JF1661: How To Underwrite A Value-add Apartment Deal Part 4 of 6 | Syndication School with Theo Hicks

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Today’s syndication school is continued over from yesterday’s episode. Theo will cover the rest of the assumptions you will be setting. So dive in and hit play to learn more about how to do an apartment syndication deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be a continuation of a six-part series. This is going to be part four… And that series in entitled “How to underwrite a value-add apartment deal.” Now, if you haven’t done so already, I recommend that you listen to parts one through three, because if you don’t, some of this stuff might not make sense, because we’re continuing where we left off from the last episode.

In part one you learned the four things that you need in order to underwrite a value-add apartment deal, which are the T-12, the rent roll, the offering memorandum and the financial model. Then we went through steps one through three of the overall seven-step underwriting process, which is step one, read the OM, step two, input the rent roll data, and step three, input the T-12 data. When I mean “input” – I mean input it into your financial model, which if you want to have a starter, we are giving away a free, simplified cashflow calculator which you can find in the show notes of this show, or you can find at SyndicationSchool.com.

Then in part two we introduced the step four, which is setting your assumptions. But before we went into discussing those, we went over 27 ways to add value to apartment deals, because when you are doing a value-add  deal you’re gonna be doing some renovations, and you need to know what renovations you’re actually going to do, before you set your renovation assumptions. So we went through some of the ways that we add value to our deals and other common ways to add value to deals, to give you some ideas of what you can do to your deals.

Then in step three we actually began diving into the assumptions that you need, and the first set of assumptions that we started discussing will help you determine how much money you need to raise; so we discussed setting your acquisition fee assumption, closing costs assumption, financing fees assumption, operating account fund assumption, and then we began to discuss the renovation cost assumptions. We went high-level on how to determine what renovations we’re going to do, and some strategies to do that when you’re just starting out and don’t necessarily know how much it costs to install a dog park, or how much it costs to place cabinets.

Then we went over some questions to ask yourself in order to determine your overall interior budget. We stopped there, so we’re going to begin this episode by continuing that first batch of assumptions, which will help you determine how much money you need to raise, and that is going to be the  exterior renovations.

So we’re still on point number four, which is renovation costs. We discussed the interiors, and now we’re gonna talk about the exteriors. The exterior renovations will fall in two buckets. One is going to be the cost to address any deferred maintenance on the big ticket items and amenities, and number two is going to be the costs to upgrade the exteriors. So deferred maintenance is going to be things that just need to be done; you’re not necessarily gonna get a return on investment, it’s just things that are in disarray, or not repaired properly, or are old and deteriorating and need to be replaced. Then the second one are gonna be amenities that you are going to create or upgrade in order to attract new residents.

For the second bucket, those amenities – we talked about those in the 27 ways to add value. Those are things like adding a park, those are things like renovating the clubhouse, or adding a clubhouse; renovating or adding a fitness center, adding a playground, upgrading the pool… Things like that that will increase the appeal of your property. A landscaping overhaul, rebranding the property with new signage.

The first bucket is what we’re gonna be talking about now, because we’ve already talked about the second bucket, of the amenities. Some questions that you wanna ask yourself and that you wanna find the answers to either in the OM, or add to the list of questions that you ask the broker, are gonna be 1) What is the roof type? You need to know what kind of roof the property has. I guess we’ll get into why you need to ask that question… So first, what is the roof time – typically, flat roofs are gonna be less expensive to actually buy and repair, but they’re not gonna last as long as a pitched roof. That leads us to our second question – when was the roof last replaced? Flat roofs typically have an average life of around 15 years, whereas pitched roofs have an average life of around 25 years. So if you determine that the property is a flat roof that was replaced 20 years ago, then you’re most likely gonna need to replace it either right away, or at some point during the business plan. If you have to replace it at any time in the business plan, then you wanna account for that upfront, because roofs are pretty expensive, and you’re not gonna want to have to pull six months’ worth of cashflow in order to replace a roof halfway into the business plan. You would much rather raise that money upfront and replace it upfront.

Similarly, if it’s a pitched roof that was replaced 15 years ago and your projected business plan is only five years, then you most likely won’t have to replace that roof… But still, if it’s close to the end of its life and it has the possibility of needing to be repaired during the business plan, then make sure that you have the roof checked out.

Next question is what is the siding type, and when was it last replaced? Typically, vinyl siding is gonna last about 60 years, whereas aluminum siding is gonna last about 25 years. If it’s brick, you don’t necessarily have to worry about it, because brick can last a long, long time. So unless you see any issues with the brick, then you should not have to be replacing any brick during the business plan.

Again, similar to the roof, if you’re getting towards the useful life of the siding, then you need to determine whether or not you’re going to replace it upfront, and the costs associated with replacing it.

Next is when was the last time that property was painted? Even if the vinyl, or the aluminum siding, or the brick is in good condition and it was replaced well before the end of its useful life, you still need to know when the property was last painted, because painting does not last as long as 60 years or, 25 to 45 years. Typically, you wanna repaint the property every five to ten years, so unless it was just painted, you’re likely gonna need to paint it once you’ve taken over management.

Next is gonna be when was the clubhouse last renovated. If it was recently renovated or not, you’re still gonna wanna compare the quality of the clubhouse to the comps that you’re using, to see what’s the quality of the competition’s clubhouse, and what types of amenities are offered in that clubhouse.

You don’t necessarily need to match the types of amenities that are offered, but the quality should be very similar. So if your quality is not similar and you’re using rental comps that have much nicer clubhouses, then you should consider renovating the clubhouse.

Next is what is the condition of the pool and the pool furniture. Does the pool need repairs? Do you need to replace the pool furniture with nicer chairs, nicer umbrellas? Maybe add a grilling area…

Next, when was the last time the landscaping was done? When was the last time they’ve invested a large amount of money into getting the landscaping overhauled? Landscaping is gonna be one of the first things people see when they come to your property, so you wanna make sure that it is nice and clean. It is not, you’re gonna have to do that once you’ve taken over the property and budget for it.

Next, what are the ages of the boilers or HVAC systems? Typically, HVAC lasts 15-20 years, and they claim boilers last 10-15 years, but from my understanding from boiler experts, the life of  a boiler is dependent on how much maintenance and maintaining was done to the boiler. So if the boilers were inspected every year and cleaned out every year, then they could last 30, 40, 50 years. If the boilers haven’t been looked at for ten years, then they’re gonna have a much lower life and you’ll have to replace those once you’ve taken over the property.

Next you wanna ask yourself “Are there individual water heaters, or is there one water heater per building?” Typically, the average life of water heaters are about 15 years, so again, if you’re getting towards the end of that useful life, you might have to replace that during the course of the business plan.

Another question to ask yourself is when was the last time the parking lot was restriped? So if you go there and you see the parking lot is faded and has a lot of cracks, then you might want to consider restriping and repairing that parking lot once you’ve taken over the property.

And then anything else that you want to add to the property – dog park, patios… What are the things that your competition are doing to get higher rents, that you wanna do at your property, and what is gonna be the cost associated with all of those?

So I guess those were a blend of those two buckets, the deferred maintenance and the nicer amenities. Essentially, you wanna determine what is the condition of the current big-ticket items – roof, siding, HVAC, parking lot, pool, clubhouse, and determine how much it’s gonna cost to repair those and get those back up to the high quality that you want. Then you wanna ask yourself “What amenities do I wanna add to this property? Is there a large green space where I can add a dog park? Do I wanna add a couple of things to the clubhouse? Do I wanna add valet trash to a couple of the units? Do I wanna add carports or patios?”

Go take a look at that list of 27 ways to add value and see if those types of things are in demand in the market that the property is located, and if you decide to move forward with one of those, determine what the cost is going to be.

Once you’ve set your interior budget and your exterior budget based off of the way I’ve explained, then you are going to also want to set a contingency budget. So you don’t want to just say “Alright, well I’ve got my estimates for the interiors, I’ve got my estimates for the exteriors… That’s exactly how much it’s gonna cost, so I don’t have to worry about it.” Instead, you wanna say “Here’s my estimates”, but you haven’t seen every single nook and cranny of the property yet, so you have no idea what’s hidden behind the walls, because you haven’t seen every single unit yet, you haven’t seen every single amenity… You don’t necessarily know exactly how much it’s going to cost. So in order to give yourself a little bit of a cushion, you’re gonna want to add a contingency, which is going to be a percentage of that overall budget. We typically use around 15%.

So if  our overall interior/exterior budget is one million dollars, then we would add an additional $150,000 to make it a total of 1.15 million dollar budget, which includes that contingency. So we are able to overspend by $150,000 and still be within budget. If you go over budget, then hopefully you have enough money left over in your operating fund to cover those overspends.

That right there – the interior, exterior and the contingency will make up the fifth assumption, the renovation cost assumption, which will help you determine how much equity you need to raise on the deal.

The last one is going to be your loan down payment, so how much money do you actually need to pay to the lender for them to finance your deal. The two ways to determine this number is either through an LTV or LTC. As I believe I’ve mentioned in the previous episode, the two main types of loan overall are gonna be ones that include renovations and ones that don’t include renovations. Generally, if they don’t include renovations and they’re gonna loan based on an LTV (loan-to-value), which is essentially they will loan up to a certain percentage of the value of the property, and you’ll have to cover the rest.

For example, if the lender says that they will provide an 80% LTV loan on a million  dollar property, that means that they will loan you $800,000, or 80% of the million, and you’ll have to bring $200,000 to the table.

The other one is the loan to cost, LTC. You might see that if you’re getting a bridge loan or some sort of loan that includes the renovation costs. That means that they will loan up to a certain percentage of the project cost to you. If the bank says they’ll provide you with 80% loan to cost, and let’s say the purchase price is $800,000 and the renovations are $200,000, for a total project cost of a million dollars, then they’ll loan up to $800,000 and you’ll have to bring $200,000 to the table.

Typically, you’re gonna see anywhere between 65% to 85% loan to value/loan to cost, depending on the deal and the loan program. Typically, it’s gonna be lower for deals that don’t include renovations, and maybe a little bit higher for deals that do include the renovations.

Now, obviously, in order to determine what you’re basing that LTV off of, because you’re gonna want to input into the cashflow calculator the LTV of the loan program you’re using – but you’re still gonna need a purchase price, because typically the value of the property should be around what the purchase price is… So you’re gonna want to input  a purchase price.

Now, something that’s very common for the large multifamily deals – I’d say for the majority of the multifamily deals, a large majority of them – is that there won’t be a purchase price listed. So you’ll get an OM and it’ll say “Price to be determined by the market”, which means that they don’t have a price listed. Now, if you don’t input a purchase price into the cashflow calculator, it’ll give a lot of errors, and in particular you won’t be able to have a finalized estimate of how much money you need to raise for your deal… So there’s a few ways to go about it.

Number one – in your list of questions to the broker you’re gonna ask them what cap rate they expect this property to trade at. So rather than saying, “Hey, how much money does the owner want for the property?”, an indirect way to get that number is to ask the broker what cap rate they think the property will trade at. So if they come back to you and say “I think this property is gonna trade at a 5% cap rate”, well, you know how to determine value using cap rate and NOI, so go to the T-12, or… Typically, I’ll go to what they claim the T-12 NOI was in the OM, and I’ll divide that by that 5%, that cap rate that’s offered, and then whatever that number is is what I believe the owner wants for the deal. Not necessarily exactly what he wants – it might be a little low, it might be a little high, but if the broker is telling me that they think the property is trading at this specific cap rate, I’m assuming that they are saying that because the owner has a price in mind, and that’s the cap rate that supports that price… So you’ll have an idea of how much money you’ll have to spend on the property, you’re gonna input that into your cashflow calculator and everything else will auto-populate due to the formulas. Once you input the rest of your assumptions, you’ll have an exact amount of money that you need to put down, and you’ll have your cash-on-cash and IRR numbers. So that’s one way to determine the purchase price.

Another way to determine the purchase price is to ask the broker how much money the owner wants, what’s the whisper price, and they might give you a range of numbers.

The third way is to wait till the very end of the inputting process. That’s gonna be actually step number five – determine offer price by an iterative process… So you keep changing the purchase price until you get the returns that you want. We’ll go into more details on that in step number five, which we’ll likely be discussing on next week.

Once you’ve inputted your acquisition cost assumption, you’ve inputted your closing costs, financing fees, operating account fund, renovation costs and your loan LTV and your setup to determine how much money you need to raise, and if you have a purchase price, input that and you’ll know exactly how much money you need to raise. If you don’t, then you can follow one of those three strategies that I discussed: 1) ask the broker for a cap rate; 2) ask the broker for  a whisper price; 3) determine the offer price via the iterative process.

Those are the six things that you need in order to determine how much money you need to raise, and those are also six assumptions that you’ll need to input in your cashflow calculator in order to make your five-year proforma.

The next set of assumptions – we’re gonna go through as many of these as we can until the end of the episode, and then we’ll finish off the assumptions next week… But the next set of assumptions are gonna be the growth assumptions. You’re gonna want to input an annual revenue growth assumption and an annual expense growth assumption. Now, this is not revenue growth or expense growth from anything that you’ve necessarily done at that property. So the revenue growth does not include your rental premiums, they don’t include any other income that you’re gonna start collecting from increasing your fees, adding paid parking, things like that. These are just based on natural income growth over time, as well as natural expense growth over time.

The natural yearly appreciation on rent, the yearly appreciation on your other income, the extra money each year that the vendors have built in, so that they keep up with inflation. You’re gonna be paying extra money to them each year, because the costs are only gonna go up. Typically, you’re gonna want to use between 1% to 2% for each of these. 1% to 2% for your revenue growth and 1% to 2% for your expense growth. Now, something that you might see in an offering memorandum  – I’d say it’s 50/50 probably – is you might see the broker assuming a much higher revenue growth; so a revenue growth that 4%, 5%, 6%. The evidence that they use to support that is that over the past five years the revenue in this particular market has increased by 6%-7% for the past five years.

Now, you obviously don’t wanna base your assumptions on the broker’s proforma, and you shouldn’t even have gotten to that point in the process yet, because if you remember, when you’re reading the OM you stop once you get to the financial analysis section… But eventually you’ll get there; or maybe you snuck a peek anyways and you saw that they claimed a 6% revenue growth each year in their proforma, based on the market average. Well, you don’t wanna do that, because there’s no reason to believe that the next five years are gonna be the same as the previous five years. Sure, rents have exploded the past 6-7 years by 6%-7%, but there’s no guarantee that that’s gonna continue to happen… So you wanna be conservative and work with the smaller 2%-3%. If the rents to continue to grow by 6%-7% each year, then that’s more money in your pocket. But if they don’t, and they only grow a few percentage points, or God forbid they don’t grow at all or they go down, then you’re not gonna be that far off your projections as you would have been if you’ve used that market average.

Same thing for expense growth – they might say that the expenses haven’t grown in five years, so you can assume 0%. Well, similarly to the revenue growth, there’s no reason to believe the next five years are gonna be the same as the previous five years. If the expenses do grow by 0%, then more money in your pocket. But if they grow by 2%, 3% or 4%, then your projections are on the money or they are just slightly off, but not off by 4%, 5%, 6%.

Next are going to be what I call Project Assumptions, but essentially you want to input how long you expect the renovations to take, and what your projected hold period is. The reason you wanna determine the projected renovation timeline is because renovating 100 units over 12 months, as opposed to 18 months or 24 months are going to have different net operating incomes, because the income is gonna be different. So if I tell myself, “Okay, well once I renovate all 100 units, I get a $10 premium, so I’ll have a $1,000 extra per month”, well how soon are you gonna have that extra $1,000 per month? Is it gonna be after 12 months, 24 months, 18 months? So how long it takes to get that $1,000 per month is going to affect your returns. The faster you get the renovations done, the higher your returns are gonna be for the project.

Now, keep in mind that just because renovating all the units in 12 months give you the best returns doesn’t mean that’s actually true. For example, number one, you wanna determine “Can your management company or whoever is doing the renovations do them that fast?” Is it possible for them to do – in our example, if you wanna get 100 units done in a year, can they do 9 to 10 units per month? Is that even possible? Is that possible based off of the leasing situation? Are there enough leases expiring within the first month and two months and three months to do all renovations, or are all the leases 12 months, and the first lease doesn’t expire for eight months? Well, it’s impossible to do them all in 12 months, because you can’t kick people out of their units just to renovate them.

Now, there are strategies that we’ve discussed before, but technically speaking, you are not able to end the lease of an inherited tenant just because you wanna go in there and renovate their unit and make more money; there’s protections in place, so you’ll have to wait until the end of their lease to renovate their unit. Also, you wanna determine how much it’s going to cost in order to do the renovations at that expedited pace.

I had a conversation with a management company today who said that the most amount of units they’ve renovated in a month was 40, which is insanely high… Because I mentioned that we’d like to do 10-15 per month; he goes, “Well, it’s possible, but if you only plan on doing a few per month, then we can have our in-house maintenance team do those renovations… But if you wanna do 40 per month, then we’re gonna have to hire multiple outside general contractors, and we’re gonna have to manage all those people, so we’re gonna charge you 5% to 10% of that overall construction budget.” Well, maybe if I did it over 18 months I wouldn’t have to pay that extra 5% to 10%. Paying that extra 5% to 10% in 12 months kind of eliminates the benefits of doing it so quickly.

So there’s lots of moving parts… Essentially, you wanna determine 1) what rate can your property management company do the renovations, or whoever is doing the renovations, and how much money are they gonna charge you? Is it even possible to do renovations at that rate, based off of the leases?

The other project assumption is going to be the project hold period. The reason why you wanna know the hold period is 1) it’s going to impact your internal rate of return. The internal rate of return is essentially a time value of money. If you invest $100 with me, and I give you your $100 back in a year, then the IRR is gonna be higher than if I give you $100 back in three years, because in three years that $100 is gonna be worth less than it would be a year from now.

So if  you are having a five-year hold, then the IRR is not necessarily gonna be higher, but it’ll be different than it would be if you did a seven-year hold, or a ten-year hold, depending on the business plan… Plus, the way you have your cashflow calculator set up formula-wise, you’re gonna need to tell it “Hey, this is when I plan on selling the property”, so that it can pull the sales price using the year five, year seven, year ten net operating income. So if my projected hold period is five years, then when I set my disposition assumptions the cashflow calculator will assume that I’m selling at five years… So when I input what I think the exit cap rate is going to be, it’ll determine what the sales price will be based on the net operating income at five years, or at seven years, or at ten years.

Now, the next set of assumptions are essentially the meat of the cashflow calculator, and this is where you make and break your deal; this is where you make your money. Those are the stabilized income assumptions and the stabilized expense assumptions. Then the last one that we’ll discuss are the debt assumptions. Once we’ve gotten all the three remaining assumptions done, we will discuss how to set your offer price, and discuss the remaining two steps of the underwriting process, which is gonna be the rental comps, and then visiting the property in person.

We’re gonna stop there for today and we’ll start off next week with the income and the expense assumptions, and finish off the step four of the underwriting process, and then get as far as we can with steps five through seven… And if we have to, we will go to part seven and eight to finish off this series. Because again, underwriting is super-important, and this is where you determine if a deal makes sense to invest in or not… And underwriting then is where you’re going to either make your investors money, or lose your investors money.

Until then, I recommend listening to the first parts of this series, parts one through three. Check out some of the other Syndication School series we’ve done so far, and download your simplified cashflow calculator. All of those are available at SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.

JF1660: How To Underwrite A Value-add Apartment Deal Part 3 of 6 | Syndication School with Theo Hicks

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Time to start learning about setting assumptions. You’ll be setting a few assumptions when underwriting value add apartment syndication deals. Theo will be discussing those assumptions, and how to accurately set them in today’s Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Free Simple Cash Flow Calculator:

http://bit.ly/simplecashflowcalculator

 


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


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 focus on a specific aspect of the apartment syndication investment strategy. These episodes will make up a larger series, and for the majority of these series we offer some sort of document or resource, spreadsheet for you to download for free. All of these free documents, as well as past Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part three of a six-part series that we started last week, called “How to underwrite a value-add apartment deal.” If you haven’t so already, I recommend that you listen to parts one and two. In part one we introduced the things that you need in order to underwrite an apartment deal, which are a T-12, a rent roll, an offering memorandum and a financial model. We talked about how to get those and what information you actually need to use from those to input in your model, which make up steps one through three of the seven-step apartment syndication process, which is read the OM, input the rent roll data into your financial model, and input the T-12 data into your financial model. To learn how to do that, check out part one.

Then in part two we introduced the next step of the seven-step process, which is setting your assumptions for how you plan on operating the property once you take it over. Then we went over — because one of those assumptions are setting a renovation budget and a renovation business plan, so we discussed 27 ways to add value to apartment deals.

Now, as a reminder, this underwriting process is for syndicated apartment deals, and apartment deals that are value-add. Technically, it would work for turnkey or distressed properties, but the model that we gave away for free, the simplified cashflow calculator, is better for the value-add type deals. Also, as I mentioned, as the name implies, it’s a simplified cashflow calculator, so it’s only one tab, whereas the more complicated version is five, six, seven, eight tabs that all point to a project summary. So what I recommend doing is get comfortable with the current model, and then customize it and adjust it and make it more complex based on how detailed you wanna get with your underwriting. If you wanna make it so that you can do a refinance, if you wanna make it so that you can tweak a few other things, like debt terms, or the income or expense assumptions, if you’re savvy enough in Excel you should be able to do that.

Now that you know the first three steps, you’ve inputted your rent roll data, you’ve inputted your T-12 data, you’ve read through the OM, and you know some of the ways to add value to apartment deals, the next step is to set those assumptions. That’s step four. Setting assumptions is a pretty lengthy process, so we’re not gonna get through all of it in this episode; hopefully, we can cover setting the assumptions in this episode and in tomorrow’s episode, part four.

In this episode we’re gonna focus on setting the first set of assumptions, which will help you determine how much money you need to raise for your deals. Now, if you remember to a previous Syndication School series, when you set your goal – it was a goal based on how much money you need to raise; you said “I wanna make X amount of dollars per year”, and then we did some calculations to determine how much money you would need to raise in order to take down enough apartments to receive a profit split, and acquisition fee, and other fees in order to achieve that goal. Now, this is where we are going to determine how much money you actually need to raise for that deal. Ideally, it’s gonna be at most equal to the amount of money you have in verbal commitments; ideally, it’s 75% or 50% of the number of verbal commitments that you have.

In order to determine how much money you need to raise, there are going to be six different assumptions that you need to make. These are six different things that you’ll need to input into your cashflow calculator, and you should be able to input these into the simplified model that we provided. Let’s dive right into those.

Number one is going to be the acquisition fee. We discussed the types of fees that the general partners and you as a syndicator can make by putting together a syndication, and the acquisition fee is one of those. The acquisition fee is paid to the syndicator for essentially putting the deal together – finding the deal, underwriting the deal, touring the deal, submitting an offer, putting the deal under contract, completing due diligence when the deal is under contract, and securing financing and making sure that the closing goes through smoothly. For that work you can take a fee. Generally, it’s going to be  a percentage of the gross transaction amount; all of the capital contributions, all the money that was put down, the printable balance of the loan, the money you get from the lender, and then any other funds that are required to acquire, renovate, own, operate, maintain, manage the property; so any other costs associated with the deal.

Now, as I mentioned in that episode about the ways that the general partner can make money, this fee can be anywhere between half a percentage point up to 5% of the gross transaction amount, depending on the deal. So that’s number one; that money is going to come from your investors, or if you are putting money in the deal as well, it could be coming from you… But it’s coming from the limited partners, the passive investors in the deal. All of these six things I’m gonna discuss are all things that you’re gonna need to raise money for.

Number one, you’re gonna need to raise money for that acquisition fee. Number two are gonna be the closing costs – the upfront costs that you’re gonna pay in order to close on the deal. Any costs paid to the attorneys for putting together operating agreements and private placement memorandums and things like that, any due diligence costs like paying for the inspection, paying for lease audits, paying for environmental surveys, and things like that.

Now, these closing costs that I’m referring to are different than the fees that you pay to the lender for securing that; that’s something different. We’ll get into that in a second. But for the closing costs, typically if you are the one that are fronting these fees, then you can be reimbursed at sale. So you’re gonna raise this money because you’re gonna be putting your own capital into this; so you’re gonna be paying the attorneys, paying for the due diligence costs… Then once you close, you can take that money raised from your investors and reimburse yourself.

Now, again, this entire series is focused on underwriting 200+ unit value-add apartment deals, and for those size deals typically the closing costs are around $110,000. Typically, to create the PPM, to create the operating agreements, to pay for the inspection reports and things like that – those are typically fixed costs. They might be a little bit less if it’s a smaller deal, but not that much less, which is why we use that set $110,000 fee.

Number three is gonna be financing fees. These are the fees that you actually pay to the lender or the mortgage broker for securing the debt. Any applications fees, any credit reports or background check fees, processing fees, rate lock fees, things like that, things that are paid to the lender – typically, these are going to be around 1.75% of the purchase price. So these are dependent on the size of the project. If you’re doing a deal that’s smaller than 200 units, then you’ll be able to use this 1.75% number. For the closing costs you’re gonna have to have a conversation with your broker and your attorney to figure out how much it’s gonna cost for your particular deal size.

Number four is gonna be the operating account fund. This is essentially an upfront reserves account. These are to cover things like over-spending on your capital expenditure; some unexpected issue came up that you didn’t expect, and then you’ve got a fund to cover shortfalls… If there are unexpected dips in occupancy or a mass exodus of people when you take over the property due to evictions. It can cover unknown or deferred maintenance, paying for upfront insurance or taxes… Essentially, anything that could possibly come up during the first six months of the deal, you’re gonna have a fund to cover that, so that you don’t have to either do a capital call and go back to your investors and ask for more money – especially if it’s your first deal, it’s not gonna look very good – or you’re not gonna wanna come out of your own pocket to cover things like that. Or you’re not gonna wanna have to not distribute the projected returns because you’ve had to use the cashflow to cover these issues that came up.

So for the 200-unit size deals we typically use a flat fee of $200,000, but if you’re doing a smaller deal it’ll be around 1% to 5% of the purchase price.

Number five are going to be the renovation costs. The first four are pretty simple; it’s just you either input a percentage of the transaction amount, or you input a flat fee based off of the size of the deal that you’re doing and the complexity of the project itself.

Number five, renovation costs – they’re a little bit more complicated to determine because it’s gonna be based on what you’re going to actually do to the property. This is gonna be broken down into interior renovation costs, exterior renovation costs, and then a contingency budget.

The first question you’re gonna wanna ask yourself about the overall renovation costs are whether or not they’re gonna be included in the loan. I know we haven’t talked about loans yet – we will talk about that in a future episode – but high-level, the two types of loans are ones that include renovations costs and ones that don’t. So if you’re securing some sort of bridge loan on this property (a shorter-term loan, 2-3 years, maybe with some extensions, typically interest-only), it’s going to include the renovation costs in the loan. So bridge loans are gonna be used for properties where they don’t qualify for the agency debt, which has some sort of minimum occupancy requirement. If you have a deal that’s 80% occupied, you’re gonna have trouble qualifying for an agency loan, so you’re gonna have to do some sort of bridge loan first in order to stabilize the property, reposition the property, and then refinance into an agency loan.

So if you are not including the renovations in the loan, or the renovations are not included in the loan, then you’re gonna have to raise 100% of these capital expenditure costs from your passive investors. If they are included in the loan, then you’re gonna wanna know how much is included in the loan, and then the remaining amount is gonna be raised from your investors.

For example, if they aren’t included in the loan, then maybe you’ll get a loan that’s 80% loan-to-value, so the lender will loan up to 80% of the current value of the property; you have to fund the remaining 20%, and you’ll also have to fund 100% of the renovations. If the renovations are included in the loan – maybe it’s a bridge loan with an LTV of 75%, so they’ll loan up to 75% of the current value, plus they will provide 100% financing on the cap-ex budget, your renovation budget… Or it might be 75% loan-to-value, 75% of the project cost, which is also known as 75% loan-to-cost.

So it just depends… You’re gonna wanna know going in, have at least an idea of the type of loan that you plan on securing, because if you only wanna get agency debt, then certain deals will be disqualified, because again, not all deals qualify for agency debt… Whereas if you’re open to doing bridge loans, then you can look at deals that have maybe a  little bit higher renovation costs, or maybe a little bit lower current occupancy rate.

Next you’re gonna wanna know what you’re actually going to do to the property from an exterior/interior standpoint, and for ideas on that listen to part two of this series, where we discussed 27 ways to add value… But that’s not an exhaustive list; there’s plenty of ways to add value, and that’s essentially what’s going to set you apart from the competition – when you’ve got a deal, how many different ways can you determine to add value. If you find more ways to add value than the next guy, then you can submit a higher price, which will increase your chances of actually buying the deal. So this is kind of what sets syndicators apart – their ability to identify ways to add value. If you’re starting out, you can definitely rely on your management company to do that.

An example of something that I’ve been doing when I am looking at deals, because sometimes just starting out I don’t want to drag my property management company to every single property tour, because that is something that they probably don’t want to do until I’ve actually proven that I can give them business… So what I’ve been doing is I’ve been following steps 1 through 3, so read the OM, input the rent roll, input the T-12… I don’t skip this part about the renovations; I will just kind of assume that based off of just looking at the deal, how much money I think it’s gonna cost… And I’ll go over other ways of how you can put a placeholder in there in a second, but I wanted to explain the overall process.

So once I put that placeholder number in there for interior and exterior, I’ll obviously go and visit the property in person, whether it’s a formal tour, or just driving it myself and getting in there with the property management company, and I will take a bunch of pictures. Going in I’ll have an idea of “Okay, here are the five things I think I wanna do for the exteriors based on the pictures. Then based on the interior pictures, here are the ten things I wanna do.” So I have a list of that and I make sure I take pictures of all of those items, how they currently stand. If I identify something else, like maybe a roof that looks distressed, I’ll take a picture of that… And I’ll come home and I’ll create a PowerPoint presentation where each slide will have one picture; for example, the first slide will have a picture of a large open green space where I wanna put a dog park.

The next one is a picture of the pool, where I wanna replace all the furniture and lay new brick. Then three more pictures of exteriors… Then I do the same thing for interiors – I’ll take a picture of the kitchen and say “I wanna add new stainless steel appliances, and new countertops, and new floors and cabinet fronts. Here’s the bathroom – I wanna put tile on the tub, I wanna put new vanities, new lights. Here’s the living room – I wanna put new floors in here.” Maybe I wanna put new hardware on the doors, new ceiling fans.

So I’ll make a PowerPoint presentation with pictures of all the things I want to do to the property, and what I wanna do to those pictures, and then what I think the costs are gonna be per unit for the interiors, and then overall for the exteriors. I send that presentation to my property management company and say “Hey, this is the deal I’m looking at right now. I went and toured the property, I visited the property in person, I’ve put together this presentation for you, because I wanted to get your thoughts on not only my actual business plan – will these renovations bring a high enough ROI in this area? And two, are my costs correct?” Typically, they’ll come back and say, “Yeah, everything looks good, but I would say that this costs a little bit high, this costs a little bit low.”

I set these expectations with my management companies upfront. I say, “Hey, I understand that you don’t want me calling on you constantly to go on property tours and look at T-12’s and rent rolls, so I’m not gonna do that. I’m gonna do ample due diligence beforehand”, and I’m gonna put together the presentation that I just explained to you guys. “Will you mind checking that presentation and give me high-level thoughts on whether or not 1) these renovations make sense, and 2) these costs are at least semi-accurate, plus or minus 15%?” As long as they say yes, then I know that I can do that, and they also typically appreciate you respecting their time… So that’s one way to figure out what your costs are gonna be, and it’s a really strong strategy for those who are just starting out.

As you gain more experience, you can just look at an OM and know with a pretty high degree of certainty how much it’s gonna cost to renovate the interior and the exterior, sometimes without even actually seeing the property in person.

Now, more specifically for the interior costs, when you’re doing a value-add business plan, it’s typically going to be between $4,000 and $7,500 per unit in renovations. So if you’re doing a lower-end renovation, it’ll be in that $4,000 range; if you’re doing a higher-end renovation – stainless steel appliances, granite countertops, new floors, new cabinets – then it could be in the range of $7,500/unit. Now, these are just generalizations; on some units it might be way below this range, on some units it might be above this range, depending on how many units were already renovated by the current owners… But just in general, most likely the costs are gonna be around $4,000 to $7,500/unit for the interior renovations.

As I mentioned before, I went through my whole entire spiel about the PowerPoint presentation I put together and how I kind of determine what renovations I wanna do… But before I do that, in order to determine what level of renovation to do to the property, what types of improvement to do the interiors, a couple of questions to ask and a couple of questions that I ask myself are 1) what is the cost associated with each interior upgrade? As I mentioned, I’ll make a list of all the interior upgrades I think I need to do, and then typically there’s some sort of per-unit cost associated with that. Let’s say I wanna replace all the cabinet fronts, and new hardware – that could be around $1,200 to $1,400 per unit. [unintelligible [00:19:53].10] around $1,200 per unit.

Again, if you’re just starting out, you’re likely gonna have to get this information from your management company, after you’ve made your best assumption possible based on some of the research you’ve done online.

Next question you wanna ask yourself – what percentage of the units have already been upgraded? …assuming units have been upgraded, obviously. So what percentage of the units has the current owner already upgraded, and to what extent? Ideally, the owner has renovated less than 50% of the units to its full potential, because you won’t have enough meat on the bone if 75% of the units are renovated and you’re only doing 25%. But it can also be a combination of renovations… Maybe 25% of the units have been fully renovated, but then another 25% have been partially renovated, and then maybe another 25% have just had their appliances fixed. If that’s the case, okay, I’m gonna have to mostly fully renovated 25% of the units, but it’ll cost a little bit less. I’m gonna have to take 25% of the units from partial to full, and then I’m not gonna have to do anything to 25% of the units.

Or if you plan on going above and beyond in that scenario, then the only difference is you’re gonna have to renovate all of the units, and the ones that are “fully upgraded” by the owner, you’ll have to do a little bit more to get that to the level of upgrade that you want.

Now, assuming the owner has renovated some units, the next question you wanna ask yourself is what period of time were the units renovated? Let’s say it’s a 200-unit apartment community and they renovated 100 of the units; was that done over ten years, so ten units a year? Or was that done over the past couple of years, so maybe 4-5 units per month?

The reason that’s important is because if you have a property that has 100 units renovated over ten years, then the rental premiums are not gonna be as accurate as a property that has 100 units renovated over a couple of years. If it was the former, which means that they were renovated over ten years, then you’re not gonna be able to trust those premiums, and you’re gonna need to rely more on your own rent comp analysis, which we’ll go over in a later episode in this series… But if they were done over the past couple of years, then you can have more faith in those rental premiums; those rental premiums are more proven.

The next question to ask yourself is what are the rental premiums achieved? What rental premiums are they achieving on their partially upgraded units, their fully upgraded units, and any other type of upgraded unit that they’ve done – what premium are they achieving? That way you’re gonna determine, okay, so if I’m going from partial to full, what is gonna be the new premium? Is the ROI worth investing that money into fully upgrading those units? Are they really getting that much more for the fully upgraded units? If the answer is yes, then obviously you’re gonna want to fully upgrade all units. If the answer is no, then maybe they’ve over-upgraded, or something else is going on in their management. So that’d be a good question to ask – if the spread between the partial and the fully-upgraded units is low, ask them “Why aren’t you getting higher rents for those fully-renovated units, and why did you even renovate those units in the first place? Why didn’t you just stick at partial?”

And the last question — not necessarily a question, but the last thing to think about is if the offering memorandum doesn’t have an answer to the five questions, then add those questions to your list of questions for the broker.

So that’s the interior. Next is going to be the exterior costs, which we’re actually going to discuss in tomorrow’s episode. Tomorrow’s episode will start with the exterior assumptions, and then we’ll discuss the contingency, and then we’ll discuss the fifth thing that you need in order to determine how much money you need to raise, and then we will start discussing the other assumptions that you’ll need to set in order to fully-underwrite a deal.

Until then, if you haven’t done so already, listen to part one and part two, because if yo didn’t, this episode is probably a little bit confusing. Make sure you go to SyndicationSchool.com or check out the show notes of this show to download your free simplified cashflow calculator. Thank you for listening, and I will talk to you tomorrow.

JF1654: How To Underwrite A Value-add Apartment Deal Part 2 of 6 | Syndication School with Theo Hicks

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Today’s episode covers part four of seven on our value add apartment underwriting strategy. If you didn’t listen to yesterday’s episode, you should. Theo began covering the underwriting process so you’ll want to hear that first. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

As you all know, 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 series we  offer  a document, a resource or some sort of spreadsheet for you to download for free, that accompanies those episodes or the overall series. All of these documents, as well as previous Syndication School series, as always, can be found at SyndicationSchool.com.

This episode is part two of what will likely be a six-part series entitled “How to underwrite a value-add apartment deal.”

If you haven’t already, I recommend listening to part one. It’s actually more of a requirement, because this underwriting process flows one step after another. In part one, which went live yesterday, or if you’re listening to this in the future, the episode directly before this one, we learned what you need in order to underwrite a deal, we summarized the overall seven-step underwriting process, and then we went through steps one and two.

In that episode, I mentioned that we are offering a free, simplified cashflow calculator, so a free underwriting model, simplified version, with this series. I recommend downloading that, either on the show notes of this episode, or at SyndicationSchool.com under series number 14, “How to underwrite a value-add apartment deal.”

We were cut short in part one, so in part two we’re gonna start off with step three, which is inputting the T-12 information into the model. As a refresher, step one is to read through the offering memorandum, and step two was to input your rent roll information into the financial model… So step three is going to be inputting the T-12 information into the financial model, and then we are also going to discuss step four – or at least a part of step four – which are setting your underwriting assumptions, so the assumptions for how you will operate the property after it is acquired, as well as some acquisitional assumptions as well.

Step three, inputting the information from the T-12 into your financial model – the information you need from the T-12 that will be inputted into your financial model are the income numbers; those will be the concessions, which are the one-time ongoing rent reductions or fee reductions offered to residents to get them to move into your property. You’re also gonna input the unit expense, which is essentially the market rent that is lost from a unit being used by an employee, or a model unit, an admin unit, an office, a maintenance room, storage… Essentially, anything that’s being used for non-rental purposes, that could be used for rental purposes. If you’ve got an employee living in one of your units at a rent reduction of $100, then your unit loss is going to be $100/month. If you’ve got a unit that could be rented for $700 but it is being used as a model unit, then your unit loss would be $700/month.

You also will pull the bad debt information from the T-12. The bad debt, as a reminder — if you listened to series number 13, the previous series, we went to extreme detail on what all the different line items on the rent roll, on the T-12 are, so I recommend listening to that, because I’m just kind of gonna quickly go over those metrics, not define them every single time… At least not define them in detail every single time. So you pull bad debt from the T-12 –  bad debt is that uncollected revenue from tenants who have moved out of the property. If they owe money on security deposit, if they have unpaid rent and they’ve already moved out, then that’s technically considered as bad debt. If you collect it, great. If not, then you write it off.

You also wanna take  a look at the loss to lease and the vacancy loss that’s listed on the T-12 and compare that to that of the rent roll. Typically, when you get a rent roll and a T-12, the last month of the T-12 should be the same month as the rent roll. So if the T-12 is January 2018 through December 2018, then the rent roll should be for December 2018. And again, that’s gonna be a snapshot in time, a day, a moment in time of what the current rental situation is. So the loss to lease and the vacancy on the rent roll are not gonna be the exact same as the vacancy and loss to lease on the T-12, because the T-12 is for a full month, whereas the rent roll [unintelligible [00:07:18].10] is for a specific time of that day. But they should be close. There shouldn’t be a variance of 50% between the rent roll and the T-12 for the bad debt and vacancy. If there is, you wanna make a note and ask what’s going on, how did they reduce the loss to lease and vacancy by 50% in a couple of days; probably inputting errors, or something is going  on there. And you’re also gonna pull the other income data from the T-12.

So that’s the income data, but there’s also the expense data that you get from the T-12. That’s payroll, maintenance and repairs, contract services, turn and make-ready costs, advertising costs, admin costs, utilities, management fee, taxes, insurance and any other expense.

In the simplified cashflow calculator that you can download for free you wanna input the annual expense. In the T-12 – if you’ve listened to the T-12 episode you know this, but there’s 14  columns; column number one is the actual list of the income and expense line items, and the next 12 columns are gonna be the expenses or incomes associated with those line items for each of the previous twelve months. And the last one will be a total for the year, and that’s what you wanna input into  your cashflow calculator.

Now, similar to the rent roll, sometimes the T-12 will be in PDF form, other times it will be in Excel form. Again, this isn’t a requirement, but it is helpful to have the T-12 in Excel form. So if it’s not in Excel form, it might make sense to convert that to Excel… Because once you have your T-12, in order to determine the various income and expense categories, you’re gonna want to assign a category to each line item.

What I do is I open up the T-12 and I add a 15th column on the right-hand side, right next to the total, and I will essentially look at all the expense categories and all the income categories – concessions, units, bad debt, loss to lease, vacancy, other income, and then for expenses the payroll, maintenance and repairs etc. All of those — I will assign one of those to each line item on the T-12, and then I want a pivot table so that I will have a table that will have the total concessions, total units, total payroll, total maintenance and repairs… Because sometimes, as I mentioned in the T-12 episode, the T-12 will be categorized perfectly. All the payroll expenses will be under payroll, all the maintenance and repair expenses will be under maintenance and repairs… But more likely, they either have different categories, or some of the expenses fall into the wrong categories. So for me, regardless if the categories are perfect or not, I’ll still go through each line item, assign it a category and run that pivot table.

If you don’t wanna have a pivot table, you can just simply sort that by that 15th column, with all those categories, and then just hover over the cells for each of the categories to get that sum.

Now, a few things to look at when you have your converted T-12. Number one is you wanna look at the total income, total expenses and the net operating income and see how they are trending over the past 12 months. Is the total income increasing over time, or decreasing over time? Are the total expenses decreasing over time or increasing over time? And is the overall net operating income increasing over time or decreasing over time? For each of those, the first one is good, the second one isn’t necessarily bad, but it’s something that you wanna take note of. So total income is decreasing if total expenses are increasing, or if net operating income is decreasing, then you wanna make a note of that for a question to ask the broker.

Now, if one of those are trending in the wrong direction, then you can go into the line items and the categories that make up that overall category and determine, okay, so if the total income is decreasing, let’s see which line item is affecting it the most. Let’s say you determine that “Okay, loss to lease has been going up over the past 12 months, and if you take that away, then the total income is actually increasing”, then you know that something’s going on with the loss to lease. Or if you look at the expenses and see that the maintenance [unintelligible [00:11:10].00] total expenses, and that’s increasing, and you see that okay, well, there’s one $50,000 maintenance or repair cost in one of the months; if I take that away, then the total expenses are decreasing… So what was that expense, what happened? Is that something that’s recurring, or is it a one-time thing that should have been categorized as cap-ex and not maintenance and repairs?

Essentially, you want to look at the overall numbers, the overall income, the overall expenses, the overall net operating income to see if they are trending in the right or wrong direction. If one of them is trending in the wrong direction, then dive into the details to see if you can identify exactly why that is happening.

Some other things to look at – and again, I’m gonna go over some numbers, and these are, again, based on that 200+ unit value-add deal, class B property, class B market… So is the bad debt greater than 1,5%? You don’t wanna see a bad debt that’s 5%. If you do, then you wanna determine why. That might indicate a poor resident demographic, and if you plan on turning over those units and improving the resident demographic, then you’ll know that you’ll be able to reduce that number, but you need to determine exactly why it’s so high before you can determine whether or not that’s something you can fix.

Same for vacancy – is that vacancy rate greater than the market average? If it is, why? Are concessions greater than 3%? 3% is the highest concessions that you’ll wanna see on a property. If it’s higher than that, then you’ll wanna know why. As a reminder, concessions are used to attract residents, so if you’ve got 10% concessions, then something is going on either with the property, or the rents, or the demographic that’s being targeted, so you’ll wanna know “Okay, if concessions are 10% of the gross potential rent, then what’s going on?”, because concessions is a loss.

And as I mentioned, you wanna see if there are any large one-time charges, and if so, what are they? This is for the income and the expenses. One thing that is common is you’ll see Other Income that is really high, and you’ll dive into the details and you’ll see that they are collecting a ton in late fees. And if you plan on taking over the property and improving the demographic and improving the management, then you’re not going to have those late fees, so your Other Income is  actually going to be reduced.

Then also for expenses, as I’ve mentioned, if the expenses are trending upwards or if they are abnormally high – the expenses are 65% of the total income, which is pretty high; typically, it’s around 50% to 55% – then you wanna dive into the line items under each of those larger categories and see if there are any one-time large charges. As I mentioned earlier, I gave an example of a $50,000 maintenance and repair cost during one particular month, and in all the other months it’s $4,000 a month. That’s something that will stand out, and you’ll want to highlight that, make a note and ask the broker what’s going on.

After you’ve inputted all of the rent roll and the T-12 data into your cashflow calculator, you kind of got a snapshot of “Okay, here’s how the property is currently operating”, next you wanna determine how the property is going to operate after you take it over, and that’s when you begin to input  your assumptions.

This is step four, and it is going to be the most important step of the underwriting process, because again, this is where you essentially make your money. Every syndicator who looks at a deal is gonna see it differently, and probably input different assumptions based on what they can do with the property, and the value-add opportunities that they have identified. So you want to make sure that you are spending an ample amount of time and investigating in order to determine the property assumptions.

At the same time, you don’t wanna spend too much time and kind of go crazy and spend hours and hours investigating one small assumption, because that is kind of a waste of time… And no matter how much research you do at this point, you’re not gonna have perfect information, therefore you’re not gonna have perfect assumptions. So if you have difficulty with one of the assumptions, make the best assumption possible and put a placeholder number in there, or put a placeholder number in there and make sure you make a  comment in that cell to speak with your management company or the broker or the mortgage broker or the contractor, whoever it is that can help you finalize that assumption.

Of course, at the end of the underwriting process you’ll want to run all the assumptions by your property management company. Then once you put the deal under contract, you’re going to pull a whole lot of due diligence reports to either confirm or adjust and revise these assumptions. So for now, in this early point in the process, you’re gonna be relying a lot on the information provided in the OM, you’ll be relying a lot on how the property is currently operating, and you’ll rely a lot on your own knowledge and experience underwriting deals, which again, takes time… So if you’re just starting out, make the best assumptions you can.

You’re probably gonna have a million questions to ask, which is why you’ve kind of prepared your management company for that, and they know where you’re at; you didn’t lie to them and tell them that you’ve done all these deals before, because at this point you need to rely heavily on them to get these assumptions correct… And if you tell them upfront that you have all the experience, and you’re asking all these simple, basic questions during the underwriting process, then they’re gonna know that you were lying to them.

Before we go into these actual assumptions, I know I kind of set up this episode to be all about assumptions, but I’m gonna change it up a little bit, and before we get into the first set of assumptions, which are used to determine the equity required to close on a deal, I think we’re gonna talk about that in next week’s series, and instead we’re going to go over some of the ways to add value to the apartment community… Because at this point, a lot of the assumptions are gonna be revenue and expense increases, percentages and closing costs, financing fees, acquisition fees, and things that are important, but things that are pretty simple to input… But what’s gonna be more difficult is to determine what your business plan is actually going to be.

So what is your value-add business plan going to be? …from a physical perspective, not an operational perspective. So what physical improvements do you plan on making to the property? How long are they gonna take, and how do you determine which ones you’ll even do? How much are they gonna cost, how long is it gonna take, and what will be the new rents demanded with those renovations and improvements? But before we do all that, you need to figure out what you’re actually gonna do.

I want to go over a list – this is by no means exhaustive; these are just examples of ways to add value to apartment communities – in order to essentially determine which ones to use, besides running it by your management company and discussing with the broker what they think is the best business plan for this deal… You’re gonna wanna look at comps. You’re gonna wanna look at the rental comps that are provided in the OM, as well as rental comps you find on your own, and see “Okay, for these comparable properties, their interiors are this, their exteriors are this, their amenities are this, and here are the rents that they are demanding. Okay, if I input these rents and the cost of those same upgrades, then I’m able to meet my investors’ returns.” We’re gonna go over a lot more about comps in later series, but for now I just wanted to mention how do you determine what renovations you should do to the property.

The last thing we’ll do in this episode is we’ll go over this list of ways to add value to apartment communities. They’re broken into two different categories and they’re simple opportunities – opportunities that don’t cost a lot of money on your end. Then we’re gonna go over some more — not advanced, but more expensive value-add opportunities, that have a higher cost upfront, but it might be paid back, depending on the market.

For example, you don’t wanna put a wine bar in a property that has a demographic of blue-collar workers, because they don’t really care about that. Again, these are very simple and basic. You might know all these already, but I’m gonna go over them anyways.

Number one is to add washer and dryer. Simply installing a washer and dryer into either all or a select number of units will allow you to demand a premium on those units. The premium, again, will be based on the rental comps, and the premiums for all of these will be based on the rental comps.

Another option is to either create a laundry room and install coin-operated washer and dryers, or if there’s an existing laundry room, to renovate it, and put in nice countertops, nice floors, clean it up a bit, maybe put a TV in there… So that’s one.

Number two is new appliances. These could be, depending on the area, stainless steel appliances, or just black appliances. Those are refrigerators, dishwashers, microwaves and/or stoves. And instead of doing it to all units, you can offer black appliances in some units, and then have premium units where you have those stainless steel appliances, and charge a rental premium for those units.

Number three, you can offer appliance upgrade packages. For units that already have those newer or nicer appliances, you can charge a rental premium. If you buy a property and you see that half the units have stainless steel appliances, the other half have black appliances, but the rents are the same, once those leases expire you can charge a $50, $100, $200 or whatever the market demands for those units.

Number four, you’re gonna do appliance rentals. So rather than actually putting those appliances in the units, you can offer them for rent. Not appliances as in refrigerators and microwaves, but smaller appliances like vacuums or carpet cleaners. Again, you could charge $10 for someone to rent a vacuum or a carpet cleaner for their unit. Not only will you get that $10 extra per month per unit in rent, but also it’ll reduce your turnover costs, because you’ve got tenants who are actually taking care of those units, so it’s a double benefit.

Number five would be to upgrade the light fixtures. Spend $100 or $200 per unit to install nice light fixtures in the kitchen, maybe put a new ceiling fan, put new light fixtures in the bathroom… Pretty quick renovation, pretty cheap, but it’ll make the unit look a lot more aesthetically pleasing, and you either will be able to demand more rent, or at least lease those units faster.

Number six will be new hardware. If you’re installing brand new cabinets — this isn’t super relevant, but an inexpensive way to make a unit look better is to replace the hardware on the kitchen cabinets – new handles, new pulls for the drawers, you can install new hardware on the vanities in the bathroom, you can install new door handles, you can install new sinks, toilets, faucets, shower heads, curtain rods in the units… These are all pretty cheap – $50, $100 to do, but it makes the unit look a lot better, and it’ll allow you to demand a premium or rent those units faster.

Number seven would be implement a RUBS (ratio utility billing system) program. The contractor comes in and determines how much of the utilities each unit is using, and then you’re able to bill back a  percentage of your water expenses, your sewer expenses, trash, electric, gas, back to your residents.

Number eight is parking. There are a lot of different ways to charge for parking. You can charge for guaranteed spots, you can do reserved parking in some areas, and the rest is kind of free for all, and if you can’t find a spot you park on the street. You could also install carports and charge money for those. If there’s already a parking garage or units with garages, you can charge money for that. You can charge money for, again, guaranteed or premium parking… There’s lots of ways to charge money for parking, so if you look at a deal and they’re not charging for parking, then you could do that.

Another one is pet fees. If you do decide to allow pets at your property, then you can charge a fee for that. If you see the current owner does allow pets, but is not charging a fee, that’s a way that you can instantaneously add value.

Ten would be location or view premiums. In these larger apartment communities some of the units might be closer to the fitness center, or the clubhouse, or the pool, some of them might have a backyard view of a fountain, or a forest area… For those units you can charge a little bit more based on some sort of unique view or location. Another example would be a unit on the first floor, as opposed to units on the second floor. At the end of the day, you could literally go unit by unit and offset rents by $5 here, $10 there, based on where they’re at.

Number eleven is a bike rack rental. This is one of those market and resident demographic dependant amenities, but if you’ve got a lot of millennials or gen X-ers at your property, then you can install bike racks and rent them out for a monthly fee.

Another one is a clubhouse rental. If you have a large clubhouse, with an office space, or a large gathering room, then you can offer to rent that out to residents for the night to host a birthday party, or a baby shower, or a wedding rehearsal, or really anything, whatever they wanna use it for.

You can also upgrade your property management software. That’s number thirteen. This one is not a super value-add, but having the best property management software out there will help you calculate the market rents more accurately, which will help you reduce that loss to lease and make sure that you’re renting your units at the highest cost as possible.

Then the last simple value-add opportunity on here are short-term leases. Again, this could mean a lot of different things. You could charge a fee for people who are month-to-month, you can charge extra for people who are signing three or six-month leases, you could offer a unit via like an Airbnb or work with [unintelligible [00:23:54].26] housing provider and offer short-term leases that way, and charge an extra fee.

These last ones, 15 to 27, are going to be some more advanced, more expensive opportunities, but still things that can have a really high ROI. Number 15 is kind of general and demographic-based amenities. When you are looking at ways to add value to your apartment community, then you might wanna consider determining which amenities you want to offer based on the resident demographic that you want to offer. That’s the current one, or the one you want to demand. From a generational perspective, millennials prefer to live in a resort-style living experience; they value convenience and flexibility, and will often seek out apartment communities that have higher tech amenities and services.

If you are looking to attract the millennials, then you can do things like offering free coffee in the common areas, make sure you’ve got a high-speed Wi-Fi internet, have USB charging points in the units, make sure the clubhouse and the fitness center are very modern, maybe even offer some fitness classes for them.

From a gen X perspective, they also prefer the high-tech home furnishings, but they also prefer to have some sort of concierge services, as well as family-friendly features, because gen X-ers are gonna have their families. Those are things like playrooms, or playgrounds, daycare, areas that offer family-friendly activities, maybe you can offer finger-painting or costume parties… Additionally, gen X-ers also want to have easy access to washers and dryers, as well as fenced in backyards.

And then baby boomers, who surprisingly make up a decent chunk of the renter pool, they want larger living spaces, so they want larger units, as well as larger common areas. They want state of the art fitness centers and they want fitness classes, as well as social gatherings. Some of these are amenities that you can offer, but other ones are more of different events you can host at the property.

Again, just figure out  “Okay, this is the demographic”, either age-wise or income-wise, and then do some investigation to figure out what that income level of that age, that demographic wants, and make sure you have that offered at your property.

Number 16 is you can install patios or balconies. You can build patios on the ground-level units and build balconies on the second, third, fourth, up to whatever level units, and charge a premium for those units. So figure out what the absorption rate is for those types of patios and balconies in the market and then build that many. Or if there already are balconies and patios, if they’re not on every unit, then you can charge a premium on the units that they are on, and if they are on every unit, then you can still charge a premium on all units for those. And if the current owner isn’t, that’s a really quick way to add value.

Similarly, you can do fenced in yards or patios. So if they have a backyard but not patio, you can either put one there and fence it in. This increases the privacy, as well as the value of your apartment community, and you can do that on a select number of units and charge a rental premium.

Number 18 is carports, which I’ve already mentioned. If there aren’t carports there already, you can build carports. Again, don’t build one for every single unit. You’ve gotta build a select number, so there’s demand for them, and then charge a monthly or yearly fee for those.

Number 19 is extra rooms. If you’ve got extra-large units, you can add bedrooms, add bathrooms, add a dining room, living room, sunroom, by erecting walls in those units, or adding on to existing units.

Number 20 is a dog park. If you have a pet-friendly apartment community and if there’s a large green space, then you can fence it in and add some of those dog obstacles. Make sure you have those poo bag stations… And you can create a dog park. You can even add a dog washing station too, and have it be coin-operated, or charge money for that, and then you can have different events where people can bring their dogs out, and they can play together, and your tenants can meet each other… Everyone loves dogs, right?

Number 21 is storage lockers. You can install storage lockers in the clubhouse and rent them out for a yearly fee, or you can do the Amazon package lockers as well.

Number 22 is vending machines. It’s pretty simple – buy or rent a vending machine and install them in your common areas.

Number 23 is billboards. Depending on the traffic to your property, as well as the building codes, you can install a billboard and lease those billboards out to local businesses.

Number 24 – you can have daycare, after-school or summer programs, if that demographic if family-oriented. You can also in your clubhouse put a coffee  shop or little convenience mart. I’m not talking about building a Starbucks or CVS, but just a small shop or a cart that offers coffee and snacks… Similar to what  you find in a hotel lobby.

Number 26 is a fitness center. So either renovate or construct a fitness center and offer free fitness classes there, like aerobics, spin, yoga, whatever else people are doing these days. Those classes will be free, but you’ll be able to demand a premium overall at your community for having a fitness center.

And then 27 is just miscellaneous, so really anything else you can think of – other advanced or luxury upgrades that you can offer for free, with those cost built in the rents, or have a monthly, annual or one-time amenity for things like a car sharing service, 24-hour concierge, cooking classes, dry cleaning or laundry service, free Wi-Fi, an iCafé, package delivery management, personal shoppers, pet grooming, rock climbing wall, rooftop terrace, spa or massage center, tech or business center, a wine cellar… Really anything else that you can possibly think of would fall under the miscellaneous category.

Again, as I mentioned, whenever you’re looking at a prospective deal or determining how you’re going to add value to an apartment building that you already have, refresh yourself with this list of 27 ways to add value, and determine if it makes financial sense to implement those value-add opportunities, again, based on the property type, the market, renter demographic, as well as the rental comps in the area… And make sure you confirm the rental premiums that you believe you can demand with these new amenities by having that conversation with your management company.

That concludes this episode, where essentially we finished up what should have been finished up in yesterday’s episode, which is inputting the T-12 information into the financial model, and then we went over 27 ways to add value to apartment communities.

Now, in next week’s series we’re gonna continue with this, “How to underwrite a value-add apartment deal”, by going over step four of the seven-step underwriting process, which is setting those underwriting assumptions. Until then, I recommend listening to part one, downloading your free simplified cashflow calculator, as well as listening to some of the other Syndication School episodes that we’ve already done, and checking out those free documents as well. All those can be found at SyndicationSchool.com.

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

JF1653: How To Underwrite A Value-add Apartment Deal Part 1 of 6 | Syndication School with Theo Hicks

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Theo has covered a ton of details so far for apartment syndication deals. Today we’ll start learning about the actual underwriting process. Steps 1, 2, and 3 (of 7) are covered today, with more to follow! PLUS we’re including a free simplified cash flow calculator for you to practice your underwriting with, can be used along with these episodes to follow along. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

As you all know, 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 series we will be offering some sort of document or spreadsheet or resource for you to download for free, that accompanies the series. All these free documents, as well as past Syndication School series can be found at syndicationschool.com.

This episode is going to be part one of probably a six-part series entitled “How to underwrite a value-add apartment deal.” By the end of this particular episode you will learn what you need in order to underwrite an apartment deal. We’re gonna quickly summarize the overall process, and then we’re going to start discussing the process by going over steps one through three of the seven-step process that we use to underwrite our value-add apartment deals.

The majority of the things that I say will apply to any size apartment deal – a five-unit up to a thousand-unit or even more units. But whenever I reference a number or a percentage that is common, I’m referring to an apartment deal that is over 200 units, is a value-add deal that’s a class B property, in a class B market. So if you’re not a value-add investor or if you’re focusing on class D or class A properties, the numbers and percentages that I mention will be a little bit different for you. But regardless of which investment strategy or type of property you invest in, this series is going to be an introduction to underwriting, and can be helpful to you regardless.

Let’s jump right in… So what do you need in order to underwrite a deal? Well, in the last series, series 13, I believe, we broke down the three documents that you need in order to underwrite the deal. First would be the T-12, so that’s the profit & loss statement, which is an itemized report of all of the income and expenses at the property. For the T-12 you want to make sure that it is as recent as possible.

When you are looking through deals, the most common T-12 you’re gonna find is the one that’s up to the most recent month. So if you’re looking at a deal in March, then ideally that T-12 leads up to at least January… Because sometimes companies are a little bit behind, and it takes a few weeks to record the data from the previous month. So if you’re looking at a deal in March, the earliest you’d wanna see is it ending in January or December of that previous year. Sometimes they might provide a T-12 for the previous calendar year; so I might be looking at a deal in July of 2019, and the T-12 they provide is just for 2018. That’s helpful, but you’re missing the last six months, and if I was looking at a deal in January 2019 and the T-12 was up to December 2018, then I would wanna get my hands on those six months, because that would indicate to me that not necessarily they’re hiding something, but that something happened in the previous six months that they don’t want you to see.

Next is the rent roll, which we also went over in the last series. For the rent roll, you also want that to be as current as possible. Ideally, the rent roll is from the previous month. If I’m looking at a deal in March, then I wanna see a rent roll that was pulled in February. Again, if I’m looking at a deal in March and the rent roll is from September the previous year, then that would be concerning for me, because it’s not going to be an accurate snapshot of how the property is currently operating… And that’s what we’re using a rent roll for, to figure out how the property is currently operating, so that we can make some assumptions of how we’ll be able to operate it once we take over, and what areas on the rent roll, the T-12, that we’ll need to fix. So those are the first two things you need.

The third thing is for an on market deal only, and that is the offering memorandum. That was the third document that we went over in the previous series. The offering memorandum is that sales package that the broker puts together; it may be biased, but there is still some helpful information in there that can guide you through this process of underwriting.

And of course, the fourth thing that you need is going to be some sort of financial model in order to input all of your data into in order to underwrite the deal properly. Unlike fix and flips or single-family rentals where you can use the 70% rule or the 1% or the 50% rule, for apartments that’s not going to work. They’re too complicated and too complex to do a back of the napkin analysis. You’re going to need to have some sort of financial model that you use. It could be simple, it could be super-complex – it’s really up to you, but you’re gonna need some sort of model… Especially since you’re raising money from other people, they’re gonna want to know what assumptions you made, and they’ll want to ask questions about your underwriting process. If your answer was “Well, I [unintelligible [00:08:09].27] my gut” or “I just did some numbers on the calculator on my iPhone”, that’s not going to give them much confidence in investing in your deal.

So there’s a few ways to create or to get a financial model. Number one – I think this is the best way – is to actually create it from scratch. If you have some Excel experience, you know how to do formulas, basically — and if you know how to do formulas, you can look up the rest in order to create a cashflow calculator. That’s the best way to do it, because you will know your model inside and out, and it’ll help you troubleshoot it if there’s any errors, it will help you communicate the results of your model and what’s going on in that model to other people… And just overall, what you’ll learn about the underwriting process just by creating your financial model will be invaluable to you.

Now, you’re likely not going to be able to just create one from scratch if you’ve never even seen an apartment cashflow calculator before, so the other option, on the other end of the spectrum, is to purchase a model from someone. There’s lots of syndicators out there that will sell you their financial model for some sort of fee, or if you join an apartment syndicator’s mentorship or client program, then they will have a cashflow calculator provided for you. That’s still a really good way to get a model. It’s probably second best to actually creating your own from scratch, but again, creating your own from scratch is gonna take some skill and experience… So what is best is either to get your hands on a model, no matter how complex or simple it is, and start working with that, and then over time, as you begin to understand that model, you can tweak it, customize it, so that it fits your particular need and where you’re at Excel-wise.

Now, since this is Syndication School and we give away lots of free stuff, the free resource for this series is going to be a simplified cashflow calculator. This calculator definitely allows for some flexibility, but there’s some things that it will not allow you to do, and if you want to change it, you’ll have to do it manually. So go to SyndicationSchool.com, or the show notes of this show, and download the simplified cashflow calculator. As I mentioned, I would start with that, and practice underwriting deals with that to get an understanding of how the inputs work, how the formulas work, what the various data tables are the various outputs are, and then from there you can add extra tabs, or you can input more detailed data and add some formulas in order to make it as flexible as possible for you. But if you need a model, the simplified cashflow calculator can be used to fully underwrite an apartment deal, and it can be used in tandem with this seven-step underwriting process that we are going to go over in this series.

So the overall process for underwriting a deal that we’re gonna go over, the seven-step process, is first you’re going to read through the offering memorandum. Step two is you’re going to input data from the rent roll into your model. Three, you’re going to input data from the T-12 into your model. Step four is you’re going to set your underwriting assumptions for how you will operate that property after taking it over, as well as some acquisition assumptions as well. Step five is to determine an offer price – set an offer price based on the previous four steps and inputting all that data into your model. Step six is to perform a rental comp analysis in order to confirm or determine what the rental premiums are going to be. So depending on the deal, you might do the rent comps before determining an offer price, but typically, when you’re looking at value-add deals sometimes there will be some sort of value-add program that was implemented or initiated by the current owner, and depending on that process, you can use their proven rental premiums as your rental premiums. In that case, you can set your offer price and then you can confirm those rental premiums by performing a rent comp analysis.

Then step seven is going to be to visit the property in person to confirm or adjust some of the underwriting assumptions that you’ve made, that you kind of just put a placeholder in your model until you can actually get out to the property and see its condition, see the surrounding market and see the comps, and things like that.

As I mentioned, in this episode we’re gonna focus on those first three steps. That’s going to be reading through the OM, and then that is going to be inputting the rent roll and the T-12 information into the cashflow calculator. Now, before we go into that, just a few things about the actual assumptions that you’re going to be inputting, which again, we’re not gonna go over until the next episode, but I did want to kind of introduce those and discuss some things to look at.

So your assumptions are gonna be based on how the property will operate once you take over, and those are gonna be based on how the property is currently operating, as well as market information you’ve obtained from your management company, the broker, mortgage broker, a vendor that you’re working with etc. It needs to be a combination of those two things. It can’t be just based on how the property is currently operating, and it can’t just be based on your research. You need to say “Okay, the property is operating like this currently. Here’s what I plan on doing to the property, and once that’s done, here’s what the property will look like after all of those renovations and operational improvements are implemented.”

When you’re going through the underwriting process and you get hung up on an assumption, don’t worry about it too much, don’t fret, don’t spend hours and hours trying to figure out how to make that one assumption as perfect as possible, because you’re not gonna have perfect information at this point. Right now all you have is an OM, a rent roll and a T-12, which is important information and is required to start the underwriting process, but you’re still gonna do some further investigations on your own, you’re gonna need to visit the property in person, you’re gonna need to ask questions to the vendors that are maybe implementing the improvements, or the property management company, to hone in on the assumptions.

So whenever you come across such an assumption that you’re kind of stuck on, just put something in there as a placeholder, just make it as accurate as possible with information you have, and then insert a comment into that cell explaining this is an assumption that you made based on minimal information, and “Here are the questions I need to ask, the information I need to uncover in order to get that assumption to be more accurate.”

At the end of the day, once you are done with your model and you’ve gone through all seven of these steps, you’re gonna want to run all of the assumptions by your management company, because they’re the ones that are gonna be operating the property, managing the property, and likely implementing the business plan that you want, and they need to approve the assumptions before you actually buy the property… Because if you say that you can reduce some expense by 10%, and the property management company has never seen that, and then once you close on the deal, you send them your budget, they say “Hey Theo, this expense you have here is not gonna be reduced by 10%. It’s actually gonna go up by 10%, or stay the same.” That’s gonna affect your returns to your investors. So you wanna make sure that you confirm all of these assumptions with your management company.

Now, that being said, let’s dive into the seven-step process. Again, we’re gonna go, at most, one through three in this episode, depending on time. And remember, as I said in the beginning of the episode, any numbers or percentages that I use are based on a deal that’s over 200 units, is value-add, and is a class B property in a class B market. If you are looking at a deal smaller than that, or a different investment strategy, or a different property class or market class, some of the numbers might be a little bit different, some of them will actually be the same. I’ll differentiate once we get to the point where we talk about those assumptions.

Step one is to read through the offering memorandum. As a refresher, the offering memorandum is that sales package that’s created by the listing broker, that’s explaining the ins and outs of the investment. Essentially, you want to read through the OM and first take some high-level notes on the deal – where is the deal located, what’s the total number of units, what is the date of construction, and then again, since we’re discussing value-add deals, you wanna know “Is this a value-add deal?” Typically, when the property is sent to your inbox for the on market deal, or when you look it up online, it’ll say “value-add deal”, but you wanna go in there and confirm that it actually is a value-add deal, and see in their executive summary what they say about the value that can be added to the property. Is it a value-add deal because of the outdated interiors, or outdated amenities, or is it something else, like a really high loss to lease, or some other operational improvement that can be made to the property?

So a few questions that you wanna ask yourself, and take notes on all of these, is 1) has the current owner started renovating the units? Have they initiated some sort of renovation plan on their own? And if they have, how many units have they renovated and over what period of time were those units renovated?

If you remember, in the previous episode I mentioned that it’s important to understand over what period of time the renovations were done, because if you have 20 units that were done in the last two years, then those rental premiums are not going to be something you can trust, whereas if they renovated 20 units in the past two months, then you can trust in those rental premiums a lot more.

You also wanna know how many units were renovated, because you wanna know if there’s enough meat on the bone for you to implement your value-add program. For us, if we see a deal that has more than 50% of the units already renovated, then that is not enough meat on the bone and we will most likely pass on that deal, unless there is some sort of other value-add opportunity, or if we plan on renovating the units to a greater degree.

Next you wanna see — okay, so they’ve renovated this many units, over this period of time, so we’re confident in the rental premiums… So what is that premium that they’re demanding? And again, later on in the underwriting process I’ll explain that this is a rental premium that you can potentially use as your own. You’ll have to ask a few more questions and we’ll get into those later on in the series.

Next you wanna know what renovations were actually performed, because sometimes they’ve done a full upgrade on a few units, and then you can look at that and say “Okay, I’ll just renovate the remaining units to that same degree.” Sometimes they might have renovated a percentage of the units fully, but you plan on going above and beyond that… So on the units that were renovated, the costs will be a little bit lower than having to renovate the entire unit. And sometimes they might have a combination of renovations, so you might have a unit that’s a premium unit, and then you might have one that’s fully upgraded, but not to the same degree as the premium unit. Then you might have some units that were partially renovated, so maybe they just replaced appliances.

So it’s important to understand what percentage of the units were renovated, and to what degree, in order to determine your interior renovation budget, which we’ll go over in tomorrow’s episode.

Other information to look at in the OM would be debt. Does the current owner have debt on the property? If they don’t, that’s something good to know, because you could leverage that potentially offer some sort of creative financing. If there is debt, then you wanna know if that debt is assumable, and if the debt is assumable, what are the terms of that assumable loan – what is the interest rate, what are the number of years remaining on the term, is there a pre-payment penalty? Things like that.

Then you also wanna look at the market section of the OM and determine “Okay, is this a really good submarket, or is this kind of a rough area?”, which can be determined by the crime rates and demographic information.

You also wanna know if it’s a blue-collar area, or a white collar area. That’s gonna determine the rental premiums you can demand, and likely the level of renovations you’ll want to perform. Then another good exercise to perform is to use Google Maps Street View function and drop that little pedestrian guy directly on the property. Look at the property to see its condition, because the Google Maps picture is likely not going to be as pretty as the pictures that are included in the offering memorandum.

I can tell you from first-hand experience there’s many times where I’ve seen a property go for sale, and I looked through the offering memorandum and the pictures are beautiful, the landscaping looks perfect, everything looks freshly painted… And then I go to the property and realize that they had some professional photographer going there that took pictures from the perfect angle, and you get there to realize the property is in pretty bad shape. So Google Maps can be helpful for that; just make sure you check the date, and make sure that the date is in the past couple of years, and you’re not looking at a picture from ten years ago.

At that point in the OM you’ll likely run into the financial analysis, the proforma section, and when you’re underwriting a deal you wanna stop there, because you don’t want the broker’s proforma or the broker’s assumptions of how that property will operate when someone takes it over to affect the assumptions that you make.

Once you’re finished reading through the offering memorandum and taking your notes, which should take between 15 to 30 minutes, step two is to input the rent roll information. When I say “input the rent roll information”, you’ve gotta remember you have your financial model; if you take a look at the simplified cashflow calculator, there are sections that are highlighted where it says “Hey, input data here”, and all the formulas are already set up, so you don’t need to do that yourself. It would make sense to maybe go through the formulas just to understand how things are being calculated, but… That’s why I mentioned that, because if I say “input rent roll”, well, what are you inputting it into? You’re inputting it into your cashflow calculator.

So the information that you need to pull from the rent roll and input into your cashflow calculator are the unit types; these should include ideally renovation statuses. That’s A1 for one bed/one bath unit, A2 for the larger one bed/one bath unit. Then if one of those one bed/one bath units are renovated, then there might an A1R and an A2R. If some of the units are fully renovated and others are partially renovated, there might be an A1 for the standard, basic unit, an A1R for a fully renovated unit, and an A1P for a partially renovated unit. Essentially, you wanna figure out “Okay, here are all the different unit types at this property”, and then for all those unit types you wanna determine what the occupancy status is. Essentially, are they occupied or are they vacant, or are they being used for some other purpose, like an admin unit or a  model unit.

You’ll wanna know what the square footage is for each of those unit types, the total number of units for each of the units types, and the average market rent and the average current rent for each of those unit types.

Now, sometimes the rent roll is sent to you as an Excel document, other times it’s sent to you as a PDF. This is not a requirement, but it’s very helpful to have the rent roll in PDF form. That way, you can kind of manipulate and rearrange and organize things and use Excel formula functions to calculate certain things that I’ll go over in a second. But of course, you can technically do it on the PDFs, just using your handheld calculator or inputting certain pieces of information into excel… But to streamline the process, I recommend that you convert the PDF to Excel; if the rent roll is already in Excel, you don’t have to worry about that. Then you wanna organize it such that each unit is its own row.

Typically, on these larger properties, when you convert the rent roll to Excel you’ll see that each unit might have four, five, six rows because of the various charge codes. There’s a rent charge code, then there’s a pet fee charge code, or a rent subsidy charge code, or a parking charge code… All of those charges are important, but the most important and the one that’s relevant at this point is the rent charge code.

Now, sometimes all the rent charge codes will be the first charge codes listed, and all the other one are below it, so you can simply delete the rows for any other charge codes… But most likely it’s going to be all over the place. Sometimes it might be the first one, sometimes it might be second one, third one, fourth one… So you’re gonna want to rearrange it such that each unit is its own row, and the only charge code that’s there is the rent charge code. The other charge codes are included on the T-12 and we will be inputting those into our cashflow calculator from the T-12; the pet fees, month to month fees, any other fees that have been charged to a resident is listed on the T-12, and we will use that and not  the charge codes on the rent roll.

So that might take some time, depending on your skills in Excel. Once that conversion is done, then you can do a pivot table to essentially get a data table that gives you all the unit types and all the metrics that I’ve mentioned before.

Now, a few things to note, because additionally from the rent roll you’re gonna be inputting the loss to lease, as well as the vacancy loss. The loss to lease is the total market rent minus the total current rent for occupied units only. So in Excel you need to make sure that you’re not including the vacant units or the admin model units in your loss to lease calculation, because the market rent is going to be $700, but since it is vacant, the current rent is going to be zero. And if you include the vacant units in your loss to lease calculation, then you’re going to essentially account for vacancy twice – once in your loss to lease calculation and once in your vacancy calculation. So again, just make sure that you’re doing the market rent minus the current rent for the occupied units only.

For the vacancy, you are inputting vacancies loss, not a vacancy percentage. So we’re not looking at physical vacancy. It’s kind of like economic vacancy, but essentially it is going to be how much market rent is being lost due to vacant units. Essentially, sort your rent roll Excel document by occupancy type, and then add up all of the market rents for the vacant units, and that’s going to be your vacancy loss.

A few things again, because as we’re doing this process, we wanna take some notes for questions to ask brokers and vendors and your property management company… For the vacancy, you wanna know “Okay, is the current vacancy higher than the marker average?” If it is, you wanna know why. For loss to lease, is the loss to lease outside of 3% to 5% range? Essentially, when you think of loss to lease, if you assume rents increase by 3% each year, then your loss to lease is likely going to be 3%… Because if I sign a lease today, at say $1,000, and then the next 12 months that same unit is worth $1,030, that person is still at $1,000, because they signed a 12-month lease. So by the end of their lease, there’s technically going to be a $30 loss to lease that you’ll recapture by re-signing their lease or putting a new tenant in there… But you’re most likely going to be running at around a 3% loss to lease, or maybe 5%, depending on how fast rents grow.

If it’s outside of that range, the loss to lease is high for a reason other than the natural rent growth. So if it’s outside of 5%, then you’ll wanna know why. If it’s really low, then  something also might be going on, either with your calculation or in the information they’ve inputted into their rent roll, and you’ll wanna know why it’s low as well.

You’ll also want to compare the total number of renovated units on the rent roll to the total number of renovated units that were listed on the offering memorandum. If the offering memorandum said that they’ve renovated 45 units so far, then you’ll wanna see 45 units that were renovated on the rent roll.

Similarly, you’ll wanna take a look at the rental premiums, and make sure that the rental premiums on the rent roll align with the rental premiums on the offering memorandum. If they say that for those 45 units the rental premium demanded was $110, then it better be $110 on the rent roll as well.

And then lastly, after you input loss to lease, vacancy and all of the unit information, just check to make sure that the gross potential rent on the bottom of the rent roll matches the gross potential rent on your financial model, just to make sure that you’ve inputted everything correctly and that all of your formulas are correct.

I wanted to go into the T-12, but we’re at the 30-minute mark now, so we will start tomorrow’s episode by going over step three, which is inputting the T-12 information, and then we will continue on to step four and discuss the beginning stages of inputting your stabilized assumptions for how the property will operate when you’re done.

So as a summary of what we learned today – we discussed the four things you need in order to underwrite an apartment deal: the rent roll, the T-12, the offering memorandum and your financial model. We went through step one, which is read through the offering memorandum, as well as step two, which is to input data from the rent roll… As well as some questions to ask, things to look at when you are taking your notes and creating your list of questions for brokers and property management companies and vendors.

Until then, I recommend listening to some of the other Syndication School series about the how-to’s of apartment syndications, as well as downloading that free simplified cashflow calculator at SyndicationSchool.com.

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

JF1647: Apartment Financial Statements Part 6 of 6 | Syndication School with Theo Hicks

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Final episode of the financial statements segment of the Syndication School series. Theo will be talking about more, you guessed it, financial documents. He’ll finish breaking down the OM today, and finish the episode with useful underwriting tips as it pertains to the entire financial statement series. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be part six of a six-part series, so we’re going to conclude the breaking down of the apartment financials series. If you haven’t so already, I recommend listening to part one through four. In part one and two we broke down the rent roll; in part three and four we broke down the T-12. And then of course, you’re gonna have to listen to part five in order to understand what we’re talking about today, because the first podcast we broke down the offering memorandum (OM), and we’re gonna finish up breaking down the OM today, as well as discuss a few things that you want to look for when specifically you are underwriting the deal.

We already discussed what to do when you’re screening deals, but we’re going to conclude by discussing “Okay, so here’s what the OM is. What’s relevant to me when I’m actually underwriting the deal?”

So in part five, the first episode about the offering memorandum, we went ahead and went over the executive summary, we went over the location analysis, as well as the property description. As I mentioned in that episode and I’ll mention again here, whenever you’re underwriting a deal, what you wanna do is you wanna read through the offering memorandum first, but you only wanna read up to the point where it starts to discuss financial information. That’s either the actual financial analysis where they go over “Here’s what the proforma is going to be” (which is the case for this OM) if it’s hard discussing the rent comps… Because you don’t want that information to affect how you underwrite the deal, because again, that information is likely to be biased and is based off of what the broker thinks, and what the broker thinks doesn’t necessarily matter when you’re underwriting the deal. What’s more important is how you and your team think the property is going to operate. But as I mentioned at the end of the episode, there is some useful information in the financial analysis, so you wanna look at that after you’ve done your own financial analysis.

Before we get to the financial analysis, in this particular OM the rent comps actually come first. Then we’re gonna go over the financial analysis, and then we’re gonna quickly go back to the OM and explain what information is relevant to you when you’re underwriting the deal. So if you don’t know what a rent comparable analysis is, essentially it is when you find comparable/similar/like properties in the area, within a few miles of the subject property, the property you’re looking at. When I say that they’re comparable, that means that the comparable property needs to be similar to what the finished product is going to look like. You don’t wanna find a property that’s similar to how the property is now, you wanna know “Okay, so I plan on doing A, B, C, D to my property, so let’s find a property that’s within a few miles of my property that has already had A, B, C and D done to it.”

Now the rental comparable analysis will be included in the offering memorandum, of course, because we’re going over that today, and people have different philosophies on how to approach the rent comps, but what we do is typically we will use the rent comps that were provided by the broker, but rather than use the actual rents and unit rent information provided by the broker, we will seek out that information ourselves.

So we’ll say “Okay, for this particular property there are eleven different rent comps listed”, so we would just look at the names, we’d look over their addresses, determine how many units they are, what unit types they have, what’s the quality of the interiors, what amenities are offered at the property, to make sure that they actually are comparable, and if the unit interiors and the amenities offered are similar to the unit interiors and exteriors of our finished product, then we will find the rent information, and use that to create our own rental premiums.

Essentially, that’s what the outcome of the rent comp analysis is – determine “Okay, right now [unintelligible [00:07:20].10] for $500/month, and I plan on spending 5k and doing granite countertops, and fancy appliances, and whatever it happens to be… How much rent can I demand for that new unit?” That’s what the rental comp analysis is for – I find properties within a few miles, that have those stainless steel appliances, granite countertops, and maybe the same state of the art fitness center and resort style pool that my property has, and then I will determine what  their rent per square foot is, and then based on the square footage in my units, I can say “Okay, I’m gonna get the same rent per square foot as them, so here’s my new rent.” That’s one way.

Another way to determine what the rent premiums are going to be are based on proven rental premiums from the current owner. If you remember, or if hopefully you’ve listened to yesterday’s episode when I was going over the executive summary, it explained that the current owner had already renovated 200 units, spent about $2,000/unit and was getting a $110 rental premium. So as long as I confirm that to be true on the rent roll and the T-12, and actually visiting the property and seeing “Okay, these 200 units were actually renovated”, then as long as those renovations were done within the past couple years, then I can say “Okay, well if I do $2,000 worth of renovations, then I too will get $110 premium.”

Now, for this particular deal, if we were to buy it we would go above and beyond the renovations that they did. Maybe [unintelligible [00:08:45].07] so we’d have to spend $2,000 on the remaining units that weren’t renovated, and then an extra $2,200 on all units to get to our new, higher-quality unit. And since we’re not doing exactly what the owner did, then we’d have to do our own rent comp analysis, because $2,200 worth of renovations will demand a $110 premium, but doing $5,000 will demand more than $110, so we need to know exactly why.

I guess I went over what you wanna do when you’re looking at underwriting for this section, but I do wanna go back over the previous sections and do the same exercise that we just performed.

Going back to the OM, if you go to page 25 (not page 25 of the actual PDF, but page 25 of the OM), you’ll see the first page that discusses rent comps, and what you’ll see is a map that has the 11 rent comps labeled plus the subject properties. So you’ll see subject property number 11, and then “Here’s all the rental comps.”  Two of them seem like they’re right next door, two are about a block away, and then the remaining are pretty far away from the actual subject property. It looks like five of them are close enough, but two of them seem like they’re kind of far away, so I would question whether or not I would wanna use those as my rent comps. One of them is by a lake, and the other one is at the intersection of two major highways, whereas the subject property is kind of dead-set in the middle of a triangle of highways. I’m sure if I visited these properties in person, they would kind of have a slightly different feel to them location-wise, especially the one that has a lake right in its backyard. So I probably wouldn’t use that lake one, just based on looking at this map. But I would still investigate further; I wouldn’t just look at this map.

On the next page it has a data table with all of the 11 rental comps, plus the subject property. In here it has some more information about those properties. For each of these 12 properties we’ve got the year that it was built. That’s gonna be important, because  a property that was built in 1980 is not going to be a rent comp for a property that was built in 2000. And a property that was built in 2000 might not be a rent comp for a property that was built in 2010 or 2015. So if you look at this particular deal, this deal was built in 2002, and some of the rent comps are in the 2000’s – 2004, 2007, 2008, 2008, 2007… But then you’ve got ones that are actually a lot newer. You’ve got a couple of 2016, 2015… So again, that right there is something that I would make a note of in my mind (or if someone else would write it down), and I would want to make sure that I would look at the properties that were built in the late 2010’s to see “Okay, are these a higher quality than my subject property? Will I be able to take a 2002 property and make it look like a 2016 property?” Because if not, I’m not gonna use a 2016 property as a rental comp; I would use a 2002 property that was recently renovated instead.

Next we’ve got total number of units. That’s also gonna be important, especially if you’re looking at smaller multifamilies. If you’re looking at, let’s say, a 50-unit, then you’re probably not gonna want to use a 400-unit building as a rental comp, because your 50-unit property is not gonna have the same clubhouse, the same pool, the same amenities as a 400-unit building.

This particular unit is 250 units, and all the rent comps are between 150 to 450. So at the 450 one – I might wanna look at that and be like “Okay, do they have multiple pools, multiple fitness centers, multiple amenities that would allow them to demand a little bit higher rent than mine, and make the adjustment?”

Next we’ve got average square footage, and the reason why that’s important is because when you’re doing a rental comp analysis to compare like properties you need to find the dollar per square foot. So once it lists out the average square footage, it will give you a market and effective rent. Market rent is what the unit should be renting for based on comparables, and the effective rent is what they’re actually getting. For each of those there’s a rent per square foot.

The subject property here ranks 11th when it comes to the rent per square foot for the effective rent. So the current rent, on a per-square-foot basis, is the second lowest.

And then it will have occupancy. What’s weird about this one is the number one property has a 25% occupancy rate, so that’s kind of weird that that was included on here, but the rest of them are all 90% or higher.

Next it goes in even more details. Before it had just kind of the overall average market rent and the overall average effective rent, overall market rent per square foot, overall effective rent per square foot… Next it’s gonna break it down by unit basis, which is going to be more important to you. You’re gonna wanna do your rent comp on a unit by unit basis, not an overall basis. So you’re not gonna say “Oh, currently my property is at a rent per square foot of $1,24, and the average rent comp is $1,39, so every single unit is going to be $1,39.” It’s not necessarily the case, because in some locations a certain floor plan type is going to rent for more.

It looks like for this case the floor plan with the highest rent per square foot is going to be the one bed/one bath. So it’s got a breakdown of all those 11 rent comps plus the subject property, and it has a unit type, so one bed/one bath is one data table, two bed/one bath is one data table, the other two bed/two bath is another data table, and the three bed/two bath is another data table, so there’s a total of four data tables… And it lists out number of units for each of those unit types, square footage and the rent, and then it gives you a rent per square foot for each of those, and at the bottom of each data table is going to be an average rent per square foot. That’s what you’re gonna wanna use.

So for the one bed/one bath I would assume that I would be able to get $1,31 per square foot. For the two bed/two bath $1,24 per square foot, and so on and so forth. So I use those numbers, multiply them by the square footage of the four different unit types, and then that’s what my new rent is going to be after I implement my value-add business plan.

Then the next part of the rental comp analysis is going to be essentially what the rent comps by floor plan data tables were based off of. So it’s gonna take each of the 11 properties and it’s going to give you a data table that has a breakdown of all the different unit types, the number of those units, the square footage, and then again, the average market and effective rents, as well as average market and effective rents per square foot for each of those properties. Then it’ll give you an average of all of them at the end.

So the page that’s gonna be most important to you is going to be the rent comps by floor plan, page 27, but again, you’re gonna wanna do what they did yourself. So you’re gonna wanna create these four data tables yourself and pull their rental information yourself, and confirm that all 11 of those properties are indeed rental comps. The ones that aren’t – remove them, and add the ones that you found through your investigations.

Sometimes your rental comp analysis is going to be exactly like theirs, whereas other times it isn’t. Maybe they made the OM a few months before listing the deal and the rents have changed in the area. Or maybe an inputting mistake, or maybe they’re just trying to pull a fast one on you, or maybe it was something else. You don’t really know, which is why you always want to trust, but confirm.

So again, you want to either create your own list of  properties, or you can start with a list provided by the broker, step one. Step two is to go to each of those individual properties either websites, or apartments.com website listing, and essentially make an amenities checklist, which we’ll go over in the underwriting, and write out all the interior amenities and all the exterior amenities, and make sure that those are similar. It doesn’t have to be the exact same. One property has 1,000 foot pool and another property has a 2,000 square foot pool, you can still use it as a comp; there just has to be a pool there. So once you have confirmed that, then you wanna go and find the actual rental information and unit count information yourself.

The last section in this OM is going to be the financial analysis. The financial analysis is going to basically be the broker’s opinion on the projected financials, the projected income and expenses of the property once someone takes it over. So again, this is something that you don’t wanna look at until you’ve actually done it yourself, but it is good to see what the broker actually thinks it’s going to happen, compared to yours; and then any differences, you’re gonna ask the broker and say “Hey, I saw that you said that the year one vacancy is going to be 5%, but I’m getting 10%. What’s your justification for making it 5%? My justification is that the average occupancy in the market has been 90% for the past ten years, so I’m assuming a 10% occupancy. Why are you assuming 5%?” It’s an example; I completely made that example up, but that’s something that could happen, and if you don’t look at the financials ever, then you’re not gonna be able to ask those questions. And if you look at the financials first, then you might just assume that they’re right and then you’ll have no questions because you have exactly what they have.

So for this particular OM, the first page kind of summarizes the investment. A lot of stuff in the OM you’ll realize is a repeat; so again, it’s got the date and year of construction, number of units, rentable square feet, average unit size, occupancy, market rent and rent per square foot.

Next it kind of summarizes, “Okay, so based on our underwriting, year one – here’s what your gross income is going to be. Here’s what your operating expenses are going to be. After your reserves, here’s what your net operating income should be.” And then it also has some tax information, so how they are calculating their proforma tax rate, and then it has this particular one, kind of an income trend. It’s showing you “Hey, if you look at the T-6, compared to the T-3, compared to the T-1, income has been going up in a one-to-one relationship. Again, they might just pull random data points like that. Maybe instead of total income trend it’s vacancy, or maybe it’s rent, or maybe it’s something else that is trending good.

Then right here at the bottom left of this investment summary page it says that “We are basing all of our assumptions on someone coming in there and renovating the remaining units at the same cost as the owner, and getting the same rental increase that the owner received… As well as we think that if you put in new appliances, washers and dryers in certain units, and it’ll cost you $3,000 and you should be able to get an extra $75 in increases.”

On the next page it is comparing the T-12 to their proforma. As you will see, this will be pretty familiar to you, because you’ve already looked at the actual T-12… But on here it will have the Trailing-12 month information for gross rent, and the vacancy, the concessions, other income, all the different expenses… Essentially, everything we went over in the T-12 interview. On this particular one it says “Here’s what it was like for the last 12 months, but look, for the past six months it’s been getting better. And for the past three months it’s been even better, and for the past one month this is an amazing deal now!”

Then they’ll compare that to the proforma. They’ll have essentially their year one, their stabilized proforma, so what’s it’s gonna be like once that property is stabilized; same information, so all the income and expense line items that we went over in the T-12, and it will break it down for the year, on a monthly basis, on a per-unit basis and on a per-square-foot basis. For the expenses, it will give you a percentage of the gross income.

Now, what’s interesting is that on the page where they discuss either a comparison of the historicals of the proforma or just the proforma, then they’re going to have a list of their assumptions for the proforma. I just think it’s interesting to read through those and compare their assumptions to my assumptions. For this particular deal they say that, for example, market rents are growing 5% in year one, 4% in year two, and 3.5% in year three. So for me, for every deal I typically assume only a 3% annual increase, but they might be including the rental premiums here as well. So they’re saying that “Okay, you’re gonna implement your value-add business plan and you’re gonna have the biggest increase in year one, but then you’re gonna do a little bit less in year two, and then it’ll go back to that 3% in year three.”

Something else, they say that the gained loss-to-lease is going to be 1% each year, but if I go ahead and look at their historicals, it looks like it is pretty similar to what they did before, so that’s a good note.

Another example – on-site payroll was $1,200/unit, right on board with our assumptions. They say that the bad debt is going to be 0.3%. So I’d look at their bad debt and be like, “Okay, well you’re saying there’s gonna be $11,000 in year one, but no matter what combination of Trailing 12/6/3/1 they look at, it’s between 50k and 85k. So I would probably set it closer to those numbers, just because that’s what it’s currently operating at… And then I hope that I can burn that off, but I don’t want to assume that I can just automatically burn that off because the broker told me I can burn it off. That’s an example of a question I would ask the actual broker.

Essentially, what you wanna do is read through all of their proforma notes, their proforma assumptions, and then compare them to your assumptions and see “Okay, why are you making that assumption, when I’m making this other assumption myself?”

On the next page it has a 10-year cashflow. On the page before it just says “Hey, here’s what it’s gonna be like in year one.” Now they’re saying, “Hey, here’s what it’s gonna be like every year for the next ten years”, and they’ll also include whatever their growth assumptions are. For this particular case, as they said before, 5%, 4%, 3.5% for the market rent growth, and then market rent growth by 3% each year thereafter.

Loss to lease is gonna be 1% forever, they say. Vacancy is gonna be 5% forever, they say. Other income growth is gonna be 3% each year, and then based off of that they can pain an overall picture of what the net operating income is going to be each year for the next ten years, or five years, or seven years… It kind of just varies.

So that’s kind of like their proforma, and then they’re gonna go over what they’re basing it all on. You’ll see here they’ve got another unit mix data table, with all the unit types, and what the annual market rent is, and then what’s the monthly rent, and then based on their most current rent roll and the rent per square foot. Then another data table that shows “Hey, as you go up in unit size and number of beds/baths here’s how much more rent we get.” Then they also have a pie chart that shows a breakdown of the actual unit mix. It looks like they have half two-bedrooms, and then about a fifth three-bedrooms, and then the rest are gonna be one-bedroom units. Essentially, this is a snapshot of the most current rent roll, as it states on there.

For this particular deal, that’s all they have on here. We’ve got the investment summary page, where it says “Hey, here’s what your year one income is going to be.” They’ve got their comparison of the T-12’s, T-6’s, T-3’s, T-1’s to their proforma and what assumptions they made. Then the have the 10-year cashflow, same thing, comparing the T-3 in this case to year one through year ten. Then for some reason they decided to give a current snapshot of the rent roll.

Now, in some cases there might be a lot more information in this section. They might include information on debt, what type of debt they expect on the property, an insurance quote that they got, maybe they might have a data table of the cap-ex breakdown… So it really depends, but overall, the information that you’re gonna need from the OM, as I mentioned, is 1) look at the rent comps and see what they’re using and confirm that they’re correct, and after that essentially you’re gonna wanna compare all the information they have in their OM to your information.

You’ve already done your location analysis, so does their location information line up with yours? Did they include information that maybe you didn’t know about? Maybe there’s a certain school that was listed on some sort of top ten list that you didn’t know about, and that’s great information that you can include when making your investment summary.

For the actual property description you wanna use that information in order to kind of screen it against your investment criteria, see if the deal makes sense. For example, for me in Tampa it’s not good to have properties that don’t have a concrete slab construction. So I’ll look at the property description, and if it says that the foundation is made of wood, then I will automatically disqualify that deal from contention.

The property description stuff can also give you an idea of the different amenities at the property, maybe amenities that you add, or maybe different fees you can charge for certain amenities. Then for the financial analysis section, besides the rent comps, you’re just gonna wanna kind of after you’ve filled out your cashflow calculator, compare their proforma to your proforma, and then any discrepancies you identify, you wanna go ahead and ask that listing broker “Hey, why are you making this assumption? I’m making this assumption because of a, b, c and d. Am I missing something? Is there something you can shed a light on, so I know that I’m making the correct assumption?”

Then you also wanna run all of this stuff by your management company to confirm all of your underwriting, which again, we’ll talk about either in the next series… Or it might not actually be the next series. We’re gonna dive into everyone’s favorite topic, which is underwriting. So in the next series or the series after we’ll go over that, and we’ll reference these T-12’s and rent rolls and offering memorandums.

The point of this series – I just wanted to introduce you to those three different documents, so that the underwriting series wasn’t gonna be 20 parts long. This six-part series was based on breaking down those financials, and all this information you’ve learned in this series, as well as all of the previous series too, will be used during the underwriting series.

Until then, I recommend listening to parts one through five, as well as downloading the T-12, downloading the rent roll and downloading the offering memorandum and reading through it, maybe relistening to the episodes with the document in front of you, so you kind of grasp it… Because you’re gonna need that information when we underwrite deals.

So listen to those episodes, download your documents, and listen to other series at SyndicationSchool.com. Download our other free documents there as well… And again, I appreciate you guys listening, and I will talk to you tomorrow on Follow Along Friday.

JF1646: Apartment Financial Statements Part 5 of 6 | Syndication School with Theo Hicks

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Part 5 of our 6 part series on apartment financial statements. Theo will be covering a few different documents today, including the OM. So without much more explaining from me, hit play and learn more about the financials from Theo. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. Typically, we’ll do four, six or eight-part series, so two to four weeks’ worth of podcast episodes. The episode you’re listening to now is going to be part five of a six-part series, so we’re gonna complete a series about breaking down the financials for underwriting apartment deals, as well as managing apartment deals.

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

As I mentioned, this is going to be part five of a six-part series entitled “Breaking down the apartment syndication financials.” If you haven’t already, I recommend listening to parts one through four. In parts one and two we broke down the rent roll, and in parts three and four we broke down the T-12. Those are the two main documents you need in order to underwrite apartment deals, as well as documentation that you’ll wanna provide to your investors on an ongoing basis.

The last piece of the puzzle isn’t necessarily a requirement, but it’s more of something that is helpful when underwriting, and that is the offering memorandum. We’re gonna follow a similar structure to the T-12 and rent roll episodes. We’re gonna go over what the OM is, what it’s used for, take a big step back and discuss big picture what the OM is used for and how to use it, and then we’re going to walk through an example OM and essentially just like the other episodes, go page-by-page, line by line, and explain exactly what each of the items mean as it relates to underwriting.

For this particular documentation you don’t necessarily need this on an ongoing basis, however there are a few other things that you will use it for that you didn’t necessarily use the rent roll and the T-12 for.

Let’s jump right in with what is an offering memorandum. I’m gonna refer to it as an OM, just so I don’t have to say offering memorandum over and over again… So shorthand for the offering memorandum is the OM. Essentially, it is a sales package that highlights the ins and outs of an on-market investment offering. An offering memorandum is something that is created by the broker who is listing the deal, and it is used to essentially market the property to interested investors.

The OM is actually used for multiple purposes. Number one, you can  use it to actually screen deals. Within the first few pages of the OM there will be an executive summary that basically summarizes everything that’s going to be in the following pages. The OM we’re gonna go over today is about 50 pages long, and it’s broken down into different sections about the market, and the property, and the financials, and the business plan… And the executive summary essentially summarizes all of that. If you read that, you can see what type of property this is, what’s the expected business plan, and determine if it meets your investment criteria.

Your investment criteria, if you remember from previous Syndication School series… Which is not from one series – we kind of went about creating it over multiple episodes, but that’s going to be the submarket of the neighborhood; the first page, you’ll be able to tell where the property is located – “Okay, it’s in California; my target market is Texas, so I can completely ignore this one.” If it’s in your market, then you can look at the number of units, date of construction and the property class to determine if it meets your investment criteria, as well as the business plan.

Typically, when the property is listed for sale and you’re sent the listing, it will say “This is a turnkey property/This is a highly distressed property/This is a value-add property.” So essentially, one of the ways you can use the OM is to screen deals, and that’s as simple as reading that executive summary.

Secondly, it will be used during the underwriting process. However, it will only be used as a guide, because the information is likely biased. I was trying to think of what would be a good analogy for the OM and the T-12 and the rent roll, and I was going to say that that T-12 and the rent roll are kind of the — I’ll do a movie analogy… There are always those movies that are based on a true story, but they’re typically exaggerated, and the actors are much better-looking than the actual people, and the events seem to go faster, and it’s more entertaining and engaging, and it’s used for marketing purposes… Because obviously, if they just made a movie on exactly what happened, it would be too boring and it wouldn’t grab people’s attention.

Well, the offering memorandum is like the “based on a true story” movie, whereas the T-12 and the rent roll are what actually happened. And when you’re looking at deals, you wanna know what’s actually going on, not what some movie producer – which is the broker in this case – is telling you. But still, just because the information is likely biased, there’s still some very good info in there that you’ll be able to use when underwriting, as well as when you are preparing an investment summary, which is the third thing it could be used for.

The investment summary – we haven’t talked about this yet on the Syndication School series, but essentially, once you put a deal under contract, you’re going to want to create your own offering memorandum, which is ideally not based on a true story, but is the actual true picture of the actual deal… And it’s going to look similar to the OM, they’re gonna have similar sections. You’re gonna have your executive summary, you’re gonna have your market information, the property description and your financials.

So one, you can use the structure of the OM as a guide to create your own investment summary, but also, you might be able to pull some of the information that the brokers have already found and include that in your investment summary… Specifically, the market data. Typically, the market data in these OMs are going to be accurate. The only thing that you necessarily don’t want to follow is the financials, but we’ll discuss that here a little bit later in the episode.

Lastly, you are going to use an OM when you are selling; not the same OM, but when you are getting ready to sell your property and you go to your broker and let them know, then they are likely going to create that OM for your property so that they too can market your deal to interested investors.

Before we go over to the example OM, I wanna discuss a couple other things about the OM as a whole. They keyword when I said what an OM is is a sales package. As I said, the info is likely going to be biased, because if you think about it, obviously the listing broker’s goal is to sell the property at the highest price and as quickly as possible. Now, I’m not saying that every single broker is going to do this, but they may have a tendency to not include certain pieces of information and only include certain pieces of information that make that property look as good as possible, so that they can achieve their goal of making money.

At the end of the day, a good philosophy to have is trust, but verify. You’re gonna look at the OM, and you’re going to see the information that’s in there, and rather than just take it at face value,  you’re going to be like “Okay, let’s confirm this is true. Okay, everything the broker said is true. That’s great, I’m looking forward to working with them.” Or, on the other hand, “Oh, this information is incorrect. The broker either made a mistake, or is lying and this might not be someone I want to continue to work with in the future.”

Now, every offering memorandum that you come across is going to include different information, it’s going to be structured differently. Typically, if you’re working with a brokerage or this deal is listed by a brokerage, they’re gonna have some sort of template that they use, and they’ll just plug in pictures, data tables and words into that template. But for the large brokerages you’re gonna find OMs that are very detailed. If you’re getting it from maybe a small-time broker, it’s not going to be as detailed or as aesthetically pleasing from a design standpoint than ones that are made by the big boys, like Marcus & Millichap and Cushman & Wakefield and CBRE and places like that. Regardless, the information in there should be the same, they just might look a  little bit different.

So in order to obtain the OM for a property, it kind of depends, but typically what happens is that the on-market deal is listed on the brokerage’s website, as well as an e-mail blast that’s sent out. If you’re on the e-mail list, you’ll get the e-mail and it should have a link. If you click on it, it will bring you to the page on the website that’s listing the property, at which point there should be some sort of instructions for downloading the offering memorandum and the financials. So you might just be able to download it right away, you might need to create an account, and then you’ll have access to some sort of portal. You might have to sign a confidentiality agreement, at which point you’re e-mailed or given access to the documents at a later date, or instantly… But either way, go to the website where the property is listed for sale, and there should be instructions for obtaining the offering memorandum.

Now, we’re gonna go over underwriting in a lot of detail in either the next series or the series after that, Syndication School-wise, but I just wanna mention that when you’re underwriting, you’re not going to want to read through the entire offering memorandum. Typically, what you wanna do is you wanna read through it up to the financials, so up to when they start talking about what the rents are going to be, what the expenses are going to be… So you’ll wanna read up to that point, and then stop, and then you’ll input your data into the cashflow calculator, and based on reading the OM and that inputting process you will create a list of questions to go back and ask the listing broker.

The point I wanna get across is that you don’t wanna just read through the entire offering memorandum first when you’re underwriting; you only wanna read up to the point where they go over the financials, because again, that information is based on what the broker says is going to happen, where we don’t necessarily care about what the broker thinks; it’s more of what we think and what our team thinks.

So now that we’ve gotten that out of the way, let’s go ahead and go through the sample offering memorandum, which you can download at SyndicationSchool.com, under this series, which I believe is series number 13, “Breaking down the apartment financials.” It will be available for download under parts five and six. Or if you’re listening to this now, you can find the link to download this in the show notes.

This is a much older offering memorandum for a deal that was listed for sale back in 2015, but it is very detailed, which is why I wanted to go over it, because it includes essentially all the information you’ll ever find in an OM. As I mentioned, sometimes we might find less information, more condensed information, but this is one of the most detailed OMs you’ll see. It’s 50 pages long, so I wanted to do that so that we could hit on everything that you could possibly see, so that you know exactly what each of these sections mean.

In the rest of this episode, as well as in the next episode, we’re going to go through this 50-page document page by page, so let’s dive into it.

The first couple pages are just gonna be pictures of the property, just to kind of start off the bat with some aesthetically pleasing images of the property, ideally professionally. Then it’ll have the name of the apartment community.

The first important page in this particular OM is going to be the fourth page – it’s actually labeled as “IV”, but it’s going to go over 1) the offering procedures; that’s something that you’re gonna wanna know. You’re gonna know what the offering process is, so if you do underwrite the deal and you wanna submit an offer, what you are supposed to do.

For this particular property, they request that you submit a letter of intent, you submit a resume and/or a business letter indicating the assets owned and assets purchased in the past year, so the portfolio of your properties from the past two years. They’re gonna want transaction references and banking references, as well as the source of equity for your acquisition – who’s supplying the debt, and who is going to be supplying the equity. Then it mentions that upon an accepted LOI, the person who submitted that LOI will be supplied with a purchase sales agreement.

This particular deal – there’s a call to offers, but there’s not a best and final sellers round. So you submit your LOI and basically your resume, and then if you win, you get a PSA; if you don’t, then you get turned down. It also mentioned the brokerage commission on the deal, as well as who you should be contacting. As you remember, I said that you’re gonna be creating a list of questions to ask the broker who is listing this property; well, on this page it tells you the five different parties who are listing the deal, and that’s who you can contact.

And then lastly, it mentions that they don’t want you to contact the property owner to schedule any tours; you wanna do that through the same broker. Essentially, the point people are going to be these brokers; here’s their names, their titles, their address, phone numbers, and — on here there’s no e-mail address, so it looks like you’ve gotta hit them up on the phone.

Next page just goes over a confidentiality agreement about the property and the financial documents that are provided (the brochure etc.) Then once they kind of get the housekeeping out of the way, you’ll see a table of contents page that will outline exactly what you should expect to find in this OM. In this particular OM, it starts off with the executive summary; then it goes over to the property description, then the location analysis, then the rent comparables and the financial analysis.

As you remember I said, you wanna read up to the point where it starts discussing the financials. In this case, I would read the executive summary, the property description and the location analysis, at which point I would start underwriting the deal myself. Then when I was done, I’d go back and look at their rent comps and their financials to see how they match up.

So for the executive summary, as I mentioned, the first true page in this – the first page is actually labeled after the table of contents – is going to be the executive summary. [unintelligible [00:16:13].00] summary page, with essentially a written explanation of the property. First it goes over the market highlights and what’s good about the market in which the property is located; then it will go over what the listing broker believes would be the best business plan for this deal. For this deal it says that “It’s an excellent opportunity to complete a value-add unit enhancement program.”

Next it discusses “This is the business plan. This is what the business plan should be, but here’s more specifics on the business plan.” It mentions how many units the current owner renovated, what those renovations were and how much money they’re currently demanding. Then it discusses what you can do – essentially, continue this upgrade plan if you want to, and “This is how much it’s gonna  cost, and here’s how much rent you’re gonna be able to increase it by.”

Then it goes over some of the key amenities of the properties: state of the art fitness center, resort-style swimming pool, spacious business center… That’s kind of where that “based on a true story” is. Instead of saying “There’s a fitness center, a swimming pool…”, it’s “a state of the art fitness center, a resort-style swimming pool, a spacious business center.” But still, at the end of the day, it’s important information to know what amenities are offered at that property.

Then next it just kind of wraps it all up and just has a closing statement saying basically how great this deal is for investors. Then it’s got a data table of the investment summary, so it goes over some of the key, important piece of information that you can use to initially screen the deal, as I mentioned, based on your investment criteria. It’s got the year built, number of units, average rent per square foot, the current occupancy rate…

The next page goes into more details on the expected business plan. As they mentioned in the executive summary, they believe that this is an excellent opportunity for a value-add business plan, and it kind of explains why; when the property was built – it was built in 2002 – and what it would benefit by from upgraded appliances and adding washer and dryers to make it more competitive.

It goes over, again, what renovations were performed by the current owner, as well as what you can expect renovation-wise and rental premium-wise, and then it kind of goes over exactly what renovations were done by the owner.

So whenever they’re discussing a value-add business plan – and again, we’re gonna go over this a lot more in the underwriting phase, but you’ll wanna know 1) did the current owner begin to implement a value-add business plan? If the answer is yes, how many units, and what renovations were done, and over what timeline were those renovations done?

The first three or four pieces of information are in here, but you don’t have a timeline of when the renovations were done… Because if you do 100 units in a year, versus 10 unit in a year, then the rental premiums are going to be different to you. If they did 100 units in a year, then those rental premiums are likely more accurate, whereas if they only did 10 units, that’s not enough of a sample size to use that as your rent premium assumption.

For here, it says that the current owner spent about $2,000/unit and achieved a rental premium of $110 on 200 units. So a question I would ask is over what period of time were these 200 units renovated? If he says ten years, then I’m gonna be like “Okay, well that’s not necessarily gonna help me out here”, but if he says one year or two years, then that’s gonna be a bit more accurate on my end.

Now, that concludes the executive summary, where again, it summarizes everything that’s going to be explained in more detail later on in the offering memorandum. So now on page four it moves into discussing the market. We’ve got the market highlights – it talks about the demographics and the future rent growth. It says “The household income is really high (twice the national average). Here’s an award this market received, and the jobs are expected to increase.”

Again, the information here is gonna vary depending on the market. In some markets it’s jobs, in some markets it’s rents, in some markets it’s population… It really depends. It’s also gonna go over “This is an outstanding location, and here’s why. The property is right next to a highway, and it’s an amazing school district, and the airport is really close.”

Then it’ll also discuss some employment drivers – what’s the job situation like, what are some of the major companies around there, what’s the projected job growth, how many workers live in a certain radius of the actual property.

So demographic-wise, you’re gonna want to know about any awards, or anything special about the area, as well as information about jobs. Then after that, typically it will have a map. When they explain “Here are the big companies, here are the good school districts”, then they’ll have a map saying “Okay, here’s where the property is and here’s where all of these highways and businesses and country clubs and schools and hospitals are located compared to the property.”

Next on this particular one, again, it just keeps going into more detail about how great the market is. It explains how there’s gonna be a highway expansion, and it also talks about the city itself.

Next, once it moves on from the location analysis, it will start talking about the actual property itself. As you’ll see on page nine of the offering memorandum, there’s a bunch of data tables that kind of look like the auditor’s site, where it kind of goes over in extreme detail everything you need to know about the property. You’ve got the address information, you’ve got your built number of units, the size of the units and the overall building, what’s the laundry situation, what’s the parking situation, what’s the personnel that’s currently working at the property, what are the school districts, what are the leasing fees – that’s gonna be pretty important when you’re underwriting, what types of fees they’re charging to tenants who are interested in renting. Tax information, utilities, who pays for what, and then the construction type of the property.

On the next page it goes over the interior highlights. It explains — earlier it said that they renovated the units, so now they’ll go over in bullet point form “Here’s exactly what amenities are offered for the interiors of these units, as well as some pictures.” It talks about nine-foot ceilings, crown molding, microwave, tub, refrigerator with an ice maker, ceiling fans… Again, at this point you probably haven’t seen the property yet, so you wanna know “Okay, what do the interiors look like and what amenities do the interiors have?” This section will help you out with that.

They’ll do the same thing for the exteriors – it’ll tell you what exterior amenities are offered. For this particular deal it’s a clubhouse, state of the art fitness center, business center, pool, dog park.

Next it will have the floor plans. It will have a 2D snippet of what the floor plans look like. It’ll have “Here’s where the bathroom is, here’s where the kitchen is, here’s where the little bedroom is, here’s what the size of the bedroom is”, so kind of just how the units are arranged for each of the different unit types at the property. For this particular deal there happens to be six units types, so there’s six different designs of what the floor plans are.

Then it’ll have an actual overall site plan, so it’ll show you where all of the different exterior amenities are, as well as where the units are, where the parking is, where the entrance is, where the clubhouse is. On this particular deal it gives you a 2D Google Earth view of the same image that was shown earlier during the location analysis. So rather than straight up bird’s eye view of the surrounding area, this one’s more at an angle and it kind of show you “Okay, here’s where the property is, highlighted, and here’s where all the great nearby businesses are.” It does that through different pictures that give it a 360 view.

I think I misspoke earlier; when I was going over the location analysis earlier, that was actually the executive summary portion of it, so it was just the highlights of the location. Here it goes into a lot more detail on the location. It talks about the overall MSA – Dallas-Fort Worth, and then it will talk about the demographics of that area the educational attainment of Dallas-Fort Worth, the economy, what’s the GDP, how many Fortune 500 companies are there, what companies are moving to Dallas-Fort Worth; it’ll do a labor analysis, so how many people actually work in the area, what’s the growth going to be, what sectors and industries they work in.

Then it also goes over an apartment overview of Dallas-Fort Worth – how many units are there, what’s the annual rent growth, what’s the annual rent, what’s the average occupancy. Then similarly it does for the submarket; the submarket in which this property is located is Mansfield, and the larger MSA is Dallas-Fort Worth, so it does all this information for the MSA, as well as the actual submarket.

If I was underwriting the deal, this is where I would stop, because now it starts going into the rent comps and the financials. So just like I would be if I was underwriting, we’re gonna go ahead and stop for today, and we’ll continue with the rent comps and the financial analysis in tomorrow’s episode.

To listen to parts one through four and listen to other Syndication School series about the how-to’s of apartment syndications and to download the offering memorandum that we’ve been discussing today, go to SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

JF1640: Breaking Down the T-12: Apartment Financial Statements Part 4 of 6 | Syndication School with Theo Hicks

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Part two of the T-12 walk with Theo. You’ll want to listen in to learn even more details about the trailing 12. It’s important to understand this statement so you don’t make a bad decision on a deal that costs you money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week we air two-part podcast series about a specific aspect of the apartment syndication investment strategy. Typically, these series are four, six, to eight parts, so the entire series is over multiple weeks… But for the majority of these series we offer some sort of document, or spreadsheet, or resource for you to download for free.

All these free documents, as well as the past Syndication School series can be found at SyndicationSchool.com. Today is Thursday, so this is going to be a continuation of what will likely be a six-part series entitled “Breaking down the apartment financials.” In part one and two we broke down the rent roll, and in part three and four – which includes today’s episode – we’re gonna break down the T-12.

Yesterday, or in part three, we talked about what a T-12 actually is, when you use it – during underwriting, and then when you’re executing your business plan. We kind of took a big picture look at how the T-12 flows, how you find the T-12 and what you should do with the T-12 more specifically during the underwriting process and when you’re executing the business plan, and then we actually walked through a sample T-12 from a deal that Joe did, and we got through the first major section, which is the Income section, which consists of the rental revenue and the Other Tenant Income. Below the rental revenue there were 10-15 line items, and then under the Other Tenant Income there were another 13 or so line items that we went through and defined, and mentioned what to look for when you’re underwriting, and what to look for on an ongoing basis for each of those.

In this episode we’re going to move on to the expenses. These are going to be the operating expenses, the non-operating expenses, and really any other expenses that the property incurs. We’re gonna go ahead and go through all those and define those, so by the end of this two-part series you should be able to look at a rent roll and a T-12 and be able to find essentially every single metric that’s on those documents.

Let’s jump right in. For the overall Expense section, the first category is going to be the Operating Expenses. The operating expenses are the variable expenses associated with running your apartment community. These are things that aren’t going to be the same every single month. They’re going to fluctuate based on how the property performs, what happens to the property etc. So when I define each of these terms, I’m going to provide you with a market cost per unit per year for each of these different operating expenses. These dollar per unit per years are going to be for apartment communities that are located in major markets that are 200 units or more.

If you’re working with a smaller property, or if you’re working in a secondary or tertiary market – this probably applies to secondary markets, but probably not tertiary markets. If that’s the case, you’re gonna want to talk to your property management company and the broker to help you determine these accurate market cost ranges for your specific market… But for now, since most of you are likely investing in major markets, we’re gonna focus on that. The grey areas – you’re gonna have to speak with a management company.

Generally, the operating expenses are gonna be broken into nine major categories. These are the nine categories you should have on your cashflow calculator, and in the next series and the series after that, when we start going over underwriting and we give away the free, simplified cashflow calculator, you’ll see that there are nine different categories for operating expenses.

So if you come across a T-12 that is not broken down in these nine categories, then you’re gonna have to do some rearranging, which is why it’s gonna be very important for you to download this and see “Okay, for utilities, what is considered a utility? What is considered a contract service? What is considered maintenance repairs?” Because you might come across a T-12 where all the maintenance repairs, all the contract services and all the turnkey make-ready costs are all within the same category, and you’re gonna have to pull out what is what and break apart that one category into three categories. So this portion of the podcast is gonna be very important to listen closely.

First we’re gonna have the utilities. That’s gonna be the cost of the utilities of the property. You’ll see that there is the electric for the vacant units; if a unit is vacant, you’re gonna have to pay for those utilities. There’s the house electric – that’s mostly serialized electricity for your amenities like your gym, your pool, your lights for your barbecue area, lights for your pet park, things like that.

You’re obviously gonna have the electric for the clubhouse or your office, and then you’re most likely gonna be paying for gas and heating oil overall, for the entire property… So whether it’s gas for the grill, or if you have a boiler, gas for your boiler… You’re paying for utilities and water for the entire property. Cable – cable for the office, or your model unit. Telephone and internet for your office, as well as any waste disposal that you have – kind of a one-off waste disposal if you’re doing renovations… Because you typically have this when you’re doing renovations, or just trash collection in general. So those are gonna be utilities.

When you’re underwriting a deal, again, you’re using this T-12 as a guide to set your stabilized expense assumptions… So when you are underwriting a deal, you’re gonna wanna set your stabilized expense assumption to the same annual cost on the T-12. Right here, the annual utilities are approximately $230,000, so if I was underwriting this deal, I’d be like “Okay, well my annual utilities are also likely going to be $230,000”, and then if total utility cost is outside the range of $750 to $900 per unit per year – so take that total number, divide it by the total number of units, if that is over $750 to $900, outside that range, then just make a note, because likely either utilities are really low, or they’re too high. And for anything that’s outside of this market cost per unit per year range, then you’re gonna wanna mark that down and ask the management company “Okay, why are the utilities really low? Are tenants paying for parts of the utilities?” or “Why are the utilities really high? Are there  water leaks somewhere? Is the electric really high for some reason?” And if it is too high, it’s not a deal-breaker, because it is an opportunity for you to add value.

The next category is the contract services. These are the costs or expenses associated with ongoing contracts that you have with vendors… Those are gonna be landscaping, anything related to security – patrols, alarm monitoring, emergency phone… A key maintenance person, pest control, and other upkeep-related contracts that you have. These are contracts that you have with vendors, not one-off maintenance repair issues; it’s going to be things that are on a consistent basis.

As I’ve mentioned, you’ve got your landscaping contract, you’ve got your security patrol contract, alarm monitoring contract, emergency phone contract, key maintenance person contract, pest control contract, and then just a contract with probably a paraservices company which is on-call if you’ve got something small that happens and you need to be able to take care of it, and you don’t wanna have your key maintenance person do it.

As I’ve mentioned, a lot of times these contract services will be lumped in with repairs and maintenance, so make sure that when you’re underwriting you take a look at the individual line items and make sure that something that’s in Repairs and Maintenance isn’t actually a contract service.

So when you’re underwriting, you’re gonna want to set your stabilized expense assumptions for contract services to the T-12 amount, and making note if it is outside $200 to $400 per unit per year. If it’s above that or below that and you’re looking at a 200+ unit apartment community in a major market, then it’s either too low or too high and you wanna make a note to ask the broker why.

Next we’ve got Repairs and Maintenance. These are going to be costs associated with the ongoing repairs of interiors and exteriors, including supplies but excluding capital expenditure. So you do not want to include your cap-ex costs in repairs and maintenance, and when you’re reviewing deals, you wanna make sure that they’re not including those in there. If there’s a line item that says “New roof” and it’s $250,000, that’s gonna throw off your repairs and maintenance.

For Repairs and Maintenance let’s just kind of go through these… There are some that are pretty self-explanatory. You’ve got equipment repairs, you’ve got HVAC repairs and supplies, pool supplies, you’ve got paint service and supplies, you’ve got [unintelligible [00:11:31].00] repairs, supplies for landscaping, supplies and repairs for plumbing, supplies and repairs for electrical, you’ve got general maintenance supplies, small tools, supplies that are broken or replaced, parking lot repair maintenance – again, this is not you going in there and restriping the entire parking lot; these are one-off, smaller repairs to your parking lot.

Same with the roof repairs and building exterior repairs, windows and door repairs – maybe you’re replacing one door, but not replacing every door, every window… Fire safety supplies, new locks and keys, new light bulbs, floor repairs, cleaning for your office or the clubhouse, cleaning supplies, pest control products, appliance repairs and parts, general exterior repairs, water extraction, and fitness room repairs and supplies. So really anything that’s a supply or a repair will go under this line item, but not anything that’s like a brand new cap-ex type of budget.

And when you’re underwriting, you’re gonna wanna go ahead and set Stabilized Expense to the same annual number as the T-12, and make a note if that number falls outside the $250 to $350 per unit per year range.

Next we have the Turnover, or it might be called Turn, or it might be called Make-ready, or Turn Make-Ready… These are gonna be costs that are associated with repairing a unit for a new resident. Again, just like contract services, this might be included in the maintenance and repairs, so make sure that you are, again, looking through the maintenance or repairs line items every single time, to make sure that it’s only including maintenance or repairs and not including things like contract services and turnover.

So this is gonna include things like painting units and cleaning units, and again, it’s not going to include capital expenditures. If a unit is turned and then you are doing your value-add renovation of 6k-7k, you’re not gonna include that here. These are gonna be costs associated with repairing a unit for a new resident, not renovating a unit for a new resident. These are gonna be repainting the units, cleaning the units, resurfacing the countertops or the floors, cleaning the carpets, things like that.

When you’re underwriting, you’re gonna wanna go ahead and assume that it’ll be approximately $150 to $300 per unit per year. So if the current number is $400 per unit per year, then you’ve reduced your assumption to $300, and then make a note to ask the broker why their turn costs are so high. Likely, high turn costs is a reflection of a poor demographic and/or a high turnover, which is kind of also a sign of poor renter demographic.

Next we have Payroll. These are gonna be the costs associated with paying the salaries of your full-time employees. This is different from the contracts that you have. These are gonna be people that are full-time employees at your property, so these are gonna be things like the payroll for your main maintenance person, payroll for people that work the admin jobs in your office – these could be leasing agents, the person at the front desk… You’re also gonna want to account for any bonuses that are paid, or temporary salaries to temporary leasing agents, as well as payroll taxes, any insurance you have… Right here we’ve got group health insurance, the key man life insurance… So health insurance, life insurance, any compensation that’s paid out, and then your payroll processing fees if you have those.

Next we’ve got the taxes and insurance category. On your cashflow calculator these are actually broken into two different categories. First we wanna take a look at insurance — but I’m sorry, before we go to that I’ve gotta go back to Payroll and explain what the market rate is. So when you’re underwriting, you’re gonna wanna go ahead and assume a stabilized expense of $1,000 to $1,200 per unit per year for the payroll. For example, if the current payroll is $800, you’ll set it to $1,000; if it’s $400, you’ll set it to $1,200, and making note that it’s too low or too high, and then ask the management company why that is.

This is one of those things that you might not even see if you’re looking at a building that’s got less than 50 units, because you don’t have any on-site management, you don’t have any on-site people working there. Maybe you just contract out a leasing service to fill the units, so this might be way lower than $1,000 to $1,200 range, and it might actually be zero when you’re dealing with a four-unit, a ten-unit, a 20-unit.

Now we can move on to the Taxes and Insurance. Insurance is the property insurance, pretty self-explanatory. For insurance, the minimum amount that you’ll see is about $225 per unit per year. Typically, you’ll see somewhere around $250 to $300 per unit per year for property insurance, so just set your stabilized expense assumption for insurance to the same as the T-12, just for a good place to start, and then get a quote from someone; you need a ballpark quote for the property, to get a more accurate assumption.

Then for taxes, you’ve got your property taxes, and then on this T-12 there’s also a property tax consultant. You’ll see at the end of the year, in November, they pay about $2,700 to talk to a tax consultant to help reduce their taxes… But overall, this is very important. So when you’re underwriting a deal, you’re gonna see an annual tax on the T-12, but that’s gonna be based on whatever the property was valued last, it’s gonna be based on that number. So if you plan on buying the property, and let’s say you buy the property for five million dollars more than what the current tax rate is based off of, and you use the current tax rate, then you’re gonna be surprised when your tax rate goes up by 100k or 200k. So when you are underwriting deals, make sure you go to the auditor’s site or the appraiser’s site and figure out what the tax rate is. Usually, it will be like 85% of the value, times 0.142435, some random tax rate number… And they’ll determine what your annual taxes will be.

Make sure you calculate your stabilized tax assumption using that method, don’t just copy and paste the current taxes, because they’re most likely going to be different.

Next we’ve got Management Fees, pretty self-explanatory. This is the fee paid to the management company for managing the property. So what you wanna do here for the T-12 – you’re gonna want to divide the annual management fees paid to buy the annual total collected income, because typically the management fee is based on the total collected income. Get a percentage, so you can see what rate the current management company is charging. Then for your stabilized assumption, you want to ask your property management company, “Hey, I’ve got this 200-unit deal in this market. What percentage of the collected rents would you charge to manage this property, and what will I get in return for that?” Then you wanna know if that percentage includes everything, or if there are gonna be other fees that you have to pay, and you wanna know what those are, so you can make sure you add those in, as well.

Next we’ve got the admin fees, or Administrative Expenses. Those are gonna be essentially any administrative legal or office-related costs. On this T-12 we’ve got eviction costs, so whenever you go through an eviction, there’s legal fees associated with that. The utility billing – since you are most likely going to be paying some sort of utility bill, the company might charge you for using an automated service, or mailing you the bills…

Resident screening – costs associated with screening out residents. This could be background checks, things like that. Fees, Dues and Subscriptions – any newspaper or online business article, or any type of group that your company or your property manager is a part of, and they’ve got monthly or yearly fees, or subscriptions, or dues – that’s here.

You’ve got your Banks Fees – these are fees charged by the bank to you for essentially being able to collect rent via direct deposit, things like that. Payment Processing – payment processors might charge you a percentage of the money you collect using their service. Blue Moon – that is actually the property management software that they use, so you’ll see that there’s an annual fee of about $900 to use that.

Office Supplies & Equipment – pretty self-explanatory. Answering Service, Uniform. Payment Reversal Fees – so if your tenant submits a payment, and the payment is reversed and not accepted, then you’re charged for that.

Property Management Software – that’s the secondary software used with Blue Moon. Any IT support, costs associated with maintaining or updating the website. Postage, Courier and Freight – basically, Post and stamps.

Any meetings or trainings that you have for your employees. Training shop – same thing. Any legal services that you use, talking to a lawyer… Permanent registration – if you need to pull a permit from the city, there’s a cost associated with that. Mileage Reimbursement to your employees, and then Meals and Entertainment for your employees.

When you’re underwriting, you’ll wanna go ahead and just simply set your stabilized expense assumption to the same annual expense on the T-12, and making note if that number is outside of the $150 to $250 per unit per year range.

And the last operating expense on here is going to be Marketing. It might also be referred to as Advertising. These will be the costs associated with marketing your apartment community to fill the units. So here we’ve got “Marketing – others”, so really anything that doesn’t fall into the Other categories or what they go over.

You’ve got Printing – printing out fliers to hand out to local businesses… Resident Party and Functions – if you host a Halloween party, Christmas party. Locator Fees – a locator is essentially a company where all they do is they work with properties and they help properties find tenants, so they’re kind of the middle man.

Marketing Events & Gifts – if you make gift baskets and drop them off at local companies. Referral Fees – if you have a referral program, where if your tenants refer someone, they get $300 off their rent. Promotional Fee – pretty self-explanatory. Intermittent Ads & Listings, Web Analytics, Lead Tracking, Office Hospitality… Anything related to marketing or advertising your property to prospective tenants will be included here.

When you’re underwriting, you’re gonna want to set your stabilized expense assumption for marketing to whatever the amount is on the T-12, and making note if it is outside of the $100 to $200 per unit per year range. Similar to Payroll, and probably even  Administrative too, those numbers will be much lower, or potentially even zero for those small apartments. And for Marketing in particular, this should be tied to rent, loss to lease, and vacancy loss. So if the market rent is low, or the loss to lease is high, or if the vacancy is high, then these marketing expenses should be going up.

Now, as I mentioned, you have your Total Operating Expense, which is a sum of all nine of those categories. Then you’ve got your Total Expense, which here is the exact same as the Total Operating Expense.

Then you’ve got your Net Operating Income. Net Operating Income is gonna be the Total Income minus the Total Operating Expenses, and this is what’s used to actually determine the value of a property. So when you’re underwriting a deal, the Net Operating Income is as important, although is what your lender will use to underwrite your deal, so that’s what they’ll base the debt they’ll provide on, is what’s the current Net Operating Income.

Typically, what I would do is I’ll take the Net Operating Income and the asking price, or the Net Operating Income and the cap rate that the listing broker claims the market is at or the property will trade at, and that can be found by looking at the recent sales comps that the broker included, just to get an idea of what the owner thinks they should be getting for this property. That will determine, okay, if they wanna get 10 million dollars for this property, and based on the current NOI that’s a 4% cap rate, but I know that the lender is gonna underwrite at a 6% cap rate, then I’m gonna have trouble getting the property at that price.

So it’s something that I personally use just to determine “Okay, is this even worth pursuing, and does the seller have realistic expectation of how much their property is actually worth?”

Then when you own the property, you wanna take a look at that Variance column for the net operating income. Essentially, you compare what’s actually happening to your budget on a monthly basis, and if that variance is high, you wanna work with your property management company as quickly as possible to identify whatever is causing that variance, and brainstorm ways to increase the net operating income.

Above net operating income there’s over 160 different line items, so you’ve got 160 different potential causes for why the net operating income is not what it’s supposed to be, which is why it’s important to know what each of those line items actually mean, as I said earlier. Now at this point you should be a master on all of those.

Below the net operating income you’ve got a few other expense line items that aren’t accounted for in the net operating income. You’ve got kind of miscellaneous expense – this is anything that is not an operating expense, that doesn’t fit into another category. The asset management fee – that’s the fee charged by you, the syndicator, for managing the property. Any professional or legal fees — right here you’ve got Legal Fees and Accounting Services, so consulting with your lawyer, consulting with your accountant, bookkeeping from your accountant, things like that. That will give a total Other Expense, and then the next is going to be the Non-Operating Expense, which typically is just going to be the debt service and the interest. This is the principal and interest paid by you to the lender.

From there, you’ll get your total non-operating expense, and then you’ll get your total net income. This total net income is the total income minus the operating expenses minus the other expenses minus the non-operating expenses. This right here is also referred to as the cashflow. This is going to be at the end of the day how much money is this property actually cash-flowing.

Now, overall, when you’re looking at a T-12, specifically during the underwriting process, one thing I would mention — and that’s why it’s important for this to be broken out by month… So for each of those expenses I mentioned what a market range would be. For example, for payroll a good market range would be between $1,000 and $1,200 per unit per year. Now, let’s say for some reason that the payroll cost ends up being $1,800 per unit per year, which is, again, really high for payroll, unless you’re downtown L.A. At that point, I’m making note and saying “Okay, payroll seems to be very high, so let’s go ahead and look at the individual line items below payroll by month.”

Let’s say I’ve got the line item Payroll Temp, and then let’s say it’s between 0 and $1,000 every single month, but then in one month, for some reason, it’s $6,000; it’s really abnormally high. Now, instead of going back to the broker and saying, “Hey, the payroll costs are high. What’s going on?”, I can say “Oh, the payroll costs are really high, and I looked at the T-12 and saw that for one month the payroll to temporary employees was like $8,000. Do you know what that was?” That way they can respond and say “Oh, we had a really slow month, so we brought in ten temporary employees to bring our vacancy back up again, but it was kind of a one-off thing.”

Then you can look at it and be like, “Okay, well the payroll is not actually gonna be $1,600, it’s actually gonna be a little bit lower”, whereas if you didn’t do that, you might have just set it to $1,600 or $1,800 and might  have lost on the deal, because as expenses go up, the net operating income goes down, which means that you need to offer a lower price in order to get the returns that you want.

So multiply that by 160 different line items and you’re talking about a huge difference in how much money you’ll be offering for the property. So if you see anything that falls outside that market range, make sure you’re digging into the individual line items that make up that overarching category. I use that payroll as an example, but it could be applied to any of these categories.

Make sure that there isn’t one line item that has one really high expense for one month and that’s it, because if that’s the case, then you can likely set that to whatever the average is and then say “Okay, well in reality what’s most likely to happen is that payroll will be $1,100 if I take out that random $6,000 temporary payroll cost.”

Besides that, I recommend downloading this T-12 and walking through each of these line items just to make sure you’re familiar with them. I also recommend doing the same thing for the rent roll in parts one and two. From there, we will also be doing parts five and six next week, where we will be diving into the third piece of information that you will need for underwriting a deal, assuming it’s off-market, and that’s going to be the offering memorandum.

Until then, listen to part one, two and three, listen to the other Syndication School series about the how-to’s of apartment syndication, and download your free document this week, which is gonna be the sample T-12 as a guide; but it’s still very helpful, because I’m not sure if you guys have downloaded one of these online somewhere. The document, parts one through three, and other Syndication School series can be found at SyndicationSchool.com.

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

JF1639: Breaking Down the T-12: Apartment Financial Statements Part 3 of 6 | Syndication School with Theo Hicks

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Last week’s syndication school episodes were all about the rent roll. This week, Theo is talking about the T-12 (trailing 12, profit & loss statement) it has different names sometimes, but we’ll refer to it as simply the T-12. We’ve provided a free T-12 from an actual deal in the notes below. You’ll need to know how to read this statement for your apartment syndication business. If you never plan to buy larger apartment buildings, you’ll still need this skill for smaller properties if you want to accurately perform your due diligence. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Free Document (Real T-12 from a deal):

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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are focused on a specific aspect of the apartment syndication investment strategy, that is raising money from passive investors to buy apartments and sharing in the profits. And for the majority of these podcast episodes, which together will create a series, we will offer a document or a spreadsheet or some kind of resource for you to download for free. All of these documents, as well as the past Syndication School series can be found at SyndicationSchool.com.

This episode is part three of a series entitled “Breaking down the apartment financials.” Last week in parts one and two we broke down the first financial document that you need in order to underwrite a deal, which is the rent roll; it is essentially a schedule of rents at the property. It’s a document that breaks down who’s living in what unit, at what rent, and what other charges and at what lease terms. That is one of the documents that you need in order to underwrite a new deal, and that’s also one of the documents you will want to provide to your passive investors on an ongoing basis.

In this part three, as well as tomorrow’s episode part four, we will be focusing on the second financial document that you need in order to underwrite a deal, as well as the second financial document you will want to provide to your passive investors after you’ve acquired the deal, and that is the T-12, also known as the Trailing 12-month financials, the profit and loss statement… It has different names, depending on who you’re talking to, but essentially, the T-12 is going to be a financial statement that details the income and expenses of an apartment community over a 12-month period. It’s Excel, or it could be in PDF too, with a bunch of rows for each of the various different income and expense categories. At the end, it will provide you with a net operating income, and there also will be a list of the other expenses, and some non-operating expenses, to eventually come to the net income, which is the actual cashflow you’re receiving at the property.

So in these next two parts we’re going to go through a sample T-12, which you can download for free at SyndicationSchool.com, and we’re gonna go ahead and go through each of these line items and define them, explain what they are, as well as what to look for when you’re analyzing a T-12 during the underwriting process, as well as when you are analyzing it on an ongoing basis.

But first, what is the T-12 used for, which is something I’ve already mentioned at the beginning of this podcast – essentially, you’re gonna use a T-12 at two points in your business plan. First, you’re gonna use it during the underwriting process. When you’re underwriting the deal, you’re gonna want to use the current owner’s profit and loss statement, trailing T-12 as a guide for first inputting that data into your cashflow calculator, so you know how the property is currently operating.

Then you will also use that as a guide for making your income and expense assumptions for once you actually stabilize the asset. We’ll talk about how to do that here in a little bit, probably actually in tomorrow’s episode, part four. But we wanna hit on some of it in this episode, at least for the income line items.

So you set these assumptions based on the T-12, as well as conversations with the property management company, to get an understanding of what the market expenses are. Then you wanna do a rental comp to figure out what your new rents are going to be, and then based on that, once your model is completed, you’ll submit an offer to the seller. Once the offer is accepted, all of these assumptions you made based on this T-12, at least in part, will then be confirmed during the due diligence phase, through a variety of due diligence reports and working with your property management continually… Which will result in a finalized projected budget, or a proforma for the property.

Essentially, you’ll be able to forecast out the income and expense line items for each year you plan on holding on to the property, which at the end of that business plan, when you decide to sell, you’ll have a projected NOI each year, so that if you sell at year 5, you’ll be like “Okay, well at year five my forecasted NOI is this, the in-place cap rate is 5%, so I’m gonna assume a 5,5% cap rate at sale”, and then you can determine how much money you’re gonna sell the property for. So the T-12 is pretty important on the front-end, for certain, but you will also use it on the back-end when you actually have the property under management and you are implementing your business plan, because as I said, you created a forecasted budget, so you’re gonna have to track the performance of the property on a monthly basis and compare that to your initial forecasted budget, to make sure that you are on track to meet your return projections… And if there is a big variance, then you’re gonna want to strategize with your management company to 1) identify what the issue is, and 2) determine how to rectify that issue.

Then you’re also gonna want to send those T-12’s to your investors as well, so they can essentially do the exact same thing – compare how the property is actually performing to how you forecasted the property to perform.

We actually provide our T-12’s as well as the rent roll to our investors on a quarterly basis. Technically, you can do it each month, but we do it on a quarterly basis.

Before we jump into defining the terms on the example T-12, I wanna just take a step back and give you an overall big picture of what the T-12 is and how it’s organized before we go into the specifics.

When you download the free T-12 example from an actual deal that Joe has done – the deal is sold, so we’re able to use t as an example – across the top you’re gonna see a different column for each month, and then below that the rows are going to be different types of incomes or expenses. Typically, there’s going to be an income category, and then under the income category things are gonna be broken down into Rental Revenue, so things that are related to rents, and then you’re gonna see another subcategory of other tenant income… So that’s essentially how the T-12 flows – it starts with the income, and then it’s got various sub-categories of the income, and then below that there’s specific line items that make up those sub-categories.

Then the same thing for expenses, you’re gonna have the overall category, so Operating Expenses, for example, and then what are the operating expenses – there’s utilities, so that’s a subcategory, and then under utilities you’ve got Water, Electric, Gas… Then a total utilities of all those are this number. So that’s how it flows. You’ve got your major categories, which are the income, and the expense, and then below those you’re gonna have various subcategories, and then below those you’ll have even more subcategories, and then at the smallest detail will be the specific thing for the overall subcategory. Then at the bottom of that it will add all those smaller metrics together to give you the overall Other Tenant Income, for example.

When you’re actually underwriting the deal, if the deal is on-market, then you’ll get this T-12 from the listing broker. If the deal is off-market, then you’ll get it from either the owner, or whoever the point person is. The other point person will probably just be the property management company.

For larger apartment deals that you’re looking at – this is kind of general, but properties that  are 50 units or more, or deals that are professionally managed, will likely have a very detailed T-12. The tongue-twister I was explaining earlier about the major categories, and under that you’ve got subcategories, and under that even more subcategories, until you have the individual line items – that’s gonna be a very detailed T-12, where essentially every single individual expense or income is assigned its own code. For example, code 4100 is gonna be late charges. So whenever there’s a late charge, that’s input into that, as opposed to lumping late charges into other income and just having that one other income line item.

So those are gonna be the ideal T-12’s, because the more detailed the T-12, the better it is for you when you’re underwriting the deal, because you can actually see what each of the major categories are consisted of, and it also is very helpful when you are obviously trying to compare your projected budget to what’s actually happening, because again, rather than saying, “Oh, well Other Income is really low. I wonder what’s going on”, instead you’re gonna be like “Alright, well Other Income is really low; let’s take a look at the 25 different line items that make up the Other Income. Oh, okay, it looks like our parking fees are really low compared to our budget, so that’s something that we need to focus on.” Whereas for smaller deals — so these are deals that are, again, generally 50 units or below, as well as deals that are not professionally managed, so these are kind of mom-and-pop properties, then you may still have that detailed T-12, but it’s more likely that you’re gonna have a less detailed T-12. Maybe you’ll have the Income category, and then below that you’ll have rental revenue, but that’s it; it doesn’t break it down further. So Rental Revenue is rent, loss to lease, vacancy loss, employee discounts; on a detailed T-12 you’ll have individual line items for those metrics, but if it’s not detailed, you might just have Rental Income and Other Income. And for expenses it might just have like Utilities and Maintenance and Repairs, and it doesn’t break it down any further than that.

As I mentioned, the less detailed the T-12, you’ve gotta rely more heavily on your property management company to set those income and expense assumptions… Because if you can’t see what each of the categories are consisted of, then you’re not going to be able to determine what you’ll be able to do better, or what’s going to be worse, or what’s gonna be held the same; it would be impossible to know, because all you have is the total sum of all those individual line items.

After acquiring the asset, your property management company should track all of these income and expense figures and then provide you with an updated T-12 on a monthly basis. So when you’re initially reaching out to your property companies, if you remember back in an earlier series, one of the things that you ask them was what kind of property management software they use, and the type of property management software they use will determine the types of reports that it can generate… And you might wanna ask them for a sample report. It does not need to be filled out with the actual numbers from a property, but you wanna know what types of metrics they track, and you’re gonna want to see, again, the larger categories, the rental revenue categories, the utility categories – you’re gonna wanna see those broken down to the actual individual components that make up that overall category.

Now, the major difference between a T-12 that you received during the underwriting process and the T-12 that you received from your property management company after you’ve acquired the property, besides obviously the numbers being different, is going to be an extra column at the end, which is the variance column. The variance column is going to be essentially the actual numbers minus the forecasted numbers. Ideally, the variance is 0 or a positive number, because that means that you are either meeting or exceeding your forecast. If it’s negative, that means that something is happening and you are not sticking to your budget.

If you remember, I mentioned about your property management company that they’re gonna be the one that signs off on your budget initially, so during the underwriting process, as you sign off on your budget, as well as during the due diligence period… So if any income or expense line item or category differs greatly from your budget, so it has a large negative variance, then you’re gonna want to look at the individual line items under that larger category to see if you can figure out what caused the issue.

For example, if my total rental revenue is a negative variance, and then I look through the individual line items and see “Okay, well my loss to lease was supposed to be $100,000, but now it’s $200,000”, and that is accounting for 90% of that variance, then I can go back and reach out to my property management company and say “Hey, this loss to lease is varying greatly from our projection. What’s going on? What do we need to do in order to fix this?”

Since your return projections are based on your budget, if you have these large variances, then that’s going to impact your returns… So you’re gonna want to identify the cause of these variances quickly and then resolve those quickly as well.

Now, for the remainder of this episode, as well as part three (next episode) we’re going to walk through an example of T-12 for a deal that Joe did. We’re going to define the major categories I was telling you about, as well as the subcategories and those line items that make up those subcategories, as well as explain what to look for when you’re analyzing this T-12 during the underwriting process and during the post-acquisition phase.

I’m going to try to go through this as detailed as possible, but it would be helpful if you had the sample T-12 that I’m going to go over in front of you. So if you go to the resources site, or if you look at the show notes, you should be able to download the example T-12 that I will be referring to for the remainder of this episode.

This T-12 was actually for a 200+ unit deal that Joe did in Dallas, Texas. At the time that this T-12 was pulled, they were 14 months into a value-add business plan, and a little bit over 130 units had been upgraded, with about 80 being upgraded by Joe and his team, and then 50 being renovated by the previous owner. So about a little over halfway through the value-add business plan. And again, since this is a T-12 for one of Joe’s deals, this is going to be a very detailed T-12, so you’re gonna have all those line items that you want when you’re underwriting, as well as when you’re going to analyze on an ongoing basis.

In this episode I want to try to get through all of the Income section, and then in the next episode we’re gonna focus strictly on the expenses. So if you have a T-12 open – or if not, just follow along – the first  category under Income is going to be the Rental Revenue. Overall, the Income section we’re gonna discuss today is gonna include all the metrics and factors that are related to the revenue of the apartment community, so that is money that is coming in.

Generally, it’s going to be broken down into two categories – you’re gonna have the rental revenue (the rents), and then the other one is going to be any other income that you’re bringing in. Then both of these categories will obtain various subcategories and various line items that make up the larger Rental Revenue and Other Income categories.

For the first one, Rental Revenue, it’s going to include the various incomes and various losses that are associated with the money collected from leased and non-leased units.

First you’re gonna see Rent – pretty self-explanatory. Actually, it’s not self-explanatory. What this is actually referring to is the gross potential rent. That is going to be the total amount of rent that would be collected if all the units were leased, and if all the units were leased at current market rates. So this is not the actual rent collected, this is essentially the total market rent.

So when you’re underwriting, you’re going to want to make sure that this gross potential rent for the most recent month – in this case November 2017 – it doesn’t need to be exactly the same as that rent roll, because this is a total for the month of November, whereas the rent roll is just a snapshot in time of November, so it might be a little bit different… But it should be close.

So the gross potential rent on the T-12 and the rent roll should be close enough. For example, in this T-12 it’s $195,000. We wanna see the rent roll around that $195,000, plus or minus maybe a couple hundred dollars. You don’t wanna see the rent roll with $180,000, because that means something’s wrong and there’s an inputting error somewhere. So kind of just check, to make sure that the rent roll and T-12 are actually lined up.

You’re also gonna wanna take a look at the 12-month trend. Look at each month, step-wise, and say “Okay, is the gross potential rent going up, or is it going down?” Ideally, it’s going up, because that lets you know that the rents in that market are actually trending upwards. If they initiated a value-add program on their end, you also wanna see this going up, because it should be going up if they’re renovating units, which means that they should be demanding more rent.

After acquisition, the first thing you wanna do is compare your gross potential rent to your budget, so take a look at that Variance column, to make sure that that’s a positive number, or at least a small negative number. You also wanna make sure that it’s also trending upwards.

Again, you’re doing a value-add business plan, so each month you should be renovating units and then demanding more rents, so this number should be going up.

Next you’ll see the Loss/Gain to Lease. This is going to be the income that is lost or the income that is gained due to units being rented either below or above the current market rates. If you take the rent minus the loss/gain to lease, then that is where you’ll get the actual rents that are collected from the tenants.

When you’re underwriting the deal, you want to essentially set the loss to lease to the same percentage of gross potential rent that is listed on the owner’s T-12… So you’ll wanna take the total loss to lease for the year divided by the rent, and that’ll give you a percentage. On this deal I believe the loss to lease is around 12%, which is pretty high.

The loss to lease that you’re going to have on an ongoing basis is gonna be pretty similar to what the current owner is operating at, because once you take over the property, the loss to lease is gonna be what the loss to lease percentage that the owner left you, and it’s your job to try to burn that off.

When you’re underwriting a deal, a good loss to lease that you wanna see is a 3%-5% of the gross potential rent… But if the loss to lease is 5% or higher, that’s not necessarily a bad thing, because that means that you have the opportunity to increase the current rents without having to really do anything at all besides obviously replacing current tenants with new tenants. You’re gonna be going through the whole leasing process, but you don’t have to technically do any renovations. So that’s kind of  an extra cushion of rental increase there, on top of your rental premiums.

After acquisition you want to see a loss-to-lease that is decreasing. You see on this property, starting from December 2016 to November 2016 – yeah, sure, the loss to lease for that year was 12%, but it started off as 20% in December 2016, and after a year of operations they were able to reduce the loss to lease to 9%. So a 10% reduction in loss to lease is huge. It’s an additional $20,000 in revenue that’s gained just through increasing rents to market rates.

Next we’ve got a line item called Month to Month. Generally, if a resident is not on a one-year lease – let’s say their lease expires and they don’t wanna move out, but they don’t wanna sign a  new lease, and you don’t really have anyone else to move in there, then you can just put them to a month-to-month lease; some leases will automatically go to a month-to-month lease. If that’s the case, you’re typically gonna want to charge them a fee for that, because there’s more risks to you as the owner, because they could get up and leave with 30 days’ notice, whereas for a 12-month lease you know they’re gonna be there for 12 months. So that’s just what that is – it’s an extra income that comes in from having month-to-month leases.

Next we’ve got a line item that says “Rent from subsidy/third party.” Pretty self-explanatory. It’s rent that’s paid from someone other than the tenant. The most common would be Section 8. Maybe the tenant themselves pays 50% of the rent, and then Section 8 pays the remaining 50%.

You’ve got Accelerated Rent Charges. If a resident stops paying rent, then you’re able to demand the entire balance of the remainder of their lease in one lump sum. So when you’re underwriting a deal, if there’s a lot of accelerated rent charges, then that’s the sign of a poor renter demographic that you’re gonna want to replace. Then obviously, when you have the property yourself, you want to minimize this… Even though it is income coming in, if you have a lot of accelerated rent charges it’s going to impact you negatively elsewhere, specifically in the Vacancy category.

Next on there you’ll see Delinquent Rent. Pretty self-explanatory – if a resident hasn’t paid the rent by the end of their grace period (typically 3-5 days after the first of the month), it’s considered delinquent. So however much rent that is delinquent at the time. In this rent roll there’s only one month where it looks like a few tenants hadn’t paid their rent.

If this delinquent rent is pretty high, again, this is going to be a syndicator of a poor resident demographic, who’s not paying the rent on time, and that’s something you want to keep in mind when you’re underwriting the deal.

Next we’ve got Vacancy Loss. This is going to be the income that is lost due to vacant units. If you’ve got ten units that are vacant, that could be rented at $800, your vacancy loss is going to be $8,000 for that month.

This is not the same as the vacancy rate. This is not the rate of unoccupied units, this is essentially the total money that are lost because of vacant units. So those are two different metrics.

The acceptable rate for vacancy loss is gonna vary from market to market and deal to deal, and based on the historical operation of the property… But generally, you don’t wanna see a vacancy rate that exceeds 8% to 10% while you’re doing renovations, and then 5% after renovations. So if you are underwriting the deal and see a pretty high vacancy rate, you’re gonna want to ask a couple questions about what’s going on with that, and you’re gonna wanna set your underwriting assumptions to 8% to 10% while you’re renovation, 5% to 6%(ish) or whatever the historical vacancy rate is for post-renovations, and make sure you’re sticking to that when you’re analyzing your T-12 on an ongoing basis.

Next we’ve got Employee Discounts. These are gonna be rental discounts that are given to employees who choose to live in the units.

Next we have Bad Debt. Bad Debt is gonna be money that is owed by a tenant who has moved out. When you’re underwriting, you’re gonna want to essentially set the bad debt assumption to the same percentage of gross potential rent that is listed on the owner’s T-12… So if the owner is currently getting 2%, then you’re gonna want to assume that you’re gonna get 2% as well.

Ideally, bad debt does not exceed 2% of the growth potential rent, and should ideally hover around 1%. If the bad debt is 10%, or whatever, then you’re gonna have to do some adjustments and say “Okay, well day one red 10%… Should I burn that off to 5% at the end of year one, and then eventually get to that 2% by the end of year two?”

Next you’ve got Model or Administrative Units. These are units that are vacant, but they’re not vacant because  a tenant is not living there. It’s because it’s being used for some other purpose – a model unit, and admin unit, an office.

And then the last one is going to be One-time Special or Allowance. This is going to be income that is lost due to concessions given to residents, which are usually gonna be, as it says, one-time rent specials. So you waive an application fee, you discount the rent or security deposits, things like that. These are typically offered to attract new residents to the property in order to increase the occupancy rate.

[unintelligible [00:25:52].08] 10% of the gross potential rent would be pretty insanely high… But typically it will just set your stabilized assumption to the same percentage of gross potential rent as the current owner. And your goal would be to keep concessions as long as possible.

The concessions will likely be tied to the vacancy loss. If vacancy loss goes up, concessions will also go up. As vacancy loss goes down, concessions should be going down as well.

So those are all the Rental Revenue. Let’s quickly go through the Other Income, just because typically when you’re underwriting you’re just gonna plug in your vacancy loss, or loss to lease, your bad debt, your concessions, your employee units, whereas for Other Income you’re just plugging in other income, you’re not gonna plug in late charges, and pet fees, and bad debt collection… So I’ll just quickly go over what these ones mean, but essentially Other Income is any other income that’s collected from residents that is not associated with their monthly rent.

When you’re underwriting, you’re going to want to set your stabilized Other Income assumption to the same percentage of gross potential rent that is listed on the T-12. The only way you wouldn’t is if you plan on adding something to the asset that will bring in additional income, like parking, different amenities, RUBS programs, or if you see another income fee that is abnormally high – late charges, for example; if those are really high and you plan on turning over the property and [unintelligible [00:27:16].21] then that is likely going to be reduced.

Let’s go through these throughout the episode… If you’ve got late charges, these are fees that are paid by the rents for paying the rent late. Having a high amount of consistent late charges may indicate a poor demographic. If you plan on turning over the property, this will likely be going down.

Next we have application fee income. Whenever a tenant applies for a unit, they need to fill out an application, and that requires background checks, credit checks, so typically you can charge a fee to cover those expenses on your end.

Next is pet fee. If the tenant has a pet in their unit, you can charge them a fee. Administrative fees – these are fees that cover the admin costs of leasing a unit to a new resident.

Insufficient notice penalty – this is a fee that’s paid by a resident who decides to move out without giving you sufficient notice, as defined in the lease.

Lease termination fees – fee paid by tenant who terminates the lease before the lease end date. Bad debt collection is gonna be the income from collecting the bad debt from residents who have moved out. So you’ve got your bad debt in the rental revenue, which is going to be a negative number, so it’s gonna be an actual loss, whereas the bad debt collection is going to be a positive number. Ideally, you’re collecting all of the bad debt, but it’s most likely not going to happen, which is why you account for that in your underwriting.

Lease violation fees – these are fees paid by residents who violate the terms of their lease. You’ve got reserved/covered parking fees – a tenant who decides to sign up for a reserved parking spot or a covered parking spot, or a carport, or a parking garage, or whatever parking situation you have there, you can charge a fee for that.

Amenity fee – this is a fee paid by your residents for using a certain paid amenity. NSF Fee is  non-sufficient funds. So if a resident [unintelligible [00:29:05].02] check, their credit card is rejected by the bank, so if the check bounces and the credit card is rejected, then that’s gonna cost you money, because it’s rent that you don’t have, so you can charge them a fee for that. Plus, you’ll be charged a fee by them, and you’ll wanna pass it on to your tenants.

Damage fee is a fee if the tenant damages their unit, and you fix it – you can charge them a fee for that. Same with the cleaning fee, as well. Miscellaneous Income – as it says, it’s any other income that doesn’t fit into another category. Cable TV commission – it’s commission paid to you from the cable company for essentially giving them business. If you’ve got a 200+ unit apartment building, everyone is using Spectrum cable, then if there’s multiple competing cable TV companies – which there will be – and you go with one or the other, then they’ll pay you money for helping them out.

Renters Insurance Charges – these are fees collected from the residents who decide to use your renters insurance policy. Transfer Fee – this is a  fee charged to tenants who transfer from one unit to another. Keys/Cards/Remotes – if someone loses the key or a remote to their garage, or some sort of card to get into the gym, then you can charge them a fee to replace that.

Utility Commission Income – commission paid to you from the utility company, again, for giving them business; similar to the cable TV commission.

These next line items – utility reimbursement for water/electric/trash, pest, gas, are all going to be essentially the RUBS program. So these will be the reimbursements from your residents for the water, common electric, trash, pest control, incoming gas… Then the Utility Billing Fee – since you’re paying for their utilities, if there’s any sort of fees associated with the bills that you pay, then you can pass it on to your tenants as well.

Security Deposits Forfeiture – these are income collected from residents who have to forfeit their security deposit for one reason or another. And then there’s Bad Debt/Other Income, which is, again, tied to that bad debt collection. That concludes the Other Income.

There’s this other item before we get total income, which is the Interest Income Earned. If you have an interest-earning account where you’re holding your security deposits, or your rents, then you can account for that there.

Then of course at the bottom you’re gonna have your total income. That’s the sum of all of the rental revenue line items, all of the other income line items, as well as that Interest Income Earned line item.

We’re gonna stop there, and in the next episode we’ll go through all of the expense line items, which is a lot more than income, so it’ll definitely fill up a full episode.

Just to summarize what we went over in this episode -we talked about what a T-12 is, what it’s used for during the underwriting process, and then on an ongoing basis when you’re implementing your business plan. We went over the big picture of how the T-12 flows, and then we were able to go through the first part of the T-12, which is the income section. We got through all of those and ended up at total income, and stopped before we got to the expenses, which we’ll focus on, as I said, in tomorrow’s episode.

Again, I recommend downloading this T-12 from the SyndicationSchool.com website, or from the show notes of this episode, just so you can see how it flows yourself, as well as follow along as I go through each of these different line items. Until then, I would recommend checking out the other Syndication School series episodes to learn the how-to’s of apartment syndications, and to download the T-12 free document, as well as past free documents at SyndicationSchool.com.

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

JF1633: Breaking Down the Rent: Apartment Financial Statements Part 2 of 6 | Syndication School with Theo Hicks

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We are continuing our discussion and break down of the rent today. I don’t need to explain much here, if you want to know more about the rent roll for apartment syndication purposes, tune in. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

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

As you know, each week we air two podcast episodes about a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes that make up larger series we offer some sort of document, spreadsheet or resource for you to download for free. All these free documents, as well as the past and future Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part two of what will likely be a six-part series that is focused on breaking down the three different pieces of information/documents you need to obtain in order to underwrite the deal.

In part one – and we’re gonna continue talking about it in part two – we are breaking down the rent roll. So in part one we discussed what a rent roll is, which is essentially an account or a schedule of the rents. We also discussed how to obtain the rent roll, which is if it’s an on-market deal from the broker, if it’s off-market from the point person, who is either the owner or the management company. We explained why you need a rent roll, which is for 1) underwriting, 2) sending it to your investors for quarterly financials, and then we also began to go over the definitions of the various metrics that are on the rent roll… And we got through the first five, which was the unit (the unit or letter designation for the unit), the unit type, which is basically the floor plan or the quality of the unit, square footage (pretty straightforward, the size of the units), the residents (the people living there), and then the different status, which could be occupancy, or a unit or a lease status code for that unit.

In part two we’re going to finish up the remaining ten or so different metrics, we’re going to talk about the different types of summarized data tables you might find on a rent roll, we’re going to discuss how to use the actual data on the rent roll to underwrite, and then we’re gonna go over a few other things to look out for when we are looking at analyzing a rent roll.

Let’s hop right into it by starting with the next metric on the rent roll, which is going to be the market rent. On the rent roll there’s going to be a market rent and then some sort of current rent. The different between the two is that market rent is what the unit should be renting for, and the amount of rent that the current owner is capable of receiving on that unit based on rental comps, so how similar properties in the area are renting. Then the rent, actual rent, current rent, however they describe it, is going to be how much rent the current tenant is being charged by the landlord.

It’s important to understand the differences between these two, because when you are buying the property, you don’t want to underwrite just using the market rent, because that’s not reality, that’s not what the current owner is actually getting. What’s more important is what they’re actually getting, compared to what that market rent should be… And that difference is something that’s called loss to lease, which we’ll go over in more detail in parts three and four, when we talk about the T-12. We actually might get into it a little bit later on in this episode when we’re discussing what information you need to underwrite, but essentially the loss to lease is the amount of money the current landlord is losing because his/her units are not rented at the rental amount that he could be demanding.

Typically, that number will be anywhere between 3%-4%, which is pretty common, because if someone’s signing a 12-month lease, day zero they’re paying a number of bucks; if you assume that the rent is gonna naturally go up by 3% each year, then at the end of that loan term it will be under-rented by 3% just because of that year passing by… Whereas other times that different might be a lot higher, for some reason that you want to understand, because you wanna know if it’s something that is either the market’s problem, or if it’s an operational problem that you can solve. And if there’s a really high loss to lease, that’s definitely a time to add value, because if all you need to do is just raise the rents,  you don’t really need to do any physical improvements to the property.

Now, you wanna do physical improvements on top of that to maximize that rental increase, but technically you could just buy properties that have high loss to leases and then figure out/identify the reason why the loss to lease is so high, resolve that issue itself and reap the benefits of that.

Overall, going back to the metric, you’ve got the market rent, and that is something that is populated by the property management company using their property management rental comp software… It will be fairly accurate, but not as accurate as you performing your own rental comp analysis, which we’ll go over when we talk about how to underwrite the deals.

Next you’re going to see on the rent roll that’s in the show notes and on SyndicationSchool.com is the Description metric. This Description metric is going to essentially be the different charges to the tenant and what they are. On this particular rent roll, there are a total of nine different codes on there. These codes are gonna vary drastically. You’re never gonna see a rent roll that has the exact same number of codes, because they’re gonna be very specific to the business plan, the property management company, the owner…

I’ll just go over the codes that are on this rent roll and what they mean, and then I’ll go over additional codes which you will most likely see at some point. If there’s any code that you see on a rent roll that you don’t know what it means, you can ask the broker or the management company or the point person, and they should be able to tell that for you, but most of these are pretty self-explanatory.

On this rent roll obviously we’ve got Rent – a majority of these units are going to have a rent charge code, and that is going to be the amount of money that that person pays each month in rent. It’s pretty simple. And as I mentioned, when you are sorting out the rent roll for the underwriting process, you want to have one row for each unit; the reason why there’s multiple rows right now is because there’s multiple charge codes… So you wanna sort it out so that the only charge code that is there is the rent. Most all these other charges that the tenants are paying to you – which is going to be an income – will be on the T-12… Because this is just kind of a snapshot of one moment in time; what is more important for those other incomes is what it has been averaging over the past 12 months… Whereas for the rents, that’s also gonna be important, but you need to know what the current rents are, because that’s going to be what you are inheriting at that moment, whereas these charge codes kind of fluctuate, whereas the rents are locked in for 12 months.

So you’ve got Rent, obviously… Next we’ve got month-to-month charges. On some of them you might see “MTM.” That means that the person living in that unit is not on a 12-month lease, they’re on a month-to-month lease. Typically, how most leases are worded is that if they don’t resign the lease and they’re not given some sort of notice to vacate, then they automatically go to a month-to-month lease. Or if someone who wants to live there short-term doesn’t wanna sign the 12-month lease, they might sign a month-to-month lease, but because of the additional risk that the owner has by signing a month-to-month lease, because rather than having a solid income for 12 months, anytime that person can give a 30 days notice and be gone, and then it’ll be vacant… So you can charge a little bit extra money, and that’s what that month-to-month (MTM) charge is referring to.

Next there’s monthly pet rent, or it might just say “Pet rent”, “Pet fee”. That’s the fee charged to the tenant for having a pet. Sometimes they might have a one-time deposit, other times there might be a monthly fee paid by that person in order to have an animal in their unit… And it might be different for different types of pets, different size pets; it just really depends on what the owner and property management company agree to, but that is going to be accounted for in that description charge code.

Next you have Renter’s Insurance on there. If the property owner has an overall renter insurance plan for the entire property, that could be a selling point for people living there, but obviously you’re gonna wanna recoup that money by passing some or all of that cost to the tenants. So anyone who accepts that renter’s insurance will pay a fee. For this rent roll, it looks like the fee is $15 extra per month.

Next there is the reserved or covered parking charges. It might just say “Parking” or “Park.” This is referring to units that either come with parking, or people that have reserved parking spots that are available to the entire community, and the cost associated with that.

The next code is going to be Subsidy Rent. It might just say Subsidy, it might just say Subrent… That’s referring to essentially Section 8 tenants; there will be the rent that they’re actually paying, and then the rent that’s subsidized, that’s coming from somewhere else. That’s what that code is referring to.

There also is the concession or move-in special credit. That’s actually going to be typically a negative number. All other charges will be positive numbers, because it’s money that you are collecting and that they’re paying, whereas a negative number, the credits, are things that you are paying or you are losing. So the three credit description codes that are on this rent roll is the concession move-in special, which is the concessions that are offered to tenants in order to have them move into the property. “Hey, if you move in, we’ll give you a month’s worth of rent for free” or “Hey tenant, if you refer someone, we’ll give you $300 off your rent”, things like that.

There’s also the employee unit rent credit. This might also say EMP, Employee, EmpRent, EmpCredit. This is referring to some sort of employee that is employed by you or the property management company, who has decided to live on the grounds with a reduced rent. On this particular one there is the “Loss gain to lease” charge code, which is most likely just going to be the difference between the market rent and the actual rent.

Now, I pulled all of those — if you’re looking at the Excel of the rent roll, there’s a summary of the total charges and total credits at the bottom of the rent roll. This starts in rows 883. But as you scroll through the rent roll, you’ll see that there are these different charge codes that are called “Something-something special”, like “B1R Special”, “A1 Special”, “A2R Special.” Essentially, this is going to be a negative number, and this is basically just a concession that was given to that person for living in that renovated unit. Maybe a unit is renovated, and in order to lease that unit quickly, you offer it to people that already live there at a slightly reduced rent. They wanna differentiate between move-in specials and those types of specials, so they made a different charge code for that.

Obviously, that’s not an exhaustive list of all the different charging credit codes. A few others that you might come across are admin or maintenance shop or office – that’s gonna be a unit that’s being used for an office/maintenance job/administrative purposes, and it’s either gonna be a reduced rent or a non-rent… But again, you wanna differentiate between that and a vacant unit, because the admin is always gonna be used by the administrative person until you take over the property, and at that point you can decide whether or not you wanna convert that unit into a live unit, or if you wanna continue to use it as an admin unit.

You might also see something called a “Conv. Bill Fee”, or “Convenient Fee.” That’s what’s referring to any convenience fees that are charged to the resident for things like paying the rent with the credit card. Typically, if they’re paying the rent with a credit card, you’re dealing with thousands and thousands of dollars here, and the credit card companies will charge 3.5%, 5% of that whenever they process that. In order for you to use their payment processor, they’re gonna charge you, the owner, some sort of fee, so obviously you want your tenants to pay with cash, check, money order or deposits, but if they have to pay with credit cards, you don’t want to have to pay that fee, because you don’t have to pay that for any of the other payment methods, so you’ll pass it on to your residents.

You might  see a pest fee, which is a pest control fee that’s passed on to your residents. Same with trash – if you have dumpsters, you might charge a fee to your tenants for the dumpster, because again, you’re being charged for that, and you can pass that cost on to them.

You may see utility fees… So if the owner is paying for all the utilities, or only some of the utilities, like the water, they can charge a $10, $15, $50 fee a month to the residents for that.

There’s valet trash (Val. Trash), that’s units that have a trash receptacle in the [unintelligible [00:16:03].21] Obviously, that is going to be something that they will have to pay for, because other units will have it; it’s a premium unit, which will require some sort of charge.

Now, those are just a kind of handful of the many different transcodes, description codes, charge codes, credit codes, however you wanna call them, that you will find on a rent roll. Some of them are gonna be self-explanatory and pretty easy to understand, like on this rent roll; other ones might be abbreviations that you might not understand, so if you have any questions on any of these, the person to contact would be the owner or the point person for this particular deal.

Next we have the amount. The description is the what, and the amount is how much. So the what is gonna be rent, the how much is gonna be $724, and then you’ll see for all the different units there’s a total. So you’ll have the individual charge or credit codes broken out. For example rent,  pet rent and renter’s insurance, and there’s going to be a total number for all those combined, and that’s how much revenue each unit is bringing in per month.

Next you’re gonna see three different columns for dates. You’re gonna have the move-in date, which is the date that the person moved in, you’re gonna have the lease start date, which is the most recently started… For example, we’ve got a resident here who moved in in 2011, but their most recent lease is 2017. This is a rent roll from the end of 2018, by the way.

Then you also have the lease ending date, so when does the most current lease end. As I mentioned before, if the person has a notice to vacate, then there’ll also be a move-out date.

Next you have surety bonds. They’re actually zero for all of these units, so I’m not gonna go over those. You’ve got the deposits, so that’s how much money they have as a deposit; that can be the security deposit, their pet rent deposit… And then lastly, you’re going to see a balance. That is gonna be money that is past due, that is owed by the resident for rent, or some other charge. Maybe they didn’t pay their full rent that month, maybe they haven’t paid just a specific fee, or maybe they haven’t paid rent for multiple months. Or maybe they paid too much money, and you owe them money, and the balance is negative.

That concludes the meat of the rent roll, which are all those different metrics at the top of the rent roll. Based on all the information that we went over, typically, if you have a rent roll that was generated by some sort of property management software, there’s going to be summarized data tables. On this particular rent roll, there are four summarized data tables.

First, we have the total charges, which is a summary of all of those different charge codes on the description – month-to-month charges, how many total monthly pet rent, renter’s insurance, the parking and the subsidized rent, and all of that is added up to the total amount of money brought in by the property each month.

Then you’ve got the credits, similarly. These are credits to the residents. On here we’ve got the move-in specials and the concessions, total for the month, the employee unit rent credit for the month, and the loss to lease for the month. Then you’ve got a total.

The next summary data table on here is the property occupancy. It just does a breakdown of the market rents, number of units and total square footage for the occupied units and the vacant units. As you can see — here’s a good differentiator; this right here, this first one, this Market Rent, where it’s got 84.3% and 5.7% for vacant, that’s referring to the economic occupancy, in a sense. Not completely, but it’s sort of like the economic occupancy. It’s saying, “Alright, so all of the occupied units – how much rent are we collecting? And of the vacant units, how much rent are we using?” As you can see, those percentages are slightly different than the actual physical occupancy, so the actual total number of units. And of course that’s going to be the case, because if all of the 12 vacant units were one-bedroom units, then the physical occupancy rate is going to be much higher than the economic occupancy rate, because on average the one-bedrooms are going to be renting for lower than the three-bedroom units or the larger units, so the amount of rent that’s being lost is not as high as opposed to if all the 12 units that are vacant were three-bedroom units that were renovated – then the economic occupancy is gonna be much lower than the physical occupancy, because you’re losing a lot more rent on those units.

Then you’ve got the total square footage, which isn’t something that’s super-relevant.

Then lastly, this last summarized data table, which is going to be the most important for the purposes of underwriting is going to be the unit type. It does the same thing as the property occupancy, but it breaks it down by unit type. You’ve got A1, occupied/vacant, what’s the total market rent for the occupied A1 units, what’s the total market rent for the units that are vacant. What are the total number of units that are occupied that are A1 and vacant for A2. It does that for each of the A2 unit types, the B1 unit types, so on and so forth.

Now, when we get to the point where we’re underwriting deals, you’ll see that there’s a unit type where you input the unit types, market rents, square footage, and then your renovated rents. It’s going to look the exact same as this unit type occupancy data table. It will look very similar. It’s a little more condensed than this, because it doesn’t break apart occupied and vacant, but basically the goal of the rent roll conversion is to get to the point where you have this summarized data table.

For this rent roll, since it’s Joe’s rent roll and Joe’s deals, they have the property management company generate this unit type occupancy specifically for that reason, so they can compare it to their underwriting, their projections. But other property management companies, other owners might not have this, so you will have to create this yourself, as I mentioned. To do that, you want to sort the rent rolls so that each unit has its own row, and the only description and amount code that is on there is rent, and then you can run a simple pivot table by unit type, and then drag in market rent and the amount too there, and then do some sort of count for the unit type to get the numbers of each.

Now, there might be a few other data tables that are on there, and they might have a summary of all of the deposits or balances by unit type, they might have a summary data table of all of the different unit statuses… It really just depends, but the ones that I have over here – the property occupancy, unit type occupancy, and then a summary of those charge and credit codes are what’s gonna be most common.

Now, the last thing I wanted to discuss is about how to locate the data on this rent roll that you need in order to underwrite the deals. I’m not gonna go into extreme detail on this, because we’re going to talk about this again when we talk about underwriting… But overall, there are six different metrics you need to pull from the rent roll that will be inputted into your cashflow calculator.

Number one is going to be the different unit types. For this deal, the A1, A1P, A1R, A1U etc. You’re gonna want to understand how many different unit types there are, what they are, and then for each of the unit types, the second thing you’re gonna want is the number of units for each of those unit types.

The third thing you’re gonna want is the average square footage for those unit types. The reason I say “average” is because on this particular rent roll the A unit type is broken into A1, A2, A3, A4 etc. whereas other times it might just say A. So in this case, A1 has a square footage of 700 square feet, and A2 has a square footage of 800 square feet, whereas if the rent roll just had A, then that average would be 750 square feet. So that’s the third thing you want.

The fourth thing you want is going to be the average current market rent for each of the unit types, and then you’re also going to want to figure out what the current vacancy loss is, so what is the total amount of market rent that is lost due to vacant units.

Then lastly, you’re going to want to know the loss to lease – of the occupied units, how much rent is being lost due to the rents being below market value.

Those are the six things that you want. On this particular rent roll it’s pretty easy to pull all that data because of that unit type occupancy. You can pull all of those except for loss to lease on that data table. To find out the loss to lease, you’re gonna have to do the sorting exercise that I mentioned, in order to figure out what the total actual rent, minus those other charges and credits, and then subtract that from the total market rent of only the occupied units, because we’re already accounting for the rental losses of the vacant units and that vacant loss; so only for the occupied units, subtract the total market rent of occupied, minus actual rent of occupied to get that loss to lease number.

Then once you have that data input in your cashflow calculator, you move on to the profit and loss statement, which we’ll talk about next week.

The last-last thing that I wanted to talk about are the few other things to keep in mind when you’re looking at the rent roll. One of those is going to be that move-in date. As you’ll see on this rent roll, some of these move-in dates are very recent for this rent roll, because this rent roll was from (I believe) the beginning of 2018, so we’ve got some move-in dates that are end of 2017, some of them are 2016, and others are like 2010-2011, or in the actual 2000’s.

What you wanna do is you wanna sort by move-in date, so have the most recent move-in date at the top, and I guess the oldest move-in date at the bottom. Take a look at that loss to lease, and see if the loss to lease is consistent across time, or if the loss to lease on older properties are much higher, and the ones on newer units are not.

If the loss to lease is pretty consistent over time and it’s low, that’s fine. If it’s pretty consistent over time but it’s really high, that’s a sign that something’s going on, because the owner is not raising rent on old units, but also not asking for the higher rent on newer units. What you’re most likely going to see is a higher loss to lease for some of the older units, and ideally a very low to minimal loss to lease for the units that were rented within the past couple of months.

That will give you an idea of how quickly you could potentially burn off that loss to lease after taking over the property, as well as if you have a high loss to lease on those units that were recently leased… Because if they were leased a month ago and the loss to lease is 10%, you can’t really change that person’s rent for 11 months… Whereas if the newer units that were rented within the past few months have a really low loss to lease, then all the loss to lease is because of either month-to-month leases or leases that expire within a few months, then you know that you can burn up that loss to lease pretty quickly.

Next you wanna look at if they have these types of status codes – units that are occupied with a notice to vacate – because that will let you know, “Okay, well right now the occupancy is 95%, but 10% of the units have a notice to vacate, so in reality once I take over this property in two months, the occupancy rate is going to be 15% and not 5%.”

You also wanna know if there’s a notice to vacate and it’s leased, because those right there are telling you “Okay, the unit will be vacant, but it will be leased by the time I take over”, so differentiating between that notice to vacate not leased, and notice to vacate leased.

You also wanna take a look at the vacant units and see which ones are straight up vacant and not leased, as opposed to vacant but they are leased. Again, you wanna see vacant units that are already leased, and you don’t wanna see units that are vacant but not leased, because that’s concerning and you wanna know why those units aren’t leased.

Something else you wanna take a look at too, assuming that they have differentiated this in the unit type – the different types of renovated units versus the non-renovated units. If the property has a lot of renovated units, and you see that the move-in date is pretty recently or all within a one year span, and you see that the rents on the renovated units are $150 higher than the rents on the partially renovated units, and the partially renovated unit rents are $100 higher than the non-renovated units, then that could help you calculate the rental premiums, because they’re already proving that compared to the regular units, if you do these partial upgrades which cost us 3k, you can raise the rent by $100; and if you do these full premium upgrades, you can raise the rent by $250.

So those are just a few things to take a look at. There are obviously a ton of different ways to analyze a rent roll, and hopefully those four things that I just mentioned can get some ideas churning in your mind for different things to look at, and how a rent roll can tell you a lot about a property.

That concludes this episode, part two, and this concludes the breaking down of the rent roll. In this episode we finished up talking about the different metrics on the rent roll, I went over the different types of summarized data tables to expect, I briefly touched upon what data you need to pull from the rent roll when you’re underwriting, those six different factors – the unit type, number of units for each unit type, the square footage for each unit type, the current market rent for each unit type, and then the overall vacancy loss and the overall loss to lease. Then lastly I provided a few different ways to look at the rent roll in order to gain a better understanding of the property and its operations.

In order to listen to part one, as well as the other Syndication School series about the how-to’s of apartment syndication, and to download this rent roll document that I’ve been referring to for the past 30 minutes, visit SyndicationSchool.com.

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

JF1632: Breaking Down the Rent: Apartment Financial Statements Part 1 of 6 | Syndication School with Theo Hicks

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This episode is all about the Rent Roll. What is it? How do you get it? Why do you need it? All of these questions and more are answered in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are focused on a specific aspect of the apartment syndication investment strategy. Most of these are series – two-part, four-part, six-part, one of them even eight parts… And for the majority of these series we will offer some sort of document, or a spreadsheet, or a resource for you to download for free. All these free resources, as well as the past Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part one of series number 13, so pretty well into the syndication process. So far we’ve gone from someone who has really no experience, no education, to the point where they’re able to find a deal. After you find a deal, the next thing you need to understand how to do and the next thing you’re going to do is underwrite the deal. So before we get into the actual underwriting process, it’s important to understand what all is needed in order to underwrite the deal.

This series will likely be a six-part series, and it’s going to focus on the three things that you need in order to initially underwrite a deal. That’s going to be the rent roll, the T-12/profit & loss statements/financial statements, and if the deal is on-market, the offering memorandum.

In this part one, as well as tomorrow’s episode (part two), we’re going to discuss the rent roll. Then next week in parts three and four we’re going to discuss the T-12. Then parts five and six are going to focus on the offering memorandum. This series is going to be entitled Breaking Down the Financial Documents. This is going to be part one and two, which is the rent roll.

By the end of this episode, as well as tomorrow’s episode, because I’m not exactly sure how far into this rent roll I’m gonna go today, but by the end of these two episodes you’re going to learn what a rent roll is, you’re going to learn how you actually obtain a rent roll, why you need a rent roll… We’re actually going to go through a sample rent roll and talk about every single line item and metric that’s on the rent roll, how to find the data on the rent roll that you need for underwriting, and then just some kind of overall other things to look for and take into account when you are underwriting your deals using the rent roll.

Let’s jump right in with the first part, which is what is a rent roll. A more formal definition of a rent roll is that it is an account or schedule of rents, the amount due from each tenant, and the total amount of money received. It’s going to be essentially a roster of all the units at your property, and the metrics of that unit… And we’ll get into what those metrics are a little bit, but everything you need to know about the individual units at the apartment community will be outlined in the rent roll.

Now, something that’s important to know is that not all rent rolls are going to be the same, and obviously there are gonna be different number of units, different description codes, different amounts of rent, different market rents – that’s not what I mean. I mean the information actually provided on the rent roll is going to be different. For this episode, we’re going to focus on a very detailed rent roll, probably as detailed as we’re going to see, just so that we can cover every single thing that could potentially be on the rent roll.

This rent roll is generated by property management software. This is actually a real deal that Joe has done. They’ve already sold this deal, so I’m able to use it for this episode. But sometimes, especially if you’re just starting out and you’re looking at smaller deals, or if you’re looking at a deal that’s self-managed, they might not be using a property management software, so they might not be able to generate such a nice and clean and detailed rent roll. Sometimes they might only have a few metrics on there – just the unit number, who’s living there, when they moved in, what they’re paying in rent – and other times they might just have a name and the rent and that’s it.

I know for the 12 units that I bought in Cincinnati the rent roll was very basic. I think it only had three columns – one was the unit number, two was the person living there, and three was the amount of rent they were paying. As it turned out, those rents that they were paying weren’t actually accurate; they weren’t the same rents that were being paid on the leases.

So the whole point is that when you are looking  at deals, don’t expect to see a nice, clean rent roll every single time. Sometimes you might have to put forth a little bit more effort in order to uncover the data sets that you need in order to underwrite the deal, which we will discuss in this series.

Now that you know what a rent roll is, how do you get the rent roll? If the deal is on-market, which means it is listed by a commercial real estate broker, then typically you’re going to get the rent roll from the listing broker. Depending on the broker, they might have a website where they list all of their deals, you’ll come across a deal that meets your investment criteria, click on it, and the rent roll will be available for download.

Sometimes you need to submit a confidentiality agreement first with that brokerage before they give you access to their portal. Other times a deal might have just gone live and they don’t have a rent roll yet, so you’ll have to wait, and they’ll just have some summarized rent roll information instead… So there’s a variety of ways to actually get it from the broker, but overall, if it’s on-market, the broker is the person that you’re going to get the rent roll from.

If the deal is not listed with a broker, therefore it’s an off-market opportunity, then you are going to get the rent roll from whoever that point person is for that off-market deal, which is most likely going to be the owner, but it could also be the property management company.

If you remember, in the previous series where we talked about how to find your first deal, when you are pursuing these off-market opportunities I mentioned that the rent roll is one of the two things you need to obtain from the owner. If you don’t really have much knowledge in apartment syndications, and you’re asking for a rent roll and don’t really know if what they’re giving you is actually the rent roll, after listening to this episode and downloading the rent roll that we will put in the show notes of this episode, as well as on SyndicationSchool.com, you will have an understanding of what a rent roll actually looks like. But overall, you’re either gonna get the rent roll from the broker or from the property management company or the owner of the property.

Now, why do you need a rent roll? Pretty obvious answer, at least in part. We’re gonna need the rent roll to underwrite the deal, because when you’re underwriting the deal, which will probably be the next series that we do – so once we get through this six-part series, we’ll do a long series going into extreme detail on how to underwrite deals… But once we get to that point, you will know that you need to input the current rental information of the property, so that you can  use that to determine where that property is at now, and to also understand what the rental premium could potentially be once you take over the property and implement your value-add business plan.

So towards the end of this episode, once we go over the metrics, I’ll explain what metrics specifically are used for underwriting, but for now just know that the rent roll is going to be one of the vital pieces towards underwriting a deal… But then also, once you actually acquire the property, and as you begin to implement your business plan, you’re going to want to provide your investors with a rent roll at least a few times a year. We do it on a quarterly basis; we do our monthly e-mail update, and then on a quarterly basis, in those e-mail updates, we will provide links for investors to download the rent roll. Of course, the reason for doing that is in order for the investors to see how the actual property is performing compared to the projections. The other financial that we provide is also the T-12, which will be the focus of parts three and four.

So the two things that you’re gonna use this rent roll for are for underwriting, as well as for the quarterly financial statements provided to your investors. Those are the two main things, at least; I guess technically a third time you need a rent roll is when you’re teaching what a rent roll is to people on Syndication School. So those are the two main things you will use it for – underwriting, and quarterly financials.

Now, for the meat of this episode and this series – it’s going to be going over the different metrics that are on the rent roll. So we’re going to go through as many of these as we can, until the end of the episode, and then we will finish off the metrics tomorrow, as well as discuss exactly what metrics you need in order to underwrite, as well as a few other things to keep in mind when you are analyzing the rent rolls.

If you’re listening to this in your car, I’m going to be as descriptive as possible. But once you’re back home, I recommend downloading the rent roll on SyndicationSchool.com, or the one in the show notes, just so you can get a visual representation of what I’m saying right now… But I think I’ll be descriptive enough that you don’t need to download this, but it will be helpful.

The rent roll is going to be an Excel. Sometimes it might be a PDF, so you might need to actually convert the PDF to Excel first, because you’re gonna want to do some math, and of course you can technically do it on just keeping it PDF and using your cell phone calculator, but it’s a lot easier if you just convert the entire thing to Excel; that way you can use the built-in formulas on Excel to do that math.

What you’re gonna see is you’re gonna see a variety of different columns, and each column has a different metric for the property. We’ve got unit, we’ve got unit type, square footage, the person living there, the rents, when they moved in… So each unit will have its own row in the Excel document, and actually each unit will have multiple rows, because sometimes there are multiple charges that  a tenant is paying, or that the person that’s occupying the unit is paying, so those are kind of stacked on top of each other. Each unit will have 3-4 rows, which whenever we are underwriting our deals, we will typically convert this PDF to Excel, and then we will sort the document so that each unit has its own row, and the only charge code that we take into account is going to be the rent.

So just think of your typical data table, with columns that have headers, and then below each of those headers are what that is for each of the units. We’re gonna go over each of these column headers and describe what they mean.

First we’ve got the unit  – that is going to be the actual number or letter designation for the address of the unit. This property is on 123 Main Street; then looking on here the first unit is going to be 57, so that person’s address is going to be 123 Main Street unit/apartment 57.

Next on this particular rent roll it says Type, but what it’s referring to is the unit type, or the floor plan type. What that is is  a letter and/or number designation for the actual unit type. Sometimes on rent rolls it’ll be A, B, C, D, A being one-bedroom, B being two-bedroom, C being three-bedrooms and D being four-bedrooms. Sometimes you might have a very long code, where the only thing that really matters to you, or the only thing that describes the unit type are the last few digits in that code. Other times there will be A1 and A2, that breaks apart two different types of one-bedroom units. So maybe A1 is going to be one bed, one bath that has 800 square feet, A2 is one bed, one bath that’s going to be 900 square feet.

Then the most detailed you’re gonna see, which is what you’ll see on this rent roll, is going to be not only is it differentiating between different types of one-bedroom units, but it’s also differentiating between a different quality of one-bedroom units.

For example, if you look at the first five or six units on this rent roll, you’ll see an A2R, an A2P, and A2U. “A” is referring to a one bedroom, one bath unit. That 2 is referring to, okay, there is at least two different-sized one bed, one bath units, so 2 is going to be either the largest, or something that’s larger than that 1. Then you’ve got R, P and U. What do those mean? “R” means renovated, so that would be a unit that’s fully renovated. “P” is going to be a unit that’s partially renovated, and then “U” is going to be a unit that is upgraded to a different degree than R. So it’s either upgraded to a higher level, or it’s upgraded to a lower level than the R. For this particular property, I believe all there is is an R, P and a U.

I guess one other thing is that you might see — if you’re looking at a rent roll after you’ve acquired the property, you might have different codes for units that were renovated by the previous owners, and units that were renovated by you, just because you might have used different materials. A couple other things that I can think of that might give it a different unit designation would be if there is a patio or a balcony at one of these units, a first floor versus second floor unit, a unit that’s closer to the front of the community versus a unit that’s closer to the back of the community, maybe a unit that has a very nice view… So there’s lots of different levels of renovations or different unit designations that you will see. Again, it can be very complicated, or it could be as basic as A, B, C, D. This depends on what software was used.

When you are actually underwriting these deals, it’s going to be important to break apart these different types of units because they’re all going to have different current rents, they’re all going to have different rents once you actually stabilize the property, and they’re all going to cost a different amount of money to actually renovate. You need to know all of that in order to have the most accurate underwriting as possible.

Next you’re going to see Sq. Ft., which is square footage. That is just the measurement that is common and standard, that’s used for the units sizes. For here, we’ve got A2, which is 806 square feet, or A1, 741 square feet. I mentioned that A1/A2 difference is the square footage.

Next you’re going to see Residents, which all those are blank, because I don’t wanna include people’s names on here without their permission… But that is where you’ll find the name of the person occupying that unit, or the names. So if it’s a two-bedroom unit, then you might have two names under that Residents tab.

Next you’re going to have the Status or the Lease Status. On this particular rent roll it just says C for the majority of the units, some of them say UE, I think I saw a CR on here as well… From my perspective, looking at it right now, I don’t really know what any of those actually mean, because C, UE, CR are probably designations that are used internally for the property management company. If that is the case, I don’t wanna know what those mean, but typically you can look at the rent roll and look at — okay, so there’s a lot of C’s, so I’m assuming that C’s are just units that are leased. Then there’s a couple of ones that say UE, but those ones that say UE don’t have a rent next to it, or they have a subsidized rent next to it, so it must be referring to units that are subsidized. The one that says CR, that’s a vacant unit.

Sometimes you can figure it out yourself, but just to be sure, I’d definitely reach out to the property management company, the broker, the owner, to figure out what those mean.

Other times, the status will be more obvious what it means. For example, on rent rolls it might let you know about the lease status or the occupancy status of the unit, and examples of those would be — it might say “Occupied, no NTV”, which means that the unit is currently occupied, and that NTV means Notice to Vacate. That means that the person is living there, but they don’t have a notice to vacate, so it’s just a normal unit, normal persons live in there, they’re not being evicted. They’re just living there until the end of their lease, and at that point the code might change to “Occupied, Pending renewal”, which means that they are living in that unit, they’re towards the end of their actual lease, but they’ve already renewed their lease, so they’re just waiting for that new lease to actually start. For that case, you’re going to see when they moved in and when their new lease starts or their new lease actually ends.

You might also see “Occupied, NTV”, which means that the unit is occupied, but there is some sort of notice to vacate, so in that case you’re going to see a move-out date; whatever data that notice told them they need to vacate by will be that move-out date.

You might also see a code that says “Occupied, NTV, Leased”, which means that the unit is currently occupied, the current occupant has received a notice to vacate, but that unit is already also leased. For those, you’re going to see a lot of different rows for that unit; it will have the current tenant’s name, what rent they’re paying, when they moved in, when their lease started, when their lease ends and when they’re moving out, and then you’re gonna have another resident, what their rent is going to be, when they’re supposed to move in, the lease start with be the same as the move-in date, and then when the lease is supposed to end.

There’s also different types of vacant codes, because obviously a unit isn’t just vacant… It’s vacant and leased, which means that no one’s living there now, but the unit is leased to someone, so it’ll have a name, it’ll have a move-in, a Lease Start and a Lease End date, or it might be a “Vacant, not leased”, which means that no one is living there and there are no leases pending, so essentially everything will be blank… Or it might be a “Vacant, down” or a “Vacant, admin”, which means that the unit is not leased, and it’s either being used for other purposes, so a modeling unit, an administration unit, a maintenance unit, or it means that the unit is down for one reason or another. Maybe there’s some renovation that needs to be done to it, maybe the previous tenant completely destroyed the unit and you’re waiting on replacing something. You don’t really know what that means, so if you do see a high amount of these down units, you’ll definitely want to ask the management company what’s going on there.

I think that’s  a good place to stop for this episode. We’ve gone over the unit, unit type, square footage, residents and those status codes. Tomorrow we’re going to finish talking about the remaining metrics, which is the market rents, the description codes for the different charges that are being charged, lease terms and a few other things, and then we’ll finish up by talking about some of the summarized data tables you might find on the rent roll, as well as how to find what data on this rent roll needs to be used to underwrite the deals.

That concludes part one. In order to listen to the other Syndication School series about the how-to’s of apartment syndications, which I highly recommend, because we’re kind of getting into the weeds now and getting into more detailed strategies and things that need to be done in order to complete your first deal, and if you don’t have that educational foundation from those previous 12 series, you might be a little bit confused. So I recommend listening to those, checking out those free documents – all those are available at SyndicationSchool.com.

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

JF1626: How To Find Your First Apartment Syndication Deal Part 6 of 6 | Syndication School with Theo Hicks

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Part 6: Two more deal finding case studies

Yesterday Theo talked to us and walked us through an example of cold texting to find an apartment syndication deal. Today, we get two more case studies of deal finding. One case study is from Joe on how he was able to secure a couple of deals over every other investor fighting for one of them. The other case study is with a previous guest, Daniel Ameduri on how he eliminates his competition in the market. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Free document for this episode:

http://bit.ly/freedoc9

 

Daniels episode explaining his strategy:

https://joefairless.com/podcast/jf1106-how-to-find-owner-financing-deals-with-daniel-amedu

 

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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these series, including this one, we offer a document or a spreadsheet or some sort of resource for you to download for free, that accompanies what was discussed during the Syndication School series. All of these free documents, as well as previous Syndication School series can be found at SyndicationSchool.com.

This episode is going to be the final part of a six-part series that is focused on how you will find your first apartment deal. In the first four parts, which happened the previous four weeks, we introduced you to the difference between the two main types of deals – the on-market and the off-market deals. In part two we discussed how to find on-market deals and off-market deals through real estate broker relationships.

In part three we talked about one of the main ways to find off-market deals, which is through direct mailing campaigns. Then in part four we discussed, I believe, nine more ways for you to find off-market apartment deals. Then yesterday, in part five, we went over a seven-step process for finding off-market deals via cold texting.

Part five and this part (six) are gonna be focused on some real-world case studies that investors have used to find apartment deals, that weren’t necessarily discussed in the previous four parts.

In this part we’re going to go over two more case studies. The first is gonna be how to find deals in a hot market, following a case study from Joe and his company. Then we’re gonna go over another case study, which is how to eliminate the majority of the competition in your market. For that case study, we’re actually gonna go over two different ways to accomplish that.

Let’s hop right in with case study number one, which is the secret to finding deals in a hot market. First, a quick story – Joe and his company were sent an on-market opportunity from a broker in Texas. It was a little bit over 300 units, and the unit mix was primarily one-bedroom. Now, the deal met their investment criteria – it was built after 1980, it was in a major city, it was the right number of units, and there were opportunities to add value; however, it was a highly marketed property, which is typical for on-market properties. The broker makes an offering memorandum, they send it out to anyone who subscribes to their e-mail list, and really allows anyone to submit an offer on the deal.

So because of this competition and because of this marketing, the price kept going higher and higher. They’d submit an offer, then the broker would come back and say it’s not enough, and kind of kept going higher and higher until it got to the point where they weren’t confident in their ability to actually achieve their return goals for their investors, because the price was just too high.

At the same time, they noticed an apartment complex across the street, that was a 200+ unit apartment community that was primarily two and three bedrooms. So what they decided to do was ask the broker to contact the owner of that property to see if they’d be interested in selling. One thing led to another, and after some negotiation they ended up actually putting this deal under contract, and since it was an off-market deal, they were able to negotiate a price that was well below the market value of the property.

Now, because of the discount they were able to achieve on that off-market deal, they were able to bid the higher price on the on-market opportunity, and were also awarded that deal. Essentially, they bought both properties.

Now, the benefits of this strategy are fairly straightforward, but first of all it is a way to find deals in a hot market, rather than just focusing on that on-market deal, and once the price goes too high you just kind of give up and move on to the next one. Instead, you try to find a complementary off-market deal in that same area and put that property under market at a discount, and then tap into that discount to buy the on-market deal.

More succinctly, for every on-market deal that you come across, you should reach out to the owners of the surrounding properties and attempt to purchase both properties – the on-market property and the off-market property. More specifically, you should pursue off-market properties that naturally complement the on-market property.

In this particular example, the 300-unit on-market deal was primarily one-bedroom, whereas the complex across the street was 200 units and primarily two and three-bedrooms. The benefits of purchasing that complementary off-market deal with the on-market deal is 1) the economies of scale. Think about the reduced expenses due to having two properties directly across the street from one another. Rather than having two maintenance people for each property, you’re gonna have one maintenance person. Same thing with the contractors and vendors you’re working with – pest control, security – they can just do both properties.

You can advertise and market the properties together. You can split the costs of commissions and salaries of your leasing and office personnel, property management teams. Really, the majority of the expenses aren’t gonna be cut in half per se, but they’re going to be reduced because they are essentially a 500-unit apartment community that’s split by a street.

Another benefit – and this is where the off-market deal being complementary is important – is that you’ll have a natural referral source. If someone comes to your building and is interested in buying a two-bedroom, rather than turning them away and saying “We only have one-bedrooms”, you can say “Well, we only have one-bedrooms here, but we actually are also managing the property across the street, and we’ve got openings for two and three bedrooms, so why don’t I put you in contact with that leasing person?” Or maybe the person they’re talking to is the leasing person for that property as well, and rather than losing that customer, you can refer them to your other property. But again, if you look at it from the perspective of it being a 500-unit apartment community, then you’re just saying “Well, we don’t have that here, but across the street we have that here.”

Or vice-versa – if you’ve got someone who wants to downgrade from a two-bedroom to a one-bedroom, rather than saying “Well, we only have two and three bedrooms here” you can say “Well, across the street we’ve got plenty of one-bedrooms available for you”, [unintelligible [00:09:26].25]

Then another benefit is going to be the flexibility with your underwriting. As I mentioned, because of their ability to put the off-market deal under contract at a reduced price, they were able to tap into that discount to buy the on-market deal. Again, the purchase price for that alone was too high, but since they were buying it as a package, the two purchase prices together combined with the stabilized NOI and the stabilized cashflow resulted in a return projection that met and exceeded their investors’ goals, where that wouldn’t have happened if they had just purchased the first deal.

So from now on, especially now in a hot market, when you’re looking at deals or the broker sends you a deal, I always personally go ahead and visit those properties in person, and I’ll make a list of the surrounding properties and consider reaching out to the owners, if the only reason why I’m not buying the deal is because of price.

Most of the deals I’ve come across have been eliminated not because of price, but for other factors. But once I do come across a deal that the only reason why I can’t buy is because it’s too expensive, then I will focus on trying to find a complementary property in the  surrounding area and try to buy those two deals together as a portfolio, have the investors invest in the portfolio, so that I can tap into that discount to buy the on-market opportunity. So that was case study number two (number one was yesterday), which is the secret to finding a deal in a hot market is to make a list of the properties surrounding an on-market opportunity, ask your broker to contact the owner, and attempt to put that deal under contract at a reduced price, so that you can tap into the discount to buy the on-market deal, as well as benefit from the natural referral source, as well as ongoing economies of scale.

Now, the last case that I wanted to talk about was focused on how to eliminate competition. Similar to this first one, it’s essentially how do you find deals in a super-hot market? One of them is to kind of make your own deals, so pursue those off-market opportunities. Another strategy is from Daniel Ameduri, who was a guest on Joe’s podcast, so if you wanna listen to that, google “joe fairless daniel ameduri.” He had a three-step process for eliminating 99% of his competition in a particular market.

Essentially, what he would do is he would buy the properties that nobody else wanted to buy. So step number one of this process was to identify a problem in the market. This would be, as I said, a property that nobody wants to actually buy. So what he would do is ask around with local investors, he’d ask wholesalers, realtors, brokers, really anyone who is involved in the real estate industry, and he would say “What is the property type that nobody else wants to buy, the one that scares away most investors?”

Daniel does smaller deals, but this concept can definitely still apply to apartments. It’s the concept that’s important, not the specifics. So in his market, since he was a single-family investor, the problem in his market (and most markets as well) is foundation issues. People avoid properties that have foundation issues, so if they hear or read or see anything about a foundation issue, they’ll automatically just disqualify the deal and move on, because of the costs associated with the foundations issues, or the perceived costs associated with foundation issues, as well as the fact  that most banks won’t loan on a property that has foundation issues, because it’s too risky of a bet on their end.

So in your market, doing the same thing – ask the brokers and wholesalers and people at meetup groups what are the types of apartments that nobody wants to buy. Then step number two is to find a solution to that problem. Figure out, based on those responses, how can you solve that issue in a cost-efficient manner.

For Daniel’s example, as it relates to the foundation issues, he came across his solution kind of randomly, he said. He went to buy a single-family home for himself, and it happened to have a foundation problem; and rather than just running away and finding a new house, he went the entrepreneur/problem-solver mode and figured out “Okay, how much is this actually going to cost? I’ve heard people say it’s gonna cost $50,000 because they’re gonna have to lift the property, which may result in broken pipes, and cracked beams that need to be replaced, cracked walls… So how much is it actually gonna cost?” And they reached out to a vendor and got a quote for $3,500. His mind was blown, and he was like, “Wow, this is not as expensive as I thought it was gonna be”, so because of that — obviously, step two is to find the solution, but step three, because of that, he decided to become the go-to person for those types of deals.

He reached out to all the brokers and all the wholesalers he could talk to and asked them to notify him whenever they come across a deal that has a foundation issue, because he’s got a guy who can fix the problem very cost-effectively.

Now, for this particular strategy he has to pursue seller financing for most of these deals, but the owners are more than happy to do that because everyone’s afraid to buy their property.

Now, how can this concept apply to apartment investing? Well, step one, you can ask around and find apartments people don’t wanna buy – whether it’s a type of a property, or a condition of a property, or  allocation of a property – and then figure out what can you do to buy that property without having to lose money on that deal, basically. Like, how can you buy that problem-property and make money… Whether it be a property in a low-income area, maybe there’s one particular type of property or issue with the property that you know how to fix really well, because either you can do it, or you know a guy who can do it for cheap… This is, again, kind of a general strategy, and it depends on you and your background and your market, but just figure out, what don’t people wanna buy, and then brainstorm for however long it takes ways to buy that property for it to make sense financially.

Then once you do that and you’ve proven that you can do that, then become the go-to person for those types of deals. You might not wanna be going on podcasts and tell everyone about this strategy, because you don’t want people stealing that strategy in your market, but again, that’s really up to you… I think something interesting that one of the guests on Joe’s podcast said – because he was giving out some really rock start advice, and Joe said “Thank you for offering this advice. I’m surprised you give away your secrets, because you don’t want people to compete with you and steal those strategies and use them to compete with you”, and the person responded saying, “No, most people that are listening to this or most people that I tell this are never gonna do it anyways. 99% of the people aren’t gonna take action anyway”, so I guess at the end of the day if you find another strategy you can tell it to people because they’re probably not gonna do it anyways. But anyways, we’re kind of getting out of point now.

If you become that go-to person for those deals, then you’re gonna be the only person that’s looking at them, that’s pursuing them, because everyone else is running away from them, because you’re focusing on properties that nobody wants to actually buy.

To learn more about this strategy and how Daniel implements it, to maybe give yourself some additional ideas or a starting place, definitely check out that episode by Daniel Ameduri.

Now, another way to eliminate competition is to uncover some sort of investment strategy that nobody else knows about. When I first made the outline for this, I was gonna stop after Daniel, but yesterday I actually met with a local Tampa Bay investor named Armando… And I don’t believe he’s been a guest on the show yet, but I think he should be a guest at some point… He is a developer in the area, and he was telling me yesterday at lunch about this really  unique investment strategy that he discovered, that no one else really knows about, so he didn’t really have any competition.

He learned about it from his mentor, so I guess mentor knows about it, but his mentor is worth tens of millions of dollars and isn’t necessarily focused on these smaller types of projects… Armando is kind of the only guy in Tampa that’s pursuing these types of deals.

I’m not gonna go into extreme detail on what the strategy is, because if Armando comes on the show I don’t wanna steal his thunder, but essentially there are certain locations in Tampa that are zoned residential single-family, but can be rezoned to residential multifamily, based on the zoning laws on those specific plots.

An example he gave is that he bought a single-family home that was 7,800 square feet zoned RS, and he was able to after a form of process rezone that plot to RM, and ended up knocking down that building. I think he said he developed eight units, an eightplex, on that lot. Again, this is a specific example, but the concept is what’s important – figuring out what is some creative strategy, some loophole that you know about, that no one else knows about. What’s that unique thing that you can do or you know about that others don’t, that you can leverage to find deals that others can’t, or have deals that make sense, that don’t make sense for other people. You get the idea.

That concludes this episode. The first case study was how to find deals in a hot market which involved searching for properties surrounding on-market opportunities in order to tap into that discount, as well as the economies of scale and natural referral source to buy both properties together. Then case study number two was strategies to eliminate 99% of the competition in your market for the types of deals you’re looking at, and one is to essentially buy properties that nobody else wants to buy, and figure out a cost-efficient solution to whatever issues that property has, and then be the go-to person for those types of deals.

Then the other one was, again, from Armando, who discovered a creative investment strategy that nobody else knew about, so he was able to instead of being the guy who bought a single-family house, knocked it down and built another single-family house, he knocked it down, rezoned it multifamily, and was able to develop multifamily buildings on those units.

That actually concludes part six, as well as the series for how to find your first apartment deal. As promised, we’re gonna give away a free document, and this is  going to be a deal-finding tracker. It’s going to be a spreadsheet that allows you to track deals that you are finding through literally all of the different ways I told you you can find deals in this six-part series. From brokers, from off-market deals, new deals from your thought leadership platform, deals you find through your meetup group, this document will allow you to track all of that – track the progress, track the conversion rates of your direct mailing campaigns, track which brokers send you qualified deals and which brokers aren’t etc.

In order to download that document, it will be in the show notes of this episode, or you can download that document at SyndicationSchool.com, under the series “How to find your first apartment deal”, which is going to be series number twelve. Series number twelve, part six, Deal-Finding Tracker – download your free document, and check out the other SyndicationSchool.com.

I really appreciate you guys listening today, and I will talk to you guys tomorrow on Follow Along Friday.

JF1619: How To Find Your First Apartment Syndication Deal Part 4 of 6 | Syndication School with Theo Hicks

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Part 4: 9 More Ways to Find Off-Market Deals

 

Don’t need much description and intro here. We’re continuing last episode’s focus on finding off market deals. Let’s get to it! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of the series – in fact all of the series – at some point, we offer a document or a spreadsheet for you to download for free. For this series we’ll most likely be offering the free document in the last part, to bring everything together… But all of these free documents, for past and future Syndication School series, as well as the actual episodes, can be found at syndicationschool.com.

This episode is going to be part four of what will be either a six or an eight-part series, entitled “How to find your first apartment deal.” If you haven’t already, I recommend listening to parts one through three, just to catch up to where we’re at now.

In part one we talked about the difference between the two main types of apartment deals – an on market and an off-market deal – as well as the overall factors that will ultimately win or lose you a deal, so kind of things to think about when you’re underwriting and reviewing deals and submitting offers.

Then in part two we talked about how to find deals from commercial real estate brokers – those are on market deals through them, as well as working on building up a relationship with them, to the point where they’re comfortable sending you their off-market opportunities. Then yesterday in part three we began to talk about how to find off-market deals, and the focus of that episode was on one of the main ways to find off-market deals, and that’s going to be a direct mailing campaign.

Again, check out those three episodes, either in the podcast, or you can go to SyndicationSchool.com and click on the links for each of those episodes. In this episode we’re going to finish off the list of ten ways to find off-market deals by going over nine more ways to find off-market deals. We’re not gonna go as in-depth into each of these strategies as direct mail, but again, these are proven ways that you can find off-market deals.

Number one is direct mail, number two is going to be cold calling. Essentially, this is gonna be the exact same as direct mail, but instead of sending out a mailer to your list, you’re going to actually call the owner of that property. So you’re gonna create of list the same way as a direct mailing campaign, you’re going to find motivated sellers the same way as you would for a direct mailing campaign, but rather than making a message and sending out a letter in the mail to the owner, you’re gonna wanna get your hands on the actual phone number and give them a call.

How you find their phone number is going to vary from city to city, state to state, county to county, but you can most likely find the owner’s phone number on either the auditor or appraisal site, or using a service like ListSource or CoStar. If you’re having trouble finding the owner’s phone number, you can do some skip-tracing, find the numbers of someone of a certain address…

So there are different ways to actually find the phone number, but what’s more important is what you actually say once you’ve given them a call. You will want to use a similar script to the one you use when you’re screening incoming calls for direct mail. But obviously, you’re not gonna be referencing a letter, so rather than saying, “Thank you for responding to my letter”, you’re going to just mention that you’re interested in buying their property and giving them a little bit of background about yourself, so that they know that — again, there’s two main things you wanna get across… One is “I’m interested in buying a property” and two, I’m experienced enough to actually close on the deal.” Then based on what they say – again, follow the same way you would screen incoming calls for direct mail.

So if they’re mad at you for calling them, then take them off your list. If they’re nice, but don’t wanna sell at the time, figure out why they don’t wanna sell, and then send them a follow-up letter and tell them “Hey, thanks for the phone call. I’m gonna follow back up in three months”, and then again, call them every three months until either they sell you their deal, or they give you some sort of referral to someone else who wants to sell a deal. If they are interested, then find out a little bit more about the property, again, following the same strategy as you would for the direct mailing campaign.

Now, this is kind of like strategy two, but instead of actually cold calling, something you can do instead is to actually text to the owner. Joe interviewed someone on the podcast named James Kandasamy, and he actually closed on two apartment deals by sending a cold text to the owner. All his text said was “Hi, I’m a prominent investor in X market. I saw your property at ABC Main Street, and I’m interested in buying it. You can sell it directly to me, without any broker’s commission. Would you like to talk further?”

Then the strategy for how to respond based off what they say – to learn more about the cold texting strategy, as well as the cold calling strategy, I recommend checking out episode 1273, where James Kandasamy talks about his cold texting and cold calling strategies. So that’s number two, rather than direct-mailing, follow the same approach as a direct mailing campaign, but don’t send out a mailer; call them or text them instead.

The third way to find off-market deals is gonna be through your team members. So I’ve already mentioned that the real estate broker is out there grinding for deals, and typically they will list them on the market to maximize that sales price, but if you build strong enough a relationship with them, they might send you those deals first, before they’re listed on the market… But your real estate broker is not gonna be the only people that you can actually find opportunities through, because remember, the ways to find off-market deals are talk to owners directly or talk to people who know owners, and your real estate broker, your property management company, your mentor, your mortgage broker, maybe even your attorney and your CPA are working with apartment investors, and they are going to know who’s interested in selling. And again, if you build a strong enough relationship with them, then they might be willing to give you some inside information on who is selling.

Again, not all of them are gonna do this, and some of them might not do it for ethical reasons, but if you work with your property management company and they manage properties from 40 different investors, at some point one of those investors are gonna sell. And if you are consistently in front of your property management company and asking them questions about “Hey, do you know anyone who’s selling any properties?”, then hopefully you’re the first person they come to with an opportunity. So that’s number three, your actual team members who actually know owners of  apartment communities, and will know when they’re ready to sell.

Number four is going to be through your thought leadership platform. The thought leadership platform keeps coming back up, which is why it’s vital that you have one. Again, this is going to be your interview-based podcast or YouTube channel, and through that you’re going to be essentially building relationships with various real estate professionals who may know owners who are interested in selling their property, so they might bring you some deals.

Also, the people listening to your podcast, which is an even greater number – or watching your YouTube channel, or reading your blog… They might also themselves or know someone who is interested in selling an apartment deal that meets your investment criteria.

Same with your meetup group. Again, you’re actually meeting with these people in person, so the attendees and the speakers are active real estate investors; they may be apartment investors who are looking to sell a deal at some point, or they may know someone who’s looking to sell a deal at some point.

So the thought leadership platform – you’re reaching out to owners directly, as well as people who know owners directly. And for all these strategies, besides the cold calling and anything that you’re kind of directly speaking with an owner, they’re gonna take time. You’re not gonna talk to a real estate broker tomorrow and then have them send you off-market deals. You’re not gonna start a podcast tomorrow and have a listener call up and send you an off-market deal. It’s possible, but it’s highly unlikely, and if that’s your expectation, you’re just gonna be disappointed.

So these are gonna be long-term strategies to build up that lead pipeline, which is why you wanna do a combination of these things. You wanna be talking to brokers to get on market deals, sending out direct mailing campaigns, cold texting, building relations with your team members, working on that thought leadership platform, and the other strategies that I’m gonna go over here in a second.

Moving on, with that out of the way, number five is going to be to actually For Rent ads. This may be a little bit easier for smaller multifamilies, but I don’t see why it wouldn’t work for larger multifamily as well. So you wanna go to a website like Craigslist or Zillow, or Apartments.com, or when you’re driving through your market looking at For Rent signs… And when you see a For Rent sign, call that person up and see if they’re interested in selling. You’ll either speak directly with the owner, or a property management company. If  you think about it, if they’re listing a unit for rent, that means that they have a vacant unit, and that right there is a potential pain point for them. Maybe that unit has been vacant for multiple months, maybe it’s been vacant for half a year, or maybe they keep finding tenants and then the applications fail, or they move in and they skip out after a couple months… And for every 100 different listings on there, maybe one person is going through a hard situation renting that unit, and you find them at that perfect moment when they’re interested enough to talk to you about selling their property.

So for this one it’s kind of like a numbers age… The majority of the people that you call are not gonna have any interest at all in selling, at which point you follow up and build a relationship with them. If you do find that needle in the haystack who is interested in selling their property, this is essentially a free marketing strategy – it just takes some time to make the phone calls  – then your ROI is gonna be crazy high, finding that one deal by calling a For Rent ad.

Number six is going to be title companies. Again, title companies are closing on deals constantly, so they know who is buying deals… So since they’re closing on these deals and they know who is buying deals, then they may also know who’s also selling deals, and who’s interested and ready to sell a deal. So if you build a relationship with a local title company, you may have a head start on some of the deal before they hit the market.

On a related note, title companies can also be a pretty good referral source for finding investor capital, because they are constantly working with groups that are closing on apartment communities. If you find a great deal, then maybe that group will invest in your deal.

Again, don’t expect every title company to send you this in general, and definitely don’t expect them to send it to you right away. It’s all about building that relationship, and then over time you tell them your intentions to buy and raise money, and hopefully they hear that and provide you with referrals.

Number seven are going to be apartment association meetings, or really any meetup group in your area that’s not yours. So go online and find and join your local apartment association specifically. That’ll cost maybe a few hundred dollars  a year to join, but if you think about it, if you find one deal from that meeting, then the profits from that deal far outweigh any couple hundred dollars you’ve spent on membership fees. But while there, network like you would anywhere else, with active investors in your market. Tell the types of deals that you’re looking for, and where you’re investing. And about your team, and all the money that you’ve raised. Of course, people are actually gonna actively bring deals there to sell to people. Those investment opportunities that people are bring there, but also ones that are below the surface – maybe an owner is kind of interested in selling, but doesn’t really know he is until he’s talked to you and kind of got excited about selling you their property, or even down the line, someone you met reaches back out and says “Hey, I remember you were talking about properties in my market. I’m ready to sell mine, are you interested?”

So putting yourself out there and letting people at these meetings know what your intentions are, and eventually someone will reach out with a deal. And if not, you’ll obviously find some sort of value by attending these meetings – some other referrals, some piece of education or investment strategy you didn’t think about.

Alright, number eight are going to be vendors. This is a creative, interesting strategy, but again, the way you find off-market deals are either through talking to owners directly, or people who know owners… And how knows owners better than the vendors that are working at that property? These are the electricians, the carpet installers, the roofers, the plumbers, the HVAC professionals, or the pool repair people, the pool cleaning people, the lawn care people, the general contracts – really, anyone who’s involved with servicing an apartment. Since they’re servicing the apartment, they are going to know a) if the owner is interested in selling, obviously; they’re gonna hear complaints from tenants about maybe the owner or the property’s condition, or they’re gonna know overall the property is being neglected, which are all signs of a potential motivated seller.

Now, you don’t want to just start calling up your local electrician and your local carpet installers and start telling them that you’re an investor and that if they see any properties that are neglected to give you a call, because they’re not really incentivized to do that. So what would be better is to either hire them, or to do this strategy with people who are already working at your buildings. So it’s a little bit harder to use if you don’t own a building yet, but essentially maybe you need some electrical done, so you hire an electrician, and you’re sort of asking them, “Hey, do you work on other properties in the area?” He’s like, “Oh yeah, I was just over at ABC Apartments the other day, and I had contact with BEF Apartments…” Then at a point you can ask them, “Did you see any  properties that seem to be neglected?”, or kind of walk them through what types of properties indicate a motivated seller, and ask them to just send you a text with the address. Heck, you can even offer them some sort of finder’s fee, or bird-dogging fee for finding that deal for you if you end up closing on it. But again, don’t just hit up all of the local lawn care professionals and ask them to send you addresses. You wanna add value to their lives first, and the best way to do that is just to use their services, even if it’s for your residential home.

Number nine, and we’ve talked about this multiple times on this Syndication School before, and that’s Bigger Pockets. Of course, you can just post to the Bigger Pockets marketplace if you have a Pro membership, with your intention to buy a property, but more indirectly — as I said, post valuable content to the forums and the member blogs. In your signature, have a link to your website or a landing page of some sort if your main goal of using Bigger Pockets is to find deals, and then in your biography state the types of deals you’re looking for. Say “If you have any deals that meet these investment criteria, please go to this website, or feel free to reach out.” But if you just do that, no one’s ever really gonna go to your profile, so the whole idea is to post valuable content to the forums and member blogs;  people are grateful for you adding value to their business, they click on your profile or send you a direct message, and you build a relationship from there.

Once you let them know what types of deals you’re looking for, again, maybe one out of ten or one out of fifty people say “Hey, I’ve got this relationship with this owner who I know is interested in selling a property.” Or “Hey, I know this broker who sends me off-market deals all the time. If I don’t buy one, I’ll send it to you.” Again, putting yourself out there, letting people know your intentions to buy, displaying your expertise and your ability to actually close, and seeing what happens.

And then strategy number ten, which is kind of similar to strategy number eight – network with local connectors. These are people that aren’t necessarily real estate professionals, but they still are people who come in contact with a lot of variety of people every single day. These are gonna be your fitness trainers, your residential real estate agents, your insurance salespeople, your restaurant owners, hairstylists, barbers, teachers, mailmen… Really anyone in your local community who has a job that has them come in contact with lots of people on a daily basis.

Talk to them, strike up a conversation, let them know about your intention to purchase apartment communities, and essentially have them be your bird dogs. Tell them “Hey, if you  come across a property that…”, and lay out exactly what indicates a motivated seller. “If you find this type of property, send me a text with the address. If I end up closing on that deal, I will give you $500 or $1,000.”

So those are the nine other ways to find off-market deals. Just to reiterate again, the concept of the majority of these, besides obviously calling the For Rent ads, or the cold calling, cold texting and direct mailing, because those ones are more in your face, you’re talking directly to the owners – the other seven strategies are more of you talking to people who know owners… So they’re gonna be a little slower, you’re gonna have a little bit lower conversion rate, but ultimately if you focus on all ten of these – which is possible, because most of these are actually gonna be free, and most of them you’re already doing anyways for other reasons – over time you’ll start to build relationships with a ton of different people who know apartment owners. And you might only get a handful of deals through these sources, or you might get every single deal in the future from these sources. You don’t really know until you try it out.

Just to go over these ten again:

1) Direct mail

2) Cold calling/Cold texting

3) Through your team members

4) Through your thought leadership platform

5) By calling For Rent ads

6) Building relationships with title companies

7) Attending apartment association meetings

8) Finding deals through vendors

9) Finding deals through Bigger Pockets

10) Network with local connectors.

That concludes part four. To listen to part one through part three, as well as the other Syndication School series about the how-to’s of apartment syndications, visit SyndicationSchool.com. We’ll be back next week to continue this series, and we are going to go over some creative strategies, more in-depth, similar to how in-depth we went on the direct mailing campaign strategy, for  how to find deals in a hot market, for example.

Again, these ten that I went over today are more — not necessarily high-level, but I wanna go over some case studies of how investors have actually found off-market deals, just so you know that these strategies aren’t just theoretical; these are proven strategies, that have worked in the past to find off-market deals, and will continue to work in the future as long as you stay consistent with the strategies.

Thank you for listening and I will talk to you next week on Syndication School, as well as tomorrow on Follow Along Friday.

JF1611: How To Find Your First Apartment Syndication Deal Part 1 of 6 | Syndication School with Theo Hicks

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Part 1: On Market Vs. Off Market Deals

We’ve covered a lot of the apartment syndication process so far. Now it’s time to start talking about actually searching for and finding that elusive first deal. We’ve talked due diligence, financing, raising money, and how to structure the GP & LP compensation. This episode will be covering the details of on market vs. off market deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be episode one of what will likely be around a four-part series, maybe six parts (not really sure yet). This series, no matter how long it will be, will be focused solely on how to find your first apartment syndication deal.

In this episode you will learn what you need to accomplish before you are ready to find a deal, so we’re going to do a little summary of what we’ve talked about so far on Syndication School, and then we’re going to focus on talking about the differences between the two main types of deals, as well as talk about some of the factors to keep in mind that will most likely win or lose you a deal once you start to submit offers.

So that’s what we’re gonna talk about in this episode, but so far what we’ve learned in the Syndication School, just to summarize what we’ve done so far – number one, I want to congratulate you on your journey, but two, I also want to let people who are just starting to listen now, all the steps that we’ve discussed so far, as well as what you’re going to need to do in order to get to the point where you’re ready to find your first deal.

The first Syndication School series – we’re teaching you about the apartment syndication process, as well as the important terminology that you’re going to need to know in order to communicate with your investors, as well as team members. So that’s the educational requirement that you’ll need. Then we also talked about the experience requirement that you will need, that is previous real estate and/or business experience… Experience and education combined will put you at the point where you’re ready to start your journey.

We also talked about establishing  a 12-month goal, as well as a long-term vision, so we talked about goal-setting. We talked about the thought leadership platform and branding in general, so how you can establish yourself as a credible apartment expert by creating an interview-based thought leadership platform – that is a podcast, YouTube channel, blog, things like that.

We also went through the process of evaluating and ultimately selecting the target market that you will invest in. We also talked about the team members that you’re going to need to bring on, what their responsibilities are, how to find them, how to interview them, how they’re going to interview you.

Then we also talked about everything passive investors – different types of passive investors, how to find passive investors, how to talk to passive investors, what questions to expect to get from passive investors… Everything you need to know about the actual raising money aspect of the apartment syndication investment strategy.

Then last week we talked about the three-step financial analysis, because you need to know how to analyze a deal before you actually start looking for deals. The main focus was on selecting an apartment syndication investment strategy that you can use to screen out the majority of deals that come across your desk or your e-mail inbox.

Once you’ve done all those steps, as well as the many steps in-between – you can learn all about the steps I’ve just mentioned in the previous Syndication School series at SyndicationSchool.com – now you’re ready to find your first deal. In this episode we’re going to focus on distinguishing between the two main types of deals, but overall in this series we’re gonna talk about how to find deals and how to determine which deals to actually underwrite. In the next series we will most likely focus on underwriting.

Now that I think of it, this will probably be a pretty long series, so at least six parts, just because we have a lot of strategies for finding deals to discuss… Because at the end of the day, certain strategies work in any market, but the way you’re gonna find deals in a seller’s market is gonna be different than the ways you find deals in a buyer’s market, or the top of the market, or at the bottom of the market, in a really big town or a really small town – it’s all gonna be a slightly different approach… So we’re gonna start high-level the first couple of parts, and then kind of get more detailed and try to find a creative or a specific strategy that will work for you based off of your current situation.

With that being said, as I mentioned, we’re gonna talk about the two main types of deals. In reality, the two main types of deals are on-market deals and off-market deals. If you’re a real estate investor, if you’re a loyal Best Ever listener, you know what those mean… But just to reiterate, an on-market deal is going to be a deal that is listed by a real estate broker, so a broker that’s doing their own lead generation strategies to find owners who are interested in selling their properties. The owner will list their property with the real estate broker, who will then over the next couple of weeks or the next couple of months create an offering memorandum, which is that sales package that you see whenever a  new deal is presented to you. Then, once that offering memorandum is completed, they will make sure they get the financials – the T-12 and the rent rolls – from the owners, and they will list all that information either on their website, or they will send it via e-mail after you signed a confidentiality agreement.

Then the real estate broker will host open houses or property tours on a case-by-case basis with people. The interested buyers will be in communication with that listing broker, and they’re kind of the go-between between the buyer and the seller. As a buyer of an on-market deal, you’re most likely only going to be talking to the actual broker. You will have limited access – if any access at all – to the actual owner. And as I mentioned, it’s going to be mass-marketed using that offering memorandum. So these are on-market deals.

Off-market deals are deals that are not massively listed by real estate brokers. The two main types of off-market deals is gonna be 1) somehow you find the owner of the property, whether it’s through direct mail, through a friend of a friend, they attend your meetup, or they’ve reached out to you… There’s many different ways to actually find the off-market deals, and we’re gonna talk about that in a future part in this series… But the most important part is that it’s not listed by a broker.

So you’re either going directly to the owner, or the broker found the deal, and before listing it, presented the deal to you as an off-market opportunity. So on the one hand, you go directly to the owner; on the other hand, the broker brings you the deal before actually putting it on the market. Both of those are considered to be off-market deals – essentially, a deal that’s not listed for sale on the market.

The main differences between the two are that for on-market deals they’re gonna be a lot easier to find, whereas for off-market deals it’s gonna be a lot more difficult to find. Pretty obvious, but if an on-market deal is going to be mass-marketed by the broker, then everyone in your area, or anyone who has that city as their target market is going to have the deals sent to their inbox. So this is a strategy where technically at the start of every week you can go to your broker’s website to see what new deals they have listed, and then throughout the week you can favorite or flag various e-mails you receive from brokers with a new deal, and then underwrite it as they come in… Whereas for off-market deals, you’re most likely not going to have off-market deals sent to your inbox on a frequent basis. If  you’re gonna get an off-market deal from a broker, they’ll most likely call you, and if you are going to get an off-market deal from an owner, then sure they could technically call you if you’ve got a strong website, Facebook advertising; you need to be proactive in order for them to reach out to you, but more than likely you’re going to be reaching out to them…

So you’re gonna be sending out direct mailing campaigns and the various other strategies, which again, we’re gonna discuss in a future part of this series. But overall, the point is on-market deals are easier to find, off-market deals are more difficult to find… And what I mean by deal  is an actual property for sale, not a property that you’re going to actually buy. Because as I mentioned, since on-market deals are easier to find because they are mass marketed, then you’re more likely going to have to pay more for that property, or at least have a more difficult time finding a good deal because of that competition. So if everyone is looking at this property and you’ve got ten offers, and one offer is higher than the other offer, higher than the other offer, then the price will be bid up and the price will be higher than it would have been if for example you’ve found that owner before they listed it with a broker and you are the only person that was in contention for that deal… Or if the broker brings that to maybe a handful of their premiere investors – it’s still gonna be a lot less competition than the on-market deal.

So the two main differences are going to be the ease of finding – on-market deals are easier to find compared to the off-market deals… But you’re most likely gonna either pay more, or you’re gonna have a lot more difficult time actually putting a deal under contract that is listed on market, compared to off-market.

Which strategy you pursue really depends on how much time you have, and your skillset, and just what your strategy is. There’s plenty of investors who have only bought on-market deals, and there’s other investors who have never bought an on-market deal… But just to talk a little bit more about the off-market deals – it’s important to understand the benefits of these, because not only are there benefits to you as the buyer, obviously, but you also want to figure out what the benefits are to the seller. Because as I mentioned, the on-market deals are going to likely catch a higher price due to competition, so why would an owner sell the property to you off-market? If you reach out to an owner, he might say “Yeah, I kind of am interested in selling my property, but I think I’m gonna list it with a real estate broker, because that way I’ll get the highest price.”

So by knowing how selling their deal off-market will benefit the actual owner, you can put yourself in the best position to negotiate, with pure intentions, in order to create a win/win scenario. These are gonna be the off-market opportunities that you get from the owner themselves; these don’t necessarily apply to one that’s still technically listed by a broker, but not mass-marketed. Those kinds of deals are in-between, and kind of have the characteristics of on-market and off-market deals, but… The owner will benefit in two major ways by selling their deal off-market.

Number one is going to be the cost savings associated with not having to pay the broker’s commission. On these large apartment communities on multifamily, the typical commission is going to be between 3% to 4% of the purchase price if the purchase price is below 8 million dollars. Once the purchase price goes above 8 million dollars, then the commission is a flat fee of around $150,000.

So if the owner is wanting to sell their property and they list it with a broker, they can go ahead and knock off at least around $150,000 of the profit they’re gonna make, because they’re gonna have to pay the broker money for putting together the sales package, and tours, and things like that. Now, if they sell it to you off-market, they get to pocket that $150,000 themselves.

The other benefit is going to be the fact that selling a deal off-market can have less hassle. From the seller’s perspective, they don’t have to worry about hosting multiple property tours, they don’t have to worry about a broker coming back to them after every single property tour with a list of questions from the people who toured the property. They don’t have to worry about random people poking around their property, which in turn will result in rumors floating around about “Why are these people touring the property? Is the property being sold?”, which could affect the relationships with the tenants and the vendors.

Instead, they will have one person poking around the property, which is gonna be way less than having 10, 20 property tours. They’ll only have to answer questions from one person, and the number of rumors floating around the property about it being sold will be minimized. So those are the two main benefits.

Then how YOU actually benefit from buying the deal off-market are pretty obvious, but we’ll hit those anyways. Number one, as I mentioned, less competition. So since you are the only person in contention for this deal, you will likely be able to pay a little bit less, and even if it doesn’t mean you’re paying a lower purchase price, you might be able to create better terms that will result in you paying less.

For example, right now in the top market a lot of people are putting down these non-refundable earnest deposits, whereas if you buy the deal off-market you’re probably not going to need to do that. You’re probably not going to need to make your offer very attractive by adding in those types of things.

Another example would be you’re not having to waive any due diligence items. Both of those things don’t directly affect how much money you’re paying for the deal, but if you do a non-refundable earnest deposit and you end up not closing on the deal, that’s money that you’ve lost. Or if you decide to waive due diligence fees in order to win a deal, or if you waive due diligence items in order to win a deal, and you end up closing and realizing that you under-estimated the deferred maintenance by 50%, you’re gonna lose all the money.

Something else too is that there will also be more opportunities for creative financing. Again, the owner of an on-market deal, with a ton of competition, is gonna go with the best offer, and if they’ve got one offer that’s all cash, and then another offer who wants to do some sort of creative financing, like a lease option or seller financing, they’re most likely gonna go with that all-cash offer. Whereas if you’re buying the deal off-market, that means you have the chance to actually speak with the owner, and that can help you identify their goals, or specifically why it is they wanna sell their deal. Once you figure out exactly what they wanna get out of selling that deal, maybe you still just need to get a regular loan, but maybe you can do some sort of seller financing or some sort of lease option, which will reduce the amount of money that you have to put down, and it can make you qualify for the deal easier, as well as maybe make the results of your underwriting meet the required terms that you need, whereas if you did your standard 25%-30% down loan, the deal doesn’t make any sense.

And then lastly, the off-market deals are likely to be perceived as better deals in the eyes of your investors, and that kind of shows that extra level of effort you’re putting forward, because you’re not just sitting back and waiting for those deals to come into your inbox, you’re actively out there proactively either reaching out to owners, or building relationships with the brokers to the point where they’re sending you deals before even listing them on the market, so they’re perceived as better deals, and you’re perceived as a better investor in the eyes of your passive investors.

Again, when you’re just starting out, you can either go all-in on the off-market strategies, which we’ll go over in a future episode, or you can start off by just reaching out to brokers, getting set up on their automated lists, and practicing underwriting their deals, touring properties, touring comps, running rental comp analysis and building that relationship with the broker with the hopes of them ultimately sending you off-market deals in the future.

For example, I just started looking for deals towards the end of 2018, so that was only a few months ago… And I have about 5, 6, 7 brokers that I’ve reached out to, I’ve talked to on the phone, I’ve met a few of them in person already, through property tours, or just getting lunch or coffee. Every time I talked to them, I said “Ultimately, I’d like to get off-market deals for me, but I understand that you don’t know who I am, you don’t know my experience, and you’re more likely going to send your off-market opportunities to people that you know can close… And I want to prove to you that I am a person who can close.” I would say that, and they’d be like, “Yeah, we understand.” They wouldn’t say “We’re not gonna send you deals”, but they would just kind of be like, “Yeah, you’re right.”

Well, just last week one of the brokers that I was working on a deal with towards the end of last year, the deal ended up not working out, but we did a property tour together, kind of chatted about our personal lives – we had a lot in common, actually – and he referred me to a lender who I talked to as well, and then just last week he called me with an off-market opportunity. Now, that off-market opportunity was not in our target market, which obviously we’re not gonna be investing outside of our target market, because we have not evaluated other markets yet, plus I live here and this is what we wanna focus on… But just the fact that he sent me that off-market opportunity kind of shows that working on your relationship with the brokers to get sent off-market deals is possible, and it is possible to do it quickly, too.

Tomorrow’s episode, part two, is going to be focused on how to find deals from brokers, but I just wanted to quickly tell that story before going into the last part of this episode, which is going to be the factors that will win or lose you the deal.

Obviously, how you buying the property and your offer benefits the owner is going to be very important, and we went over how the seller, as well as the buyer benefits from buying a deal off-market, and even like an on-market deal as well… But there’s five other factors that will ultimately win or lose you the deal. One is going to be the price, so how much money you actually offer; 10 million dollars versus 10.5 million dollars. The highest price doesn’t necessarily always win, but it’s gonna be an important factor that the owner will take into account when they are determining who to sell their deal to.

Something else is going to be the terms. So you’ve got the price, but then you’ve also got the terms, which are things like the earnest deposits, the inspection period, the due diligence period, the closing date… So terms that the owner might take into account when deciding who to sell the property to are whether you put a non-refundable earnest deposit, or if you are submitting an all-cash offer, or if you decide to waive certain due diligence items, so that you can close faster or reduce the opportunity of you backing out of the actual deal. Those terms could win or lose you a deal, especially in a hot market.

Number four is going to be the relationship you have – that’s the relationship you have with the broker who is listing the property, or the owner if it’s an off-market deal. So what’s your relationship with that broker – have you been following the strategies that we’ll talk about tomorrow? Have you been following up with them? Have you been paying them a consulting fee?

And then for the owner – if you’re sending out direct mailers, then you probably don’t know the owner at all… However, there are ways to increase your chances of being recognized by that owner. For example, if you have a powerful thought leadership platform with a bunch of followers, maybe they’ve heard of you before. Or if you are talking to a lot of the brokers, property management companies, lenders in the market, and they also work with the same lenders, they too might recognize you… So your relationship with the owner is gonna be a little bit more difficult, but there are ways to build that relationship with them without actually meeting them first. Then it also helps if you have a meetup group in the market as well, for name recognition.

Number five is going to be your team. For example, some owners won’t sell to a investor who doesn’t have their own in-house property management company, because they believe that that company is not integrated enough and ultimately won’t be able to close on the deal. Now, whether that’s true or not doesn’t really matter, because some owners think that to be true. And of course, they’re also going to want to know about the experience of your team; so what’s your experience, what’s your property management company’s experience… Because ultimately, if you’re inexperienced, then you’re less likely to be able to close on that deal.

Then the last thing that could win or lose you the deal is gonna be your underwriting. What that means is when you’re underwriting a deal – sometimes a larger one, 100 units, 200 units, everyone’s gonna underwrite that deal differently, based on their background and their skillset. So if you’re able to identify more value-add opportunities than the next guy, then you’re gonna be able to pay more for that property… And vice-versa – if you’re unable to identify value-add opportunities that your competition are, then they’re gonna be able to submit a stronger offer, because they’re gonna be able to increase the NOI more than you will be able to.

So those are the six things that will ultimately win or lose you the deal. 1) How it will benefit the owner, 2) your offer price, 3) your offer terms, 4) your relationship with the selling representative (broker or owner), 5) the structure and experience of your team, 6) your ability to identify the most amount of value-add opportunities while underwriting the deal.

So that concludes part one. In this episode you learned about the seven (or so) things you need to do before you’re ready to actually find your first deal. Then we also discussed the differences between the on-market and off-market deals, as well as how the off-market deal can benefit you as a buyer, and then the seller as well. Then we talked about the six factors that will ultimately win or lose you the deal.

In tomorrow’s episode – or if you’re listening to this way in the future, the next episode – we are going to discuss how to find off-market and on-market deals from real estate brokers.

To listen to other Syndication School series about the how-to’s of apartment syndications, and to download all of the free documents that we’ve provided for past episodes, visit SyndicationSchool.com.

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

JF1605: How to Qualify an Apartment Deal Part 2 of 2 | Syndication School with Theo Hicks

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Now you’ve found some deals, time to underwrite! This is a very crucial part of the apartment syndication business, as good/bad underwriting can make or break a deal. Listen to Theo and Joe’s best underwriting tips to get you started on the crucial part of apartment syndications. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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

 

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

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

You are currently listening to part two of a two-part series entitled “How to qualify an apartment deal.” In yesterday’s episode, which was part one, or if you’re listening to this in the future, the episode that was aired directly before this one, we introduced the three-step financial analysis process, which is 1) screening deals against your investment criteria, 2) underwriting a deal, and 3) performing due diligence on a deal. In part one we went through step one, which was the investment criteria. So if you haven’t done some already, listen to yesterday’s episode, which will take you through a four-step process to set your investment criteria. The reason why is because setting your investment criteria is going to save you from wasting time underwriting deals that you know don’t make sense for you based on your investment strategy. So definitely listen to that episode first.

In this episode we’re going to talk about steps two and three of the financial analysis process, which are going to be the underwriting and due diligence. Now, in yesterday’s episode I mentioned that these are not going to be the exhaustive episodes on underwriting due diligence; we’re kind of going in order here, and at this point all you need is that investment criteria in order to start looking at deals… But it’s going to be important to also understand what you’re going to be doing once you actually find those deals, so I wanna introduce underwriting, introduce due diligence, and then in the future once we get to those steps in the process, we’ll dedicate an entire series to underwriting, and dedicate an entire other series to the due diligence process.

Underwriting, step two. Deals that meet your investment criteria are going to move on to what’s called the underwriting phase. This is going to be the actual running the numbers phase. When you’re underwriting a deal, what you wanna do is you want to obtain the financial information from the seller. This is going to be the T-12, which is essentially a profit & loss statement for the previous 12 months of the property; so it’s got all of the income and all of the expense line items broken down into months. You’re gonna use that, as well as a rent roll, which is a list of all of the units at the property, and people living there, and how much rent they’re paying, or how many units are vacant, things like that.

You’re gonna use those two things and you’re gonna input them into a financial model, so you’re gonna need some sort of cashflow calculator. I believe we’re going to offer a cashflow calculator for free once we get to that phase. It’s not gonna be out super-detail customized cashflow calculator that we use for client, but it’s going to be a simplified version that still gets the job done and will allow you to at least have something to start with, and then ideally customize it yourself from there.

Anyway, so you’re gonna input your T-12 and rent roll data into your cashflow calculator to have an understanding of how the property is currently operating, and then based on your expertise, conversations with your property management company, understanding of the market, you are going to input information how YOU plan on operating the property… So what are the rents gonna be after YOU buy the property, what are the expenses going to be after YOU buy the property, what’s gonna be the debt service, what are gonna be the growth assumptions? …things like that. In doing so, you’re gonna essentially create a yearly, or ideally a monthly breakdown, or a monthly projection, for the entire whole period. If you plan on holding on to the property for ten years, then you’re going to have 120 different columns for each of those months during that time. Obviously, it’s gonna start off day one how the property is currently being operated, then you’re gonna totally transition it over 1-2 years to how you’re gonna operate the property, and then it’s gonna be smooth sailing from there, slowly increasing rents until you sell the property after ten years.

The most important aspect of the underwriting is going to be that 1-2 period where you are repositioning the property, assuming you’re a value-add investor. Moving forward we’re gonna be acting as if you’re value-add, because that’s what we do, and it’s what we always recommend people do.

What’s gonna be the most important during that underwriting is going to be that transition from how it’s currently operating to how it’s going to be like once you’ve stabilized the property at its new rents and at its new expense. A plus or minus 5% there is gonna sway the property values, which is going to sway the exit sales price, which is gonna mess up the return projections to your investors. So that two-year period of projections is very important, and again, we’ll go over in detail how to make sure you’re doing that properly.

Once you’ve inputted all that data, then you are going to do an iterative process – set an offer price that results in returns that meet your and your investors’ return goals, and then that’s the offer that you’re gonna submit to the owner. So the underwriting process starts with “Does this property meet me investment criteria?” Yes, to inputting information into your cashflow calculator, to it spitting out “This is how much money you can pay for the property”, to submitting an offer.

Now, at this point in the process – and this is very important – the important outputs of the cashflow calculator, which if you remember all the way back in maybe one of the first Syndication School series, we said that the main focus is going to be that internal rate of return and cash-on-cash return… These are going to be projections, and they’re not going to be exact values, because obviously you can’t predict the future, so you don’t know exactly how the property is going to operate once you take over. The goal is to get as accurate assumptions as possible at this point, so that you can submit a fair offer. Then once you do your due diligence, which is step three, you are going to make these assumptions even more accurate, but they’re never going to be perfect. So the goal is to get them as perfect as possible, but also knowing that they’re not going to be exact values, especially in underwriting; they will be more exact after due diligence, but still not perfect.

Before moving on to the due diligence and finishing up the episode – this is gonna be a short one – I wanted to go over some tips for underwriting value-add apartment communities. We’re kind of going out of order here a little bit and I’m jumping ahead to underwriting, but I’m gonna assume that you guys have some understanding of underwriting properties, even if it’s just underwriting fix and flips, so you’re gonna understand some of this terminology. If you don’t understand the terminology, I recommend going to our blog and looking up the glossary of apartment syndication terms, because the definition of all these terms are going to be found there… Because I don’t wanna stop every two seconds and define the terms that I’m using.

That said, here are some of the top tips for underwriting value-add apartment deals – it’s going to be ten. Some of these I might have already hit on already, but I’m just gonna do them in order anyways. Number one is  a tip on how to calculate the offer price. You do not wanna base your offer price on how the property is currently operating. This is something that people typically do on smaller 2-4 unit buildings, where they’re gonna be like “Okay, here is what the rents could be, and here is what I think the expenses are going to be. Based on that, there’s gonna be an NOI of whatever, and my debt service is gonna be this, so it’s cash-flowing $10,000/year. Based on my down payment of $100,000 – 10% cashflow. Great! I want that.” You don’t wanna do that, because you have to take into account how the property is going from how it’s currently operating, to it being how it’s gonna operate once you take over, and it’s not gonna be instantaneous, which means that you also can’t base your offer price on how the property will operate once it’s stabilized. You can’t say “Okay, these are what the rents are going to be, these are what the expenses are going to be, here’s my offer price.”

I guess I might have mixed up the first one, when I said “Don’t base your offer price on how the property is currently operating.” So what you don’t wanna do is be like, “Okay, the rents are this right now, and the expenses are this right now. This is how much I wanna buy the property for.” So you don’t wanna do either of those. What you actually wanna do is you wanna base your offer price on the projections for the entire business plan. You’re going to want to say, “Okay, year one it’s gonna cash-flow this much. Year two it’s gonna cash-flow this much, after I’ve done my renovations. Year four it’s gonna cash-flow this much, year five, year six, year seven etc, and then year eight I’m gonna sell this property, and I expect to sell it at this much based on what the rents are going to be, so I’m gonna make this much extra cashflow at sale. That way I’ve gotten this total annualized cashflow of 25%, which is what I want, so I’m gonna set my offer price based off of this deal over eight years cash-flowing an annualized 25%.” That’s the best way to set an offer price.

I guess you could technically follow those other two strategies, but your return projections are going to be way off if you base it on how the property is currently operating, or if you base it on how the property will operate once it’s stabilized… Because that is not going to be the state of the property for all eight years; it’s going to be different.

Number two is going to be don’t trust the offering memorandum. Again, the offering memorandum is going to be a sales package – keyword being “sales” – put together by a broker for an apartment deal that is mass-marketed. Most likely, you’re going to be e-mailed a new deal, and they’ll say “Click here for the offering memorandum”, and you’re gonna go through the offering memorandum. There’s gonna be all these fancy charts and graphs and pictures, and all these statements about how great this deal is, as well as a breakdown of how they are predicting the property to operate for the next five years.

You don’t wanna base your offer price on that proforma. Again, you wanna base it on the T-12, the rent roll, and your stabilized assumptions, so how you are going to operate the property after you’ve taken over, based on how it’s currently being operated, and projecting that out for however long you plan on holding on to the property.

Tip number three is about how to determine the rent premiums. The rent premiums are — and I guess I am going through and defining these terms… [laughs] So the rent premium is going to be the amount of extra rent you can demand after taking over the property. For example, let’s say that I am buying an apartment of all one-bedroom units that are rented for $700, and my plan is to go in there and spend 5k/unit in renovations, and — let’s take a step back… Let’s say I read the offering memorandum and it says that you’re gonna need to spend $5,000 in renovations and you will be able to raise the rent by $200. Great! So I just input that in my cashflow calculator, right? $200, $5,000/unit – boom, I’m done. Well, no. You need too 1) confirm that $5,000 number. That means going to the property, looking at the interiors and saying “Okay, this is exactly what I need to do. Okay, based off of that, how much is it going to cost?”

Then you also need to perform a rental comparable analysis to look at comparable properties in the markets, with units that are comparable to what your unit is going to look like after it’s renovated, and determine how much rent per square foot they are getting. Then use that rent per square foot, multiply it by the square footage at your building to get a new rent, and the difference between that new rent and that old rent is going to be that rental premium.

Now, besides rental comps, the only other way to determine a rental premium is if the current owner already has proven rental premiums. So going back to our one-bedroom example, let’s say I’ve got a 100-unit building with all one-bedroom units, that 50% are not renovated, and they’re renting for $700, and then 50 units are renovated, and they’ve been renovated within the past 12 months, and they are renting for $850. Then you wanna confirm through your rental comp analysis, but you can be pretty confident that your rental premium on those remaining 50% of the units is going to be $150, because they’ve proven that for 50 units.

Now, since we’re talking about rent comps, tip number four is going to be about rent comps, which is “How do you actually perform the rent comps? What is a good rent comp?” The factors that you wanna look at when you are analyzing comps are 1) what was the construction date of the property? That needs to be comparable. What is the distance away from the property? This is also very important, because a property could be a mile away, but in a completely different type of neighborhood, especially if you’re in a big city. Also the number of units, because a 50-unit apartment building is not going to offer the same amenities as a 200-unit apartment community. So you’re not gonna be able to use  a 200-unit apartment community as a comp for a 50-unit, as  an example.

Also the unit type and size. Depending, for example, if you’re looking at a comp that has massive walk-in closets, it’s got a dining room, it’s got a living room, it’s got a den, and an office, and then two bedrooms and one bathroom – that’s not gonna be a good comp if you have just a two-bed/one-bath with a super-small kitchen, and just the living room and those two bedrooms and that’s it.

Also – this is kind of obvious, but the unit upgrades. An apartment with granite countertops and stainless steel in the kitchen is not gonna be a good comp if you plan on only putting in white appliances and laminate countertops. And also the amenities offered at the property. What you wanna do is create an amenities checklist for all of the amenities at the subject property, plus whatever you plan on adding in, and then when you’re looking at comps, add that comp to your checklist and check off how many amenities match, and which extra ones do they have, and if they have a pool, and a barbecue area, and a dog park, and a business center, and a clubhouse, and then your property has none of those, it’s not gonna be a good comp.

Now, this is when you’re either looking at off-market deals, you’re gonna find your own comps, or if the broker has really bad comps, you’ve gotta find your own comps… So in order to determine if the broker has bad comps, here are three things to look at; these are all based on what I’ve already said. Number one, the distance to the property. Number two is the year the property was renovated and the renovation timeline. That timeline should be similar to the timeline you plan on implementing yours. If you are looking at a comp, or even your subject property, and they are saying that they’ve got a proven rental premium of $150, but they’ve only renovated one unit, or they renovated 20 units over a five-year period, that’s not a good comp.

And then lastly, you also wanna take a look at the property operation. For example, who pays utilities? If at the subject property (the property that you are gonna buy) the owner only pays for water, but then you’ve got a comp where the owner pays for everything, that’s not gonna be a good comp, or at least you have to adjust for that extra money that your tenants are gonna be paying that is not necessarily going towards the rent. So that’s tip number four about the rental comps.

Tip number five is that you want to confirm all of your underwriting assumptions with your property management company. They’re the ones that are operating the property, they’re the ones that are gonna need to stick to that budget, so they need to approve that budget before you close on the property. So when you’re underwriting a deal and you input all of your assumptions, make sure you run that by your property management company before you submit an offer. They might see something that you didn’t see, they might know something you don’t know, and they might have you tweak something that might save you from buying a bad deal.

Tip number six is going to be about the revenue or the income line items. In regards to rents, when you’re analyzing a deal, make sure you are inputting market rent information, and not the actual rents. When you look at the rent roll, there’s going to be the rent that is actually being paid – so it might just say “Rent”, it might say “Current Rent”, it might say “Collected Rent” – and there’s gonna be another column that’s gonna say what the market rent is, and the market rent is what that unit should be rented for. Sometimes the current rent and the market rent might be the same, but more than likely the actual rent is gonna be lower than the market rent. The reason why that’s important is because that is going to be a potential value-add opportunity. So if the market rents are $800, but the owner is only renting the units out for $700, then you’ve got $100 in there that you can get by just turning over the units at their current condition. Add in there your $150 rental premium and you’re raising rents by $250, rather than just $150. So it’s important to know what the difference between the market rents and the actual rents are, which is actually called loss to lease. So on a T-12 you might see LTL or Loss to Lease, and that’s what they’re referring to – that’s the difference between the market rents, aka the amount of rent they could demand for that unit, versus the amount of rent they’re actually demanding. That difference is loss to lease, and ideally that’s gonna be around 2%-3%, because if you think about it, if I were to rent out a unit today at $500, and rents go up by 3% each year, then at the end of their lease after 12 months that unit is now worth $500 plus 3%. But since I can’t raise rent during that 12 months, there’ll be that 3% loss to lease. But if it’s anything higher than that, then something else is going on.

You also wanna know the difference between the economic and physical occupancy. Physical occupancy is the rate of occupied units. If there are 100 units in the building and 80 are occupied, then the physical occupancy is 80%. But let’s say that of those 80 units maybe ten of those people aren’t paying rent at all. Only 70 units are actually paying rent, so the economic occupancy is 70%. So the physical is 80%, economic is 70%. 70% is actually based on how much money you are collecting, whereas that 80% is not necessarily a reflection on the amount of income you’re producing, because 10 of those units aren’t actually paying any rent.

That’s a pretty important distinction when you are looking at deals, and when you’re inputting vacancy, you wanna input the economic vacancy, or the vacancies loss, so how much money is being lost on those vacant units, as opposed just to how many units are vacant in general.

And then lastly for the vacancy rate, you wanna make sure that – since we’re doing value-add, the vacancy rate is going to be higher during renovations than post renovations… Because every time you’re renovating the unit, it’s vacant. Once all the units are renovated, then you’re gonna have much less vacant units, unless something else is going on in the market. So that’s tip number six, about the revenue line items.

Tip number seven is gonna be about taxes. Obviously, one of the biggest expenses for real estate, ongoing and at sale, are the taxes… And you wanna make sure that you are basing your tax assumption on the purchase price, not based on what they are currently paying. Because what you’ll see on many properties is that they will have their T-12, and the taxes will be, let’s say, $500,000 for the year, but that’s based on a tax appraisal from five years ago, when the property was worth 70% of what it is now.

You need to go to the appraisal or auditor site, find out the tax rate, and multiply that out by your purchase price to get the new tax expense. Sometimes you’ll see that the taxes go up by quite a bit. They could be going up by multiples of hundreds of thousands of dollars, depending on the property type and how long ago the property was audited.

Number eight is gonna be about renovations. When you are looking at interior renovations, a few questions you wanna ask yourself are “How many units were renovated by the current owner? What percent of the units were renovated by the current owner?” and then you wanna know what were the unit upgrades. What did they actually do to these units? Then you wanna know if you will be replicating what they did, or if you’re doing less or doing more. That will help you determine a cost.

Then for the rental premium that comes from those interior renovations, the two questions you wanna ask yourself are “What period of time were those units renovated?” As I mentioned, 20 units renovated in two months is different than 20 units renovated over two years. The rental premiums of the two months  are going to be way more accurate than the rental premiums of a two-year renovation timeline. And of course, you wanna know what premium was actually achieved based on those interior renovations.

Then to determine your exterior costs, really the only way to do that is to visit the property in person, preferably with your property management company or the general contractor. So again, for interior essentially you just need to figure out what the current owner did to the property, if anything. If they did do something, are you replicating it or are you going to do something else? And then if you are gonna replicate it, what was the timeline of those renovations and what was the rental premium? The idea is to figure out how much to spend on interior renovations, as well as to get an idea of that rental premium.

The last two are pretty quick. Tip number eight is going to be about the operating account fund, so make sure you have upfront reserves that are equal to 1% to 5% of the purchase price. That’s going to be to cover unexpected issues that come up during the first couple of years before you can create your reserves from the ongoing cashflow. You need to have those reserves upfront to cover things, so you don’t have to do a capital call if, God forbid, something massive comes up.

Then lastly, it’s about the disposition assumptions. When you’re underwriting a deal, you’re going to have sales assumptions. The most important sales assumption is going to be what will be the cap rate. You’ve got your budget, you know what the NOI will likely be at sale, and the other factor you need to determine the value of the property is gonna be the cap rate, so what the exit cap rate is. There are a lot of different strategies for determining and setting an exit cap rate assumption, but what we do is we add 20 to 50 basis points – that’s 0.2% to 0.5% – to the in-place cap rate.

If the current NOI of the property is 100k and we’re buying the property for two million bucks, then the in-place purchase cap rate is going to be 5%, so we would assume that when we sell the property the cap rate will be 5.2% to 5.5%. That’s what we will input in our cashflow calculator, which will determine the amount of money we will make at sale, and obviously that’s being distributed to our investors, so that impacts the return projections as well.

So those are the ten tips for underwriting. Again, I’m gonna spend an entire series focused on the underwriting process in great detail, and you’ll definitely receive some sort of free document to help you get started with your cashflow calculator… But continuing on with that 100/30/10/1 process, for every 30 deals that meet your investment criteria, expect about 10, so one third of those will actually end up meeting your investment criteria and warrant an offer.

Now, once you submit an offer, and if it’s accepted, then you move into what’s called the due diligence phase. This is gonna be step three of the financial analysis process, the last step before closing. This is the phase between the contract and the closing. The purpose of the due diligence is to confirm all of those assumptions that you made during the underwriting process, so that you can determine if the deal still meets your investment goals.

During this period, you’re gonna have the property inspected, your property management company is gonna do a bunch of audits on the current operations, you’re gonna have an appraisal, people are gonna come survey the property… And all of these different inspections, audits, appraisals and surveys  will generate reports that you will then review, and based on the results on those reports you’ll go back to your financial model and update or confirm the input assumptions, which will give you a much more accurate five-year or seven-year (or whatever your hold period is) projections. Based on that, you can at that point ask yourself, “Okay, after due diligence I’ve got all these documents, all these inspections, I know to a higher degree of accuracy what the cashflow will be for 5, 7, whatever your hold period is. Does this deal still make sense?” And again, I’m gonna dedicate an entire series to going over what those reports are, what they mean, how much they cost, how to analyze them, things like that… But for now, just know that you’re gonna get all those things, and then for every ten deals that you submit an offer on, expect that you will only close on one. That means that all those ten deals that you submit offers on, one of those will have the offer accepted and will pass that due diligence intensive analysis phase and be closed on. So those are the three steps.

The last thing I wanna talk about is a general timeline, so you know what to expect for each of these steps. For setting your investment criteria, it could take anywhere from a few months to a few years, because as you know — I think we’re on series number nine right now, so we’ve done eight other series on apartment syndication, and so before you even get to the point where you can set your investment criteria, you need to go through all those eight steps first. You need to get educated, you need to get experience, you need to set your goals, you need to build your brand, you need to get a team, you need to get passive investors. So depending on where you’re at, you might be able to do all of that in a few months. Unlikely, but you might be able to do it in a few months; more than likely it will take you six months to a year, but if you don’t have any experience, then you might need to spend the next 12 months getting experience before you even start the syndication process, and get to the point where you can make your investment criteria. That’s why I said a few months to a few years, depending on where you’re currently at.

For the underwriting – underwriting a deal could take anywhere from a few weeks to a few months; typically, for on-market deals at least, when they’re listed for sale, the call to offers date usually isn’t for about a month. For on market deals you could be submitting an offer within a few weeks, up to a month, maybe two months; for off market deals it could be a year before you negotiate an offer with the owner. Then the due diligence phase, again, is negotiable, but generally it’s going to be 60-90 days. So contract to close is going to be 60-90 days.

That concludes this two-part series about how to qualify a deal. Again, we didn’t go into extreme detail; we just did an overview just to introduce you to the concepts of underwriting and due diligence, which was in this episode… And in the last episode we did go into detail on how to set your investment criteria, because that’s what you actually need in order to start looking at deals.

In this episode, again, we went over the ten underwriting tips and described underwriting a little bit, and we also gave you an overview of the due diligence, which is step three, and then we gave you an overall timeline for this financial analysis.

That concludes the episode. To listen to part one and the other Syndication School series about the how-to’s of apartment syndication, and to download your free documents, visit SyndicationSchool.com.

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

JF1604: How to Qualify an Apartment Deal Part 1 of 2 | Syndication School with Theo Hicks

Listen to the Episode Below (32:06)
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When it’s almost time to search for a deal, it’s important to have your criteria set for what kind of property you are searching for. But how exactly do you figure that out? Well tune into this episode where Theo walks us through exactly that! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be part one of  a two-part series entitled “How to qualify an apartment deal.”

In this two-part series we’re gonna go over the three-step financial analysis process. In this part we’re gonna go over step one, and then tomorrow we’ll be going over steps two and three. Now, so far in the Syndication School series we’ve gone to the point where you have raised money, you’ve gotten verbal commitments from passive investors, so you have an idea of how much money you’re able to raise.

Now, the last step before you’re actually ready to go out and start finding deals is to understand how you’re actually going to qualify these deals before you start finding them. The two main reasons why – number one, it’s gonna save you a ton of time if you have criteria set before you start looking at deals… Because if you don’t have any criteria set, then you’re going to be looking at every single deal that comes across your desk, from 100-unit class A luxury apartments to duplexes that [unintelligible [00:03:57].02]

You probably have an idea in mind of the types of properties you wanna look at, but this episode we’re going to help you set specific investment criteria that you’re gonna use to analyze deals. I’ll mention how much time you will likely save during this podcast as well; this is also important, and I believe I’ve talked about this before, but when you are having your conversations with brokers and lenders and property managers and owners and really anyone that you’re talking to about your apartment syndication and also investors, they’re gonna ask you what types of deals you are looking at… And if you don’t have an answer for them, then you’re not going to look very credible. So having one sentence that you can repeat to every single person who asks you what your investment criteria is will make you look more credible in their eyes, rather than saying “Well, I don’t really care. I’m just looking for any deal, in any market, any size deal, any class deal.” You’re not gonna be taken that serious.

Overall, the qualification process for qualifying  a deal is where you analyze the current operations, and then you also project out the future operations of an apartment community so that you can make the necessary assumptions in order to determine whether or not an offer is warranted on a property. Now, this process is referred to by many names; you might have heard underwriting, or financial analysis, financial modeling, or something very informal, which is “running the numbers.” Again, this is the process where you’re analyzing the property as it is now, as well as through conversations with your property management company and your expertise, determining how the property will operate once you take over, putting together a budget and a proforma, and then determining what price makes sense based off of your goals and your investors’ goals.

Now, there are many different ways to do this underwriting/financial analysis process. I’m gonna call it “running the numbers” moving forward, so whenever I refer to running the numbers, that’s what I’m talking about. There’s a lot of different ways to actually run the numbers on an apartment deal, and it’s kind of the same way for any real estate investment strategy. For fix and flips, some people follow the 70%, whereas others have a more detailed process. For rentals some people follow the 1% or 2% rule, or they assume that expenses are going to be 50% of the income… So there’s a lot of different ways to run the numbers, but the main point is that you actually do something, you perform some sort of analysis, rather than just going to the property and saying “I’ve got a really good feeling about this deal” and just sending in an offer, or just sending an offer based off of the list price.

What’s worse than that, what’s probably worse than going with your gut is actually trusting the broker’s proforma. When you are looking at deals, if it’s an on-market deal there’s gonna be something called the offering memorandum, which is just a sales package put together by the broker… And in that offering memorandum will be  a proforma, which is basically a five-year profit and loss projection for the property based off of how the broker believes the property is gonna operate. And you don’t want to use that data to set an offer price. Again, arguably worse than just going with your gut and your instinct, just because the offering memorandum might be completely accurate, but it also might be completely inaccurate, and the data is misrepresented by the broker because they want to sell the deal. You don’t really know until you run the numbers yourself.

Overall, the three-step financial analysis running the numbers process is going to be step one – and again, these are going to be three questions you’re gonna ask yourself when you are looking at a deal and going through the process. So when a deal comes across your desk, the first question you wanna ask yourself is “Does this deal meet my investment criteria?” If the answer is no, then you can pass on the deal right away. If the answer is yes, then you’re going to formally underwrite the deal. I’ll get into more information on each of these steps, but you’re gonna need to underwrite the deal, and then you’re going to ask the next question after the underwriting is complete, which is “Do the results of my underwriting meet my goals and my passive investors’ return goals?” If the answer is yes to that, then you will submit an offer, put the property under contract… And then once the property is under contract, you’re gonna be performing extra due diligence – and again, I’ll go into what due diligence is actually in tomorrow’s episode… But at that point you’re gonna ask yourself the final question, which is “Does the property still meet my and my investors’ return goals after this due diligence process?” If the answer is yes, then you close on the deal and the financial analysis process is complete.

As I said, in this episode we’re gonna focus on that first question, which is does the deal meet my investment criteria? And then tomorrow, or if you’re listening to this in the future, the episode after this one will be focused on the underwriting and the due diligence. And I’m actually not going to go into extreme detail on the due diligence and the underwriting in tomorrow’s episode, I’m just gonna give a brief overview of the process, just to kind of complete the three-step cycle. Eventually, in future episodes we’ll have a series that’s focused on underwriting and a series that’s focused on the due diligence.

Let’s hop into the investment criteria. Step two is a pretty lengthy process. When you’re first starting out, if you’ve never underwritten a deal before – and this assuming you already actually have a cashflow calculator on hand, which is basically an Excel document with formulas that allows you to input data and it will spit out IRRs, cash-on-cash returns, budgets, proformas, things like that. Now, if you’re just starting out, it might take you a few days to underwrite a deal. I’m not saying it’s gonna take 24-48 hours to write a deal, because obviously you’re not working the whole time, but if you just spend 3, 4, 5 hours a day underwriting a deal, when you’re first starting off it’s probably gonna take you a couple of days, so let’s say 10-15 hours. Then once you get more experienced, maybe it will take you a little bit less time; maybe you can underwrite a deal in an afternoon. But overall, it’s pretty lengthy.

It’s going to be nearly impossible for you to underwrite every single deal that comes across your desk or your computer screen. So if it takes you ten hours to underwrite a deal and you can only dedicate ten hours per week to underwriting deals, then you can only underwrite one deal per week. You wanna make sure that the one deal you’re underwriting per week is something that is worthy of being underwritten; the way to do that is to screen all deals against your investment criteria, which in doing so is a way to quickly eliminate deals from contention before having to go through that 10-hour (or 3-hour, if you’re experienced) underwriting process.

For your investment criteria – and again, different syndicators will have different metrics that they use for their investment criteria, but here are the four metrics, the four parts that Joe uses when he’s screening out deals.

The first is going to be the investment strategy. Essentially, what is going to be your business plan for once you take over the property? Because if your business plan is to just buy the property and hold on to it and not have to do anything, then you’re not going to want to be looking at deals that are in complete disarray, deferred maintenance, not stabilized, and vice-versa.

The three main categories of deals – and again, people might use different names, but what’s most important is the description of these types of categories. The first category we’re gonna call the highly distressed deal. This is gonna be a non-stabilized property, which means that the economic occupancy, so the rate of paying tenants, is less than 85%, but most likely it’s gonna be lower than that; it might be in the 70’s or even in the 60’s. And heck, it could be even lower than that; it could be in the 50’s or 40’s.

And the reason why – it could be many different reasons. It could be due to just poor operations in general, it could be due to tenant issues, it could be due to having outdated interiors, outdated exteriors, outdated amenities, so they’re not attracting enough good tenants… It could be due to mismanagement, it could be due to just deferred maintenance, and people don’t wanna live there because of how many issues there are… A property can be distressed for many, many reasons, so if you are looking at distressed properties, then your business plan would be to take over the property, and you would address the deferred maintenance, you’d install a new management company, you’d probably turn over some of the problem tenants, and overall you’re gonna be bringing that property to stabilization – an occupancy rate of 85% to 90%+, ideally even higher.

At that point, you would either hold on to the property and continue to either make improvements, or just keep it how it is in cashflow, or you would sell the property to someone else who would take it to that next level.

So the pros of this highly distressed investment strategy – really the only major benefit is going to be the upside potential, because you are 1) likely going to be purchasing the asset well below market value because of the deferred maintenance costs and the lower occupancy. Because of that, the rents are likely going to be lower, or at least the income is going to be pretty low. Once you’re able to cure all the issues at the property and get that occupancy rate from 60%-70% all the way up to 95%, you’re creating a ton of value in that property, and that is going to be equity that you’re able to distribute to your investors.

Now, the downside is going to be that since the property is highly distressed, it’s not going to cash-flow from day one, and it also might not cash-flow for the first couple of years during that stabilization process. If that’s the case, then you’re going to need to have investors who are content with not receiving a cashflow distribution during that stabilization period.

And also, because the property is highly distressed, there are a ton of variables that you need to take into account when you’re underwriting the deal. Obviously, the more variables there are, the more things that can go wrong.

Overall, the highly distressed investment strategy has a higher upside potential, but with that higher upside potential comes a greater risk, and the highest risk for this strategy – to actually lose all of your investors’ capital. There’s a risk in regards to there not being much ongoing cashflow, but also risks in regard to capital preservation. So that’s one…

On the opposite end of the spectrum would be what I’m gonna call the turnkey investment strategies. This is when you buy an apartment that requires minimal to no work after acquisition; the property is fully updated to market standards, it’s highly stabilized, occupancy rates 95% or higher… It’s most likely going to be a class A property, although I don’t see why you couldn’t buy maybe a fully-stabilized class B property, or class C property, as long as they’re in  a class B or class C market.

The business plan for the turnkey investment strategy would be to take over the asset and essentially achieve cashflow from day one, and kind of just ride that out until you either sell the property, or just kind of hold on to it indefinitely and cash out your investors, or whatever the strategy is going to be after that… But the key here is that you’re buying a property that is completely done, and you’re not going to need to do anything to it renovation-wise after you buy that property.

Now, of course, the benefit of this strategy is that it’s the least risky because of the fact that the property has no issues and is highly stabilized. You’re buying a property that’s cash-flowing from day one, so you don’t have that 6-month to 2-year period where you’re in limbo, you’re doing renovations and you’re hoping that your assumptions during your underwriting process and due diligence in regard to rent premiums were correct, and that you’re able to achieve that NOI number that you projected, and then also achieve that cash-on-cash return you offer to your investors.

For this property we’re gonna know day one how much it’s going to cashflow, and most likely how it’s going to cashflow the years after that… So you’re pretty confident in your return projections to your investors.

A downside of this strategy is 1) there is much less upside with this strategy, because it’s gonna be very difficult to force appreciation. The property is highly stabilized; if the units are all at market standards, then there’s not much meat on the bone for you to go in there and do things to increase the rents. Maybe you can go in there and do a couple operational things to shave off some expenses, but at the end of the day it’s gonna be much more difficult to increase income or decrease expenses in order to force appreciation.

Now, that said, the person following this strategy might try to buy a turnkey property and bet on natural appreciation (market appreciation), which as you know violates the first immutable law of real estate investing. Obviously, not everyone that buys these turnkey properties are doing it for that natural appreciation, but since there’s not that upside of forced appreciation, really the only way the property value is going to increase is through that natural appreciation.

Also, on a similar note, obviously the value of apartments are based off of the cap rate, and since this property is turnkey, then you know that they NOI itself is not going to be changing much after you’ve bought the property, and you know the value of the property is based off of the cap rate and NOI… So if the market stays how it is, then the property value won’t change at all. If the market gets better and cap rates go down, then the value will go up; but if the cap rates go up and the market gets worse, then your property value is going down.

That’s not necessarily the case for the other properties, because yeah, sure, the market could do worse and the cap rates could go up, but you’ve increased that NOI since you’ve bought the property, so it could be awash, or it might lose value a little bit, or you might have actually been able to add value to that property even though the cap rates have increased. So there is still risk with that turnkey property, especially when it comes to the actual market conditions that are completely outside of your control.

The third bucket of investment strategies is going to be the value-add, which if you’re a loyal Best Ever listener you know what value-add is. That’s what Joe does, that’s what I am going to do, that’s what our clients do… And that is when you buy a class B, class C property which is essentially already stabilized, so it’s got an occupancy rate of at least 85%, and there’s some sort of opportunity to add value.

Adding value means that you are making improvements to the operations of the property and the physical property through exterior and interior renovations, with the purpose of increasing the income and decreasing the expenses.

So the business plan is to buy the property and add value. The pros of the value-add investment strategy is that it minimizes the downsides and it maximizes the benefits of those turnkey and distressed properties. If you remember, the pros of the distressed investment strategy is the upside potential; with value-add you’re not gonna have as much upside potential, but you’re still going in there and doing things at a property to increase the income and decrease the expenses, so there is still going to be that upside potential.

At the same time, since you are buying a property that’s already stabilized, like with the turnkey strategy, you are able to achieve some sort of cashflow from day one. So you can send out distributions to your investors the first few months after closing, whereas you can’t really do that for the distressed investment strategy.

Now, another pro is going to be that most likely the majority of the larger big-ticket items of the property are going to be up to date, or at least they’re not going to be in complete disarray, like they are for the highly distressed. What I mean by big-ticket items are the HVAC, the boilers, the roofs, the siding, the plumbing, foundations – anything that’s going to cost you a ton of money to replace is most likely going to either be maybe 5-10 years old, it’s not going to need to be immediately replaced, and even if it is older, it’s not going to be a terrible condition; it’s going to be something that you don’t necessarily have to replace, but you can if you want to.

Now, maybe you might need to go in there and replace roofs, and maybe you need to replace some of the A/C units, but it’s not going to be a property where every single big ticket item needs to be replaced; that’s not going to be that value-add investment strategy.

Another pro is going to be, as I mentioned, that the property is going to be stabilized at closing, so they’re gonna achieve cashflow from day one. As well, there’s going to be that higher upside potential because of the ability of you to force appreciation, which in turn allows you to provide your investors with a large lump sum distribution at sale, which you’re not able to do with the turnkey investment strategy.

Now, the cons of the value-add strategy are gonna be 1) there are going to be more variables to take into account compared to the turnkey, because you are doing those renovations, but it’s way less than the highly distressed, and as long as you are conservatively underwriting deals, which we will explain in future episodes, then you will have a pretty good handle on these variables by the time you’ve gotten to the closing table.

And then lastly – this isn’t necessarily a con, but compared to the highly distressed investment strategy, there is not as high of upside. The highly distressed – you’re buying a property at a 60% occupancy, and you’re increasing that to 95% occupancy, so that 35% increase is gonna add a ton of value to the property, whereas for the value-add you’re going to be bumping the occupancy rate from 85% to 95%, and you’re also going to be increasing those rents, so there is that potential for a very high upside, and maybe an upside even higher than the highly distressed, but on average, it has lower upside potential than the highly distressed, but way higher upside potential compared to the turnkey.

Which investment strategy is going to be ideal for you? Well, it’s going to be based on your and your investors’ return goals, as well as your risk tolerance, as well as the team that you have. If you have investors who are content with tying up their capital for a year or two, with a minimal to no ongoing cashflow, in order to potentially receive a large lump sum profit at sale, plus you have a team with experience repositioning highly distressed apartments, then you could pursue that highly distressed investment strategy.

But if you talk to your investors and they are more interested in a low-risk place to park their money in order to receive a return that beats inflation, but they aren’t necessarily interested or attracted to a large upside at sale, then you can pursue those turnkey properties.

If you have investors who are interested in ongoing cashflow, as well as an upside potential at sale, plus a property that’s going to be a much less risky than the highly distressed investment strategy, then value-add is going to be the way for you. Also, there’s many other factors that you can take into account here, most importantly the current economic conditions, but overall these are the things you wanna think about when selecting your investment strategy.

Once you select an investment strategy, then based off of that investment strategy you will have your first set of investment criteria that you’re gonna use to screen deals. So if you are distressed, then your investment criteria are going to be class C or class D properties, with a less than 85% occupancy rates, that need a lot of work. If turnkey, it’s going to be class A or class B properties, with 85% or higher occupancy, that needs no work after purchase, and if you select the value-add investment strategy, then your investment criteria is going to be class B or class C properties, with an 85% or higher occupancy, with the opportunity to add value. That is part one of your investment criteria.

Parts two are a little more simple than the investment strategy… Part number two is gonna be the location. If you’ve been listening to this syndication series, then in series in number six you would have already selected your top one or two markets to invest in. If you haven’t done that, go back and listen to Syndication School series number six in order to select your top one or two target markets, and that will be your location investment criteria. Any property that’s not in that location, you won’t even be looking at. You only send out for brokerage lists and send out your direct mailing campaigns, and other off market lead generation strategies that you choose, to apartments that are in your target market.

Number three is going to be the year the property is built, which also is going to essentially correspond with your investment strategy. And again, this is actually pretty general, which is why you’re gonna do plus or minus 5-10 years for each of these, just because you might find a value-add opportunity that falls in the distressed age range, but… This is just general advice. Distressed properties are most likely going to be built over 30 years ago; but again, a property could have been built five years ago, that the owner completely ignored, and it could still technically be a  highly distressed property.

For turnkey, it’s most likely going to be built within the last ten years, and for value-add it’s most likely going to be built 10-30 years ago. Whichever investment strategy you choose, take the current date and subtract 30 years for distressed, subtract 10 years for turnkey, and subtract 10-30 years for value-add. Do plus or minus 5-10 years on the upper and lower ends, and those are going to be the ages of properties you look at.

Right now it’s 2019, so if I was going to be a turnkey investor, then I’d only look at properties that were built in the 2000’s, for example. That’s number three.

Number four is going to be the number of units. If you remember actually the last Syndication School series, number nine, where we discussed how to raise capital from passive investors, you should be already on your way to getting verbal commitments from people in your network, and pursuing all of the various different money-raising strategies we discussed in those episodes. Based on that, you should have an understanding of how much money you’re capable of raising… And I believe we’ve talked about this before, but when you’re buying apartments, expect to have to raise about 30%-35% of the project costs. So since you know how much money you can raise, you know how much money you need to raise for a deal, then you can use those two numbers to determine what’s the maximum amount of apartments you’re capable of buying.

Then once you have that number, you can determine what the average cost per unit is for recent sales of properties that meet your investment criteria. That’s going to be value-add, distressed, or turnkey. Then the location, as well as the year built, which is information you can get from your broker, or you can do that by looking up recent sales yourself. All of those will get you to the point where you can determine how many units you’re capable of purchasing.

It might have been confusing, so here’s an example… Because for me, that all made sense in my head, but here’s an example. Let’s say you determine how much money you can raise, and then based off of that 35% of the project cost, you determine — you’re capable of raising 1.155 million dollars; 35% down means you can buy a property worth 3.3 million dollars. Then let’s say you talk to your broker and you determine that based off of your value-add investment strategy those properties are going for approximately 50k/unit in your market. So 3.3 million dollars divided by 50k/unit is going to be 66 units. The average is 50k/unit; you can essentially round up to 100 units. So my investment criteria would be 100 units. I could look at properties that are up to 100 units, but no more.

Those are the four pieces of your investment criteria. One was your investment strategy, two was the location, your target market, three – what is going to be the age ranges of properties they look at, as well as the number of units.

Now, again, one of the main reasons why we did this was to save ourselves time… And if you remember back to the Syndication School series about the company presentation, you remember the 100/30/10/1 process, which means for every 100 deals, 30 will meet your investment criteria and get underwritten; of those 30, 10 will meet your actual return goals, and of those ten which you send offers on, one will be accepted and closed on.

In other words, for where we’re at right now, for every 100 deals you look at, only 30 are  being worthy of being underwritten. So if you don’t have this investment criteria, that means you’re underwriting 100 deals, and only 30 make sense… Whereas now you are going to eliminate those 70 deals that don’t make sense and just underwrite those 30 deals that meet your investment criteria.

Now, once you become an expert underwriter, underwriting should take you around three hours to do per deal. So since you’re limiting 70 deals, that means you’re saving 210 hours worth of time, which is over five 40-hour workweeks. So just by following the simple four-part exercise and setting investment criteria, which is going to be your investment strategy (value-add, distressed or turnkey), it’s going to be an occupancy level – if it’s value add it’s gonna be greater than 85%, if it’s distressed it’s gonna be less than 85%, and if it’s turnkey it’s gonna be greater than 95%. Also, obviously, for distressed it’s gonna need a whole lot of deferred maintenance, for turnkey it’s gonna need no work, and for value-add it’s going to have value-add opportunities.

You’re also gonna have your location, so your one or two top target markets. You’re going to have an age range, and you’re gonna have a number of units. Using all of those, you’re gonna be able to filter out 70 deals and save yourself five 40-hour workweeks of time.

That concludes this part of the episode, where we introduced the three-step financial analysis process, and then we focused on step one, which was about your investment criteria and defining your investment criteria.

At this point, you can actually start to find deals, which is most likely what we’re gonna talk about in next week’s series, but I didn’t wanna finish off the three-step financial analysis process and talk a little bit about underwriting and due diligence, which we will talk about tomorrow, in part two.

In order to listen to other Syndication School series about the how-to’s of apartment syndications, as well as to download your free documents that are on there for past series, make sure you visit SyndicationSchool.com.

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

JF1597: How to Structure GP & LP Compensation Part 1 of 2 | Syndication School with Theo Hicks

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

 

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TRASNCRIPTION

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

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

 

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

Each week we air a podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we’ll be offering free documents or spreadsheets for you to download. All of these free documents and previous Syndication School series can be found at syndicationschool.com.

We just finished up an eight-part series about raising capital from passive investors, so I highly recommend that you listen to that episode. It moves us one step closer to you launching your apartment syndication empire. In this episode – this will be part one of a two-part series entitled “How to structure the GP and LP compensation.”

As a refresher, the GP (general partnership) will be you and anyone else that you bring on as a team member – a partner, a loan guarantor, a sponsor, people like that. And the LP are going to be your passive investors. So GP is general partnership, LP is limited partners.

By the end of this episode you will learn how to structure the general partnership. We’re gonna go over the five parts of the general partnership, as well as the responsibilities and ownership percentages of each of those rules. Then tomorrow – or if you’re listening to this way in the future, the next episode (part two), we will go over the limited partner compensation.

If you remember back when you were forming a team, you discussed the reasons why you would bring on a partner, as well as we talked a little bit about the loan guarantor/sponsor/key principal. Those are going to be two people that are potentially on the general partnership, including yourself, so there’s a total of three people.

Most likely when you’re first starting off it’s not just going to be you on the general partnership, because you haven’t done a deal before – we’ve talked about this before, but you’re gonna have a credibility challenge with your investors, because they’re gonna say to themselves “Hey, you haven’t done a deal before, so why should I trust you with my money?” And one of the ways to address that objection is to bring on partners and team members who have done apartment syndications in the past.

So starting out, the GP will likely be a group, but it is possibly, technically, starting out, and more likely in the future for you to be the general partner yourself. So it’s possible, but most likely it’s gonna be a group.

For example, Joe and Frank are partners on the general partnership, as well as for my business it’s going to be me and Matt, are the main general partners. I know for Joe and Frank they bring on other general partners to help them raise capital, and me and Matt will do the same, as well as having to bring on a loan guarantor to help us qualify for financing.

So the general partnership can be structured in any way, and all the ownership percentages are completely negotiable between the two partners, so what I’m gonna go over in this episode is going to be kind of a generic overview of how the general partnership can be structured… But there are always gonna be exceptions.

For example, if I don’t really know anything at all about apartment syndications, but I’ve got access to maybe 200k in capital, I could partner with someone, raise part of the capital for that deal, but I’m likely not going to get a percentage of the GP that’s in proportion to the amount of money I raise, because I’m not necessarily bringing a lot of value. This is just one example, but again, it’s completely negotiable, and I just want to give you an idea of how general partnerships are commonly structured.

Overall, there are going to be five different parts of the GP, and for each of these parts there’s a specific responsibility, as well as a specific ownership percentage. The first part is going to be the person(s) who front the due diligence costs. We haven’t discussed the  due diligence on this Syndication School series yet, but overall, the due diligence is going to be the period between the time you sign the purchase and sale agreement, so once you get the property under contract –  from then until you close on the deal. Between then there’s a variety of different tasks that need to be completed in order to close on the deal – having the property inspected, getting the appraisal, getting the environmental, doing lease audits, getting the operating agreements and all the different agreements between you and your investors signed, securing the financing, things like that. That’s going to cost you some money, and since you haven’t closed on the deal yet, you’re not going to have access to your investors’ capital to cover this, so someone’s going to have to come out of pocket and front these costs. Of course, you can raise extra capital to reimburse these costs at closing, but you still  need the money.

Here’s a list of some of the upfront due diligence costs to expect, as well as the range of costs associated with each of those. You’re gonna have the lender and due diligence fees – those are the fees you pay to the lender for them to do their due diligence; expect to spend about 2k up to 10k on those, depending on how large the project is.

You’re also going to have to perform a property condition assessment (PSA), which is a very detailed inspection of the apartment, and expect to pay anywhere $50 and $250/unit for that.

You’re also going to need to get an environmental survey called a Phase One Environmental. That will cost about 2k.

You’re gonna have to do a unit walk inspection, so each of the individual units is walked and inspected. That’ll be about $25/unit.

You have the lease audit, where your property management company will sit down, or a consultant will sit down and go through all the leases, to make sure that they’re written legally by the book, as well as to make sure all the terms are accurate based on the rent roll and the financials that they provide. So that’ll be about $25/unit as well.

Then there’s the property survey, where they map out the property, check out boundaries, things like that. That’ll be about 5k.

Then you’re gonna have your earnest deposit. That’s something that is going to be negotiable, but expect that to be between 1%-2% the purchase price. That’s just that small down payment that you put into escrow to show your intentions to purchase the property. [unintelligible [00:08:51].18]

You’re also gonna have the lender application deposit. That’s you paying the lender to do the application process for you to qualify for the loan, so credit checks, things like that. That will be about 25k.

Then if you apply for agency debt, which I know we haven’t discussed debt on the podcast yet, but we’ll get into that… Agency debt will be Freddie or Fannie Mae debt, and you have the ability to pay the lender to lock in a rate. Let’s say your due diligence period is 90 days, and the interest rate is 5% right now, but you think that it might be going up to 5.2% or 5.25% by the end of 90 days; you can pay money in order to lock in that interest rate, because a 5% interest loan will have a lot lower debt service than a 5.25% interest loan, and that adds up over multiple years. So that’ll be approximately 2% of the loan balance.

Then you have the legal fees. You’re gonna have to pay an attorney to create the operating agreements, which could be anywhere between $350 all the way up to $15,000, depending on, again, how complicated the partnership structure is.

You’re also gonna need a private placement memorandum, which essentially goes through all of the risks associated with a deal, and describes the deal and the partnership in great detail. That could be anywhere between 5k and 15k.

You will have your subscription agreement with your investors, where they promise to buy shares at a set price, and you promise to sell those shares at a set price, of the LLC that owns the property. That could be anywhere between $350 to $5,000.

You’re also likely going to put the property in an LLC, so you’ll have to pay to have that LLC formed. That could be anywhere between $200 if you’re doing it yourself online, up to $2,000 if you’re having an attorney help you out with that.

Then of course there’s going to be fees associated with your attorney negotiating on the loan documents, and that is most likely going to be some sort of hourly rate.

I went over all the numbers, and that adds up to five figures, and possibly up to six figures, although that’s on a very, very large deal. Someone’s gonna have to front that money, so a couple of strategies for this part of the general partnership – one, you could cover those costs yourself, if you have that money sitting in an account, or if you wanna put it on credit cards. Or you and your business partner can split those costs, and then of course reimburse yourselves at closing.

Another way is to borrow money from a family or a friend, and then sign a personal guarantee promising to pay them back at closing, and I believe this is what Joe actually did for his first deal, to cover those due diligence costs. Or you could ask one of your passive investors to front the cost, and then promise to pay them back at closing with some sort of interest rate, or without an interest rate; it depends on your relationship with that person.

If you cover the costs yourself, or if you and your partner do it, then that’s not really gonna have any sort of impact on the share of the general partnership, unless one partner covers it and the other one doesn’t cover it. But if you have a passive investor front those costs, or if you’ve got some sort of family member that’s fronting those costs, and you don’t wanna pay them an interest rate, you can give them a percentage of the GP, and that could be a low percentage – about 5%. But make sure you consult with your attorney first, because people on the GP have to have an active role in the deal, so just make sure you’re going by the book when offering ownership percentages for fronting those due diligence costs. So that’s kind of task number one of the general partnership.

Number two is going to be the acquisition management. This will be the person or people who are responsible for finding deals. They’re gonna be generating off-market leads, as well as focusing on building relationships with commercial real estate brokers to find on-market deals, and cultivate that relationship, so they increase the probability of being awarded the deal.

Once a deal is identified, they’re responsible for evaluating the deal, so performing the underwriting, visiting the property in person, driving the market, things like that. If the deal makes sense and the result of the underwriting are returns that meet the investors’ goals, then they’re also responsible for submitting offers on those deals.

Then if the offer is accepted, they’ll be the ones that go through the best and final seller call, if that’s what they do, or are responsible for making sure that the PSA is signed, and all the terms are correct.

Once the deal is under contract, they’re gonna be responsible for managing that due diligence process – inspections, appraisals, working with the lender, working with the property management company to make sure that all the due diligence is covered.

They’re also going to work with the lender or mortgage broker to secure financing on the deal, and then they’ll be the one who also oversees the closing process. Essentially, they’re responsible for, as the name implies, the acquisition task. So going from finding the deals, all the way to closing on the deals. This person should be given approximately 20% of the general partnership. Now we’re up to 25% between those first two tasks.

Number three is going to be the sponsor. This is going to be the individual or group of individuals who sign on the loan. The sponsor is also referred to as the key principal, or I like to call them just the loan guarantor.

For a first-time syndicator, you likely will not have the liquidity, net worth or experience requirements to qualify for the loan, so you’re gonna need someone else that has experience with a similar sized deal. The experience requirements are kind of vague, but when talking to lenders that’s what they’re gonna look at, “Does this person signing on the loan have experience taking a similar sized deal and a similar investment strategy full-cycle?”

You’re also gonna need to find someone with the net worth requirements, so that’s gonna be a net worth equal to the loan amount.

Then you’re also gonna need liquidity requirements. These also kind of vary, but a good rule of thumb is 10% of the principal loan amount in liquidity.

Ideally, you can find a sponsor that covers all three of these requirements, that way you don’t have to worry about having too many people on the GP and having to split this role between many people. But again, it’s better to get a deal done and have a ton of loan guarantors than not getting a deal done at all.

The compensation for the sponsor/loan guarantor is gonna vary from deal to deal. It can be a one-time fee that’s paid to them at closing, or it can be an ongoing percentage of the general partnership, or it can be a combination of the two.

For a one-time fee, it can be as low as 0.5% to 1% of the loan balance, or as high as 3.5% to 5% of the loan balance paid at closing, depending mostly on the risk of the loan. If it’s a bridge loan that’s recourse, you’re going to have to pay a larger guarantee fee or a larger one-time fee to that person, as opposed to a 12-year Fannie/Freddie loan that’s non-recourse. That’s also gonna depend on your relationship with that person. If you know them really well, you can probably get away with offering them a lower fee, but if you don’t know the person, then you’re gonna have to attract them with a higher fee.

It also depends on the investment strategy. If you have a distressed deal, you’re probably gonna have to pay more than you would for a value-add deal, than you would for a turnkey deal.

Now, again, you can also offer them an ongoing percentage of the general partnership, and this can be as low as 5%, and the highest I’ve seen is actually 20% for this. 20% obviously seems very high, but again, it’s better to give away 20% of the GP in order to close than to not give away 20% and not have the ability to close on the deal… But more likely you’ll be able to find someone closer to the 10%-15% range.

Again, that range is gonna be based on your relationship with the person, the risks associated with the loan and the risks associated with the investment strategy. Now we’re up to between 30% and 45% of the GP.

The next part, part number four, is going to be the person who is responsible for investor relations. This is a person who is responsible for finding the passive investor, so they’ve spent time on the thought leadership platform and reaching out to different people they know on LinkedIn, or on Bigger Pockets, posting a ton in order to generate interest from passive investors before a deal is found.

Once a deal is actually found, they’re gonna be responsible for presenting that deal to the investors, as well as securing commitments from those investors in order to fund the equity investment for the deal.

Then once the deal is closed, they’re responsible for notifying the investors, setting expectations for communication and distributions moving forward, and then execute on those expectations of sending out monthly updates, sending out financials quarterly, and making sure that the person responsible for sending out the distributions is doing so on time, and those distributions are accurate.

This person should be/could be given about 35% of the general partnership. This could be one single person raising all the capital, or a combination of people raising capital. I guess the most fair way would be to allocate that 35% in proportion to the amount of money that the individual raised… But again, that’s going to be completely negotiable between you and those people raising the capital. 35% is what Joe does. For me, we actually do 40%; just because we’re so new, we’re likely not going to be able to raise all the capital ourselves, so we wanted to allocate a large chunk of the GP to the person responsible for raising capital, so that we could attract people to fund our deals, as opposed to someone else’s deal, who maybe only has 20% allocated to the person responsible for raising money.

So that’s number four, and now we’re up to 65% to 80%. That remaining 20% to 35% will go to the person who is responsible for task number five, which is going to be the asset management. This is the person who ensures that the property management company is implementing the business plan after the property is closed on. This includes things like conducting weekly performance reviews with the site manager, frequently visiting the property in person, analyzing the market and the competition on a consistent basis, and addressing really any issue that arises during the hold period. And again, this person will be given 20% to 35%, depending on the previous four tasks.

So those are the five different tasks. There’s asset management, investor relations, the sponsor, acquisition management and due diligence costs.

Now, those are five tasks, but they don’t necessarily need to be assigned to five different people. For example, you and your business partner could both go 50/50 on the due diligence costs, and then maybe one of the partners is responsible for acquisition management and asset management, so they do essentially all of the operational tasks, and then the other partner could be responsible for the investor relations, and then they both could find someone to sponsor the deal, and that person is given an ownership percentage in the deal. Then ideally, eventually, they could be the people who are able to sponsor the deal, so there’s only two people on the general partnership.

Or it could be something like one person is responsible for acquisition management executive, who just does acquisitional tasks, and then once they’re done, they hand it off to the asset manager, and then they go back to finding more deals. So you’ve got an acquisition person, an asset management person, and then maybe you’ve got five people who are focused on raising money; or maybe you’ve got two people who are focused on raising money and then one person does the ongoing communications. Then maybe you’ve got three different people sponsoring the deal, and those people who are sponsoring the deal are also helping you cover the due diligence costs.

So really, everything is possible. The general partnership could be a few people, to 10-20 people. It really varies from deal to deal and group to group, but most likely on your first few deals there’s gonna be multiple people on the GP, because again, you’re likely not going to be able to sponsor the deal yourself, you might also not be able to cover the due diligence costs, and then you might also need to have someone with experience do the asset management or the acquisition management while you focus on just raising money, for example.

Again, just to summarize, the five main parts of the general partnership are the due diligence costs, which could receive 5% of the GP, then there’s the acquisition manager, who could get 20% of the GP, there’s the sponsor/loan guarantor/the person who signs on the loan with 5%-20%, there’s the person responsible for investor relations, around 35%, and then there’s an asset manager with 20% to 35%. Again, these are just very high-level percentages, and kind of breaking apart the tasks. It’s all negotiable and it’s definitely gonna vary from deal to deal and syndicator to syndicator.

That concludes the GP compensation. In part two we’re gonna discuss the other side of the coin, which is how to structure the limited partner or the passive investor compensation.

To listen to other Syndication School series about the how-to’s of apartment syndications, and make sure you download those free documents that we offer – those are all available at SyndicationSchool.com.

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

 

JF1590: How To Raise Capital From Private Investors Part 7 of 8 | Syndication School with Theo Hicks

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Now that we’re actually talking to investors, we’ll be answering a lot of questions. You’ll really want to know some common questions that come up, and how to answer them. That’s what Theo will be going over today in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

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

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

 

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

This is the first episode of the new year, 2019, so to everyone listening, happy new year! Each week in 2019 we will continue to air two-part podcast series about a specific aspect of the apartment syndication investment strategy. Those will air Wednesday and Thursday. For the majority of this series we will be offering the document or spreadsheet for you to download for free.

All these free documents, as well as the 2018 Syndication School series and the future Syndication School series can be found at SyndicationSchool.com. This episode is actually a continuation of an eight-part series that we’re doing; this is part seven. That eight-part series is about how to raise capital from passive investors. If you haven’t already, I highly recommend listening to parts one through six.

In part one, if you’ve listened to it or are planning on listening to it, what you will learn is your current mindset towards raising money, as well as how to overcome any fears or limiting beliefs you have about raising money, and you also learn the main reason why someone will invest with you, which comes down to trust.

Part two is more educational, and you will learn the differences between the joint venture and the syndication strategy, as well as the differences between the two main apartment syndication offering types, which is the 506(b) and the 506(c). In part three and part four combined you will have a total of 12 ways to find passive investors. In part three I believe I went over three of the main strategies, which was your thought leadership platform, leveraging Bigger Pockets, as well as meetup groups. And then nine more secondary strategies that are longer-term in nature, but are also great ways to find passive investors. And with those two episodes, part three and part four, you were able to download a free document, a free money-raising tracker. So you can find that in the show notes of part three and four, or at SyndicationSchool.com.

In part five we discussed the next steps for when you actually find a passive investor, and that would be to set up the introductory call, as well as execute the intro call, so we went over how to do that. Then in part six we began to discuss how to overcome the objections your investors will have, which is you lack apartment experience or you lack business experience, so we went over a few strategies of how to overcome that objection.

In this episode, part seven (and in part eight) we are going to discuss how to prepare and respond to some of the most common questions passive investors will ask you. These aren’t necessarily objections; they’re not the same as “You don’t have real estate experience” or “You don’t have business experience. Why should I invest with you?” These are more questions that they will ask or want to know about your team and about the business plan you want to execute. So these are things that you want to ideally proactively address before they come up in conversation, that way you’re not spending the entire conversation answering a list of questions that they have; this is where your company presentation comes in handy, which we discussed on a previous Syndication School series, and in fact offered a free template for you to download to create your company presentation. So a lot of those team and business plan questions will be addressed in that.

Then also during your introductory call as well as ongoing conversations before you actually have a deal, some of these questions might come up or you might address these proactively during the conversation if you’re leading it. But whether you have a deal or you don’t have a deal, these questions that we’re gonna go over will definitely come up at some point in the process. I’ve broken them down, as I said, into the team-related questions, as well as business plan related questions.

Keep in mind, and always remembering when you are listening to these episodes and you’re trying to figure out how to apply these lessons to your business when raising money, you have to remember that the passive investors invest based off of who they trust. So when you are formulating your responses to any questions that your passive investors have, or when you’re preparing for potential questions that may be asked, keep that in mind and try to respond based off of the fact that investors will invest with you because they trust you. So you want to cultivate trust by essentially everything that you say during the conversation.

Again, I’m gonna go over a list of these questions. There’s actually 49 questions, so I’m gonna cover as many as I can in this episode, and then in tomorrow’s episode I will cover the remaining questions. What you’re going to want to do is you’re going to want to either pause after each question and write it down, or — the free document this week will be the list of all these questions, so you can just download that list, and then what you’re gonna wanna do is actually write out how you would respond to each of those questions before you actually do a new deal call or start to go in-depth about your investment strategy with your investors.

But when you actually reply to these questions, you don’t want to just read your answers. The reason why you want to formulate responses beforehand is so that you have in your mind an idea of what you’re going to say… Just because 1) you don’t wanna just read a script when you’re talking to investors, and 2) your reply is going to be unique based off of the individual’s circumstances. I think we’ve talked about this in previous episodes, but what’s gonna be important to an engineer is gonna be different to what’s important to a sales professional, it’s different than what’s important to a doctor… So you have to keep all that in mind when you are writing out your answers.

So here they are – there’s actually gonna be nine questions related to your team, that you should expect to receive, as well as 40 questions related to your business plan. Let’s just right into those questions. We’ll start with the team-based questions, and we’ll definitely go through those in this episode, and probably get through a decent amount of the business plan related questions.

One last thing before I get into these questions – if you don’t have a lot of apartment experience or syndication knowledge, this could also help you with your education, because a lot of the responses to these questions you might not know the answer to, or it might be new information. So this episode will help you, 1) obviously, the main purpose is to help you know the types of questions investors are going to ask, as well as the thought process around the answer, but 2) these might be questions that you actually have, and so this could be kind of like a syndication FAQ as well. Let’s get into it.

  1. How much money will you have in the deal?

Your investors are gonna want to know if you are personally investing your own capital in the deal or not. Of course, if you are, then that results in an extra level of alignment of interest. But if you don’t have your money in the deal, then you are not exposed to the same level of risk as your passive investors, and if you don’t have your own skin in the game, the passive investors are gonna perceive you differently than if you actually have your money in the deal… Because if you invest in the deal, “Oh, this person is investing their own personal money in the deal, so I’m gonna trust them to manage the deal better than if they had no money in the deal at all… Because if they had no money in the deal at all, then whether the deal is good or bad doesn’t impact them as much.”

Now, of course, starting out you might not have enough money of your own to invest in the deal, and that’s where you’re going to want to go back and listen to part six (I believe), where we discussed how to create alignment of interests in other ways. For this particular question, that would be having a different team member invest money in the deal – the broker invest their commission in the deal, the property management company invest money in the deal, or someone else on your team brings investors into the deal.

Essentially, the investors are gonna want to know “Are we the only ones putting money into this deal, or are you or someone else putting money in the deal?” And the more people that are putting money into the deal, the more alignment of interest there is.

  1. How many of your investors have invested in multiple deals?

This is pretty obvious, but if you have investors that continue to come back, to invest in future deals, that signals to new potential investors that you have a proven track record of meeting and/or exceeding your projected returns… Because if you didn’t make money for your investors, they probably wouldn’t be coming back; they’d probably find someone else. So that just signals to potential investors the strength of your previous deals.

Now, even if you’ve only done one deal in the past, I would definitely mention how many investors came back. Obviously, if zero investors came back, you might not wanna mention that… And then if you haven’t done a single deal yet, then you won’t be able to leverage this to your advantage, so instead you’re gonna want to focus on other benefits and factors to attract these potential investors.

  1. Do you have family/friends that invest in your deals?

Some people, especially starting off, will have a high concentration of family and friends investing in their deals. Again, this question implies that you’ve done a deal before. So if you have done a deal before and you’ve had family and friends invest, you’d say yes and maybe share a little bit about your relationship with them… Because as far as friends go, if you have a relationship with someone, even if you don’t necessarily know them for a long time, you might still consider them to be a friend… So instead of just saying you’ve got friends investing in your deals, talk about your relationship with that person; how long did you know them, how did you meet, how has your relationship evolved over time… Questions like that. And it may not seem super-relevant, but maintaining relationships with people over a long period of time, and they trust you enough to invest in your deals, speaks volumes to your character. If you’ve got a friend for 15 years and were able to maintain that relationship for 15 straights years and then they’re investing in your deals, that shows a lot about your character compared to someone who doesn’t have any friends.

Essentially, a knowledge [unintelligible [00:13:30].11] trust factor in the eyes of prospective investors. “Well, if his friends invest, his family invests, he won’t lose his friends and family’s money – will he?” That’s the thought process they’ll have.

Now, of course, this will depend on whether you’ve done a deal or not, so if you have done a deal, you can mention what  the average investment is; what’s the average investment for a new person, and what’s the average investment for someone on an ongoing basis. Investors will usually invest more if you had an investor who invested $100,000, and then it jumped to four million, six million and six million on deals three, five and [unintelligible [00:14:03].17] but it is possible to see an investor go from a very small to a large amount after investing in a successful deal. That’s going to come with that immediate trust factor – “Wow, he must know what he’s doing.” That’s question number four.

  1. What is your experience?

Again, this is one of those very vague questions, and you can kind of respond with 1,000 words, or you can quickly pull it off your experience… But again, they’re asking this question because they want to know that they can trust you. You know that before becoming an apartment syndicator you need to have a proven track record in real estate or business, ideally both… As well as you need to have that education covered and you need to have your experienced team. So when you are responding to this question “What is your experience?” and you’re just starting off, you probably want to obviously bring up your relevant experiences, but you’re gonna have to lean more on your team and their experiences operating similar deals.

Then once you’ve got a few deals under your belt, that’s when you can start focusing more on your past success, and bring up case studies. That’s question number five.

  1. There are a number of apartment syndicators in your market. Why should I invest with your company?

I’m not sure if we’ve discussed this yet on the Syndication School series, but the three main ways that you can differentiate yourself from other syndicators is through alignment of interests, which we discussed the four different alignment of interest tiers in part six of this eight-part series. Also, it’s transparency, and it’s also trust. I’ve given a good amount of examples in the Syndication School series on how to gain trust and alignment of interest and transparencies, but another way to also separate yourself from other investors is to focus on your unique skillsets.

For example, Joe has a client who has 33 years of engineering experience, so his company’s tagline is “Engineering conservative deals.” Then when he speaks with investors, he talks about all the ways he uses his engineering background to offer conservative deals. That’s very unique to his specific situation, so you’re going to want to identify what is unique about you, and how that makes you a better apartment syndicator, and then focus on that.

Don’t just talk about returns, because at the end of the day really any syndicator can say what types of returns they’re gonna get. What they wanna know is what’s unique about you that can make them trust you with their money.

  1. How do you know your business partner?

Of course, this implies you have a business partner, but at the end of the day, your property management company, your real estate broker – they’re also technically partners in the deal as well… But they don’t really care how you met your business partner; what they really wanna know is are they in good hands? So they know you, but what about your business partner?

So explain how you met your business partner, but more importantly, explain why you actually selected that person. Elaborate on your partner’s skillsets, as well as how they complement your skillsets, which we’ll set the deal up for success.

For example for me, I have a business partner who focuses on raising capital. The reason why I selected him is because he has experience raising capital for syndication deals in the past. So I would explain to them that he’s raised well over six figures for multiple syndication deals in the past, whereas I have the operational experience.

Essentially, you wanna just explain why you selected that person, and not just say “Oh yeah, he’s my really good friend, and we look forward to doing great deals together.” That’s probably not going to let them know they’re in good hands if you just tell them that they’re your friend. That’s kind of how to answer that question.

  1. Where did your business partner work before?

Again, same logic as the previous question – they wanna know if they’re in good hands, and a good way to know if they are in good hands is to see how the business partner performed in the past at previous jobs. Ideally, your business partner should have success in apartment syndication already, or else why would you select them. So you want to, again, focus on what their syndication or apartment experience is, and how that will help you complete a deal.

Then the last team-related question is:

  1. Have you ever taken a deal full-cycle?

If you have, you can kind of leave it at that. If you haven’t, you don’t wanna just say no and leave it at that. Instead – and again, this is a theme for if you haven’t done a deal yet, if you don’t have the experience… You want to rely on your team. So you will say “Well, I haven’t personally taken an apartment deal full-cycle, but I have a property management company and a business partner, as well as a consultant/mentor who has taken a deal full cycle and who will be heavily involved in the deal. They’re people who I can call upon with any questions that I have, so you are in good hands.”

Those are the nine team-related questions. We’ve got about ten minutes left, so let’s hop into the business plan related questions. And again, these are questions that you should be prepared to answer when speaking with passive investors.

  1. Is the investment in a fund or in an individual asset?

Tell the investor that they will always know what they’re investing in beforehand, which for our case standalone, individual apartment assets. The differences between a fund and an individual asset – for a fund you invest before a deal is found, and the syndicator or the general partnership will use that money to buy deals. On the other hand, the individual asset, which is what Joe does, which is what I do, is you identify an asset, you present that asset to your investors, and then they decide whether or not they want to invest in it.

So you’re most likely doing the individual asset route, so you can tell them that, but if you’re not, then obviously you explain to them that you’re doing a fund.

  1. Do you currently have any deals under contract?

If you’ve just put a deal under contract, you can mention that to them and invite them to the new investment offering call. If you have a deal under contract and you are well into the due diligence phase, mention how much money you already have raised; ideally, a total dollar amount, as well as the amount you still need to raise, in a percentage form.

For example, for a 10 million dollar raise, if you’ve already raised 5 million dollars, mention that you’ve already raised 5 million dollars, and you have 50% remaining, and see if they’re interested in looking at that deal package. And of course, if you don’t have a deal under contract, then the response to that is no, and you can move on… Or you can discuss any deals that you’re currently underwriting, maybe something about the deal flow that you’re receiving, when you expect to have a deal  under contract, but not making any promises. Because again, it’s all about trust; if you tell them “I’m underwriting a deal right now and we’re gonna have it under contract in 60 days” and then that deal falls through, you kind of lost a little bit of trust… Whereas if you just say “I’m underwriting a few deals right now. The second we get a deal under contract you’ll be notified, because you’re on our e-mail list.”

  1. How do taxes work with this investment?

Typically – or I guess all the time – the passive investors will receive a schedule K-1 tax form at the beginning of each year, and you’ll wanna let them know when they should expect to receive that by. We send ours out by March 31st, but I do know that a common complaint from passive investors is not getting the schedule K-1 in time, or the K-1 having errors on it… But in regards to tax benefits, you’ll always want to tell your passive investors to consult with their accountant for actual specifics based off of their personal situation… But you can give them some general information, and that is that investors are usually attracted to real estate because of the depreciation benefits. And as a passive investor, as long as you are passing on the depreciation to your passive investors, the depreciation should be greater than the distributions paid out on an ongoing basis. If that’s the case, then the investors won’t have to pay taxes on their ongoing distributions, but they will have to pay taxes on the proceeds from the sale on the property, which is the capital gains.

Some groups don’t pass on the depreciation to the LP, so if you do decide to do that, that could be a selling point for your company and can be added to the list of things that differentiate you from other syndicators in the area. But again, this is just very general, high-level tax information, and you are definitely going to want to talk to your accountant, as well as recommend that your investors talk to their accountants.

  1. What type of financing do you typically do for your deals?

They’re going to want to know things like what are the interest rates to expect, the actual terms; are there pre-payment penalties, is it interest-only? They’re gonna want to know what the loan-to-value is, is the loan recourse or non-recourse?

Typically, the type of financing that you are going to get is going to be determined on a case-by-case basis. Sometimes you might just go straight agency debt, sometimes you might do a bridge loan, sometimes you might put down a larger down payment, sometimes it might be a smaller down payment… So it’s going to vary, and you’re gonna want to let them know that there is no standard debt. You will always select the debt that is best for the specific deal, and that maximizes the investor’s returns while also minimizing risks.

We’re gonna have an episode in the future that focuses a lot on financing, and the differences between permanent debt and bridge loans, and things like that, so I’m not gonna focus too much on debt now… But generally, you’ve gotta let them know that the type of financing will be selected based on the option that will maximize investor returns while minimizing the risks.

  1. How frequently will I get paid?

This is something that you’re going to want to decide pretty early on. Not necessarily before you start looking for deals, but it wouldn’t hurt to know exactly how frequently you plan on paying your investors right now in the process.

The three main ways are monthly, quarterly or annually. Joe, and what I will also do, is the monthly distribution, just because when people set their goals, typically it’s “I wanna make this much money per month.” Not many people set goals saying “I wanna make this much money per quarter.” I believe monthly is much more attractive than the quarterly, and the quarterly is obviously more attractive than the annually.

Before you actually make the decision, talk to your property management company to see — because they’re most likely gonna be responsible for the distributions, and see what they’re capable of delivering. Because if you promise monthly distributions and then you talk to your property management company and they say “Well, we can’t really do monthly distributions; we usually do quarterly, and we’re only set up to do quarterly”, then again you’re losing some of that trust with your passive investors.

The last question that we will go over in this episode is:

  1. Can you walk me through the typical investment from an investor’s point of view?

If you remember all the way back at Syndication School series about how to create the company presentation, and if you downloaded that template there was a section where it was “The seven steps to a typical investment”, and it walked through exactly how that works.

Again, this is one of those things that you’re gonna be proactively addressing by sending the company presentation to your investors… And this is likely something that’s gonna be brought up early on in your career when you’ve got family and friends investing, and sophisticated investors… But once you grow and start bringing accredited investors, they likely know about the investment from their point of view, because they’ve done it before… So this is more of a question that you should receive early on.

You also wanna tell them specifically about the return structure to them. Let them know about the preferred return, if that’s what you’re gonna do, the profit splits, let them know about your target total return and IRR when you’re underwriting deals, tell them about the expected hold period, how you calculate the distributions at sale, and things like that.

Then maybe give them a timeline of like “I find a deal, then I underwrite the deal, and I put the deal under contract. Once it’s under contract, this many days after you should receive an e-mail from me inviting you to an investment offering call. We’ll do the call, we’ll send you a recording, and then we’ll start following up for commitments. We’ll have you send the legal documents, then we’ll close and send you a closing e-mail, and then on an ongoing basis we will communicate about the deal and you’ll receive your monthly or quarterly distributions, and then at this point we plan on refinacing after 2-3 years, and then we plan on selling after 5 years.”

That’s essentially the investment from the investor’s point of view, and what steps they’re involved in. I guess you could just technically say what I said, but also, again, based it off of who you’re talking to and your unique business plan.

So those are the first 15 questions out of 49. That will conclude this episode. In part eight we will run through the remaining questions of the total of 49 questions to expect to receive from interested passive investors. In the meantime, I definitely recommend listening to part one through six of how to find passive investors or how to raise money from passive investors. Also check out other Syndication School series episodes, and download your free documents. Take advantage of that at SyndicationSchool.com.

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

JF1582: Scaling A Single Family Investing Biz To 7,000 Deals In 14 Years with Lee Kearney

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Lee has been a real estate investor for well over a decade. He prefers to invest in single family homes, and has bought and sold over 7,000 properties since 2004. As he says, he’s done everything you can do in the single family space. If you want to learn how to scale to a huge investing business, listen to this episode and take notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Lee Kearney. How are you doing, Lee?

Lee Kearney: Doing great. How about yourself?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Lee – he has since 2004 bought and sold over 7,000 properties. He has focused on single-family homes. He’s based in Tampa, Florida, and his company is Spin Companies. You can go to the website, SpinCompanies.com. With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Lee Kearney: Absolutely. I’ve been doing this, as you’ve mentioned, almost 15 years. I have done absolutely everything in the single-family space – I’ve dabbled in commercial, I’ve dabbled in multifamily, but I really focused and honed my skills in single-family. At my high point I owned about 30 million dollars worth of rentals, over 300 doors, and I bought and sold about 7,500 units, over half a billion.

I started off in 2003, actually, by accident, and flipped my first condo. I bought it, it got broken into, I hated it, stole it, and ended up making 35k. That’s when the light bulb went off that “Okay, there’s something here. I made more money flipping this property by mistake than what I did in my job.” I moved to California, did a couple flips out there… Again, found a mentor right at the beginning, and really tried to understand what the business was, how to fix up the house, where to buy, what to buy, and really on those first two houses I would say I made every mistake known to man on those two properties… And I still made money, because I was in an upward market.

I moved to Florida in 2005, and began buying foreclosures. I didn’t have a clue what a foreclosure was; I had to ask a lot of questions, I found some people that really were knowledgeable in the space, in my circle… Just asking lots and lots of questions. And that’s what I tell everybody out there – ask lots of questions, even if they seem stupid. They’re not stupid if you don’t know.

So I bought and sold foreclosures for a couple years, and about midway through 2007 I realized I was starting to lose money. Then I started to lose money on every single property. What had happened – in a two-year period I had made and lost two million bucks. I was back to square one.

In 2008 I had to reinvent myself, learning a couple big lessons. One, there’s always money in real estate, and two, you’ve gotta figure out what side of the trade to be one, which is the right side. Once I learned that that was the rules in engagement, I started wholesaling, because that was the right side of the trade with a lot of market risk; I made almost a million bucks my first year, just wholesaling houses, and I’ve never looked back since then.

Again, we’re talking thousands of assets flipped since then, done several thousand fix and flips… Really, I’ve done everything. I’ve come across every scenario that you can see in real estate, bought and sold notes, too; I’ve been on both sides of the transaction as far as being the borrower, being the lender, and I’ve really got a good understanding of how to make money in real estate in any cycle, which is what you need to do; if you wanna stay in the business, you don’t need to sit on the sidelines… You need to constantly be analyzing where the opportunity is, and moving your business in that direction.

Joe Fairless: Tell us a story of one of the most challenging transactions that you’ve done.

Lee Kearney: I can tell you one that actually is just getting settled this week. It is a two-year court battle on a property that I bought two years ago. Specifically, the gentleman who’s going to a tax deed sale –  we’d purchased the property the day before the tax deed sale, didn’t hear anything for about two weeks. Then that particular gentleman, who had come in with his friend by the way, who had witnessed the deed and was notarized in person with a driver’s license with one of my processors here who is a notary, and claimed that he didn’t know he was signing a deed to the property, and sued me for what’s called fraudulent inducement.

Joe Fairless: [laughs]

Lee Kearney: He basically said I tricked him into signing a deed. Now, I have never done that, I never will do that. I fought that gentleman in court for two years and we’ve just won.

Joe Fairless: Congratulations.

Lee Kearney: It was a two-year court battle just to prove that I was right. I did not want my name dragged through court records as fraudulently inducing anybody into selling their home.

Joe Fairless: Yeah, congrats on that… How much did it cost you in legal fees?

Lee Kearney: Oh, geez – an honest answer? About $20,000.

Joe Fairless: And how much did the property make you?

Lee Kearney: I think when we flip this asset — it’s got a tax-assessed value double what our basis is right now… So we’ll double our money on the property, even with all the extra legal. What’s really interesting is there was an extra payout that I was going to be paying this owner as part of our agreement, and what we ended up settling on in court after we won was that I end up taking out my attorney’s fees… So my global amount two years later was the exact same as I would have paid two years ago, except my attorney got half the money instead of him.

From their vantage point it was a pointless exercise, and I think that really for everybody out there – don’t just get in lawsuits. Ultimately, the attorneys win if you’re just getting in a lawsuit to get in a lawsuit. But if you’re right and it makes business sense, go for it. This is where each case is different, the facts are different, and the amount of potential profit is different in each deal… So you really wanna make a business decision before you just start getting in court. It’s my least favorite thing to do, besides filing tax returns. I hate fighting people in court.

Joe Fairless: Yeah, you and I are similar in that regard. Two things that are not enjoyable, and at the bottom of my fun list. You said you started wholesaling and you haven’t looked back since… Does that mean that you currently focus primarily on wholesaling?

Lee Kearney: No, what I meant specifically by that is that I began building a base in real estate and didn’t go back to square one again.

Joe Fairless: Oh, okay.

Lee Kearney: So we moved forward as the market started rapidly appreciating after 2011. We jumped right into the fix and flip space. Now that we can see that we’re coming to the end of that cycle, we’re dialing down fix and flip and dialing back up wholesale again, to take risk off the table.

Joe Fairless: Okay, got it. So over the last 12 months, what percent would you estimate you’ve done wholesale versus fix and flip versus whatever other category there is? We’ll call it miscellaneous category.

Lee Kearney: It’s been about somewhere between 60% and 70% to 30% – 40% wholesale. So we have done more fix and flip than wholesale. However, we’re ratcheting down rehabs and dialing up wholesales, so I suspect that number to be completely flipped next year, and be more two thirds wholesale, one third retail.

Joe Fairless: And in order to dial-up wholesaling, what do you do from a staffing standpoint to make that happen?

Lee Kearney: Well, in our particular case what we did was we subbed out the marketing to a joint venture partner, so I didn’t have to dial-up staff. When it comes to processing a wholesale asset, you actually need less staff, because the asset move through your production line so quickly compared to a rehab… You could literally hold the asset anywhere from hours, to days, to possibly a couple weeks, versus typically several months with a rehab, and there’s a lot of touch with the rehab. You’ve got processors touching that asset almost every day if you’re fix and flipping it.

Joe Fairless: How does that work when you partner up via a joint venture to do wholesaling?

Lee Kearney: Sure. That was actually fairly straightforward. We paid a small marketing fee on the front-end, which helped pay their sales for, and on the back-end we split the profits 50/50, so once they do the marketing, we’ve got a property in the door. We process the asset, whether it’s a rehab, a wholesale trash-out, we sell the property, and then when the proceeds are concluded, what we’ll do at that point is escrow 10% back into our joint venture for new marketing, and then we split the other 90% 50/50.

Joe Fairless: Beautiful. Thank you for very succinctly walking through that; that’s very straightforward. How did you find your joint venture partner who — basically, they find the deal and then you take it from there, right?

Lee Kearney: Absolutely. That’s [unintelligible [00:10:31].18] and that’s the joint venture who’s actually my partner in the educational space through Advisors Education, my Flip Your Income platform. So there was a natural fit already there in the info side of the business, and they said they were dialing up the seller-direct campaign; I said, “You guys already have [unintelligible [00:10:53].09] you already have that infrastructure, I already have an entire floor of processors, and a construction team and vendors, and we have an entire team of lenders, so let’s just partner up. I’ll do what I’m good at, I’ll do more of it, you do what you’re good at and you do more of it, and then it’s a win/win for everybody.”

And I will say this to everybody out there – if you’re getting in a joint venture, make sure both parties bring something to the table. Otherwise you’re gonna have a disgruntled partnership from the standpoint that one partner is gonna be doing a lot more than the other partner, you’re splitting the proceeds, and then you end up with a very short-term partnership because it just doesn’t make sense in the long-term to do something where both parties are not bringing value to the table.

Joe Fairless: You said at one time you had 30 million dollars in property and 300 doors, that was your portfolio high point… What are some things, knowing what you know now — if you were presented a similar position, what would you do differently to maintain that?

Lee Kearney: I would say initially we didn’t do our tenant screening correctly. That’s probably — when it comes to maintaining high occupancy and high payment rate, the biggest place we screwed up early on is that we were just trying to get warm bodies in our properties. Then we realized later if we’d spent a few more moments on screening a tenant correctly, our net income would go way up. That’s when I really went from hating rental properties to loving rental properties, when they stopped being a liability and became an asset from a cashflow standpoint.

Joe Fairless: So you had a lot of turnovers, I guess…

Lee Kearney: Yeah, yeah. At our low point, early on, when I was building that rental portfolio, I had about 20 evictions going on, and I said to my team “This is not going the right direction.” Rental properties, which are supposed to really pay you in three ways – through appreciation, through being able to depreciate that asset on your tax return, and also create cashflow… It wasn’t hitting the cashflow button, it was just costing us money every month, so I wanted to turn that around because we’d built a sizeable rental portfolio, so the outgoing cashflow was at a point that really was making a dent in the company’s finances, and I knew I needed to turn that situation around if I wanted to hang on to these rental properties long-term.

That situation forced us to really look at what kind of tenants were defaulting, what was broken in our screening process, and we needed to make some changes as far as the qualifications for our tenants coming into our properties.

Joe Fairless: And what were the results of those changes?

Lee Kearney: For several years, until I started winding down — I would say realistically four to five years we’d been maintaining at the worst time 95%, but averaging more around 97%-98% rent collection, 97%-98% occupancy on C, C- assets, which I think is pretty incredible when I talk to people out there.

Joe Fairless: It is, yeah. Do you have your own property management company?

Lee Kearney: That’s one thing I got right, right out of the gate. I manage property management in-house, and just to give you a quick explanation why — when you’re dealing with an external property management company, their interests are completely misaligned with you as the owner. Let’s talk about that…

As an owner, you want people to stay in your property and you want people to pay. A property management company makes money when stuff breaks and when people move out, and when new people move in. So at a very base level, the industry is broken, because property managers actually make a lot more money when the owner makes a lot less money. I didn’t like that setup, I knew I couldn’t fix it, so rather than try to fix an industry, I brought those best practices in-house from day one, and really rewarded my staff through bonuses and incentives to make sure that they brought in people that paid and people that stayed, and kept them in there so that our occupancy and our payment was at that 97%-98% range.

Joe Fairless: What’s been some of the challenge of building out a property management company?

Lee Kearney: Just building out your SOPs… Realizing that on the payment side – you just have to be consistent with that, as far as rent collection goes. What I mean specifically about that – because you mentioned at the beginning of the show we’re cutting out the fluff here… Everybody gets a three-day notice, everybody gets sent to the attorney after the three-day notice has expired. Everybody must pay half their balance, including the attorney’s fees, and also they stay in eviction until they’ve completed a written stipulation payment. So we actually don’t even stop the eviction until they’re brought current again; we make them sign it, it’s a stipulated payment agreement, and they must be caught up by the end of the following month… Because what you don’t want is when you finally go to evict someone that they’re three months in arrears, because you’ve put them on a payment plan that will never actually get them caught up.

For instance, if you’ve got $1,000 rent and someone’s $1,000 in the hole, if they’re just paying their $250, they’re never paying down that $1,000 balance. Realistically, they’ve gotta be paying $300-$400 a week to get that payment down, where they’re paying their current rent and they’re paying down what they’re delinquent on.

So that’s some of the lessons we learned early on that really affected how well we did property management… Even something as simple as raising our deposit from a half month, which we used to do for Section 8, a month for non-Section 8 tenants… We raised it across the bar, we did nicer properties, cleaner, and we did a month and a half for everybody; it did not matter if you were Section 8, private pay… Everybody had to pay a month and a half. And all of the bottom feeders, who had tried to negotiate with you over a security deposit because they didn’t have any money no longer applied for our properties.

Joe Fairless: Switching gears back to wholesaling, you said that’s gonna be dialed up in the foreseeable future based on where you see the market heading… How do you maximize the conversion rate whenever you receive the leads, from receiving it to actually making money on the deal?

Lee Kearney: That’s a really, really good question. First, not every lead is the same. What I mean by that – if you spent the same amount of time on all leads, you would never process your really good leads effectively… So one of the first things we try  to do is weed out the “definite no’s” we call them. What I mean by that – if in your initial screening of that lead you realize these people are over-leveraged and they cannot sell, they’re gone. So we don’t spend any more time on that. It doesn’t matter if they want to sell, or they have to sell; they can’t sell.

So the first thing we’re always trying to do is to not waste time on deals that we can never convert to a deal… And I think a lot of people out there, when I talk to them, they’re on the front-end, they’re the opener, and they’re screening every deal, and then they’re trying to analyze the really good deals and wonder why they’re missing the really good deals… It’s because they’re working on analyzing all the deals that will never become a deal.

If you wanna get your conversion rate up, your openers should be weeding out the people who are not good leads, and then your closers should be hand-fed any lead that’s in range. What I mean by that – they can sell, they have to sell, and they recognize that they need to sell. That’s really the unicorn seller… When you’re dealing direct with seller, you’re looking for three things: those who can sell, those who have to sell, and those who realize they have to sell. They’re the ones we’re focused on.

We have not limited geography. As we move forward now and we’ve really matured in this space, we’ve realized we’re chasing distressed sellers and not chasing geographical locations… So we open up a much wider geography, to cast a much wider net, to get the most distressed sellers.

Joe Fairless: You mentioned that you’ve done some commercial, and then also some multifamily, but your bread and butter is single-family. For a lot of people, they do single-family and then they decide to do something else, like multifamily or commercial or something like that… So what about single-family has attracted you to it to maintain that for the long-term?

Lee Kearney: When we made the decision to begin to move into multifamily, we realized the multifamily space was overheated… So although I would take down 100 units, 500 units tomorrow, the market’s not bearing a price that I can live with. That means that we are very dialed in in the single-family space, so we’re gonna keep doing that until the right opportunities come along.

Unlike a lot of people out there, just because I want to move into multifamily, I’m not gonna chase it down to the lowest cap rates. I’m not willing to do that. I believe that economically we could be coming into a time of recession, I believe the real estate cycle has almost gone full circle, and with all those things being said, to chase multifamily deals at peak pricing is not in line with our core business model.

Joe Fairless: What’s your best real estate investing advice ever?

Lee Kearney: I’ve got a couple, actually. I’ll give you one, if you want one – it’s not important to call the bottom of the market, but it’s important to call the top of the market.

Joe Fairless: What indicators do you look at in order to call the top of the market?

Lee Kearney: Extreme euphoria. Everybody’s buying real estate, everybody’s an investor, rates are going up, there’s no supply, there’s a desperation to buy a deal just to keep your pipeline full. All of those things I see going on in a lot of primary markets, which means that desperation means that people are overpaying, and ultimately the chickens come home to roost. You make your money in real estate typically on your acquisition, and if you get that wrong, that’s also where you’re gonna lose money. It’s just when that happens.

I see a lot of desperation in the market, and I see the foreclosure rates –  just to quote a specific statistic here in Florida – year-over-year [unintelligible [00:20:50].22] rate appears to be climbing… So I’m seeing a lot of indicators that we are coming full circle, and even something simple as the rates –  they’re about 2% higher than they were just two years ago.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Lee Kearney: Sure.

Joe Fairless: Alright, let’s do it. First though, a quick word from our Best Ever partners.

Break: [00:21:13].09] to [00:22:29].17]

Joe Fairless: What’s the best ever book you’ve recently read?

Lee Kearney: Tools of the Titans.

Joe Fairless: I love Tim. And all of his books. I haven’t read the cooking one, but all other Tim Ferriss books – I love those. What’s the best ever deal you’ve done that we haven’t talked about?

Lee Kearney: It was a deal that had a second mortgage. We were able to wipe out the second mortgage. We are selling the property next month, and will net about $250,000 on a single-family asset.

Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about?

Lee Kearney: I bought a gigantic rehab; it was a million dollar home, that we ended up losing $300,000 on.

Joe Fairless: And what’s the lesson learned there?

Lee Kearney: The renovation budget was about $150,000 off, and our resell price was a similar figure off. And our hold time was about double what we thought it was going to be.

Joe Fairless: Best ever way you like to give back to the community?

Lee Kearney: We like to support an organization that protects trafficked women and brings them back into society. Redefining Refuge, it’s a charity that we support, and supported for many years. I’m very passionate about that. Those who prey on the weak in our society – I have a tough time with that, whether it’s women or children or anybody that’s considered weak or vulnerable in society; I feel very passionate about supporting organizations that try to help out with those causes.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Lee Kearney: Sure. FlipYourIncome.com is the best way to learn about what we do in teaching real estate.

Joe Fairless: Awesome. Lee, thank you so much for being on the show. We talked about a whole lot of stuff, from how to increase your conversion rate if you’re a wholesaler, to the reason why you’re focused on single-family homes and not multifamily, and when to stick to your guns on a court case; when you’re in the right, you ride it out… And lawyers are usually the only ones that win, but in this case you also came out even, or positive, because I’d say from the learning experience that you had working with the lawyers who were essentially paid for by the person who was suing you, I’m sure you learned some stuff too along the way.

I really enjoyed our conversation. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Lee Kearney: Great, thanks for having me on the show.

JF1577: How To Raise Capital From Private Investors Part 6 of 8 | Syndication School with Theo Hicks

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Now we have found our investors, had a phone call, and have sent them a deal. Now we’ll have to conquer their objections. Theo will discuss what are common objections and how to handle them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is part six of an eight-part series entitled “How to raise capital from passive investors. We’ve done five parts already, so I highly recommend listening to those first, before jumping into this episode, because there’s information in those episodes that we will build upon in this episode.

Listen to part one and you will go through an exercise to determine your current mindset towards raising capital, which likely includes a little bit of anxiety. Because of that, you will also learn how to overcome any fears, anxiety or limiting beliefs you have about raising money. Then you’re going to learn why someone will invest with you, and the primary reason people invest is not because of money or because of your team or because of the market, but because of trusting you. So it’s all about trust.

Then in part two – listen to that and you will learn the differences between a joint venture and a syndication, as well as the differences between the two main apartment syndication offerings, which are the 506(b) and the 506(c). Of course, when choosing between a JV or a syndication, and a 506(c) and a 506(b), make sure you talk to an attorney, because I am not one.

Moving on to part three – listen to that episode and you will learn the first three ways to find people to invest in your apartment syndications. Then in part four we discuss nine more ways to find passive investors, for a total of 12 strategies. With those episodes comes the free document, which is the Money Raising Tracker, for you to track your progress of the people you’re finding to invest in your deals.

Then yesterday, in part five, we discussed the next steps after finding passive investors. Once you find these people, what do you do? Well, you set up an introductory call with them, and then you actually execute on the introductory call.

This episode, part six, is gonna be a little bit shorter, because we are going to essentially set up for next week’s series, where we will go through a list of 49 frequently asked questions that you need to be prepared to answer from your investors. But in this episode we’re gonna talk about how to overcome investor objections.

You are out there, implementing one, or all, or a combination of the 12 ways to find passive investors, and someone fills out your lead capture form, and you reach out to them and they agree to a phone call. You hop on the phone call, you learn about their background, you learn about their investment goals, and then you sign off, you build a relationship, [unintelligible [00:06:14].13] and then you finally get a deal, and you send the deal to them, and you go through the process of presenting the new deal, which we’ll go over in future episodes, and then you follow up with this person and say “Hey, are you interested in investing in this deal? If so, how much?” They reply and say, “No, I don’t wanna invest.” You don’t know why, you ask why, and you figure out it’s because of your inexperience.

The biggest challenge, as I said, when you are starting off as a money raiser and as a syndicator in general is going to be your lack of credibility. So as I mentioned and as I went into extreme detail on in a previous syndication school episode, in order to become a syndicator you need to have past business experience or past real estate experience, and ideally both. And I went into extreme detail on what those two mean. But even if you do, you’re still gonna face objections.

Let’s say you just have a strong business background. Well, when you get to that point with Billy, and you are following up to have him invest and they say no, and you ask them why, they might say “Well, I know you have prior success working for a large corporation, and you’re responsible for 20 million dollars in sales, but that still doesn’t make me feel any more comfortable about giving you my money to invest in real estate, because you’ve never done it before.”

Or if you have a background in real estate but it’s not an apartment syndication or an apartment, they can say “Well, Theo, it’s amazing that you own 13 rental units in Cincinnati, but you’ve never done anything over four units, and I do not wanna be the test subject, so I’m sorry. If you do a few deals, then I will come back.”

Those are just examples. It could be any combination of words, but what they’re trying to tell you is that “I don’t trust you enough yet because of your background.” So what do you do in this situation? Do you just give up and move on? Well, of course not. We’re gonna tell you what you actually do.

What you need to do is you need to have alignment of interests. What this means is that the investor’s interests are to preserve and make money, so they want to know that if they lose money, then you lose money, too; or other people involved in the deal lose money. If that’s the case, then they feel that you are more likely to perform efficiently, so that you don’t lose money, which in turn means that they don’t lose money. That’s essentially what alignment of interests means.

Now, on your first deal you’re probably going to need a lot of alignment of interests, which means you might have to give up a large portion of the general partnership. And as the saying goes, a percentage of something is better than 100% of nothing. So do not be afraid to give up the majority of your stake in the deal in order just to get a deal done, because once you’ve got that momentum, eventually you’ll get to the point where you might not be able to do it all yourself, but it will only be a few of you on the general partnership, which means more money for you.

The alignment of interests – we rank them from the least alignment of interest to the most alignment of interest. There’s gonna be five tiers. For your first deal – maybe you’re gonna need to be on tier five or four, whereas eventually you can be on tier one, or maybe not have any alignment of interest at all, because of your past performance.

Tier one is going to be you bringing a qualified person on to partake in that project. This is when you hire a credible, experienced property management company, following the strategies outlined in the previous Syndication School series. Same for a mentor or consultant. Same for a real estate broker. This is just you bringing on someone who’s got experience doing what you’re trying to do. The reason why there is an alignment of interest is because your passive investors know that at the very least the people managing the deal have done it before. But the reason why it’s tier one is because they’re just there, and their skin in the game is limited to really their effort. But if the deal does well or bad, it doesn’t necessarily impact them that much, because they don’t have any financial skin in the game. Sure, it might hurt their reputation if their property management company is known for failing on a project, but they’re not gonna actually lose money.

Number two is to provide this qualified team member with equity in the deal, or some sort of stake in the deal. So there’s a little bit more alignment of interest, because now there is skin in the game, because if they perform well they can make money… But if they perform poorly, they’re not necessarily losing any of their own money; they’re losing money they could have earned, but they’re not losing their own money.

An example of this tier would be just give them 5% of the GP, but a better example would be to go to your property management company and negotiate a reduced property management fee. Let’s say they are wanting to charge you 5% – I’d go to them and say “Hey, how about you charge me 2.5%? I plan on holding on to the property for five years, so obviously five times 2.5% is going to be 12.5%, so I will pay you 25%, so two times what you lost on your property management fee during those five years, at the sale of the property. You will get paid less ongoing, but then you will be rewarded with a big bonus at the end of the property.”

This way they have a stake in the deal, but you’re also getting the benefit of having that reduced ongoing management fee. But again, they don’t have their own  money in the deal, so if they perform well, they get paid, if they perform poorly, they don’t get paid, but they’re not actually losing money. So that’s why it’s tier number two.

Tier number three is if this qualified member actually invests in the deal – the property management company invests in the deal, or the property manager themselves invest in the deal. If the real estate brokerages invest in the deal, or if the real estate brokerage invests their commission into the deal. Or if you’ve got a mentor who is invested in the deal. Someone who is qualified and will be helping you with the project, and also actually now has skin in the game. So if they perform well, they make money; if they perform poorly, not only do they not make money, but they lose money. So that’s tier three, alignment of interest.

Tier four is even better, because not only is the qualified team member bringing their own capital into the deal, but they are bringing on their own investors. So not only is their skin fully in the game, but they have brought other people’s skin fully in the game. So if they perform well, they make money and their friends make money, or whoever they brought into the deal, but if they perform poorly, not only do they lose money, but the other party also loses money, which makes them more likely to obviously treat the deal as if it’s their own, and the passive investor will perceive it that way.

Then tier five is going to be if you can get one of these team members to actually sign on the loan. They invest their own money in the deal, they brought on investors, and they’re signing on the loan. So if they perform poorly, not only would they lose the money they have invested in the deal, but now their personal assets might be at stake as well.

The highest level of alignment of interest would be for a qualified team member to invest in the deal, to bring on their own investors, and to sign on the loan. If you tell your passive investor that you’ve got a team member who’s doing those things, when they say “I don’t trust you because of your experience”, you’ll say “Well, I’ve got a property management company who has been managing properties in this area for 25 years, and they are themselves investing in the deal, they brought on investors, and they’re also signing on the loan. Plus, the real estate broker is investing their commission in the deal, plus I’ve got a mentor or a consultant who’s also going to be signing on the loan. So I understand your hesitation to invest because of my experience, but I have stellar team members who will be helping me manage the deal, plus they have financial skin in the game, which makes it even more likely for them to perform properly.”

That’s a powerful response to an objection. Now, not all of these team members result in the same level of alignment of interest. Let’s take for example tier number three, when a qualified team member invests in the deal – you’re gonna get the highest level of alignment of interest if it’s the property management company, because they have an ongoing role in the project. The level below that would be a local owner, or a mentor or a consultant. They’re going to have an ongoing role, but not as much as the property management company. And then the lowest would be if your real estate broker invests in the deal, or invests their commission… Because all three of these parties are investing their own money in the deal, but the real estate broker really doesn’t have any involvement in the ongoing business plan until the sale… So that’s why they result in the least level. But regardless, having a real estate broker invest in a deal is gonna be better than having a property management company just be on the team.

The tier system, one through five, an increasing level of alignment of interest, but within the tiers the increasing level of alignment of interest is the real estate broker is at the lowest, the local owner, the mentor and the consultant is the middle, and the highest would be the property management company.

Now, another way to overcome these objections — the best way is gonna be these alignment of interests, but another way would be to hire a mentor, and the mentor is gonna need to be an active apartment syndicator, who is still active and has previous success. That will help you because you will be able to leverage their success in order to overcome those objections.

You can tell your passive investor who is objecting to your lack of experience by saying that “I have a mentor who (using Joe’s example) has over 450 million dollars in apartment syndications under control, he has a consulting program that I’m in where he offers the system that he used, so that I can replicate his success. I am able to e-mail him or call him not necessarily 24 hours/day, 7 days/week, but any time during the day and he’ll get back to me within 24 hours. And he is also going to be signing on the loan, or he is also going to be an advisor for me to lean on whenever I have any issues that come up… Plus, he is allowing me to use his credibility to qualify for financing.”

So not as great as having them actually invest in the deal or have skin in the game, but if it’s between a first-time investor who’s doing it by themselves and an investor who actually has a mentor who is a successful syndicator, you’re gonna do with the latter person over the former person. So it’s not the best way to overcome this objection, but it’s something that can definitely help and push you in the right direction.

Then lastly you’ve got your brand – you’ve got your thought leadership platform and your online presence. The reason why this is gonna help is because that’s gonna help you with your credibility. If you’ve got a first-time investor — let’s say I am a passive investor and I am talking to two first-time investors, and I’ve got this concern that they don’t have any experience with apartment syndications, so why would I give them my money… And I do a quick Google search, and the first person, Theo – all I see is a Facebook page and a LinkedIn profile that hasn’t been updated since 2015. Then I google Joe, and I see that Joe has a really nice website, he has a podcast that I can actually listen to and hear him talk… He’s got a yearly conference that he does, and other things that I find online about this person. Who am I more likely to invest with? Obviously, I’m not investing with Theo, I’m investing with Joe, because just by googling him and seeing his online presence gives Joe an extra level of credibility compared to Theo, who doesn’t have that brand, doesn’t have that online presence.

Again, this is not going to be as great as having a qualified team member signing the loan, but it is something that is still going to set you apart from other first-time investors, and that might be the difference between you getting an investor and not getting an investor. Maybe they’re willing to take a chance on you because of the effort they’ve seen you put forth in order to create such a large online presence.

Those are really the three main ways to overcome that lack of experience objection, and that is the alignment of interests, having a mentor, and then focusing on that online presence through the brand and the thought leadership platform.

Now, I wanted to get into the list of the common questions that investors are going to ask you on these either intro calls, or essentially before you have a deal, but I’m gonna stop here for now, and then next week, the podcasts will be about those questions.

Until then, I recommend listening to parts one through five of the series “How to raise capital from passive investors.” Check out the other apartment syndication school series, as well as download your free money-raising document and the other free documents we have for previous series. All those can be found at SyndicationSchool.com.

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

 

JF1576: How To Raise Capital From Private Investors Part 5 of 8 | Syndication School with Theo Hicks

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Ready for some more apartment syndication knowledge? Lucky for you, Theo has plenty more knowledge to drop on us today. We’ll be learning more about raising the money we need to complete these deals. Specifically, we’re discussing how to “court” the passive investors that you have found through the methods discussed in the last two Syndication School episodes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is a continuation of what was supposed to be a four-part series, which turned into a six-part series, and now is likely going to be an eight-part series, entitled “How to raise capital from passive investors.”

In part one you determined your current mindset towards raising money, and you learned how to overcome any fears or limiting beliefs of this mindset that you have about raising money, as well as you learned why someone will actually invest with you, which comes down to trust.

In part two you learned the differences between a joint venture and a syndication, as well as the differences between the two main apartment syndication offerings – the 506(b) and the 506(c).

In part three we transitioned into discussing how to actually find investors. In part three we learned the first three ways to find people to invest in your apartment syndications, which was a thought leadership platform using Bigger Pockets, as well as meetup groups, and then in part four you learned nine more ways to find passive investors, which include volunteering, referrals, advertising, building relationships as a couple, tapping into your current network, partners, mentorship, having alignment of interests, and then getting creative.

For all of those 12 ways we either provided you with a step-by-step process for what to actually do, or gave you some high-level advice on how to approach that strategy. Then we gave away a free document, The Money Raising Tracker, so that you can begin to log the information of these people that you found.

In this episode you will learn what the next steps are after you find a passive investor, using one of these 12, or a creative way that you’ve come up with… And that is to set up an introductory call and then to execute that introductory call.

Once you’ve actually found an investor, as I mentioned in previous parts, your goal is to set up an intro call. Your goal is to get them on the phone with you. Now, this is gonna be accomplished with the fancy technology known as the e-mail. You’re gonna send them an e-mail with the goal of scheduling an introductory phone call with them. The e-mail content – what is actually within the e-mail – is going to be based on your understanding of this person, as well as your relationship with this person.

Let’s say you have your thought leadership platform and that’s what you use to find investors. A listener goes to your landing page and fills out their information, and says “This is my name, this is my e-mail, this is how much money I can invest.” Now you’ve got their e-mail address, so you will send them an e-mail. If you actually know this person already, you have an existing personal relationship with them, and you have previous real estate experience, whether that’s syndicating a deal already, of being a fix and flipper, or smaller rentals, or teaching real estate, or really any sort of real estate experience, here is a template that you can use. Now, don’t use this template exactly; adjust it based on your communication style, and obviously the examples aren’t gonna be the same for every single investor, but here’s an example of what I would send to someone I had an existing personal relationship with, based off of my real estate background. For some reason I really like the name Billy, so we’ll say I’m e-mailing Billy.

“Hi, Billy.

First off, I hope you’re having a wonderful week, and that your job is going well at GM.”

I’m gonna pause… “Your job is going well at GM” – obviously, you’re gonna wanna insert a personal reference that’s specific to them. “I hope your kid is doing well in basketball”, “I hope your wife is doing well”, because obviously you know this person already, so you can bring up something that’s a personal reference to them. Back to the e-mail:

“I’m writing to let you know that I’ve evolved my business to incorporate investors into the deals I do. As you might know, I’ve ________” Here you wanna insert your own personal real estate experience. For me, I would say “As you might know, I’ve acquired a personal portfolio of 13 rental units in Cincinnati, Ohio, and recently co-authored a best-selling book about apartment syndications. Continuing the e-mail:

“…and after doing that, I realize it makes sense to have a small number of people I know join me in the best deals I come across. I’d love to meet with you and learn more about your financial goals to see whether I can help you reach them. It’d be great to catch up, too.

Are you free ______? Either way, I wish you the best and I’m looking forward to staying in touch.”

So you’re not asking them for money, you’re not asking them to invest in a particular deal. The purpose is to just have a conversation with them, and get them to agree to going on the phone, and you’re suggesting a time and date, so that they don’t have to come up with one themselves. You’re explaining how you progressed from doing what you’re doing what you’re doing now, which is actually you doing something in real estate, to wanting to raise money for those deals. You’re basically saying, “I’ve had success, so I’m gonna share the success with others as well.”

Now, let’s say you have an existing relationship with this person, but you don’t have any real estate experience, you just have your business experience, because you need to either have real estate or business experience before becoming a syndicator; then instead of talking about your past experience, you would say – this is very unique, but you would say “I’m writing an article for my blog about lessons business professionals such as yourself have learned as they’ve evolved their careers. I’d like to include some of the lessons that you’ve learned in this article.”

Since you don’t have real estate experience to leverage, you shouldn’t even bring up the fact that you are going to be an apartment syndicator, or that you are interested in raising money. Instead, you want to just say that you’re gonna write a blog about them. That way you can get on the phone with them and then you can obviously interview them for your blog. Then you have them on your e-mail investor list, so as you start sending out your blogs, your podcasts, any new deals that you come across, they’re on that list and they will see them, and then maybe in the future you can follow with the previous e-mail, which is to invite them on a call to discuss their financial goals.

Now, the e-mail service that we use is MailChimp. It’s very simple and it should be free up to 50 e-mail subscribers; I’m not exactly sure how many, but starting out you get the free version, and then eventually once your list grows, you’ll have to pay money for it… But it’s a very simple service and you can create decent-looking e-mails without having to have any sort of design experience, because their guides are pretty straightforward. Plus, you’re able to link MailChimp up with your website, so you can have your lead capture form go directly to MailChimp, which is nice and saves you some time… So I recommend using MailChimp to create this e-mail list.

But anyways, once you have confirmed a time with them – and this is not for the blog strategy, but for the strategy where you mentioned your real estate background, so someone you have a pre-existing relationship with and you have a real estate background, you want to send them your company presentation, which you created and we’ve provided you a free template with in a previous Syndication School series.

Let’s say you send that e-mail and they say “I’d love to hop on a call. That day and time looks great, looking forward to it”, you reply with:

“Hi Billy,

You’re scheduled for December 25th at 6 PM. In the meantime, I’ve attached the Hicks Acquisitions company overview to give you some background on my company. I’m looking forward to our conversation and we’ll speak to you on Christmas Eve.”

So we created that company presentation earlier, and that wasn’t just for you to look at yourself… Now we’re actually gonna use it, and we’re going to use it by sending it to our prospective investors. That way they can familiarize themselves with you, your company and your business plan before you do the phone call, which will allow you to focus on talking about them, and not reading the presentation.

Now, for your first few deals you’re likely gonna stick with a 506(b) and you’re going to have a pre-existing relationship with that, which means you have a pre-existing relationship with your investors, so these two templates, with and without real estate experience, should apply. But as you start to grow, and people that you don’t have a pre-existing relationship with reach out, the approach will be a little bit different. [unintelligible [00:11:54].06] being proactive with them, because these e-mail templates above are you being proactive with people you already know, or reactive to people who have filled out your contact form… But as you progress through your business, people will start to actually reach out to you, so you don’t really need to convince them to hop on a phone call with you; they already want to talk with you… Instead, it’s just figuring out a date and time that works best.

I’m sure eventually you’ll have so many of these inquiries that you’ll have an extra qualification process before hopping on a call. Maybe on the lead capture form there’s a section where it says how much money they can invest, or there’s a section that says “Do you wanna be passive or active?” Just things so that you can eliminate people who aren’t going to be good fits for your investment strategy.

Now, for the actual introductory call there are three keys to a successful call that Joe has learned from doing thousands of these things. Number one is to take a ton of notes. So before the call, open up a Word document, put that person’s name at the top, and then Enter, and then put the date of the conversation, and then Enter, and then Bullet Point. During the call, take as many bullet points as possible based off of what they’ve said; and again, anything that they’ve said. Then save that document with their name, and maybe have a folder for these investor conversations where you can put all the different documents for your conversations, and the next time you talk to this person you can open up that document, and obviously hit Enter, put today’s date, and then Bullet Point and then take more notes… But during the conversation you can bring up something that you have in your notes above.

Never underestimate how impressed someone will be if you remember what’s going on in their lives. During your first conversation, Joe’s go-to question is “What’s been the highlight of your week?” If they say “My son made All-Conference for football” or “I just closed on a big business transaction for the company I’ve been working on for two years, or six months…”, bring that up. I don’t know what you would say to follow it up, I’m sure you can figure it out, but bring that up during the next conversation.

Again, raising money is all about building trust with people, and if you actually care about them and remember them, then they are going to trust you more. So that’s number one, take notes.

Number two is to keep in mind that this is a conversation, not a presentation, so you aren’t gonna read through your company presentation slides; you’re not going to do a webinar where your company presentation is up and you go through each slide and say “Any questions on this slide? Any questions on this slide?” Number one, they’ve already seen the company presentation – that’s why we’ve sent it in the first place – but number two, if you’re presenting, that means you’re talking… And the goal of the conversation is to actually get to know them, identify their ideal investment, and then answer any questions they have. But if you’re presenting the whole time, then they’re not gonna have a chance to tell you about themselves, to tell you what their ideal investment is, and ask too many questions. So no matter what, do not present to them, do not read through the company presentation.

Number three is going to be the 70/30 or 80/20 rule, them to you talking. They should talk at least 70% of the time, whereas you should only talk at most 30% of the time. They need to talk, so that you can accomplish your goals of that conversation, which is to get to know them and their investment goals. Now, the only exception is if they obviously want you to lead the conversation. If you ask them about their background and they say “Oh, I’ve been interested in real estate for five years, I’m a pilot and I live in Tampa.” If that’s all they say, then obviously they want you to lead the conversation, so make sure you’re prepared to actually lead the conversation with questions to ask them, and based off of their answers to those questions, what you’ll say next… Because the last thing you want is a bunch of awkward silence.

Now, when you know what their investment goals are, which you will be able to accomplish by not talking and letting them talk, then you can match them up with the ideal investment solution. This investment solution could either be them investing in your deals, or you might have to refer them to someone else… But by taking the time to listen to them, speak with them, and then by giving them a referral, now they know what you do, and who knows, maybe a year from, two years from now, ten years from now they come back and invest in your deals.

So the two main questions that you want to ask the investor is 1) what is your background, and 2) what are your investment goals? So to lead off the conversation, you should ask them about their personal and investing background. So I’d say “Billy, tell me a little bit more about your background, as well as your investing background”, and then just let Billy go; let Billy talk as much as he wants. And I don’t know about you, but if people let me talk and ramble on, I guess kind of like these podcasts, it makes me like them more… And when you like someone, you trust them. So if you are allowing your investors to do all the talking, they’re going to like you more and trust you more, or at least like you faster and trust you faster.

At the same time, you are also deciding if you actually want to partner with them. This is less relevant when you’re first starting out; you should probably take anyone who is interested in investing. But eventually you might be interviewing them as much as they’re interviewing you, and you want a person who’s an ideal fit to invest in your deals.

Now, the two signs, or two red flags that you might not want to have someone invest in your deals is 1) contempt – if they show you contempt, or if you show them contempt, then it’s probably not gonna be a good idea… Because if things get rocky at all and you hold contempt towards them, or they hold contempt towards you, it’s not gonna be a very pleasant situation. And in fact, things might get rocky because of the fact that one party holds contempt for the other one.

Then another reason would be if they ask you a lot of accusatory questions that don’t convey that they trust you. So if they’re being kind of snotty and ask you questions that make it seem like they think you don’t know what you’re doing and that they’re better than you, and it’s not going to be a partnership, then it might make sense to pass, because again, if things get tough — or this might be the reason why things get tough, and that is not going to be pleasant.

So learn about their background, and then again, of course, knowing about their personal background will allow you to bring that up on a future call with them. But the next question, and probably the most important question, is to ask them what their investment goals are.

After they’ve talked about their background, whether that’s been for 30 seconds or for — I guess not an hour, but maybe 20 minutes, you wanna transition into asking them questions about their investment goals. So ask them first “What does a good passive investment look like to you?” One, that question eliminates any active investors, because you’re saying “What does a  good PASSIVE investment look like to you?” and if they say “Well, I wanna be involved”, then you know they’re not a good fit for your deals… But also, it’ll help you understand what’s important to them.

They might say “I want alignment of interests”, or “I want 10% return on my capital”, or “I don’t wanna lose money”, or “I wanna be comfortable with the person and the team calling these shots.” Whatever their reason is, you want to focus the conversation on the aspects of apartment syndications that will fulfill those needs. Again, this is why you don’t present, because when you present, you’re telling them everything about the process, but most likely 90% of that stuff is irrelevant to them, at least for now, and they only wanna know why apartment syndications will help them solve their goals.

For example, if they say “The idea passive investment to me has a lot of alignment of interests”, I would say “Well, that’s great, because I personally invest at least $50,000 in all the deals, and I have a mentor who has a portfolio of over 450 million dollars in real estate who will be signing on the loan.” Boom! Two examples of alignment of interests.

Or if they say “I want an 8% or a 15% IRR, or an 8% cash-on-cash return”, I would say “Well, when we underwrite deals, we only submit offers on deals that have at least a 15% IRR, and at least an 8% cash-on-cash return to the investors.” That’s how you qualify the deals; I don’t ever wanna guarantee a return, because that’s not what apartment syndications is  – it’s not a guarantee, it’s an offer.

The same things applies to “I don’t want to lose any money” – you can mention the strategies you put in place so that at the very least they will get their capital back at the end of the business plan. This would be the three immutable laws of real estate investing, which is buying for cashflow, not appreciation, securing a long-term debt, and having adequate cash reserves.

And if they say they wanna be comfortable with you and the team calling the shots, then you know that you need to discuss your team members, their background, you’re going to want to meet with this person more frequently than a person who just cares about making money… Again, as you’re kind of getting an idea, the reason for wanting to invest, or their idea of a good passive investment – that will determine how you will approach the conversation.

Now, you also want to learn what type of deal they prefer to invest in, if any. If they’re more advanced, they might say “I only invest in new construction, or distressed, or value-add, or turnkey.” And then you also wanna know how much money they might be interested in investing. You could ask the following question – “If I find something that I think you might be interested in, what would be the range of investment you’re looking to do?” Because if you don’t ask them how much money they’re willing to invest, you won’t know how much money you’ll be able to raise, which means you won’t be able to set a goal, you won’t be able to set an investment criteria, and things like that. So “If I find something that I think you might be interested in, what would be the range of investment you’re looking to do?”

Now, from there you can include the conversation, see if they have any other questions based off of your company presentation, but these conversations can really be anywhere from a few minutes, to half an hour, to maybe even an hour, depending on the person. The shortest phone call that Joe has ever had, that resulted in the highest investment, was when he had built a relationship with someone via e-mail before; they had to go back and forth for a while, until this person finally agreed to hop on a call with Joe. The call was about eight minutes, where Joe learned about his background, and then the investor asked Joe what he had… To which Joe replied, “I happen to have a deal, and I will share that information with you.” That person ended up investing $100,000.

So sometimes it’s just that fast – quick phone call, boom, 100k in the bank – whereas other times you might be on the phone with them for half an hour or an hour, they ask you a ton of questions, but they never invest… Although “never” is probably not the right word, because you never know. If somebody doesn’t invest for five years, they haven’t invested yet, but they still might invest in the future, so… Unless there’s contempt or accusatory questions, or unless they’re willing to be active, then it’s worth having a conversation with them, especially upfront, for your first couple of deals.

This concludes part five, where you learned how to set up the intro call with prospective investors. You learned the three keys to a successful intro call, which were take a ton of notes, it’s a conversation, not a presentation, and the 80/20 or 70/30  them to you talking… As well as the two main questions you want to ask the investor during the call, which were “What is your background?” and “What are your investment goals?”

In part six, we are going to discuss how to overcome passive investor objections. It’s your first deal, you’ve never done this before – they’re likely going to have objections to giving you their capital, and we’re going to discuss how to overcome that challenge.

To listen to parts one through four, as well as to other Syndication School series about the how-to’s of apartment syndications, and to download your free money-raising tracker spreadsheet, visit SyndicationSchool.com.

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

JF1570: How To Raise Capital From Private Investors Part 4 of 8 | Syndication School with Theo Hicks

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Yesterday Theo gave us six ways to find passive investors for our apartment syndication deals. Today we’ll hear six ore ways to find our limited partners. If you’ve been following along with this series, you know how important raising money is for this process. These 12 ways to find investors are tested and proven to work by Joe himself. These tactics and strategies have raised enough money from passive investors to close on over $460,000,000 in apartment communities. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be a continuation of what will likely be a six-part series entitled “How to raise capital from passive investors?”

In part one you learned how to determine your current mindset towards raising money, as well as how to overcome any fears or limiting beliefs you have about raising money, as well as why someone will actually invest with you. In part two, you learned the differences between the joint venture and syndication strategy, as well as the differences between the two main apartment syndication offerings, which are the 506(b) and the 506(c).

Then yesterday, in part three, you learned three ways to find people to invest in your apartment syndications. Those were a thought leadership platform, Bigger Pockets and meetup groups.

This is part four, and we are going to continue to discuss various ways to find people to invest in your apartment syndications. We did three yesterday, and we have nine more to go, so hopefully we’ll cover all of those. If not, we will continue this series next week, with the remaining ways of how to find the passive investors, as well as start the discussion on what to actually say to these investors once you have found them. Let’s jump right into it.

Number four, the fourth way to find passive investors is going to be through volunteering. A strategy that has way more benefits than just you obviously raising money would be for you to find a non-profit that aligns with your values and interests, and then you go there and volunteer.

The ways to do this – you might have a charity or a non-profit in mind already, but there are a lot of good resources online that list out the charities in your local area. It’s as simple as googling a couple of things you’re interested in, with the word “volunteering” at the end. Hospice volunteering, or young entrepreneurs volunteering, or nonprofits, and  finding some sort of nonprofit to actually go volunteer. The process of volunteering there might be different; I know Joe had to go through a couple trainings first before he did his hospice; I volunteered back when I was in Cincinnati for a nonprofit, and I had to do a background check and things like that.

So there might be some hoops to jump through, but the primary goal of volunteering is obviously to give back, to contribute to your local community… But your secondary goal is going to be to get on the board of the nonprofit. Again, longer-term strategy. You’re not going to work there for three months and then get on the board, but the reason why you wanna get on the board is because of the relationships you’re going to form with the board members. Because if you listened to yesterday’s podcast, all these strategies are about building trusting relationships with people, and if you are able to build trusting relationships with these board members, these board members are likely going to be affluent, which means that they are themselves a high net worth individual, and they know other people who are high net worth individuals.

Once you’re on the board, your goal is to genuinely form relationships with this person outside of volunteering with them. You wanna truly bond with these bond members personally, talk about your family and things outside of just work and actually volunteering.

Also, you’re gonna have the same approach for people that are volunteering this as well, but you’re doing this without expecting anything in return. You can’t go in with the idea that you’re going to build a personal relationship with them for six months and they’re going to invest with you, because 1) that’s not genuine, 2) if you do that and they don’t invest after six months, you’re probably gonna get angry and ruin the relationship, and that is proof that it wasn’t genuine in the first place.

So you wanna do this slowly and organically over time… And heck, if you’ve got time, you could repeat this for multiple charities. If  you start looking into charities and there’s two or three that you’re really interested in doing, then just them all. But I’d start with one, and then kind of grow from there.

Again, the primary goal is to give back and to contribute, the secondary goal is to get on the board, because these board members likely have a lot of money, and will ideally invest in your deals eventually.

I guess one more thing about this, and really any other conversation you’re having with other people – we’ll get into this  a little bit next week – you want it to be an organic transition to talking about investing. You don’t want at the first board meeting you go to, have an [unintelligible [00:08:07].06] agenda where you get to talk about your real estate business. You build a personal relationship first, and then it’ll naturally transition to them talking about their business goals or financial goals, and then you can learn about what they’re investing in, and how much the return is, and then that’s when you can mention what you’re doing. So let them bring it up. So that’s number four, volunteering.

Number five is going to be referrals. Again, this is not something that’s going to happen instantaneously, although it’s possible, but you’re going to follow one of these 12 strategies I’m talking about and find an individual to invest in your deal. Then they invest in your deal and you are able to provide them with the returns you projected, or ideally you’re able to exceed those returns, and they’re so happy with your performance that they mention to five of their friends about how great of a syndicator you are and how you’re making them all this money. Then those people will become interested, and their friends [unintelligible [00:09:07].26] the landing page on your website, they fill it out and you have a conversation with them, and then boom, you’ve got a few more investors added to your list.

Referrals is going to be a huge source of new investors, especially once you are established. All this work you’re putting in now is in order for you to get that snowball effect, and eventually the momentum of all of your previous work will allow you to have referrals begin to pour in, and then you won’t have to spend as much time focusing on how to find more investors, rather on how to cultivate the relationships we have with existing investors. Ideally, it gets to the point where you’ve got so many investors that when you send out a new deal, you’ve got the commitments  filled up within a week, and you’ve got a very long waitlist of people who want to invest in that deal. Then that will allow you to start to increase the number of deals that you can do, as well as the frequency at which you do these deals. So number five is referrals. That’s going to be big once you’re established and have done a few deals.

Number six is going to be advertising. And again, this is something that you’re gonna wanna talk to your attorney about, because there are gonna be restrictions on the types of advertisements you can do for the 506(b) offering, whereas for 506(c) I don’t think there’s really anything – you can advertise as much as you want, but make sure you consult with your attorney first, and figure out which offering you’re going to do, and then figure out what types of advertising you can do.

But for 506(c) in particular, you are allowed to advertise your deals. So if you have a deal under contract, or you’ve identified a deal and you don’t have enough passive investors or enough verbal commitments yet, then you can create a targeted Facebook ad, or you can put an advertisement in the newspaper, or you can become a sponsor on someone else’s thought leadership platform or newsletter. Really any marketing strategy or advertising strategy that you would use to attract a customer, you can figure out a way to use that for your apartment syndication deal, and raise money.

Again, for any advertisement, before you actually create it, make sure you consult with your attorney first, and make sure you are in line with securities law. That’s number six.

Number seven is going to be your current network. For your first deal – and maybe your first few deals after that – the majority, if not all of your investors will be people you already know. These are people that you’ve known for at least a couple of years… Something that you’re going to want to do at this stage in the process is do a formal analysis of your current network in order to determine if anyone in your current network is a prospective passive investor.

Again, this will depend on whether you’re doing 506(c) or 506(b), because if you’re doing 506(c), you can only attract accredited investors, but if you’re doing 506(b), then you can attract sophisticated investors that you have a pre-existing relationship with… So more than likely – and again, consult your attorney first, but more than likely your first deal is gonna be that 506(b) where you are raising money from sophisticated investors that you have a pre-existing relationship with. And in order to do so, here is a process for formally analyzing your current network, with the purpose of getting them interested in investing in your deal.

This is before you even have a deal, because right now in the syndication school series we haven’t even talked about finding deals yet.

So this is before you have a deal – step one is to create a list of all of your personal connections. Really anyone that you’ve known for at least a couple of years. Anyone at work, anyone in your family, any friends, any extra-curricular activity that you do – this could be you’re volunteering, this could be if you’re playing on a football team, or if you play pickup basketball, the people you know from the gym, obviously people at work, but also previous jobs; this could be people you went to college with, people you went to high school with… Really anyone that you could think of that you had a relationship with for more than two years, write them down.

Maybe it’ll help by going to Facebook, and going to your friends list and starting there, and then maybe going to LinkedIn next and seeing your business connections and creating a list there… So create  an exhaustive list in Excel of all the people that you know.

The next step is going to be to categorize these individuals based on how you know them. You have a category for family, you have a category for friends, but it should be more specific than friends; have a category for Cincinnati friends, and a category for college friends, and then a category for previous roommates, and then a category for people you know from your first job, your second job, your third job. You get the idea. Put every single person on that list into a category. That could be a few category, or that could be 20 categories, it doesn’t really matter. The more categories, the better, because that means you know more people.

Once you have them broken into categories, the goal is to get one person from each category to say “Yes, I’m interested in investing” or “Yes, I’m interested in learning more.”

Again, I will mention how to get them to say this next week, but once they’ve done that, then with their permission you want to namedrop that person to others within that category. For example, you’ve got your work colleagues, and let’s say you get Bob to become interested in investing; then you can go to Billy, and I’ll tell you exactly what to say, but you’ll namedrop Bob, and say “Bob is interested in investing.” Then they’ll think to themselves “Oh, Bob is interested in investing? Well, I know Bob is really smart, he’s a fiscally-responsible guy, so I’ll definitely take a look at this.”

It’s the concept of social credibility. We’re more likely to buy something/to do something that someone else that we know has already bought or done. We want to leverage this concept in order to get others in that category to become interested in investing in our deals.

For Joe’s first deal, as an example – the raised $843,000 from 12 different people. These are people that he’d known for 2 to 10 years, and none of them were actually family members, which is quite impressive. So three were colleagues from his advertising days, so people that we worked with through advertising. Two were from the Texas Tech Alumni Advisory Board; Joe was on the advisory board of the Texas Tech Alumni Association. Two of them were actually friends of his brother’s… So they don’t necessarily have to be — well, I’m sure Joe knew these people, since he grew up with them.

He also had a college roommate, and then someone that he lived with after college invest in his deal, as well as two high school friends, and then one person from his flag football team. Now, this is what you will do starting out, but it doesn’t necessarily have to be people that you know directly.

Another strategy is to tap into the current network of your friends and family. A really good example of this is one of Joe’s clients. He was able to raise one million dollars for their first deal, and $350,000 of that came from his wife’s network… Which naturally transitions into number eight way to find passive investors, which is to build relationships as a couple.

Joe’s client was able to build a relationship with multiple couples that his wife knew, [unintelligible [00:16:37].03] the conversation with their people in his wife’s network, and doing so, they were able to get verbal commitments, and then actual commitments of over $350,000.

Now, the reason why this is a great way to find passive investors is because building relationships as a couple will add an extra dimension to the relationship. So you’re able to establish trust quicker, and the bond is stronger because not only are you forming a relationship with the husband or wife, but your husband/wife is also forming a relationship with both of then, but more likely their significant other.

For example, if me and my wife were reaching out to people, maybe through her work, we would speak with them, eat dinner with them, and naturally the conversation would transition into investing… And since my wife already knows them really well, that gives me an extra level of credibility, as opposed to me approaching them and them not really knowing who I actually am.

So when you’re working with your significant other, and whether they’re already friends, or even if they’re not friends already, they’re more likely to invest.

A different example would be if I start to get interest from people in Tampa, and I start meeting with them in person, rather than me just meeting with Billy one-on-one, I’ll say “Hey Billy, do you and your wife want to go get dinner with me and my wife?” So me and Billy become friends, our wives become friends, and now we have a more trusting relationship and they’re more likely to invest.

Examples of these, as I said, could be dinner, but it could also just something as fast as drinks, and then as you build a strong relationship, you can actually do weekends away together – a trip to a lake house, or a trip to Las Vegas, or a trip to a real estate conference. It really depends… This is a pretty unique strategy.

Again, all of these strategies take a lot of time, and this particular strategy – you need to have a significant other to actually do this, but… I don’t see why you couldn’t do it with a really close friend too, but I think this would work much better with a significant other. So that’s number eight.

Number nine is going to be to partner. This is kind of a hack, where you don’t necessarily have to find passive investors, you just have to find someone to find passive investors on your behalf. This is what I did – I partnered with someone who focuses 100% on raising money and nothing else, while I focus on everything else. So I don’t have to really implement any of these strategies. I do have to keep an eye out for, obviously, potential passive investors and then send their contact information to my partner… But I don’t have to focus on money-raising strategies because I’ve got someone else to do it with me.

Additionally, it doesn’t necessarily have to be a business partner, but you could also partner with a real estate brokerage or a property management company, or a mortgage brokerage, and they could invest themselves, or they could also raise money.

During my conversations with various real estate brokerages, and — I don’t think I’ve found any property management companies, but definitely real estate brokerages and definitely mortgage brokers, who I obviously was talking to them with the purpose of the real estate brokerage to have them find me deals, and for the mortgage broker to have them help me secure debt for deals… But I did come across maybe two brokers and one mortgage broker who also said that they have a money-raising arm, so they can actually help me raise money for my deals. What’s good about that is there’s also an extra level of alignment of interest, because someone who has an active involvement in the deal besides you is also putting their money in the deal…

So the mortgage broker is investing in the deal, the real estate broker who found the deal is investing in the deal – alignment of interest between your team and your investors… And then of course, they themselves might actually invest their own capital in the deal, or they themselves might have some sort of discounted rate in order for an equity stake in the deal. So that might help you raise some money, but it really depends on the actual structure; if you’re just giving away equity, then of course that’s not helping you reach your funding goal… But if they’re going to bring money into the deal, whether through their company or they themselves personally, that is another great way to actually raise capital.

And then going back to the “partner with a money-raising expert”, there are a lot of people out there who could potentially sponsor your deal, and they could do more than just raise money for the deal, but that will just be one particular aspect of the services that they offer. So it doesn’t have to be someone that you partner up with and you guys do it for every single deal. It could be a one-off thing where for your first deal or for your first two deals you can find someone to find one of these sponsors who can help you raise money, and then once you’ve kind of established yourself and you’re able to start getting investors yourselves, you can go on your own. So that’s number nine, partner.

Number ten is a mentorship. When you get a mentorship – and again, this is a paid consultant who is an active apartment syndicator, and obviously is successful as well… Because one, they can actually teach you how to raise capital; so they could do what I’m doing, which is tell you how to do it, but then since they’re your mentor, they can kind of walk you through the process in more detail and make it more personalized to you, since you’re having a back-and-forth face-to-face conversation.

They may also bring you on the GP side of their own deals, and in that case you can raise money for their deals, but that’s good because you don’t need to raise 100% of the funds. If it’s a ten million dollar raise, obviously you can’t do that yourself, so you wanna be able to do the deal… But if they bring you on the GP, then maybe you only have to raise a couple hundred thousand dollars for the first deal, and maybe a couple hundred thousand dollars more for the second deal. That way you could implement your learnings without having to wait to actually execute a money raise until you’ve got verbal commitments of 5-10 million dollars; you can do it once you’ve got 50k, or maybe even one investor. Maybe they’ll just let you be the GP for one investor.

And of course, they will also likely have connections to help you raise money for your deal. They’ll know a business partner you can go with, a sponsor, or they themselves will sponsor the deal, or they can allow you to tap into their network of actual passive investors to fund your deals… Of course, likely for a cut of the profits.

Number eleven is going to be having alignment of interests. So structuring your deals to maximize alignment of interests with your passive investors will result in them more likely investing in your deal. Alignment of interests basically means that — of course, your investors’ interests are to make money, but if you or your team members don’t have any skin in the game, then the interests aren’t really aligned, because you don’t make money the same way that they make money, or your team members don’t make money the same way that your passive investors make money.

You want to have an alignment of interests where all parties’ ways of making money are aligned, or ways of losing money are also aligned. I wanna go over the alignment  of interests in next week’s episode, because this is going to be a strategy for overcoming objections that passive investors have… And they’re gonna have objections, they’re not just gonna give you their money without any pressure or pushback… But we’re gonna talk about how to overcome these objections, especially when it’s your first few deals.

Number twelve, lastly – this is  a combination of different strategies, but it’s to be creative. Think of creative ways to build relationships with high net worth individuals, or ways to create relationships with people who are interested in passively investing in deals. Here are just a few examples of what Joe does.

Number one, he will host a board game night with the local investors. Very simple – just investors playing board games at his house for a few hours, and getting to know each other better. He also traveled the country in 2018 and hosted happy hours for investors. Obviously, he’s meeting with the investors that are local to him, because that’s pretty easy, but in order to meet face-to-face with investors out of state, this was a strategy – he scheduled a night where he’d have a happy hour, and he’d fly out there and all the investors would come to the bar and they’d all hang out and drink together.

Joe also sends out monthly newsletters to his list of current and prospective investors. Anyone who’s on his e-mail list will get a newsletter every month. Of course, the people investing in his deals get updates on the deals every month, and then whenever he has a new deal, that gets sent out to the e-mail list… But additionally, anyone on that e-mail list, whether they’re an investor or not, will receive a newsletter. That again is actually something that we will publish interviews with other passive investors just to kind of explain to people what it’s like to be a passive investor, from the eyes of an actual passive investor.

Joe also has a passive investor FAQ page on the website. Essentially, it’s a page that will walk someone who has no idea what passive investing is, to figure out whether that’s a good strategy for them. If it is, what should they invest in, and if they choose to invest in apartment syndications, here’s everything you need to know about passively investing in apartment syndications.

Then we’re actually going to use that content, as well as feedback we’ve received from investors, as well as more in-depth research to create a passive investor handbook in 2019. That’s gonna be  our book for 2019.

These are, again, creative ways specific and unique to Joe for how he builds relationships with these prospective passive investors. For you, you will wanna come up with your own creative ways, ways that aren’t on this list, and implement those. Of course, it’s gonna be trial and error, and you will learn what works and what doesn’t work as you progress through your career… But the more creative you are, the more personal it’s going to be, and the more trust that you’re going to build, because it’s going to be authentic and real.

So those are the 12 ways to find passive investors. In this episode we went through nine, in the last episode we went through three, for a total of 12. We’re going to provide you with a free resource with this series, and that’s going to be the money-raising tracker, which is a spreadsheet which allows you to input as you find these people and begin to have conversations with them, which we’ll go over in the next week’s series… You’ll want to input that information into your money-raising tracker, so that you know how much money you have in verbal commitments… Which, if you remember from the series about setting goals, you need to know how much money you’re capable of raising to set your 12-month goal, and in order to know how much real estate you can actually syndicate. To download that document, SyndicationSchool.com, or in the show notes of any of the parts of this series.

This concludes part four, and in part three and four combined we learned the 12 ways to find passive investors. In this particular episode we talked about volunteering, referrals, advertising, tapping into your current network, building relationships as a couple, partnering, mentorship, having alignment of interests and getting creative.

In part five and six  you’re going to learn how to communicate with these prospective investors once they are found, as well as an exhaustive list of all of the objections and potential questions to expect from passive investors, and if they’re an objection, how to overcome that, if it’s a question, how to actually answer them.

To listen to parts one through three, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download your free money-raising tracker, visit SyndicationSchool.com.

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

JF1562: How To Raise Capital From Private Investors Part 1 of 8 | Syndication School with Theo Hicks

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Were back with more syndication school episodes. Today we’re going to start talking about raising the money from private investors. You’ll need to get verbal commitments from investors so that you’ll know how much you can raise and what kind of properties you can buy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

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

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

 

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

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

This episode is part one of a series entitled “How to raise capital from passive investors.” This is series number 11, and I highly recommend that you go listen to series one through ten. I know it’s gonna take a while to listen to those, but everything that we have discussed so far has been leading up to this moment, which is the moment where you are now finally ready to start generating interest for your deals and attempting to raise money.

After that, we will start talking about how to actually find deals, and you’re ready to actually start your syndication journey. But before you start  finding deals, you need to actually have verbal interest. The reason why, if you remember back to when we set our goals, you need to know how much money you’re capable of raising, because that will determine the type of property you can buy.

If I’m only capable of raising $50,000, then I’m not going to be looking at 100-unit deals. But if I’m capable of raising a couple million dollars, then that’s an entire different story. Plus, understanding how much money we can raise will help us set our 12-month goal. But more importantly, we need to know how much money we can raise to actually set investment criteria for the types of deals to look at.

This will be part one, where we will talk about the introduction to  raising money. First, we’re gonna go over a task to gauge your mindset as it relates to raising money. Then you will learn how to overcome any fears or limiting beliefs you have about raising money, and then we’ll talk about why someone will even invest with you in the first place.

All of this episode is basically focused on mindset, because for some, raising money and using other people’s money to buy real estate could be something that you are a little hesitant at doing.

In The Best Ever Apartment Syndication Book we offer a five-question sanity test to essentially gauge where you’re at and how you think about using other people’s money… So answer these five question; they’re just yes/no questions:

Do you have a fear of using other people’s money? Yes or no.

Do you have reservations about partnering with investors?

Do you think your relationships with your friends and family will be forever changed if you partner with them on a deal?

After successfully completing ten or more syndications, do you think you’ll be ten times more concerned with gaining and maintaining trust with your passive investors?

And then finally, do you think after you’ve done ten or more successful syndicated deals your ongoing awareness of the importance of being trusted with investors’ capital will be magnified by ten times?

Unless you’ve actually used other people’s money for investing before, then you will likely answer yes to all these questions. In the book we made a joke about if you don’t answer yes to these questions, you’re probably a sociopath, which — obviously, this isn’t a sociopath test, but the whole entire point is that the sanity test lets you know that it’s okay to be, for example, slightly fearful of using other people’s money… Because if you’ve never done it before, of course you’re going to have some sort of anxiety around it, just like anything new that you are trying; you’re not gonna go in there super-confident, because at the end of the day, you don’t really know what you’re doing.

The second question about “Do you have reservations about partnering with investors?”, of course you should. It’s a huge responsibility. They’re giving you their hard-earned capital, and you are using that to hopefully make them money, but obviously at the end of the day things could go wrong and you might not make them money. So it’s a pretty big burden on your shoulders to make sure that you are doing things properly.

The third question – “Do you think your relationship with your friends and family will be forever changed if you partner with them on the deal?” Of course it will. It’s probably different when a stranger invests in your deal than a family member, because when a stranger is investing in your deal, you’ve only known them for as long as they actually reached out to you, whereas for a family member you’ve known them for your entire life… So there’s a lot of extra baggage that comes with that. And typically, your relationship with your family is a lot more personal, whereas if they actually invest in your deal, that relationship is gonna have the added business dimension. And you know your family members really well. Sometimes they might be really weird about money, so definitely expect if you’ve got your family investing in deals for things to change with that relationship.

Question number four, “After successfully completing ten or more syndications, do you think you’ll be ten times more concerned with gaining and maintaining trust with your passive investors?” Well, after doing ten deals with the same passive investor, you’re definitely going to have a much closer and stronger personal connection with them, and you’ll look at them as more of a friend, and as a result, you’ll want to take care of them more. So yes, you’ll be way more concerned about making sure you’re maintaining that trust factor with them, and that you are able to return their capital to them, because they’re your friend now.

And then lastly, do you think that after doing ten or more successfully syndicated deals your ongoing awareness of the importance of being trusted with investors’ capital will be magnified by ten times? Of course, the answer is yes, because they are actually helping you to achieve your financial goals by investing in the deal, so you want them to trust you, so they’ll keep coming back… But at the same time, not only do you want them to trust you so they keep coming back, but one of the main sources of new investors are going to be referrals. So if they trust you, then they are more likely to refer you to one of their friends, and that can start a domino effect, where you’ve go referrals from them, and then that person refers you to someone else, and you  can eventually grow your investor database based solely on these referrals.

Overall, the purpose of that five-question sanity test was to let you know that it’s okay to be afraid, and it’s okay to have reservations, and we are going to talk about how to overcome that fear and reservations in this episode.

So how do you overcome this fear or this barrier of using other people’s money to invest in real estate? This is not the most common question, but it’s a pretty common question… Maybe not asked exactly in that form, “I’m afraid to use other people’s money”, but you can see it subtly through these questions that the reasons why they’re asking that question is because they’re probably a little hesitant about using other people’s money to raise capital. I know I’m for sure a perfect example of that.

The way you overcome this fear – it really varies from situation to situation, and person to person… So I’ll just give you a few examples, because examples are really the best way to explain things.

For Joe, it was out of necessity. Now, keep in mind he has always been confident with raising money; it was never something he was necessarily afraid of, but this is more of a story of how he got to the point where he needed to raise money, and if he was afraid, his need would have allowed him to overcome that fear… Because he had a goal and he needed to accomplish that goal, and raising money was the only way.

So Joe initially started off by purchasing four single-family homes in about three years. His original goal was to make $10,000/month, and I believe with these four properties he had about $1,000/month coming in, cashflow. But the problem was that he couldn’t see a quick way to scale this single-family business to $10,000/month, because four properties generated a $1,000, so he would need 40 properties to generate $10,000/month… And he didn’t know how he would get there. He didn’t know how he would save up the down payments, mostly, for all those properties, let alone actually qualify for financing, since you’re only allowed to get up to ten of these residential loans.

At the same time, he was spending a lot more of his time managing these four properties than he would actually want to. And then, of course, only making $1,000/month, if you have one move-out or one large maintenance issue, then all that $1,000 goes away, and all that time and three years of energy was not necessarily wasted, but he was that much further away from his $10,000 goal.

So he started to investigate ways to overcome this problem. He went to the Rich Dad, Poor Dad seminar, where he heard that the only way to get rich was to not do single-family residence, but to do apartments or mobile home parks. Joe wasn’t familiar with mobile home parks, although he had lived in one when he was younger… But he did live in an apartment at the time, and decided to choose apartments over mobile home parks for his way to reach that $10,000/month goal.

But of course, the same issue arises, which is how do you afford the down payments, and then Joe discovered the apartment syndication investment model, and obviously the rest is history.

Again, he wasn’t necessarily afraid of using other people’s money, but if he was, then he would have been able to overcome that fear out of necessity. So if you’re in the same situation and you have a goal of making a certain amount of money per month, or something else that you want to accomplish, and you aren’t able to do it on your own, by using your own capital to finance deals, then you need to ask yourself “What’s worse? Me being afraid of talking to other people and raising money, or would I much rather be afraid, but be able to reach my goals? Or would I rather not reach my goal, but not have to face an investor and ask them for money?” It kind of just depends on who you are, but obviously, for Joe, actually talking to investors and reaching his goals was better for him than just not doing it, and trying to figure out how to actually scale these properties.

Now, even though Joe, again, wasn’t necessarily afraid starting out, a better example would be me, because I never even imagine myself raising money for deals, because I was afraid of using other people’s money… And the way that I overcame this fear was a combination of things. Number one, it was just sheer luck. If I had never met Joe, which was really sheer luck… I happened to become interested in real estate around the same time Joe moved to Cincinnati, and Joe was also active on Bigger Pockets, and also was interested in starting a meetup, so the stars aligned… So I met Joe, and obviously Joe raises money, and that was kind of my introduction into the concept of apartment syndications, whereas before I had no idea that that even existed.

Secondly, it would be experience and education. Through working with Joe, I obviously have gained a ton of experience and knowledge about the syndication process, and obviously education and experience are the two main requirements to becoming an apartment syndicator. You can learn more about that in the Syndication School episodes 1499 and 1500.

Obviously, with that experience and education I had more confidence in my ability to successfully implement a syndication business plan, which then in turn gave me a little bit more confidence in raising money… But I still wasn’t there yet. I was still afraid. I still was like “Well, I have all this information in my head about syndications”, but earlier I said that people ask questions, and they don’t necessarily say “I’m afraid of raising money. How do I get over it?”, but they’ll ask a question that is assuming they’re afraid. One of those, I think, is “I don’t know how to raise money” or “I don’t know anyone to raise money from”, whereas in reality what you’re saying is that “I’m too afraid to approach anyone in my network to ask them for money.” At least that’s what I was doing. I would say I didn’t know who I’d raise money from, I didn’t have anyone in my network who was high net worth, whereas in reality I’m sure I did, but I just was too afraid to actually do anything.

But the big game-changer for me was actually the Best Ever Conference in 2018, where I got dinner with a handful of people, but one of the people at the table had just completed their first syndication deal. We were talking about kind of the process, and what he did, and just based off of his situation, and the fact that he did a deal, I told myself, “Well, I’ve been working with Joe, and I definitely have a lot more of an education foundation than he does, and I definitely have more experience as well with real estate…”, however the key difference was that he had a partner. So that was kind of the key that I was missing the entire time. It was like, well, if I don’t want to raise capital for a deal, if I’m too afraid to, sure, I could do sort of what Joe does and just get over that fear, and out of necessity do it, or I could just partner with someone who can raise money, and I can do everything else…

And there’s still obviously that anxiety, because if I’m doing the acquisitions and the operations of it, then I’m still responsible for the money that these people have invested in the deal… But I’m not the one that’s actively going out there and actually raising the capital. So what I did is based on the conversation with the guy at the Best Ever Conference, I decided to partner up with someone who had experience raising capital.

Now, the last reason why someone might be afraid of raising capital, and this likely applies to me as well, and it probably applies to you, and it might be  a little harsh, but this is the Syndication School, so we tell the truth here… And that reason would be selfishness.

Here’s examples that we use again from the Best Ever Apartment Syndication Book; Joe came up with this analogy, and I really like this analogy. Imagine that you’re living in a town that has a plague that might wipe out 50% of the population; it’s a really nasty plague. Let’s say the Black Death has re-emerged in your hometown, and you happen to, for some reason, have the cure for this plague… But again, for some reason, the only way for you to get this cure out to the public is for you to go to the town hall, go up on stage in front of the entire town population, half of which are infected, and give a speech about how you came up with this cure. You basically have to sell the cure to them, because you’re some random guy, so how do they know the cure is gonna work? But let’s say you have stage fright, and you’re too afraid to go up on stage and present this cure to an audience, so you just decide not to do that because you don’t wanna be uncomfortable.

Obviously, thinking about it in that situation, of course you would go on stage and you would forget about the stage fright, and  you’d go up there and you’d probably be afraid and sweating, but you still get over it, and present the cure and save the town.

Now, obviously, helping someone achieve their financial goals through apartment syndications isn’t as severe as a plague, because no one’s going to die; at least 50% of the population isn’t going to die if you don’t do a syndication… But it’s still kind of the same concept, because you have the potential to positively influence people’s lives in a positive way. Just by listening to this school, you are aware of the syndication concept. Now, it doesn’t mean you can do one today, or tomorrow, or a month from now, or even a year from now, but just the fact that you’ve been given access to this information is such a rarity, because not many people know about syndications. So since you’re one of the few people that know of its existence, then there’s no reason why you can’t put your comfort aside, put whatever it is you’re afraid of aside, and spend the next couple of years educating yourself, getting experience in order to raise capital for deals, and influence people’s lives in a positive way.

Obviously, you’re gonna influence your investors’ lives, because they’re investing in your deals, instead of investing in the stock market or in something else, or just not investing at all… You’re giving them a great opportunity to invest their funds into a large apartment deal and see some pretty solid returns.

Obviously, that will have a positive influence on their lives, but it’ll also have a positive influence on your close bubble of people that you’re close with, your circle of influence, because by you doing these types of deals, they could also obviously invest in those deals as well, but you’re going to have more money and more freedom to obviously improve the lives of those around you.

And then lastly, you’re going to positively influence the lives of people all over the world. A belief that Joe has is that people are inherently good, and if they actually have more free time, then they’re gonna be able to do more things. And if you are an apartment syndicator and these people invest in your deals, and are able to increase their passive income to a point where they can leave their full-time job, then they’ll have 40 hours a week extra to spend on doing good in the world.

So you really have no idea how much of a positive influence you starting a syndication business can have. Of course, the only way to find out is to actually do it, but these are just a couple examples of things that will be benefitted, that are outside of yourself.

Now, of course, if you need to be selfish, then you can still do apartment syndications and still raise money, and just instead of saying how much you’re going to improve the lives of others, you can say you’re gonna improve your own life, because obviously you’re gonna make a ton of money, too.

So I’m not gonna judge. At the end of the day it depends on how you are motivated. If you’re motivated by other people, then I would definitely focus on how you will positively influence other people’s lives. And if  you aren’t, then obviously you can focus on your 12-month goal and your long-term vision, and how it will positively influence your life… But the best is to go with a combination of both – a little bit of selfishness, sprinkled in with a little bit of selflessness, and finding that right balance.

Again, we’re talking about how to overcome that fear of losing other people’s money… And if you’re just focused on yourself, it’s going to be difficult, because you’re going to focus so much on how it makes you feel, as opposed to how you overcoming that fear could benefit other people’s lives.

Overall, the ways to overcome the fear of using other people’s money to invest in real estate is one, it comes out of necessity, using Joe’s example… Two, three, four and five, which was my example, are sheer luck, really; just kind of putting yourself in the right situations. Number three, getting that experience and education to give you the confidence to do so, and to learn more about that, remember to listen to the episodes 1499 and 1500. Number four, we start talking to other successful syndicators to see how they’re overcoming that fear. And then number five would be to actually partner with someone… So rather than overcoming the fear, just have someone else do it for you. And then lastly, number six is be selfish.

The last thing I wanna talk about in this episode is to give you an understanding of why someone will actually want to invest with you. What do you think that is? Do you think it’s the types of returns that you offer? Do you think it’s the market that the property is in? Do you think it’s the business plan – value-add vs. distressed vs. turnkey? Do you think it is the actual deal itself? What do you think it is?

The answer is actually none of those. Obviously, those are reasons why people invest in deals, but that’s not the primary reason people invest in deals, and sure enough, the primary reason people will invest in your deals – and we’ve kind of hit on this earlier in this episode, during that five-question sanity test, is going to come down to trust.

A passive investor can get returns from anyone; each market will have a handful of syndicators they can choose from, there is a handful of syndicators that are operating the exact same business plan within that market, so the reason why they pick one syndicator over another is going to come down to trust.

Now, there are three main ways to gain trust, specific to this apartment syndication process. Obviously, there’s more ways to gain trust than just these three, but these are the three main ways to gain trust with a potential passive investor.

Number one is going to be time. A big thing that you see, again, on places like Bigger Pockets, with people asking about “How do I raise money for the deals?”, they’ll say that “I’ve done a couple deals in the past, fix and flips, or small multifamily deals, and I want to raise capital. How do I find investors?” And whenever I see a post like that, I always respond with saying that you just start with your current network. You need to start with people that you already know, because people that are going to invest with you are going to know you already and trust you already… Because since you don’t have experience, you can’t really leverage that experience in order to get strangers or people that you’ve recently met to invest with you, because there’s no proof that you’re going to be able to execute the business plan properly, and to get them their returns, and to keep their capital.

Whereas if you reach out to people that you already know, then you have that business background that you need, and that education foundation, they’ll know that, and they’ll know that maybe you’ve been trusting in the past for a certain situation… Or for some reason or another they’ve known you long enough and they trust you and they’ll invest in your deal.

Obviously, the first way to gain trust is going to be that time factor. you need to spend time with these people in order to gain their trust to invest. Back to the Bigger Pockets question about “How do I get people to invest with me?”, start with your current network, start with people that you’ve known for at least a couple of years.

Now, if you don’t know anyone at all, or if you haven’t known anyone for a couple of years, then obviously you’re gonna need to work on that first before you have the potential to raise capital. Obviously, you can get over this by partnering with someone else who does this, but this is specifically for you trying to raise capital yourself… The answer is going to be time.

Joe, for his first deal, knew his investors for 2 to 10 years. So these weren’t people that he just met in the past couple of months. It was people that he had built a relationship with over 2 to 10 years, and they trusted him enough with their money to invest in his real estate deals.

Obviously, now that he’s done over 10 deals, this time horizon decreases to maybe even a couple of months. As you complete more deals, the time horizon for how long you need to know someone before you’re getting their trust will decrease, because  – this transitions to number two – of your expertise.

So the second way to gain trust is through your expertise. You display your expertise in a way that a potential investor understands. You’ve done a few deals, and now you know what you’re talking about, so you can set up a lead capture form on your website, for example, where people can contact you if they want to learn more about investing in your deals.

Or your ten investors starting out, you’ve done such a good job and you know what you’re talking about, that they refer you to other people, who in turn come and reach out to you to ask you about the deal, and since you know what you’re talking about, you can get them interested based off of their communication style.

For example, you want to make sure you obviously displaying your expertise in a way the investor understands; a salesperson understands differently than an engineer, who understands differently than a business owner, who understands differently than a seasoned investor. So if you’re talking to a salesperson, then you’re going to display your expertise a lot differently than you are to an engineer, who probably wants to know more about the actual numbers; or the salesperson wants more high-level, overview of the actual business plan.

So again, it’s not only displaying your expertise, but displaying it in a way that the person you’re talking to understands. Of course, if you’ve done a few deals, then that’s how you’re gonna be able to display your expertise, talk about those first few deals… But if you haven’t, again, this is where that past experience and education comes into play. You’ve got your past real estate or business experience, and you can talk about that… And obviously, you haven’t done a syndication deal yet, but you can communicate how you are going to be able to successfully execute the business plan based off of your past real estate and business success.

Also, a great way to display your expertise is through your thought leadership platform, which is something else we’ve talked about on the Syndication School. So if you’ve got your interview-based thought leadership platform, you’re talking to apartment professionals and people are listening to your podcast, and they look at you as a credible expert, because you’re out there talking to the movers and shakers in the industry… And I know I’ve said this before, but a lot of people will reach out to Joe, who are interested in investing, and they mention that they feel that they already know him because of his podcast.

And then lastly, you’re gonna display expertise through your team. You wanna use your expertise, but also your team’s expertise to gain the trust of the investors. Talk about their background, how many deals they’ve done in the past, things like that.

And then lastly, a way to gain trust is just the good old-fashioned personal connection… Because at the end of the day, people make decisions – and that includes investment decisions – based on emotions, not rationality or analytically. You need to figure out what they care about, and then see whether you can align with that thing in a genuine way. If  you’re able to do this when you’re communicating with investors or potential investors, or just anyone you meet or know, is ask them what’s been the highlight of their week – maybe some business deal they’ve done, something with their family… Just to kind of build that personal connection.

And whenever you’re talking to someone that you think might be a potential investor, make sure that you allow them to lead the conversation. Ask them what’s been the highlight of their week, see what they say. Ask follow-up questions, see what they say. Obviously, the goal is identifying some need that they have, that you can provide a solution to, by having them invest in your syndication deals. So when you’re talking to investors, later on in the series we’ll focus on how to actually communicate and have these conversations with investors… But for now, the rule of thumb is the 80/20 rule, which is 80% of the time they should be talking, 20% of the time you should be talking… Again, with the purpose of identifying some sort of need that they have that you can provide the solution to with your syndication business.

Overall, the three ways to gain trust is time, displaying expertise and building a personal connection. That concludes this episode, where you took the five-question sanity test to gain your mindset as it relates to raising capital. We also talked about the six ways to overcome any fears or limiting beliefs you have about using other people’s money… And finally, we talked about the three ways to gain trust from potential investors, because the primary reason people invest is because they trust the syndicator.

In part two we are going to have a discussion about the different types of structures, because you need to know what type of syndication structure you’re going to pursue before you start reaching out to passive investors… Because the ways that you’re allowed to reach out to them, as well as the actual qualifications of the investor varies from structure to structure.

This episode has been more of a (I guess) story time, whereas this next episode is going to be pretty technical and into the details on the structures.

To listen to the other Syndication School series about the how-to’s of apartment syndications and to download those free documents, visit SyndicationSchool.com.

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

JF1555: How to Build Your All-Star Apartment Syndication Team Part 3 of 4 | Syndication School with Theo Hicks

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Today Theo will cover another important part of your apartment syndication team, finding and hiring real estate brokers. This will most likely be your best source for deals so getting in with a good broker is HUGE for you syndication business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

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

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

 

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

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

This episode will be a continuation of the four-part series entitled “How to build your all-star apartment syndication team.” In part one, which is episode 1548, you learned the six ways to find your prospective team members, as well as the process for hiring the first two team members, which are a business partner and a mentor. Then in part two, which is episode 1549, you learned the process for hiring the third team member, which is a property management company… And in this episode, which is part three, we will be discussing the process for hiring a real estate broker. By the end of this episode, as well as the previous two episodes, you will learn how to find and hire a business partner, a mentor, a property management company, and a real estate broker. In the next part, part four, we will discuss the final three team members, which are your attorneys, your mortgage broker and your accountant.

The free resource for this four-part series will be a Building Your Team spreadsheet, which is a spreadsheet that allows you to log your various team members and make sure you are hiring everyone that you need. That is available for you to download for free, either in the show notes of this episode, or any of the other three parts, as well as at SyndicationSchool.com.

Let’s get right into it, the process for hiring a real estate broker. First, what is a real estate broker’s responsibility? Well, primarily, they do five things… And these are the five things that all real estate brokers will do. Number one is they will source deals with the purpose of wanting to represent the owner of the property, and list that property for sale to the public. These are considered on-market deals, which are deals that are listed by a real estate broker. There’s  an offer memorandum created, and it’s mass-marketed to the entire population, I guess, technically.

Now, this is slightly different than for single-family residents, because when you are investing in single-families or in smaller multifamilies, typically you’ve got a real estate broker or agent who’s representing you, and then they’ll set you up in the MLS. The deals on the MLS are listed by a different broker, so there’s two agents involved – your agent, and then the selling agent… Whereas for apartments, the more likely scenario is that you are going to reach out to a ton of brokers; you’re gonna work with 5, 10, 15 different brokers, and if you end up submitting an offer on one of the deals they have listed, then they are likely going to represent you. So a little bit different that single-families or smaller duplexes and fourplexes, where an agent is representing you as a buyer, and then the seller as well. For apartments, it’s usually the one broker representing both parties.

Another responsibility is they create the offering memorandum (OM), which briefly mentioned. This is the sales package that the broker puts together, that essentially highlights the investment. So it’s got information on the market, the property, the financials, things like that.

They also help the owner of the property with the listing is live, to the signed contract. They will work with the owner between the time the property is listed for sale, and between the time the contract is signed, with things like confidentiality agreements, scheduling and conducting the property tours, answering potential buyers’ questions, and things like that. They will also manage the offer process, so from offers to contracts being signed. They’ll schedule the calls, the offer date, and they’re the ones that accept the offers and relay those to the owner. They’ll coordinate the best and final sellers call, and essentially everything that is involved in the offer process, they will help manage that.

Then once the contract is signed, they are responsible for ensuring that the deal makes it to the closing table, and then also as you’ll repeat that process for you in the back-end. So if you buy a property from broker A, then they will be your point person for getting the property to the closing table, and then 5-10 years later when you sell the property, you’ll likely use that same broker to list the property for sale.

Those are the five primary responsibilities that more or less every single real estate broker will do. Now, there are additional services that a real estate broker will provide to you once you’ve proven yourself worthy of the services. Those are – most importantly, they are a great source for off-market deals… Again, on-market deals are deals listed by a real estate broker to the public; but at the same time, since real estate brokers are sourcing deals, before putting it on market, they might send that deal to a list of premier investors or people they know can close, and bring them the deal first to see if they wanna take a look at it, see if they wanna buy it, and if not, they’ll put it on the market.

Most of the rest of this podcast will be a conversation on how to get brokers to send you those off-market deals, which involves winning over their trust and portraying yourself as a credible, serious person who can close on a deal. We’ll talk about how you can do that here in a few seconds.

Another additional service a broker could provide is offer advice on particular markets, and submarkets within that market, and neighborhoods within that submarket, as well as help with deals. The deal depends on the situation. If you are working with the same broker who’s listing the property, then they can definitely help you to an extent with the deal, but at the end of the day they want to sell that deal, so trust their information, but also verify that what they’re saying is correct and it’s not biased because they wanna sell it. But if you happen to find a real estate brokerage who’s also a property management company, and you bring that property management company on, then whenever you’re looking at deals, you’ll have the eyes and ears of a broker to kind of review the deal with you, in addition to your property management company reviewing the deal.

That’s one example where they could help you with the deals, but again, if you’re working with the actual listing broker, do not take everything they say at face value. Trust what they say, but you wanna verify that what they’re saying is correct.

They can also provide a broker’s opinion of value (BOV) when you’re ready to sell, or considering selling. After you buy the property from a listing broker, and every year or two you should get a broker’s opinion of value, or at least determine what the value of the property is, to see if it makes sense to sell – ideally, your broker will help you out with that.

They could also invest their commission in the deal. This is what actually happened for Joe’s first deal that he did – the real estate broker invested a portion or all (I can’t remember which one of those is true) of their commission into the actual deal. This is great because it provides alignment of interest with your investors, because if the listing broker is investing on the deal, then the perception is that it’s a really good deal, because why else would the broker put their money in the deal.

And then lastly – and I kind of already mentioned this – they could potentially fulfill the role of another team member. For example, my property management company – and most property management companies are also going to be brokerages, too… So the property management company I work with, the wife is the president of the management company, and the husband is the president of the brokerage… So I kind of get to rely on both of them whenever I’m underwriting a deal; they help me check my assumptions, or tour the property with, but at the same time, since he’s a broker, he’s also out there looking for deals, so every once in  a while he’ll send me deals.

Then there’s another brokerage that I talk to who also has an equity raising arm of their brokerage. They have the ability to help you raise funds for your deals as well, as an example of how they can fill another team member role.

So how do you find your real estate broker? I discussed this in part one, which is episode 1541, and I talked about the six ways to find your team members… But here’s exactly what I did to find my real estate brokers in Tampa. A little bit more specific, since I mentioned in part one finding these team members – whether it’s a property management company, a broker, a mentor, an attorney – there’s really only a certain number of ways to find them, and it’s going to be very similar, a few iterations… But I wanna provide an example of exactly what I did to find my real estate brokers in the Tampa Bay market.

First, obviously, I created a list of Tampa brokers, but exactly how I did that is I googled “top Tampa Bay real estate commercial brokers”, and essentially went through 10-20 pages of Google, and whenever a website came up, I would open it up in a tab, and by the end of it I had 20 tabs open of potential brokers to work with.

I also searched for commercial brokers, real estate brokers, multifamily brokers on Bigger Pockets, and created a list of a handful of people there. Then I did the same thing on LinkedIn. Now, LinkedIn is gonna be a little bit harder, because there’s gonna be a lot of results… So I started doing it, I got through a couple of pages, and realized that most of the people that I came across worked for the companies that I already had opened in a Google tab. So I just used Google and Bigger Pockets, but LinkedIn is another source you could use as well.

Once I created my lists – I created the name, the website, the e-mail and the phone number… And I contacted the local team. For some of these brokers – they’re national brokerages, and I needed to make sure I actually found the Tampa Bay office, instead of just reaching out to the general phone number or general e-mail address. And then obviously, for the Bigger Pockets or LinkedIn I would have reached out to the actual individual via direct message.

And here’s exactly what I’ve said to every single person, and I had a 100% response rate… This is exactly the e-mail I sent to every single person. I said:

“My name is Theo Hicks, and I’m reaching out because my business partner and I are actively seeking multifamily opportunities in the Greater Tampa Bay Area. We both have previous apartment experience. I work with a 400 million dollar apartment syndicator, helping him with investor relations, co-authoring an apartment syndication book and managing a consulting program with over 80 active apartment syndicators, underwriting hundreds of deals in the process.

I also own a portfolio of multifamily assets in Cincinnati, Ohio. My business partner has a background in raising equity, we have our equity, debt and management lined up, and now all we need is a deal. With that said, I was wondering if you could have one of your directors contact me, so that we can discuss our company’s investment parameters and business plan in further detail, as well as learn more about CBRE Tampa.”

Obviously, that last sentence is gonna change based off of the company and based off of the person that you’re reaching out to. I believe for this one I was reaching out to the office manager, so I asked her to direct me to a person that could help me.

Now, what’s important to include in your opener, and which I included here, is number one, you want to let them know what types of real estate you’re looking at and where; I mentioned I’m looking for multifamily in the Greater  Tampa Bay Area. Also – and this is probably the most important  – is to let them know about your experience; I let them know that I work with an investor, I’ve had investing experience myself, I work in a consulting program, I’ve written a book about this… And then I also talked about what pieces I already had in place. I mentioned how I already had equity lined up, I already had debt lined up, I already had a property management company lined up… So I wasn’t just reaching at random because I just randomly thought “Hey, I’m gonna start reaching out to brokers.” No. They read my statement and realize that I’ve put in effort, I’ve talked to investors, I’ve talked to mortgage brokers, I’ve talked to property management companies, I’ve got everything lined up and now I’m just ready to find a deal. All of this shows that I’m serious, educated and credible, and that I will have the ability to close on a deal.

Now, you should work with every qualified commercial broker that you find, because again, you want to work with as many brokers as possible, because the more brokers you work with, the more deals you will find. Because unlike the MLS, where all the real estate agents and brokers will post their listings there, most of these commercial brokerages will have their own listings service; their own website has their listings… So it’s not one centralized location for all of them, at least not something that I have found.

So you want to work with all the qualified brokers you can; make sure you get on their lists. Then, obviously, once you find a deal, you’re likely going to work with that listing broker until you close, as well as, again, on the back-end when you sell the property. But ultimately, it’s up to you; you can work with one broker, you can work with as many as you want… You can work with one broker on the front-end and a different broker on the back-end, but this is just kind of the general recommendation of what you should do.

Now, before we get into the qualification process and how to actually win these brokers over to your side, so they start sending you off-market deals, I wanted to quickly discuss how they actually get paid. Real estate brokers are paid via commission, and a good rule of thumb is to expect to pay them or expect for them to be paid by the seller 3% to 6% of the purchase price if the apartment is less than 8 million dollars. If it’s over 8 million dollars, expect some sort of flat fee of around 150k. Typically, the seller is the one who’s paying these fees, so when you’re selling the property and when you’re underwriting the property make sure that you are accounting for this fee in your disposition summary.

Now, how do you actually qualify a broker? Your goal of these broker conversations, after you’ve done that initial introduction script that I mentioned – you’ll likely hop on a call with them and have a kind of informal interview of them, and they’ll also be interviewing you at the same time. The goal for you is to determine the broker’s level of experience, as well as their success with apartment communities that are comparable to the types of deals that you actually want to invest in.

If you’re a value-add investor, you want to find a real estate broker who finds and lists value-add deals, because obviously, that will increase the chances of you finding a deal that meets your investment criteria… Because what you’ll notice when you start searching for commercial real estate brokers is that not every single one lists value-add properties, let alone multifamily. For example, you will come across some that really only list retail, or only list offices, or land, or self-storage, but they don’t really focus on apartments… So even if they list one apartment a year, you should probably subscribe to their list, but when you’re interviewing them, the ones that focus more on multifamily (and particularly value-add multifamily) should get more of your attention than a brokerage who lists one multifamily property every year, and most of their stuff is office space.

Here is a list of questions to ask the broker – or at least these are questions you should ask yourself, and then find the answers to them, whether it’s from actually asking the broker or doing some investigations on their website. And again, just like I said in the previous episodes, when you’re talking to them don’t just run down this list and robotically ask them every single question; bring them up more organically, and do some research before you actually speak to them to find the answers to some of these questions first.

One thing you wanna know is how many successful closes they have done in the last 12 months, because obviously the more deals that they’ve done, the more experience they have and the more active they are… Which means you have a better chance of finding a deal that meets your investment criteria.

You’ll also want to know of those successful closes what were the average number of units. Again, does that align with your investment criteria? If they’re closing on an average of 20 units per close, and their investment criteria is 100 units, then that broker might not be the ideal fit for you, or at least you shouldn’t spend a ton of time working on that relationship as you would someone who averages exactly 100 doors per sale.

You also wanna know what percentage of the deals they list are value-add, for example, if that’s what your investment strategy is. Ideally, the majority of the deals that they list are in alignment with your investment strategy. If you’re looking for turnkey properties, then the majority of their properties listed should be turnkey, and same for value-add and distressed.

You also wanna know how long they’ve been working as a real estate broker, as well as how long they’ve been focused on multifamily. Again,  the longer they’ve been working, the more experienced they are.

You also wanna know where they’re located, which you shouldn’t have to ask them that question. You should be able to find that online, ideally. And more of a requirement, your broker needs to be local to the market you’re investing in, or at least have a team nearby. If you’re investing in a smaller city or smaller market, then they should have an office in the closest big city. It’s gonna be difficult to work with a broker in Chicago if you’re trying to buy houses in Florida. It’s possible, but it’s gonna be more difficult than it would be to work with someone who’s actually local to Tampa, because they’ll understand the area a lot better.

You also wanna know how many value-add apartment listings – or whatever your investment strategy is – that they currently have, just to give you an idea of how many potential deals they list and you’ll be able to look at, keeping seasonality in mind. Usually winter, this time of the year, is when these things are the slowest. So if they don’t have a ton of deals listed for sale in the winter, don’t be too concerned; but if it’s in the middle of May and they have no listings, then that should be a concern, or at least a red flag.

Also you wanna ask them if they can walk you through a timeline of a typical deal, just to get an understanding of how that works… So how long after finding a deal do they usually have it listed for sale, how long from the time the property is listed for sale until they call us to offer, what’s the tour process, do they have an open house that you can go to, do you have to call ahead to schedule, and when you should go to the property, will you be able to see? And then also ask them what the offer process is – is there just going to be a call to offer, and that’s it? Is there gonna be a best and final sellers call? How does the offer process work?

You also wanna know how they actually find their deals. This is more for comparison purposes, so compare the way broker A finds deals to broker B, to see which one you should focus on building a relationship with more. You also wanna ask them what stage the local apartment market is in – is it a buyers or a sellers market? What are the cap rates and how are those trending? Are we at the top or at the bottom of the cycle? …just to gauge their understanding of the actual market.

You also want to ask them what they specialize in. As I mentioned before, the term “commercial broker” means that they could  focus on multifamily, retail, office, land, skyscrapers, condominiums… Any commercial real estate that’s not single-family home, or I guess four units or lower, that could be their specialty. Ideally, they specialize in what your investment strategy is, so they specialize in multifamily, or more specifically, value-add multifamily.

You also wanna ask them how they structure their fees – what commission do they charge, and are there any other fees that are charged for using their services? You wanna know if there is anything in particular that they  do differently than other brokers in the real estate market, for comparison purposes.

You also wanna ask them if they can provide you with a property management company, mortgage brokers, attorneys, accountants, referrals. Number one, that will obviously give you potential team members to interview, and that’s gonna be great — if they’re a really good broker, then they’re gonna give you really good referrals… But it also gives you an idea of how tapped into the market they are, and how tapped into the big players they are. If they don’t have any property management or mortgage broker recommendations, it’s not really a good sign. It shows they’re likely inexperienced.

And then lastly, you want to know if they offer both on-market and off-market deals. So are all the deals listed the exact same? So they find them, they create a marketing package, and no one sees it until the sales package is listed, or is posted on their website? Or do they send the deals to a list of preferred investors first, as an off-market opportunity, before listing it on market? When you ask this question, follow up by saying that you completely understand that they’re not going to send you off-market deals until you’ve proven yourself. That’s the transition to the next part of this episode, which is how to prove yourself to the broker, how to win them over, and eventually have them send you their off-market opportunities, or at least increase your chances of being awarded the deal… Because brokers are going to be one of the best deal sources. They obviously aren’t going to send you these off-market deals right away, or really enthusiastically answer your questions until you’ve proven that you can fulfill their need, which is to obviously make money, and then make money by you closing on the deal. So don’t expect off-market deals, don’t expect brokers to instantaneously respond to your questions until you’ve proven yourself worthy to receive those off-market deals. To accomplish this goal, there’s a few things that you can do.

Here’s a list of things you need to do before you even reach out to these brokers, to set yourself up for success. Number one is to have a property management company, or at least have an idea of who you’re gonna work with. You don’t need to have a signed contract or anything, but have an idea of at least one management company you can work with; having two or three is even better. That way they have an idea of who is going to manage the deal after it’s closed on.

You also want to have a mortgage broker or a lender, so they know how you’re going to fund the deal, and that you are qualified for financing. You’re also going to want to have verbal commitments from your passive investors. That way, they will know how you’re going to fund the loan down payment, the renovations and the other fees associated with closing on the deal.

Lastly, you’re gonna want your mentor or consultant, because assuming you haven’t done a deal before, you’re going to need to leverage their experience, expertise and credibility with the real estate broker. Those are the four things you need to do before you even make your list and start reaching out to brokers.

Once you’ve done those four things, then when you’re actually interacting with brokers, in that initial conversation – and ongoing conversations – first you want to bring up your relevant experiences… So what have you done in your past that will show a broker that you’re serious about closing on a deal? This could be real estate experience, this could be non-real estate experience, so business success, if you’ve gotten a ton of promotions, you’ve managed this much money in sales… Then you could also obviously leverage your team’s experience as well.

Then, of course, you wanna tell them what you’ve already done, just to show them, again, that you’re serious, that you’ve put forth effort already, and now you just need a deal to bring everything together… So who are your team members, who’s gonna fund the debt and what’s the debt going to be, what kind of terms can you get, how much can you qualify for, how much equity can you raise, and if you evaluated the market yet… Things like that.

Then lastly, work on building a personal connection with them, because that is the best way for them to trust you and for them to send you off-market deals. Obviously, you wanna do this genuinely. Joe’s go-to question is ask people what’s been the highlight of their week, but a lot of other people will build rapport with brokers by taking them out for drinks, having coffee with them, dinners and lunches, going golfing, things like that. So it doesn’t have to be strictly business, it can be some fun as well.

Now, here are four other things that you can do to win over the broker without having to actually complete a deal. This is after you’ve found them, you’ve had the initial conversation with them, and you’ve told them about all the team members that you’ve brought on already, and your debt and equity… This is what you can do moving forward to start to build that connection with them, that trust with them.

Number one is just to pay them. You can offer a consulting fee of, say, $150 to $200/hour for their advice. Maybe you can say “Hey, can I pick your brain for half an hour and I’ll pay you $100?” Or “Hey, can you meet me at this property and take a look at it? I’ll pay you $200.”

Another thing you do is to visit their recent sales. This is a very good tactic to show them that you’re serious. Ask them for a list of their ten most recent sales, and then actually drive to those properties, drive around the property; if you want to, you can act like you’re a tenant and actually go into the units, but I personally just drove around the outside of the properties and looked at the exterior conditions, then I went online and looked at the interiors, looked at the rents… I essentially did a very high-level analysis of the property, and then I followed up with the broker, creating a pros and cons list as it relates to how that property compares to the type of property I wanna buy. In doing so, one, it is helping me learn more about the market and the types of properties this broker lists. Number two, it gives them the idea of the type of property that you want to buy, but number three, most importantly, as I mentioned, it shows them that you’re serious and that you’re putting forth effort and you’re not someone that just reached out, had that conversation and fell off the face of the Earth. You’re actually out there, boots on the ground, doing work.

Also, you can offer them information on how you will fund a deal… Not how you find the deal – they’re finding the deals for you – but how you will fund the deal, so how much debt are you qualified for, who is your mortgage broker, how much equity can you raise, how will the compensation structure be for the GP and LP… And again, they wanna know that you can close, so if they know that you have enough money to close, then that’s just one more tick in the positive box for you as the investor, in the eyes of the broker.

And then lastly – and this is kind of general, and this could fall into the other categories as well – diligently follow-up with the broker. If they send you a deal, underwrite it right away, and then reply back to them with their feedback within 24-48 hours. Go and visit the actual comps that they selected and give your feedback on those right away. If you do a property tour with them, don’t take multiple days to get back to them with any follow-up questions or feedback. E-mail them right when you get home. If you bring on a new team member, let them know; if you’ve just found a big investor, let them know. Anything that points to you getting closer to completing a deal, let the broker know. Again, it shows that you’re serious, but also, you don’t wanna go weeks at a time without contacting the broker, because then they’ll completely forget about you, so… These are ways to constantly stay in contact with that broker.

Now, we’re running a little bit over, so I’m gonna quickly go over this last section, which are questions that you should be prepared to answer, because obviously, the broker is interviewing you just as much as you are interviewing them… So really quickly, here are the questions that you should be prepared to answer from the broker. Number one is who is your property management company; they’ll wanna know who’s gonna manage the property once it’s been taken over by you, and if they’re credible. They’ll wanna know how many units this property management company manages, what’s the average building size, what’s the biggest building size, what types of properties do they focus on, and are they local? They’ll also wanna know who is your business partner and what their experience is. Essentially, they’re gonna wanna know about all of your team members – business partner, property management company, if you’ve got a consultant or a mentor, anyone else on the general partnership, they’ll wanna know about that.

They’ll wanna know if you’ve purchased an apartment building before. Obviously, if you haven’t, that’s where you want to leverage your team’s experience – your property management company, your partner, and/or your mentor or consultant, which is why you need those three things, because you’re gonna need to leverage their expertise and their experience.

They’re also gonna want to know what types of deals you’re looking for, and they’re gonna want to see you be specific. If you just say “I’m looking for a 100-unit deal”, that’s not specific enough and it’s gonna show them that you don’t really know what you’re talking about. They’ll wanna know how many units, what’s the cost, what market are you looking at, what’s the asset type (A, B, C class), value-add, distressed, turnkey… They’re gonna want to know what age of construction, construction type, roof type, things like that. Be as specific as possible with your investment criteria to show them you know what you’re talking about.

They’re also gonna want to know what markets you’re looking into. Similar to the investment criteria, don’t just say “I’m looking in Tampa” or “I’m looking in New York.” Say exactly what submarkets you’re looking at, what neighborhoods you’re looking at… Again, it shows them that you know what you’re talking about.

They’re also gonna wanna know how you’re gonna fund the deal, so that’s the debt and the equity… And then they’re also likely going to ask you if you are willing to sign an exclusive agreement with them, so they can get you the best deals. Now, out of all the brokers I’ve talked to, none of them have said this, but you might come across this, and we always recommend that you don’t sign an exclusive agreement, because then you’re pigeon-holing yourself to working with only one broker, which means you are limiting your lead pipeline.

Overall, when it comes to brokers — you’ve gotta keep in mind that these brokers are likely contacted by investors all the time, so kind of figure out what sets you apart by other newbie investors. And then also, don’t expect for them to send you off-market deals until you’ve proven yourself. And for both of those – what sets you apart and how to prove yourself – have been the sole focus of this episode… So now is time to get out there and assume you’ve got your bases covered, which means you’ve got your team in place, and you can start looking for brokers so you can start finding deals.

That concludes part three, where you learned the process for hiring a real estate broker, and in part four, the final part of the series, we’re gonna discuss the process for hiring the remaining three team members, which are the attorneys, the mortgage broker and the accountant, and then we’re also going to talk about what order to actually hire these team members in.

To listen to parts one and two, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download your free teambuilding document, visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

JF1549: How to Build Your All-Star Apartment Syndication Team Part 2 of 4 | Syndication School with Theo Hicks

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Today Theo is covering how to find a great property management company. This is a huge part of your business, to be a successful syndicator you’ll need a great property management company that you can count on to do outstanding work without you having to micro manage. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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

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

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


TRANSCRIPTION

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

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

 

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

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

This episode is part two of the four-part series titled “How to build your all-star apartment syndication team.” In part one, yesterday’s episode, you learned about the four core team members and the three secondary team members that make up your seven-person company team. We talked about the six main ways to find prospective team members, and then we discussed the process for hiring a business partner and a mentor.

This episode, part two, will focus solely on the process for hiring a property management company. Now, just to reiterate, the most important aspect of apartment syndication — I guess the most important aspect of a successful apartment syndicator, is their ability to execute a business plan. The best deal, in the best market, means nothing if you and your team cannot execute the business plan… Keyword there, for our purposes right now, is being “team.” So the team is one of the pieces that will help you implement your business plan, so it’s very important that you find the correct team members.

For the property management company, their primary responsibility is to manage the property after closing. So once you’ve closed on the deal, the property management company will replace the old property management company, and they will be responsible for managing the day-to-day operations: fulfilling maintenance requests, maintaining the occupancy, things like that.

Now, additional services that property management companies may or may not provide based off of the company are [unintelligible [00:06:05].08] for the pre-deal, and they might advise you on what neighborhoods and submarkets to look at. Once you have a deal, they can help you confirm your underwriting assumptions… So your expense assumptions after you take over the property – they can let you know if those make sense based on how they’ll operate the property, and the market, as an example.

Once you have a deal under contract, they can help you with the due diligence process, helping you manage the inspections and the appraisals that happen, and all the audits of the current owners, find historical financials and rent rolls, and help with finalizing the budget… So finalizing your proforma, as well as your renovation budget.

Once you have the deal closed, aside from their primary responsibilities, they could also help you manage the renovations, help you host residence appreciation parties, help you implement the best marketing strategies, and things like that. Typically, and especially when you’re starting out, the property management company is going to be a third-party. So you’re not going to want to start your own property management company when you’re first starting out, because you’ve got a lot of other things to deal with and learn about, and you don’t have time to focus on that particular aspect of the business plan.

But as you grow, and get your portfolio to a certain size, which people differ on which size you should actually bring on your own in-house management company, you can bring the management company in-house and run it yourself, or continue on with a third-party. It’s really up to you.

Now, how do the property managers make money? Well, typically, they will charge a management fee, which is a percentage of the collected income at the property. In general, this could be anywhere between 2% and 10%, but since we’re dealing with apartments, you’re gonna be looking at the lower end of that range, because 10% is for single-family homes, 8% is probably for duplexes… So once you’re over 100 units, you’re looking at around 5% or lower.

Other ways that management companies might get paid are through various fees – lease up fees, renewal fees, eviction fees, application fees, marketing fees, referral fees… There are a lot of different fees that they can charge. Again, it depends on the management company and the size of the property. And you might also run into a property management company who is willing to help you manage renovations at a cost, which is the construction management fee; it’s typically a percentage of the total rehab budget, anywhere from 3% to 10%, with the larger rehab budgets falling on the lower end of that range. For example, say a million dollar rehab and they are charging you 5% – well, then you’ve gotta pay them $50,000 out of that budget, so that’s just 50 additional thousand dollars you should raise at the beginning of the project.

Now, let’s get into the important aspects, which is how do you qualify the property management company? Basically, you’ll use one of those six ways to find a property management company – you’ll create a list, you will reach out to them, and you will — first, what you wanna do is introduce yourself, and when you’re doing so, you want to 1) tell them what you’ve done or what you’re in the process of doing that’s getting your closer to closing on a deal. So I would call them up and say “Hey, my name is Theo Hicks. I am from Tampa, Florida, and I am actively working with real estate brokers right now to find deals. I’ve underwritten this many deals.

Right now I’m just looking for a property management company to bring on. Are you willing to spend five minutes to speak with me, so I can learn more about your company? And you can learn more about my business, as well.” Because, whether you know it or not, this is actually a two-way street; they’re actually interviewing you as well, because they wanna be confident that you are able to satisfy their business needs. Their business needs are obviously to make money, and the way they make money is to manage deals, and the way to manage deals is to work with investors who actually can close on deals.

At the same time, they also want someone who has realistic expectations of what a property management company is supposed to do… So you’re gonna have to prove your worthiness before asking them for additional services that I went over, like coming with you to property tours, and helping you confirm your underwriting assumptions.

Before we go into how you should prepare for this interview, let’s go over the types of things you should be asking and figuring out from the property management company to qualify them. First, how long have they been in business? A pretty simple question.

A couple things about these questions… 1) Don’t just call the property management company and ask all these questions in order like a robot; ask them sporadically, but do your due diligence beforehand and see how many of these answers you can find.

How long have you been in business – you can find that online, on their website, pretty easily. This is a list of questions that you need to ask either them, or ask yourself and find the answers to, whether that be on their website, through someone else, or through them directly… Because if I was talking to someone and they asked me a question that was front and center on my website, I wouldn’t find them very credible.

So you wanna know how long they’ve been in business, because the longer they’ve been in business, the more experience they have, which in turn likely means they are more credible. You also wanna know what areas they cover. 1) Do they cover the areas that you’re targeting? Pretty important… But you also wanna know  if they are focused on a handful of target markets, or if they are spread out across the nation. Again, not a disqualifier, and it really depends on the size of the company, but if they’re focused on too many markets, then they might not be able to give you the attention you need, and they might not be as big of experts on that actual market, because they cover so many and it’s impossible to know everything about every single market.

You also wanna know if they’re actually located in that market. Ideally, they are. Ideally, they say that “I’ve been in business for 20 years. I cover the Tampa Bay market, and that’s where our headquarters are located.” It just makes things easier for you, and it kind of indicates their knowledge of that particular market.

You also wanna know how many units they manage, so total number of units. If they are, for example, the biggest in the market, or at the higher end in the market, that’s a positive, because that indicates that they are credible… But at the same time, you might not get the attention that you want, because they’re working with big-time investors and you’re kind of a little fish at this point in time, and you might not get the attention that you want.

On a similar note, you also wanna know essentially what’s the biggest unit they manage, what’s the smallest building they manage, and what’s the average unit count. You wanna make sure that they are able to manage the size of property that you are interested in investing in. So what you will realize is that when you talk to property management companies, they either specialize in, obviously, single-family homes or smaller multifamily; then you’ll find companies that specialize in that 10 to 50-unit range, buildings that don’t need on-site management. Then you’ll find other companies who specialize in the 100+ unit range, or maybe even 1,000+ unit range, and then everywhere in between.

You wanna find a property management company who aligns with your current business plan. If your business plan is to buy a 20-unit, then you’re gonna want to find a management company who specializes in those smaller multifamilies… But if you were looking at a 100-unit, then that same property management company would not be a good fit. And I’m telling you, when you talk to them, they will try to convince you that they are a good fit, they’ll try to convince you that they’re interested in moving into that market, or they haven’t done it before, but they’ve got the processes in place to do so… But at the end of the day, you don’t want someone else learning on your dime. You wanna find a company who has experience doing that size of a project.

You also wanna know what types of properties they specialize in. Similarly to the unit size, you also wanna make sure that they are able to execute, or at least manage, the business plan that you plan on executing… So if you’re going to buy value-add apartments, you want to make sure that you find a property management company who has experience with value-add apartments.

You also wanna know how many apartments they personally own or their company owns, because that could be a potential conflict of interest. If they own apartments in your market, and a unit goes vacant at your property and a unit goes vacant at their property, which unit do you think they’re going to fill first?

You also want to have them describe to you what their process is for managing a moderate renovation. Again, this is for value-add syndicators. You wanna know how do they track the work, who are the contractors – are they in-house GC’s? Do they find sub-contractors for everything? Who manages these contractors? Who approves the work before the contractors get paid, and then what fees will they charge? Essentially, you want to know what to expect during the renovation process from them, what types of updates that you’re going to receive, who’s actually doing the work, is the work being checked, how much does it cost, how long is it gonna take? Things like that, because those are all going to factor into your underwriting – how long is it gonna take, how much is it going to cost.

Then also you want to plan ahead and figure out exactly how to approach your performance reviews with the property management company, and so now you’ll know “Okay, well the work is tracked this way, so I should expect information presented to me in this way”, and know exactly who the contractors are, their in-house contractors, who they’ve worked with in the past, their sub-contractors… “It’s gonna cost me this much, and it should be done within 12 months.”

You also wanna know if they offer any due diligence services, and what the cost is… So will they help you deal with the due diligence process            ? Will they perform a lease audit? Will they perform a financial audit? Will they look at the bank statements of the property? Will they help you perform the inspections? Will they walk the appraiser through the property? Things like that. And then you also wanna know how much that costs. Will it be free, as long as you close? Will it be free if you don’t close, or will they charge you money if you don’t close? All things to think about.

You also want to get your hands on a list of nearby properties that they currently manage, so then you can go look at these properties and confirm that they are the type of property they say they specialize in, you can see how well the property is maintained, the area, and kind of get a general feel for the property.

You also could ask what special trainings their managers receive from their company. Again, this one right here is not a deal breaker, but if you’re down to two management companies and one has a very specialized training for their managers and the other one doesn’t, that could be the deciding factor.

You also wanna know how they manage the property’s online reputation. I think it’s something like 80%+ of people search for rental homes online, so the first thing that a prospective resident is going to see is likely gonna be the property’s ranking on Google, and Apartments.com, and places like that… So you wanna ask them, are they doing anything to make sure that they maximize that rating? And again, this could be a deciding factor between multiple property management companies.

You also want to know who the point person is going to be to you. Is the point person going to be the site manager (which is ideal) or is it gonna be some lower-level employee?

You also wanna ask them what they see as the site manager’s duties. What do they expect out of the site manager, and does that align with your expectations of what the site manager should do? You can also ask if you can interview and approve the site manager before hiring them.

You also wanna know what kind of relationship they expect their site manager to have with the owner, so how often do they expect the site manager to contact the owner, and when they do contact them, what types of updates will they provide?

Another important thing to think about is what maintenance issues will require approval? Is there a certain dollar amount that if it’s under that dollar amount, then they’ll just take care of it; if it’s not, they’ll come to you and ask for your approval. And you also wanna know how accessible they will be. If you call them, will they answer? If not, how long do they say they’ll get back to you?

You also wanna ask you if they’ll provide you with a written management plan. Will they provide you with a renovation plan, and a marketing plan that they plan on implementing once you’ve closed on the property?

You also wanna ask them about what fees they charge, and what is actually included in the monthly management fee… Because sometimes you’ve got the management fee and then you’ve got all these other fees built on top of that, but you only accounted for the management fee in underwriting. You also wanna ask them what type of property management software they use. Really, you wanna make sure that they’re using one…

You also want to ask how much time it takes to typically do a make-ready. Once a tenant moves out of a unit, how long does it take for them to get that leased again? Depending on the market, it could be a couple of days, or it could be a couple of weeks… You’re going to want to know what the average is in that market and what they are committed to doing… Because again, the longer the unit is vacant, the less revenue you are bringing in.

You also wanna know what types of rent payment methods will be available to the residents, and make sure that that aligns with the renter demographic. If you’re in a low-income neighborhood, then not collecting cash or not taking cashier’s checks might be an issue… Whereas if you’re in a higher, more affluent neighborhood, then not having the ability for them to submit their rent via direct deposit might be an issue.

Also, you wanna ask them if they require you to list the property with them upon sale, because some property management companies will put that in their contract. You also wanna ask if you can have the cell phone number of the site manager, the regional manager and the national office, just in case you need to get a hold of them… And if you can’t get a hold of the site manager, you can go up the chain of command to the regional manager, if you can’t get a hold of them, you can go to the national level.

And then lastly, you can ask them for contact information for a few of their current clients who have buildings that are similar to the types of buildings you will be investing in, so that you can go to those references and check things out.

Now, again, don’t just go through this list of questions and ask them in order, like a robot, to the property management company. Take a look at this list, do you research to see if you can find the answers to these questions yourself, and the ones that you can’t find, scatter them out naturally throughout the course of the conversation.

Now, as I mentioned, you are not the only person that’s doing the interviewing here. The management company will also be interviewing you, because they want to make sure that you are able to satisfy their business needs, which means that you’re able to close on a deal… So there’s a few things that you can do to win the property management company over to your side.

The first one is to be prepared for the interview. There are going to be questions that they’re definitely going to ask you, and if you don’t know the answers, then you’ve kind of ruined your opportunity to present yourself as a credible investor to this management company. That’s why what you do is make sure you know the answers to these questions before you even speak with a management company.

Number one, who is your broker? Who is your real estate broker? They’re gonna wanna know that you are actually looking for deals at this point in time, and that is accomplished by telling them “Hey, my broker is John Doe, from John Doe Academy.”

Next, they’re going to ask you if you’ve purchased an apartment before, and obviously you haven’t, if you haven’t before; if you have, you have. If you haven’t, this is where your mentor or partner comes into play. If your mentor or partner or someone else on their team has completed a deal before, then you can say “I haven’t completed a deal before. However, I have a partner who’s done XYZ, and a board member who control 300 million dollars in apartment communities, so we’ve got that covered.”

They’re gonna wanna know what types of properties you’re looking for, as well as what markets and neighborhoods. Again, this shows that you know what you’re talking about, if you could spit off and say “Well, I’m looking for apartment communities built after the 1980’s, that are 100+ units, that have the opportunity to add value, but aren’t distressed. That are in Tampa, Florida, Ybor City, Temple Terrace, these particular submarkets.” That sounds a lot better than “It doesn’t really matter. I’m looking for an apartment in Florida somewhere.” Those two things sound completely different. The first method shows that you’re active and that you know what you’re talking about, and that you’ve done your due diligence, and also that they can confirm that they cover the market that you are actually investing in.

They’re also gonna wanna know what your business plan is. Again, this will show your credibility and expertise, as well as let them know if it aligns with their specialty. So if someone asks me what my business plan is, I say “Well, I want to buy a value-add property, take 12-18 months to turn over and stabilize the asset with my renovations, that will probably be about 5k-7k per unit… As well as some exterior renovations. We’ll hold onto the property for five years, and then after those five years, we will sell and rinse and repeat.”

They may also ask you how you actually found them… It’s not really important, but I have heard that some real estate brokers, for example, don’t like it when you say “I found you on LoopNet”, but again, I don’t think this one here really matters too much… But they might ask you that, so be prepared.

They’re also gonna ask you if you’re working with any other property management companies, of course, because they wanna know if there’s competition. They also are gonna ask you what expectations you have for a property management company. So now, after listening to this podcast, you know what their primary responsibilities are, as well as the additional duties, so when they ask you this question, you can explain to them that ideally you’d want the additional services, but you know that you’re gonna have to prove yourself first… So it’ll kind of start there, and start with them just managing the property, as well as the renovation budget, the renovations after close, and then go from there.

They’re also gonna want to know how you actually underwrite the deals, and more particularly, they’re gonna want to know what assumptions you actually use, and are those assumptions going to be realistic. So if you tell them that you do the 50% rule, then you’re not going to look very credible, and they’re probably gonna not want to work with you, because since they’re the one managing the project, they’re gonna want to confirm the assumptions, and if they can’t confirm the assumptions, they’re not going to want to manage the project.

They’re gonna want to know how you’re gonna fund the deal. That’s the debt and the equity… So what mortgage brokers are you talking to? What types of debt can you get? What LTV, interest rates, recourse vs. non-recourse, is it a Fannie Mae/Freddie Mac? Is it a bridge loan? What types of debt are you going to get? And then your equity – how much equity are you able to raise? Who’s it coming from? Is it your money? Is it from investors? How many investors? How do you know these investors?

Again, this is gonna show your ability to close on the deal, as well as show if you’ve done your due diligence. If you have no idea how you’re gonna fund the deal, it’s not gonna look too good.

And then lastly, they might ask you for biographies on you and your business partners, so you might want to have those handy; at the very least, have information on your business partners handy. For example, if they ask you “Well, have you done a deal before?”, you’ll say “No, but I have a board member who has done a deal before.” Then they go “How many deals has he done? How long has he been an investor for? Where does he invest?” They might ask you questions like that, so be prepared to answer them.

Besides obviously being able to answer their questions, there’s a couple of other things that  you can do as well to win over a property management company. One, which is something you’re already going to do, because you asked them for a list of their properties — but I actually go visit those properties in person, and then provide them with feedback. For example, let’s say you get a list of five properties; you go to all five properties, and maybe a few of them are pretty distressed, and there’s a couple of issues that are concerning to you, but then one property looks really nice, and is exactly what you would want.

Well, you can go back and say “Hey, I visited the properties. Here are the pros and cons of each, and the questions I have. For property ABC, I went there and realized that some of the roof shingles are missing, and the gutters were falling down, and it looked like it hadn’t been painted in a while, and it looked like the lawn hadn’t been mown in a while… What’s going on? Is that management issues, is that owner issue? Are they not giving you money? What’s going on there? I also saw XYZ property – immaculate condition. What’s the difference between the owners of those two properties? Why are they so different? Is it the owners, is it the market? What’s going on there?”

This shows that you’re interested, it shows that you’re actually out there doing things,  that you know what you’re talking about and you truly want to learn and put yourself in the best position to complete a deal.

Another one would be for you to send them your proformas for deals that you’re underwriting. Again, don’t expect them to fully underwrite a deal for you. What you wanna do is say “Hey, I’ve underwritten this deal. Do you mind taking a look at my underwriting assumptions and give me your feedback on them?” Typically, they might not send you a 1,000-word response, but they might give you a couple pointers and tips; you’re just building more rapport.

And then lastly, and this is kind of overall, is to have timely follow-up. After you do a property tour with them, make sure you follow up and ask them, “Okay, what were your thoughts on the property tour? Can you help me with ABC? Can we create some kind of cap-ex budget? What types of rents do you think we can get? What are your thoughts on the rent comps provided?” But don’t wait a couple of days or a couple of weeks to follow up and ask those questions after the property tour. Show that you’re serious, that you’re putting forth the effort to close on the deal.

And then really after completing any task that brings you closer to completing a deal, let them know. “Hey, I underwrote this deal. I’m gonna go visit it in person next Tuesday.” Or “Hey, I just talked with this mortgage broker and got approved for an additional one million dollars in financing”, things like that.

That is the overall process for hiring the property management company. We talked about what the property management company actually does, how they’re compensated, and we talked about what you need to do in order to qualify a property management company, but also what you need to be prepared for and what you need to do in order to win them over to your side.

Winning over the property management company to your side is gonna be important, because all of those additional services that they can provide to you, that would be an immense value to your business. But they’re not just gonna do that for any random person who calls them up on the phone and says they found them on Google and wants to become an apartment syndicator. You have to prove your worthiness, and we’ve gone over multiple tips on how to accomplish that.

Now, as I mentioned, this is a four-part series. Next week will be part three, and we will discuss the process for hiring your real estate brokers. Now we’re getting into the fun stuff, which is how to actually find deals. To listen to part one, and other Syndication School series about the how-to’s of apartment syndications, and to download your free team building document, visit SyndicationSchool.com.

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

JF1548: How to Build Your All-Star Apartment Syndication Team Part 1 of 4 | Syndication School with Theo Hicks

We’ve worked through finding our market and other aspects that lead up to completing your first apartment syndication deal. Today, Theo is covering the first part of building a great team. In this particular part of the four part series, we’ll hear about the four core team members, who they are and how to find them. He’ll also cover the topic, “Do you need a partner and a mentor?”. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Whether you need a mentor comes down to your expectations of what they will do and if you want to hire one”

Free document for this episode:

http://bit.ly/2TRkmMZ


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Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

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

 

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

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

This week is the start of our second four-part series. This will be part one, and the series is entitled “How to build your all-star apartment syndication team.” As the name implies, we are going to be talking about building your team. If you have followed the previous eight series, essentially we’ve built to the point where you are now ready to start actually reaching out to various team members in order to bring them on, and are one step closer to actually looking for deals. So you’ve got your education and experience on lock, your goals are set, market selected… Next step is to start building your team.

In this episode we are going to go over what the core and the secondary team members are, and then we are going to have a conversation around how you find these team members. Some team members are found a specific way, but in general, you’re gonna find these people in a similar way… And then we’re going to actually talk about the process for hiring two of your team members in this episode; that would be the business partner, and a mentor. Over the next three episodes, we will go over the process for hiring the remaining team members.

If you remember, in episode 1527, when we discussed the market evaluation strategies, if you remember, we posed the question “What’s the most important factor in real estate?” Obviously, in that episode we went over how to select and qualify a target market, but what I said is that the overall MSA or city is not as important as the actual neighborhood or submarket, and the neighborhood and submarket are not as important as the actual deal, but all of those things are trumped by the ability to execute the business plan. So the market is not the most important factor, nor is the deal, nor is the cap rate or anything else. The most important aspect of real estate, and in particular apartment syndications, is the ability to execute the business plan. Because if you can’t execute the business plan, then the best deal and the best market really means nothing.

We said that one way for you to build up your ability to execute the business plan is obviously gonna be your education and experience, but the most important piece is going to be your team… Because when you are first starting out, you’re not going to know how to execute the business plan properly, and that’s kind of the catch-22, because the best way to learn how to do it is to actually do it, but you can’t really do it until you’ve done it before. So the way to get around that is to surround yourself with an incredible, experienced team, who has experience executing the business plan in the past successfully. So that’s what we’re going to talk about over the course of this next four-part series.

I just wanted to start off by mentioning how important your team actually is, because your  team is gonna be the one that’s gonna be helping you implement the business plan. With that being said, who is on the apartment syndication team? I’ve broken it into two different categories. The first is the core team members – these are people that you are essentially working with on a daily or weekly basis, and are pretty heavily involved in the process… Whereas the other team members are more deal-specific, or maybe you have meetings with them once every quarter or once a year; those are your secondary team members.

The four core team members are gonna be a business partner, a mentor,  a property management company, and a real estate broker, or brokers. Those are gonna be the four most important members of your team.

The secondary team members are going to be the attorneys, so the real estate and securities attorneys, as well as a mortgage broker or a lender, and then finally, an accountant. Essentially, there are a set of companies that you’re going to need to bring onto your team. In this episode, we’re going to talk about the first two, the partner and the mentor. In part two we’re going to talk about the property management company. In part three we’re going to talk about the real estate brokers, and then in part four we’re going to talk about those secondary team members. For this series, there is going to be a free document, of course, and it’s going to be a Building Your Team spreadsheet, so it will be a place for you to log the contact information of all the various team members that you need… Kind of like a checklist to make sure that you’ve got all of your bases covered. To download that document – you can find it in the show notes of any of the four episodes in this series, or at SyndicationSchool.com.

Before we dive into the process for hiring a partner and a mentor, I wanted to discuss how you actually find these team members. Again, for some of them it’s gonna be a very specific way to find them, or you might have a different strategy in mind, or have heard of ways to be able to find people in the past… But generally, you’re gonna find all of these team members through one of six ways.

The first way to find potential team members is through your interview-based thought leadership platform. In last week’s series – it actually was a four-part series, so the previous two weeks – series seven and eight, we discussed the thought leadership platform, and the importance of building a brand as an apartment syndicator… And one of those benefits was the networking capabilities of having an interview-based thought leadership platform. You are having a conversation with one real estate professional every week, bi-weekly or once a month, and that person in particular could be a potential team member, or maybe they know someone who could be a potential team member.

For example, you could make it your goal to try to interview at least one person from each of these four team member categories a month. Maybe one month you’ll interview a potential partner, and the next month a potential mentor, and the next month a potential property management company, and so on and so forth… And you get the dual benefits of  having a podcast or YouTube episode, but also you have the opportunity to meet with them, talk with them, get to know them, and see if they would be a good fit for your business.

Again, I’m just talking about how to find these people. We will go into particulars on what to do once you’ve found them in the later sections of this episode for the partner and the mentor.

Another way to find potential team members is through other interview-based thought leadership platforms. For example, you could listen to this daily podcast, so there’s seven different real estate professionals every week, 365 every single year, so maybe one of those people could be your property management company, or a mortgage broker. Right now our sponsor is actually a mortgage broker, so that’s the perfect example of a way to find a potential team member. Listening to the other podcasts, watching the real estate YouTube channels, reading blogs…

The third way is to attend local apartment meetup groups; go there, network, talk to people, figure out who is doing what, and see if they could be a potential team member. I know at Joe’s meetup group, for example, there is a section of the meetup where people get to ask  a question, or have an ask… So if you’re at this point in the process, your ask could be “Hey, I’m looking for a mortgage broker. I’m looking for a real estate broker. Do you have any recommendations?” and build a list.

The fourth way is through Bigger Pockets. There’s millions of active real estate professionals on Bigger Pockets. You can use the search function… For example, me in Tampa, I’d say “Tampa Bay property managers”, compile a list of all the profiles, and reach out to them and ask them to set up a phone call to discuss a conversation about potentially bringing them on as a team member. Now, for the Bigger Pockets strategy, I recommend only contacting people that are actually active on Bigger Pockets. If their profile has been inactive for multiple years, or if they don’t have any posts, then that’s not as good as someone who’s actively posting multiple times per day, because that’s the indication of that person’s business acumen and work effort, and things like that.

Another way is simply just to use the internet. You can google the top property management companies in your market, top real estate brokerages in your market, compile a list of those, and reach out, give them a call. That’s actually how I found my real estate brokers and property management company – I use Google.

And then lastly, but most importantly, the best way to find prospective team members is through referrals. The main source of your referrals could be a mentor – we’ll get to that person here later in this episode. Once you’ve found a mentor who’s an active apartment syndicator, who has a track record of success, obviously they’re tapped into the market, they’re tapped into the industry, and they should be able to provide you with connections to the various team members that you need.

Another approach is to bring on a property management company first, or a real estate broker, or a mortgage broker, and all three of those people will work with all the team members that you would need to bring on, so you can ask all of them for referrals  as well.

Really, the best way to find these people is through referrals, and those first six steps, except for maybe with the exception of the internet, are kind of essentially referral-based. So that’s how you find these team members.

Again, there’s particular ways to find a certain team member that might not work for a different team member, but in general, those are going to be the top six ways to find your team members.

Now, let’s get into the meat of this series, which is the process for actually hiring these team members. In this episode, I’m going to talk about the partner and the mentor. First of all, not every single person is going to need a partner or a mentor. It really depends… For example, for the partner, if you want a business partner, it should be someone who complements your strengths and interests, first of all, and they make up for the areas that you are lacking in.

A few examples – for me, I have a strong operational background. I understand the acquisition process, I am very detail-oriented, and I have the strongest experience in underwriting, as well as managing deals in the back-end… Whereas something that I’m lacking in is access to private capital, the ability (or really the interest) to raise money. So what I did is rather than attempt to do all that by myself, I decided to bring on a partner for the specific outcome of raising money. So I didn’t find someone who also liked to underwrite or someone who also wanted to be an asset manager; I found someone who was hyper-focused in the one skill that I was lacking in. That’s what you need to do.

Starting out, that might be a little different for you, because you might have no experience, or no credibility or strength; you actually might think you do… But you’ve gotta be a little creative. Based off of your educational background and your experience background, what do you have to bring to the table? What is it exactly? It’s gonna be something that you are good at and want to do, and then once you’ve identified that, you want to find other people, other partners to complement what you’re able to do.

What do I mean by “do”? What exactly do you need on the general partnership side for the apartment syndication? Because you’ve got your passive investors who are investing in the deal, and you’ve got your outside third-party team members who are finding deals for you, they’re managing the deals afterwards, but at the end of the day, apartment syndication is a business and you’re gonna need to have a team of people who are actually fulfilling the roles of that business.

There’s actually five parts to the general partnership. The first part would be someone who funds the upfront costs. This is the person who funds the costs from contract to close, although they’re usually reimbursed; you’re gonna need someone on the team that does that. There’s also gonna be someone that does acquisition management; they’re gonna find the deals, underwrite the deals, submit offers on the deals, manage the due diligence process, secure the financing, oversee the closing process… Essentially, everything from start to close.

You’re also gonna need a sponsor, also known as a key principal or a loan guarantor. This is someone who meets the liquidity, net worth and experience requirements set forth by the lender, and they sign on the loan. There’s also going to be the investor relations person; they’re the ones who find the investors, secure the commitments once there’s a deal under contract, and is responsible for the ongoing communication with the investors.

And then lastly, you’ve got the person who’s the asset manager. They’re the ones who manage the business plan and the management company after close. All five of those could be done by one person. One person is gonna be responsible for each; it could be really a combination of those two. And usually, when you’re starting out, it’s probably going to be at least two GP’s.  For example, you might have one person that’s responsible for acquisition management and asset management; another person is responsible for investor relations, they’re a sponsor, and they fund the upfront costs… But more than likely, there’s gonna be a lot fo GP’s. You might have one person who’s funding the upfront costs, you might have multiple people who are finding and underwriting deals, so they’re responsible for acquisition management; you might have ten sponsors to help you qualify for that loan, and you might have ten more people who are helping you raise money for the deal, and then a few people doing the asset management.

For each of these parts, there is a general compensation or general percentage of the general partnership assigned to each of these, so that’s how you know how to compensate your partners, as well as how you’ll be compensated. If you remember, in episode 1513 we discussed all the different ways the general partner makes money; that essentially goes into a pot, and if there’s one GP, then they get 100% of that pot. If there’s multiple GP’s, then the percentage of the pot that they receive is based off of the role that they’re fulfilling.

For the person who is responsible for the upfront costs, they’re getting reimbursed; there’s a little bit lower risk, so typically they’ll receive maybe 5% of the general partnership, or there might be some other agreement that they make with that person, and then they’ll get any percentage of the general partnership. Maybe they get interest rate while the money is being held, or something like that.

For the acquisition management, that is obviously a much bigger role, because you’re finding the deals, offering the deals, managing due diligence, and so on. So that is typically around 20% of the general partnership. The sponsor, key principal, loan guarantor, that person who signs on the loan – that could be anywhere between 5% and 20%. Now, why such a wide range? Well, it depends on the risk level of the deal. If it’s a turnkey property, it’ll probably be on the lower end of the range, whereas if it’s a highly distressed business plan, then they’ll have to give them a little bit more, because the risk level is increased.

It also depends on the type of loan. For example, if the loan is recourse, which means that the loan guarantor is personally liable, then you’re gonna have to offer them a little bit more than if the loan was non-recourse, which means they aren’t personally liable, unless a carve-out is triggered.

It also will depend on your relationship with this person. If you have a personal connection, a trusting relationship with the sponsor, then they’ll likely charge you a little bit less, whereas if they have no idea who you are, they don’t know your abilities, they don’t know you personally, then you’re gonna have to give up a little bit more of the general partnership to bring them on.

Other examples of ways to compensate this person is you could just give them a percentage of the principal balance at closing. On the low end, that could be 0.5% to 1%, on the high end that could be 3.5% to 5% of the loan balance, one lump sum paid to them. That could be in addition to or instead of the percentage of the general partnership.

Next, the investor relations person. That is also, obviously, very important, and it could likely be multiple people. That could be anywhere between 30% to 40% of the general partnership. And then lastly, you’ve got the asset manager, who would get 20% to 35% of the general partnership.

Now, how do you actually qualify a potential partner? Here are a few things for you to think about when you are talking to either potential business partners, like straight up 50/50, breaking this apart 50/50, or when you are bringing on someone for a particular duty, like investor relations or as a sponsor.

Number one, you’re gonna want to know what their track record is, in real estate and in business, similar to why you need a track record in real estate and in business before becoming an apartment syndicator… And you’re also gonna want to get a little bit more specific and ask them what is their track record on the specific thing they’re supposed to do. If they’re supposed to raise money, what’s their track record on raising money.

You also wanna know how much time they have to spend on the business. Do they have a full-time job where they’re working 100 hours/week and they can only dedicate a few hours a week to their duty, or do they have a more flexible job that allows them to give their responsibility the attention it deserves?

At the same time, you wanna know, especially if you’re doing 50/50, if they have the same amount of time that you have, because that might bring up issues in the future, if they’re working 20 hours a week in the business and you’re only working 5 hours a week, or vice-versa.

You’ll also want to know if they have complementary skills to you. You wanna know what they’re good at, and what they’re bad at or inexperienced at, and see if you are essentially the opposite. So what they’re good at, you’re not good at, or experienced at, and vice-versa.

You also want to know if you have complementary personalities. Essentially, can you get along with this person, or are you both very stubborn, do you both need to be in charge, in control? Kind of on a more emotional, personal level.

And then lastly, what is your long-term goal? If your goals are too far apart, it also probably won’t work out. If you wanna make a billion dollar company and they only wanna do a couple of deals before getting out, then again, that might bring up issues down the road.

Now, for the person who’s just starting out – and if you’re a browser of Bigger Pockets, you’ll see a lot of people asking questions about wanting a partner because they are inexperienced… And if that’s the case, then obviously you’re gonna have to win them over. You’re gonna give them something to add value to them, or else why would they be working with you?

A few strategies on how to actually be presentable when reaching out to potential partners who you actually need in order to help you complete the deal, whereas they don’t actually technically need you… Number one is to have that strong business and real estate background. If you wanna know what that means, make sure you listen to episode 1499 and 1500, where we had a conversation about that. You also wanna make sure that you display your apartment investing expertise. While having a conversation with them, let them know that you know what you’re talking about, basically… Which means that you can answer their questions on what markets you’re investing in, your investment strategy… Essentially, the questions that you’re going to be asked by the property management company, real estate broker, other team members… We’ll go over that in the future episodes.

You’ll also wanna bring something that they need to the table. Figure out what they need, and help them with that. Maybe you have  a particular skillset that they need, or maybe you have money, but you need help with everything else… You need to bring something to the table, rather than just wanting to do a deal and that’s really it.

Also, try to form a personal connection. I know a lot of people have success wining and dining, going out to the bars for a drink, or at restaurants, playing golf, and kind of just building a personal trusting relationship with this person, so that they trust you and they’re willing to work with you.

The last option is just pay them. Pay them money to be your partner. In that case, they’re essentially going to be a mentor, which is a perfect transition to the next section or the next team member, which is the mentor.

The mentor is going to be a paid consultant, so I’m not talking about someone who is like a fatherly figure to you, who you aren’t paying; this is someone you’re actually paying. A lot of people have different opinions on whether or not you need a mentor, and I’m not going to say whether you do or don’t need a mentor, instead I’m going to talk about what to expect or what not to expect from a mentor, and when you are ready to actually hire a mentor… And then the decision is ultimately up to you.

Whether you need a mentor really comes down to your expectations of what a mentor will do for you, as well as why you’ll want to hire a mentor. The four things that you should expect out of a mentor is 1) an active, successful apartment syndicator; they’re currently doing it, they’ve been doing it in the past, they plan on doing it in the future, and they’ve been successful. 2) You should expect a step-by-step system, as well as the personalized help for you to navigate the grey areas. They should have a system for you to plug into to replicate their success, but you actually have to do the work… And things that aren’t covered by that system, you should be able to talk to them about those grey areas.

3) A mentor is an ally that you can call on selfishly about anything. Since you’re paying them, you don’t really have to worry about asking them about their day, or how things are going for them, because you’re paying them to just talk about yourself. And then 4) you should expect connections. Again, since they’re active and since they’re an apartment syndicator, they should have connections to the people that you need to help you create your team.

Now, the two things that you shouldn’t expect… Number one is a knight in shining armor. Don’t expect to hire a mentor and then magically have a multi-million-dollar apartment syndication business in a couple of years. Expect to go in there and actually have to do the work yourself. They’re just gonna give you a leg up. And lastly, don’t expect that done-for-you system. Again, you’re gonna be doing the work yourself; you don’t want them to do everything for you. Number one, they probably won’t be doing anything for you, and two, even if they did, you’re highly dependent on them and they’re never gonna be able to break off on your own.

Now, what does a mentor actually do for you, besides those four things to expect… 1) Providing you with a step-by-step system; helping you navigate the grey areas. 2) Being an ally to call upon. 3) Connections. 4) Them being the active, successful apartment syndicator… You will also have the ability to leverage their credibility when talking to team members and to potentially passive investors, as well… Because you’re gonna say “Hey, on my team there’s a board member who has done multiple millions of dollars in deals; they’ve been doing it for 20 years”, and then also you’ve got the potential for alignment of interests. Just the fact that they’re being on your team, you can leverage their credibility, but they also might have some sort of stake in the deal, whether it’s a sweat equity stake of actually working on the deal, or they have their own money in the deal. Those are the things that a mentor could do for you.

How do you know you’re ready to hire a mentor? And not everyone is at that point right now… The two things that you need to do in order to be ready to hire a mentor – number one is to have the accurate expectations, which now after listening to this episode you actually have those expectations. And number two is to have a defined outcome. What is it exactly you want to get out of the mentorship? You need to know exactly what it is. Is it to find deals, is it to bring on team members…? It just can’t only be an apartment syndicator; it has to be something specific, so that you can leverage that person accordingly.

If what you really want are connections, then the expectation is that the mentor should offer connections, so when you’re talking to mentors, ask them about their connections, and then once you’ve actually hired them, make sure that’s your focus, at least at first.

Now, how a mentor is compensated is really based on their compensation structure for their program… But I would expect to pay at least a few thousand dollars for a high-quality mentor. But again, since we’re dealing in a hundred-thousand, multi-million-dollar industry, what’s a few thousand dollars if you’re able to close on a deal?

Now, the thing to think about when you’re qualifying this person – number one, are they an apartment syndicator? Number two, are they still active? And three, do they have a successful track record? By successful – did they meet or exceed their return projections on their deals? You don’t want someone who just teaches apartment syndications, but hasn’t actually done it before or isn’t still doing it, because like everything, it’s an evolving industry, and if they were successful in the past, it might have been because something that happened in the future that didn’t affect them, because they were buying the deals at that point in time. So make sure that they’re actually an apartment syndicator, that they’re still active, and that they have a successful track record.

Now, I did say that the mentor is a paid person, so obviously, your way to win them over to your side is to pay them money… But once you’re actually in their program, there are still a few things that you can do to set yourself apart from the other people in the program, in order to hopefully get extra help from them, and ideally, have some sort of stake in the deal… And the best way to do that – and it’s very simple said, but harder in practice – is to actually make sure you remain active in their program and actually do the exercises. Once you get into the program, they’re gonna have some system for you, and it’s probably gonna start off by you getting educated, and then kind of going from there… Make sure you set time each day to actually perform those exercises. Don’t just pay the money and then disappear. Make sure you’re active, actively asking questions to show that you’re serious about closing on a deal.

And then lastly, you can listen to episode 1507, “How to break into the apartment syndication industry”, to learn another tactic for how to win over a mentor. In this specific strategy it’s technically not a mentor, because you’re not paying them money, you’re paying them in a different form… So I would definitely recommend checking out that episode, 1507.

That wraps up this episode, the part one of the four-part series about forming your apartment syndication team. In this episode you learned about the four core team members and the three secondary team members that make up your seven-man team, or seven-woman team, or seven-company team. You also learned the top six ways to find your prospective team members, and then lastly, you learned the process for hiring a business partner(s), as well as a mentor.

In part two, we will discuss the process for hiring a property management company. The fact that we’re dedicating an entire episode to just the property management company should tell you how important they are to your success.

Until then, to listen to other Syndication School series about the how-to’s of apartment syndications, and to download your free teambuilding spreadsheet document, visit SyndicationSchool.com.

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

JF1542: The Power Of Your Apartment Syndication Brand Part 4 of 4 | Syndication School with Theo Hicks

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If you haven’t listened to the first three parts of this series, I highly recommend you do so before listening to this episode. Those episodes were 1534,1535, and 1541. This episode is all about choosing and creating your thought leadership platform. How do you know which is best for you? How do you actually create it? Theo will cover those questions and many more in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

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

This episode is going to be part four of the four-part series entitled “The power of your apartment syndication brand.” I highly recommend that you listen to the first three parts before listening to this episode, because this episode is going to be an accumulation of those three parts and the ultimate, final component of the brand, which is the thought leadership platform.

In part one, which was episode 1534, you learned the primary benefits of creating a brand, as well as why and how to define a target audience for your brand, and then we discussed the first three components of the brand, which are the company name, the logo and the business card.

In part two, which is episode 1535, we talked about the fourth component of the brand, which is the website. We discussed how to create a website and ways to increase your website traffic and convert your viewers. Then in the third party, we discussed the fifth component of the brand, which is the company presentation. We outlined the purpose of the company presentation, how it’s used, and also the seven-part company presentation document, and we also offered a free document, which is a company presentation template for you to use as a guide to create your own presentation, which you can download at SyndicationSchool.com for free.

Now, in part four, as I mentioned, we’re gonna go over the sixth and final component, which is the thought leadership platform. By the end of this episode you will learn what a thought leadership platform is, how to select a thought leadership platform, the keys to a successful thought leadership platform, the process for developing a thought leadership platform, as well as addressing the objections you’ll likely have to creating a thought leadership platform.

Lots to go over in this episode, so let’s dive right in. What is a thought leadership platform? Well, the outcome of the thought leadership platform is to attract your 2,000 true fans, which is your primary target audience, which you defined in part one of this series, episode 1534. So if you wanna achieve massive levels of success in apartment syndication, then a thought leadership platform is an absolute must. As I mentioned in part one, about how important the brand is, the thought leadership platform is the foundation for your brand.

Specifically, what a thought leadership platform is – well, an example is you’re listening to one now, but specifically what a thought leadership platform is, is an interview-based online network where you consistently offer valuable content to your 2,000 true fans for free.

The five benefits of the thought leadership platform are the same five benefits of a brand as a whole, which are 1) credibility – with your thought leadership platform the goal is to become the go-to source for best investing advice and wisdom. If you are the go-to source, you’re a pretty credible person.

Next is education – you can use your thought leadership platform to create your own customized educational program.

Three is networking – you can create and cultivate new relationships with potential investors, team members and business partners, as well as reinforce existing relationships through your thought leadership platform. Four is contribution. By having your thought leadership platform, you’re also not only helping yourself in regards to education, but you’re also helping others with their education, and since your thought leadership platform is gonna help you grow your business, the investors who are investing in your business will also benefit by being able to find you for investment opportunities and achieve their investment goals.

Then lastly is the potential for cashflow through sponsorships. Now, we’re not gonna discuss this on the podcast, but if you go to SyndicationSchool.com or the show notes, you can download a free document for this episode, which is “How to structure sponsorships on your thought leadership platform.” It’s a guide to how to essentially monetize your thought leadership platform.

Overall, the purpose of the thought leadership platform is to stay top of mind with and be incredible in the eyes of your 2,000 true fans, your primary target audience, your passive investors, along with the secondary benefits of education, contribution and the cashflow.

So how do you select a thought leadership platform? We’ll just use Joe as an example. Joe’s first thought leadership platform was a podcast, which you’re listening to now, and then from there he expanded to other platforms, which are a meetup group, a newsletter, a YouTube channel, blog, conference, books, and a Facebook group. All of those are examples of thought leadership platforms, and we recommend that you follow the similar strategy of starting with on, and then focusing all of your attention on that, and then once that is a self-sustaining machine, you can grow and expand from there.

So pick one of these following thought leadership platforms – a YouTube channel, a podcast, a blog, a newsletter, or a Facebook group. How do you know which one is the best for you? Ask yourself what would you enjoy and prefer doing? Let’s say for example that you really like speaking, but you don’t like the prospect of being on camera or talking in person, because you get stage fright, or I guess video fright. Well, then your best option would be a podcast.

Well, let’s say you don’t like to speak, but you like to write; or let’s say that you enjoy speaking, but you’re afraid to do any sort of speaking or video thought leadership platform because of your full-time job, and if your boss finds out, he’s not gonna like how you’re spending your spare time… Well, then your best option might be a blog.

Or let’s say you enjoy speaking and you’re comfortable with being on camera, but you don’t wanna actually speak in person; then the YouTube channel would be your best. Or let’s say you enjoy speaking, you’re comfortable being on camera AND you’re comfortable speaking in person – essentially, you’re a rockstar – then the meetup group might be best for you.

Now, the last two – the newsletter and the Facebook group – you should do regardless, because those are places for you to post and share your content. Whether you enjoy or prefer doing those doesn’t really matter; you need to make a newsletter and a Facebook group.

Based off of Joe’s experience and my experience with having over 1,500 episodes for the podcast, that generates over 350,000 monthly downloads, as well as creating hundreds of blogs and YouTube videos, writing multiple books, hosting meetup groups for years, hosting two conferences, these are the five keys that we’ve discovered to creating a successful thought leadership platform.

Number one is it must be interview-based. Because remember, one of the main objectives of the thought leadership platform is to increase your credibility, to be perceived as an expert apartment syndicator, as well as to network with investors and team members. The only way to accomplish this is to actually do interviews. So from a credibility perspective, you are going to position yourself as a go-to resource for the best info, advice and strategies, because you’re going to be interviewing the most successful real estate professionals. As you do that, your audience will grow, as well as your reputation, which will allow you to attract even better guests. When you attract ever better guests, your audience and reputation will continue to grow even more, which will allow you to, again, have that credibility and expertise perception, which will allow you to attract more passive investors.

From a networking perspective, you’re able to speak with people who are active and successful, and in fact, as I mentioned in a couple of Syndication School episodes before, you’ll be able to network and speak with people that it would have been impossible for you to otherwise. For example, Joe has spoken to Tony Hawk, Emmitt Smith, Robert Kiyosaki, Barbara Corcoran, and the majority of those were before he had done many syndication deals. The reason he was able to do that was because he had a podcast that he posted consistently, that had a following of active real estate professionals.

If you think about it in the long-term, if you just do one interview per week for two years, that’s over 100 conversations with successful, active real estate investors. Look at that from many perspectives – from an educational perspective, you’re going to learn the best advice from over 100 people, and then also think about the networking opportunities from speaking to these 100 people, and then having access to people that they know, and it’s a runaway effect from there. So that’s number one – it must be interview-based.

Number two is you must consistently post content. Your audience needs to know when to expect new content. If you post new content sporadically, then you’re building less rapport, and therefore have less loyalty from your listeners, and it also comes with less credibility, because you’re not perceived as someone who is consistently posting content. So what you should do is pick a frequency – daily, a few times a week, maybe Tuesday or Thursday, weekly, bi-weekly, monthly, or even if it’s twice a year, pick a frequency and stick to that frequency no matter what, with the only exception being you increasing the frequency. If you started off by posting once a month, then you cannot go to posting twice a month. You must stick to at least once a month, but from there you can go to maybe bi-monthly, or weekly; then you go to bi-weekly and then you go to daily.

The reason why is because think about something that you really like – pick a TV show, or a movie, or  a sports team. Do they have their games or their TV shows just randomly posted, without the notice of the audience, or are these things scheduled months or years in advance? It’s the latter, not the former. They don’t have random basketball games that you don’t know when it’s gonna happen, and the reason why is because that increases the anticipation, because they know it’s coming, as well as their loyalty, because again, they know when this content is going to be coming, so they can plan to listen to it accordingly.

It’s going to be very difficult at first, and this depends on the type of personality you have, but it could be hard at first to stick to your frequency, because you’re not gonna have the momentum and the habits from doing it for months at a time, and you’re also not gonna have the motivation from having a large following, because when you first start out, you’re only gonna have a couple people listening to your podcasts or reading your blog… So that’s why it’s extremely important for you to actually create a schedule that’s at least a month out in advance (ideally two months) of the content that you’re going to create.

Essentially, you wanna create an editorial calendar for the frequency of content, as well as the topic. If it’s a blog, what are you gonna blog about? If it’s a podcast, who are you interviewing? Have that calendar.

For example, if you want to post a podcast once per week, then you want to have at least five episodes recorded before launching, so that means you have five weeks’ worth of content. Then as long as you record one new interview a week, then you always will be five weeks ahead of schedule. So you [unintelligible [00:16:13].07] then schedule out five weeks’ worth of episodes and then each week schedule one new episode, and that way you’ll always be five weeks in advance. Another benefit is that you’re increasing your chances of being featured on the New and Noteworthy section on iTunes.

If you want, you can actually release all five of those episodes once a day for five days, so you’ll have ten episodes pre-recorded, released five days in a row, and then do one weekly. If you do that, you’ll increase your chances of being on that New and Noteworthy section, which will give you a huge boost and a huge head start.

Overall, pick a frequency – daily, monthly, weekly etc. – and then create a content calendar that’s at least one month out in advance. So that’s number two, consistent content.

Number three is to tie into a large built-in audience. Don’t start from scratch. Start by tapping into a platform that already has a large existing audience, and leverage that audience. For example, Bigger Pockets has one million members. iTunes has 70 million monthly podcast listeners. YouTube is used by over a billion people. Various social media sites are used by over 80% of the population, and WordPress is the world’s biggest blog.

So rather than just simply posting content on your website, tap into these existing networks. But even though you are tapping into this large existing network, don’t expect to see quick results; don’t expect to really see any results for at least six months, and then to see some results that I guess put a smile on your face, expect to wait at least 1-2 years. Just like apartment syndications, building a brand is a long-term game, but once you’ve posted content consistently and followed these keys for a year, you are going to see results. And maybe even sooner, depending on how well you structure your thought leadership platform. So that’s number three, tie to a large built-in audience.

Number four is going to be uniqueness. Tim Ferriss says “Be unique before trying to be incrementally better.” What that means is focus on creating very unique content specific to you first, and then focus on how to grow your audience, rather than trying to focus on what are the best ways to grow your audience, and not focusing on what you’re actually good at and what your talents are. Because we all have a unique talent, we’re all unique – we have different backgrounds, areas of expertise, personalities, passions, interests… So you need to figure out what your unique talents are, and then figure out how to incorporate that into your thought leadership platform.

One way to determine your unique talents is to ask other people. There is a four-step exercise called “The Unique Capabilities Survey”, which is from the 80/20 Sales and Marketing book by Perry Marshall. The four-step process is to 1) create a list of five people that you’ve known for at least a year, that aren’t family members… Because our family members may not give us the best responses. So create that list. 2) Ask people on that list what is my unique ability and what do I do naturally better than most. 3) Categorize their responses based off of things that are mentioned by everyone, and then things that are mentioned by at least two people, and then based off of those categories, determine your giftedness zone. This giftedness zone are your unique talents, that were confirmed by others; you will use these to create your unique thought leadership platform.

For example, when I performed this exercise, my three responses that were either said by everyone, or said by a few people, was 1) I was funny, 2) I was very detail-oriented and 3) I was personable. So since I was personable, I decided to start a YouTube channel, and I tried my best to incorporate my humor into that YouTube channel, as well as getting into the weeds with the information I was discussing, so very detail and data-oriented. And again, I wouldn’t have known what I was best at without asking those people, because I would never have said that I was personable or detail-oriented. That’s just me. Maybe you know what you are objectively and don’t need to do this, but still, I recommend doing it just to confirm your assumptions.

Another strategy to either do instead or in addition to implementing and incorporating your giftedness zone is to incorporate your area of expertise into your thought leadership platform. For example, if you have a background in construction, then you can have a thought leadership platform that is about hands-on tips from your experience, and then you can extract what questions to ask others during the interviews.

Let’s say you have a background in direct sales. Well, you can create a thought leadership platform that focuses on sales techniques, and how that applies to attracting passive investors or team members or deals. Or let’s say that you are a marketing executive, or I guess a marketing manager; then you can do a podcast or a YouTube channel with marketing tips for finding deals, or finding residents after you have a deal under contract.

So those are two approaches, but overall the idea is to make your podcast or YouTube channel or thought leadership platform unique, based off of either your giftedness zone or your area of expertise… Or ideally both. That’s number four, uniqueness.

Number five, and lastly, is to educate while you’re entertaining. So who is more famous – LeBron James, or Mrs. Wrinkle. The answer is LeBron James, or your answer is probably “Who the heck is Mrs. Wrinkle?” Mrs. Wrinkle was my first grade teacher. She was a great educator, but the reason why she wasn’t LeBron James status, besides her (I guess) physique, was that she was not an entertainer. People prefer to be entertained more than they prefer to be educated, which is fairly self-evident, but still worth saying. So take this into consideration when you’re structuring your thought leadership platform and ask yourself “How can I entertain my listeners while also educating them?”

Let’s use Joe’s podcast as an example. Rather than just having a dry interview format that’s the same every single podcast, instead Joe has some engaging intro and outro music, he also has different types of podcast episodes each week. Obviously, there’s the Syndication School that you’re listening to, and then he has his Monday-Thursday interviews, where he just interviews regular guests, and then on Fridays we do Follow Along Friday, where me and Joe go over our business updates for the week. Then there’s Situation Saturday, where Joe has a conversation with an investor about a stinky situation that they were in and how they overcame it. Then on Sunday there’s Skillset Sunday, where Joe interviews someone to extract a specific skillset that that investor has, and how that applies to real estate.

Also, Joe concludes his episodes with the Best Ever Lightning Round, where he asks them questions about their favorite book, their best/worst deal. He also has a name for the listeners – the Best Ever listeners – which is what we use when we introduce each podcast. We’ve also incorporated a trivia question of the week into Follow Along Friday. So those are all podcasts, and then there’s another example – we’ve created a quick for the blog… An engaging quiz that allows people to test their knowledge, rather than just absorbing information.

Those are all just some examples of how to create entertaining content, educating at the same time, so brainstorm some ideas for your thought leadership platform… Either copy Joe’s exactly, which is probably what you don’t wanna do, but it could work; I recommend just using Joe’s as a guide, and then incorporating your giftedness zone and your area of expertise into how to make your podcast or YouTube channel or thought leadership platform entertaining, while educating.

A good question to ask yourself after creating content to determine if you’re actually entertaining people is to just ask yourself “Would my target audience love this content so much that they will feel compelled to share it with their friends?” Because if your audience is sharing it with people, that’s the ultimate validation of your content. Of course, you wanna track what content was shared the most in order to optimize your content on an ongoing basis.

Those are the five keys to success. Again, those are having an interview-based thought leadership platform. Number two, posting on a consistent basis. Number three, tying into a large built-in audience. Four, uniqueness, and five is to educate while entertaining, or entertaining while educating.

Now let’s get into the specifics on how to actually develop your thought leadership platform, which is a five-step process. Number one is ask yourself what is the goal. Well, the goal of a thought leadership platform should be to help you achieve your 12-month goal and long-term vision, which if you don’t know what those are, listen to episode 1513 and 1514. Based off of those goals, you wanna list out how your thought leadership platform will help you achieve those goals. For example, let’s say you believe your thought leadership platform is gonna help you find deals, build trust and a personal connection with your investors, as well as help you with your education. Well, then you want to create a mission statement that is specific and quantifiable about how it will help you achieve those goals.

For example, based off of those – finding the deal, building trust and personal connection with investors and education goals, my mission statement would be “I will research apartment owners in my target market, invite at least one per month to be an interview guest on my podcast, build a relationship with them and ultimately purchase their apartment communities in the future.” That covers goal number one.

By interviewing active real estate professionals once a week, including these owners, my target audience will get to know me faster, resulting in a higher level of trust and confidence in my ability to successfully invest their money. So goal number two – build trust and personal connections with investors.

When I stick to interviewing one real estate professional per week, which equates to 52 per year, I will grow smarter. In turn, this will help me execute my business plan. So goal number three, which is the education.

So that’s the first thing you wanna do – determine what the goal is and create a mission statement for how specifically and quantifiably you will accomplish that goal.

Number two is to ask yourself “Who is my target audience?”, which if you’ve been following the syndication school series in order, you should have already done. If you haven’t, go back and listen to episode 1534, where you will define your primary target audience, which is specific demographic information on the type of person you want investing in your deals, which more than likely will be your current circle of influence, so people that you already know.

But you also want to define a secondary target audience. We briefly hit on this during episode 1534, but your secondary target audience are people that you want to know, people that could be potential team members, or other people that you wanna attract. Let’s say for example your goal is to eventually have a consulting program; well, then your secondary target audience could be people who are interested in becoming apartment syndicators. Or maybe the secondary target audience is people who can bring you deals. Those are examples… Again, it depends on what you’re trying to get out of it on top of attracting passive investors.

Once you have your primary and secondary target audience, you want to add those to your mission statement. For example, Joe’s statement for this part would be “65% of my content is directed at my primary audience, who are 35-65 year-old males who are accredited investors. 35% of my content is directed at my secondary target audience, who are individuals who want to become apartment syndicators.” So that’s number two, who is the primary and secondary target audience.

Number three is why will they come? Because if you build it, they will not necessarily come. So questions to think about for this particular step in the process are “Why does your target audience need the information you will provide?” What solutions to their problems can you provide with your thought leadership platform? What’s in it for them? How will they benefit? Why will they become a loyal follower of your content and not the thousands of other real estate-related thought leadership platforms? And finally, what qualifications do you have that make you the go-to person for this information?

I recommend writing out a couple of sentences in response to each of those questions, and then take those answers and incorporate them into the description for your thought leadership platform, as well as the name. For example, “Joe’s podcast is the best real estate investing advice ever, because the reason why people will come is to learn the best advice ever from real estate professionals.” His description is “Are you ready for the best real estate investing advice ever? Welcome to the world’s longest-running daily real estate investing podcast. Join Joe Fairless as he talks to successful real estate professionals, as they give you their best ever advice with no fluff. Joe controls over 400 million dollars in real estate, but started with zero dollars in 2009. He went from buying single-family homes worth $35,000, and moved up to raising money and buying large apartment communities with investors. He has made mistakes, money and friends along the way, so click play now and see why this is one of the top investing shows on iTunes.”

If  you break down that description, it starts off with a question that they’re gonna respond with “Yes, I wanna know what the best advice ever is.” He also mentions that it’s the world’s longest-running daily real estate investing podcast, so again, that’s a qualification. He also talks about what the podcast is actually about, and what they’ll be getting out of it by listening to it, which is the best advice from real estate investors, with no fluff. He also discusses more qualifications as to why people should listen to him, which is that he owns 400 million dollars of real estate, and he started with zero dollars in 2009. And finally, he ends with some honesty where he says “I’ve made mistakes, money and friends along the way.” Again, all of that is to attract that listener and answer that question, which is “Why should I listen to this podcast?” Well, that’s covered by the title and the description.

That takes us into step four, which is what is the name of your thought leadership platform. Again, ponder those questions from the previous step, and create 3-5 names based off of the answers to those questions, as well as your goal and your target audience, and then ask for feedback from your target audience preferably, or just your circle of influence, and select the most popular name.

For help or guidance on how to create a name, if you’re stuck, I recommend going to iTunes and taking a look at the names of some of the most popular podcasts in the real estate investing industry, and using those for guidance.

Lastly, step five is how will the thought leadership platform flow? Some questions to think about are what will be the specific structure of your thought leadership platform? Will your content be your own, or will it be presented in interview form? …which you already have the answer to – interview form. How often will you create content, which you should know, when you picked and committed to your frequency. How often will you create content? How will it start and end? If you’re doing a podcast, how will it start and end? Will it be the same each time, or will it be different? How long will the content be? For a blog – are you gonna do 1,000 words, or is gonna be 15,000 words, if you’re feeling bold? Or how long will each podcast episode be? And will the content be unique, or will it follow a standard template  each time? For example, Joe’s got Follow Along Friday, Situation Saturday, and Syndication School, so it’s gonna be unique each episode… And the same thing for blogs. We’ve got blogs based off of interviews, we’ve got blogs based on a specific topic, we do picture blogs, we do blogs based off of questions in the Facebook community…

For example, the flow of a podcast – Joe’s podcast in particular, one specific type of podcast, it starts off by briefly introducing the guest, then Joe asks the guest to provide more information on their background and what they are focused on now; then the meat of the podcast is asking questions related to their given field. If it’s a real estate investor, Joe asks deal-specific questions. If it’s not a real estate investor, then he asks questions to extract skillsets that might be relevant to investors. Then he asks the money question, which is “What is your best real estate investing advice ever?” Once they answer that question, Joe goes into the Best Ever Lightning Round, and then concludes the episode by providing a summary of information provided by the guest.

What you wanna do is you wanna create a similar list of exactly how your podcast, YouTube channel or thought leadership platform is going to flow. One of the reasons why you wanna do this, besides the fact that you want to determine this information, is that you want to send this info to any interview guests, so they know what they’re getting into. As I gave that example structure, the interview guest would know beforehand that it’s gonna start off by them being introduced, and then they’re gonna have to give more information on their background, and they’re gonna be asked questions about their related field, answer the money question, as well as the questions from the Best Ever Lightning Round.

That’s the five-step process to actually develop your thought leadership platform. Number one is what is the goal, number two is who is the target audience, number three is why will they come, four is what is the name of your platform, and five, how will it flow?

Now, I know we’re a little bit over time here, but I still wanna go over this last section, which is addressing any objections you may have. The top three objections to creating a thought leadership platform are 1) I just don’t wanna do it, for whatever reason; most likely because it gives you anxiety, speaking or being on video, or speaking in person kind of gives you anxiety. 2) I don’t have the time to do a thought leadership platform, which is probably the most common, and 3) I don’t have the money to do a thought leadership platform. Let’s go over all three of those quickly, as well as what you need to do in order to overcome those objections.

In regards to not wanting to start a thought leadership platform for anxiety reasons or commitment reasons, well think about it from this way – regardless, you’re gonna have to commit to something, you’re gonna have to do something with your life, and do you want that to be a thought leadership platform that could potentially lead to you launching a multi-million-dollar apartment syndication empire, or do you want that commitment to be working a 9-to-5 job that you dislike? Now, maybe you like your job, maybe it’s some other reason why you don’t wanna do it, but overall, you need to keep in mind that the thought leadership platform is the key to your success, it’s the foundation of your business; it will help you educate yourself and other, it’ll help you build that credibility that you need when you’re first starting out, because you haven’t done a deal before, and it will help you and others achieve their financial goals.

So what holds a higher priority in your mind – those benefits, or the anxiety or the dislike, or whatever it is why you don’t wanna do a thought leadership platform. So which one would you rather have, one or the other? You’ve gotta choose. Do you want the benefits of a thought leadership platform, with the downside of the potential anxiety upfront, or would you rather not have that anxiety and continue doing what you’re doing right now? Ultimately it’s up to you.

The next objection is “I don’t have the money”, and the question to ask yourself for that one, as well as to ask yourself if you’re saying “I don’t have the time” is to ask yourself how have these similar excuses served you in the past? Think of something that you haven’t done in the past because you didn’t have the money or time, and what that outcome was. And to overcome both of those objections, what you wanna do is brainstorm ways to prioritize things in your life in order to accomplish the goal of starting a thought leadership platform. So if you don’t have any money, a potential solution would be to focus on using free tools for your thought leadership platform and your website. Or if you don’t have the money to shell out and buy a nice microphone, or some fancy video editing software, then just record your interviews with your cell phone or laptop, which you already have.

If your objection is “I don’t have the time”, well, it will take a maximum of 30 minutes a day to create a thought leadership platform if you’re doing weekly or monthly content, so ask yourself “How can I create 30 additional minutes per day?” Does that mean reducing the amount of time you’re on social media, or watching TV? Does that mean waking up 30 minutes earlier each day, or staying up 30 minutes later?

Now, if you have the money, another solution is to hire team members to reduce your workload. So maybe all you do is the interviews and have team members who set up the interviews, edit the interviews and post the interviews. Or you can forego all of that and just do all of the content creation on the weekend. So block an hour every Saturday morning, instead of sleeping in, get up an hour earlier and work on your thought leadership platform then.

These are just a few potential solutions, but ultimately it’s up to prioritizing your time, because everyone has 24 hours in a day – so it’s prioritizing those 24 hours to fit this thought leadership platform into your schedule. The reasons why are, again, because of all those benefits. It’s gonna be the key to your success; you need this thought leadership platform.

Again, I know we went a little bit overtime, but to conclude, this is part four of the four-part series about the power of the apartment syndication brand. In this particular episode you learned what the purpose of the thought leadership platform is, how to select a thought leadership platform, the five keys to success of a thought leadership platform, which is it being interview-based, posting content consistently, tying into a large built-in audience, making it unique, and educating while entertaining.

Then you also learned the five-step process to actually develop your thought leadership platform, and lastly, we went over some strategies to overcome any objections that you have. And of course, the free document for this episode was the guide to structuring sponsorships on your thought leadership platform, so eventually you will be able to monetize it with sponsorships, assuming you’ve grown your audience and have followed the five keys, and developed your thought leadership platform properly.

Thank you for listening. To listen to parts one through three, as well as the other Syndication School series about the how-to’s of apartment syndications, and to download all the free documents we have available, make sure you visit SyndicationSchool.com. Thank you for listening, and I will talk to you next week.

JF1541: The Power Of Your Apartment Syndication Brand Part 3 of 4 | Syndication School with Theo Hicks

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For part 3 of this 4 part series, Theo will be focusing on your company presentation. If you haven’t listened to Part One or Part Two we highly recommend you do so before listening to this episode. Those were episodes 1534 and 1535. Once you’re caught up, or if you already are, hit play and learn why the company presentation is so important and how to put together a really good presentation to present to your investors and other potential team members. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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

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

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


TRANSCRIPTION

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

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

 

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

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

This episode is part three of a four-part series entitled “The power of your apartment syndication brand.” So it’s focused on the branding aspect and the benefits of your brand towards apartment syndications. Now, I highly recommend that you listen to part one and two of this series, because we are going to grow off of those two episodes.

Part one was episode 1534, and in that episode you will learn the five primary benefits of creating a brand, which are credibility, networking, cashflow, education and contribution. You’ll also learn why and how to define a target audience for your brand, which is based off of the 2,000 true fans concept. Then lastly, you will learn how to create the first three components of your brand, which is a company name, a logo and a business card.

In part two, which was episode 1535, the focus was on the fourth component of the brand, which is a website, so you will learn how to create a website, as well as eight strategies for increasing your website traffic, as well as conversion.

Now, this is part three, and by the end of this episode you will learn about the fifth component of the brand, which is your company presentation. So we’ll be discussing the purpose of your company presentation, as well as how to create the company presentation, and since this is the Syndication School, you will also be able to download a free document, which will be a PowerPoint template that you can use as a guide to creating your own company presentation.

Now, what is the point of the company presentation? Well, what it’s not is it’s not a pitch book, or a sales tool. You don’t want to think about the company presentation as that. Instead, you want to think about the company presentation being a solution to your investors’ challenge, which is them making money, them making a return on their investment. So you’re not really selling them anything, rather you’re presenting them with a solution to their challenge and allowing them to decide whether investing in your deals will help them overcome that challenge.

Now, if you remember – or if you need a refresher, listen to episode 1534, which was part one of this series – I mentioned the five main benefits of creating a brand, and the PowerPoint presentation helps you accomplish all five of those, obviously, but the three main benefits of the company presentation as it relates to your brand are credibility, networking and education.

So in regards to credibility, this company presentation will be a passive investor’s first introduction to you and your business. Sure, maybe they listened to you before on the podcast, or they’ve filled out the Contact Us form on your website, but this is the first time that you are speaking directly to them. And what you wanna use this company presentation for is to attract the interest and obtain trust from your passive investors, because within your company presentation, which we’ll go over here later in the episode, you’ll have a chance to display your expertise and your team’s expertise, as well as experience.

So once the potential investor reads through your company presentation, they’ll know all about you and your team, and you will also include additional information in the company presentation, which will attract their interest in not only investing in apartment syndications, but i