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

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

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

 

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

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

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

Click here for more info on PropStream


TRANSCRIPTION

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

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

Theo Hicks: What did I say?

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

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

Travis Watts: Yeah, alright.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for more info on PropStream


TRANSCRIPTION

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

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

Theo Hicks: Hello, Best Ever listeners, and welcome to another episode of The Syndication School series – a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week, we air a syndication school episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, especially the ones in the past, we’ve released free resources for you to download. All of these free resources as well as past syndication school series episodes can be found at syndicationschool.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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

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

Click here for more info on groundbreaker.co

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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

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

Click here for more info on groundbreaker.co

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


TRANSCRIPTION

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

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

Theo Hicks: Hello, Best Ever listeners. Welcome to another episode of The Syndication School series – a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we offer free resources. These are free PDF how-to guides, free Excel template calculators, free PowerPoint templates; these are all free resources that will help you along your apartment syndication journey. These free documents, as well as past syndication school series episodes are available at syndicationschool.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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

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

Click here for more info on groundbreaker.co

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

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

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

Click here for more info on groundbreaker.co

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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

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

Click here for more info on groundbreaker.co

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


TRANSCRIPT

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

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

Theo Hicks: Hello, Best Ever listeners, and welcome to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. So each week, we air two syndication school episodes that focus on a specific aspect of the apartment syndication investment strategy, and we give away a lot of free documents with these episodes, as well as our free PDF how-to guides, free PowerPoint presentation templates, free Excel calculator templates, things like that, that’ll help you along your apartment syndication journey. So make sure you check out our previous syndication school episodes, as well as all of those free documents at syndicationschool.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

 

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

 

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

Coronavirus and Commonly asked passive apartment investor questions

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

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Best Ever Tweet:

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Part 1 of SOS: JF2033

 

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

 

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

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

Best Ever Tweet:

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

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Ever Tweet:

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

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Ever Tweet:

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

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Ever Tweet:

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

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Best Ever Tweet:

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


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

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

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

Then you’re also going to want to actually attempt to speak with that person while you’re at the conference. So before you go to the conference, you want to know exactly what speakers you want to see. That involves investigating each of the speakers. So you go to the Whova app or visit our site, find them, see what they do, see what panel they’re on, and then maybe narrow it down to a handful of speakers you want to meet, and then go to their websites, go to their LinkedIn pages and do a little bit more investigations on them, on their background… Because you’re going to want to have a written list of questions that you want to ask them one on one before you’re attending the conference.

A great way to stand out in their mind, and to have them interested in talking to you, is to bring up some piece of information, some personal information that you would not have known without researching them. So something that you found while you were looking at their LinkedIn page or their Facebook page or the website that is relevant to you, and bring that up during the conversation. You’ll stand out and then you can have some common ground and then show that you’re prepared and then go through some of your questions.

Obviously, don’t ask all the questions. Obviously, don’t ask a question that they answered during their presentation. I’ll go into exactly how to approach them, but for now, this is just a preparation. So find the speakers that you want to meet with while you’re at the conference by looking at the different presentations that they’re are doing, what they do, do some extra research on them online, and then come up with some questions to ask them when you get to speak to them, one-on-one in person at the conference. Then how to approach that one-on-one conversation – we’ll get into it in the next section, because now moving on to what to actually do while you are at the conference.

The three main things that you’ll be doing at the Best Ever conference is one, you’ll be listening to speakers. Number two, you’ll be browsing the various exhibitor sponsor booths. Then three, you’re gonna be networking with people who are there, whether it’s the speakers or it’s with the attendees. Now, all three of these are going to be important, but depending on what your specific outcome is, one or two might be more important than the others. So obviously, when it comes to the speakers, I mentioned before in preparation you’ve already researched the speakers, you already know exactly what talks, what presentations you want to attend. Of those speakers, you know exactly which one do you want to talk to and you have your list of questions.

At this point, you should have all the different talks bucketed into one of three categories. So these are one that you must attend, these are ones that you have to attend in order to accomplish your goal. Number two are the ones that you’d like to attend if you have time, and then number three are the ones you don’t need to attend. So you’ve got your schedule set at this point, so you know that you need to go to the must-attend sessions, and then depending on how things go, you might be able to attend some of or all of the sessions you’d like to attend. Then whenever there’s a session that you don’t need to attend, you know that you can use that time to focus on the other two, which are the booths and then networking.

So something else you can also do is take a look at the exhibitors. Back to our Best Ever app – go to the attendees, you’ve got the exhibitors; there are 10 people, and you can go through and see all the different exhibitors. So we’ve got GigaFly, we’ve got Axiom Workforce, we’ve got Costar, we’ve got RealtyMogul… So of all those exhibitor booths, you’re going to want to check out what those companies do, what type of services they provide and see if going to that booth and asking them questions, learning about their services will help you with your specifically defined outcome for the conference.

Then from there, again, if you’ve got part of your schedule set with the must-attend apartment syndicator related presentations, then now you know, “Okay, well during the ones that I don’t need to attend, or I don’t want to attend at all, I’m going to go to these three booths during one of the networking breaks. I’m gonna hit all three of those booths during one of the networking breaks. I’m gonna hit all three booths during two of the talks I don’t need to go to.” Now you’ve got the exhibitors you want to go talk to and you’ve got that scheduled. Then again, make sure you’re prepared with the questions you want to ask them so that you can use your time efficiently.

Now that you’ve got those two parts of your schedule set – the presentations you’re going to attend and who you’re going to speak to from the exhibitor booths, the rest of the time can be spent networking with speakers and other attendees. So in preparation, you have your list of questions for the speakers at these must-attend presentations. You’re also likely going to have other questions that come up during the presentation, as well as questions you can remove because they were answered during the presentation. At some point during the conference, you’re going to want to talk to them.

So here’s an inside tip. Let’s say you want to talk to Frank, Joe’s business partner, about underwriting. You’re sitting there, you’ve got lots of questions, and then you tell yourself, “Okay. Well, once Frank is done giving this presentation, afterwards I’m gonna go up and talk to him.” He had his presentation, you’ve crossed off maybe half your questions because Frank answered them, and then you added maybe five more questions to ask him about underwriting or whatever. And you said, “Okay, I’ve got my top questions that I want to ask him about underwriting. ” Then you sit back, he gives this presentation, it’s over. You get up and you wait in line for half an hour to talk to Frank. That’s one way to go about doing it.

But an insider tip for how to talk to Frank or any speaker much easier is to not talk to them immediately after their presentation. That’s probably going to be the hardest way to talk to them. Then the second hardest would probably be speaking to them either at some point after their presentation, so later that day, because people are probably thinking the same thing like, “Oh, well, I’m not going to talk to him directly afterwards, because that’s when everyone’s gonna want to talk to him. So I’m gonna wait an hour, then I’m gonna talk to him.” Many people are probably thinking that. So something that’s even better is to talk to them before they even give their presentation, because that is probably when the least amount of people are going to be talking to them. Because not every single person is going to be as prepared as you.

Not every single person is gonna have gone through the list of speakers, know exactly who they want to talk to, or exactly what they want to say that person, and then think, “Okay, well, I’m gonna talk to them before. Maybe if they give a presentation day two, I’m gonna talk to them in the morning of day one.”

Now if you’re really good, the best way would be to figure out a way to meet with them during lunch, the breakfast period or the after-party, or during breakfast & lunch, or afterward the next day. The best would be getting dinner with them before the after-party. Because I remember during the first Best Ever conference – now, there weren’t as many people at that first one, but I was able to get dinner with– I think it was me and three of the speakers. So it was me, a newbie investor, with three super experienced investors. One of them had raised a billion dollars for their deals, or raised four billion dollars for the deals. Another guy had done a bunch of single-family homes and now these mobile homes. The other one is a full-time passive investor.

So the best way to get all of your questions answered and more is to figure out a way to get dinner with them. I’m not exactly sure how insane this conference is going to be, I’m not sure if the speakers are going to have their dinners pre-planned and they’ll get dinner together… But if you hang out at the end of the day and don’t leave immediately, then you see speakers talking, float out over there and start talking to them at that point and then ask them, “Hey, what are you guys doing for dinner?” and see if you can tag along. That’d be the best approach. So you’ve got your top few speakers you want to meet with. Sure you can ask them questions during the conference, you can wait in line like everyone else, or even attempt to do the Best Ever approach and try to get lunch or dinner with them for a more intimate one-on-one setting.

So you’ve got the speakers, and you’ve also got the attendees, which are gonna be a little bit easier to access; maybe a little bit harder to find exactly who is the best attendee to talk to. Again, there is the search function on the app where you can look up people in the general admission, but there are 265 people, so you’re going to go through all those different profiles to see who’s the best people to talk to. But do the best research that you can. It’s good to just be random and meet random people but go in there with a plan. Have a few attendees that you want to speak with, message them on the app beforehand, maybe say, “Hey, do you want to meet up for coffee before?” or, “Do you want to just make sure that we see each other during one of the networking events?” Or you can just approach them and say, “Hey, I saw your profile on here and wanted to learn more about you and ask you some questions.”

If your outcome is finding an apartment syndication partner, the people who are most likely to partner with you are going to be other attendees who have the same goals as you; the same goal of finding a partnership. So go on the app beforehand and maybe post a forum about what you’re looking for at the conference, and then see who replies. Go on there and look for posts of people who are a similar background to you, are in a similar niche as you and who are apartment syndicators, and see if you can meet with them.

Now, when it comes to the relationship– so I talked about in part one that you want to bring business cards, but you don’t want to just hand out as many business cards as possible. You don’t want to just do drive-by’s and [unintelligible [00:15:56].01] your business cards, going up to groups and saying, “Hi, I’m Theo. Here’s my business card. Alright, catch you later.” That’s not the best approach to achieving your outcome… Unless your outcome is to hand out 100 business cards, which again, isn’t the best approach to the conference.

So instead of doing that, the best ever approach is going to be focusing on creating one deep relationship each day. So you’ve got two days, so one outcome you can have is to form two deep relationships with people who are potential apartment syndication partners or potential apartment syndication mentors, or employees, depending on where you’re at in your career, during the entire conference.

So these are the people that you are spending time with in the networking sessions, at the after-party, during dinner, during lunch, during breakfast. You’re sitting with them at the conference. Just form a relationship that’s deeper than just surface level with one new person per day. That doesn’t guarantee that they’re gonna become your partner, your mentor, that you’re gonna get some financial benefit out of the partnership, but you’re setting yourself up for success, because you’re much more likely to have a long-term relationship with someone that you are meeting with, talking with, learning about on a deeper level, than you would be by just handing out business cards or just talking to people for a little bit, very surface level and then moving on.

So once you find that one person that you resonate with, that is complementary to what you’re looking for, or someone that you could be a potential mentor, I highly recommend attempting to continue to form that relationship throughout the rest of the day, and then focus on another person the next day. Because one deep relationship is much better than speaking with ten people for a few minutes and then handing them a business card. I know for me, my first conference, I organically, naturally followed this approach and was able to form some very deep relationships. I’m looking forward to meeting these people again when I come to the conference.

So next, we have the Whova app. I talked about how to use the Whova app in preparation, a little bit about how to use it while you’re there, but just a quick list of all the different functions of the Whova app. So you can create a profile so other attendees can learn more about you. You can view the entire agenda for the conference. You will receive notifications when a new session begins or when a session you’ve scheduled begins. So once they’ve given their presentations, whoever is present on the screen, it will be uploaded to the Whova app under their session on the agenda. You can download that into your computer and see that afterward. So that in combination with any recordings you have is very powerful.

You can click on their biography and learn more about them, and you can leave comments on the session or on their page about what you learned, questions you have. You can browse the list of conference attendees, and you can send and receive messages from the attendees as well as the speakers and the exhibitors. You can create a post or browse existing posts in the community forums – we’ve talked about that already. You can browse open job listings, so people that are looking to hire can post job listings on the Whova app, and you can apply for those jobs. Or you can post your own listing. Post pictures, participate in giveaways and you can earn points, and there’s much more.  So I recommend, before you’re at the conference – I’ve already talked about this – download the app, figure out how to use it, and then also learn how to use it while you’re actually at the conference.

Then the last thing would be to not leave until Sunday. So if possible, stay for the entire duration of the conference. Most people fly in Wednesday night or Thursday morning, and then they will fly out Sunday night or later so that you can maximize your networking. So the formal conference is over, but you can still get dinner with someone that night without having to fly out that night and go home right away. You can have a whole extra five, six, seven hours of networking by flying out on Sunday.

Then lastly, so the conference is over, what do you do afterward, what are some of the best ever practices for post-conference? I guess the first thing would be to determine if you’ve achieved your apartment syndication goal. Hopefully, you did. If you didn’t, hopefully, you can attempt to accomplish it afterward by following up with certain people that you’ve met at the conference, that you weren’t able to meet at the conference. So let’s say that there’s a speaker you wanted to talk to, but you never had a chance to– well, you still have the app. You can still message them and schedule a phone call, have them on your podcast to get some of your questions answered, or hopefully accomplish your goal. But regardless, you’re going to follow up with really anyone you met at the conference, at a more than surface level. Especially the people that you’ve formed a deep relationship with. So it could be that Monday after the conference or sometime during that week after the conference, follow up with these new people that you met. The sooner you follow up, the better, because it’ll increase your credibility in their mind. Plus the content from whatever you guys talked about will be top of mind.

So a good strategy would be to go to their LinkedIn page– unless you got their phone number or their email… Go to their LinkedIn page and send a follow-up message. In this message, include a piece of information that was brought up during the conversation. It can be like a joke, something funny that happened, it could be personal information, it could be some lessons that you learned from the conversation. Then also try to immediately add value to their business. So when you spoke to them in person, you had an outcome for the conference. Hopefully, they also had an outcome of the conference. So what was that outcome for the conference? Is there a way that you can help them achieve that outcome if they didn’t achieve it, or to build on the outcome if they did achieve it at the conference. Offer to add value in some way. So if they mentioned that they were looking for a partner – well, either you can say, “I might be interested in partnering with you” or “I know someone else who is interested in partnering with you. Let me send you his contact information.” Proactively do this; add value to their business. Then for the people that you form a deeper relationship with, you will likely have their phone number or email, so you can do the same thing in that form instead.

Now if you met through the conference and you made some commitment with them – you planned on sending them something, sending them your contact information, sending them someone else’s contact information, a book recommendation, going on their podcast, bringing them on your podcast, any sort of commitment whatsoever – make sure, number one, you’re recording that either in your notepad, or you can record it in the Whova app, but make sure you’re following up on those things are right away. Then obviously, you’re gonna want to implement any lessons you learned from the best ever conference immediately, because that’s when you’re gonna have the most motivation. So if your outcome was to learn how to do some direct mailing campaign, then make sure you do the direct mailing campaign that we could get back to start that pattern.

Then lastly, take advantage of any discounts that are offered for future conferences. So last year or two years ago – I’m not exactly sure if we still do this, but I’m pretty sure that we do – if you buy your ticket within a certain timeframe after the conference and you attended the conference, you get it at a significant discount. So if you got a lot out of the conference this year, and you plan to come back next year, you might as well buy your ticket right away, because that’s when it will be the most inexpensive.

So that is the apartment syndicator’s guide to the Best Ever conference. You got a lot of these things that can be applied to really any type of investor, any type of real estate professional. I tried to throw in some apartment syndication specific examples, but in reality, this is the approach that can be used at any conference. Maybe minus the Whova app. But I would say that the most important things to do are, number one, make sure you’re prepared with your specific outcome for attending, and the based on the outcome, determine what speakers, presentations you must attend, what booths you must attend, and then what speakers and then what general admission attendees you need to speak with in order to accomplish that goal. I would learn how to use the Whova app, I would also make sure you’re focusing on building one or a few deep relationships each day, and then make sure you’re following up with whatever you committed to doing after the conference and then implementing any lessons you learned immediately that Monday or Tuesday, because that is when you’re going to have the most motivation.

So if you want the written version of what I talked about today– it’s called, “The First Timer’s Guide to the Best Real Estate Investing Ever Conference.” Then the information on the speakers, the schedule, buying a ticket, if you haven’t bought a ticket already, that’s bec20.com. Then the Whova app is just W-H-O-V-A on the App Store. If you buy a ticket, you should be getting an email with instructions on how to download and log in to the Whova app.

That concludes the series on the apartment syndicator’s guide to the Best Ever Conference. In the meantime, until the conference, and until next week’s syndication school, make sure you check out some of the other episodes we have, as well as download some of our free documents at syndicationschool.com. Thank you for listening. I look forward to seeing all of you at the conference. I will talk to you soon.

 

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JF1982: The Apartment Syndicator’s Guide to the Best Ever Conference Part 1 with Theo Hicks

Theo shares his best tips for aspiring syndicators who are planning to attend the Best Ever Conference in Keystone, CO on February 20-22, 2020. In this episode, Theo discusses how to prepare, what to expect, and how to make the most of the conference.

 

Best Ever Tweet:

“You’re going to want to have a specifically defined outcome for attending the conference. You’re paying all this money to get a ticket, to fly out there, time away from your business, time away from the family, paying for the hotel, so you don’t want to just come in here and wing it.” – Theo Hicks


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

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

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


TRANSCRIPTION

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

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

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host Theo Hicks. Each week, we air two podcast episodes, also YouTube videos, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes and series, we offer some sort of free documents. These are PowerPoint presentation templates, PD, how-to guides, Excel calculator templates, things like that, that accompany the episodes in the series.

All of the previous syndication school episodes, as well as the free documents, can be found at syndicationschool.com. In this two-part series, we’re going to be talking about the Best Ever conference. So if you’re listening to this in real-time, the conference is less than one month away, in Colorado again, no longer in Denver. Now it is at a ski resort in Colorado. I thought it would be a good idea to do a Syndication School series on the apartment syndicator’s guide to the Best Ever conference. This is going to be based on a blog post that we wrote, which is the first timer’s guide to the Best Real Estate Investing Advice Ever Conference. So if you haven’t attended the conference before, or if you want to have some tips on how to approach the conference, specifically as an aspiring or a current apartment indicator, I wanted to talk about that today.

Again, this is going to be a two-part series. I’m going to go through as much as I can in this episode, and then the next episode is going to conclude the series. So the first thing I wanted to talk about is how to prepare for the Best Ever conference; most of the things will apply to everyone. I’ll talk about when they’re specific to apartment syndicators.

So the first thing that we have in this blog post is what to wear. This is a conference where you can really wear whatever you feel the most comfortable and confident in. You’re not gonna want to wear something just because you think you’re supposed to wear it, because you’re not going to be comfortable, and when you’re not comfortable, you’re not going to be able to get the most out of the conference. So this may seem like it is not important, but if you aren’t used to wearing a suit, and you wear a suit or a designer suit, you think that wouldn’t matter as much, but most likely, that’s going to have some impact on your ability to network, because you’re gonna be worried about how you look the entire time.

So if you want to wear a T-shirt and jeans, that’s not a problem. Obviously, if you want to wear a suit, that’s okay. But no matter how you dress, if you been in these conferences before, you’re gonna have on the one hand, people wearing really nice suits and the other hand, people wearing T-shirts and jeans. This includes the speakers, by the way. So as I mentioned, don’t wear a specific outfit just because you think you’re supposed to look a certain way at the conference, for real estate investors.

Again, people are gonna be wearing a wide range of different clothing because the attendees at the Best Ever conference cover a wide range of real estate investing niches. You probably don’t want to wear sweat pants or something you would work out in. That’s probably a little bit too casual. We also want to keep in mind that the conference is going to be in Colorado, so if you’re like me, and you’re used to living in Florida, make sure you bring some winter gear, make sure you bring a coat. I’m not necessarily sure if there’s gonna be any outside walking. I remember in Denver it was helpful to bring boots, because you had to walk from the hotel to the conference center. But just make sure you have the outfits that will keep you warm. So don’t just bring T-shirts, like I probably would automatically, because again, I’m used to wearing T-shirts or short-sleeve shirts in Florida.

We’re also going to have a happy hour, as well as an after-party, so you want to make sure that you’re also bringing some clothes for that as well. If you’re a dancer, make sure you bring your dancing shoes.

Then lastly, if you are interested, since this is at a resort, feel free to stay for a few days afterwards and enjoy the ski slopes, the resort, Denver or somewhere else in the general area for a vacation. If you do that either before or after the conference, make sure you’re bringing the proper clothing and gear for that. So overall, wear whatever you want, whatever you’re most comfortable in. That is going to help you set yourself up for success for the conference.

Now, what else should you bring with you to the Best Ever conference? Well, number one, you want to bring your phone obviously, as well as a charger. We’ll go into more detail on the phone aspect of it in a little bit with the Best Ever Whova app. But you’re going to want to bring your phone because of capturing people’s contact information, scheduling future meetings using the app, as I mentioned, taking pictures and posting those to the app, as well as to Facebook. Then bring your charger too, because your phone’s going to die pretty quickly if you’re using it constantly. A lot of people will actually record the different speakers, so you can use your phone for that, or you can bring a recorder for that. In the future, after the conference is over, most of the presentations are being recorded and we’ll have those videos. I’m pretty sure people that attend will have the ability to download those for free or purchase those– I’m not a 100% sure exactly how that happens. But I do know that there will be recordings.

Another tip is to bring one of those little portable chargers that you charge it in your computer or USB, and then you can just plug your phone into it and charge it that way, and not having to have access to an outlet. Because I remember the first conference– you see a lot of people that were kind of hanging out by walls because they were charging their phones or their laptops. The more time you’re spending on your phone charging it, the less time you spend on networking. If you don’t want to use your phone for recording for power conservation purposes or whatever, you can always buy a recorder to record your presentations as well.

Also, you’ll wanna bring your business cards. There’s something interesting on the app where you can just scan someone’s business card and log their contact information in the app. We’ll go into this a little bit later in this episode, or maybe in the next episode, but you don’t want to just bring a bunch of business cards and just pass them out to everyone. Or at least that’s not all you want to do. You want to also make sure that you’re having in-depth conversations with people. Again, we’ll focus on that a little bit later.

As I mentioned, a digital business card saving on the app – you can use that. You’ll also want to bring a notebook and pen to take notes. Make sure you’ve got some extra room in your luggage because there’s a lot of booths, and the booths are giving away some free stuff. So make sure you got some room in there to stuff all your free swag into there. We also do giveaways, so if you win a prize, you’re gonna want a place to put that as well.

At this point now, let’s get into some more things that are specific to apartment indicators. So you’re also gonna want to come with an outcome for attending. So out of all the different things, this is going to be the most important, because you’re going to want to have a specifically defined outcome for attending the conference. You’re paying all this money to get a ticket to fly out there, time away from your business, time away from the family, paying for the hotel… So you don’t want to just come in here and wing it. You don’t want to just show up and just see what happens. You’re going to have a specific outcome. Since you’re an apartment syndicator, depending on where you’re at in your business, you’re going to have a different outcome. So for example, let’s say you are someone who’s just starting out, maybe you’ve been listening to Syndication School since the beginning and you’ve been looking forward to the Best Ever conference for the past 12 months because you are interested in finding a business partner. Well, it’s likely that you’re going to find someone else, or multiple people are the Best Ever conference, who are in similar situations. Because there’s going to be hundreds of people at this conference.

So if your goal is to get a business partner, that is a good start, but that’s not specific enough, because you’re going to want to know exactly what you need out of the business partner. So for example, let’s say you are interested or have a background or skills in the asset management or acquisition aspect of apartment syndications, but you’ve not pulled the trigger on doing any deals because you don’t know how to find the money. You don’t have a network of high net worth individuals, you’ve reached out to family and friends, but no one’s really interested or doesn’t have the money at the moment, and the biggest pain point for you, the biggest thing holding back is private equity. Well, that would be a specific outcome for the Best Ever conference – to find a business partner who has the ability to raise capital. So with that outcome in mind, you can prepare for the conference with the focus on finding that individual. We’ll go into how to actually do that in a little bit.

Again, it could be the opposite, where you’ve got a lot of money, but you don’t know how to do syndication, so you can find someone who’s experienced in apartment syndications while you’re at the event. Or maybe you just want to learn more about a certain topic. Maybe you want to learn more about underwriting, maybe you want to learn more about asset management, maybe you want some tips on how to raise more money. So whether it’s an educational specific outcome or a business partner-specific outcome, or you’re looking for a deal, you want to know exactly what your outcome is for attending the Best Ever conference before you show up. That way, you can spend your time efficiently, and then when you leave the conference, you’ll know if you were successful or not, because if you didn’t achieve your outcome, then you weren’t successful. And if you did, then obviously you were successful. Lastly, if you want to stay there for a vacation, something else to bring would be a snowboard or skis or whatever.

Alrighty, so what else do we do in preparation for the conference? You’re going to want to download the Best Ever Whova app. So once you buy your ticket, then you can download the Whova app  in the application store on your iPhone or on your Android device. The Whova app has a lot of different functionalities. It will be something that’ll be a very powerful tool for you during the conference.

I’ve got the app open up on my phone right now, so we’ll just go through it before the conference, so this is exactly what you’d be doing for the conference. So when you open it up and you go to the home screen, it has a section for additional resources and a section for the event description near the bottom. So I’m on the iPhone; it might look a little bit different on the Android. So at the bottom you have the home and then you’ve got the agenda tab. So on the agenda tab, you’ve got the schedule for the two days; so Friday, the 21st and Saturday, the 22nd.

If you scroll down, you’ll see in order all the different panels, speakers, presentations and sessions. So it starts off with the welcome, and then we’ve got the first speaker, Whitney Sewell, talking about– it says, my first Best Ever conference, so what he’s done since then. Then you’ve got Economic Update with Glenn Mueller. Then if you click on it, it will tell you if this is something that’s focused on active or passive investing. It’ll allow you to add it to your agenda, so you’ll get notifications while at the conference that a presentation you signed up for is coming up. It’s got the speaker, so you can click on the speaker and you can read their biographical information and learn more about them, and you have the ability to send the speaker a message. So if your outcome was to learn more about, in this case, the commercial real estate economy and what it has been looking like and what the forecast is, well, you’re gonna want to meet Glenn Mueller, so you can have that as your outcome – meet and speak to Glenn Mueller.

Next, we’ve got a keynote speech, lessons learned from crowdfunding $2 billion in commercial real estate. So if your goal is to learn more about raising money, well, that’d be a great session to attend. So it’s the same thing for everything. Eventually, we’ve got a networking break, and it goes through all the different sessions for the day, which ends with the cocktail hour at night. Then you go to the next day, Saturday, the same thing, all the different sessions, panels, speakers. What’s interesting too is that you can find a lunch mate. So if you go to lunch, if you can find people to have lunch with, so again, if your outcome is specific to a certain thing, which it should be, you can find other attendees that are also focused on that same niche, so multifamily apartments, whatever. You can invite them to lunch on the app without even meeting them in person yet.

Next, you’ve got the attendees tab at the bottom. So from here, it lists out all the attendees. So you can look by categories, you can look at the people who have booths, speakers, the organizers, some VIPs, the sponsors, and then general admission. So again, for everyone who attends a conference, like you, you’ll fill out your information on the app, and you will be able to find other people who are attending the conference and you can send them messages beforehand.

For example, I’ve got a message that says, “Hey, Theo. I’d love to meet up with you. I’m also a chemical engineer by trade. I’m super excited to work with you on underwriting in Joe’s mentorship program. See you in Keystone.” So that’s one individual that I’ll be meeting up with at the conference. I’ve got other messages where someone’s invited me to a meetup group that they have. These are things that seem like they’ll occur during the networking breaks or out in the lobby of the conference. We’ve got a “How to Start and Scale a Syndication Business on a Budget” with 71 people attending. This is a meetup that I’m assuming will be occurring in some location in the lobby, and Ellie will be presenting about how to start and scale a syndication business on a budget.

So again, there’s countless different opportunities at the conference to achieve your outcome. You’ve got the speakers, then you have the ability to speak to the speakers. You’ve got the booths, you’ve got the exhibitors, you’ve got various sponsors, you’ve got these meetup groups, you’ve got the ability to actually network with people out in the lobby, you can schedule meetups, you can schedule lunches with certain individuals, whether it’s speakers or general admission. So lots of different opportunities on this app.

Next, we’ve got the community. So this is pretty cool. The community is like a forum, where people will post different questions or topics for people to post under. So for example, we’ve got two meetups. There are 38 meetups that people have scheduled for the Best Ever conference that are, again, outside of the actual scheduled sessions. So these are meetups that are created by people who are attending the conference. For example, we’ve got a meetup group for a specific area, Fort Wayne, Indiana. We’ve got a meet up for passive cashflow, we’ve got a meetup for underwriting deals, for accounting done right, single-family investing, multifamily master… So this is probably something that you’re definitely going to want to do based off of your outcome. So if your outcome is to learn more about raising money, you’re going to find a meetup that focuses on raising money.

Here’s another one… So if you want to learn how to expand your thought leadership platform, your podcast, we’ve got a podcasters meetup. If you live in a certain area and you want to learn more about the market, for example, let’s say if you live in Florida, we’ve got a Central Florida networking meetup. If you want to work out, we even got a Friday morning run that you can do.

Then after the conference, you’ll have the ability to get dinner with people, so there’s plenty of drinks and dinner meetups on here as well. Then you’ve also got different topics that you can post on it. You’ve got asset protection, we’ll be having a fireside chat on asset protection… It’s what questions– it’s actually the person who’s gonna be interviewing the panel, asking us the attendees, “What questions do you want me to ask during the panel?” So there’s those from the panels. We’ve got someone here who’s asking a question about losing money. “Any story that you can share about losing money in real estate, what went wrong?” So again, you can technically get your outcome accomplished before even attending the conference by creating a forum post on this community page.

Then the last tab is going to be your messages. So anyone who sends you a message, it’ll appear on this page, and then you can create a message by clicking at the top right. That will give you the ability to select anyone who’s signed up for the conference and email them. You can search by their name, their affiliation, their location. Or you can just scroll through and look at their businesses, what they do – are they a speaker, a sponsor, who are they? Again, if your goal is to meet a specific person or to learn a specific thing, you can get that through this app.

So again, the app is very powerful, I would definitely recommend the second you buy your ticket going on there, looking through the agenda, looking through that community page, see if you can find any meetup groups that are relevant to you, find any– after the first day, getting drinks or after the second day, getting drinks with people, meeting people for lunch, meeting people for breakfast in the morning, meeting people during the networking breaks, and then for the messages, you can meet with specific individuals that you want to reach out to, to help you accomplish your specific defined goal.

So I think it’s a good place to stop. We’ve talked about what to wear, what to bring and then we’ve gone pretty in-depth on the app. You should get an email or have been getting emails about the app as well, how to download it and a little bit of information about its functionality. But again, this is an apartment syndicator’s guide to the Best Ever conference, so any outcome that you have, for those listening, it’s going to be apartment syndication related. So when you’re on the app, when you’re looking at the agenda, and you’re looking at the attendees and looking at the community, you want to find things that are multifamily related, and that are related to raising money for multifamily deals. We’re gonna talk about underwriting, asset management, raising capital, or talking about the actual condition of a market… Those are the types of speakers, of panels, of presentations, keynotes, and community events that you’re going to want to be involved in.

Then when you’re considering reaching out to people using the messenger, you’re also going to focus on people who are actually where you want to be. So if you have never done a deal before, then you’re going to want to find people who have done deals before. If you’ve done a few deals, you’re going to find someone who’s done more deals than what you have done. Then consider just sending them a nice friendly message, pretty quick and succinct, mentioning your background, and that you’re interested in having a quick conversation with them at the conference.

So in the next episode, tomorrow, we’re going to talk about the last thing that you need to do in preparation for the conference. Then we’re going to talk about how to actually approach the conference once you’re actually there. Then we’re talking about what to do once the conference is over. Again, all from the perspective of an apartment syndicator. Until then, I recommend listening to some of the other syndication school series episodes on the How-to’s of apartment syndication, and to download the free documents that we have available. All that is on the syndicationschool.com Thanks for listening. I’ll talk to you tomorrow.

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

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

 

Best Ever Tweet:

“If the person that performs the environmental site assessment identifies an environmental problem, you’ll want to get with your lender to make sure that is not something that will disqualify you from financing”

 


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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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“Depending on what type of loan you’re getting, you may have to address some things before you close”

 


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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

 

Best Ever Tweet:

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

 


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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. As you know, each week we air two podcast episodes – every Wednesday and Thursday – that are part of a larger podcast series, where we discuss and focus on a specific aspect of the apartment syndication investment strategy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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