in deals with each, why would they bring it to you as opposed to them? That’s gonna be a pretty big problem starting out, which is why I said you’re gonna be cultivating those relationships for a while, because at the end of the day the broker cares the most about closing, because that’s when they get paid. So they’re going to trust someone who they’ve done deals with in the past to close more than they’re gonna trust some guy who found them through a Google search, and talk to them one time and asking them to send in their best off-market deals.

So instead of doing that, don’t really expect off-market deals right away, but there are a few things that you can do in order to win over a broker at a faster pace; so rather than doing it in a year, maybe you can do it in six months, or rather than doing it in five years, maybe you can do it in two years, depending on the market and where you’re at right now.

So one thing to think about is how a broker qualifies who they work with, because the best brokers don’t work with just anyone, because they have to prioritize their time and focus their efforts on the people who, again, are going to get them what they want, which is their commission at close.

Joe interviewed a top broker in Washington DC, I believe – it might have been a year ago – and one of the things Joe asked him was how he  as a broker will qualify a new investor who reaches out via e-mail or a phone call. The five questions that this broker will ask a new client are 1) Have you ever completed a deal before? Obviously, if you’ve done a deal before, you’re going to be perceived as more credible than someone who has not done a deal before, so it’s really a yes or no answer at this point. If the answer is no, then you’re not out of luck yet, because we’re gonna discuss in the next section how to win over a broker before you’ve actually closed a deal… But for now, a top broker is gonna ask you if you’ve closed a deal before, and if you haven’t, you’re gonna have a very hard time working with them in general, more than just being put on their e-mail list.

Question number two is gonna be “Can you send me examples of what you’ve done before?” Assuming you’ve done a deal before, they wanna know what type of deal that was. Was it an A class property or a C class property? What was the purchase price? Was it a million dollars or ten million dollars? How much money did you make on that deal, cash-on-cash return, IRR? Were you happy with your investment, that is did it meet your projections? Was the level of deferred maintenance what you thought it was going to be? Things like that, with the purpose of trying to understand what you are actually used to as an investor. So if you’re used to buying ten million dollar properties, they’re gonna approach you differently than if you’re used to buying $100,000 duplexes.

Next they’re gonna ask you if you understand the market, which you do, because you’ve listened to Syndication School and you followed the market evaluation steps we talked about in the previous Syndication School series. So if they ask you if you understand the market, you say yes, and then tell them a little bit about the market – what businesses are moving in there, what are some of these population trends, employment trends, medium rent trends, occupancy trends, things like that… Because at the end of the day, the best brokers don’t have time to educate you on the market. Sure, you can ask them, after proving to them that you know what you’re talking about when it comes to the market, then you’re gonna ask them “What are your thoughts on this specific area?”, but something you don’t wanna do is if they ask you “Do you understand the market?”, you say “Well, no. Tell me about the market. What’s the unemployment rate here?” They don’t have time for that. Again, they’re prioritizing their time to close deals, and educating someone on a market they’re not necessarily getting more closing from that. Sure, that person might eventually close on a deal, but their time can be spent better elsewhere, so make sure you understand the market before talking to brokers.

Number four, they’re gonna ask you “How will you finance a potential deal?”, which is why before you start looking for deals you need to have a) your debt lined up, and b) your equity lined up. Now, that doesn’t mean that you need to have a pre-approval letter from a lender, nor does it mean you need to have ten investors with $100,000 given to you in the bank account.

For debt, you need to have a conversation with a mortgage broker and have an understanding of the type of loan programs you’re gonna qualify for, and what you need to do in order to qualify for the loan program, and making sure that you know who’s going to be the person signing on the loan. And number two, for the equity standpoint, as we talked about in the Syndication School series focused on passive investors, you’re gonna need to know how much money you’re capable of raising, and ultimately they’re gonna wanna know “If I brought you a deal today, could you close on it?” and the answer should be yes. You should have enough in verbal commitments from your passive investors, as well as a head nod from a mortgage broker saying “Yeah, if you find a deal of this size, we should be able to qualify you for a loan, as long as you bring on a loan guarantor who has experience with a similar such property, as well as a net worth of this, and a liquidity of this.” If you say no, then you’re kind of wasting their time.

And then lastly, number five is gonna be “What are your goals?” This one right here is not as important as the other four, but it’s still gonna be an important question, because they’re gonna wanna know if you have realistic expectations of what you’re able to accomplish in that specific market. For example, if your goal is to make a million dollars per month in cashflow, but you’re only buying properties worth a million dollars, then that’s not very realistic; that’s basically impossible.

Whereas if you have more realistic expectations of running an annualized cash-on-cash return of 8% for five years, and at the five-year exit we’re looking for a 15% IRR at least, on a property that’s 10 million dollars, and we plan on raising the rents by $150 – things like that, what are your specific goals for the deal, and are they realistic?

They’re also going to want to know if you have the team members in place to actually achieve that goal? So if your plan is to do a value-add deal, then who is gonna be the property management company managing that? What’s their experience doing value-add deals? Again, they want to know if your goals are realistic, and if you have the pieces in place to actually achieve those goals.

Those are the five questions that a top broker in the market is going to ask you, and that you should be prepared to answer before you even start reaching out to the top brokers in your market.

Now, as I mentioned, that first question, “Have you ever completed a deal before?”, if your answer is no, you’re not out of luck just yet. Again, it’s gonna be difficult to work with a top broker, but you’re still going to be able to cultivate relationships with the top broker(s) or just brokers in general in your market, and kind of expedite the time it takes for them to send you off-market deals, as opposed to kind of just really doing nothing with the broker besides that initial conversation.

So in order to win over a broker, before closing on a deal with them or a deal in general, and to expedite the time for them to send you the off-market opportunities, number one is going to be to pay them a consulting fee. So if you need their help with anything, for example if you want to talk to them on the phone for half an hour to pick their brain about a market, you can offer to pay them a fee of $50 to $100/hour. Say, “Hey, do you mind if I hop on the phone with you for 30 minutes to talk about this market? I will pay you $100/hour for your time.”

That’s you essentially telling them that you know how valuable their time is, and how valuable their expertise is, and you’re not necessarily taking advantage of them, but you’re not gonna waste their time by just asking them questions for 30 minutes and thinking that they’ve got all the time in the world to help you out and that you’re the center of the universe. Instead, you’re kind of reversing that and saying “Hey, you’re really smart, I really wanna pick your brain. I understand how valuable your time is, and I’m even willing to pay you in order to teach me about the market.” So that’s number one, offer a consulting fee.

Number two is going to be to drive their recent sales. I’ve had a lot of success with this strategy. Essentially, what you do is after initially talking to the broker and telling them your investment criteria, say “Hey, I really want to get to know the market on a street-by-street level, as well as learn a little bit more about the opportunities that your company lists. Could you send me a list of your most recent five to ten sales? All I need is the address, but if you have a sales package, that would be even better. I would like to drive these properties and offer you my feedback on how these properties relate to my investment strategy.”

I haven’t had anyone say no, but I have had it where they only send the address and nothing else, due to confidentiality reasons… But I’ve had some people send me the actual offering memorandum too, which is helpful because you can kind of use that to screen the broker to see “Okay, here are the rental comps that they listed, so let’s drive the subject property and the rental comps to see if those are actually rental comps or not.” If they aren’t rental comps, then you’re gonna have a little bit less trust in that broker… But the idea is to get the list of recent sales, drive those recent sales, take notes on the actual property, the condition of the property, the location of the property, and then  once you’re done, go back to your desk and send that broker an e-mail of a pros and cons list as it relates to your investment strategy. So you say “Hey, Billy, I went and drove those ten properties. Thanks again for sending me those lists. Based on my tours, here’s the things that did and didn’t align with my investment strategy. Property number one – perfectly aligned with my investment strategy. I really liked the way that property was maintained, the location was great, the gated security, which I really liked, the demographic was ideal. The only negative was I saw a shingle missing from the roof. Is that something that’s pretty standard at these properties, or is that because the owner won’t pay for that, or does it have something to do with…?” Questions like that.

Then if it’s a really bad property, obviously trying to find some positive about that property, but then say “Hey, my investment strategy is to buy properties that are built after 1980, whereas this property was built in 1960. I also saw that the foundation was wood frame, whereas I only want concrete foundation…” Again, not only are you showing them that you are willing to put forth the effort to close on the deal, but it’s also giving them an idea of the types of properties that you want to invest in. So that’s number two, driven the recent sales.

Number three is going to be to underwrite the deals quickly and visit the property beforehand. If a broker sends out a new deal, your goal should be to underwrite it within the first few days of it being listed… As long as it meets your investment criteria, obviously. Then you can go visit that property that weekend, in person, and that next week, a week after the property has been listed, you can reach back out to that broker and say “Hey, I saw that you’ve listed this deal. I’ve underwritten it and it kind of passed the first phase of my underwriting, so I went ahead and visited the property in person, as well as visited the comps. The comps look great, you’ve selected the perfect comps. Can I set up a property tour to the inside, so I can finalize my underwriting?”

That’s a lot better than saying “Hey, I saw you listed that deal. Can I schedule a property tour?” So at the end of the day you’re going to still tour the property, but you’ve put work in upfront to show the broker that you’re a serious person, who is interested and capable of  closing on a deal.

Number four is gonna be to complete the market evaluation, which you’ve done already, but again, if you reach out to a broker and you are in the Tampa market, you can not necessarily send them a spreadsheet of your market evaluation, but just tell them why you picked that market, why you’re investing in that market. That can be on the phone, or in an e-mail, and we kind of already went over that. You’re like “Hey, I really like this specific neighborhood because I know that this Fortune 500 company plans on moving there, which is gonna generate 10,000 new jobs in the next five years.” Again, show that you’re serious, credible and can close on a deal.

Number five is gonna be to provide information on how you’ll fund the deal from an equity and a debt standpoint, which I’ve already talked about, so I’m not gonna focus on that one too much.

Next is gonna be to bring on a sponsor or a mentor. If a broker asks you “Have you had a deal before?” and you say “No, but my partner…”, who in reality is like a mentor, who might be signing on the loan, but you say your partner, because at the end of the day they’re gonna be a general partner – “…my partner has closed on over 460 million dollars in real estate, so there’s that.” That will be very wowing to the broker, and lets them know that they’re in good hands.

And then lastly – and this is just kind of general – follow up and contact the broker frequently. Try to have a point of contact with them every two weeks, with some new relevant piece of information. It could be after you drive their recent sales, and then for each deal that you underwrite, and then if you see interesting economic development, you can send that to them… If you brought in a new investor that would change the size of deal you can take down, you can let them know that. If your mentor closed on a deal, you can say that your partner closed on a new deal… And in general, just try to keep yourself in front of them constantly, to let them know, again, that you’re serious and that you’re in this for the long haul, because I guarantee you the majority of the people that reach out to these brokers just talk to them once and then disappear. You do not wanna be that person who disappears; instead, you wanna be that person that they see and hear about at least once every two weeks.

That concludes part two. In this episode we discussed how a top broker will qualify you, as well as the six or seven things you can do to win over a broker if you actually haven’t closed on a deal yet.

To listen to part one, as well as other Syndication School series about the how-to’s of apartment syndications, and to download your free documents – and there will be a free document for this series, just not for these first two parts  – visit SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.

JF1598: How to Structure GP & LP Compensation Part 2 of 2 | Syndication School with Theo Hicks

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One slightly important part your apartment syndication career is how you will be getting paid, as well as how you will be paying your investors. Today Theo will cover how to pay the Limited Partners in your apartment syndication deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. 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 am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we offer a document or a spreadsheet or some sort of resource for you to download for free. All of these free documents, as well as previously recorded Syndication School series can be found at syndicationschool.com.

This is going to be part two of a two-part series entitled “How to structure the GP and LP compensation.” If you haven’t already, I recommend going back and listening to part one of the series, where we discussed the different parts of the general partnership, and the responsibilities and ownership percentages of each of those parts.

If you don’t wanna listen to that, just to summarize, the five parts are going to be 1) the person who fronts the due diligence costs, 2) the person responsible for acquisition management, so everything from finding the deal through closing on the deal. Then you’re going to have the sponsor, the loan guarantor, key principal – that’s the person who can qualify for financing, and therefore signs on the loan. Part four is going to be the person responsible for investor relations, so everything from raising the capital to the ongoing communication with investors after the deal is closed. And then fifth is going to be the person responsible for asset management. The percentages for those are 5% for the person fronting due diligence costs, 20% to the acquisition manager, 5%-20% for the sponsor, 35% for the person responsible for investor relations, and then 20%-35% for the asset manager.

As I mentioned in part one, these are general ranges for the ownership percentages, and it’s going to vary from deal to deal and syndication team to syndication team, and it’s all negotiable. For more detail on those, check out part one.

In this part we’re going to discuss the other side of the coin, which is the structure of the LP or the passive investor compensation. So we’re gonna talk about first the two types of investors, and then we’re going to walk through the investor decision tree, which will also be a free document for you to download, so you can go through that exercise yourself. So let’s just jump right in.

There are really going to be two types of passive investors, and they’re gonna be lumped into two different types of groups. One is going to be an equity investor, and two is going to be a debt investor. So from an equity investor’s perspective, it’s going to be the most profitable, because the equity investor participates in the upside in the deal. So they’re gonna receive their money back until the sale of the apartment. However, they’re going to be — in return for their capital being used to fund the project, they’re gonna be offered an ongoing return, as well as a proportion of the profits at sale. So this cashflow is going to come out of the profits remaining after the GP pays all operating expenses, as well as the debt service, and sometimes the asset management fee.

I know for Joe’s company, and what we’re also going to do – we’re going to put the asset management fee in second position to this ongoing  return, because that promotes alignment of interests; we don’t get paid until after the passive investors get paid… But ultimately, that’s up to you. You can take your asset management fee first, and then pay out the return, or you can do what we do and pay out the return first, and then collect your asset management fee.

This ongoing return for equity investors is commonly referred to as the preferred return. The preferred return is not a guarantee, but is an offer to the investors, saying “Hey, you give us this capital, up to a certain percentage of the first cashflow will go to you before we ourselves get paid.” This percentage of the remaining cashflow can be anywhere from 2% to 12% of the equity investment paid out annually. What part of the range you’re at is gonna be based off of the experience of the general partnership and your team. So if you’re first starting out, the preferred return offered might be a little bit higher, because there’s gonna be more risks with a newer syndication team, whereas someone who’s done 10-20 deals could offer a little bit lower preferred return, because the investors will have more confidence in the GP’s ability to hit that number. It’s also gonna be based off of the risks of the project, and the investment strategy.

For example, the preferred return on a distressed investment strategy might be 12%, but since it’s distressed, you’re not gonna be able to hit that 12% right away, because occupancy is at 60%, and half of those people that are already there aren’t paying rent, so you’re gonna have to reposition the project for a few years… So that preferred return will likely accrue and will be paid out in one lump sum, most likely at closing, or once cashflow is able to support that preferred return.

If you’re doing a turnkey strategy, so you’re buying a property and really doing nothing to it, just cash-flowing, the preferred return could be, say, 5%, because again, you’re not pushing the rents up and adding value to it, but also it’s going to be less risky, because everything’s already done, and it’s gonna continue to cash-flow how much it’s been cash-flowing for the past 3, 4, 5 years. And then for the value-add strategy, the common preferred return is going to be 8%. It’s still a lot less risky than the distressed strategy, because the property is likely already stabilized, and you’re just updating the interiors and maybe upgrading or adding in some new amenities to push those rents up. So it’s less risky than the distressed, but it’s got a little bit more risk than a turnkey strategy, so 8% is the common preferred return.

Now, once that preferred return is hit, typically there’s going to be some sort of profit split. So overall, at the end of the business plan, the profit will be split between the passive investors and the general partnership anywhere between 50/50 and 90/10. I’m pretty sure what Joe does is they offer that 8% preferred return, and then the profits are split 70/30, and then they catch themselves up at the sale, to make sure that they hit that 30% number. But again, it’s really completely up to you.

You could just do a peer profit split instead, so you could say “Once we pay all the operating expenses and debt service and the asset management fee, all remaining profits will be split 70/30. 70% to the LP, 30% to the GP.” Now, the issue with that strategy is that there is a reduction in alignment of interests. With the preferred return, they get paid first, before you get paid, whereas for this peer profit split, you both get paid at the exact same time. And that’s on an ongoing basis.

The equity investor also participates in the upside of the deal. So for the value-add investment strategy, for example, since you are going in and raising rents, you’re gonna create a lot of equity in the deal, so when you go to sell the property you might have added  a couple hundred thousand to a couple million dollars to the value of the property. So at sale, after you pay back the loan and all the different closing costs, let’s say you’ve got two million dollars remaining – that will get split between the limited partners and the general partners based off of whatever profit split was agreed to.

So overall, the equity investor gets paid on an ongoing basis in the form of a preferred return or a profit split, and then at sale they will also get paid out based off of the profit split that was set, or whatever agreement was set in the documents at the beginning of the deal.

The most common equity structure for a value-add deal is going to be the 8% preferred return, and then the 50/50 split of profits overall. It’s overall, so it’s not 8% preferred return and then the profits are split; it’s overall 50/50 between the GP and the LP.

Now, the other type of investor is going to be the debt investor. From the debt investor’s perspective, it’s going to be the least profitable… So it’s gonna be less profitable than the equity investor. However, there is much lower risk. After the operating expenses and the debt service is paid, the remaining cashflow must go to distributing a fixed interest rate to the debt investor. So unlike the preferred return, if the GP is unable to pay the fixed interest rate to the debt investor – this is assuming that they’re still able to cover the operating expenses and the debt service, but that remaining cashflow isn’t enough to pay that fixed interest rate, then technically the debt investor can’t take control of the property.

So there’s much lower risk, because the investment is based off of the collateral, so they could take the collateral if they’re not paid their fixed interest rate, whereas for the preferred return, if the investor offers 8% and only can distribute 6%, there’s really not much the passive investor can do except not invest with that person anymore. But if they were a debt investor, they could technically pursue the actual asset itself, and take it over.

Now, since they are debt investor, they’re not equity investors, they do not participate in the upside of the deal. So at sale they are not given a portion of those profits. Instead, they are going to be offered a fixed interest rate for  a set amount of time, and then [unintelligible [00:11:50].11] is gonna be a balloon payment, where the GP must return 100% of the investment. So this interest rate is going to be similar to the preferred return. It’s gonna be based off of the GP’s experience, as well as the risk factors associated with the project and the investment strategy.

So if the GP is doing the first or second deal and they’re doing a distressed property, then that fixed interest rate is going to be much higher than a general partnership who’s done 20 deals and are doing a value-add strategy. But overall, since it’s a less risky investment from the debt investor’s perspective, the fixed interest rate is going to be lower than the preferred return would be, all other things being equal.

Now, as I said, there’s gonna be that balloon payment after 1, 2, 3, 4, 5 years, whatever you negotiated with your passive debt investor. So you’re gonna have to give them all their capital back, and this is gonna be done before you actually sell the deal. This would occur most likely with a refinance or a supplemental loan.

Now, from your perspective, having debt investors is going to be the most profitable for you, because if you think about it, if you have a debt investor with a three-year term and you pay them 8% for three years while you implement your value-add business plan and you create  a ton of equity, to the point where you’re able to distribute all of their capital back and then you have 100% ownership of the property. Now, the drawback is you have to add enough value to distribute all of those returns back, which means that if they are funding 30% of the down payment, then you’re gonna have to add 30% value to the property in order to pay them back. So when you’re underwriting the deal you’ve gotta make sure that that’s what you’re projecting, is that 30% increase.

Another option would be to do a combination of the two. When I was talking to a bunch of attorneys and lenders, and they were explaining to me what they typically see, they’ll see a large chunk of the money raise will be a debt investor; so there’ll be maybe one or two people who are bringing the majority of the capital, and then they offer them a fixed interest rate for a certain amount of years, and then that’s it. Then to cover the remaining 10% to 40%-50% of the equity raise, they bring on 20% different equity investors who invest 50k each, and maybe they’re family or friends who are not necessarily worried about a large ongoing return, but they wanna see that money double in five years.

That way, you’ve got your equity investors, who are participating in the upside of the deal, as well as you’re getting the ongoing return, but then you’ve got your debt investors who only funded 50%-70% of the actual investment, so now rather than having to add 30% value to the deal, you only need to add 20% value to the deal in order to pay them back. You’ll, again, own the majority of the property, and all you have to do is worry about paying those 10%-30% of the equity investors their ongoing return, and then paying them their upside at the sale.

So overall, the best partnership structure that you create is gonna be based off of, technically, what you want to do, but also what your passive investors want to do. If you start having passive investor conversations and they seem more interested in a low-risk investment vehicle to park their money in for a few years, or receiving a lower fixed interest rate that simply beats inflation, then you could potentially structure your deals with debt investors.

But if you start talking to investors and they’re more interested in something that offers a higher ongoing return that’s not necessarily guaranteed, but they’re interested in a higher return, as well as the potential for that large lump sum profit at sale, then you’re gonna have to structure your deals as equity investors. So you can either 1) make decisions yourself and only find investors that wanna be debt investors or equity investors, or you can base it off of the conversations you’re having with investors, and kind of what’s going on in the market at that time, what your competitors are doing.

Then of course, again, I said you could diversify. From the passive investors’ perspective, maybe in a couple of deals they’ll invest as debt investors, and in a couple of deals they’ll invest as equity investors… [unintelligible [00:16:06].10] you can bring on debt and equity investors.

But of course, make sure you consult with your attorney first to make sure, if you’re doing a combination of these two, that you’re doing the right security offering type, and things like that, and just make sure you’re doing everything  by the book.

As I mentioned, we’re going to go over a structure decision tree that you can go through step by step in order to create the specific compensation structure with your limited partners, because you’re gonna wanna know what the compensation structure is going to be pretty early on. I didn’t mention that you can kind of feel it out with your investors, but if you remember back in a previous series about how to find passive investors, we went through the 49 common questions that the investors are going to ask you, and one of the most obvious questions they’re gonna ask you is how much money they get paid and how the deal is structured… So  you need to have an answer for them, you can’t just tell them “How much money do you wanna make?” That’s gonna be unprofessional. You need to have at least a general structure in mind in order to run that by them, so they can make a decision on whether or not they want to invest with that structure.

The best way to do so is going to be to go through a decision tree, which as I mentioned, we will offer as a free document that you can download at SyndicationSchool.com, or in the show notes of this episode. So you’ll run through a series of questions, and then based on your answer, you’ll go down one side of the tree or the other side of the tree.

The first question is “Do you have equity investors or debt investors?” Circle one  – are you gonna bring on equity investors or debt investors? If you’re bringing on equity investors, then will you offer a preferred return, yes or no? If yes to  the preferred return, what will the preferred return be? That could be, as I mentioned, between 2% and 12%. There’s a blank for you to fill in, and then it says “The preferred return percentage is ____%.” For example, the preferred return is 8%. If you go ahead and fill that out, that’s gonna be one part of your compensation structure.

Next is gonna be what is the profit split after the preferred return? It gives you five different profit split examples to choose from: 50/50, 60/40, 70/30, 80/20 or 90/10. Again, that first percentage is for the LP, and that second percentage is for you, the GP.

I haven’t mentioned this yet, but the next question is gonna be “Will you set a hurdle?” What that means is that let’s say you offer the 8% preferred return and you do a 70/30 profit split. Year one, year two, year three, year four, year five you hit that number, and then you go to sell the property, and you do the 70/30 split entirely. Let’s say that results in a 25% internal rate of return to your investors. That’s great, that’s totally something that you can do. But as you gain more experience, or starting out, again, depending on what you wanna do and where your investors are at, you can set a hurdle. So following the same scenario, you offer 8% preferred return year one, year two, year three, year four, year five, and hit the number, and then at sale you distribute your profits based off of a 70/30 split… But let’s say once you distributed three quarters of the profits to the investors, they hit a 20% IRR. Now, you can set 20% IRR as a hurdle, when you initially start the agreement, and then after that hurdle is hit, the profits cannot be split 50/50. That might result in a 21% internal rate of return to your investors, while you are able to make more capital.

So for the question “Will you set a hurdle?” if the answer is no, you can just leave it blank, but if it’s yes, what will that hurdle factor be? In the example that I gave, it was the internal rate of return, which is going to be the most common, but technically I guess you could set it off of a cash-on-cash return as well.

So pick IRR, or cash-on-cash return, or if you wanna do some other hurdle or other factor, by all means, I guess it’s technically possible. You could do an equity multiple, or [unintelligible [00:20:10].05] multiplier, or something like that, although I haven’t seen that before, and then at what percentage will that hurdle come into effect, and what will be the new profit split? So fill in the blank. Once the LP receives x% of whatever factor you use, the profit split is __/__ thereafter.

For example, once the LP receives 13% IRR – so the hurdle is going to be IRR, and the percentage is 13% – then the profit split is going to be 50/50 thereafter. Now, going back to the other side of the decision tree, the question was “Will you offer a preferred return?” and we’ve done yes… What about no? So if the answer is no, you’re not gonna offer a preferred return, that means you’re doing that peer profit split, so now what is the profit split going to be? Of course, again, based on the team’s experience and the risks of the project in your business plan, that could be anywhere between 50/50 and 90/10… And then, you’re gonna have that same question about the hurdle. So are you gonna set a hurdle such that once the return or IRR or cash-on-cash return or whatever reaches a certain number, then that profit split changes?

Again, as an example, once the LP receives 13% IRR, the profit split is 50/50 thereafter. Now, that concludes the equity investor side of the decision tree. Now, what about the debt investor side of the decision tree?

If you circled debt investor, the next question will be “What interest rate will I offer?” So fill in the blank… For example, you offer a 12% interest rate to your debt investor. The next question is “What will be the length of the loan?” aka “When will you return all of the debt investors’ capital?” Fill in the blank. For example, it could be three years.

And then lastly, the question will be “How will I return all the debt investors’ capital?” You have the option of circling Refinance, Supplemental Loan, Buyout, or fill in the blank with some other type of strategy for returning all of their capital.

I highly recommend just using this decision tree to create your LP compensation structure… Again, remembering to keep your investors’ goals in mind, since you’ve already started those conversations, and then also maybe kind of go through the decision tree to run a few different scenarios, just to get the hang of setting these compensation structures.

That concludes this series of how to set the compensation structure for the general partnership and the limited partnership. In this episodes you learned the differences between the debt and the equity investors, as well as ran through the decision tree for actually setting the compensation structure based off of whether you are going to bring on debt investors or equity investors. As I mentioned, we will be giving away the decision tree document for free, so you can download that at SyndicationSchool.com or in the show notes of this episode.

To listen to part one of this series, as well as other Syndication School series about the how-to’s of apartment syndications, and to download that free decision tree document, go to SyndicastionSchool.com.

Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.

JF1591: How To Raise Capital From Private Investors Part 8 of 8 | Syndication School with Theo Hicks

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Yesterday Theo discussed 15 of 49 common questions you’ll get from your passive investors, and how to address them. Today, Theo will go over the remaining 34 common questions that you will get from investors. All of these questions are available in the document below. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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http://bit.ly/commoninvestorquestions – 49 Common Questions

 


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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. Welcome back to another episode 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 a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of these series we offer a document or spreadsheet for you to download for free. All of these documents, and the past and future Syndication School series can be found at SyndicationSchool.com.

This episode is part eight of an eight-part series entitled “How to raise capital from passive investors.” By the end of this episode, assuming you’ve listened to parts one through seven, you should know everything that you need to know about raising money from passive investors.

Reviewing what we’ve learned so far, you’ve determined your mindset towards raising money, if you have any fears or limiting beliefs, as well as how to overcome those fear or limiting beliefs. You also learned why someone will invest with you, which is trust. You learned the differences between a joint venture and a syndication, as well as the differences between a 506(b) and 506(c) investment offering. You learned 12 ways to find people to invest in your apartment syndication deals, from thought leadership platforms, to Bigger Pockets, to volunteering, to advertising, and everything in between. You also learned the next steps after finding a passive investor who’s interested in investing, which is to set up an introductory call and actually do the introductory call. You also learned how to overcome the “You lack apartment experience” objection before you’ve done your first deal; essentially, how to get investors to invest in your first deal without you personally having done a deal before; basically, how to overcome that catch-22.

Then we learned about the questions to expect from passive investors about your team and about your business plan. That was yesterday’s episode. We went over the 15 of 49 questions, and we’re going to jump into those remaining 34 questions right now.

  1. Why should I invest in apartments?

Again, these are questions that your passive investors will likely be thinking to themselves, and might not actually ask, or they might actually ask you these questions, so either way, you need to prepare to answer them… And if they don’t come up, you need to proactively answer these questions.

Why should I invest in apartments? Well, again, going back to that company presentation template that is available for free at SyndicationSchool.com, there is a list of reasons why I and you like to invest in apartments. As of today, which is the beginning of 2019, historically there is less risk and better returns with real estate investments overall, compared to stocks and bonds. That kind of says why we invest in real estate. But why we invest particularly in apartments in because there is decreasing home ownership, which means people are renting, and there is a decreasing apartment vacancy rate, which means demand is increasing, as well as an overall increasing in population.

On the other hand, if they’re asking “Why should I invest in apartments?” then they’re probably not going to invest in your deals at all, most likely, and they’re definitely not gonna invest in your first deal, because it’s gonna take them some time to get comfortable with the apartment asset class if they don’t know really anything about it. Fortunately for you, that’s where your thought leadership platform comes into play, where you’re gonna educate people about the benefits of passive investing.

So if someone asks this question, you respond with the historical risks and returns, and the population growth vacancy decreasing, and those things, but you’re also gonna wanna direct them towards your thought leadership platform, so they can learn more and get themselves educated before investing in your deal.

  1. Why did you decide to pursue the value-add business model? Why did you decide to pursue the turnkey, or the distressed business model?

For us (and for me), we do the value-add business model, and the reason why is because the value-add essentially offers the best of the turnkey and the distressed. For turnkey overall there’s gonna be lower risk, because all deferred maintenance is [unintelligible [00:07:24].08] property is up to market conditions, so you’re not gonna have to spend a ton of money on capital improvements… But at the same time, there’s a lot lower upside potential, because you’re not able to add value.

Distressed are on the opposite end of the spectrum, where there is a lot of upside potential, but there’s also a lot more risk, because if you’re buying a property that’s 50% occupied, if you are not able to increase that occupancy rate, then you’re gonna lose some money.

Value-add offers the best of both worlds. There’s lower risk, because you’re buying a property that’s already stabilized, but it also has higher upside potential because you’re gonna take it from a C to a B, for example. So if you’re doing value-add, you can explain why you do it. If you’re doing turnkey or distressed, then the answer is gonna be a little bit different.

  1. I want something that is low-risk, so what are the major risk factors in investing in apartments?

The three main risk factors when investing in apartments is the deal, the market and the team. We recommend that if someone asks this question, you explain what it is exactly you do to minimize the risks for the deal, for the market and for the team.

The answer is – for the deal, you want to make sure you’re conservatively underwriting deals. For the market, you want to make sure that you are properly evaluating the market, so you follow the market evaluation strategy that we discussed in the previous Syndication School series. And then for the team, you wanna make sure that you’re hiring qualified, experienced team members.

Then in addition to all of that, you want to make sure that you’re also following and aligning with the three immutable laws of real estate investing – a theme here – which we discussed in a past Syndication School episode. Just as a reminder, those are 1) Buy for cashflow, 2) Secure long-term debt, and 3) Have adequate cash reserves.

If they want to know about the risk factors, you can say “The deal, the market and the team are the major risk factors here. However, we conservatively underwrite deals by doing XYZ. We evaluate our target market across these ten factors, or these six factors, as well as we hired team members who have done X amount of deals following this exact same business plan. Then also we make sure that we’re buying for cashflow and not appreciation, we are securing long-term debt, and we have adequate cash reserves in place, just in case the market were to go into a downturn we’ll have ourselves covered.”

  1. Can you provide me with a worst-case scenario for the typical investment from an investor’s point of view?

Well, the worst case scenario is you lose all of the investor’s money, and then you have to do a capital call to try to turn the deal around, and then you lose that money, too. That’s probably the worst case scenario. Unlikely to happen, but this is an investment, and like all investments, there are risks. But again, in that previous question we discussed exactly what you’re going to do to mitigate those risks. You want to follow up with the strategies, and not just saying “Hey, we could lose all of your money, do a capital call, and lose all your money again. This is an investment, so things can happen.” You wanna also be like “But it’s unlikely to happen, and here are the policies and procedures we’re putting in place to make sure that that does not happen.”

  1. How long do I have to keep my money in the deal?

Being a passive investor, this is not liquid, so it’s kind of depending on your agreement, they likely are not gonna be able to pull their money out until the sale, unless they’re able to sell their shares to someone else, with the written consent of the general partnership. So just tell them that “Your money will be locked in for…” whatever your hold period is. For Joe and for me, that’d be five years.

  1. What happens if I want to use my invested money for something else? Can I pull it out?

The process for how or if an investor can pull their money out of the deal should be outlined in the private placement memorandum created by your attorney. Generally, the investors can sell their shares with the written consent of the general partnership. They must find a qualified buyer, and then that person must be approved by you. Or you can make it so that they’re not allowed to get out at all, or that only you can buy their shares… It kind of depends on how the PPM and the agreement is structured.

  1. How are you finding deals?

Now, at this point we haven’t gone over how to find deals yet, so I will briefly touch on this question, and we’ll definitely go into more depth on how to find deals in future episodes… But going into the future, you’ll know how you’re finding deals at this point, so  you’ll tell them exactly what you are doing. If you’ve done a deal in the past, you can also mention how you found that deal. Most likely, if you’re talking to investors now, and we obviously haven’t gone over how to find deals yet in Syndication School, we have plenty of blog posts on how to find deals, and you can also tell them, at least for now, that you’re working with this/these real estate broker(s) who are sending you deals on an ongoing basis. It’s more of the off-market strategies that we haven’t discussed yet, that you probably would not be able to answer to right now, but you will be able to in the coming months, once we’ve covered that in Syndication School.

  1. What markets are you currently focused on?

We’ve already selected our one or two target markets in a previous Syndication School series, so you wanna explain why you selected those markets. Go through how you narrow down the 19,000 U.S. cities to seven, based off of where you live and places you know, and places that were in top 10 lists, and then you evaluate those seven markets across unemployment, population, supply and demand, employment, job diversity… And then based off of those factors, these were the top one or two cities to invest in. Then you actually visit those properties in person to do a more in-depth analysis, and maybe you disqualified one and kept the other one, for example.

  1. Do I have to submit my financials to anyone?

If you remember, in the earlier part of this eight-part series we discussed the differences between the 506(b) and the 506(c). If you are doing a 506(b) offering, then they will not need to submit their financials to anyone, but if you’re doing a 506(c) offering, then they actually will, because they are not allowed to self-verify that they are accredited for 506(c). They can only do that for 506(b). So if you’re doing a 506(c), the answer is yes, and with 506(b) the answer is no.

  1. Who owns the property?

Typically, the property is going to be owned by an LLC that you set up, and then the investors are going to buy shares of that LLC, which means that the investors will not have any liability.

  1. Who manages the property? Is it a third-party management company, or do you do your own management?

This kind of depends on you, but if you’re just starting out, you likely are hiring a third-party, so you are going to want to tell them that, as well as talk a little bit about their background and give some statistics around that property management company – how many doors do they manage, how long have they been managing apartments, have you worked with them in the past… Things like that. Again, they wanna know that they’re in good hands.

Now, some experienced accredited investors might only invest in deals where the management company is in-house. Sometimes actually even sellers will only sell to people who have in-house property management companies, just because there’s that perception that if they have their own in-house property management company they’re more credible than someone who doesn’t, which may or may not actually be true; it’s just a perception thing. Again, this response depends on where you’re at, and whether or not you’re planning on doing your own management. If you’re just starting off, definitely get a third-party, because you probably don’t know how to actually manage an apartment, unless that’s your background.

  1. What happens if the project fails?

Similar to the worst case scenario question, “What happens if you lose all of your money?” Obviously, you want to begin by saying that you don’t expect the project to fail, but of course, the unexpected could happen, and with any investment there are going to be risks… And that for investing in any deal, they will be presented with all of these risks which are in the PPM, and that even though there are those risks, you will always proactively address them, remembering that the main risks are the deal, the market and the team, and you do so by conservatively underwriting the deals and performing detailed due diligence once the deal is under contract. You do that by qualifying the market using the six or seven factors, and you only partner with team members who have past syndication success and not failures.

  1. What types of reserves are typically established with each property to shield investors from any potential capital calls?

When we go over underwriting in Syndication School I will talk about the operating account fund, which is an upfront fund that you are able to fund using money from your passive investors. That money is used as essentially a contingency if anything unexpected were to happen… And rather than having to go back to your investors for money, you can pull from that fund.

So if there are unexpected dips in occupancy, if there’s some deferred maintenance issues that for some reason you weren’t able to find, things like that, you will be able to pull from that operating account fund to cover that expense.

  1. What are my responsibilities?

Again, this is one of those questions where if someone’s asking this, then they probably aren’t going to invest, because they don’t really know much about the process, but… This question might come up, and if it does, just tell them that really their only responsibility is to fund the deal. Then maybe they could be a loan guarantor if you needed help signing the loan, but… They’re called passive investors for a reason – completely passive, they have no active involvement in the deal.

Question 30 is a follow-up question:

  1. What are your responsibilities?

The answer is “Everything else.” You and your team are responsible for finding deals, reviewing and qualifying the deals, negotiating offers coordinating with professional property inspectors, making sure you find the best financing options, coordinating with your attorneys to create the LLC and different partnership documents, traveling to the property and the market to perform due diligence, hiring and overseeing the property management company, and then performing your asset management duties once the deal is under contract, including the money from the lenders to fund the renovations, making sure the business plan is executed properly, ongoing communication, distributions, evaluating the market, and then of course, at the end, selling the deal.

Again, those questions, 29 and 30, “What are my responsibilities?” and “What are your responsibilities?”, they are likely gonna know that already, unless they’re a family and friend who doesn’t have much experience with real estate or passive investing.

  1. How much of a role do you personally take in overseeing the acquisition and management of the asset?

The answer is “Entirely responsible for the acquisition and the ongoing management of the asset”, even if you’ve got a third-party management company.

  1. Do you guarantee a return?

The simple answer to this is no, you do not guarantee a return. The preferred return is not a guarantee. Don’t ever use the word “guarantee” when talking to investors, because they will hold you to that, and if you don’t provide them with that return, again, you’re gonna lose that trust factor.

A preferred return is offered, and if it’s hit, it will be distributed, but if it’s not hit, then whatever cashflow there is will be distributed. I guess this naturally leads into the next question…

  1. What happens if you can’t make the projected cashflow?

Ideally, your projected returns are higher than the preferred return to your investors, so if you’re honoring a deal and you want to offer 8% preferred return to your investor, then ideally the deal has a 9% return, so that you’ve got a buffer just in case you’re not able to increase the rent premium this much, or decrease the expenses as much.

If you aren’t able to distribute the full preferred return – if you won 8% preferred return, projected 9% cashflow but are only hitting 7%, then the process really depends on what was agreed to. Usually, the distribution will accrue until it can be paid out, and that might not be until the sale of the property. Of course, if the property loses money, then your investors won’t be paid out that profit.

  1. What does my money go towards?

Specifically, if you actually have a deal, there’s a list called “The sources and uses” section of the private placement memorandum, which will list out exactly where each dollar is going. These categories include closing costs, renovation costs, depending on whether or not they’re included in the loan… Your operating account fund, origination fee, the fees paid out to you as the general partner, as well as the down payment for the loan.

  1. How do you make money?

That will also be outlined in the PPM, and we also went over how you make money as an apartment syndicator in one the first Syndication School series. You’ll want to explain to them what types of fees you plan on charging, whether that’s an acquisition fee, ongoing asset management fee, the profit split… Just be very transparent and let them know exactly how you make money on the deal, and then explaining your alignment of interest as well.

  1. What is the minimum investment?

Again, this really depends on you. You probably don’t want people investing one dollar or $500. The juice is not worth the squeeze, so to speak. I know that for Joe his minimum is $50,000 for first-time investors, and then $25,000 for returning investors… But that is gonna go up, and that is the 506(b). If you’re doing a 506(b), you probably wanna have a minimum. For a 506(c), since you’re able to advertise for your deals, again, you could set a high minimum, or you could set a lower minimum and try to cast as wide a net as possible through advertising online and in print.

You could have investors who bring as little as 5k, and hope that they will grow over time. But again, if you are doing a 506(b) offering, which means you need to have a pre-existing relationship with your investors, you’re gonna want a minimum investment. That’s, again, gonna be due to the opportunity costs of building that relationship over time, whereas for the 506(c) you don’t need to know them at all, so  you can just send them one e-mail, or they can reply to an ad and invest 5k, whereas if you’re spending all this time working on a relationship and they only spend 5k, that time could have been spent on cultivating a relationship with someone who could invest 50k, or 100k, or 500k, if you get what I’m saying. But at the end of the day, if you need to raise that last 100k, 20 people investing 50k is better than zero people investing 100k.

  1. How does the process work after you find an investment?

Well, typically what happens is once you place a deal under contract, which means that you have a signed purchase and sales agreement, you will notify the investors about the new opportunity, and then you’re also going to want to include a link to the investment summary; this is a PowerPoint presentation that essentially looks an offering memorandum. It goes into extreme detail on the deal, but unlike the offering memorandum, it’s based off of your numbers and your analysis. Then you also invite them to a new investment offering call, which is either a conference call or a webinar, where you’ll actually present the deals to the investors, as well as answer any questions that they have.

Then after that call, the interested investors will be able to verbally commit to invest in the deal, and then eventually they will sign the required documents to officially commit to the deal, and then they will wire their funds and then we will close on the deal… At which point they will receive a closing e-mail, as well as information on what to expect on an ongoing basis.

  1. What are you doing about the market correction that’s coming?

That’s probably a question that you are definitely going to get from at least one investor, especially right now, since real estate seems to be on a hot streak… And luckily for you, we have a response to what happens in a down market, and that is the three immutable laws of real estate investing. As long as you follow those three laws, you really don’t care if the market is high or low… Because if you buy for cashflow, if you secure long-term debt and you have adequate cash reserves, you’re going to be able to at the very least survive a massive downturn, but more likely you’ll be able to thrive while others are pulling their hair out.

  1. What contingency plan is there for these properties if we go into another concession?

For that answer, refer to the previous answer, which is the three immutable laws of real estate investing.

  1. Are there any other asset classes that you focus on?

Most likely, you are focusing on just apartments, but if you’re focusing on other asset classes, like mobile homes, self-storage, single-families, just let them know… They might follow up by asking you what percentage of your time is spent on apartments, just to make sure that you are spending an adequate amount of time on apartments. If you say “Well, I’m only spending 10% of my time on apartments and 90% on mobile homes”, then they’re gonna probably be hesitant to invest… Whereas if you say “I focus on primarily on apartments, but on the side, in my spare time, I buy single-family homes every once in a while.”

  1. Is everyone notified at the same time when you have a new opportunity?

This will also depend on your strategy. Starting off, the answer is most likely going to be yes. On an ongoing basis, Joe and his company – they still notify all the investors on his e-mail list at the same time when a  new opportunity is under contract… Whereas other investors might just e-mail their returning investors first, and then they might e-mail people who haven’t invested in a deal second… Or they might have a list of a couple of preferred investors who might be able to cover the entire down payment, and anywhere in between. It kind of just depends on your preference and where you’re at in your business.

  1. Who will be my point person?

Ideally, the answer is you. Mention that – and hopefully this is true about you – you pride yourself on transparency and your communication timeliness, because one thing that we know for sure is that investors really appreciate timely communication. They really appreciate the monthly e-mails that are sent, and they also appreciate having their questions responded to a timely manner. If they ask a question, don’t wait a week or two weeks or a month to reply; the second you see it, take the time, take a couple of minutes to reply with an answer… And if you’re super-busy for some reason, then just reply quickly and say “Hey, I’ve got your question. I will reply to you this afternoon” or “I’ll reply to you tomorrow morning/night.” They will really appreciate that.

Of course, as you grow and get really big, and you’ve got hundreds of investors’ questions coming in, you can delegate some of that to an admin or an assistant or someone else on your team. If fact, you could just hire someone who’s strictly responsible for investor relations if you get big enough.

  1. Can I invest with an LLC?

Most likely the answer is yes. People will either invest in an LLC, or they’ll invest as an individual… But make sure you have them talk to their CPA on how to invest with an LLC or as an individual, and which one works best based off of their specific situation. In general, you don’t wanna give out any legal or tax advice. You can give out general information, but always direct them to their CPA or attorney for the specifics.

  1. What type of reporting do your investors receive?

What we do is we send out our monthly recap e-mails, and in those we include occupancy rates, we include the number of units renovated, as well as the rental premiums demanded by those renovated units. We provide information on the ongoing capital improvement projects, and then we’ll also discuss any relevant market updates, or companies moving into the area… And then we’ll also discuss any resident events that happen – Christmas parties, New Year parties, things like that. Then on a quarterly basis we send out the profit and loss statement for the last 12 months, as well as a current rent roll.

Again, that’s what we do; that’s covering all our bases. You can do all of that yourself, you can do part of it, you can add something else in there… It really just depends on what you wanna do, and your preferences.

  1. What other questions do you typically get from investors?

Well, I have just gone over 44 questions, so if they didn’t ask one of those 44 questions, which is highly likely, you can pick a few from there and answer those questions for them.

  1. From your perspective as an educated and/or experienced investor, what other questions should I ask that I haven’t already?

Similar to the last question, you’ve got a whole list of questions that are common, and you can pick a few from that list and answer those.

  1. If I want to talk to other investors or if I want to get references, is that something that can be arranged?

Again, it’s up to you, but we say yes. Be prepared to have a couple of handpicked investors that you know are willing to talk to interested investors about passive investing.

  1. If I want to invest, what would be the next steps?

The next steps are typically going to be adding them to your private e-mail list, and letting them know that once you have an opportunity, that they will be notified immediately by being on the e-mail list.

  1. Do you have any tips you can pass to me as someone who is investing for the first time?

One thing that you can say to them is to focus on risk mitigation and conservative opportunities, at which point you can go into the three immutable laws of real estate investing, which again, if you have them memorized by now, shame on you, but just to reiterate – 1) buy for cashflow, 2) secure long-term debt, and 3) have adequate cash reserves.

That concludes the 49 questions, 19 related 40 business plan related, that you should expect from passive investors. Now, all these questions are not gonna come up during your [unintelligible [00:30:15].00] conversation, right? This two-part series has taken over an hour, and you’re not gonna be having hour-long conversations with each investors… So if they don’t come up, that’s fine; they will eventually come up though. They might come up once you actually have a deal under contract, or in the FAQ section, they might come up after you actually have closed on a deal, but at some point you’re gonna have to answer all of these questions, which means that you’re going to want to make sure you write the answers out to all of them, so that you know you know the answers and you’re not able to answer those when they come up from an investor, because again, that will reduce the trust factor.

This concludes the eight-part series about how to raise capital from passive investors, which is a high-level overview of everything you need to know about raising capital. Now you should be able to go out there and start to generate verbal interest from investors.

That concludes this episode. To listen to the other Syndication School series about the how-to’s of apartment syndications and to download the free documents that we are offering for this series, as well as past series, all of that can be found at SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.

Theo Hicks part 3 of 8 on the Best Show Ever flyer

JF1569: How To Raise Capital From Private Investors Part 3 of 8 | Syndication School with Theo Hicks

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Now we know why people will invest with us, and which entity to use for the capital raise. Now it’s time we talk about finding the actual people and investors that will be investing with you. Theo gives us six great ways to do it today. And we’ll hear six more ways to find our passive investors tomorrow. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. Welcome back to another episode of the Syndication School series –  a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks.

Each week we air a part of a podcast series. This week’s podcast series is going to be a continuation of actually a six-part series that we’re doing… But all these series will be about a specific aspect of the apartment syndication investment strategy, and for the majority of these series we’ll be offering a document, or a spreadsheet, or some other additional hard copy resource for you to download for free. All of  these documents, as well as  previous Syndication School series episodes can be found at SyndicationSchool.com. As I said, this episode is going to be a continuation of a six-part series entitled “How to raise capital from passive investors.”

In part one you determined what your current mindset was towards raising money. We’ve talked about the fear people have about raising other people’s money, as well as how to overcome these fears, or really any other limiting belief that you have towards raising money from passive investors. Then we’ve also learned why someone would actually invest with you, and the answer isn’t money or returns, but it’s actually trust.

From there we moved into part two, where you learned the differences between a joint venture and a syndication. Essentially, a syndication has limited partners that are completely passive, and then general partners who are active in the business plan… Whereas the joint venture – everyone’s essentially a general partner, so no one’s completely passive. The people investing the capital also have some other role or responsibility.

Then we also talked about the differences between the two main apartment syndication offering types – the 506(b) versus the 506(c). I highly recommend listening to those episodes first, before moving into this episode, which is part three. We will begin to discuss how to actually find passive investors.

By the end of this episode you will learn the first six ways to find people to actually invest in your apartment syndications. Then in the next episode, tomorrow, we’ll talk about six more ways, so in total you’ll have 12 ways of how to find these investors.

Of course, this is assuming that you’ve listened to the previous Syndication School series and you’ve hit all of the requirements. If you don’t have the education and experience requirements, if you haven’t put together the rest of your team and the other things that we discussed, then you need to focus on that first, before acting on these… But at the same time, raising money is a long-term strategy, so you might be able to actually implement some of these right away, and then others you are going to want to wait until you’ve got other pieces in place.

For example, the number one way to find passive investors — and by the way, these are not in any particular order, so it’s not like number one is the best way… These are all great ways that have been used by others to find passive investors… But number one is going to be the thought leadership platform. The thought leadership platform is going to be your interview-based online service, essentially… A podcast, a blog, a YouTube channel where you have conversations with apartment or real estate or syndication professionals, and then write a blog post about it, record a YouTube video or podcast episode, and share that to a following for free.

Now, one of the reasons why a thought leadership platform is a good strategy for raising money is because of all the relationships that you’re building. So if you are going to do a podcast, for example, and you are going to interview different apartment professionals once a week, then you’re going to have 52 conversations a year with 52 different active real estate professionals. And if just a handful of those know someone, or they themselves are interested in investing in your deal, then the thought leadership platform is well worth the time.

Your relationships formed with the guests, whether it be them investing directly, or them providing you with a referral of someone else who invests, or… Again, we’ve talked about this before – even if they refer you to someone who ends up coming on your team, and then maybe in the future they invest, having the thought leadership platform and interacting with these guests, whether it’s tomorrow or in two years from now, will have a direct impact on your money-raising abilities. Additionally, you’ll have these people actually listening to your thought leadership platform.

Let’s say, for example, you create a thought leadership platform that is directed towards passive investors, which would be a brilliant idea, because if you are creating content directed towards passive investors, if you’re likely interviewing passive investors, which is the opportunity to find an investor and get referrals from them.

At the same time, you’re creating content that’s going to attract other passive investors that you haven’t met yet. In doing so, they will reach out to you… We’ll get into exactly how to do that in a second, but that’s just another example of how the thought leadership platform can help you attract passive investors, and that will be the listener base.

Overall, with your thought leadership platform, regardless of who you are interviewing or what the theme of the podcast or the thought leadership platform is, you are going to be transmitting to the world your intentions to raise money to purchase apartment buildings, and share in the profits.

So we defined our primary target audience and the secondary target audience in a previous Syndication School series, with the primary target audience ideally being our passive investors… We basically created a brand around that fact, and to attract that primary target audience. And in doing so, when you are creating these podcasts and these blogs and these YouTube channels directed at your primary target audience, you’re letting them know that you are raising money for apartment buildings, and you are going to obviously share in the profits with the people who invest in those deals… So anyone who comes across your content and sees that’s what you’re doing, if they’re interested, then they will reach out.

And then finally, the thought leadership platform is great – and this might sound repetitive if you’ve been listening to the Syndication School, but it’s super-important, and that is the credibility factor. Because if you remember, the biggest challenge you’re going to face as a first-time money-raiser, as a first-time syndicator and when you’re trying to find team members, is going to be the lack of credibility, because you’ve never done this before.

We’ve talked about all the different ways to promote credibility, but one way is the thought leadership platform, and the credibility will help you with the actual passive investors, because if you are, again, having all the conversations with investors, creating all this valuable content, you’re gonna be perceived as an expert, and it’s gonna give you additional credibility than someone who just has a LinkedIn profile or a Facebook page, or someone that they’ve never heard of before.

For those reasons, you’re gonna wanna make sure you have a landing page on your website in order to capture the information of these interested investors. So you’ve got your thought leadership platform, you’re transmitting to the world that you are raising money to purchase apartment buildings and to share in the profits with these passive investors. “If you’re interested, go to InvestWithJoe.com and fill out our landing page in order to learn more.” It’s as simple as that.

Then you’ll have their e-mail address and you’ll be able to move on to the communication phase of this, which we will be discussing in next week’s series, how to actually communicate with investors once you’ve found them.

And then also, besides your actual thought leadership platform, you will also wanna get interviewed on other people’s thought leadership platforms for similar reasons. You’re gonna be more credible by saying “Not only do I have my own podcast, but I’ve been interviewed on these five popular podcasts”, and you’re gonna get in front of more people, which will, again, allow you to form those relationships with the guests, as well as the listeners of their podcasts, and then you’re gonna have that credibility factor as well.

And then if you direct them back to your website, they’ll find your landing page, and boom, you have their contact information.

Most of these steps… I should have probably mentioned this earlier, but most of these – in fact all of these – the goal really is to get their e-mail address and to get them to agree to hop on a phone call with you… And we’ll go over strategies of how to do that.

Again, this episode, and then part four tomorrow, is just gonna be focused on how to find them. Next week’s series will be focused on what to actually do once you find them. So number one is the thought leadership platform.

Number two is Bigger Pockets. Do not underestimate the power of Bigger Pockets as it relates to networking, because at the end of the day, raising money is really gonna be about your network and people trusting you. So Bigger Pockets and other real estate related services or other services like Bigger Pockets – they attract both active investors and passive investors, or investors who don’t know if they wanna be active or passive.

Being someone who posts to Bigger Pockets multiple times a day, five days a week, for the past couple of months, I would say that the majority of the forum posts that would be relevant to syndicators are people who essentially say that they’re interested in getting into real estate, they have 50k or 100k saved up, but they don’t know what to do. They have a need, which is “I’ve got this money. I don’t know where to put it”, and they’re reaching out and most of the time they’re saying “Should I fix and flip? Should I buy a large apartment building myself?” None necessarily will say “Should I passive invest in apartment syndication?” because maybe they don’t know about that strategy, so a perfect technique would be to locate those types of posts, and then comment, adding value, saying “You could do fix and flip. Here’s the pros and cons of that.

You can buy your own building, here’s the pros and cons of that, but there’s also another strategy called apartment syndication, and here are the pros and cons of that.” See what they say, and if they respond and say “Oh great, thanks for the advice”, send them a DM and say “Hey, I actually am an apartment syndicator. Do you want to learn more, or do you wanna have a conversation about it” And again, we’ll talk about what to say during that conversation on a future episode.

Now, you’re not allowed to explicitly advertise on Bigger Pockets unless you are a pro member, and then you can explicitly advertise on the marketplace. So you could technically just create a post, once a week, once a month, asking for investors… Assuming you actually have a deal, you can ask for investors on that marketplace, assuming you’re gonna do that 506(c) and you’re allowed to attract investors… And you could also — again, I would probably ask your attorney first, to make sure you’re not violating any laws, but you can create a post in the marketplace before you have a deal, just to generate interest. And if you’re on Bigger Pockets, you’ve probably seen those types of posts.

And then you could also advertise on their podcast or in their newsletter as a sponsor, but that’s pretty pricey, and you probably won’t be doing that for at least a few years.

Now, I highly recommend getting a pro account, because not only will it allow you to post in that Bigger Pockets marketplace, but it will also allow you to add a link in your signature or your description, that will obviously link to your website, or I guess wherever you want it to link to. For us, we have a specific apartment syndication page where we have all of our blogs and videos, so that’s the link that I have in my signature. That way, if I am posting a ton, and people wanna learn more about me, they click on that link and they’re directed to that apartment syndication page, and now they’re on our website.

You also wanna make a strong biography page on your actual profile, that actually states your intention, so what are you trying to accomplish – well, we’re trying to raise money for apartments, to share in the profits. So if someone sees you’re posting a ton, and they click on your profile, they’ll see that’s what you do, they’ll see your website, they’ll click on your website and ideally get to your landing page.

Now, another strategy is going to be to post valuable content to the forums. As I mentioned, I post seven to ten times every day of the week, so five days a week, and the goal is to add value.

Here is the exact strategy that I use, and the reason why I am saying this is because it’s something that I think everyone should do, and there really isn’t a competition to see who posts to Bigger Pockets, although if you do follow the strategy, I can guarantee you that you will be on the top contributor list on the specific forum that you actually post to. For this case, it’d be the multifamily forum. I’m consistently in the top three top contributors for the multifamily forum by following this strategy, which honestly takes me one hour per day maximum… At least now that I’ve got a process down, which I had to determine by trial and error… But this is a very powerful strategy, and I’ll tell you why once I actually explain what the strategy is.

First, I go to BiggerPockets.com, I obviously sign in, and then I will go to my notifications first, because since I’m posting on an ongoing basis, I will want to go see if anyone replied to a comment that I posted, or mentioned me in a comment.

So you go there, you open up all those in new tabs, and you go through each of them. If someone just says “Thank you” or doesn’t necessarily ask you a question or something that you can respond to, just make sure you up-vote on that; obviously, if they asked you a question, answer that question.

Once I exhaust my notifications, I go ahead and delete all those, and then I will go to the keyword alerts next. The keyword alerts that I use are “passive investing”, “passive investor”, “syndication”, “crowdfunding” and “accredited”. I have more keyword alerts than just that, but these are ones that are relevant to specifically attracting investors.

Anyone who mentions those terms in their forum post, I will be notified via e-mail… But again, I just do it once a day, so I go through all of them one at a time. So I will go and I will answer any question, or reply to any thread that’s relevant… Because sometimes you might get a notification and the thread isn’t necessarily relevant, because someone just said “accredited”, but they were using it incorrectly, or they were kind of just mentioning it in passing and it wasn’t the main theme of the thread. But I’d say 50% of the keyword alerts are worth responding to.

Then once I’m done with the keyword alerts, I move on to the Commercial forum category, and the under Commercial there’s a multifamily forum. I will go over and look at the posts over the last 24 hours, and I’ll read the title, and anyone that seems like it might be potentially relevant and worth responding to, I’ll open that up in a new tab, read through the thread, and then formulate a response. At that point, if I’ve hit my 7 to 10, then I’m done.

I maybe only have five posts out of all of those, because it’s Friday and I didn’t have any notifications or keyword alerts – then I move on to the Commercial Real Estate category. So it’s Commercial Multifamily, and then Commercial-Commercial. I’ll look through there, and usually there’s not much going on in that forum. Probably only 10-15 posts every day.

From there, I’ll move on to the Private Money forum. I think the category is Lending, and there’s one of them that’s Private Money. In there you have a lot of people asking about either loan questions, or they’ll be asking about private money, so hard money loans, passive investors, things like that. That’s the forum where most people will post asking about “What should I do with all this money that I have?”

Then from there, if I still don’t have the 7 to 10, I will just go to the most recent posts and just start from the top, and go down, and keep replying to the forums until I have exhausted the day’s posts, or if I’ve gotten my 7 to 10.

Now, as I said before, one of the benefits of this is that I can guarantee that if you follow this for at least a month, you’re going to be in the top contributor list for the multifamily forum… Obviously, unless every single person listening to this does it, then you might not be in there… But I have been in the top contributor list for the past few months just by following that strategy. But also, just by posting for a few months, you’re gonna start getting a ton of private messages and direct messages. Most of them are just them thanking you for replying to their thread, and “If there’s anything I can do, let me know.”

Even if one out of ten out those messages is someone who might potentially invest or be a potential investor, the strategy is well worth it, because this strategy is essentially free; I think the Bigger Pockets membership is like $100/year, so for $100/year if you can get one investor who invests $100,000 in your deal – or heck, even $25,000 in your deal – that’s a pretty good return on investment.

So not only do you have the ability to obviously reach out to passive investors or potential passive investors directly yourself, you will also start to get direct messages from interested investors as well. Obviously, not every single direct message is gonna be like that, but it is a possibility. But then as I stressed, do not expect to see results for a few months. Don’t expect to post five to ten times a day for a week  and then all of a sudden you’ve got an investor asking to invest a million dollars in your deal.

This strategy, as well as the majority of these strategies are longer-term in nature, so six months at minimum for all of these strategies until you’ll start to see any sort of results… So make sure you stick to it.

And lastly, in addition to posting content to the forums, you can also post content to the member blog. Bigger Pockets has a member blog function where all the various profiles and members can post blog posts on one centralized location. So for you, the easiest way to create a blog once a week/once a month would be to repurpose the content from your thought leadership platform.

If you interviewed someone let’s say for an hour, you can probably break that into 2-4 blog posts. If you do one interview a month, you can post 2-4 blogs to the Bigger Pockets blog, as well as to your own blog.

You could also write about a certain lesson you learned based on a deal you’ve actually done, or based on a specific aspect of the syndication process you’ve recently gone through. Maybe you’re finding success using a certain strategy for your thought leadership platform – write about that. Maybe you found a team member in a unique way – write about that.

So that’s number two, and I think that’s something that’s going to be pretty important, that really anyone can do right away, and benefit from finding passive investors. That’s the Bigger Pockets strategy, and I highly recommend that you follow that one.

Number three are going to be attending real estate meetups. These are really any type of event that other real estate investors attend. First, you can actually attend these meetups and conferences and seminars in person. Obviously, you are not allowed to explicitly advertise for money, so you can’t go in there and say “Hey, I am Theo. I raise money for deals. Who wants to invest?” You’re not allowed to do that, unless you’re doing that 506(c), but still, talk with your securities attorney about that… But you are able to focus on building relationships.

Again, this raising money part is gonna be all about the relationships, the trusting relationships in particular. So you’re going to need to come in with a plan of how to build these relationships, how to approach these relationships. There are really two approaches to forming relationships – the broad abroad and the hyper-focused approach.

The broad approach would be you walking into the Best Ever Conference 2019 with a stack of business cards at a networking event, talking to people for two minutes, handing out a business card and then leaving, and trying to hit as many people as possible.

The hyper-focused approach would be – again, using the Best Ever conference as an example – you attending the Best Ever conference, and then during all the networking sessions you are trying to find that one person that you hit it off with, and then focusing on building that relationship for the rest of the day.

We believe – and I’ve found  – that the hyper-focused approach is much better than the broad approach, because (and it’s pretty obvious) if you just handed a bunch of business cards… Yeah, I’m sure they’ll remember you, but you’re not really standing out. Whereas if you focus on the hyper-focused approach, you’re gonna build that personal relationship, which will give you that connection and will create trust.

So here is Joe’s three-step approach when he attends these types of in-person events. Again, this could be a monthly meetup group, or it could be a three-day conference that’s happening once a year.

As I mentioned, part one would be to focus on creating one new relationship. If it’s a multi-day event, try to focus on creating one new relationship per day.

Number two, when you are actually speaking to these people, you want to ask them personal questions, with the purpose of learning about their goals and why they’re attending the event. So your main outcome of these conversations should be “What do they want to achieve by attending this event?” So why are they there? Are they trying to find a team member? Are they trying to find a new investment strategy? Passive investors? Why are they at this conference?

The reason you wanna know this is because once the conference is over, you want to follow-up with this person, whether it be on LinkedIn or e-mail, and add value. And you will add value by helping them solve the goal that they had for attending the event.

For example, if they said they were attending the event because they’re trying to find a business partner, then I would go home after the event and send them a colleague request on LinkedIn, and reach out and say “Hey Joe, I wanted to follow up. It was great meeting you this weekend at the Best Ever Conference. You mentioned that you were trying to find a potential business partner; I hope you were able to find a couple of names.” And I’m gonna pause – at this point you would either solve the problem yourself, or you would send them a  referral to someone who might be able to help them.

Continuing on our example for that person who’s trying to find a business partner, I would either say “I’m actually looking for a business partner as well, and based off of our conversations it looks like our skills complemented each other. Let’s set up a phone call to discuss it more.”

Or if I did not wanna be their partner, or we were at different parts of our business and our careers, then I would say “I hope you’re able to find a business partner. In the meantime, here are three names of people that I know are actually searching for business partners as well. You should definitely reach out.”

That’s the three-step approach. Now, again, these are long-term approaches. Just because that person needs help with something that wouldn’t necessarily help you raise money, that’s not really the point. The point is to add value, and do something for them, and then who knows — maybe you never hear from that person again, and maybe you do this 20 times and 15 people you never hear from them again, but five of them a few years down the road actually took action on your advice, have a business partner, and now they’re willing to partner up, or they’re willing to bring you deals, or they’re willing to raise money for your deals.

You really never really know where any relationship might lead. I never knew that when I got coffee with Joe 3-4 years ago that it will lead to me recording a syndication school podcast series, but it just started off by me helping him with his podcast. The connection between me helping him with his podcast, to now obviously recording this podcast, as well as in the process of launching my own syndication business – it would have been impossible for me to actually foresee. You need to have that same approach when you are attending these meetups, as well as following really any of these strategies, is that it’s all about forming relationships, and you do not know where these relationships will lead. Maybe they lead nowhere, and maybe this person is gonna be your next business partner.

In addition to actually attending these meetups and conferences, you can actually create your own meetup or conference. I’m not going to focus on this one, because the benefits are going to be the same as attending other meetups, except for the added credibility factor, because you’re the man in charge, you’re the woman in charge, so that comes with an extra level of credibility than just attending these conferences in person… And there’s also benefits of organizing an event, and the marketing to get people to actually show up, and speaking in front of people, and things like that. But again, it’s all about building relationships, and in order to learn about how to create a meetup group, you can read a blog, which is “To source real estate deals and generate more wealth, start a monthly meetup.” That is a blog post that we wrote that has three strategies for how to start a meetup group. Or really, it’s actually just three different meetup structures for you to choose from, and like the thought leadership platform, it’s all about being consistent, because your first few meetups you’ll only have a handful of people show up, but if you stick to it, just like everyone else who has a massive meetup – they started out with a few people attending; stick to it and you can create a massive meetup in your market.

Now, you could also create what I wanna call a virtual meetup, so to speak. This would be like a Facebook community, for example. The Best Ever Facebook Community that we have, where people can join and ask questions to other active investors, and then we’ll post content and questions for engagement there… You can do this in addition to the meetup in person, or instead of; ideally, do both, but a Facebook community is another great way to attract potential passive investors through, again, forming these relationships… Because for our Facebook community we’ve got over 1,000 active investors who are on there, and again, we don’t know where any of these relationships could lead in the future.

I know I said I’d go over six this episode, but we’ve hit our 30-minute mark, so I’m actually gonna stop here, and ideally I’ll go over the rest… So I’ve done three, and I’ll do nine in the next episode, because these first three were really not the main or most important strategies, but they’re the most in-depth strategies, just because we’ve done all of these and we have a lot of information to provide for how to replicate these strategies.

These other ones we’ve also done, but they are a little bit more simple and not as in-depth. Again, the first three that we went over in this episode are 1) your thought leadership platform, 2) Bigger Pockets, 3) real estate meetups. For all of those we went over in-depth strategies for exactly what you need to do in order to start cultivating relationships in order to attract these passive investors.

As I mentioned, that’s the conclusion of part three. In part four we’re going to discuss hopefully the next nine strategies. In the meantime, 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.

The Best Show Ever flyer with Theo Hicks, part 2 of 8

JF1563: How To Raise Capital From Private Investors Part 2 of 8 | Syndication School with Theo Hicks

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Since we’re on the raising money topic, what better time to discuss 506b vs. 506c? How do you figure out which to use? Is one better than the other? What are the differences between the two? All this and more is covered in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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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. Welcome back to another episode of the Syndication School series –  a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we  offer a document, a resource, a spreadsheet, for you to download for free. All of these documents, as well as past and future Syndication School series, can be found at SyndicationSchool.com.

This episode is part two of either a four-part or a six-part series – not exactly sure how many episodes will be in this one yet… But the series in entitled “How to raise capital from passive investors.”

If you haven’t had the chance to, I recommend listening to part one. In part one we had you take a test to gauge your mindset as it relates to raising money. We also talked about how to overcome any fears or limiting beliefs you have about raising money, and then we also learned why it is that someone will invest with you in the first place. So part one was focused mostly on mindset.

In part two we will have a discussion about the different type of syndication structures, so you’ll learn the differences between a syndication and a joint venture, as well as the differences between a 506(b) and a 506(c) investment offering. Now, the reason why we are talking about this now in the series about raising capital is because before you can start the process of reaching out to investors, you need to understand the structure of your syndication and the type of offering you are going to provide, because that will dictate how you can reach out to these investors, and the requirements these investors need in order to invest in your deals.

Syndication versus JV – I wanted to talk about that, because there’s a lot of questions about “Should I do a joint venture, or should I do a syndication?” Obviously, this is Syndication School, so we do not talk about joint ventures here, but I just wanted to go over the differences between the two, just for your knowledge, so that if you happen to wanna do a joint venture in the future, you can… But this is probably the only time we’re gonna talk about JV, right now.

The best way to determine whether you should do a joint venture – I’m gonna refer to joint venture as JV moving forward – or a syndication is to ask yourself these two questions. Question one, “Will investors invest money in a common venture with you?” If you answer yes to that, that’s a syndication or a JV. The second question is “Do your investors have an expectation of profits based solely on your efforts, skills and experience?” If the answer is yes to that second question and yes to the first question, then it is a syndication. If the answer is yes to the first question, but no to the second question, then it might be a joint venture.

For a joint venture, all of the partners are active in the investment. All the partners in the JV have some sort of active involvement in the investment. A perfect example of a joint venture would actually be the general partnership of a syndication. For example, me and my business partner are technically a joint venture together, because we’re both bringing capital to the deal, and we both have active roles or responsibilities in the deal. Essentially, we’re not passive, we’re active, and that would make that a joint venture.

There are no restrictions on advertising for joint venture partners, so I can go on Bigger Pockets or Facebook and say “Hey, I’m  doing this deal. I need someone who can do asset management.” There’s no restrictions on that. And there is unlimited liability for all parties involved. Everyone involved in the deal has unlimited liability.

Now, the syndication is different, because unlike the joint venture, if you’re doing a syndication, then obviously the general partners are going to be active, but the people that are bringing the money aren’t active in the deal. They’re strictly passive investors; all they’re doing is bringing equity to the deal. And per that second question, those investors have the expectations of profits based solely on your efforts, skills and experience… Not theirs, but yours. And there are restrictions on advertising for syndication partners. We’ll talk more on this later.

Then there is unlimited liability for the general partners, because again, that is actually a joint venture, but there is a limited liability for the limited partners or the passive investors

An example of a joint venture would be me and you partnering up together to buy a fix and flip together. We both bring in half the capital, we both do half the work; that would be a joint venture. Or if we and three other people partner up to do a apartment syndication, then we would be a joint venture, but our agreement between us and the investors would be an actual syndication, and we would have to be adherent with the securities law.

Now that we know the differences between the syndication and the JV, let’s now focus on the syndication. So who is actually allowed to invest in apartment syndications? Well, high-level this is going to be your target audience that you defined in an earlier Syndication School series episode; that episode is 1534, so make sure you listen to that to learn about how to select your primary target audience for your brand, which again, you’re using in order to attract potential passive investors. But more specifically, the two types of people who can invest in syndications are accredited investors and sophisticated investors.

Now, an accredited investor, for the formal definition, is a person that can invest in securities, a.k.a. they can invest in an apartment syndication as a limited partner, by satisfying one of the requirements regarding income or net worth. The current requirements as of December 2018 to qualify are an annual income of $200,000, or $300,000 for joint income for the last two years, with the expectation of earning the same or higher, or a net worth exceeding one million dollars, either individually or jointly with the spouse.

So an accredited investor makes $200,000 a year themselves, or $300,000 a year with their spouse, for the last two years, and expects to make more or at least the same moving forward… Or they have a net worth of a million dollars. So it’s one or the other. That’s what an accredited investor is.

A sophisticated investor, the formal definition is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. Very vague, and there are no income requirements. It’s just saying that they have to have sufficient investing experience and knowledge of investing. We’ll go over a little bit more about the qualifications, what you need to do for someone to be considered a sophisticated investor.

Now, the reason why I discussed the accredited and sophisticated investors is because there are two main types of syndication structures, and based off of which one you select, you might be able to only have accredited investors, or you might be able to add in a certain amount of sophisticated investors as well… And these two different structures are 506(b) and 506(c).

There is something called Rule 506 or Regulation D, which something from the SEC, and it provides two distinct exemptions from registration for companies when they offer and sell securities. These are the 506(b) and the 506(c).

For 506(b), which is actually what Joe does, you cannot use general solicitation or advertising for investors. You can’t go on social media and advertise your deals. You can’t send an e-mail out to a general e-mail list you have about a deal. You can’t stand on a street corner with a banner saying “Invest in my deal.” None of those things are allowed.

Instead, you must have a substantive, pre-existing relationship before you make the offer to invest. That means you’ve already had a conversation with this investor about their finances, or about their business, or about their investing experience before you actually send them a deal to invest in.

Also, for the 506(b), you’re able to sell to an unlimited number of accredited investors, and up to 35 sophisticated investors. So if  you have someone who you have a pre-existing relationship with, who you’ve already had a conversation about their finances or their business, and they are not accredited, they do not meet that million-dollar net worth requirement, or they do not have that single income of 200k or that joint income of 300k, then they can invest in a 506(b), and you can actually have up to 35 of those people.

So 506(b) is actually really good for those who are just starting out, because unless you have a network of high net worth individuals, then you likely do not have many accredited investors, but you probably have access to a lot of sophisticated investors within family, friends and work colleagues. Since you can have up to 35, you could definitely do a deal with only sophisticated investors.

So for those listening  who haven’t done a deal before, this is most likely the route you’re going to take. I probably should have said this in the beginning of this episode, but I’m gonna say it now as a disclaimer – I am not an attorney, so the advice that I’m offering is just general advice. I’m not telling you what’s good or bad, what you should or shouldn’t do to determine which partnership type is best for you. Please discuss this with a real estate or a syndication attorney.

Now that that disclaimer is out of the way, the last thing to know about the 506(b) is that in order to essentially certify that they are an accredited or a sophisticated investor – it’s a self-certification process through a questionnaire… So they can self-certify that they are an accredited or a sophisticated investor without having any third-party involved.

Now, 506(c) is essentially the opposite. You are allowed to do advertising for your deals; general advertising is permitted. As I said before for the 506(b), you aren’t allowed to advertise on social media or e-mail database, or stand on a street corner with a banner. If you pursue the 506(c) option, then you are allowed to do that, because you can advertise and you do not need to prove a pre-existing relationship with the investor.

Now, the caveat is that you can only take on accredited investors. So unless you live in New York City or a big city, then standing on the corner with a street sign is probably not the best way to attract accredited investors, but again, who knows…

Unlike the 506(b), where there’s a self-certification process, for the 506(c) you must take reasonable steps to verify the accredited investor status. So that means that you or a CPA, or an attorney, or a registered investment advisor must review the investor’s documentation such as their W-2’s, tax returns, brokers statements, credit reports, things like that, to determine that they do meet that accredited investor qualifications. So self-certification is not permissible.

Overall, the differences between 506(b) and 506(c) is that with 506(b) you can’t advertise, you must have a pre-existing relationship with the investor. You are allowed to take on sophisticated investors, and the investors can self-certify that they are accredited or sophisticated.

For 506(c) you are allowed to advertise, you don’t need a pre-existing relationship, you’re only allowed to take on accredited investors, so no sophisticated investors, and you must take reasonable steps to verify the accredited investor status.

Now, I mentioned earlier that Joe does 506(b), but they only take on accredited investors. Again, I’m not an attorney, and all I wanna do is provide you with the information on the differences between 506(b), 506(c), as well as the differences between a syndication and a joint venture… But at the end of the day, in order to determine what’s best for you, you need to consult with a real estate attorney and a securities attorney. To learn more about those two team members, you can go to SyndicationSchool.com and check out those episodes on building a team.

Now, I know this was a short episode, the shortest probably of all that I’ve done so far, but I wanted to have a standalone episode that went over these JV versus syndication, and the 506(b) versus 506(c).

This concludes part two. In part three and part four we’re going to start talking about how to actually raise money from passive investors. Those two episodes are gonna focus on the different strategies and tactics for actually raising money from passive investors, and then likely part five and six are gonna focus on how to actually have these conversations with investors once they start to reach out to you through your various lead generation methods.

Then from there, once you’ve actually secured your verbal commitments, then we’ll talk in the next series about how to actually find deals. In the meantime, I recommend listening to part one, as well as other Syndication School series about the how-to’s of apartment syndications, and be sure to check out the episodes with the free documents as well. All of that is available at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

JF1556: How to Build Your All-Star Apartment Syndication Team Part 4 of 4 | Syndication School with Theo Hicks

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The Process for Hiring Attorneys, Mortgage Broker, and an Accountant


Three huge parts of your team are discussed today. When, why, and how to hire great attorney’s, mortgage broker and an accountant. If you haven’t listened to the first parts of this series, you should get caught up there first. Those were episodes 1548, 1549, and 1555. Once you have all these team members in place, you’re one giant step closer to closing your first apartment syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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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. 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 am your host, Theo Hicks.

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document, a spreadsheet, or some sort of resource for you to download for free. All of these free documents, as well as past and future Syndication School series, can be located at SyndicationSchool.com.

This episode is going to be part four of a four-part series entitled “How to build your all-star apartment syndication team.”

So far, in part one, you learned the six ways to find the various team members, as well as the process for hiring team members number one and two, which are the business partner and the mentor. In part two you learned the process for hiring team member number three, the property management company; in part three, which was yesterday, you learned the process for hiring real estate brokers, so team member number four.

In this episode we will be discussing the process for hiring team members five, six and seven, which are your attorneys, the mortgage broker, as well as the accountant. Then lastly, we will discuss what order to actually hire these seven team members in.

Team member number five is going to be the attorneys. In particular, there are two attorneys that you need to bring on your team – the real estate attorney and the securities attorney. Now, the main purpose of these attorneys is to help you with the creation and the review of the various contracts required to complete a syndication deal.

There are essentially four major documents that the attorneys will help you create or review, the first being the Purchase and Sale Agreement (PSA), which is the contract between the seller and the buyer, outlining the terms of purchase. Usually how it works is you’ll get a deal, and when you submit your offer, you submit it in the form of an LOI, which is a non-binding agreement that just shows your intent to buy at these specific terms. Then they’ll review the LOIs, they’ll have either a best and final sellers call, or they’ll just select the best offer, and you’ll be awarded the deal… At which point, the process of signing the PSA begins.

Usually, the PSA is going to be created by the seller’s real estate attorney, but make sure that if you are the buyer, that you have your real estate attorney review the terms of the PSA as well.

Once you sign the PSA, you move on to the due diligence phase, and at that point you will need to create document number two, which is an operating agreement. Now, there’s going to be two different operating agreements. The first operating agreement is going to be for the general partnership, so it outlines the responsibilities and ownership percentages of the GP members.

If you remember – maybe it was part one; I’m not exactly sure which episode it was – we discussed the fact that the GP is likely not going to be just one single person. There’s likely gonna be someone who is the acquisitions person, and maybe that person also does the asset management, but then someone else does the equity raising, but then maybe that person who’s equity-raising has four or five people helping them raise money, so that’s six people, and they might have two loan guarantors, so that’s eight people on the GP. So you’re gonna need an operating agreement between those eight members to determine who does what and what percentage of the GP do they actually own.

Then you’ll also need to create an operating agreement between the general partnership and the limited partners. That outlines the responsibilities of both parties, as well as how much of the deal the GP owns, and how much of the deal the LP owns, and how does the compensation work, and things like that. Both of these operating agreements are created by a real estate attorney.

Now, the third document is the private placement memorandum (PPM), which is a legal document that highlights the legal disclaimers for how essentially the LP can lose money in the deal. It includes a summary of the offering, a description of the property that’s being purchased, information on the investment min and max amounts, the key risks involved with the offering, a disclosure on how the GP and LP are paid, as well as other basic disclosures like information on the general partnership and a list of all the risks associated with fee offering.

Usually, these PPMs are going to be at least 100 pages long for a 100-unit apartment building, and it’s jam-packed with a lot of information. This is going to be created by your securities attorney. The first two – the PSA and the operating agreement – are the real estate attorney, and the PPM is where your securities attorney comes into play.

Then the fourth major document is going to be the subscription agreement, which is essentially a promise by the LLC that is the purchaser of the property – because typically you will create an LLC that will buy the property, and then your investors will buy shares of that LLC. So the subscription agreement is a promise by this LLC to sell a specific number of shares to the LP at a specific price, and it’s also a promise by the limited partners to pay that price. This is going to be prepared by the real estate attorney as well.

For these four documents – for the PSA you could probably work with your real estate attorney one time to create a Purchase and Sale Agreement template, and then just have blanks for the property name and due diligence periods, and things like that… So you’ll likely only need to do that one time.

The operating agreement – you’re only gonna need to do the operating agreement one time for the GP, but you’ll need to create a new operating agreement for the GP and LP for each deal that you do. Again, that’s with the real estate attorney.

The private placement memorandum – similar to the PSA, you can probably make that once and then just do some slight changes for each deal. And then for the subscription agreement – again, that’s gonna be prepared for each deal, but you’ll likely have them create a template one time, and then kind of pay them for their time to fill in the blanks.

Those are the four documents that those attorneys will help you create.

Other things that attorneys could do for you is to advise you on the best structures for your operating agreements. For the general partnership, they’re gonna advise you on how to structure that, as well as how to structure the LP and GP. And usually, they’ll send you a questionnaire and you’ll fill it out, and then based off of that, they’ll create the operating agreement; they might go back and forth and ask for questions on certain things they don’t understand, or certain things they need more clarification on, and get more explanation on your background, your business partners’ background, what you’re trying to do with the deal, so they could help you create the best structure possible.

Then, of course, you can consult with them on an as-needed basis. If things come up legal-wise, then you can call up your real estate attorney and have a conversation with them about that.

Now, each of these documents obviously cost money, and that’s how the attorneys are gonna be compensated. Typically, all of these will likely be made between putting the deal under contract and closing. They might make the operating agreement for the general partnership before you put the deal under contract, but the PSA, the PPM and the subscription agreement are things that are likely going to be created once you have the deal under contract, so you have to keep in mind how you are actually going to fund these legal fees before you close on the deal, because you’re not gonna have investor money yet, so it’s gonna have to either come out of pocket, or someone else is gonna have to cover it. But you will get reimbursed at closing, so at least you’ll get your money back, as long as you do close.

These are ballpark numbers how much is it gonna cost for these four documents… And again, it’s basically gonna depend on how complicated the partnership is, or how complicated the contract is going to be… Because I’m going to give you some pretty big ranges.

For the Purchase and Sale Agreement it could be anywhere between $1,000 to $5,000. For the operating agreements, I’ve seen as low as $350 and as high as $5,000. For the PPM, this is the one you’re gonna pay the big bucks. This could be anywhere from a few thousand dollars – but that’s gonna be unlikely –  up to $40,000. So you’re gonna be somewhere in the $10,000 most  likely, but if you’re doing a super-complicated deal, then expect to shell out 40k-60k for this Private Placement Memorandum. Maybe a great way to break into the apartment syndication industry is to become a securities attorney, and if you partner up with some investors, you can make a ton of money by creating these documents.

Lastly, the subscription agreement is gonna be similar to the operating agreement, so it could be a few hundred bucks to a few thousand dollars, depending on how complicated the structure is.

In order to actually qualify the attorney — these last three team members, you’re not gonna qualify them and sell yourself to them the same way that you did for the property management and the brokerage, because they’re more providing kind of a service that you just pay them money and they do it for you; you don’t need to win them over with your experience and background. You show them the money, and they’ll create these documents for you.

But there are a few things you wanna do. You don’t wanna just work with just any securities attorney or any real estate attorney. For the securities attorney it’s really not going to be that big of a deal. You just wanna make sure that they actually specialize in apartment syndications, and they specialize in the types of apartment syndication that you’re going to do. The two major ones are gonna be 506(b) and 506(c), which we’ll talk about in more detail in future episodes, but just very high-level – 506(b) you’re allowed to bring on sophisticated investors, so you don’t just need to bring on accredited investors… But you must have a pre-existing relationship with all of your investors. You can’t find someone one Bigger Pockets and have them invest in your deal; you need to know them and prove that you know them.

506(c) is kind of the opposite – accredited investors only, and these investors must be verified by a third-party, and you as a syndicator are allowed to solicit for this money. So you  can create Facebook ads, you can post about it on the Bigger Pockets marketplace, you can drop fliers from the sky… You can really do whatever you want with 506(c) in regards to soliciting for money. So those are kind of the major differences between the two.

506(b), again – you don’t need accredited investors, but you must know your investors. 506(c), accredited investors only, but you don’t need to know them, and you can actually advertise for your deals. That’s for the securities attorney.

Then similarly, for the real estate attorney, you wanna make sure that they have experience making operating agreements and subscription agreements for apartment syndications. You don’t want a real estate attorney that focuses on single-family, for example. Essentially, you wanna make sure that these attorneys know how to do exactly what it is you want them to do, and they’re not learning on your dime.

Now, you don’t wanna pay the attorneys until you are for sure going to close on the deal, because you don’t wanna spend thousands of dollars on the PPM, and the PSA, and the operating agreements if you don’t end up actually doing a deal. So what you wanna do is you want to first have an intro call, 30 minutes (it’s usually going to be free), just to qualify them, to make sure that they actually specialize or at least have experience in doing exactly what it is that you wanna do. Apartment syndications 506(b), for example. But you don’t want to after that have them create your operating agreements and PPMs. Wait until you start actually looking at deals and you’ve got a deal that you are interested in buying before reaching out to them and saying “Hey, it’s go time”, to start creating those documents. So that’s the attorney.

Next it’s going to be the mortgage broker. The mortgage broker, as the name implies, is going to provide financing for the deals. That’s their primary focus, and that’s what all mortgage brokers are able to do. Additionally, you might find a mortgage broker who is willing to help you with the underwriting. If you just find a deal that you’re interested in submitting an offer on, you can send them the info and they will provide you with the ballpark loan terms, and they also might actually provide equity.

A mortgage broker that I work with – they provide debt, but they also raise money from institutions. As long as you need to raise more than a certain number of dollars, they can help you raise money for that deal, as well.

Primarily, they provide financing for deals, but they might have additional services as well. Like the property management company and the real estate broker, in order to earn these additional services, you’re going to need to prove yourself. We’ll talk about that here, in a few seconds, but how they are compensated first – they are usually paid closing costs and financing fees. That’s what comes out of your pocket, at least.

A good rule of thumb for closing costs is it’s gonna be around 1% of the purchase price, and the financing fees are gonna be around 1.75% of the purchase price. In total, around 2.75% – 3% of the purchase price is gonna go towards paying this lender or mortgage broker.

Now, in order for you to qualify them, to make sure they’re in alignment with what you need, there’s a  couple of questions you want to have answered. And again, don’t just ask them these lists of questions robotically; try to organically get this information out of them and do some research on them beforehand, to see if you can figure out some of the answers to these questions.

One thing you wanna know is how many deals they provided financing on in the last 12 months, to get an idea of how active they are. Then you also wanna know what types of loan programs that they offer to someone like you, with your background. So explain to them your background, exactly what it is you’re looking to do, and then ask them what’s the best loan program that they have to offer. Do they offer agency debt, do they offer bridge loans, do they offer interest-only loans? What type of loan-to-value they can provide? What are the loan terms? Three-year loans, twelve-year loans, thirty-year loans? Will the debt be recourse or non-recourse? If you don’t know what those things mean, I will definitely do future episodes on lending and financing and loans, but for now, if you go to our website, JoeFairless.com and check out the blog, you’ll find different posts on agency versus bridge loans, recourse versus non-recourse… Or even better, just google “joe fairless bridge loans” or “joe fairless recourse vs. non-recourse” and you’ll find information on that… But again, I promise you I will do future Syndication School episodes focused solely on talking about debt.

You also wanna ask them how they qualify a deal. What do they need from you in order to qualify you for financing? Usually, if you have a deal, they’re gonna ask you for the rent roll, the Trailing-12 months profit and loss, as well as the offering memorandum and a pricing target, and then they will provide you with a quote based off of that information. Usually, they’re gonna provide financing based off of a loan-to-value or loan-to-cost.

What they’ll do is they’ll use the in-place NOI, or they might do some things differently, like they might use T-3 income (trailing three months income) and then maybe a combination of the 12-month income and the 12-month expenses, or maybe they might use the expenses that you’re going to project, but  they’ll use some sort of NOI – they all calculate it differently – as well as the market cap rate to determine what the value of the property will be, and then they will fund a percentage of that. That’s what the LTV is. An 80% LTV means that they will fund 80% of the property value. If the value of the property is a million dollars, then they will loan $800,000 and you’ll need to come up with the remaining $200,000.

Now, the cost is based off of the value plus the cap-ex costs. If the all-in price is going to be a million dollars, so the purchase price is $800,000 and the renovations are $200,000, and the loan-to-cost is 80%, then they’ll loan $800,000 and you need to come up with the remaining $200,000. Usually, loan-to-cost is for bridge loans, which are these shorter-term construction-type loans for properties that can’t qualify for agency debt.

Now, they might also take the debt service coverage ratio into account. Essentially, that is a ratio of the net operating income to the mortgage payments. They’ll obviously wanna see a net operating income that’s higher than the mortgage payments. The standard minimum is going to be 1.25 for agency debt, and around 1.1 for bridge loans. Again, that’s based off of the in-place NOI, or however they calculate the NOI, and they will use that plus the minimum debt service coverage ratio to determine the maximum amount of debt service or monthly mortgage payments that you’ll pay, and then they’ll kind of back-calculate how much money they can lend you based off of the maximum amount of debt service the property can qualify for.

You’re also gonna wanna ask them how much financing that you will actually qualify for. Ask them how much they can loan to you personally. Again, they’re gonna base this off of the LTV, maybe debt service coverage ratio, but at the end of the day, they’re gonna need someone to sign on the loan that meets the liquidity, net worth and experience requirements… Which if you don’t remember what those are, go back to listen to part one. That’s where I have the conversation about the loan guarantor. The loan guarantor is the person who signs on the loan to help you qualify.

Let’s say for example you are buying a million dollar property, and they’re willing to lend you $800,000. You’re going to need to have a net worth of $800,000, as well as experience with a similar-sized deal, and then some sort of liquidity requirements; it might be 10% or 15% of the $800,000. If you don’t meet that, then you’re gonna need to bring someone or someones on to help you sign the loan, and then compensate them. Again, I’ve talked about the loan guarantor in part one of this series… But to determine how much you actually qualify for, they’re gonna ask you to fill out a personal financial statement; you’ll fill out all your financials, credit history, net worth, things like that, and they’ll figure out exactly how much money they can lend you.

Now, in order to win them over, and ideally have them provide you with better financing, to provide you with estimates on financing when you’re underwriting, as well as maybe if they’re equity raisers, they’ll trust you enough to have their investors invest in your deal… Here are a few things that you can tell them, or that they’re at least going to ask you when you’re talking to them, so that they can actually qualify you as an investor.

They’re gonna wanna know who your property management company is, they’re gonna wanna know the statistics on them – how many units do they manage, what size are these units? Are they local? What type of properties do they focus on? They’re also gonna wanna know what your business plan is; what type of property are you buying? Value-add property. What’s the cost gonna be? What’s the number of units? What do you expect to pay for cap-ex costs? Is it gonna be a certain dollar per unit? How much do you expect to pay for exterior renovations? What’s your plan for when you actually take over the property? How long will it take to implement these renovations? How long will it take to increase the occupancy rates? Essentially, what’s your five-year proforma look like? Or seven-year, depending on how long you’re gonna hold on to the property, which is the last thing they wanna know about your business plan – what’s your hold period? Are you gonna hold on to it for one year, five years, ten years, indefinitely? They’ll want to know that as well.

They’ll also wanna know how you’re gonna fund the deal. How much money are you personally gonna put in the deal, and then how much money are you going to raise, and then who are these investors, and how do you know them?

They’re also gonna want to know what the LP/GP structure is. Are you bringing on debt investors or equity investors? If debt, what interest rate are you paying them? What’s the balloon period? If equity investors, what’s the preferred return, what’s the profit split? They’ll wanna know all these things.

They’ll also likely wanna know how you plan on funding the upfront costs, so the costs between contract and close: earnest deposit, due diligence fees, the legal fees I just talked about earlier… How are you gonna fund these things? They’re also going to want to know what your multifamily experience is, because most lenders are gonna have a very vague experience requirement that they can’t necessarily communicate to you during the initial conversations, but… The best explanation I’ve heard is that you need to have experience with a similar deal in the past. If you don’t, then you’re gonna need to have a loan guarantor who does. And they’re also gonna want to talk about your team members and their experience as well, particularly the property management company… Because they’re going to want to see the contract between you and the property management company to make sure that the company who is managing the property will take good care of it, because again, the lender wants to get paid every month. And then lastly, they’re gonna ask you to fill out that personal financial statement to determine your liquidity, net worth, credit history, existing debt, things like that, to qualify you for financing.

Now, the last team member is going to be the accountant. The accountant will do your yearly taxes, they’ll create the schedule of K-1’s, the tax documents for your investors at the end of the year, ideally they help you with ongoing bookkeeping, and then they should provide you with general tax advice, as well as some tax planning services, and then maybe if this is what you decided to pursue, they could help you with a 1031 exchange on the back-end.

Again, similar to the lawyer, you don’t really need to win over an accountant. Just pay them money, and they’ll do what you paid them to do. But like all other team members, you want to qualify them to make sure they’re a good fit. One important thing to know is if they currently represent apartment syndicators, because you don’t want them learning the apartment syndication business plan and the tax benefits for apartment syndications on your dime. They should already know what types of tax deductions you can take, and also knows the apartment syndication business model.

You’re also gonna wanna know how their fees are structured… A good understanding of exactly how you’re going to be charged. Is there a fee each time you call them, or do you put them on a monthly retainer and you can call them whenever? Do these ongoing fees include the tax returns at the end of the year? Is that separate? Do they bookkeeping, and how much do they charge for that? Things like that.

You’ll also wanna know who’s your point person. Are you gonna be communicating back and forth with a partner, or will it be a mid-level accountant, or will it be someone right out of college? Ideally, it’s at least a mid-level accountant, but even better would be the partner.

You’ll also wanna know how conservative or aggressive their tax positions are. That should obviously align with your preferences. If you’re very conservative, then you want a conservative accountant. If you’re very aggressive, you’ll want an aggressive accountant. But if you do get an aggressive accountant, you’ll also wanna know how that info will be communicated to you, and whether or not you have the final say of whether you can deny or accept those tax positions.

You’ll also wanna ask if they have a secure portal to transfer sensitive files back and forth, which they probably will… But that’s important, because tax documents include important information, like your social security number, how much money you make, things like that… If it’s not a secure portal, then you might run into identity theft issues, so you wanna just confirm that they’re not just sending information back and forth via regular e-mail.

You’ll also wanna know how proactive they are with tax planning and how the tax planning services work. Obviously, you want them to be proactive and be up to date on the tax code, and then get some information on how tax planning works, and see if that aligns with what you’re looking for.

You’re also going to want to know if they’re able to file tax returns for all state and local governments in the country, because you might move or you might change markets, and you still wanna work with this accountant and not have to start over with someone else.

You’ll also wanna ask them what they expect of you, just to set expectations earlier. What do they expect you to send them, when do they expect to send it to you, how do expect conversations to go? Things like that.

And then lastly – this is a big one – you’ll wanna know when they will send you the investor K-1’s? A big thing that you’ll hear from passive investors is that the syndicators either don’t send the K-1’s on time, or the K-1’s are incorrect. We proud ourselves on sending the K-1’s by March 31st each year. You’ll just wanna confirm with the accountant when they will get those to you by, and what you need to do in order to stay on schedule.

That’s the accountant… Again, really the only way to win them over is just to pay them; whatever compensation structure they have, just make sure to pay them on time. And obviously, when they tell you what they expect out of clients, you meet that and don’t go overboard.

Lastly, let’s talk about what order to hire your team members in. Again, your team members are gonna be a partner, a mentor, a property management company, real estate brokers, attorneys, mortgage brokers and accountants. Here’s the best path forward for someone who has none of these — but at the end of the day it’s really up to you. This is just what I found to be the best way, because again, if you remember, when you’re trying to win some of these people over to your side, you’re leveraging the experience of other team members. So if you don’t have that team member yet, then you’re leaving a lot of leverage on the table. Here’s what I did.

First, you wanna start with a mentor. Start very high-level, find a mentor who’s an active apartment syndicator, who is successful; they’re doing deals that at least meet their projections, and ideally exceed those projections. Then from there, you should work on finding a business partner.

With the mentor you’ll learn a lot about apartment syndications, and then you’ll learn what you like and what you’re good at, and what you suck at. Then you can find a business partner to complement your strengths. Once you have a mentor and a business partner, next is to work on getting verbal commitments from investors, which is going to be the focus of the next series. The next series in the Syndication School is gonna be all about passive investors. I’m not sure how many parts it’s gonna be yet, but it’s gonna be a long one.

Once you get your verbal commitments from investors, next is to start reaching out to property management companies and mortgage brokers. Then once you’ve got your property management company and your debt lined up and your equity lined up, a business partner and a mentor, that’s when you start looking for real estate brokers, because at this point you’re ready to start looking for deals. And then lastly, as you’re looking for deals or after you find a deal, you can start reaching out to attorneys and accountants.

That concludes this series. In this particular episode, part four, you learned the process for hiring these final three team members, which are the real estate and securities attorney, the mortgage broker and the accountant, as well as what order to actually hire these team members in.

To listen to part one through three of this podcast series, which is “How to build your all-star apartment syndication team”, and to download your free team building spreadsheet document, as well as other Syndication School series about the how-to’s of apartment syndications, make sure you visit SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

JF1535: The Power Of Your Apartment Syndication Brand Part 2 of 4 | Syndication School with Theo Hicks

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Yesterday, we opened the door on the branding topic. Today, Theo gets into the weeds a little more on the topic and focuses on website traffic and conversions. Your website is one of, if not the most important component to your apartment syndication brand. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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 back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks.

Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we offer a document or a spreadsheet or some other resource for you to download for free. All of these free documents and the free Syndication School series can be found at SyndicationSchool.com.

This episode is part two of a two-part series entitled “The power of your apartment syndication brand”, so make sure you listen to part one, which aired yesterday, or if you’re listening to this in the future, is the podcast episode directly before this one. In part one you will learn the primary benefits of creating a brand as it relates to starting and growing your apartment syndication business; you also learn the one thing Joe wishes he would have done differently with his brand starting out, which was to define a specific target audience, and to do so, we introduced the concept of 2,000 true fans, and pursuing selective fame versus general fame.

Then we talked about how to actually select your target audience starting out, as well as talked about the first three main components of the brand, which is your company name, your log and your business card. In this part – part two – you will learn how to create your first website and how to increase your website traffic. So the focus is going to be on the website.

The website is going to be the most important aspect of your brand. If someone googles your name or your company name, the website is going to be the first thing that they see, so this is going to be their introduction to you and your company, so that is going to be the most important component, because first impressions are everything, and if you don’t have a solid website, then you are leaving a lot of money on the table.

The website is also going to be your main lead generator, as well as your main lead capture source. Leads would be your passive investors, so if it’s the first thing they see, it’s going to be the lead generator, and at the same time – we’ll get into this later in the episode – it’s going to be the main place where you capture information of interested investors.

And then lastly, it is also going to be the source of all of the content you create for your thought leadership platform, which will be the focus of the next syndication school series. So the website – very important.

To create your website, there’s really an infinite number of ways to do this, but I will just talk about one strategy in particular that applies to someone listening who has not done a syndication deal yet. When you’re first starting out, you should definitely create the website yourself, because websites are very expensive and it takes a lot of time to create a website professionally, and if you’re just starting out, you likely don’t have the money to invest in a website, nor the time to sit around and wait for the website to be completed. The best strategy is to start off by making it yourself.

Now, your first websites should be very simple, should not be complicated with a thousand different pages and 20 different tabs on the home screen. What you should do is you should go to a website creator like Wix, Weebly, WordPress, GoDaddy or SquareSpace, which offer step by step guides for creating your website. So you’ll go there and it will literally walk you through how to create pages, color schemes, add pictures, add content to the website.

So you wanna do that, and you should also be able to buy a domain name at one of those sources as well. I got mine through GoDaddy, or you can use WordPress, as well. For the domain name, it can either be YourName.com or YourBusinessName.com. It really depends… Or you just do both, like what Joe does. Joe has JoeFairless.com, as well as AshcroftCapital.com.

So if you’re just starting off, I recommend right now going to GoDaddy and buying YourName.com. Even if you’re not gonna use it particularly for your syndication business, it’s always good to lay claim to that, just in case you want to start a consulting business or use it for other purposes. For me, unfortunately, TheoHicks.com was taken, so I had to take TheoHicks.org.

Now, as your business grows and your bank account also grows, that’s when you want to actually hire a web designer. So you already have a website established, and you can hire a web designer to create a second website while your first initial website is still active and live. In order to hire someone to professionally make your website, you can go to a site like Fiverr or UpWork, Elance, you can google “web designer”, or the best strategy is to ask for referrals from a website that you really like.

Now, as I mentioned before, and this is why you didn’t create one starting out, but professionally-designed websites are expensive. If you wanna get a cheaply done website, it might be a couple hundred bucks, but in order to get a great website, it’s gonna run you at least a few thousand dollars. When you create a professionally-done website, it’s really up to you; probably the limiting factor is going to be money… So once you have the money to buy the website, you should definitely do it. But also, you don’t want to start off by, again, creating a professionally-done website, because it takes a long time and you want to make sure you probably have a deal under your belt first, or at least have started putting together your team before focusing on the professionally-done website, because you probably have other duties that are more important, and your basic website should do the job.

Now, what do you include on your website? If you listened to part one or if you go to SyndicationSchool.com, or the show notes of part one, you’ll be able to download the free document that came with that, which was a branding resources document, which gives tips, pointers and links to things related to building a website. One of these sections includes 11 examples of apartment syndicators’ websites. So if you wanna know what to include on your website, the best way to do so is to look at the websites of other accomplished syndicators. I’d definitely recommend checking out that document and spending an hour and click through the different tabs and pages on those 11 sample websites.

Some of those websites are from very accomplished, advanced syndicators, and when you’re first starting out, you’re not gonna have the level of content that they do, because you haven’t had the time to create that content yet. So at a minimum, when you’re first starting out I recommend having these four tabs. Number one is gonna be your homepage, obviously. This is gonna be the first page that they see when they go to your website, so make sure that it is attractively designed. Also, I recommend putting a call-to-action on the front of your website.

Again, the ultimate purpose is to capture the information of passive investors. Everything else that you do is in order to direct more traffic to your website so you are able to convert more people into passive investors. So this call-to-action is going to be an e-mail capture form. Now, when you’re starting off, it’s probably just gonna be very simple and just say “Input your e-mail to receive my weekly newsletter, or receive updates on my business”, or something along those lines, because you haven’t really created any giveaways yet, but ideally, you are offering a free resource in return for their e-mail. So they give you their e-mail, and you give them some sort of free document. We’ll go over what type of document that could be here in a little bit. That’s the first tab, the homepage.

Secondly, you wanna have an About page. You can call it About, or you can have it like Joe, which is Meet Joe, or you can come up with a creative tab that gets the same point across. Obviously, this About page will have a bio for you, your company and an explanation of what you do.

Number three – you want to have a Blog tab, and this is where you’re going to post your thought leadership content, so your podcast, your blog, YouTube videos… Really any content that you create will be posted on this page.

And then lastly, you wanna have a tab dedicated to lead capture. These are capturing the e-mails of investors, or if you’re looking for a business partner, or a consultant, or team members… Whoever’s information you wanna capture, you’re gonna have a page dedicated to that specifically. Again, this is where you capture the information of your investors.

So those are the four pages that you want to have at a minimum when you are initially creating your website. Now, as you become more advanced, you’re going to add more tabs and pages, and have a better design overall. Using Joe’s website as an example, he has — and again, this is in addition to those four previous components, which is the homepage, the About page, the Blog page and the lead capture page… So he has a page dedicated specifically to the podcast. Again, when you’re first starting off, you probably just have a basic Blog and post everything there, but once you start to add on – you’ve got a blog, and a podcast, maybe a YouTube channel – you’ve got multiple content streams, then you wanna create tabs or pages dedicated to that specific piece of content.

Joe has his daily podcast, so he has a podcast page where he posts all the new podcasts. He also has a consulting program, so he has the “Work with Joe” page, which is actually not only just a consulting program, but also for passive investors, too. So it’s details on both of those programs, passive investors and the consulting program, as well as a lead capture button for them to input their e-mail if they’re interested.

Also, his About page is more detailed than just his bio. He also has information about the charities he’s involved in, as well as the press mentions. If he was mentioned, or posted content on Forbes, or Huffington Post, those logos would be there, as well as links to those articles.

He also has a Resources tab. This is where all the resources that he offers are located. Specifically for Joe, he has a Passive Investor page, with passive investor FAQs. He’s got a page for content that is specific to apartment syndications, and he also has a My Recommendations page, where he recommends different resources and services that he has used for his syndication business. So really any other resource you can think of would go under this type of tab.

He also has an Events tab for his conferences and meetups, a Books tab for all his books, and then the most important page, the homepage, which you will have on your initial website, but it’ll be very basic… As you become more advanced, you want to incorporate all of the most important content on your homepage. For example, right now the homepage features a link and info on our new book, the Best Ever Apartment Syndication Book, which you should definitely buy at Amazon.com. There are links to the two lead capture forms for his passive investors and consulting program, there is a section for the most recent content, so the YouTube videos, blogs, podcasts… And then also, he has the company metrics. Since JoeFairless.com is more focused on the brand, the metrics are information on the consulting program, information on podcast viewers, YouTube viewers, things like that.

Then also scattered throughout the website are multiple e-mail capture forms, giving away multiple pieces of content. So rather than just having that one lead capture on your homepage, you want to not only create multiple lead capture forms on different pages, but also offer various pieces of free content as well, and make sure that the giveaways are specific to that page. For example, on Joe’s passive investor page, his call-to-action wouldn’t offer something that has to do with fix and flipping, because that’s not relevant.

Other things to think about in regards to your website is the pictures that you use… Again, this seems basic and rudimentary, but it’s very important, because you don’t wanna get into legal problems later on. So when you’re first starting off, you can probably get away with using images from Google Images, but as you grow, you might run into legal issues because you are technically stealing someone else’s image. So any images that you use on your website, or your blog, podcast, thought leadership platform, things like that – make sure they’re royalty-free. The two websites that I use for royalty-free images are Pixabay.com, or Pexels.com. You’ll be able to download royalty-free images from there.

Secondly is tracking the analytics on your website. The best way to do that is Google Analytics. If you don’t track your website’s performance, then you have no idea what is and isn’t working. The best way to determine what is and isn’t working is to look at the analytics on a weekly basis. The three main metrics that we track are the number of pageviews, the number of unique pageviews, and the number of new users. We actually track that for the overall website, for the blog specifically, and then depending on what project we’re working on, we’ll also focus on a specific blog post or a specific page on the website.

Now, setting up your website on Google Analytics is not that difficult. It’s a highly technical conversation and not very interesting, so rather than discuss it on the podcast now, we will be giving away a free document which walks you through, with screenshots, exactly how to set up analytics on your website and create your first custom report that tracks those three main metrics that I mentioned previously, which are unique pageviews, pageviews and new users. To download that, make sure you go to SyndicationSchool.com, or look at the show notes of this episode to download that free document.

The rest of this podcast episode I wanna focus on the best practices for increasing your website traffic once your website is actually created. Because again, the main purpose of your website, the ultimate purpose is to capture the information of passive investors and convert them into customers. In order to do so, you need to get prospective passive investors to your website. These are eight or so strategies to accomplish that. These strategies come from Joe, and based off of his experience growing his website, as well as podcast interviews with people who have been able to grow social media followings of in the six figures, or people who are well-known marketing experts like Neil Patel. Let’s just dive right into this… And again, the goal of all of these are to get people to your website.

Number one is going to be understanding what you should focus on starting out. When you’re first starting off, you should focus on traffic first, and conversions later. So focus on getting people to your website, not getting people to fill out your lead capture form. Now, the standard is 10,000 unique visitors per month. You wanna work your way up to 10,000 unique visitors per month before you focus on conversion. However, since we’re syndicators, we don’t need 10,000 customers, so to speak… We need our 2,000-3,000 true fans. So rather than waiting until 10,000 to focus on conversions, you can focus on getting 2,000-3,000 unique visitors per month before you begin to focus on the conversions. That’s number one.

Number two, which is kind of broken into multiple components – leveraging social media to increase your website traffic. Starting off, you want to pick one or two channels to focus on, and focus on ways to get people from social media to your website. The top sites or channels to use are Twitter, LinkedIn, Facebook and Bigger Pockets. I wanna go over a couple of strategies and tips for each of those different channels, just because they are different, and things that work on Facebook don’t necessarily work on LinkedIn and vice versa.

Let’s start with Twitter. One strategy on Twitter is to look up your competition using the search.twitter.com function. Look up other people who are creating similar content as you, and search for their articles on search.twitter.com, and see which profiles share that content. Once you identify those profiles, you can reach out to them via Tweets or via direct messaging, and ask them to share your article, too. Because if they’re already sharing articles in that industry, they’re more likely to share yours as well. This is a little time-consuming, because you have to do it manually, but if you focus on this over time, you will see a huge impact on your website analytics, because people will be going to your blog, which brings them to your website, obviously.

Something else you could do is to search the popular hashtags for your specific niche: apartments, apartment investing, passive investors, real estate syndications, apartment syndications, multifamily, things like that. Number one, you wanna include those hashtags in any tweet that you send out, but two, it will also help you identify people who are also tweeting those same hashtags, sharing articles in that niche, and top profiles that you could potentially reach out to and have them retweet your articles or your tweets.

Then in regards to what to actually tweet, the best way to come up with content is to repurpose existing content. Again, I know we haven’t talked about the thought leadership platform yet, but if you have a blog and you write a 1,000-word blog post, you could probably pull out at least ten tweetable items from that. So if you write one blog post a week, then you’ll have at least 10 tweets for that week. Ideally, you’re doing more than that, so you have more tweets, but that’s a good start. And again, we’ll get into the frequency of posting content and everything related to that in next week’s episodes focused on the thought leadership platform. Those are some pointers on how to use Twitter.

For LinkedIn, the pointers are to 1) create your profile based on a specific goal, which in this case is to increase traffic to your website, but not only that, you wanna increase traffic to your website of your specific target audience. You’ve already defined your target audience, so you wanna create your profile with the goal of increasing the number of people from your target audience visiting your website. To do so, you want to focus on the keywords that your target audience is searching for, and include those in your profile. They’re probably searching things like “apartment syndication”, “multifamily syndication”, “apartment/multifamily investing”, “passive investing.” Figure out what main keywords your target audience is using and make sure that those are scattered among your profile, because that’s how the search function works on LinkedIn. So if they type in “passive investing”, your profile will come up.

You also want to infuse your headline with the keywords. So rather than using the basic headline, which is usually your name and your company name, instead have some sort of tagline that includes those keywords, “apartment investing” and “passive investing.”

When it comes to your profile, the last thing you wanna do is to just copy and paste your resume in there. Instead, you wanna think of your profile as a digital introduction to potential passive investors, that you want to impress and make them feel confident in your ability to help them… And a resume is not necessarily going to accomplish that, so focus on including the keywords, but also focus on including things that’ll have people perceive you as a credible apartment expert.

And then lastly – this is probably self-explanatory, but don’t have a selfie as your profile picture. It should be a professionally done picture, or at least have someone else take the picture. If you have a profile picture and they can see your arm taking the selfie, they’re probably just gonna pass over you. So that’s LinkedIn. Then, of course, you also wanna post any and all content that you have to LinkedIn, as well.

For Facebook – the best strategy for Facebook is to create a private group that is only available to your target audience. Everyone who is on Facebook knows that when you scroll through your regular newsfeed, the majority of the content is just noise; it’s cat videos, people posting pictures of their food, or going on vacation, and while that’s all fine and dandy, that’s not helping you or someone who wants to become a passive investor out.

Instead, if you create an actual private group, you can reduce all of that noise and it can be focused exclusively on your syndication business and helping out interested passive investors.

For example, we’ve got the Joe Fairless page; we also have the Best Ever Show Community page for all of the podcast listeners, and then we also have a private group for all of the syndication consulting program clients.

Something else to do on Facebook is to focus on building personal relationships. You don’t necessarily have to have every piece of content or every contact be involving real estate or syndications. Instead, you could send direct messages that are saying “Happy Birthday” or “Congrats on the new job/new deal”, or whatever it is. But instead of just posting it on their Facebook page or commenting on something like everyone else, take that extra time to send them a direct message.

Also, you can utilize the Facebook Live function. This doesn’t mean you have to have an hour-long presentation or it doesn’t mean you have to actually interview someone. Instead, you can summarize content that you’ve already created. Let’s say you’ve had a blog post that gives out five tips for finding deals, or five tips for finding an apartment syndicator – you can create a video overviewing that same content. Or if you’re going on a property tour, turn on Facebook Live. If you have a meetup group that you host, you can talk about this next week as well, Facebook-Live the speaker or the Q&A session, or the roundtable discussion, or just do a Facebook Live video saying “Hey, I’m at my meetup group. Here’s who’s speaking, here’s what I learned…” Again, the goal is to get people to watch that video and look up your name and go to your website.

Then lastly – and this will cost you money, but you can do Facebook advertising that targets your 2,000 true fans specifically, which is also a very powerful function. We actually used Facebook advertising for our passive investor site and saw a huge increase in traffic. The Facebook  advertising function is very powerful.

And the fourth site that you can use is Bigger Pockets. There’s really no tricks here, it just takes consistency. Number one, make sure you set up keyword alerts for things that your target audience would likely include in their posts – multifamily investing, apartment investing, syndications, passive investors, accredited investors, things like that. And then also, I recommend posting in the forums on a daily basis, at least one time, which would take you maybe two minutes to do. Over time, you will build up that credibility; you can also include, if you have a Pro account, a link to your website… So the more times you post, the more opportunities people have to click on that link to go to your website.

Overall, for a social media strategy, you want to create a calendar that’s 30 days to 90 days. Starting off it might just be a week, but plan out when and what you’re going to post. You’ve got your one or two channels, you set up a calendar to say “Okay, I’m going to post to Bigger Pockets ten times at 5 PM every day” or “I’m going to go on Facebook Live every Monday at 10 AM.” Create that calendar and make sure that you adhere to that calendar.

And then lastly – and this could be accomplished on really all four of these sites – is interact in the comments section of the top profiles in your niche. On Facebook, join the top multifamily investing groups or passive investing groups and interact in the comments section, as an example. So that is the long-winded number two, which is utilize social media to increase your traffic.

Number three is to be better than the competition. Look up what type of content your competitors are creating and recreate that same content, but do it better and more detailed. For example, if you find a blog post with top 10 tips for becoming a passive investor, you can write the same blog post, but give ten better tips, or give 20 tips instead… Because you know that — what I mean by competition, you wanna find someone who’s the market leader in this niche, so someone who’s getting 100,000 downloads to their podcast, or getting 100,000 views to their blog, because you know what they’re doing works, and if you replicate what they do but do it better, then it’ll work for you as well.

Something else to do throughout your website is cross-linking. You want to link to other blogs and pages on your websites in any new content that you post. A good strategy is to create a piece of cornerstone content – your main, most detailed piece of content, that has the most valuable information to your target audience and the blog or the podcast that you want (it has to be a blog, actually) the most people to read. In the new blog post that you create, link to that cornerstone article. Cross-linking is a thing that helps out with your SEO and searchability on places like Google.

Next, number five, I believe, is to not expect results right away. Don’t expect to create a website today and then have 100,000 unique visitors on a month. Instead, a good rule of thumb is to not expect to really see any decent results within the first six months, and don’t expect to see solid good analytics for at least two years. Now that you know that, instead of getting discouraged after six months, make sure that you’re consistently posting new content multiple times a week on your one or two social media channels.

Next, number six, is to create content specific ot your target audience. Again, it seems like a no-brainer, but if your target audience is passive investors, then don’t write blogs about fix and flips. In order to determine what is the best content and the right amount of content, so how frequently you should post, you can do A/B tests. You can for maybe two weeks post seven times a day — sorry, not seven times a day; if you want to, that’d be pretty impressive… But seven times a week, and then over the next two weeks post twice a week, and then maybe for the next two weeks post once a week, and see which one results in the highest number of traffic to your website. You may think that seven times a week is the best, but it depends on the target audience, because some target audiences only wanna read a blog once a week, whereas other want two blogs per day, and you won’t know until you test it out.

Same with the actual type of content. You can write content that’s very valued and high-level, and then you can write content that’s very specific and detailed and see which one performs better with your audience.

Number seven is to have an easily identifiable value proposition on your website. On your homepage you wanna have the call-to-action lead capture form that is ideally giving away a free piece of content, so someone who’s visiting your website should be able to instantly identify and locate that call-to-action. That call-to-action should be offering something that is the most valuable to your target audience.

For example – obviously, your target audience are passive investors, so your call-to-action should be very obvious and front and center on your homepage; there should be good contrast between the actual call-to-action section and the background of the homepage. It shouldn’t be surrounded by distracting pictures or other lead capture forms, and it should offer something to the target audience that is very valuable to them. Again, “Top 10 tips for passive investors”, and if they type in their e-mail address, they get that sent to their e-mail automatically and you have captured their information.

There’s something else that you also want to do in A/B tests – test different locations of this call-to-action, different colors, different fonts, different wording, different giveaways, and see which ones work out the best. Again, you want to remove anything that is going to distract your target audience from this value proposition. So make sure that’s front and center and not surrounded by anything that’s distracting.

And then lastly, number eight is once you are ready to actually start converting your visitors, the best way to increase your conversion rate is to create pop-up sliders. What pop-up sliders are is they’re similar to the call-to-action/lead capture form we’re talked about on this episode, but rather than it being fixed to the page, it pops up once they visit a page. So they visit the homepage and you’ve got your initial lead capture form, but then you also create something that pops up, that they have to click off of in order to remove, which increases the likelihood of them actually filling in their information, rather than them being able to just simply scroll by your fixed call-to-action.

For these, again, you want to 1) offer free content in return for their e-mail, and 2) run the A/B tests with different popups, different timing of when it pops up, what pages they pop up on, and the entire pop-up in general (color, fonts, description and the content offered).

Those are the eight best practices for increasing your website traffic. This concludes part two, where you learned why the website is the most important aspect of your brand, and mostly that’s because it’s the first thing that prospective investors will see when they look up your name… And it’s also the main lead generator and lead capture source for your business.

We also discussed how to actually create your first website and when to bring on a third-party designer to create a more advanced website. We went over what to include on your initial website, as well as what a more advanced website will look like. We also discussed how to set up Google Analytics on your website, which involves that free document available at SyndicationSchool.com or in the show notes of this episode. Then lastly, we went over the eight main ways to increase the traffic to your website. Now, a lot of those ways involve creating content, and when you’re listening to it you might be like “Theo, we haven’t talked about any content yet” or “What is this content you’re speaking of?” Well, that’s gonna be the focus of next week’s Syndication School, where we talk about the thought leadership platform, which is probably the second most important component of your brand, second to the website. Then we’re also going to talk about creating your company presentation next week as well.

To listen to part one of this series, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download your free documents, visit SyndicationSchool.com. Thank you for listening, and I will talk to you next week.

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JF1528: How To Perform An In-Depth Analysis Of Your Apartment Syndication Market Part 2 of 2 | Syndication School with Theo Hicks

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Now that you know The 3 Immutable Laws of Real Estate Investing and have done the 5 step property analysis exercise from part one yesterday, it’s time to learn 7 new strategies to implement that will dig even deeper and give you an even better understanding of the target market, down to the street level.

 

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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. Welcome back to another episode of the Syndication School  series, which is a free resource focused on the how-to’s of apartment syndications. As always, I am your host, Theo Hicks.

Each week we air a two-part podcast series that focuses on a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a free document or a spreadsheet for you to download. All of these free documents and past and future Syndication School series can be found at SyndicationSchool.com.

This episode is part two of a two-part series entitled “How to perform an in-depth analysis of your target apartment syndication market.” In part one you learned the three immutable laws of real estate investing and how that applies to your target market, and we also went over the five-step property analysis exercise that you performed in order to gain a more in-depth understanding of your target market on the submarket, neighborhood and street level. If you’ve not listened to part one, make sure you listen to that. You will need to listen to that before listening to this one, because I will be referencing a specific step from that five-step property analysis when discussing the extra strategies in this episode, which is part two. You will learn seven other strategies to implement in addition to the 200-property analysis exercise that will give you an even better understanding of the target market on that neighborhood/submarket/street level. Then we’re going to cumulate all of your previous efforts and data into a market summary report… So we’ll go over how to do that and why you wanna create one of those in the first place.

Let’s jump right in. We’re gonna go over seven other strategies that you can implement to have a better understanding of your market. One is to do the same exercise that we did in episode 1521, when we were analyzing our seven target markets using census.gov data. We’re gonna do the exact same thing, but rather than doing it for the city or MSA, we’ll take our one or two target markets and record data for the submarkets within that city or MSA, the neighborhoods, and/or the actual census tracts.

The reason why you wanna do this is because all of that data you gathered for the MSA and the city don’t really apply to the individual neighborhoods and streets. It’s just a blended average of all neighborhoods, all streets, all census tracts, all submarkets within that MSA, and as I’ve mentioned over and over again, no two neighborhoods are the same within a city, so you need to have a strong understanding of the actual neighborhoods or the actual submarkets or the actual streets within an actual city or MSA. One way to do that would be to gather data specific to that area.

So you go to census.gov, follow the exact same process outlined in episode 1521, but rather than searching by city, search by submarket, neighborhood, or census tract. So this is gonna be a much larger spreadsheet, but once this exercise is completed, whenever you’re coming across a deal, you can determine what submarket it’s located in, what neighborhood it’s located in, and what census tract it’s located in… And you can quickly look up all of the employment, and demographic, population etc. data on your spreadsheet. That’s one. Again, pretty labor-intensive, but if you do this, you will be a guru of your market.

Another one would be to talk to the local experts. This is kind of the opposite of number one, which is logging all of that census data… Because for that, you’re getting into the particulars. This, you’re getting a more high-level overview of what are the up-and-coming areas in the city or MSA that you’re targeting, as well as where to avoid, and who better to get that information from than people who have been actively a part of apartments for decades… So you can reach out to local apartment investors on Bigger Pockets or LinkedIn and set up a phone call or an in-person meeting with them and pick their brain on where they think the market is going,  where to invest, where not to invest.

Similarly, you can attend local multifamily meetups and talk to all types of real estate professionals focused on multifamily, and again, ask them questions about what their thoughts are on the market. Also – and this will be the subject of future Syndication School series, but once you start to put together your team, you’re going to begin reaching out to property management companies and real estate brokers, and a part of that interview process, you can ask them about their expertise on the market, to 1) know where to invest and where not to invest, and then obviously you wanna follow up and do due diligence on those areas… But at the same time, you also want to screen the management  companies and real estate brokers to determine how much they know. Because if they’re experienced and they’re credible, they should be able to tell you, for example, “We sold this many properties in this neighborhood recently, so this area is definitely up-and-coming, because one year ago they were selling at this much per square foot, and now they’re selling at twice as much per square foot”, for example. Or a management company could say, “Hey, we manage properties in this neighborhood, so we know it very well.” At the same time, they can also tell you where to avoid based off of their expertise.

So that’s number two – you should talk to local experts, talk to people who know about the market based off of their actual experience, not just spreadsheet knowledge, and ask them where to look at and where not to look at.

Number three, and this is my personal favorite – create a color-coded map for your target market. This is what I did for my initial target market, which was Cincinnati. What I did is I had three neighborhoods in mind within the city; I went to Google, I typed in the Pleasant Ridge, Walnut Hills and Oakley. Those were the three neighborhoods I was targeting. I printed out a map, making sure that it was a high enough resolution where I could actually streets… I didn’t need the street names,I actually needed to see the actual streets, because once I printed those out, I bought green, yellow and red highlighters, and I literally drove through every single street, and in Oakley I actually walked every single street… But in the other two we drove every single street up and down, and once we got to the end of a block, we stopped the car, and luckily, I was with someone else, so I don’t think I actually stopped the car, or do it while I was driving – so this is ideal, it’ll save you a lot of time if you do this with someone else… But for each street, highlight that street with a green, yellow or red, and these are going to be subjective rankings based off of your investment strategy… Essentially, streets where you would invest and streets that do align with your investment strategy would be green, ones that are on the cusp, they’re a maybe, they’re not ideal, but if a deal did come up on that street, you would take a look at it – you’re gonna highlight these with yellow. And the ones that you wanna avoid – the war zones, or the ones that are really, really nice, depending on your investment strategy, you can highlight those as red.

At that point, in my opinion, this is probably the best way to get an understanding of the market – to drive every single inch of that market. Yeah, it’ll take time, but I did a neighborhood in a day, so… On Saturday I did a neighborhood, on Sunday I did another neighborhood, and on Monday I did another neighborhood. It cost a lot of gas money, but at the end of those three days I knew so much about those markets that now whenever a deal comes up, I just look at my map and say “Nope, I’m not even gonna analyze that property, because I know that that area sucks.” Or “Oh, this is an amazing area. I need to underwrite this property and likely submit an offer on that property.”

So number three is to create a color-coded map, and again, this one takes a lot of time, but it’s my personal favorite.

Number four is to visit properties in person that are managed by your property management company. On this Syndication School series we have not gone over how to find a property management company, but we will in the future, and if you are dying to know now, you can go to our blog, which is thebesteverblog.com, or you can just search “How to find a property management company joe fairless” and you’ll be able to locate the blog post we have on how to find a property management company.

Once you have them, you can ask them to send you a list of properties they currently manage. Some of them will say “Okay” and send them to you right away, other ones will have to get approval from the owners first, and they’ll wanna set up a tour… So it just depends on the manager, but eventually, once you get your hands on those addresses, visit them in person and follow step five from the 200-property analysis exercise that we went over in part one, which was the episode just previous to this one. So go to the property, take pictures, and also drive around the area.

Of course, this is going to give you an understanding of the actual neighborhoods that these properties are located in. Also, killing two birds with one stone, it’ll also give you extra credibility with your property management company, because you’re proactively showing effort, you’re actually going out and visiting these properties, so it shows an extra level of seriousness, and it also gives you an opportunity to actually screen your management companies. So you can go look at these properties to see how they’re managed, and if every single property you look at is in terrible shape, then you might consider passing on that management company, or at the very least following up and asking them why those properties are in such poor condition. So that’s going to be number four – visit properties that are managed by your management company.

Number five  is going to be underwriting deals. Again, on Syndication School we have not gone over how to underwrite deals yet, but there is a massive section in our book – Best Ever Apartment Syndication Book – that focuses on how to underwrite a deal from start to finish. So if you’re dying to know, then you can pick up that book on Amazon, or you can wait for a future Syndication School episode where we take a deep dive into underwriting. But underwriting is when you financially analyze  a deal to determine an offer price, and then based off of that offer price, you’re gonna determine whether or not to actually submit an offer, based off of the whisper price of the property.

But you can learn a lot about a market by underwriting deals. Number one, you will learn about the types of expenses that are common in that specific neighborhood, and then you can also read through the offering memorandums and look at all of the market data they have in there… But most importantly, you can visit the property in person, as well as the rental comps. That will give you at least five to ten properties to visit. Again, when you’re visiting these properties, make sure you follow the same approach that we did in step five of the 200-property analysis exercise. And again, similar to visiting the properties from your management company, this is killing two birds with one stone, because you’re going to build credibility with the listing brokers, because they know you’re actively underwriting the deals and visiting them in person, so again, an extra level of seriousness.

Then you can also tell the broker what you do and don’t like about that property. What I mean by do and don’t like is how does this property compare to your business plan. If your business plan is value-add, then you can tell the broker “Hey, this property was value-add because of A, B, C, D”, and maybe even submit an offer on that property, or if it’s not a value-add property, you can say, “Well, this doesn’t align with my business plan because of A, B, C, D.” That not only lets them know what types of properties you’re looking for, but it also gives you an extra level of credibility because of your proactive effort.

Similarly, you can also ask the real estate broker for a list of their recent sales, and visit those in person, again, using step five from the 200-property analysis exercise. You’re driving through these properties, as well as the markets. And again, killing two birds with one stone, this also builds credibility with the broker, because you can also tell them what you do and don’t like about the properties as it relates to your business plan, and you can’t submit offers on their recent sales, but maybe it’s something you can keep a note for for a few years down the road if that person decides to sell the property, and it comes up, you know that you already visited it in person, it’s pre-qualified, or eliminate the deal from contention. That’s number six.

And then lastly, number seven is you can create an automated e-mail alert system to learn about your market. First, you can create a Google alert for the market. What you wanna do is go to Google and go to the Google Alerts, and set up an alert to your e-mail for “city name + jobs”, “city name + unemployment”, “city name + apartments”, “city name + multifamily”, and anything else that you can think of. Eventually, when you become very famous, you can do “city name + your name”, so I’d do “Tampa Florida Theo Hicks.” That way, any news article that mentions the city name and jobs, unemployment, apartments, multifamily or you will be automatically sent to your e-mail. So you don’t have to actively search for them, they’ll automatically be sent to you. So you can set up what time you want those to be sent, so each day you can block off an hour or two to read through all of those articles.

As you begin to read the articles that are sent to you from Google Alerts, it will also lead you to great local online resources that you can in turn sign up for their newsletters to get even more e-mail alerts. For example, you should definitely subscribe to your local biz career website, and then any other local news sites that are relevant, you should also sign up for their newsletter. Because really, anything newsworthy has some sort of impact on real estate.

So those are the seven additional strategies… I’ll quickly go over them again:

1) Perform the census.gov exercise that we performed in episode 1521, but rather than do it on a city level or an MSA level, do it on a submarket, neighborhood or census tract level.

2) Talk to local experts. Talk to local apartment investors, go to local meetups, talk to property management companies and real estate brokers and ask them what the up and coming areas are, as well as what areas to avoid.

3) My personal favorite – create that color-coded map of your area with green, yellow and red, based off of whether that area aligns with your business plan.

4) Visit properties in person that are managed by your management company.

5) Actually underwrite deals and read through the offering memorandums and visit the property and the rental comps in person.

6) Visit the recent sales of your real estate broker.

7) Create the automated e-mail alert system using Google Alerts, and then expanding from there.

I guarantee you if you just follow a handful of those strategies, you will be a guru on your market. And if you do all seven of those, then you’re gonna be a super-guru, or whatever is a level above being a guru.

Now that you’ve done all this research on a city-level, on a MSA-level, on a submarket, neighborhood and street-level, now it’s time to summarize all this data into your market summary reports. So we’re going to give you two free documents with this episode, and they’re going to be two sample summary reports based off of the two types of market summaries that you can create, which I will go over here in a second.

Again, a market summary report will be a synopsis of the major highlights of your target market, and the purpose of the market summary report is to 1) reinforce your reasons for selecting this target market, and 2) to display expertise when speaking with real estate brokers, property managers, mortgage brokers and other real estate professionals… Because a question that all those people are gonna ask you is “Where are you investing?” and not only can you tell them where you’re investing, but you can tell them why you are investing there. And again, that display of expertise will build extra credibility for you in their eyes.

Then 3) you are going to be able to proactively provide this information to your investors. Before you find a deal, you can send out your market summary report, just letting your investors know “This is where we’re investing, and now we’re looking for deals in this area.” Then once you actually have a deal under contract, you can take the same summary reports and customize it to that specific property, and I’ll explain how to do that once I actually go over the reports, which I’m gonna do now.

The two types of reports that you can make are 1) a top 10/top 20/top 5 (however many points you wanna have) list that lists the top reasons to invest in your market. Then the second one is going to be a detailed market overview, which is going to be a 6-part report on breaking down all aspects of the market.

First is your top 10 list, and to create this report, you can use the market insights that you’ve obtained from your previous evaluation efforts, as well as perform some additional online research. The types of things you wanna have on your top 10 list would be employment information, so any new businesses moving to the area, you can put in the percentage of jobs that are in the largest industry, as long as it’s 25% or lower; you can put in any recent or planned economic developments, you can talk about the top employers/companies in that market, any Fortune 500 companies… Anything as it relates to the employment and job data of the market.

You also wanna talk about population, so you can talk about the overall population size, and the growth, and how that compares with other cities and MSA’s in the nation. Also, population age is another factor we focused on, so any significant demographic trends – if a lot of millennials are moving into the area, a lot of retirees… Also, you wanna talk about supply and demand, so any recent or planned apartment developments (supply), any information about rental growth information (demand), and then just the overall economic outlook, to essentially answer the question “Is the future of multifamily in this market good or bad?” and since it’s your target market, it should be good.

And then other things we talk about are top colleges or universities in the market, if the market is ranked on a top market list, if it’s received any awards or acknowledgments, we can talk about community characteristics, any notable school districts… Really, anything that you can think of that reinforces the strength and reasons behind selecting this target market. So essentially, what you wanna do is create a list of anything you can think of using the market insights from your previous efforts, additional online research and those points I’ve just mentioned, and then condense that into a top ten list. For an example, you can download the Free Top 10 list – and it’s actually for Baltimore – at SyndicationSchool.com, or in the show notes of this episode.

Now, the second type of market summary report you can create is a lot more detailed, it’s not necessary, but this is a report that we created for one of Joe’s very large investors, who wanted to be the sole investor on a deal. When we sent him this report, he was blown away by the level of detail. In total, this person has invested around 20 million dollars, and that is at least in part due to this detailed market overview summary. So I’d highly recommend downloading this one, and also creating this for your specific market. This is something that you can create one time, and then customize it whenever you have a deal, and I’ll explain how to do that when I go over the different sections of the report, which there are six.

The first section is going to be a Top 5 Key Assets section. As the name implies, you wanna list out the top five highlights of the market. You can use your top 10 list, or other sections that we’re gonna go over in a little bit, as a guide to creating this top 5 list. And if you have a specific deal, these top five key assets should be relevant to the actual property.

For example, if there is a new development of an office building that is in that market and it’s very close to your subject property that you’re trying to purchase, that should be in that top five list… Whereas if the property is nowhere near that development, it should be included in the information later on, but not highlighted at the top.

Section two focuses on employment information. Here you want a summary of the employment data. Things you want to include will be number of jobs compared to other surrounding submarkets, a list of the top industries and companies, the labor demographics (unemployment), employment data, and anything else that relates to employment, jobs in the area.

The third section is gonna contain economic information. Here you wanna highlight any recent or planned economic or real estate growth – either companies moving to the area, any new jobs that are created, retail, commercial, mixed use development, planned or recent, as well as the real estate price and rent trends.

Number four is education information, so highlight the education data that is specifically relevant to apartment investing and your investment strategy. For example, if you’re targeting students or recent graduates, you can give information on the types of colleges and universities in the area and their respective rankings. You can talk about the student population and the recent graduate population. If you, for example, are targeting families, then you wanna talk about the notable school districts in the area, and if for example you’re targeting young professionals, you also wanna talk about the educational attainment of the local demographic.

Number five is going to focus on awards, recognitions and achievements of the market. List out any awards won by the city, the market, a neighborhood, any local business or industry… And then lastly – and this is more for once you actually have a deal; this is a very strong resource when you have a deal, but you can still create it without a deal, and that is to create a map of the market that includes little markets to illustrate points of interest that you mentioned in the sections above – the top employers, the schools, and once you actually build a portfolio, you can reference other apartments you own… Job hubs, retail… Anything mentioned above that [unintelligible [00:28:36].09] you want to add that to your map, and then once you actually have a deal, then you can add that property address to the map and then your legend for each of the points of interest you can have a distance from the subject property included in there.

An online resource that allows you to do what I’ve just mentioned is called ZeeMaps. You can go there and type in addresses, and then label the name of that address, and then a little dot will come up on the map with either the name next to it, or the name in the legend.

Again, there are samples for the top 10 list and for the detailed market overview that you can download for free at ApartmentSyndication.com or in the show notes. The reason why (just to reiterate) you wanna create these summaries is to reinforce your reasons for selecting this target market, to display expertise when you’re talking with real estate brokers, property managers and other real estate professionals in the apartment industry, and also you want to be able to proactively provide this information to your investors before and after finding a deal. And you’ve done all this work, the three podcast episodes that are half an hour each worth of work, this is kind of your final presentation, that is an accumulation of all the effort and all the work that you’ve put in so far. It summarizes everything you learned, and this is gonna be your go-to document that you provide to others, as well as reference when you have a new deal.

This concludes part two, where you learned seven additional strategies to implement, in addition to the 200-property analysis that we went over in the last episode, in order to gain an in-depth neighborhood-level understanding of your target market. Then we discussed how to create a market summary report — actually, two reports… The top 10 list and the detailed market overview, which you can download examples of for free at SyndicationSchool.com

Also, make sure you listen to part one, as well as all of the previous Syndication School Series about the how-to’s of apartment syndications, as well as to download the free documents with this episode, as well as all past free documents. You can do all that at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

Theo Hicks' apartment syndication investment

JF1521: How To Select An Apartment Syndication Investment Market Part 2 of 2 | Syndication School with Theo Hicks

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Time for part two of selecting target markets for apartment syndication. This time, Theo is teaching how to narrow down your target markets down to seven options. After you’ve done that, you need to know how they rank, ideally you’ll have two top markets. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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 podcast series, a free resource focused on the how-to’s of the apartment syndications. As always, I am the host, Theo Hicks.

Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document or a spreadsheet or some sort of accompanying resource for you to download for free. All of these documents and all previous and future Syndication School series can be found at SyndicationSchool.com.

Right now, you’re listening to part two of a two-part podcast series entitled “How to select a target apartment syndication investment market. If you listened to part one, which you should do, you learned what a target market is, you learned why the market comes before the deal, you learned how important the market actually is, which the answer is that the market itself is not as important as understanding the neighborhood and street-by-street level of the market… Because within any market you’ll be able to find a neighborhood that works with your investment strategy. Then lastly, we went over the process for selecting a target market, which I mentioned would be the focus of the next three syndication school podcasts.

In this part (part two) you’re going to learn how to narrow it down to seven markets to evaluate, to go from the 19k U.S. markets down to seven, and then with those seven markets, we’re going to discuss the six market factors to analyze for those seven markets, as well as some additional factors that you’re going to want to consider for those markets. Then we’re going to rank your seven markets in order to select the top one or two markets for you to investigate even further.

Step one of the market selection process is to narrow down to the top seven or markets, which would be MSA’s, or actual cities. How do you pick these seven markets? You wanna mix and match between these four different types of markets. First, you wanna select the market that you actually currently live in, so that’s probably going to be one market, so where you’re at right now – that will be one of your target cities or MAS’s.

Number two would be a market that’s within a 1-3 hour drive to where you currently live. This could be one market, or it could be two markets, depending on which state you live in and how close you live to other large MSA’s. The third category would be markets that you are already familiar with, and then the fourth category would be the markets that you really have no knowledge of whatsoever, but are markets that you’re curious about.

For the first category, the market in which you currently live – you wanna pick this market because you will have the higher existing comprehension of this market, since you live there… Unless you just moved there a couple of days ago. And you’re likely going to have existing relationships in that market as well, whether that’s going to be actual team members that are real estate professionals, or passive investors. And also, investing in your own market makes some of the later steps in the syndication process a little simpler. It’ll make building your team easier, because you can actually meet these people face-to-face in person, it’ll make the further investigations that we discuss in next week’s series, but also when you’re investigating actual deals it’s much easier, because you’re there in person, so you can visit the market; you can actually tour the deal in person without having to fly out or drive to the property.

Then once you actually have a deal under contract, it will be easier for the due diligence process, so instead of living in a hotel for a couple of months in your target market, you can just live at home and then drive to the property in order to perform the due diligence. Then once you buy the property, it will be easier to visit them in person, rather than, again, having to book a flight out to the property. Because of that, you wanna pick your current location as one of your target markets.

Similarly, you wanna pick another market or another couple of markets that are within a 1-3 hour drive to where you live, because again, it will make those later steps easier… Not as easy as actually where you live – you’ll still have to drive a couple of hours, but it’s still better than having to hop on a plane, or have a 12-hour track to the property. At the same time, this also helps because what if the city you live in is not a market that aligns with your investment strategy? If you live in a very rural area, then you’re going to need to invest closer to a larger city, or if you live in a city that is not good for the apartment syndication strategy, whether it be because of some of the market factors we’re going to be discussing later on this episode, or for some other reason, you’ve got another option that is close by, without having to, again, drive or fly to another market.

The third category, which is the market you already are familiar with, is — the drawback, again, is that it might not be very close to where you currently live, but the benefit is since you are familiar with it, you’ve got a higher comprehension of the market, and you might also have relationships in that market.

If this market happens to be further away from where you live and is not overlapping with category number two, then you’re gonna need to rely on your team a lot more, because you’re not going to be able to just pick up and go to the property if something goes wrong, or once you actually have the deal under contract, or when you actually buy the property.

Now, you should be visiting the property on a frequent basis, but again, if there is an emergency, you’re not gonna be able to get there, so you’ll have to rely on your team to be able to resolve that emergency until you can get to the property.

Examples of markets that you are already familiar with would be where you grew up, so your hometown, but maybe you moved away. It could be the city where you went to college, it could be a city where you lived before, but moved away, or it could be a city where you have family and friends, so you visited this area a lot. So a market that you have some level of familiarity with.

Then category four, which is the market that you have minimum knowledge about, but are curious about – these would be just other miscellaneous real estate markets throughout the country that peaked your curiosity for one reason or another. If you don’t have any markets that have peaked your curiosity, then a good way to select markets in this category is 1) to just google “top real estate markets” or “top multifamily markets in the United States” and pick a handful off that list.

Another one, which will give you added benefits, is to read through the detailed commercial real estate reports and surveys that different real estate companies put together. The benefits of those reports, besides being able to find a top target market, is that you will also get a good education on the commercial real estate industry as a whole, and the variety of factors that are important and that investors look at when determining the state of the real estate market. This will be your first document, and it’s actually going to be multiple documents… But this is gonna be your first batch of documents that you will get for free for this episode, and those are my six go-to commercial real estate reports.

So if you go to SyndicationSchool.com, you’ll find a link to download these six reports. The first reports is Marcus & Milichap’s Annual U.S. Multifamily Investment Forecast Report. Annually, Marcus & Millichap puts together a report that gives you an analysis of the economic and political factors that have effects on the multifamily niche, in particular the forecast for the coming year, and it also provides  a ranking of all the major U.S. real estate markets using a variety of economic factors that they deem important. So that’s one document.

Another one is the CBRE Bi-annual Cap Rate Survey. As the title implies, this document will provide you with an analysis of the cap rate and return data for all of the major U.S. markets. It’ll have it for all of the different real estate niches and asset types, but multifamily is one of them. This is gonna help you figure out what markets have the highest returns or have the highest increase in returns.

The third report is IRR’s Annual Viewpoint Commercial Real Estate Trends Report. This is a detailed, data-driven report with lots and lots of graphs and data tables, focused on the overall commercial real estate trends, based on the current economic and political landscapes. Again, this is for each commercial niche, but it includes multifamily, and they’ll have especially reports for any niche that’s on the rise. At some point, multifamily might be one of those special reports, but for now, there are things like student housing, or assisted living facilities, which could technically be deemed multifamily.

Another good report to read is the Zillow Annual Consumer Housing Trends Report. This is an overall analysis of the consumers in the real estate process, which includes the buyers and seller, the lenders, and – what’s important to you is the renters. It provides you with a snapshot of the renter today and what they’re looking for when selecting a place to rent. That can give you an idea of the different rents in certain markets, but also how renters are looking to find properties, and that could help you once you’ve actually purchased a property.

The fifth report is RCLCO’s Quarterly State of the Real Estate Market. This is dedicated to real estate developers and investors and other real estate professionals that are seeking strategic advice regarding property investing planning and development. This one here just kind of gives you an overall snapshot of the real estate market and advice on how to move forward.

Then lastly, we’ve got PwC’s Annual Emerging Trends in Real Estate. This is a compilation of more than 800 interviews and 1,600 survey responses regarding the emerging trends in the real estate industry. They ask a bunch of real estate professionals what they think the emerging trends are, and they compile all their responses into this report.

Based on those four different market categories explained, as well as after analyzing these six reports and doing a quick Google search, you should be able to come up with a list of seven markets to analyze.

Now that you’ve selected these markets, it’s time to actually analyze them. This is where you’ll get the other free document – there are actually two free documents. One will be a spreadsheet to log the demographic and economic data on, as well as a guide that will provide you with links on how to find the data. Again, to download those two free documents, visit SyndicationSchool.com and it will be under the fifth series.

Once you have your seven markets selected, you want to get a high-level understanding of the demographic and economic trends for that market. And then as I mentioned earlier, we’re going to rank those markets from top to bottom in order to pick the top one or two.

There are six different categories of data that you want to analyze. First is unemployment. You want to determine the five-year unemployment trend for the market. Now, the reason why is because people need to have a job and make money from their job in order to pay their rent. So if there is a high level of unemployment, there is less supply for you as an apartment investor, because you’ve got less people that have the ability to afford rents.

In order to find this unemployment data, you wanna go to the census website, and you can find it under the Selected Economic Characteristics data table. For all of these different factors, you can download that free document at SyndicationSchool.com, and it will provide you with a link to find all this data, as well as a step-by-step guide of how to go from that link to the actual data table.

Then also, once I go over the six factors and why we are evaluating them and how to find them, I’m going to also go over how to actually analyze the results and interpret these results of the data.

Moving on, number two is the population. You want to determine the five-year trends for the population for both the city and the overall MSA. The reason why is because the population increase or decline will indicate an expanding or dying market. Because at the end of the day, people are your customers, and if there is an increasing population, that means you’re having more customers, and if it’s a decreasing population, that means you’re gonna have less customers in the future.

In order to find the population trend data, you can go (again) to the census.gov website, and to find it for the city, you wanna locate the Annual Population Estimates data table, and for the MSA, you wanna locate the Annual Estimate of Resident Population data table.

Next, you want to determine the five-year trend for the different age ranges of the population. The reason is because different generations and different ages will demand a different type of apartment product. Recent college graduates wanna live in a different apartment than people who are just starting a family, than people who are going to retire from their jobs. So there are three different age ranges, and depending on which one is dominant and increasing, it will determine which type of apartment product is in the most demand currently, as well as in the future. To find the population age data, again, census.gov and locate the Demographics and Housing Estimates data table.

This fourth factor might be the most important factor, and that is job diversity. You wanna find the percentage of the overall employed population for each job industry, for the current year. The reason is — let’s use Detroit as an example… Detroit was dominated by the auto industry in the ’70s and ’80s, and once Chrysler and GM (auto companies) went bankrupt, the city quickly followed suit and also filed for bankruptcy. The moral of the story is that you want to know what industry employs the most people in that market, and also think about what happens if that industry begins to struggle or even collapses. In order to find the job diversity data, you wanna go to census.gov and locate the selected economic characteristics data table.

Number five are the top employers. You want to compile a list of the top 10 employers in that market. The reason why is because if you have one industry that employs a large percentage of the population, you wanna determine if there are one or two or only a handful of companies that employ that large percentage. It’s not gonna be a majority, it’s not gonna be more than 50%, but it could be 30%-35%, so you wanna see “Okay, so of that 35%, how many companies are employing those people?” Depending on how many companies are employing those people will determine whether or not this market is good in regards to the top employers.

To find this data — you’ll likely find it on Google, so just do a quick Google search for the top employers in the city, and you should be able to create a list from one source, or it might take a couple of sources, but you should be able to create a list of the top ten employers.

Then lastly, number six is the supply and demand data. This is actually broken into three different factors – the vacancy rate, the median rent, and the supply trends. Why? Well, supply and demand are what impact the rental rates. You want to know this data so you can have an understanding of the rental trends and the demand trends of the apartments in your market. To find the vacancy data, you want to go to census.gov and locate the Selected Housing Characteristics data table.

For median rent — you can probably just google it, but keeping with the theme of census.gov, you can go there and locate the Financial Characteristics data table. Then for the supply, you can find the number of new 5+ units constructed on the Annual Construction page on census.gov, or you could locate that data on the local auditor or appraisals website.

Those are the what and why’s and how to find. Now let’s go over how to actually interpret the data. For unemployment, you want to see a decreasing unemployment rate. A decreasing unemployment rate is a best-case scenario. If it’s low and not increasing or decreasing, so it’s stagnant, that’s also good. But if you see a high unemployment rate or an increasing unemployment rate, or even worse, a combination of both, that is unfavorable, because again, people need jobs in order to pay their rent.

For the population, you wanna see an increase in population to the market. A stagnant population is kind of give or take, but a decreasing population is gonna be unfavorable, especially if you discover that the apartment supply is also on the rise… Because you have a larger supply in a decreasing demand.

For the population age data – as I’ve already mentioned, there’s no idea results. This is more of you want to look at which age ranges are increasing and which ones are decreasing in order to have an idea of the type of apartment product that is going to be in the most demand, and that  might help you make some tweaks to your business plan. For example, if you live in a market or you’re targeting a market where the age range of 25 to 34-year-olds is very high and increasing, then there’s likely going to be a demand for luxury apartments with nicer amenities, and maybe a market that’s very walkable.

If the same thing happens for the 35 to 40-year-old age range, so high or increasing, they’re gonna want good schools, and a playground or maybe a day care center for their kids, because they’re likely starting a family or already have a family. Or if the largest and/or increasing age range is 55 to 64, you’ve got a lot of people approaching retirement, so maybe assisted living communities would be the most in demand.

Overall, for population age, you wanna just look at the data and see which age ranges make up the largest percentage of population and which ones are increasing, to give yourself an idea of the types of apartments that will be in demand.

For the job diversity, ideally no single industry employees more than 25% of the working population, and 20% is even better. Now, if there is more than 25%, because most markets do have a dominant industry that employs more than 25% of the employed population, you wanna ask yourself “How much do I trust this job sector?” and then once you ask yourself that question, you probably don’t know the answer, so you wanna do some more digging. You wanna look at your list of top employers, you wanna talk to the locals, you wanna read some local newspapers or watch the local TV station to get an understanding of the strength or weakness or vulnerability of that specific job sector.

For the top employers – again, this is similar to the population age range, there is really no right or wrong answer; it’s just something you want to keep in mind… You wanna look at the top list of employers, and then see if one or two companies are employing the majority of that major industry determined in the job diversity section, or if it’s spread across multiple companies… With the former being unfavorable.

If you’ve got a specific job industry that employs 35% of the employed population, and then you’ve got two companies that employ half of those people – again, if those companies are strong and don’t show any signs of going away, then it’s fine… But if they do happen to go away, the employment and the economy in that market is going to take a hit. So that’s something you wanna keep in mind, and then once you know those top employers, you’re gonna want to make sure you’re tracking those for any developments. Are they creating a new facility? Are they cutting jobs? Are they moving? Are they hiring more people? Keep all those things in mind, because that will help you determine if it maybe makes sense to get out of the market, and it’ll also give you some positive information to share with your investors about the market.

Then lastly for the supply and demand – supply and demand is pretty straightforward, and all those three factors I discussed are tied together. As vacancy increases, then the median rent will likely decrease as well, because apartment owners are dropping the rents to increase occupancy, and then at the same time supply will likely decrease, because they’re not going to want to be building more apartments.

When you’re looking at these three factors, you can’t just look at them individually. You have to look at them together. For vacancy rate, a low or decreasing vacancy rate is ideal. A high vacancy rate that is also decreasing is a positive sign, and it might be a market to get into that will blow up in the future… And a stagnant vacancy rate is also okay. What you don’t wanna see is an increasing vacancy rate.

For median rent, a decreasing median rent is obviously unfavorable, especially if there’s also an increase in vacancy. Then for supply – again, this is something you can’t take by itself; you have to look at it with the median rents and the vacancies… So if the supply is increasing, but you realize that the median rent is decreasing, and the vacancy is increasing, that’s a red flag… Because if they’re building a bunch of apartments in the area and the vacancy rates are increasing, that means that the new apartments are not gonna be able to support the decreasing number of renters in that area. Those are the six main factors to look at and how to interpret that data for some kind of insights into what it means.

A couple other things you want to look at, too – one, is the market landlord or tenant-friendly? You wanna figure out how quickly can a landlord evict a tenant, what’s the eviction process overall, what’s the grace period before rent is considered to be late, how much time in advance does the landlord need to give to the tenant before they can enter their unit? What’s the process for returning security deposits at the end of the lease? Which party is favored more in court proceedings? Things like that. Obviously, a landlord-friendly market is gonna be better for you than a tenant-friendly market.

Another one is property taxes. Property taxes is one of the highest – if not THE highest expense – for owning apartments, and generally speaking, the states in the North-Eastern sector of the U.S. will have the highest taxes, and the Southern states will have the lowest taxes, with the exception of Texas, actually.

When you are looking at your market, you wanna determine “Are the taxes gonna be abnormally high, or are they gonna be low (which is a benefit)?”

Something else you wanna look at too is any upcoming construction. Do a quick Google search of your market and see whether there are any new offices or retail centers or apartments that are slated for construction. If there’s new offices or new retail centers, that means there’s gonna be more jobs, which is gonna be good for the market.

Something else you wanna look at too is to see if the market is ranked in any of the top market lists. Do another Google search and see if the specific target market comes up on a top 10 list on Forbes, or some other publication… Or you can also see if it’s won any awards as well; that’s another good thing to search for.

And the two last things – you wanna take a look at crime rates, and you wanna take a  look at the school district rankings. To find the crime rates, go to NeighborhoodScouts.com, and for school district ratings, you can go to GreatSchools.org.

Again, these are all things that people are gonna consider when moving into an area, so you want to make sure that you know what the crime rates are, what the school districts are, is it a top market to live in, are there new offices that could be in construction right around the corner from your market, things like that.

For all the different factors that you analyzed and the insights that you got from them, you wanna figure out what’s actually driving these trends. You wanna figure out if unemployment is increasing – why is it increasing? Or if it’s decreasing – why is it decreasing? Because these are all questions that your passive investors are gonna ask you. So when they ask you “Hey, Theo, why did you pick this market?” and you explain to them why you picked it, and they say, “Well, I did some investigations and I realized the unemployment is actually going up… Do you know why that is?” and if your answer is “Um, I don’t know…”, it’s not gonna look very good. So you wanna make sure you are proactively addressing these things.

For all the different trends, especially if anything is concerning, you want to, number one, call or go to the website of the Economic Development Office and ask them about the specific factor in question. You can also reach out to brokers, property managers, lenders and other real estate professionals in the area, because they’re likely tapped in, or have been tapped into the market for so long that they have an understanding of what’s driving certain economic trends…

And then lastly, on your own you can perform a Google search or look at stories in the local newspapers or TV stations, or if the market has a biz career website, you can go there and search for articles that might indicate what is driving a certain factor to go up or down.

Now you have your seven markets, you’ve got the economic and demographic data for all seven markets… The next step is to rank them from top to bottom. One way is to simply assign a score to each market for each factor. Since you have seven markets, each factor is gonna have a score of one to seven, with one being the best for that specific factor, and seven being the worst. For example, the market that has the lowest unemployment, that is also trending down, would be mark number one for unemployment, and a market that has a very high unemployment rate that’s increasing would be number seven. That’s one way.

As I mentioned when I was going over those factors, some of them are more important than others, so a better way to rank them is to rank them in tiers. There’s actually three categories of the different factors, from the most important to the least important. Tier one are the two most important factors, which are the supply and demand factors – that was vacancy, median rent and supply, and then also job diversity. Those right there hold the highest weight. So when you’re ranking supply and demand and job diversity from those seven markets, a first-place finish for tier one holds more weight than a first-place finish for tier two.

For tier number two we’ve got three factors. That’s gonna be the top employers, the population and the unemployment. If there’s anything fishy in the top employers, meaning that a handful of companies employ the majority of the top industry, and that’s the red flag, or if the population is decreasing or if the unemployment is increasing, those would all be ranked lower than a place where the top employers are diversified, the population is increasing, and the unemployment is decreasing. But those factors are not as important as supply and demand and job diversity.

And then tier number three is the population age, because again, that’s just more of an analysis tool to determine the demand for certain property types… And then all the other factors I discussed – landlord vs. tenant-friendly, property taxes, upcoming construction, crime rates, school district…

What you wanna do is, again, rank all the different markets one through seven for each factor, and then for each of the tiers, add up those numbers. For example, let’s say for one of the markets they were a five for supply and demand, and for job diversity they were a six. So for tier one they have a score of eleven. Let’s say another market was first in supply and demand and first in job diversity, so their score will be two. Do that for tiers one, two and three. That way, you’ll have a first through seventh ranking for each of the three tiers, and that will help you determine the top one or two markets that you analyzed.

Once you’ve ranked them using the three-tier system that I explained above, you wanna select the top one or two markets to investigate further. Because if you remember, in part one of this episode series, the city and MSA aren’t as important as understanding the neighborhoods and submarkets within that specific city or MSA… So that’s going to be what we talk about in the series next week.

In this episode you learned the main market factors to consider, why they’re important, where to find them and how to interpret the data for all seven of your markets. First we selected our seven markets. You also learned a couple of other things and factors to analyze and research for your target markets before you rank them one through seven using the three-tiered system I explained. Then based off of that ranking, you picked one or two target markets to investigate even further.

In next week’s series, we’re gonna talk about what this investigating even further means.

JF1513: Tony Robbins’ Ultimate Syndication Success Formula Part 1 of 2 | Syndication School with Theo Hicks

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Joe is a huge fan of Tony Robbins and has used a lot of his teachings in his daily life, which he says have propelled him to where he is today. Theo is breaking down what it takes to have success in the syndication business in the same way Joe still does today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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 the apartment syndication investment strategy. I’m your instructor, Theo Hicks.

Each week we air a two-part podcast series about a certain aspect of the apartment syndication investment strategy. For the majority of the series, we will be offering free documents or spreadsheets for you to download for free. All these documents and the previous syndication school series episodes can be found at SyndicationSchool.com.

This episode is part one of a two-part series entitled “Tony Robbins Ultimate Syndication Success Formula.” So in these next two parts we’re gonna be talking about goals, and how to set goals as an apartment syndicator. By the end of this episode you will learn first what the Tony Robbins Ultimate Success Formula is, and the episode will be focused on part one of the five-part formula, and then we’re going to have a conversation about the money question, which is “How do you make money as an apartment syndicator?” We’re gonna talk about the different fees, and then go over an example… And then lastly, you are going to set your first 12-month goal. In order to help you with that, we’re gonna provide you with a free calculator, where you essentially input your goal, and it’ll spit out what you need to do to accomplish that goal, which we’ll get into a little bit later in the episode.

First, as an introduction, what is the Tony Robbins Ultimate Success Formula? It’s a five-part formula, and as you all know, Joe is a huge fan of Tony Robbins, so I wanted to have this episode follow his outline, but apply it to apartment syndications, and get really specific on the certain parts of the formula.

Part one is Know Your Outcome, which is gonna be the focus of this episode. Part two is Know Your Reasons Why, which will be discussed in the next episode, part two. And then the last three steps are to 3) Take massive intelligent action; 4) Know what you’re getting, and then 5) Change your approach… Which we’re not gonna be talking about in this episode, but in reality, that’s what the entire Syndication School is about – what type of action to take, tracking your action, and then ways to tweak your approach, or different approaches you can take based off of your results.

Part one is Know Your Outcome. Why is this important? Well, as Tony Robbins says, clarity is power. You need something to focus on, and it needs to be something that’s specific and quantifiable, and once you’ve set this specific, quantifiable outcome, then you’re able to reverse-engineer the process and take that massive intelligent action, which is step three.

So if you don’t know what you’re doing, you have nothing to focus on, and you’re kind of flailing around like a fish out of water, and you’re not taking intelligent action – maybe you’re taking massive action, but it’s not intelligent, because it’s not pushing you towards a specific outcome… We have to set an outcome before we even start our syndication business, but after we make sure that we meet the requirements from the previous series, which is your education and experience requirements. So if you haven’t listened to those episodes yet, those were last week’s episodes in the Syndication School series, and it can also be found at SyndicationSchool.com.

So in order to know our outcome, and our outcome is gonna be a monetary goal, how much money we’re gonna make, you first need to know how the heck you make money as a syndicator. I’m gonna go over essentially all the fees that you could potentially make as a syndicator, and then mention which ones are common and which ones are uncommon, and then kind of how to think about which ones you should charge on your first couple of deals.

In total, we’re gonna go over eight different fees, and the first five are going to be the most common, and the other three probably you won’t be charging ever, most likely, but some people might be charging them at a later stage in their business.

The first way you’re gonna make money is on the profit split. Typically, how you’re going to structure the deal with your investors is that you will offer them some sort of preferred return, which is a return on their capital, and then once that preferred return is distributed, all of the remaining profits will be split between you and your investors. So the split can be 50/50, or it can be as high as 90/10, with the first number going to your investors, the second number going to you. That will be 90% of the extra profits to your investors, and 10% to you.

Most likely, you’re gonna see something between 50/50 and 70/30. So the reason why you are able to charge a profit split is because it promotes alignment of interest with your investors, because if you just meet their preferred return, then you won’t get paid until you sell the property… Whereas if you exceed the preferred return, they make more money because they’re making either 50% (up to 90%) of that remaining profits, and then of course you’re incentivized to exceed preferred returns, because you yourself want to make money. If you’re able to exceed your return projections, that means you’re also increasing the value of the property, which also increases the profit at sale for you and your investors.

If you remember from the education series, the value of the property is based on the net operating income, which is the income minus the operating expenses, and the cap rate. So the higher the operating income, the higher the property value, which means the higher the sale price, which means more profits for you and your investors at sale. So that’s number one, the profit split.

Number two is an acquisition fee. An acquisition fee is the upfront fee that is paid to the general partnership (to you) for finding, analyzing, evaluating, financing, closing on the deal. This fee is gonna be a percentage of the purchase price paid to the syndicator at closing, and it can be anywhere between 1% and 5% of the purchase price, depending on the size of the project, the scope of the project, the experience level of you and your team, as well as the profit potential of the project.

Think of the acquisition fee as a one-time consulting fee for all the behind-the-scenes work you’ve been doing in preparation to close on the deal. So it doesn’t just start with you finding the deal, it also starts with you evaluating the market beforehand and picking the market. That’s also from you spending your time getting educated, putting the team together, things like that. All the behind the scenes work that you’re doing for maybe years will finally come to fruition with your first acquisition fee at closing. So that’s number two.

Number three is an asset management fee. This is an ongoing fee paid to the general partners for the ongoing property oversight. Making sure that the business plan is executed properly, maintaining occupancy, overseeing the property management company… All the ongoing tasks required to manage and operate the asset, you’re paid for that work through this asset management fee.

Now, the asset management fee could be anywhere between 2% and 3% of the collected income, or some syndicators will charge a per-unit, per-year fee of $200 to $300. This depends on the ongoing business plan. If it’s a very complicated business plan – a lot of renovations, and rehabs, and a distressed property – then you can charge higher, whereas if it’s a turnkey property and you’re just kind of maintaining things, then it’ll probably be at the lower end of the range.

Now, Joe and his business prefers the percentage of the collected income to the dollar/unit/year, because again, alignment of interests. If you’re just charging a flat fee, then if the property does really well or really bad, you get paid the same amount of money regardless… Whereas if it’s based on the performance of the property, which the collected income is going to be performance-based, then there’s an alignment of interest, because the better the property performs, the better the syndicator gets compensated, therefore they’re incentivized to make sure the property performs.

Another way to promote alignment of interest – and you don’t have to do  this, but this is something else that we also do – is to put the asset management fee in second position to the preferred return. What that means is the preferred return is paid out first, and then we collect the asset management fee. That means that if we cannot achieve the preferred return, then we don’t get paid. So again, another added level of alignment of interests there. That’s number three, asset management fee.

Number four is the guarantee fee. This is the fee paid to the loan guarantor, who is the people that sign the loan and bring their net worth and balance sheets or their experience to help the syndicator qualify for financing. So if you eventually become the loan guarantor, because you’ve built up a large enough business where you no longer need to bring on a third party to help you qualify for financing, then you can collect a fee.

If you are the loan guarantor, it’s likely going to be a one-time fee, paid at closing, and it’s going to be based off of the principal balance of the mortgage loan, so whatever size of loan you get. This could be on the  low end between 0,5% and 2%, or as high as 3,5% to 5% of the principal balance of the mortgage loan paid at closing. Now, it’s probably gonna be on the lower end if it’s you, and the higher end if it’s someone else.

Additionally, if you’re bringing on someone else to be the loan guarantor, like an experienced syndicator, then you’re likely gonna have to give up a percentage of the general partnership, as well. That can be anywhere between 5% and 30% on the high end. Now, where you fall in that range will depend on a few factors. Number one, the risk of the deal, so how complicated is the deal, but also, more importantly, how risky is the debt. So is the debt non-recourse, meaning that the loan guarantor is not personally liable, unless certain carve-outs are triggered; if that’s the case, then it’s not as risky and they will likely accept a lower fee or a lower percentage of the general partnership. But if it’s a recourse loan, which means that they are personally liable if you were to default, then they’re gonna be on the higher end of the spectrum.

Also, experience. So if you’re less experienced, there’s more risk on the deal and they’re gonna want a higher chunk of equity and/or upfront free… And then finally, how well do you know this person? If you have a good relationship with them, a good, trusting relationship, then you’re likely gonna be able to charge less… But if you don’t know who they are and you’re desperate for a loan guarantor, then at the end of the day they can probably charge whatever they want, because you wanna get the deal done.

Always remember that a smaller percentage of something is a lot better than complete ownership of absolutely nothing… So don’t be worried about having to give away equity to someone to help you qualify for the loan in the first few deals, because in the long run eventually you’ll be able to not only sign on the deals yourself, but just getting your foot in the door. So that’s number four, the guarantee fee.

Number five is a refinancing or supplemental fee. This is a fee paid to the general partnership for the work that’s required to refinance the property or obtain a supplemental loan. Again, this is gonna be based off of the loan balance of the original loan or the new loan, depending on how the agreement is structured, and it’s gonna be between 0,5% and 2% of that loan balance. Now, sometimes a hurdle might be involved, that is if you do not distribute a certain percentage of the LP’s initial equity, then you do not get to collect this fee.

For the example deal I’m gonna go over here in a little bit, the return hurdle is 50%. So we needed to return 50% or more of the LP’s initial equity at refinance in order to collect our refinancing fee. That’s five. And the same thing applies for obtaining a supplemental loan.

Now, those are the five common fees that you’re likely gonna see and that you’ll be able to likely charge on your first few deals. I guess I wanted to make you aware of their existence.

Number six is a property management fee. We all know that the property management company, in return for their work, requires you to pay them a monthly fee. This fee could be anywhere from 2% to 8% of the collected income, depending on the size of the deal. The bigger the deal, the lower the fee is, typically… But let’s say eventually you start your own property management company to manage your assets; then you’re the one who’s gonna be collecting this fee. That’s number six.

Number seven is a construction management fee. This will be a fee paid during the construction or renovation period for big projects. Now, again, usually, if you have your property management company overseeing the renovations or the value-add business plan, then they might charge an additional fee during that period. It could be a percentage of the collected income that’s higher, but it’s most likely gonna be a percentage of the actual rehab budget, so 5% to 10% of your cap-ex budget will be paid to the property management company for managing the renovations.

And again, if you in the future create your own property management company, then you will be the one who’s charging this fee. If that’s the case, then you would either do that upfront, 5%-10% of the rehab budget, or you could include it in your asset management fee. That’s number seven.

Number eight is an organization fee. This is a fee charged for putting the group together, so bringing together all the general partners and all the limited partners. Now, this fee could be anywhere between 3% to 10% of the equity raised, but typically this is included in the acquisition fee. Some people will charge extra for an organization fee, so I just wanted to make you aware of that fee.

Those are the eight fees. Again, the first five – the profit split, acquisition fee, asset management fee, guarantee fee and the refinancing/supplemental fee – are the most common.

Now, how do you know what fees to charge? Well, you only charge fees if they 1) show alignment of interests, and 2) that you are actually adding value to that respective part of the process. If you are not doing a refinance, then you obviously are not gonna be charging a refinancing fee. If you are not responsible for the ongoing asset management, you’re not gonna be charging an asset management fee etc. Make sure that all the fees you’re charging are actually based off of things you’re doing, and then set those fees based off of what promotes the most alignment of interest with your investors.

So what’s an example of how much money you can make on a deal based on these fees I just went over? Just to give you an idea of how much money can be made as a syndicator, as well as to give you an idea of how to set your goal in the later parts of this episode. We’re gonna follow a 250-unit deal that we purchased for 14,1 million dollars, with a projected hold period of five years. The fees we charged for this deal were actually the five common fees I mentioned above. One, we had an acquisition fee, which was 2% of the purchase price; Joe and his company were also the loan guarantors for that deal, so they also charged a guarantee fee of 0,83% of the loan balance, so those were the two fees that were paid to the general partnership at closing.

For the acquisition fee, 2% of 14,1 million dollars is $282,000. Add to that the guarantee fee, which was 0,8% of the loan balance, which was 11,7 million dollars. That comes to $97,110. So a little under $400,000 at closing to the general partners.

Now, they also charged an asset management fee, which was 2% of the collected income. The collected income for the first year was a little over 2,4 million dollars. 2% of that was $48,946. That’s per year, so for the five-year hold period, that totals $244,000. That’s something that’s split up across the five years of the [unintelligible [00:21:13].28]

Next they were able to add 5,5 million dollars in equity to the deal in less than one year because of their value-add program, as well as the price they bought the property at. Because of that, they were able to do a refinance and return more than 50% of the equity, because in the agreement they were going to collect a fee of 2% of the original loan balance, as long as they were able to return more than 50% of the LP equity… Which they did, so 2% of the original loan balance, which was 11,7 million dollars, is an additional $234,000 paid a little bit around the one year mark.

The fifth fee is the profit split. The profit split for this deal was 30% to the GP, 70% to the LP. But for this particular deal, there was an internal rate of return hurdle that once the deal hit 20% IRR to the limited partners, then the profit split went to 50/50. Usually, the IRR doesn’t exceed zero until sale, because that’s when the investors receive their original equity back… So the ongoing profit split, which was a 30% of the remaining profits, was $108,000 annually. Multiply that by 5 years, and it’s a little bit over 500k.

Then also the profits at sale are split. The total profit at sale for this deal was 6,6 million. After returning the investor equity, the remaining equity was split 70/30 until that IRR hurdle was hit, and then it was 50/50. In total, that equates to 2,2 million dollars to the general partner at sale.

Now, adding all five of those fees together, during a five-year period, for that particular deal, the general partner would earn 3,6 million dollars. That’s just one deal, a 14,1 million dollar deal, which is a pretty big deal, 250 units… But imagine that multiplied by 5, 6, 7 deals. You’re talking about a lot of money. So that’s the profit potential to the GP for putting together an apartment syndication. That’s why we’re all here, right? To gain financial freedom through real estate.

Now that we went over how you actually make money, you can set a goal. The first goal we wanna set is a 12-month goal. Each year you wanna set a new 12-month goal, hopefully higher than the previous year, but since you’re just starting off, we’re gonna set our first 12-month goal… And we want this to be as specific and quantifiable as possible. We’ve got the specific, which is 12 months, and now we need to get to the quantifiable. So how much money do you wanna make in 12 months? That number might be small, it might be big… This depends on where you’re at in your life. But for the purposes of this episode, we’re gonna assume that you wanna make $100,000 this year. So… Great! We’re done, right? Specific and quantifiable. Well, no. We wanna take it a level deeper and ask ourselves “Okay, so I wanna make $100,000 this year. What exactly do I need to do in order to hit that number?” Should you set it based off of the number of deals, or the number of units you wanna complete? Well, no, because — let’s say you wanna do one deal that makes you $100,000. Well, if that one deal loses you $200,000, you’re technically hitting your goal of one deal, but not hitting your quantifiable $100,000 mark.

Same thing for the number of units you wanna control. Say I wanna control 100 units, that cash-flow $1,000/year, to hit the $100,000 number. Well, that is possible, but you’re gonna be focusing on getting those number of units, and if you don’t hit that $1,000/year mark, then you’re technically hitting your number of unit goal, but you’re not hitting your actual quantifiable number goal.

What you wanna do is you wanna figure out how much money you need to raise in order to make $100,000. There’s two ways to do this. Number one, the simple, straightforward approach is to ask yourself how much money you need to raise in order to make $100,000 acquisition fee. That way, if  you do a deal or multiple deals at that equity raise amount, then you will make that acquisition fee in 12 months. So if the goal is to make $100,000, and you’re assuming you’re charging a 2% acquisition fee, then the purchase price needs to be 5 million dollars, because 2% of 5 million dollars is $100,000.

But we’re gonna go even deeper than that, and we’re gonna say “Okay, well how much money do I need to raise in order to buy a 5 million dollar property?” We’re gonna assume – and this is a good assumption – that in order to take down an apartment community through syndication, you’re gonna need to bring 30% of the total project cost. That’s for the loan, as well as for the various other fees required – the financing fees, the closing costs, an operating account, things like that – in order to take down the deal.

So 30% of 5 million dollars is 1,5 million dollars. Now you know that in order to make $100,000 a year, you need to buy a 5 million dollar property, which means you need to raise 1,5 million dollars. Now instead of focusing on a specific number of deals or a specific number of units, you wanna focus on raising 1,5 million dollars. If you raise that 1,5 million dollars, all the pieces are in place for you to make your $100,000 goal. That’s one way to set your goal.

Another way, a little bit more complex, is to set a goal based off of, again, making $100,000, but base it off of the ongoing profit split… Because if you wanna make $100,000 year one – or actually probably to make $100,000 every year to replace your W-2 income, or that’s  how much money you need to cover your expenses, or however you came up with that number, most likely you don’t wanna make it just one year and then never make it again. So one way is to of course do a 5 million dollar deal every year, but another way is to figure out, “Okay, well  I’m gonna do that 5 million dollar deal, but how long until I’m able to make $100,000 a year without having to continue to do deals?” That’s where your free document comes into play, which is the annual income calculator.

What it allows you to do is you input your annual income goal (in this case $100,000) the acquisition fee (in this case 2%), and then you need to input the structure you have with your investors, in this case 8% preferred return and a 70/30 split. Then you input the projected cash-on-cash return for your deals. If you’re offering an 8% preferred return, this number needs to be at least 8%, but ideally it’s closer to 10%.

For this example, we’re gonna say that our income goal is $100,000 a year, we’re gonna charge a 2% acquisition fee, offer our investors an 8% preferred return with a 70/30 split, and the property that we buy is gonna have an annualized cash-on-cash return of 10%. The math is all done for you, so we’re not gonna go over it on here, but the calculator will automatically spit out your one-time acquisition fee which we will get for doing this size of a deal, or your acquisition fees in total, for doing multiple deals of this size… And then they’ll tell you exactly what the property purchase price is, as well as the equity required to buy that property in order to make $100,000/year. That’s gonna be that 30% profit split you receive.

For the example that I just went over, in order to make $100,000 a year from that profit split, you’re required to purchase 52 million dollars’ worth of apartments, which requires raising 15,66 million dollars in equity. So in order to make an acquisition fee of $100,000, you need to raise 1,5 million dollars in equity; in order to make $100,000 on an ongoing basis, you need to multiply that by a magnitude, so ten times as much equity. If you do that ten times, so you raise 1,5 million dollars ten times, or if you raise 15 million dollars one time, or somewhere in between, you will have your $100,000/year in income. So in order to plug in your number, go to SyndicationSchool.com, or go to the show notes of this episode to download the free annual income calculator.

Now, the last step after you’ve set your goal is to create an affirmation statement. You don’t wanna just set the goal one time, and then completely forget about it. You wanna continuously remind yourself of what that number is and how much money you need to raise, so that you are subconsciously seeking out opportunities that will help you reach that goal, as well as in combination with the information you’re going to learn in part two of this podcast series.

Your affirmation statement, again, is gonna be specifically quantifiable, so we’re going to use the simple example of the $100,000/year goal from the acquisition fee for this affirmation statement. If you’re using the other approach, which is the ongoing $100,000, and this will be slightly different… But for this example, the affirmation statement will be “On the date (one year from today) October 17th, 2019, I have raised 1,5 million dollars in equity from passive investors, and I use that equity to syndicate 5 million dollars’ worth of successfully performing (10% or higher cash return) apartment communities earning me a total of $100,000 in acquisition fees.”

That’s your affirmation statement, and what you should do after you’ve set your goal and created your affirmation statement is write it out each morning for the next 30 days. If you do that, it will be hardwired in your brain, you’ll probably memorize it, at that point, and once you have it memorized, you will actively seek out opportunities to achieve that goal, since it’s hardwired into your brain.

That’s part one of the Tony Robbins Ultimate Success Formula, or what I’m calling the Ultimate Syndication Success Formula, which is know your outcome. In this episode, you learned how you make money as a syndicator, as well as an example of the money made on a 250-unit deal, just to kind of give you an idea of the possibilities. Then you set your own 12-month goal and determine exactly how much money you need to raise in order to achieve that goal, which again, is either based off of an acquisition fee, or an ongoing fee from the profit split, which you can calculate using the free annual income calculator at SyndicationSchool.com Then lastly you create an affirmation statement and make a commitment to write it out 15 times each morning for the next 30 days.

That concludes part one. In part two, the next episode, we will discuss part two of Tony Robbins Ultimate Success Formula, which is “Know Your Reasons Why.” The next episode is gonna be focused on vision.

To listen to other Syndication School series about the how-to’s of apartment syndications and to download your free annual income calculator, visit SyndicationSchool.com, and if you enjoyed this episode, please leave us a review on iTunes.

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

JF1492: Why Apartment Syndications? Part 1 of 2: Syndication School With Theo Hicks

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Joe and Theo teamed up to make a brand new segment of the podcast, Syndication School. With this, Theo will be making two new episodes each week. These episodes will be focused towards, surprise, surprise – apartment syndication! This first episode is an introduction into apartment syndication and why you would want to do it. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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 the first ever syndication school episode. I am your host/instructor, Theo Hicks. Joe and I created the syndication school in order to provide you with a free apartment syndication education, so that you have the tools to launch your own syndication business.

Each week we will air a two-part series about the apartment syndication process. As an added bonus, for the majority of the episodes, we plan on offering a free resource for you to download. This could be a list or a spreadsheet that will be a companion for the episode that was aired. All the episodes, all of the resources and the ongoing syllabus for the syndication school are available at syndicationschool.com.

Now, with this being the first episode, we are going to start off by giving an overview of the apartment syndication process. In this episode, we’re going to discuss what an apartment syndication is, as well as discuss this overview of the process in order to give you a glimpse of future episodes and the types of things we’re going to be talking about in the syndication school.

Next we’re going to have a conversation about raising money for your own deals, versus using your own money to buy apartments, as well as the role you should be playing in a syndication based off of your background, whether that’s as the syndicator, or the investor, or as both.

To begin, what is an apartment syndication? The textbook definition of a syndication is a temporary professional financial alliance formed for the purpose of handling a large apartment transaction, that could be hard or impossible for the entities involved to handle individually… Which allows companies to pool their resources and share risks and returns.

In regards to apartments, a syndication is generally a partnership between the general partners, which is the syndicator, and the limited partners, which are the passive investors, to acquire and sell an apartment community while sharing in the profits.

That was a mouthful… Essentially, what an apartment syndication is, is a raising money from qualified investors to acquire apartment communities, while sharing in the profits. The high-level apartment syndication process based off of that definition is first you select a target investment market – this is where you’re actually going to invest.

Next, you’re going to build your core real estate team, which includes a property management company, a real estate broker, a mortgage broker or a lender, a real estate and securities attorney, and a CPA. Next you’re going to focus on finding capital and securing verbal commitments for investors.

Once you have the market picked, team in place and the money, then you’re gonna start looking for actual deals. As deals start to come in, you’re gonna underwrite these deals, which is when you do the financial analysis and submit offers on qualified deals.

Once the deal is under contract, assuming your offer is accepted, you’re going to perform the due diligence and secure financing from your lender, as well as secure actual commitments from your investors to fund the deal, at which point you will close and execute your business plan, and eventually sell the property for a profit.

That’s the high-level overview, and for each of those, later on in this syndication school we’re gonna go into a ton of detail, as well as provide you with free documents in order to help you with each of those steps in the process.

Now, with an apartment syndication being the act of raising money from qualified investors to acquire apartment communities while sharing in the profits, when you are determining whether or not that’s something you want to do, the two main questions you wanna ask yourself once you made the decision to actually buy apartments, is do you wanna raise money to buy apartments, or do you wanna use your own money to buy apartments? Or do you want to be the person who actually manages the deal, so do you wanna be the general partner, or do you wanna be the limited partner and be the passive in the deal?

Those are the two main decisions you have to make, again, after you made the decision to buy apartments, which we’ll go over in part two, comparing investing in apartments to all of the other strategies.

So in regards to raising money compared to using your own money to buy apartments, let’s go over a list of pros and cons. For the majority of these comparisons, there really is no objective correct answer. There’s no answer that raising money is good for everyone, and using your own money is bad for everyone. In reality, it’s based off of your goals, and where you’re at in your real estate career, your business career, how much time you have, things like that.

When you’re listening to this, listen to the pros and cons and ask yourself “Do these benefits outweigh the cons for me and my particular situation?” With that said, let’s discuss the pros and cons of raising money, compared to using your own money to buy apartments.

An obvious pro of raising money has to be the scalability. When you’re buying real estate with your own money, you are limited by the amount of money you make, whether that’s your job, money your parents gave you, money you made from other investments… So you’re limited by that in order to fund the deal. Yes, of course, there’s ways to creatively finance, but you can do creative financing whether you’re using your own money, or using other people’s money… So that’s why we’re not going to discuss that.

So for raising money, your scalability is limited to the amount of money you can raise. If you can’t raise any money, then obviously you can’t scale quickly, but after listening to Syndication School – and in future episodes we’re going to take a deep dive into raising money – you  will have the tools and the skillsets to raise money, which will allow you to raise more money from other people than you can save up yourself, which means you could buy more real estate, because you’ll have more money for down payments.

Another pro of raising money versus using your own money is your return on investment. If you’re using your own money investing in a deal – let’s say you’re buying an apartment, you put down 20%-25%, the property makes an 8% return each year, so you’re making an 8% return on your capital. Whereas if you buy that same property using other people’s money, of course you’re going to most likely fund a portion of the investment yourself and be a limited partner, but you’re not funding the entirety of the deal. That small investment you’re making as a limited partner will likely make that same 8% return, but at the same time, since you’re active in the business as a general partner, you’re going to make money in other ways, which we will go over in a future episode. As an example, you’ll make an acquisition fee at purchase, which will be a percentage of the purchase. And you’ll make an ongoing profit from the profit split that you set up with your investors, as well as a large lump sum profit at the sale.

All the money you make as a general partner comes through your effort and time commitment, versus actual capital into the deal… Which means that you’re able to become an apartment syndicator without necessarily having to have hundreds of thousands of dollars to buy apartments on your own. So less money in the deal, plus the higher returns you’ll make, means a higher return on investment.

A third pro, and one that I think is important and is not necessarily a financial pro, but — it is contribution. If you’re a Best Ever listener, you know that Joe is a huge fan of Tony Robbins, and one of his six human needs is contribution, the need to contribute. When you are using your own money to buy your own deals – yes, you’re making money for yourself, and you can use that money to donate, to helping your family out, but when you’re raising other people’s money, you get those benefits, because obviously you’re still making money yourself, but you’re also helping others to make money, you’re also helping others to achieve their financial goals. And with that, when people achieve their financial goals, they have more time to spend on the things that you’re also spending time on contributing – volunteering, spending time with your family, going on vacations, and just living a better life for yourself and for others.

So again, not only are you contributing to yourself and your family, but you’re allowing others to do the same by using their money to buy profitable apartments, and distributing them a solid return on their capital.

And then lastly, the fourth pro that we’re gonna discuss is the prestige, the significance that comes from owning these large buildings. Of course, you can get the same feeling from owning properties yourself, buying properties with your own money, but in combination with the scalability aspect, you’re not gonna be able to have and control as much in apartments as you would be able to using other people’s money, and with that comes the prestige of knowing you control a large amount of real estate; you’ll likely be invited to speak on other people’s podcasts, speak at conferences… Which also allows you to contribute more and add value to other people, and allow you to, for example, make a syndication school and teach others how to replicate your success.

The four main pros of raising money compared to using your own money to buy apartments – again, to repeat those, that’s scalability, a larger return on investment, the ability to contribute more, as well as the prestige and significance that comes from owning a large amount of real estate, as well as contributing and helping other people reach their financial goals.

Now, what about the cons? Of course, being the Best Ever podcast, we’re not going to just tell you the cons, but we’re also going to mention things that you can do to overcome these cons.

The first con of raising money compared to using your own money is the fact that you need to have access to other people’s money, which means you have to have a network of people who are liquid and trust you enough to invest in your deals. Of course, raising money is a major aspect of syndications, and there will be a lot of future episodes focused on strategies for raising money. But that’s one con – you need to raise money.

Number two, another con is that you’re going to be giving up the majority of the deal. If you are buying a 10-unit apartment on your own, you own 100% of the deal, compared to raising money for a 10-unit, and the majority of the profits are going to be going to your passive investors. Now, of course, in combination with the pros, since you’re gonna be able to buy larger buildings, it’s likely that the smaller percentage that you own in a larger apartment deal is gonna be more than you owning 100% of a smaller deal. But again, objectively, you are giving up a  percentage of the deal to your passive investors and any other team member you bring on to the general partnership.

Another con of raising money is there is likely going to be more stress, because you are using other people’s money, and if that’s something that you are fearful of or hesitant to do, then you’re likely gonna have some anxiety. But we are going to do a whole episode on how to overcome that fear of using other people’s money, and how to overcome the obstacles and the excuses that we say to ourselves in regards to why we can’t raise money from other people.

I think listening to that future episode is gonna be very helpful for those of you listening who are telling yourselves “Well, this sounds great, but I’m kind of afraid to use other people’s money, I’m afraid to lose other people’s money etc.”

And then the last con, which is something that’s gonna be repetitive throughout the first couple episodes, is this larger barrier of entry or a larger time investment. So when you are buying with your own money, then you can spend as little or as much time on the deal as you want. You should be having frequent reviews with your property management company, overseeing a business plan, finding new deals… But when you are bringing other people’s capital into the mix, there’s some extra duties required. You have to communicate with your investors on an ongoing basis before you find a deal, once you actually have the deal, and also after you close on the deal.

You’re gonna have to do things like build a brand in order to attract these investors to your business. There’s the process of all the paperwork that’s involved with actually securing the commitment from your investors, and things like that. But again, at the same time, you’re going to be spending more time on these larger deals, but you’re going to also be making more money on these deals, since they are larger and you’re not gonna be able to buy as large of apartments on your own.

And at the same time, there’s also gonna be a larger barrier of entry, because in order to raise capital, one of the major things you need to have is trust. One of the ways you get trust is by displaying expertise, which comes from creating a thought leadership platform, but also just having experience in real estate, having expertise on the actual apartment syndication process, having a strong business background, and then the time investment to actually create a team before you even start looking for deals.

In fact, series number two – so not the next episode, but the next series – will be focused on the experience and educational requirements to become an apartment syndicator.

So those are the four cons of raising money compared to using your own money. Again, as you need access to the capital, you’re gonna be giving up a majority of the deal, there’s gonna be that potential anxiety from using other people’s money, and also there’s gonna be a larger time investment ongoing, as well as a larger time investment before you start buying apartments.

As I mentioned before, you want to take these pros and cons and ask yourself “Which one of these apply to me?” If you don’t have anxiety using other people’s money, then that con is not very relevant. If you have access to capital, or you know high net worth individuals already, or you’re confident in your ability to expand your network, then that con is not  really relevant to you.

If you’re okay giving up the majority of the deal because you know it’s gonna be a larger deal and you’re gonna be making more money than you would have been otherwise, then again, that’s not very relevant to you, whereas for some people, all four of those cons might be a big deal and might either make them not wanna be a syndicator, or let them know that “Hey, I’ve got a couple of years of work I need to do before I’m ready to start raising money, and maybe I should buy a couple of deals on my own first.”

The next distinction or the next question you wanna ask yourself besides “Do I wanna raise money or use my own money?” is “Okay, so I wanna be an apartment syndicator, I wanna be involved in apartment syndications, but should I be the actual general partner? Should I be an active apartment syndicator, or should I be more passive first and be a limited partner?” First, let’s define what those terms mean.

A limited partner – this is a textbook definition – is a partner whose liability is limited to the extent of the partner share of ownership. Essentially, what that means is they’re the ones that fund a portion of the investment and their liability is limited to that investment… Whereas a general partner is the owner of the partnership and has unlimited liability. The general partner is the managing partner and is active in the day-to-day operations of the business, and they’re responsible for managing the entire apartment project from start to finish.

So what are the pros and the cons of being a general partner, being active, being the actual sponsor or syndicator, compared to being more passive and being a limited partner? The first pro is more control. Since you are managing the entire apartment project, you have control over the majority of the decisions that are made. You get to decide what market to invest in, you get to decide what investment strategy to purse, you get to decide what team members to bring on, the types of deals that you’ll look at, which deals to actually invest in and not to invest in, deal structure, loan structure, the types of renovations, and the list goes on and on. You get to control everything.

Whereas if you are the limited partner, you only get to control the syndicator you work with. So you can’t decide all those factors, you can just ask the syndicator “Hey, what type of investment strategy do you have? What market are you investing in? Who are your team members?” and then from there decide whether you want to work with that syndicator or work with someone else.

Another pro of a general partner over the limited partner is the financial barrier of entry, which I’ve briefly mentioned before… But you don’t need a lot of money yourself to get started as an apartment syndicator. As you know if you are a loyal listener of the podcast, Joe had less than six figures in his bank account when he syndicated his first deal… So you don’t need a ton of money.

Of course, there is going to be a higher barrier of entry in regards to experience, but you don’t need to have a large lump sum of money saved up… Whereas if you wanna be a passive investor in certain deals, you’re only able to be an accredited investor, which means that you need to have an annual income of $200,000, or $300,000 jointly, or a net worth exceeding a million dollars. Of course, if you have that, then you could be an accredited passive investor, but if you don’t, then there’s gonna be some time involved in building up that net worth and that annual income.

The cons of being a general partner to the limited partner has to do with, of course, the time commitment. With all that control comes more responsibilities, more duties. All those things you get to pick and choose from, you actually have to do that, as well as execute the business plan on an ongoing basis… Whereas the limited partner just needs to initially screen the syndicator, and then as deals come in, screen those deals to determine if those are worth investing in. So it’s possible, but it’s gonna be very difficult for you to be an apartment syndicator while having a full-time job. It’s possible if you’re able automate some systems, build a solid team, or if you partner up with someone who does more of the day-to-day operations and you focus more on other aspects of the business in your spare time… But if you’re gonna be doing everything yourself, it’s gonna be very difficult to be the syndicator; it might make sense to passively invest first, until you have the time to be an apartment syndicator.

Then also, of course, there’s gonna be that experience barrier to entry, which we’ll go over in series number two… So again, not the next episode, but the next series – we’ll go over the experience requirements needed before becoming an apartment syndicator. And of course, you’re gonna need education as well, which will take some time.

Overall, when comparing the limited partner to the general partner, the limited partner is someone who is comfortable giving up control, and are pretty busy with a full-time job, but still want to receive the benefits of owning apartments… Whereas the general partner is going to be  someone who wants to create a full-time apartment business, and again, has the time and those experience and educational requirements in order to do so.

When I said that the limited partner wants the benefits of owning apartments – this transitions into part two, which is where we’re going to be focusing on comparing the apartment syndication strategy to other investment strategies.

This episode we focused on kind of defining what apartment syndications are, and based off of your background determining if it’s the right fit. Now we’re gonna talk about in what situation the apartment syndications are superior to other investment strategies, and we’re gonna be talking about single-family rentals, we’re gonna be comparing it to smaller multifamily, which is up to 50 units, we’re gonna be comparing it to REITs and other stock-like investments, as well as comparing it to development.

Thank you for listening, and I will talk to you again in part two.

JF1405: Conversation With “The Go Giver” Author with John David Mann

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John and his co author came out with The Go Giver 10 years ago! The book is all about putting other people’s’ needs first. They have a cult following around their first book and are coming out with another book very soon. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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John David Mann Background:

  • Has co-authored seven New York Times and national bestsellers
  • This week he launches the his next parable, THE GO-GIVER INFLUENCER
  • Concert cellist, award-winning composer, high school founder, educator, publisher, and entrepreneur
  • Say hi to him at  http://johndavidmann.com/

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, John David Mann. How are you doing, John?

John David Mann: I am doing fantastic, thanks, Joe.

Joe Fairless: I’m glad to hear it, and I’m really glad that you’re on the show. If you recognize John’s name, then that’s because you’re a fan, just like I am, of the Go-Giver series. Recently, he just launched a book “The Go-Giver Influencer.” He’s co-authored seven New York Times and national best-sellers. Seven. He’s also a concert cellist, award-winning composer, high school founder, educator, publisher and entrepreneur, but we are gonna be focused on the Go-Giver Influencer and the lessons that he has in the book, and we’re gonna be talking about how they can be applied towards us as real estate investors. I’m really excited about this… Are you ready, John?

John David Mann: I am ready, I am buckled in.

Joe Fairless: Alright. Well, first, can you give some context for the Go-Giver Influencer? Just in case a Best Ever listener is not familiar with the Go-Giver series…

John David Mann: Sure. First, the original Go-Giver – which I wrote all these books with my buddy Bob Burg, who has a long background in sales and sales training, amazing teacher, and he is the guy whose name always comes first, because [unintelligible [00:02:35].29]

Bob and I came out with the original Go-Giver ten years ago. I cannot believe it’s been a decade, but it has… And the Go-Giver was a parable, a little story [unintelligible [00:02:48].16] in which a mysterious mentor named Pindar got what he called the Five Laws of Stratospheric Success. That book has gained kind of a cult following.

We were saying before we pushed the button that we got a new addition that came out a couple years ago, and Arianna Huffington wrote the foreword and Glenn Beck endorsed it on the back, and I love those book-ends… Arianna Huffington and Glenn Beck – how about that?!

Joe Fairless: That’d be quite the dinner party.

John David Mann: Yeah, you put them on two ends of a battery and you get a charge going. [laughter] So it’s getting kind of a cult following, and the basic message of the Go-Giver – it’s not just about being a nice person or being altruistic or being unselfish or being noble, or all these fine, high-sounding things… The core idea of the Go-Giver  is putting other people’s interests first; making the shift from putting me first to putting others first is not just a nice way to live, it’s also smart and pragmatic in a business sense, in a practical sense.

If you look out for other people’s interests first, if you gain the reputation of being a person who does that, if you genuinely approach interactions – whether it’s in business or just in relationships and friendships – with the question “How can I serve this person? How can I make his/her life better? How can I enhance their lives and give them value?” If you make that your primary question, people are gonna take care of you; you’re gonna end up being taken care of yourself.

So the principle we evolved out of that is Pindar’s paradox, which is the more you give, the more you have. That’s the idea behind that book.

There was a second parable a couple years later called The Go-Giver Leader, which took those core ideas and looked at them through the lens of leadership. And now here we are, a decade later, time for book number three.

Bob and I were talking for the last couple years, like “What should we write about next?” and it seemed to us that in this fractious, polarized world of today, that whether you’re talking politically or in any sense, that we’d kind of like to hear what Pindar has to say about teaching us how to talk to each other, how to listen to opinions we disagree with, how to negotiate, whether it’s negotiating business deals or just negotiating a friendship… How to communicate with people with whom we may differ, or with whom there’s any kind of conflict or disagreement or unseen cross-interests, and to do so in a way that’s productive and effective for all parties involved.

Joe Fairless: So with the Go-Giver, maybe it’s all the above, but hear me out on this – is it about effective communication with people when we differ in certain stances on subjects? When I hear Go-Giver Influencer I think “How can I be someone who people go to for certain resources, because they know I’m a leader in that space?”

John David Mann: Great question. It’s funny,  because the idea of influence has been sort of central to all the books. In that original book there were five laws of stratospheric success, and law number three, the middle of the five, was the law of influence. Simply stated, that was “Your influence is determined by how abundantly you place other people’s interests first”, and the characters in that book talked about how that works in terms of business and investing in real estate and everything.

In the second parable, Go-Giver Leader, there is a whole chapter called Influence. So this is sort of a theme we’ve been playing with throughout – how to be a genuinely influential person. The first book talks about what makes a person have influence, and the hero of the book says “I don’t know… Authority? Position? Power? Money? Experience?” and [unintelligible [00:06:29].19] says “Yeah, that’s what most people would say, and that’s upside down. It’s backwards.” Those things don’t create influence, influence creates those things. Being genuinely influential happens when you genuinely place other people’s interests first, and that generates a gravitational field around you that builds power, position, authority, respect, experience, money etc.

Now, coming to this book, your excellent question… The secret of this book is we started out calling it The Go-Giver Negotiator. That was our original idea. We wanted to talk about the principles of negotiation, which Bob is a master at how to get what you want without manipulation, without intimidation, without running over the other person, without making it a zero-sum game and making it “Me versus them.” How to make it a genuine — win/win is a great term, but too often in practical life what win/win really means is “I scratch your back, you’ll scratch mine. I did this favor, now you owe me.” [unintelligible [00:07:28].07]

But that’s what we’re after – genuine win/win. How to create a deal or an outcome that raises all ships, not just mine… This big tide. So the setup of the book is instead of having a single hero, like we did in the other two books, this book has a double hero – there’s a guy and a woman, two people who are negotiating between them a business deal. A young business owner, and then a rep for a big firm.

The two of them are sitting down to negotiate a deal. They each have something the other one wants, and they’re kind of at loggerheads. That’s the engine that drives the book. Instead of being one mentor, there are two mentors. The whole idea is about twoness becoming oneness.

So practically speaking, the book follows two people in a difficult negotiation over the course of a week.

Joe Fairless: Okay.

John David Mann: As we were writing, we said, you know, we don’t just wanna call this Negotiator, because what we’re really talking about is what are the ways of communication  – as you started out with your question – the ways of being with somebody else that not only produce a good deal, a good outcome, but make you a person of influence, make you the kind of person that others go to in times of trouble or discord for advice, for leadership, for wisdom, for guidance.

So it’s Influencer in the sense of two people influencing each other positively, the principles of persuasion. The subtitle of the book is “A little story about a most persuasive idea.” And it is about positive persuasion. You can apply that in the context of negotiating a deal, but we also wanted to sort of spin that in a larger framework of being influential in your whole world.

Joe Fairless: I love that, because that takes it up another notch. It’s not just about negotiating approaches that make it — I like how you said “Two becomes one.” And you’re a seven-time New York Times best-selling author, so I’m gonna assume that twoness is the actual word, so I’m just gonna repeat what you’re saying… [laughs] It is now – okay, fine. Fair. Then it takes it from just negotiating to then what things can we do during the negotiating that have long-term sustainable impact that then make us become a person of influence, because guess what, our entire life we are solving challenges where someone isn’t exactly thinking exactly how we’re thinking about that particular thing at that point in time… That happens to come up frequently, so how can we use those situations where we’re not just solving that, but we’re becoming a person of influence through our actions… So how can we do that?

John David Mann: You’re so right… Whether it’s with your spouse, with your boss, with your colleagues, your partners… All your life, exactly. In a sense, you’re negotiating constantly, because we live in a world of diversity. So the book teaches what the characters call the five secrets of ultimate influence… And it’s five steps. All of our parables are based on the five steps. I have a thing about five, I love it. Four fingers and a thumb.

The first four laws are [unintelligible [00:10:40].00] and the fifth always seems contrary. The fifth is the counter-intuitive “Huh!?” that makes the whole thing work. So I’ll go through the five secrets real quickly.

Joe Fairless: That would be lovely. I’d love that.

John David Mann: And these do work as hardcore negotiating principles as well in a business deal. In fact, there’s one character – Jackson is the main character, and Jackson’s father, Walt, has these old-school, hardcore “kill’em” negotiating tricks and tactics he tries to teach his son, and they’re hilarious.

Joe Fairless: I’ve never come across anyone ever like that.

John David Mann: I know you never do, but I’m just saying… No one did, ever. [laughter] But I had so much fun writing Walt, because he’s so old-school, and just exactly how you don’t wanna be.

The first secret, number one, is master your emotions. The idea of master your emotions is you get into a room and you’re having a disagreement, it’s really easy to let the strength of your convictions, the power of your feelings start to hold sway. The problem is feelings are really unreliable. One of the characters says “If you let your feelings behind the steering wheel, then you’re at the mercy of a drunk driver.”

So the idea of master your emotions, whether it’s an argument with your spouse or an argument with your child, or a business negotiation or anything else, or you’re on Twitter having a word war with somebody who doesn’t hold the same political belief – I know that never happens to anybody, but just let’s suppose it did… So the first thing is set your emotions to the side. And by that,  we don’t mean deny them or suppress them or pretend you don’t have them, but just let them sit in the passenger’s seat. It’s so easy to react and to come from reaction and to use phrases that incite reaction… Like, “If you only knew what you were talking about…”, or “Well, first of all, let me set you straight on…”, or as in the old Saturday Night Live, “Jane, you ignorant slut.”

So master your emotions, set them to the driver’s seat is number one. Make calm your default setting. This is something you could actually practice. When you  start to feel yourself upset, to actually let your emotions kind of sink down into your gut; have them, but breathe and go back to your thoughts and your logic and what you’re thinking here.

That’s a response you can actually train your nervous system to master. It’s a neurological pathway in your central nervous system that reacts emotionally. So what you wanna do is train yourself to respond, rather than react, and that’s the first secret.

Joe Fairless: Okay.

John David Mann: And interestingly, when you do that, it puts calm, rational thinking in the driver’s seat, which may sound cold and bloodless, but that’s exactly what you need right now… Because that’s the doorway through which you can start to get to empathy, which is where we’re going.

So that’s number one… Number two is to listen. Simply listen and attempt to step into the other person’s shoes. Ask yourself the question “What is it they’re actually saying? What is it they’re actually after here?” What are they saying, and also what are they not saying? If I read between the lines, what would I pick on that I’m not picking up on? What is it like to be that person, sitting in that seat?

There’s a judge in the story who says “You know, in all the divorce cases that I sat on the bench and listened to, all the arbitrations I listened to, not once did any party every genuinely, sincerely make the effort to figure out what the other person actually wanted.” It was always “How can I get through this with my own goals intact?”

Joe Fairless: A judge in your book, or a judge you spoke to?

John David Mann: A judge in the book. I’ve spoken to judges too, but there’s a character in the book called The Judge, who’s just a delightful person. So listen genuinely, not strategically so that you can figure out what you’re gonna say when they stop talking, but to actually try to put yourself in their shoes, which of course is the beginning of empathy.

The third secret is to set the frame of the conversation, or if the frame has already been set by the slam of the door with the person walking in, then to reset the frame. There’s always a frame being set in any interaction. For example, if you’re at the front desk in a hotel and they’ve messed up your room, and you need to be at a meeting in two hours, you’ve gotta get in there and change, and the room is not gonna be free for two more hours, they have no other rooms, you can set the frame by saying “This is impossible. I need that room. I need to speak to a manager.” That’s all true, but what you’ve just set is a confrontational frame. It isn’t that that’s evil or morally bad, but it’s ineffective, it’s impractical, because now you’ve basically set up a battle. The manager is gonna come in already pre-framed to duke it out with you.

If you would say instead “You know, this must be so frustrating for you… I understand your position and I totally get what’s happening here. I have this meeting I need to get to, and I can see [unintelligible [00:15:28].01] there’s no room available… I don’t know how we’re gonna fix this, but do you think a manager would help?” or however it is that you frame it, to frame it in a way that you and the person behind the desk are on the same side of the problem and you need to figure it out together. That’s a reframe.

A reframe can be as simple as a smile. A reframe can be as simple as “I never thought of it that way.” Or here’s a great one, by the way, for social media, where you don’t have the opportunity to smile or do a lot of body language… A great reframe on a social media exchange is “I’ve never thought of it that way”, or “There’s probably a lot I don’t know about this”, or “I could have this wrong, but…” To accept responsibility for being wrong first may seem like you’re setting up for weakness, but it’s actually putting you in a position of strength.

Joe Fairless: The first three so far – I could see how all of them could be challenging. I almost said the last one might be the most challenging because you open yourself up to vulnerability, but boy, the first two I could also see… Master your emotions – welcome to life. That’s Tony Robbins’ seminars all year long and you still might not even scratch the surface there.

John David Mann: The secret to that one is to practice it in little pieces. All these things you could practice a little tiny bit at a time. There are things you can do, like isometric exercises – a little bit every day, five seconds at a time.

Sorry, go ahead. You were gonna say then listening is also challenging.

Joe Fairless: Yeah, but I like how you mentioned some practical exercises… So maybe we’ll go through these five, and then if there’s any additional practical exercises to wrap it up, we’ll talk about that briefly.

John David Mann: Sure. Yeah, and there’s great ones for this number three, but let me just get to four; we’ll do what you just said. The fourth secret is simply to be gracious, to communicate — gracious, by the way, has the same root as graceful, and the same root as gratitude. They’re good words, they’re strategic words.

This secret is to communicate with tact and empathy. They’re related, although they’re not exactly the same. Tact is how you actually communicate, what you say and what you don’t say, and how you listen. Empathy is how you feel [unintelligible [00:17:38].29] Communicating with tact and empathy, again, is one of those things that can seem like the language of weakness… In fact, as Bob says in our second parable, tact is the language if strength. It’s the same thing as that reframe. Instead of just calling somebody out and hurling invectives at them, to say “I totally get where you’re coming from and this might not make sense, or I don’t know if this would work, but let me suggest blah-blah-blah-blah.”

It’s not being wishy-washy, it’s simply being respectful. And interestingly, not always, but often, the person will start to mirror that back. Their little mirror neurons will kick in. You could be setting yourself in the pathway of a reasonable conversation.

Empathy is the biggest one here of everything we’ve said so far, I think… Because empathy is not acting like you’re doing NLP, not acting like you’re mirroring the person and using their same phrases [unintelligible [00:18:38].20] Empathy is genuinely seeking to understand where they’re coming from, and trying to not just understand it, but feel it… To feel what they feel.

Stepping in someone’s shoes is trying to understand where they’re coming from, empathy is actually feeling it.

Joe Fairless: It certainly ties into all of them… Mastering your emotions – if you have empathy towards the other person, then you’re not just focused on yourself; you’re focused on them, therefore your emotions are mastered. Listening – well, that’s a direct correlation with empathy. Setting the frame – well, you could be wrong; it’s very possible you might have this wrong, but here are my thoughts… You’re empathizing with their perspective, and then obviously the being gracious part. That makes sense.

John David Mann: So the fifth secret is to let go of having to be right. This one’s tricky, because of course you’re right, right? You wouldn’t think what you think if you didn’t think it was right. You wouldn’t be after what you’re after if you didn’t want it. So we’re not saying “Let go of being right.” We’re not saying “Give up your position, compromise your principles.” In fact, at one point a character in the book says “Compromise comes from a Latin word meaning nobody ends up getting what they want.”

Of course, it doesn’t come from any such Latin word at all. We made that up. And the character in the book is making it up too, but that’s what compromise often turns into. Compromise… Typically what happens when two parties — neither one gets the other, neither one is empathizing with or hearing the other, so they end up creating this diluted, watered-down version of the solution that doesn’t satisfy either one. That’s a compromise… And that’s why so many wars, once they arrive at an armistice, a war breaks out again, because it was a compromise. Most of what looked like resolutions are at their heart compromises that didn’t actually arrive at resolutions.

So this fifth secret is let go of having to be right, which simply means entertaining the possibility that there might be something I’m not seeing here. I think I’m right, I really do. I think my opinion about this political thing or economic thing, or this deal, or that company, or whatever, or whether or not I put the toilet seat up or down, or whatever we’re arguing about – this is how I remember it, I really think I’m right, but it’s acknowledging that I’m not god, and that I’m not omniscient and omnipotent, and that there may be factors I haven’t thought of, so let’s just open it up to possibility here.

Joe Fairless: Okay. On that front, when you open up the possibility, at what point do you close the door…? Let’s say an impartial judge would rule that you’re 100% right; at what point do you say “Yeah, yeah, I’m opening up to be wrong, but clearly I’m right.” How does that go?

John David Mann: It’s a great question. Unfortunately, it’s almost impossible to answer because it’s so situational. But I will say this – one is that when you get into this dynamic of Pindar’s paradox (the more you give, the more you have), letting go of knee-jerk, gut-wrench reaction of clenching onto your position, that kind of white-knuckled having to be right, and just relax and breathe and open yourself to possibilities (not giving up your position, but just opening up to possibility), it’s amazing how often new solution present themselves that neither party thought of yet. Not compromises, but altogether new solutions.

That’s what happens in the book, by the way – there’s a resolution at the end that neither of them saw coming. We do that in every book, and the reason we do it is not just to make a surprise ending, but because we’ve seen that happen so often in life and in business. At the same time, we’re not trying to paint this Pollyanna picture, like it’s like a magic wand. You’re not gonna resolve every dispute, there are times when you really are right, there are times where you really are convinced you’re right and you’re actually wrong, because there is wrong and right sometimes in the facts of the matter. It’s an interesting thing…

I had a weird experience once. I walked in a bankruptcy court; one of my first businesses had gone bankrupt. It went skyrocket up, skyrocket down. There I was, sitting in front of a judge, and my single largest creditor was at the hearing. Most of the creditors didn’t come, they just accepted the judge’s ruling, but this guy showed up. My business owed him more than anybody else… And he asked if he could speak, and the judge said “Sure”, and he stood up and said “Is there any way that we can work it out so that he owes me less and can pay me less than you’re suggesting?” and the judge was freaked out, because he’d never heard anyone saying that.

It was just because we’d had really excellent communication. So you just never know what kind of resolution, what kind of leftfield when you make it a human interaction.

Joe Fairless: What’s one practical thing we can do after this conversation to apply so many things? Obviously, you have my word, I’m buying this book; I have a call after this, but I’m buying the book before I go to sleep tonight, because I love the Go-Giver. But besides reading the book, what’s one practical exercise?

John David Mann: When you’re in any kind of conflict, whether you’re face-to-face or you’re even just thinking about it, take a deep breath before you even frame a response; take a deep breath, smile at least internally (on your face, if possible), and think “What is it I don’t know about this yet, but I can find out in the next five minutes?”

Joe Fairless: Got it. Love it. How can the Best Ever listeners get this book?

John David Mann: Amazon, Barnes & Noble, anywhere. The Go-Giver Influencer. It’s on my website, JohnDavidMann.com. It’s brand new off the shelf, I hope you enjoy it. There’s a dog and [unintelligible [00:24:13].15]

Joe Fairless: Awesome. John, thank you so much for being on the show, teaching us the five secrets of ultimate influence. One, master emotions, two, listen, three, set the frame, four, be gracious, and five, let go without having to be right. This is not just a book about negotiation, it’s about how to approach the circumstances where we might not have everyone agreeing or thinking exactly how we’re thinking at that point in time, and becoming an influencer because of how we approach those daily interactions with the people when we come across those situations.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Best Ever Debate banner with Theo Hicks & Hoyuela

JF1396: Debate 01: Long Term Rentals Vs. Short Term Rentals with Theo Hicks and Sue Hoyuela

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Welcome to our first debate! Theo is debating an Airbnb expert, Sue Hoyuela. Listen as they go back and forth in this fun debate. The takeaways from this episode are meant to help investors learn more about each strategy, rather than beat the opponent down. That being said, head over to bestevercommunity.com and tell us who you thought won the debate! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Sue Hoyuela Real Estate Background:

  • Creator of the Airbnb Success Formula
  • Teaches how to trade long-term tenants for short-term guests, eliminate evictions and double rental income
  • Author, Speaker, and Real Estate Agent
  • Based in Los Angeles, California
  • Say hi to her at  www.airbnbvacationrentalbusiness.com
  • Best Ever Book: Financial Peace

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, I hope you enjoy this debate series. Theo is going up against Sue; they’re talking about long-term leases versus short-term leases, and not what strategy is superior, but which one is best for you. So enjoy this debate, and let us know your thoughts on who has the best one by going to bestevercommunity.com and sharing your thoughts.

 

Theo Hicks: Hello everyone, and welcome to the first ever Best Ever Debate. We’re streaming live from Facebook right now. I’ll be your host this time, Theo Hicks. Joe is gonna sit this one out. My opponent is going to be Sue Hoyuela of BnB Freedom Formula. Sue, thank you for being on. How are you doing today?

Sue Hoyuela: Great, Theo. Thanks for having me, it’s an honor to be here, and to be the first one to do a debate with you.

Theo Hicks: Fantastic. I wasn’t doing [unintelligible [00:01:52].05] because my outcome for this conversation is to not have a [unintelligible [00:01:59].13] back and forth on what’s the better strategy… My outcome is to help everyone listening learn the different strengths and challenges of these two different investment strategies, that you guys can determine which one fits best for your current situation… Because at the end of the day, as real estate investors, we know that there really isn’t the best strategy; the best strategy is kind of subjective and is based off of your experience, your time commitment, the amount of money you have, where you live, and things like that.

So what we’re gonna do is we’re gonna go through a list of five different factors, and kind of go back and forth and explain how those factors relate to each of our strategies.

Before we get into that, it’s important to have some context… Sue, do you mind giving a quick background on how you got into short-term rentals, as well as what short-term rentals actually are?

Sue Hoyuela: Sure. Let’s see… Back in 2011 I was deep in debt, looking for a way to make extra money, and somebody said the word “Airbnb.” In 2011, mostly people would respond “Air B and what?” So it was a way to make extra money by renting a room or a house to short-term guests, kind of like a hotel in a way. This was a website that allowed you to create a listing. Airbnb markets that to the world, so now travelers have another option for where to stay, and they can come across your listing and say “Sure, I’d love to stay with you.”

Back at that time, we had nothing to lose. We were just trying to find a way to make an extra $100 to put towards our debt and get out of debt faster… Within the first month we made an extra thousand dollars, and that was just by renting a shed in our backyard. We were like “Wow, what else will people rent?”

I’m an entrepreneur, I like ideas, and so I started to get very creative with space. I rented the laundry room in my house, the cupboard under the stairs we turned into the Harry Potter room, we rented by couch, we rented actual rooms, and after nine months I’d created enough income from this little side hustle to quit my full-time job.

Then at that point I started saying “What else can I do with this amazing tool called Airbnb?” So I started renting other people’s property, and time shares… I used four different business models, and that eventually allowed my husband to quit his job, too. We got completely out of debt, and we were making a six-figure income… And we just started saying “This is the best thing since sliced bread; this is the actual door to financial freedom. We have to tell everybody about this.” So I started teaching, and coaching, and created an online course to help people eliminate the learning curve that I had to go through to create a six-figure income with these short-term rentals… And they’re a  wonderful alternative to long-term rentals.

I’m excited to be able to share the ins and outs  and the pros and cons with you here today, and I hope that your audience will benefit from that.

Theo Hicks: Well, I’m sold. I’m converting all my long-term rentals to short-term rentals tomorrow. [laughter] I’m really excited to learn about your four short-term rental strategies, because I think even if you aren’t going to do short-term rentals, I think learning about these strategies can help you make your long-term rental business more effective, or to kind of do it in addition to your long-term rentals.

Quickly, in one sentence, define what short-term rentals are, just for the purposes of this conversation…

Sue Hoyuela: Okay, a short-term rental is anything less than 30 days. So if you’re going to rent out a room, a space or a house on Airbnb, it’s going to be less than a 30-day rental to someone who’s traveling, for any number of reasons… It’s a simple distinction, but actually a very powerful one, and we’ll get into that in a moment.

Theo Hicks: Okay. Really quickly – most of you guys know my background, but I bought my first long-term rental in (I think it was) 2013. I house-hacked a duplex that I bought after just learning about real estate the night before… I had a property under contract within two days, so I got after it… That kind of speaks to I guess you don’t really need a lot of experience… Or maybe you do, based off of how it turned out and some of the problems I went through. But after I bought that, I held that for a year, I sold it, and then a couple of years later, which was actually last August, I bought 12 units of three different fourplexes, at the exact same time, while having a full-time job; I managed those myself for 3-4 months, and then I moved to Tampa for my wife’s job, and ended up putting those under property management.

So I have an understanding of the house-hacking strategy, I’m actually for buying rentals and then managing them yourself, as well as my favorite, which is having someone else manage them for you. So that is my background, and for the purposes of this conversation, I’m going to define long-term rentals as an active strategy – that doesn’t necessarily mean you have to be the property manager, but it’s not a passive investment where all you do is just give money to someone else and they do all the finding and analyzing and managing of the deals for you… So it’s active in the sense that you have to buy it yourself and find the deal yourself.

I’m also defining it as me using my own money; I’m not raising capital for it, because that’s not fair to talk about that, because that’s completely different… And then I’m also just gonna keep it to residential properties, just because I wanna talk about more of someone who has little experience, or is just starting, or is looking to transition… So they’re not gonna be buying a 20-unit as their first long-term rental deal. And then to distinguish it from short-term rentals, I’m talking about 12-month non-furnished units.

The first factor, and I guess the most important factor, and the one that I already know that short-term rentals wins on is the returns. For my long-term rentals, when I’m looking at deals, I want a five-year average of 10%-15% cash-on-cash return. It’s usually buying 25% down, so I want a 10%-15% cash-on-cash return over a five-year period. What are the returns – I’m sure this is a very vague question, but what are the range of returns for short-term rentals?

Sue Hoyuela: Well, that’s one of the things that I discovered early on that just blew my mind. Short answer is double to triple what you’re used to making with long-term rentals. But the way I discovered that was when we started renting a room in our house, I was looking at like “What if I went to rent it on Craigslist?” and it was maybe $500/month to rent a room in someone’s house… And if you break it down, that’s $17/day. So when we put it up on Airbnb, it was $50/night, and that’s gonna be times 30 nights in a month, that’s $1,500/month; triple what you would have gotten from a regular long-term tenant.

When we applied the same strategy to a whole house rental, the same thing happened. We were renting it for $1,200/month, and when we put it up on Airbnb, we made $3,600/month. So that’s super powerful, and I’ve seen it across the board.

The funny thing is when I talk to landlords and I say “How much rent are you getting from your long-term tenants?” and they’re saying “Well, I could probably get more, but I’m afraid to raise my rents, because it’s so hard to find a good tenant… And if I raise it, they might leave and then I don’t know what I’m gonna get.”

So they wind up kind of shooting themselves in the foot almost by not raising the rents as much as they should to keep that income coming in the way it was the original intention, right? Invest in real estate and get that passive income coming from the rentals… But you have to continue to increase it, and a lot of landlords don’t. They could switch to the short-term model, and they’re actually gonna get a bigger boost in their rental income right off the bat.

So I call the difference between renting by the day, by the month to the long-term tenants, compared to renting by the night, to the short-term guests, the difference is night and day.

Theo Hicks: Nice. [laughter]

Sue Hoyuela: [unintelligible [00:10:03].29]

Theo Hicks: Something that I’ve discovered in my research about returns is consistency. People were saying for short-term rentals, since you’re doing it daily or weekly or monthly, the returns are not gonna be consistent month-over-month, whereas for long-term rentals – of course, there’s exceptions to this rule, but usually you’re gonna be collecting the same amount of rent each month… So could you speak on do the month-over-month rents fluctuate a ton? Is there some months where you’ll make no money and other months you’ll make times six times as much as you usually do, or is it consistently that three times number month-over-month?

Sue Hoyuela: Yeah, that’s very true… It speaks to risk tolerance, because the income does fluctuate, and it really depends on a lot of factors: where your property is, if it’s gonna have year-around traffic or if it’s just gonna be seasonal… So it’s gonna vary depending on where the property is and who your niche is, but there’s actually a really cool website that you can check out, if I can just throw it out there for folks…

Theo Hicks: Absolutely.

Sue Hoyuela: It’s AirDNA.co, and it’s got something called The Rentalizer. It’s really cool – you put in your address and it will show you exactly what type of occupancy rate to expect every month, based on seasonal demand and all that good stuff.

So that’s a very difficult question to answer, but I’ve found that for me – we’re in Los Angeles, and it fluctuates; summers are a busy time. We have huge events at times where our income just skyrockets, but it’s always out-performing the long-term.

For me, high turnover is a good thing, because I actually have five income maximization strategies that I incorporate into my short-term rentals, so that every time we have a turnover, I’m actually adding to my bottom line, and adding additional streams of income to my income with that. So it could be very powerful, but you have to have the tolerance for that; it’s not for everyone.

Theo Hicks: Absolutely. A couple things you hit on, I’ll definitely ask you more questions on before we move to other factors, but the last question I have, and I think I know the answer to this… One thing that attracts a lot of people to long-term rentals is the ability to accumulate equity, whether it be just natural appreciation, or renovating it and increasing the rents and increasing the property value that way… And then after a year or two pulling out equity and using that to rinse and repeat and buy some more properties. Is that a strategy that you can use in short-term rentals?

Sue Hoyuela: Absolutely. I know quite a few people that wanna do the buy and hold for a couple of years, because their end strategy is to actually flip it and get that equity out… But why not just rent it on a short-term basis in the meantime, because it actually gives you a lot more flexibility when it comes to exiting that property. If you’re on an annual lease, you’ve gotta wait 12 months for it to expire, but with Airbnb you can stop that calendar at any time you want, so you don’t miss out on opportunities like that.

Theo Hicks: Yeah, I figured… A quick follow-up question – when a bank is looking at a property and looking on whether to refinance or a home equity line of credits, do you show them what your occupancy and what your rents have been? I guess is the process the exact same as it would be for a rental, or are they like “Oh, well this is maybe inconsistent…”, they look at it differently and have a lower LTV, or (I guess) a higher LTV?

Sue Hoyuela: You know, that’s really cool, because I was doing Airbnb since 2011, and I wanted to refinance and see if a bank would accept that income, and they were like, “No, that’s ridiculous…” But now that Airbnb has been around 10 years, they are viable now and they’ve proven their business model, so now yes, banks are accepting your Airbnb income as proof that you’ve got steady income and that you can confidently refinance on right now.

Theo Hicks: That’s a huge recent development for short-term rentals.

Sue Hoyuela: Yeah, very exciting.

Theo Hicks: So that completes the return factor. The next one I wanted to talk about – I call it barrier to entry. I have it broken into subcategories; it means a lot of different things. The first one is about location. We actually had someone who’s watching ask a question… He asks:

“Can you Airbnb anywhere, or are there cities that will not allow it? If so, what do you do then for short-term rentals?”

I’m assuming he means maybe the location or the regulation against Airbnb… Do you wanna speak on that?

Sue Hoyuela: Absolutely. Yes, you have to comply with the local laws and rules, and if they require a permit, or whatever it is, you need to find out what that is and comply. It’s difficult though; there’s no blanket, no standard anywhere, so you do have to do your due diligence and so some research online.

I start with the city and the municipal code to start seeing if they have anything in place for short-term rentals. They use a lot of keywords. If you’re gonna do the research in your city, you can look under short-term rental, vacation rental, sublet… Some really archaic terms they’re using are room and board, boarding house, rooming house… Things like that. Yeah, they have all kinds of different terminologies, so it’s a little tricky to find out what the rules and laws are, but Airbnb does have a Help section for that, as well. For the bigger cities, you can already find the documentation in Airbnb’s Help section, and they link to all the things you need, so it’s really helpful.

Let’s say for example you’re in a city — oh, goodness, so many things came to mind… So I have what I call the Pyramid of Safety, of where I consider doing Airbnb. The top of the pyramid is the “Don’t do it” area, and that’s usually in HOAs, gated communities, condos with CC&R’s, because they have their own little governing boards that any moment they can change the rules, and if you do Airbnb and they decide to say it’s not permitted, you’re out of business. The risk is too high, and I’ve seen that happen to a lot of folks… So I don’t do it in anything that’s got regulations like that.

Apartment buildings are the next most dangerous place to do Airbnb, in the sense of getting shut down. They’re saying that it’s eliminating affordable housing. So do that with caution.

But if you get out into the suburbs, away from the hub, away from the main spot, that’s what’s powerful about Airbnb, too… Because you make more money out in the suburbs. First of all, it costs you less to own a property or rent something out away from the city center, and you still make fantastic returns on Airbnb… So that to me is the sweet spot – staying away from the main place that’s got all the attention on it.

There are some cities that have been completely — it’s just not allowed. I was speaking in Michigan, in Grand Rapids, and the people were like “No, they don’t allow it here in Grand Rapids.” Yeah, but the border, one block away is the next city over, they have no rules or regulations whatsoever. Do whatever you want.

So if you’ve got that flexibility – that’s what I usually say, is just look across the border for the next city over, and everything could be just fine. But if you don’t have that flexibility, you probably shouldn’t do it on that particular property… But there are ways to still get in on the Airbnb game if you still wanna play. I’ll tell you more about that later.

Theo Hicks: Perfect. You’ve basically hit on what I was gonna ask you next, so I’ll explain that, and if you have anything else that you wanna further elaborate on… Obviously, there’s the regulations in these locations, but there’s also the demand on the location, and I know for long-term rentals you can do a rental in the city, you can do it in the suburbs, I guess you could definitely rent out a farmhouse and do it that way… I’m thinking you’ve kind of already hit on this, and it was actually surprising because I figured that it would be ideal in the big cities, but you’re saying that the suburbs are actually better.

The one person that I knew personally that did Airbnb, they actually had theirs next to a hospital, so what they were actually going to do – or they considered doing – was obviously the hospitals have their hospital beds… They were gonna turn their house into like a makeshift hospital, so they could put excess patients in there… I can’t remember exactly what they said, but the amount of money that they would have made by doing that was something insane; it was crazy, because obviously there’s regulations to how many beds you can put per room, and things like that… But they were by a hospital, so… Can you walk us through what are the types of things that you wanna look for in the specific market, that will let you know that there’s gonna be a strong demand for these short-term rentals?

Sue Hoyuela: Oh wow, okay.

Theo Hicks: I’m sure there’s a million things, so…

Sue Hoyuela: Yeah, that’s one of the things that’s in my course, because that’s a real exercise to try and identify who your ideal guest is… But what I’ve learned is no matter where your property is, there is a niche to serve. Somebody’s gonna wanna stay there on a short-term basis…

Theo Hicks: Okay.

Sue Hoyuela: Yeah, and you always discover things kind of like a surprise. We started getting a lot of poker players coming to our house, professional poker players… I’m like, “Nah, you can’t make money as a professional. That’s an oxymoron, come on.” No, really, they actually are professional, and we didn’t realize that we were three miles away from the Commerce Casino, which is the poker capital of the world. Who knew…? So three miles away – poker players love us. They can get there for less than $5 in an Uber, and it’s perfect for them.

So as I’ve traveled, this is what I found – no matter where you go, there is a niche. My brother-in-law, he actually comes to me and goes, “Guess what, Sue?” He does Airbnb on his own house, in his rooms; we’ve kind of shared it with our whole family and now they’re all in Airbnb… And he says “I bought a property out in San Bernadino.” I said “That’s great! What did you buy?” “Two acres.” I go “Yeah? Well, what kind of house is on it?” He’s like “Just dirt. Just two acres.” And I say “Great!” He’s like, “Yeah, it’s already up on Airbnb, I’m already making money.” I’m like, “Wait… Okay, this is two acres of dirt in Lucerne Valley, where you don’t have water, electricity, there’s a road about a mile away… You get cell signal, and that’s it.”

He’s got a niche out there, because people love to go ride their ATV’s, he’s got film crews that are renting it… All kinds of people wanna rent that property and he’s making a killing on a piece of dirt. He didn’t even have to develop it. I was like, “Dude…” [laughs]

Theo Hicks: So this sounds like it depends on how creative you wanna get, and if you’re a super-creative person – someone like you, definitely… I mean, you started off renting  out a shed in your backyard… Then this sounds like an amazing strategy.

For someone like me, who’s a spreadsheet guy… I’m very good with numbers, but whenever my wife asks me to pick out a certain color of couch, I’m just like “I don’t know, they look the exact same to me.” So for me, I really like long-term rentals just because it is so simple and basic…

I know some people get a kick out of that creative aspect of it, but I like just the basic — you find a property in an up-and-coming area, you stick some renters in there, you don’t have to do anything fancy… I personally stick around he C or B-class properties in markets that are ride on the outskirts of A markets, that are renting for just these insane monthly rents, like $1,200 for a one-bedroom per month… Eventually, those people are going to want to start moving somewhere more affordable. That’s what I’m seeing in my rentals right now. Location-wise, I like to pick places that are right next to really nice areas.

Since we’re talking about barrier to entry, and kind of transitioning to expertise and experience – that does take some experience, because every neighborhood is different, every street is different in the neighborhood… So if someone tells you to invest in  Cincinnati, for example, there’s A markets in Cincinnati where houses are over a million dollars, or where you can get, as I said, rents for $2,000 for a 2-bedroom unit, but then literally a mile over there’s fourplexes that rent for $450. It does take a lot of — not necessarily time-consuming activity to understand your market, but you’re gonna have that for everyone.

Something else about the barrier to entry, as I just said, was experience. For me – maybe I’m an anomaly, but the second I learned about long-term rentals, I just went and bought one the next day. The reason I was able to do that was because I was able to do the house-hacking situation, so I was able to put down 3.5%… In hindsight, I wish I would have done the 203K type of loan, because I did renovations to it, I just didn’t know anything, so I paid out of pocket for the renovations… But I was able to get in there and get a crazy return just because your down payment is so low.

So in regards to barrier to entry, from my perspective, I think long-term rentals are great because of the opportunity to do the house-hacking strategy, which is you buy with owner-occupied loan, you live in one unit, and then you rent out the other ones.

It has to be a residential property, of course, but that way you could essentially live for free, so it’s a great strategy for people that are just out of college, that have maybe 10k saved up.

I think my down payment was like $5,500, and I ended up renting the top one for $1,400 and my mortgage was — I can’t remember exactly what my mortgage was, but I was actually making money, and I was like “This is the craziest thing ever. I just can’t believe this is real.” And of course, it’s different for me, because I didn’t know anything about real estate… I thought that you would have some sort of certification to invest in real estate; I was a complete newb.

Also, there’s one other point – I wanted to ask you about the team… I’m not necessarily sure if you are doing all the management yourself, but if you aren’t, or for people that have a full-time job and they don’t have the time to manage it themselves, how do they go about doing that? Is that a challenge that you or any of your clients have?

Sue Hoyuela: Well, that’s interesting that you should say that, because in the beginning I was all about creating systems and streamlining… So I implemented all these systems in my own house, so that I didn’t have to do as much. I trained cleaners, and put in systems for inventory supply… Then at one point I outsourced the communication to a co-host. That pretty much took everything off my plate. It was that simple.

Then, actually, I did have people that had properties asking me to help them, so I started a guest management services business, so that I could do all those things for busy landlords, and help them enjoy the income without the hassles. So if you’re scheduling cleaners and restocking supplies and that’s a hassle, then I was taking care of that for them.

Since then, I’ve been teaching people now how to start guest management services as well, because the need and the demand is so huge across the country and the world that there is enough to go around.

I have to say though, I love your story about the house-hacking. I wasn’t sure what that term meant, but I love that you shared it, because it’s crazy — my daughter right now is buying the house she’s living in, because it happens to be a duplex… It’s like a pocket listing deal, right? The tenants in the back moved out, the landlord came to her and said “I’m thinking about selling it. Do you wanna buy it?” She said, “Sure”, and she’s already got a storage unit full of furniture, so the minute she closes escrow, she’s throwing all that furniture there in the back house and turning it into an Airbnb… So it’s kind of your strategy, but now it’s on steroids; you’ve got the extra income from the short-term rentals to just amp it up.

She’s been doing Airbnb too, in her own house, and now that she’s got this opportunity, she already understands the power of Airbnb, so it’s not even a question of long-term or short-term… She’s going short-term all the way.

Theo Hicks: I think I found a title of a book for you… Instead of house-hack, it’s the Airbnb-hack. I think that’s gonna be the next big thing. We were house-hacking before house-hacking was a thing… I’m not sure when Brandon Turner coined that term, or even if he’s the one that coined that term, but the guys that taught me about real estate – they both house-hacked five years before I was house-hacking, so back in the mid-2000’s; it wasn’t called house-hacking… I didn’t even know how he discovered it. I actually know [unintelligible [00:25:46].07] but I’m glad that he told me about it.

Sue Hoyuela: Good strategy.

Theo Hicks: So we’re kind of already touching on it, so we’ll transition into the next factor, which is time commitment, because obviously, if you wanna make money, time is also a very valuable resource… And of course, for any strategy, you can automate the entire process and really have no time in there, but for — I guess I’ll say my side first, because I kind of did all three entry-level models… So for house-hacking – again, this is just me personally, based off of my personality… That one was the most stressful for me. Obviously, when I’m stressed out, that affects my time, because I’m not productive at all… But it was just stressful. That could mean doing parts and not knowing what I was doing before I entered, but whatever I just thought of the house – I thought it was gonna fall to the ground, catch on fire… [laughs] Whenever my phone rang, I thought it was a tenant telling me something was wrong… So that was a mess, which is why I took a two-year break.

Then after those two years, when I bought these 12 units, I did the management of all those myself. I probably spent on average maybe around 10 hours a week doing that full-time management. Once I first took it over and got all of those large duties out of the way, which is sending out all the new letters and letting them know who you are, fixing any ongoing deferred maintenance, which people that are listening to this know all about that – my boiler issue… I’m probably known as “the boiler guy” now… But once I was done with that, most of my time was spent doing landscaping. I’d go in and rake leaves and mow the lawn… Obviously, that’s stuff that’s very easily automated, and it was only 12 units, but the time commitment on that wasn’t very hard.

Now that I have an actual property management company, it’s even less, because whenever something happens, instead of having the tenant call me, I have to go there to look at it and see what’s going on and then find the proper person to solve the problem for them, now the property management company will either do all of that upfront… If it’s a small maintenance issue, they do all of it and I won’t even know about it until the end of the month. Or if it’s larger, they’ll just say “Hey Theo, here’s what’s going on. Here’s what I’ve already done, here’s the quotes. We can do this, this or this. Option a, b or c. What do you wanna do?” and then I just look at my phone, I go “Option a” and then that’s it.

So that’s how it is from my specific situation. Again, I know that it’s different — if you find the wrong property management company, that could be a problem; if you have a bad maintenance person, that could be an issue… But those are kind of just the two different types of strategies for long-term rentals that I did, and the time commitment associated with each.

My question for you – because this is what I would imagine, is that it would take a lot of time to manage a short-term rental because of all the extra variables that are involved… But I’m sure you have a perfect solution for that, so let’s hear it.

Sue Hoyuela: Of course. I have to admit, when you own property, you still have those same issues… You’re a landlord, you still have to make sure the deferred maintenance is kept up, and things can go wrong and you have to fix them… The benefits though, what I’ve heard from my landlords is that when I’ve been managing the properties for them as a guest management services manager – so it’s similar to a property manager, but it eliminates a lot of the headaches for landlords, I’m gonna say in three major areas.

Theo Hicks: Okay.

Sue Hoyuela: First of all, when you’re a landlord and you’re looking for a new tenant, the time it takes — because you wanna make sure that you get a good tenant, so it’s gonna be a long-term thing, and you wanna go through the process of screening, and running their credit, and their background check, and their bank statements… Then it’s like courting them, and you have to meet them, and then you interview them and you show them the property… That time process – I don’t even know how many weeks that takes. If you have a property management company, they’re gonna do that for you, but that process of finding a good tenant takes a long time.

When it comes to short-term rentals, everything boils down to three questions, and in my system it’s actually three questions that when they answer my question, I can give them an answer whether they’re going to stay or not in less than a minute. So we’ve just reduced the whole screening process down to like 30 seconds.

Theo Hicks: And what are the three questions you ask?

Sue Hoyuela: I ask them “Where are you coming from? Who are you traveling with?” and “What will you be doing while you’re in town?” You have no idea… They seem rather innocuous, but those are some extremely loaded questions, and it’s very important that you answer correctly, or that’s it! You’re not staying.

It’s interesting, because I worked backwards… From all of my horrible experiences with bad guests, I started saying “Well, if I had done this, I wouldn’t have had that problem.” And as I started to see patterns, I started to be able to eliminate the things that were going to cause problems, and it just boils down to those three questions.

So when it comes to screening, now we don’t have to pay a management company to run credit, and show the property, and put signs and post signs – none of that; Airbnb handles it all. I just have to screen, three questions, boom. That’s done.

Theo Hicks: I have a quick follow-up question to that before  we move on to the other two… What would be an example of something that would eliminate someone from contention?

Sue Hoyuela: Okay, so when I’m asking the question “Who will you be traveling with?”, it’s very carefully worded, because when the answer comes back, “Oh, I’m not traveling with anybody; I’m booking on behalf of my mom and my sister, who are gonna be visiting you while they’re in town, but I don’t have a room for them to stay in.” That falls under the category of a third-party booking, and that’s a rather extensive explanation of why you don’t wanna do that… But immediately, in the wording, when they answer me, if they are booking for someone else, that’s a decline. I’ve got horror stories to explain why, but we won’t go into all of that right now… It just suffices to learn from experience. That’s one way to weed out a lot of problems.

Theo Hicks: Okay. What was number two? Not the question, but the second thing to reduce the time commitment.

Sue Hoyuela: Right, so the repairs and all that good stuff, and you said if you have a good management company. One of my landlords, he had a property in Whittier, a 5-bedroom 3-bath, and it was super high-end. He was getting $4,500/month for it, renting it to like the dean of Whittier College, or something like that… And the tenant moved out, and he had his management company find him a new tenant. So the management company did, and it was a disaster. It was kids, and they started bringing their friends over, they turned it into some sort of a den of iniquity, I don’t know… But it went downhill fast.

They had to evict everybody, and when they got in there after the eviction process, he discovered this massive hole in the ceiling that was caused by some sort of a leak. He said, “Hey, management company, you were supposed to be checking on this at least every six months. How did that get there?”, because it had been like two years… So things like that don’t happen when you’re doing short-term rentals, because you have such high turnover; every little thing is taken care of, done, and doesn’t blow up into a huge, huge problem… So you save a lot of money on that end.

And then the other thing that is interesting – I don’t know if it’s true in other states, but in California, when you rent to somebody, or lease, the tenants have more rights to the property than you do, and it’s kind of annoying. If you wanna go in and check your property you’ve gotta make an appointment, and if tenants don’t wanna let you in, that’s it; you can’t go in. And it’s weird, because it’s your property. I never understood that… “Wait a minute, who’s making the mortgage payments here…?”, but that’s the law. So when it comes to Airbnb, you can come and go in your own property whenever you want.

One of my landlords, he’s calling me saying “Can you open up a block this weekend? Because my wife wants to have a book party with her girlfriends.” I said, “Sure, it’s your property. You can do whatever you want with it.” It’s a huge benefit for landlords to have that control over their own property; it seems like such a small thing, but wow… [laughs]

Theo Hicks: Yeah, control is definitely big… And as you said, in California – I’m sure it’s statewide – it’s a tenant-friendly state versus a landlord-friendly state. I did a quick Google search, for people listening… I’ve looked into it before, and I can’t remember off the top of my head which states are the best for the landlord… But yeah, it’s things like how much time do you need to give them before you can go onto the property? Can you show up, or do you need to give a 24 hours notice? What is the eviction process? The security deposit return process… Those all vary.

Maybe that will convince some people to invest in an out of state market, as opposed to their own market… But again, as most things we’re talking about, it all depends.

So I guess the last two categories won’t take too long to talk about. One of them was – I kind of already mentioned this – the extra-variables involved with short-term rentals over long-term rentals. Things like furnishing the units… It’s something that I didn’t think about until I was researching, but a review is very important — I guess reviews are important for short-term rentals, as opposed to someone like me, who’s got four units and doesn’t have a company… Again, I guess it would be reviews on Airbnb, not like a Google review, so essentially you’re kind of under a microscope; you have to be on top of your game a little bit, whereas for me – I’m not saying I’m slacking off or anything, but it’s just a whole different thing.

Other examples are — and I guess you could get creative with this, but the amenities, what all you’re gonna offer. Are you just gonna do just the standard toiletries? Are you gonna put some goodies in the fridge for them, or leave them a bottle of wine to make them really enjoy their stay?

And then [unintelligible [00:35:15].09] but also, if you are going to have a property management company, I know for long-term rentals you’re looking around 10% of the collected income for a single-family, and then as you get to four units you’re looking at maybe 8%… I don’t know what a short-term rental rate would be, but I do remember at the Best Ever Conference someone who does short-term corporate housing was there and said that it was like 25% property management fee.

Obviously, I understand that it’s all relative, based on the income you’re bringing in. If you’re bringing in five times as much income, but you’re only paying three times more in expenses, then it’s fine, but do you wanna kind of speak on anything I just said there?

Sue Hoyuela: [laughs]

Theo Hicks: I know it was a lot.

Sue Hoyuela: I’m overwhelmed, yeah. I actually, wanted to go back to the previous conversation and say that evictions are another issue if your state is not landlord-friendly. If you do short-term rentals, under 30 days – usually, 30 days is the limit that if you cross over, now you’re in long-term rental territory and you have to evict clients if they don’t comply. But if you’re under 30 days, now it’s just a matter of trespassing, and it’s so much easier to deal with. None of the headaches. That’s huge. Thank you. Okay, got that off my chest.

Now, onward to the other good stuff that you were talking about… So when it comes to reviews – you know what, that’s so incredible, because before Airbnb, we hosted international students in our house, and all of our family and friends would say “You’re crazy. How do you let strangers stay in your house?” But reviews are what changed the game, because now there’s a certain amount of accountability, and it keeps everybody on their best behavior.

So because that’s built into the system, if you get bad reviews, you’re not part of the community anymore. So it’s actually what has created that trust that allows people to be crazy and stay in stranger’s houses… “What are you doing?”, right?

I’d say the same thing about Uber. When you were a kid, didn’t your parents say “Don’t get in a car with a stranger”? What are we doing now? We’re hopping in cars with strangers like nothing. Why? What changed? Reviews.

So that accountability and that being able to see that other people had a good experience before you, so it’s probably okay – it gives you the confidence to go ahead and enjoy the use of that.

So yeah, reviews are huge… And it’s funny, because when my daughter was looking for an apartment, she had a website that she checked, and there were apartment buildings with reviews for the long-term tenants, so I do know that you are getting reviewed on Yelp, or something…

Theo Hicks: Yeah, I’m pretty sure it’s really for larger ones… If you’re looking at a fourplex — I mean, maybe you could put whatever your LLC or rental company is on there; if you have like a website, a portal for all of your rentals, and tenants can come there and see your rentals on the website, then once you google that website, it’ll get that little thing on the side on Google, where you can do Google reviews… But I think it’s based off of having a website. If you have a website for your company, then you’re most likely gonna have the reviews.

And again, when you are doing anything in your life, whether you’re trying to find a restaurant, or a place to live, or a place to go on vacation, everyone googles “Best restaurants in Tampa FL”, and they’ll just sort based off of the number of stars and the number of reviews. It’s kind of at the point right now where reviews are, as you said, a game-changer… Now it’s so important to have solid reviews.

You need to have some sort of strategy… Or a couple of other things that I was talking about is there are certain amenities that you have, certain techniques, or anything that you do to make sure that you’re always getting that perfect five-star review, or ten-star… I’m not sure what the ratings are.

Sue Hoyuela: Yeah, exactly. It’s the way we live today, everything’s being reviews. It’s just a part of our culture now. So yeah, it’s actually pretty cool, and Airbnb – they give you the playbook, and they say “If you wanna be a super host and maintain that star rating, this is what you’ve gotta do.” So you’re like, “Great, that’s it. All I’ve gotta do is that.”

It revolves around six different areas for a host. I don’t think I can name them all off the top of my head, but the most important ones are accuracy in your listing – so whatever you’re promising, you’d better deliver. That’s common sense; setting expectations, basically, with the guest.

Cleanliness. Cleanliness is so important, because it’s the first impression. A guest coming to the bedroom, and like, dramatically tearing down the sheets off the bed and going “Ah-hah! Oh, it’s clean…” [laughter]

Theo Hicks: Did they expect like a rat under there, or something?

Sue Hoyuela: I know, right? I’m like, “Okay…” [laughs] So they really want that cleanliness, and you’re like “Okay, good.” There’s a lot of ways to ensure cleanliness. I have something called “The quick changeover cleaning system” that I’ve developed, so that we get consistent results every time, because it is critical to keeping your super host status and getting five-star reviews.

Communication is the other one. That can be the biggest deal breaker and make it so hard for guests, especially when they’re coming from other countries or they speak other languages… But Airbnb gives you all the tools, so that you can over-communicate. You can use pictures, so that it’s very clear and it makes everything so smooth. There’s a lot of different things… Location though is the one that has just driven me nuts, and I think other hosts too, because that’s one of the things you get reviewed on, and we’re like “What can we do about the location?” It’s like, “I can’t move the house. I wish I could, but…”

Theo Hicks: Yeah… I’m sure they do that just so people that are selecting where to live, they’re selecting where to go, and they want some amazing view or something, and they’ll look at that and they’ll be like — that’s like their main deciding factor… But there’s nothing you can do about that.

Sue Hoyuela: Right, and we’re aware that we’re not at the beach, with a view of the ocean… Okay, we’re 26 miles away, so our price reflects that. We’re not $300/night, we’re $49/night, so we make up for it, work with me here.

Theo Hicks: The last category I was gonna talk about was competition, but you’ve hit on that, because again, it’s obvious for long-term rentals – there’s plenty of actual properties that you could buy; I’m not saying that they’re being sold or the owners are willing to sell, but there’s gonna be thousands and thousands of single-families, duplexes, triplexes, fourplexes that you can choose from in your market.

Then obviously for short-term rentals, going into this conversation I thought that it wasn’t something that you could do everywhere, but as you explain, as long as you’re super-creative, you can Airbnb out a piece of dirt, so that answers that question…

Something else I wanted to talk about too, just to wrap up here, because it’s a very insightful conversation… Personally, I just moved to Tampa, and we go at the beach all the time now, and it’s still just amazing; I can’t believe I live here, this is insane. I’m used to living in Cincinnati, so… We got here in January, it was snowing there and we came to sunny beaches… But there’s so many cute little beach towns down here, and you can see that there’s obviously vacation rentals down there. If you consider buying a single-family house — not necessarily on the beach, but in one of those beach towns, and then furnishing it, and then when we’re not there, Airbnb-ing it… But then it’s something where, well, what if you just Airbnb it during the week, and then on the weekends we just literally live down there? After work we just drop down there…

I know we’d make more money renting on the weekends, I’m assuming, but still — again, it depends on how creative you get… But that’s something we were considering doing, so coming into this conversation, I was thinking in the back of my head the entire time, it’s like “We could totally do this.” We could have a beach house, but make money if we’re having a beach house.

So there’s that, but then I know there’s one thing that I wanted to hear from you, which is —  what did you call it…? You called it the Ultimate Leverage Strategy. Do you wanna just hit on what your Ultimate Leverage Strategy is?

Sue Hoyuela: Okay, sure. Oh, and by the way, more power to you, because if you decide to go with that beach property, you’ve got the best of both worlds. You can stay it in when you want, and go back to your other house when you don’t want, or rent it on the weekends, or once a year, or whatever; you’ve got all the options open to you, so… I wanna see what happens with that. Keep me posted.

But the Ultimate Leverage Strategy came about because I teach people how to make a six-figure income with Airbnb, renting rooms and spaces in their own house; they can make $1,000 to $10,000/month… I’m showing landlords how to trade their long-term tenants for short-term guests, eliminate eviction headaches, and double or triple the rental income on their rentals. But then, people kept saying “What if I don’t have a property? What if I don’t have enough startup capital to furnish a place?” and I said “Well, there’s an answer to that.” You can actually get in on the Airbnb game and you can start an Airbnb business that you get paid for to start.

When people wanna start a business and they start asking “Well, how much is it gonna take?” and if you’re looking at buying a property, well, 3%, or you’ll have to go out and get a loan, 250k, or maybe it’s zero to start… No, this business model, the Ultimate Leverage Strategy, you actually get paid to start your business, anywhere from $500 to $2,500/property. So it’s a pretty powerful strategy, and it’s providing guest management services to busy property owners and landlords.

In contrast, I guess the newest model I’ve been hearing about lately is “Oh, let’s use other people’s property”, but when they say that, they’re actually going out and renting a property, and then subletting it on Airbnb, which… I’ve actually been approached by pretty smart landlords, and they’re like “Hey, why don’t you just give me a flat fee per  month and you keep whatever else you make on top of that?”, which I do. That works, too.

But the way you can get in on this without having to have that monthly payment, or paying utilities, or have to worry about any expenses – zero cost out of pocket  – is just partner with those busy landlords and property owners by providing the guest management services. So if anybody out there is an Airbnb host right now – little light bulbs are going off like crazy – and if you don’t already have experience doing that, I have a course called the BnB Freedom Formula that teaches you how to become that Airbnb expert, so that you can start to offer those services and create a six-figure income from your own Airbnb business.

The beauty of it, because there’s no cost to you, is it’s unlimited in the scalability. You can grow this as big as you want. I teach you how to outsource all of the different pieces of it, so that it doesn’t depend on you, and I give you the pieces to fill in as your inventory grows, so that you have unlimited capacity.

It’s a very exciting business model, and it’s been blowing it out of the water because so many people haven’t been able to get in the Airbnb game until now, so… Thank you for letting me share that.

Theo Hicks: That’s awesome. From my understanding, you’re like an Airbnb property manager; you’re acting as the property management company for example for people like you – you didn’t want to do anything… Not anything, but didn’t wanna do the day-to-day activities. From my perspective, as a long-term landlord, I’d be like “I need to find a regular property management company”, whereas if I was an Airbnb host and I was sick and tired of dealing of dealing with cleaning toilets, as they always say, you’d get this Airbnb Guest Services, or what did you call it…?

Sue Hoyuela: Guest Management Services. That’s a business model that I’ve developed. It’s not endorsed by Airbnb or anything, but I use Airbnb as the tool to deliver my services. I’ve been training people how to provide those services as well, so that they can actually tap into that additional income and get paid. Actually, all you are asking about how much you make, right? So with the Airbnb management, it’s more 20% to 50%, because you’re right, we increase the income so much, but it’s still a smaller slice that it would have been at 10% on a long-term rental.

Theo Hicks: Yeah, so if you’re a property management company, or if you are either interested in starting a property management company, this is something you should definitely be interested in and pursue further… Because if you’re making 20% to 50% on a revenue that’s five to ten times higher than what it would be otherwise, then you’re gonna be able to scale a lot faster.

Sue Hoyuela: Yeah, absolutely. And I just need to make sure that people understand – if you are a property management company already, this is a beautiful tie-in… Why not just start offering this additional service? …save yourself a lot of time on screening and all that stuff. You can probably reduce your number of employees, and save some money on your overhead, who knows. But in order to do the guest management services, it’s not technically property management, so you don’t need to have all the licenses and permits and everything involved. Because of the way I set it up, you’re not handling any of those things technically, so that you are free to just go out and start your business without any restrictions.

Theo Hicks: Awesome. I think we should end the debate portion with that powerful strategy. Before we wrap up, I want to just quickly look — I’ll ask you some listener questions. We had a question earlier from [unintelligible [00:47:54].29] so we really appreciate that. We’ve got a second question from Grant – it’s something we talked about way at the beginning of the conversation, so I apologize for that, Grant… But he asks “What happens to an existing Airbnb property when a town or city outlaws Airbnb? Do you have to show down existing Airbnb’s, or can you just not create a new one?”

Sue Hoyuela: Good question. Yeah, so it’s happened to folks… They’ve been in a zone where it’s not just like they changed the laws and said “Now you have to get a permit” or “Now you have to comply”, but they’ve actually said “Nope, it’s banned.” So unfortunately you do have to stop doing Airbnb short-term rentals. But short-term rentals, again, mean anything under 30-day rentals, so a landlord, if you own that property, you’ve got so many options open to you, right? That’s the nature of real estate – we’re always looking for higher and better uses for it, and there’s a ton of them.

So you have all the options open to you – you can go back to long-term rentals, or even there’s an in-between… Something that’s really fun is corporate rentals. Business travelers – sometimes they need to stay for 2-3 months; traveling nurses, people who need a short stay, but longer than 30 days – you can still do that no problem, and you will be compliant with the “No Airbnb”, which is actually “Nothing less than 30 days” is what they mean. So you still have a lot of options open to you.

Theo Hicks: It makes sense. Alright, Sue, I really appreciate it. Just to kind of quickly summarize what we’ve talked about… We were doing Airbnb/short-term rentals vs. long-term rentals, and we were comparing them across a variety of different factors. In regards to returns, for short-term rentals you’re looking at approximately three times as much rental income, compared to long-term rentals. The only potential drawback is the fluctuations, but again, with a little creativity, you can fix that. For long-term rentals, you’re not getting as high of returns, but you do have that consistency.

In regards to barrier to entry, which is much of a surprise to me, you can do these anywhere. You can do it in a city, depending on the rules and regulations, you can do it in the suburbs – which, as you said, is one of the main places you can do it – and then, again, my favorite part of this conversation, is the dirt. You can literally Airbnb dirt, so people can ride around on their dirt bikes.

Then obviously for long-term rentals, you can do them anywhere, as well.

We talked about the time commitment, and you gave us three things in particular that you can do to reduce the time commitment, and I went over a couple of stories of my progression through managing the property I lived in, managing properties I didn’t live in, to finally ridding myself of all responsibility and giving it to a property management company who’s doing a great job.

We kind of hit on competition a little bit, and then we wrapped up with the Ultimate Leverage Strategy, which is essentially property management for Airbnb, but with insanely much higher returns.

I really appreciate you being here. Everyone listening, thanks for tuning in. Where is a good place people can learn more about you, learn more about the information you’ve talked about today, and learn more about your short-term rental strategies?

Sue Hoyuela: They can find me at SueHoyuela.com. We might wanna put that in the show notes, because it’s kind of hard to spell… But hey, my name is right there on the screen, so if you can spell it, suehoyuela.com – that’s a great place to learn more.

Theo Hicks: Awesome. Well, thank you again, thanks everyone for listening. I hope you guys enjoyed the first ever Best Ever debate, and we will talk to you guys soon.

JF1294: Reviewing The Best Crowdfunding Platforms with Ian Ippolito

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Ian wanted to know more about all the different crowdfunding websites. He put together something comparing most of them and eventually made his website because of all the demand he was getting from other people. Now you can visit his website and review multiple platforms to help make an informed decision. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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JF483: Over 20 Rehabs a Month and How He Manages It

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Have you ever managed five rehabs in one month? How about 10? Try 20 rehabs in one month! Our best ever guest has done it, and he’s going to share how he puts together a power team! He has definitely made a mark in his local investing community, tune in!

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