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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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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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, 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.

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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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: 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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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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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.

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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Ian Ippolito Real Estate Background:

Investor and founder of Real Estate Crowdfunding Review

-Founder and CEO of vWorker: Entrepreneur Magazine’s “100 Smartest, Most Innovative and Brilliant Companies”.

-Interviewed by Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS & FOX News

-Investor tools to cut through the clutter and the hype of real estate crowdfunding.

-Say hi to him at www.therealestatecrowdfundingreview.com

-Based in Tampa Bay, Florida

-Best Ever Book: Posture Alignment by Paul D’Arezzo

 


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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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  • Focus on single family rehabs and primarily rehabbing
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