JF1807: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 7 of 10 | Syndication School with Theo Hicks

Now that we’ve purchased a property and have management in place, it will still be important for you to work with the property manager. Theo will explain seven different ways to attract high quality residents to your properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It’s better to pay them money rather than give them a discount on the rent”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

JF1801: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 6 of 8 | Syndication School with Theo Hicks

We started covering how to manage the property management company of your apartment communities yesterday. Today, Theo will cover how to approach firing them if they are not performing to your standards. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you never get to the root cause of what’s happening, you can never really fix the problem”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

JF1800: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 5 of 8 | Syndication School with Theo Hicks

Today Theo is covering how to manage the property management company. This will be a vital part of how good or bad your deal performs over its lifetime. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to know what the physical occupancy is, and what the economic occupancy is”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

JF1794: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 4 of 8 | Syndication School with Theo Hicks

Theo will give a brief review of everything we have covered so far in this series of Syndication School. The new area he will discuss today is maintaining economic opportunity. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Everything that happens at the property good or bad, is your responsibility”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


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 – and now also video episodes – that are part of a larger podcast series or video series that’s focused on a specific aspect of the apartment syndication investment strategy.

For the majority of these series we offer a document, spreadsheet, PowerPoint presentation template, some sort of resource for you to download for free. All these free documents and all of these free Syndication School series can be found at SyndicationSchool.com.

This episode is a continuation of a series entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part four, so if you haven’t done so already, make sure you check out parts one through three of this series. In parts 1-3 we went over the top ten asset management duties; these are the ten things that you as the asset manager are responsible for doing once you’ve taken over an apartment deal, and up until you see that deal. So this is most likely going to be the longest time range of the deal, which is from the contract to the selling. That could be five years, ten years, or even longer than that.

As a refresher, I’m just gonna go over these quickly, but if you want more details on each of these duties, again, make sure you check out parts 1-3. In part one we went over duties one through five, which were 1) implement the business plan, 2) do weekly performance reviews with your property management company, 3) send out investor distributions, 4) manage the renovations at the property, and 5) maintain economic occupancy. And we also gave away a free document with that part, which is the weekly performance review tracker. This is a template that has all of the KPIs that you wanna track at your property. So  you’ll send this to your property management company, they’ll fill it out, and then on that call you’ll review the results each week.

Then in part two we focused exclusively on duty number six, which is the investor communications. Then yesterday – or the episode before this one – which is part three, we went over duties seven through ten, which were 7) plan trips to the property, 8) frequently analyze the competition, 9) frequently analyze the market, and 10) expect the unexpected.

Now, before moving on to other aspects of what’ll be most likely the longest timeframe of your business plan, which is from closing to closing – for example next week we’re gonna talk about how to manage your property management company and how to approach firing a property management company –  I wanted to go into more detail on how to actually maintain that economic occupancy rate. That’s duty number five.

Again, I’ve mentioned this in all of these parts so far, at the end of the day it is your responsibility, the property is your responsibility. Everything at the property, whether it’s going wrong or right, is solely reliant on you. Yes, your property management company is gonna be heavily involved in a lot of these duties, but at the end of the day it’s your responsibility to 1) select the right property management company, and 2) manage them properly. So we’re gonna talk about how to select them, we’re gonna talk about how to manage them next week, and then we’re also gonna talk about when it might be time to part ways and fire them… But let’s say for some reason you find yourself with either a bad property management company in general, and you maybe are trying to figure out whether or not to fire them — and we’ll talk about this, again, next week, but you don’t wanna just fire them instantaneously; you kind of want to wait a set amount of time just to see if they turn things around, and then fire them.

So during that period of time you don’t want your property to go down the crapper, so you might need to become more involved in the marketing process… Or on a more ideal  side, these might be the things that your property management company might not have thought about, or maybe they’re implementing maybe half the things on this list, and you’re experiencing a down couple of months or down quarter… So you can go to your property management company and say “Hey, here are some things I think we can do in order to increase the occupancy at our property.”

At one end of the spectrum it could be you’ve got a really bad property management company, you’ve kind of in your mind put them on notice and said “Hey, I’m gonna give them six months and then I’m going to fire them if things don’t turn around… But during those six months I don’t want to just do nothing and let them continue to run the property to the ground.” That’s one end of the spectrum.

The other end of the spectrum is a really solid property management company, but maybe you’re just experiencing a few down months two years into the business plan, for something that’s outside of their control, and you wanna present them with some ideas on how to actually increase that occupancy at your property.

Whatever situation you’re in, here are 19 proven ways to market your rental listings in order to attract high-quality tenants… With high-quality being tenants who pay on time and stay at your property and take care of the property as if it was their own.

Again, some of these are pretty straightforward, some of them might take a little bit more effort; some of them are free, some of them cost money… Essentially, anything that we could think of that we’ve seen people implement in order to market the rental listings.

Number one is to set up a landing page online and direct people to it. This should be something as simple as having a specific page on the property’s website, because more than likely if you’re dealing with these larger properties you’re gonna have your overall company website, but then you’re also gonna have websites specifically for that property, that’ll have prospective tenants, current tenants, [unintelligible [00:08:38].29] So you wanna have a landing page so that prospective tenants can go there and type in the information, and you’ll get that lead. And obviously, you’ll wanna take that landing page and market it on social media, do all the best SEO practices, maybe buy an ad in some real estate investor’s newsletter… But overall, the idea is to set up a landing page online and then making sure that people can find that landing page, and when they find that landing page, they can submit information so you can qualify them to see if they’re qualified for moving into your building.

Number two is to essentially do a direct mailing campaign to a property that is similar to yours. Let’s say you’ve got your 100-unit building in Tampa; then you could find other buildings that are between 50 and 500 units and then send direct mailing campaigns to those residents, trying to tempt them to move into your property. Now, obviously this strategy is going to anger local owners if they find out that you’re trying to steal their residents… So if you do decide to do this, don’t expect to be popular.

Also, once people catch on to this strategy, they might also do it to your residents as well. This is not something that we do, this is not something that Joe does, but it is a tactic that is out there that could possibly help you get new residents.

Number three, contact the HR department at all of the surrounding employers in that area and let them know about your wonderful apartments… Someone in the HR department at the company responsible for relocating employees.

Let’s say — obviously, Cincinnati is an example. You’ve got Procter & Gamble, you’ve got GE, you’ve got Kroger, you’ve got these really large companies that obviously are also services by other large companies… So if someone from L.A. is moving to Cincinnati to work for Kroger, then sure if they’re working for a smaller company they might have to find their own place to live or to rent on their own… But if they’re working for one of these larger companies, they likely have some resource available to them at the company that helps them out with this process. So it might be someone who’s responsible for just finding them a place to live for [unintelligible [00:10:50].09] rotation, or whatever. So your goal will be to find this person at that company and let them know about your apartment and see if you can be added to their list of preferred landlords, or whatever that particular list is called.

It’s pretty easy to find contact information to these people. One, you could just call the general phone number of the company and ask to be directed to HR, or you could go to somewhere like LinkedIn and find out who’s actually in HR at that company.

Number four – this one’s pretty simple – is to create a tenant referral program. You can post letters at your residents’ doors or send them emails saying that “Hey, if you refer a tenant to us and they end up moving in, then once they sign the lease we’ll give you $300.” $300 is pretty standard, unless the lease is like $500; then you might wanna reduce that to like $100.

Number five is to set up an open house and invite members of the local community to attend. This works best if you’re unveiling something new. Let’s say you’ve just renovated the clubhouse, so you host some sort of open house at the clubhouse and invite people who live at your property to invite other friends and family to come to this open house, and serve beverages and food. Or you can have an open house for a model unit, and have all the signs out front saying “Hey, we’ve got this new model unit. Come check it out.”

Obviously, you’ll wanna market it online as well, but overall, just set up some sort of open house at your property, whether it’s a model unit, whether it’s an unveiling of a new clubhouse, maybe it’s an unveiling of a new rebrand, you just got a new monument sign… And then invite people that live in the local community to attend.

Number six is to offer a special discount on rent for military, police and first-responders. You can say something along the lines of “If you were in the military or if you are in the military, or if you were or are a police officer, or if you were or are a first-responder, you’ll get 50% off of  your first month’s rent.”

Number seven is to design For Lease banners and put them up at the entryway to your property. You see this a lot when you drive by an apartment and you can’t even tell there’s an apartment; you don’t know what the apartment name is, you don’t know if there’s any units available for rent… You have no idea. Whereas other ones, you’ll see the red, white and blue strings with little flags attached to it, they’ll have big arrows pointing at their property, they’ll have big signs and big red letters that say “One and two-bedroom units available.” Maybe it’ll talk about some special that they’re doing… So which property do you think is gonna get more foot traffic? The one that’s invisible, or the one that has all these bells and whistles that are pointing people to that property.

Number eight is to create a corporate outreach program. If your apartments would make a good corporate housing for executives or workers that are new to the area, then you will want to reach out to the corporations and see if you can get on their preferred landlord list. This is a little bit different than HR, because this is more of like a one-off basis… But if there’s — not necessarily an actual Kroger or GE or P&G, but an actual company that focuses on reaching out to corporations and placing high executives or workers that are moving into the area into places to rent… You’ll want to build a relationship with that company, so that instead of having to talk to individual human resources officers, you can just talk to this one company and they’re kind of like your nexus for all the major companies in the area.

Number nine is to design and place fliers at local establishments where you know there’s a lot of foot traffic. So make one-page fliers that talk about your property, and how it’s available for rent, and drop those off at Laundromats, hair salons, nail salons, restaurants… Anywhere that has those little tables that a lot of people drop off business cards.

Number ten is to purchase ads and place them in local newspapers. Again, this is kind of demographic-specific; if you’re obviously trying to attract millennials, then newspapers might not be the best way to go, but instead you can place ads somewhere else, and we’ll get into that a little bit later.

Number eleven is to post a listing to Craigslist, Zillow, Realtor.com, Apartments.com, Rentals.com and all of those other online rental listing services. In addition to everything else, make sure that you’re posting your listings to all these free resources online. You just create one listing, the same description for all the listings, same pictures, and just copy-paste that to all these different online portals.

Twelve is to partner with a real estate agent, or if you have a license, then I guess you’re that agent… And the purpose is to post your deal on the MLS. So it is possible to have an agent sell or buy a property, but it’s also possible to have him help you rent a property. I think they maybe take half the first month’s rent… But there’s a section on the MLS actually for rentals, and that’s one way to advertise your units.

Thirteen is to create a Facebook advertisement. Again, I guess this is gonna be demographic-specific, but Facebook advertising allows you to hyper-target a user based on a very specific criteria. You can say age, location, job, income, interests… And you can figure out “Okay, so what are those criteria for my ideal tenant?”, create a Facebook ad with pictures of your property, maybe some sort of highlights or a recent development at the property, and then mention it’s for rent. Make that ad and hopefully it gets in front of as many of your preferred tenants as possible.

Fourteen is to create  a Facebook page for your rental business. This is sort of a longer-term strategy, and this could be for your rental business or for the actual property, but ideally both. So create a Facebook page for your actual business, and then create a Facebook page for each of your individual properties. Then brainstorm ways to post content there on a weekly basis. If you’re hosting weekly resident appreciation parties, take a bunch of pictures and post those online. Once your new monument sign is installed – take a picture, and post it on Facebook. Once you’ve painted the property, once you’ve installed the dog park, once you’ve completed the model unit, once the playground [unintelligible [00:16:29].01] come in. Essentially, anything that happens, take pictures, post it on Facebook, and over time you’ll generate a following from tenants who already live at the property, and then their friends will see that they are a part of this group, they’ll join, and ideally, over time you’re able to just post rental listings there, and then your tenants and the friends of the tenants will either see that and rent it themselves, or share it on their own page to attract more tenants to the property.

Fifteen is to pay close attention to what is nearby and cater to that audience. Again, this is kind of vague, but your marketing strategies are gonna be different for colleges nearby, because then you might wanna put fliers on those little bulletin boards throughout the campus; if there’s a military base, there might be a specific person that you can talk to. Large corporations – same things. But the type of advertisement is gonna be different for someone who’s in college versus someone who’s at a military base, because someone who’s in college is gonna want something a little bit different out of their living experience than someone who’s in the military or someone who’s a VP at a company.

Sixteen is pretty simple and obvious, but still pretty important, which is to provide good old-fashioned customer service. For the people that already live there, be responsive and timely with any requests that they have or any questions that they have. You don’t necessarily have to be a marketing wizard and get hundreds of responses from your marketing pieces in order to get someone to live there. And even if you do, and they do move in there and you’re not picking up your phone when they call — and again, this is you, your team, someone on your team is not picking up the phone, someone’s not responding to the emails… Then they’re not gonna stay, and they’re not gonna recommend your property if they move in there; or if they have all these questions before moving in and you’re not answering them, they’re obviously not gonna move in in the first place.

So providing good, old-fashioned customer service is also a great way to increase your occupancy.

Number seventeen – this is an interesting one. Call all the residents who have already told you that they plan on moving out at the end of their lease and figure out why they’re leaving. So let’s say Billy Bob Joe reaches out and says “Hey, I’m moving out at the end of my lease (which is in 60 days, or whatever)”, and you reach back out and figure out exactly why they want to leave, what’s the issue with the unit, and see what you can do to convince them to stay.

Maybe it’s something like they want to move to a different unit because they want to either upgrade or downgrade. Maybe there’s something in the unit that they don’t like, or they want upgraded, like there’s white appliances and they want stainless steel appliances, or like an X on the wall, or something.” And then something else you can do too is explain to them the costs associated with moving. Obviously, give them something, but also say “Hey, if you move out, you do know that you’re gonna have to pay a new security deposit, you’re most likely gonna have to hire a moving company to move all of your stuff from here to there, there’s gonna be cleaning costs for cleaning this unit, you might have to buy new furniture if you’re upgrading or downgrading units, so it’s gonna be pretty expensive to move.”

This overall conversation – make sure this happens 60 to 90 days before the end of the lease, because this most likely isn’t gonna work if they’re moving out next week. So give them some time, and again, figure out why they’re leaving and see if there’s something you can do to attract them and keep them at the actual property.

Number eighteen is to send marketing packages and gift baskets to preferred employers surrounding your property. Preferred employers would be companies who employ your ideal tenant demographic. You’d be surprised at how effective these gift baskets can be. Essentially, you just wanna create a gift basket with wine in it, or cookies, or chips, or whatever. And then either give that to the person at this place – the HR person or the corporate outreach person – and thank them for helping you get residents at the property with the gift basket approach.

The marketing package approach would be to do something similar where you’ve got a box full of fliers, and you’re gonna attach those fliers to like a [unintelligible [00:20:13].25] or something. Something that people will pick up, take the [unintelligible [00:20:18].01] read about your property and potentially move in there. But the gift basket approach is great, because that person’s more likely to send a resident your way than someone who didn’t give them some gift basket or some goodie.

And then number nineteen is to reach out to old leads that you receive. Obviously, you’ve got leads coming in, qualified or unqualified, and then a percentage of those leads move in, a percentage of those leads kind of just die out and you never hear from them again, so every 90 days reach back out to those leads that die out to see if you can attract some of those people to move into your property.

Those are the 19 proven ways to maintain and increase economic occupancy at your apartment community. Again, that’s not an exhaustive list; there’s plenty of creative ways to market your rental listings. We’ll probably go into a few more of those throughout this series. This is gonna be a long series, there’s lots to go over, because again, this is gonna be the longest timeframe of the business plan – 5 to 10+ years.

That’s the end of this episode. As I mentioned, in parts five and six we’re going to talk about – in part five, how to manage the property management company, and in part six how to approach firing a property management company; determining if it’s time to part ways, and if so, how to actually do it.

Until next time, I recommend listening to parts one, two and three, for those ten different asset management duties. I recommend listening to the previous Syndication School series that we’ve done. I think this is series 20, so you’ve got 19 other Syndication School series to listen to… As well as around 19 free documents to download for each of those Syndication School series. All that is at SyndicationSchool.com.

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

JF1793: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 3 of 8 | Syndication School with Theo Hicks

Time for more syndication school! We’ve covered a lot of the apartment syndication process so far, if you’ve been following along, you’re no longer a newbie to the strategy. Theo covers more asset management duties today, numbers 7-10. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Tell them you’re coming and maybe they’ll clean up a little bit or do they things they don’t normally do”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


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; now we are transitioning into also releasing them in video form, so if you’re listening to this on the podcast – great; if you would like to watch on YouTube, make sure you check out Joe Fairless’ YouTube channel; we post these Syndication School episodes on there as well.

But regardless of the way you consume the content, each week we post two podcast and video episodes that are part of a larger podcast or video series that’s focused on a specific aspect of the apartment syndication investment strategy.

And for the majority of these series we offer some sort of document, spreadsheet, template, some sort of resource for you to download for free. All of these free documents, as well as the Syndication School series episodes can be found at SyndicationSchool.com.

This episode is going to be a continuation of a series we started last week, or if you’re listening to this in the future, the podcast episodes that were six and seven previous to this one. This is going to be part three of the series entitled “How to asset-manage a newly-acquired apartment syndication deal.”

As a reminder, if you haven’t done so already, I recommend listening to parts one and two, because this is a continuation, so the content in this episode will be based on the content in those first two episodes; so check out parts one and two. In part one we went over the first five asset management duties (of ten). Just as a reminder, those duties are to 1) implement the business plan, 2) do the weekly performance reviews with the property management company, 3) send out the investor distributions, 4) manage the renovations, and 5) maintain the economic occupancy.

And just taking a quick step back, the asset manager is the person who is responsible for managing the deal, and managing the property management company after the deal has been acquired. So after closing, this is the person who’s in frequent contact with the property management company, and these are the ten duties that the asset manager should be doing, at absolute minimum.

So those were the first five, and then in that part one episode we gave away a free weekly performance review tracker, which has all of the key performance indicators that you should be tracking. You can send that to your management company, or you can customize it yourself and then send it to your management company, but the goal is to send that to them and have them fill it out on a weekly basis. And then the purpose of the actual call – the weekly performance review call – is to go over that content, go over those key performance indicators, and anything that is off, brainstorming 1) what’s the cause of the KPI being odd, and 2) what’s a solution you can put in place.

And then in part two we focused specifically on duty number six, which is the ongoing investor communication, so we talked about all of the different times, and then what you should include in those communications with your investors.

In this episode we’re going to finish off the ten duties, so we’re gonna talk about duties seven through ten, and then in the next episode (part four) – if you’re listening to this now, then tomorrow’s episode; if you’re listening to this in the future, the episode after this one, which will be part four – we’re going to dive deeper into duty number five, which is maintaining economic occupancy. We’re gonna go over some strategies on how you as the asset manager can make sure that you are hitting your economic occupancy goals.

So let’s just jump right into these next duties, seven through ten. The seventh duty of the asset manager is to plan trips to the property. Obviously, this could be easy if you’re investing in your own market. It might be a little bit difficult if, say, you live in Florida and investing in Ohio. It might be difficult to get out there. But ideally, you are visiting the property at least once per month… Because at the end of the day – sure, you can see the weekly performance review, you can get updates on renovations, but you really don’t know what’s going on at the property unless you see it with your own eyes.

So if things aren’t going as planned, if things are off and you aren’t visiting the property – let’s say you visited once a year – well, then you’re not going to catch that. It might be — not necessarily too late, but in order to resolve some issue that you would have seen if you visit the property more often, it might cost you a lot more money, either investing it into the deal, or money that was actually lost.

Now, when you go to the property it’s good to sometimes let your property management company know “Hey, I plan on coming to the property on July 30th. Here’s some of the things I wanna look at. Here’s my agenda for what I would like to do.” That way they can prepare, they can make sure everything’s lined up so that if you wanna meet with a certain contractor, or if you wanna see a certain unit, or you wanna see a certain amenity, they can make sure that that is all lined up for you.

But it’s also good to make unannounced trips to the property, because at the same time the benefits of your property management company knowing you’re coming could also be a potential drawback, because you might not necessarily get a true representation of the actual day-to-day operations at the property. Because if you tell them you’re coming, then they’re going to maybe clean up a little bit more than they usually would, maybe they’re gonna do things that they wouldn’t have done otherwise. So you want to see how the property management company is acting on a day-to-day basis, if they’re just acting naturally and not over-preparing because they know that their boss is coming into the town.

So overall, you want  to visit the property at a minimum once a month. Again, that might be difficult if you have to travel, but you just wanna build that travel expense into your budget and know that “Hey, I’m gonna be spending a couple hundred bucks every month to actually go and visit the property in person.” It could be something as simple as flying in in the morning and flying out at night. Or you drive in in the morning and you drive out at night, so you don’t have to get a hotel.

Again, sometimes you want to announce your trips, so that your property management company can prepare, but the best way to get a true representation of how the property is actually being managed on a typical day-to-day basis is to make those trips unannounced. Just show up and see how things are going at the property. So that’s number seven, plan trips to the property.

One more note on number seven, planning frequent trips to the property – a good way to approach this is if you’re looking at other deals in that market, try to plan a trip to the property, but also try to do other things while you’re there. Maybe there’s a broker contact you wanna meet with, maybe there’s a couple of deals you wanna go tour… So try to address as many things as possible on that trip. Sometimes you might just visit the property, other times you might be able to do other things as well without having to then go back at a different time and do those duties. That’s number seven.

Number eight is to frequently analyze the competition. You’re gonna want to set up some sort of process with either yourself or with your management company for doing rent surveys on the surrounding competition, on the other apartments that are similar to yours in the area. The goal of this rent survey is to compare the rental rates at your property to the rental rates at the competitors. That way you can know if you’re able to increase your rental rates, or if you need to ultimately decrease your rental rates.

This is something that you wanna do on a frequent basis, but you also wanna do it on a case-by-case basis. Let’s say for example for some reason your economic occupancy is low, you have a lot of vacancies, and you’re having trouble finding leases as well. If you do a rent survey and you realize that your rents are the leader in the market, so every single competitor has rents lower than yours, then that’s an issue. Whereas you might discover that “Okay, you’ve got a really high occupancy, so let’s do a rent survey. Oh, okay, we’re significantly below the market leader, so let’s go ahead and push our rents up in order to increase our income.” Because 100% occupancy is great, but you could be 100% occupied but have a 10% loss to lease, which is the same thing as having a 0% loss to lease and being 90% occupied.

Ideally, this is something your management company does. They’ll either call around, or they’ll have access to software where they can see what the going rental rates are. Then they just send you the results and then advice on any rental rate increases. So this is something that you want your management company to do on a frequent basis. And just like all the other duties I’ve discussed so far that involve your property management company, make sure that you’re setting expectations with them upfront. So don’t close on the deal and say “Hey, here’s all the things that I want you to do” after you initially meet them, and once you actually get close to putting a deal under contract, that’s when you want to start having that conversation of “Okay, I know we talked about me wanting to do weekly performance reviews, and analyzing the competition, but here’s specifically what I would like to have done once we close on this deal.” That’s number eight, frequently analyze the competition.

Number nine, on a similar note, is to frequently analyze the market. This is a little bit different than looking at rents. In this case you’re actually looking at values of properties that are being sold. Once you’ve actually completed all of your renovations for your value-add business plan — let’s say for example your plan is to sell the property after five years, and the projected value-add business plan will be completed after two years. Well, between years two and years five you’re not just gonna want to do nothing, and then once year five comes around just sell the property without even considering it selling it earlier or selling it later.

Instead, what you’re going to do is you’re gonna pay close attention to the market, so whenever an apartment sells, what was the price? What was the cap rate? What was the dollar per unit and what was the cap rate of that sale? Then based on that you can determine, “Okay, so I know the cap rate, I’ve got my current NOI as of today. If I were to sell the property right now, or if I were to refinance the property right now, how much money would I get? How much equity would I be able to return to my investors if I refinanced? What would be the IRR or the cash-on-cash return to my investors if I sold at year 2,5 or at year 3?”

In order to do this, you can reach out to the broker – if this was an off market deal, then whatever brokers you’ve been working with  that you wanna build a strong relationship with; if it was an on market deal, then just use the broker that represented you when you bought the deal, and ask them for a broker’s opinion of value, or BOV.

What they’ll do is based on recent sales they’ll come to you and say “Hey, if  I were to list this property, here’s the lowest I think we would get, here’s the highest I think we could get, and here’s a median price.” So they’ll give you a low, medium  and high, so that you can determine “Okay, so if I were to sell this property now…” Let’s say you projected to sell the property for 18 million dollars at year five, but the broker’s opinion of value medium is 18.5 million dollars at year three – well, not only are you gonna get an extra $500,000, but you’re gonna get that money at an earlier date, which is  a better IRR, since the IRR is based on the time value of money.

So again, even if your business plan is to sell after five, seven, ten years etc. don’t wait until then to look at the market, look at prices, look at cap rates… Because as I mentioned, you might be able to provide your investors with a larger return by selling earlier than selling later… And you’ll never know that if you didn’t analyze the market.

So this is something you should do at least a few times a year, so maybe on a quarterly basis; you should do this with your property management company, and reach out to your broker and get those BOVs. It’s not something that’s super-detailed that the broker will do, so it won’t take them a lot of time, and they shouldn’t have an issue sending that to you, especially if we’re talking about multi-million-dollar deals; they want to give you a BOV, because they want to sell the property so they can make money again. So that’s number nine.

Lastly is number ten, and this kind of attempts to cover anything that’s not listen in duties numbers one through nine, and that’s to expect the unexpected. So you can do as much research as you possibly can, you can plan or have the best underwritten deal, perform all the due diligence in the world on the deal, and your team, on the market, and then you buy that property and something crazy happens. A boiler unexpectedly breaks down, and you have to determine whether you’re going to replace it or you’re gonna repair/refurbish it. Always expect things to come up that are unexpected. That’s why it’s super-important to visit the property frequently, it’s super-important to have conversations with your management company every week, because once these unexpected things come up, the longer it takes to resolve them, the more money you’re losing, and you’re putting your investors’ money at risk by not addressing these things sooner.

So duties one through are what you should be doing consistently, but at the end of the day things are going to come up, there are grey areas; we can only talk about so many things on Syndication School, we can only talk about so many things in blog posts and books, things will come  up that you do not plan on coming up, and you need to make sure that you are able to get on top of those issues right away and resolve those as quickly as possible.

And again, I gave the boiler example, but it could be something as extreme as you get a call from the management company and the entire property is burnt down; what are you going to do? A good exercise to do is think of just all the worst-case scenarios possible. We’ve talked about a lot of those on Syndication School, in particular when we were talking about how to do that new investment offering call to your investors, all the different questions they’re going to ask… And one of those questions was “What’s the worst-case scenario?” And the worst-case scenario would be the property burns down, or floods, or something happens where the property is destroyed, and then you go to your insurance company and for some reason the insurance company won’t pay out your claim. So what are you gonna do in that situation?

If you know that unexpected things are gonna come up, you need to have a general process in place for how to address those. That’s gonna vary from person to person, investor to investor, and that boiler example would just kind of be a simple ROI; that’s why it’s also really important that you have that operating account fund upfront… Because if you don’t and something were to come up during the first few months of the deal and you don’t have any money to the side to address anything that comes up that’s unexpected, you really don’t have a choice but to do either a capital call from your investors, which is bad, or to take money out of your own pocket, or to take money from somewhere else and maybe not upgrade the clubhouse because you had to fix a bunch of boilers.

So yes, you can do all the due diligence in the world, but there’s certain things that are gonna come up that are outside of your control, but it is still your responsibility as the asset manager to fix that problem, to solve that problem, so that you’re still able to hit those return goals.

So this is a little shorter episode. I wanted to just wrap up those last duties that I wasn’t able to wrap up in the previous episode, because we talked about investor communications for quite some time… So just as a summary, the last four duties of ten are 7) plan frequent trips to the property, 8) frequently analyze the competition, 9) frequently analyze the market, and 10) expect the unexpected. And then one through six were input the business plan, implement weekly performance reviews with your management company, distribute your investors’ money on time and the correct amounts, manage the renovations, maintain economic occupancy and continue to provide your investors with ongoing updates at the property.

Tomorrow (or in the next episode) we’re going to finish off these ten duties by going into more specifics on the occupancy rate, and how to maintain the economic occupancy rate. As I mentioned in part one when we discussed that, the majority of that is going to fall on your management company, because they’re the ones that are on a day-to-day basis trying to reach out and find high-quality residents to live at your property. But again, this is your property; ultimately, everything is your responsibility. So if the property management company is having trouble finding tenants, or if they aren’t’ implementing the best practices – well, one option is to fire them, which is something that we’re gonna talk about later on in this series, but another option is to present them with particular strategies for maintaining economic occupancy… So we’re gonna go over that tomorrow in part four.

Until then, to listen to the other Syndication School series, as well as parts one and two of this series, about the how-to’s of apartment syndications, and to download the free document for this series, which is that weekly performance review tracker, as well as the free documents for previous Syndication School series – all that can be found at SyndicationSchool.com.

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

JF1788: Best Ever Interview Lessons #FollowAlongFriday with Jason Yarusi and Theo

Theo has a new co host for today’s episode, Jason Yarusi. They will share with us a few things they learned last week that we as investors can also learn from. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Take time to get to know the person first and the deal second” – Jason Yarusi

Free Document:

http://bit.ly/brandingresource1

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Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.

 

TRANSCRIPTION

Theo Hicks: Hi, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks. Well, it’s Friday, so that means it’s Follow Along Friday, where we talk about the lessons that we learned from the previous week’s interviews.

This week it’s gonna be a little bit different. As you can see, this is  not Joe talking. We have a new co-host for this episode, a new Theo, and that is Jason Yarusi. Jason, how are you doing today?

Jason Yarusi: I’m doing great, thanks for having me Theo.

Theo Hicks: I appreciate you being here. We’re gonna stick to the standard Follow Along Friday template, but before we begin, I wanted Jason just to quickly introduce himself, let you guys know who he is, what he does, where you can find him, and then we’re gonna jump into the lessons that I learned from interviews last week.

Jason Yarusi: Awesome. Thanks for having me, Theo. I’m really excited to be here. I’m Jason Yarusi of Yarusi Holdings, based here in New Jersey. We invest in multifamily assets in the Midwest and the South-East with general partners on about 450 units right now. I come from a heavy construction background where we’d lift and move buildings, a lot of it for flood reasons. I have a beautiful wife and three small children, and I run a ton; so if you wanna find me at YarusiHoldings.com, or check me out on Instagram at @jasonyarusi and you can see a bunch of the crazy runs I do every week.

Theo Hicks: What’s the longest run you’ve done the past seven days?

Jason Yarusi: The past seven days would be 17 miles; past two months would have been I did a 51-mile race.

Theo Hicks: Is it just you running in the morning on your own, or are those actual races?

Jason Yarusi: The 51-mile was an actual race; the long run – I usually do a long run every Sunday, and it’s just me running.

Theo Hicks: That’s funny. My wife is training for a 10k right now. Now, keep in mind, she’s had a baby four months ago.

Jason Yarusi: Oh wow, good for her. Congrats.

Theo Hicks: 10k is five miles, and you probably just run five miles for your warm-up, probably.

Jason Yarusi: Yeah, you have 6,2 miles, so that’s where it’s at. She’s getting ready for it. But yeah, I’m gonna do a 100-miler, I’m planning on it late September. That’s gonna be a beast. It’s mental first, and then just running second.

Theo Hicks: Good advice, because it seems like you’re pretty into fitness… Before we get into real the real estate stuff, what advice do you have for someone who’s been struggling to start a new workout regimen, or [unintelligible [00:04:15].04] what’s the first thing that you’d do?

Jason Yarusi: Okay, so one thing is nobody wants to get out there and do it; you’ve just gotta get out there and do it. But the other thing is you’re not gonna go from sitting on the couch to running a marathon, or sitting on the couch to bench-pressing weekly 300 pounds. It’s getting out there and just creating constant small habits, and those build over time.

People come out of the gates — it’s like new year’s resolution. You come out there, you get to the gym, you work out for three days, you’re so sore you can’t move for a week, and you’re out again. It’s just getting out there, doing small, consistent habits, just like you do in your real estate business, to improve over the long-term… Because this is just like real estate, it’s a long play; you wanna be healthy and happy for 50 years, not just workout, crush yourself and not be able to do something for two weeks.

Theo Hicks: I appreciate that. You learn something new every day on Follow Along Friday, not just real estate related… But obviously I’m sure running 100 miles is a lot more difficult than anything you do for the real estate business, that’s for sure.

Jason Yarusi: I’ll report back. I’ll come back in October/November and let you know what happened here.

Theo Hicks: I was listening to a podcast for a guy who did the 100-mile run; it’s kind of tough, but he did it. I think he actually does one of those every single year.

Jason Yarusi: Wow.

Theo Hicks: I can’t remember what his name is; I think he’s like an ex-Navy SEAL though.

Jason Yarusi: Yeah, there’s some incredible people out there just crushing some massive goals that you wouldn’t think are achievable. You see people doing races that are like 260 miles, and you’re like “Wow…!”

Theo Hicks: A hundred first.

Jason Yarusi: Yeah, exactly, a hundred first.

Theo Hicks: Alright, so last week I did one interview. I interviewed a passive investor who goes by the moniker X-ray Vision. He’s anonymous, and we kept it that way. He actually is a radiologist, hence the X-Ray Vision moniker. He’s a passive real estate investor and  a blogger. His entire story is around him making a comeback after losing seven figures – almost basically a million dollars in a divorce. Then from there he discovered passive real estate investing and was able to climb out of that hole and achieve financial independence in his 40’s.

He was actually a -$800,000 net worth when he turned 40 years old. By the end of that decade — actually, I think he’s still in his forties right now, so I think he said by 48 he was able to achieve financial independence. A very powerful interview that will probably come out sometime in October, and I wanted to go over a few things that I learned from him.

One thing was obviously he’s a passive investor, he’s invested in a ton of deals with a ton of different sponsors… So I asked him what’s the best way to qualify a syndicator. Obviously, this is something that’s helpful for passive investors who are looking to find syndicators, but also it’s more important for people who wanna be a syndicator, because you can see from the perspective of the passive investor what they’re actually looking for out of you.

So a few things that he said – this isn’t anything too profound, but it’s simple and to the point, and still interesting… So obviously, you wanna do your due diligence on that individual and that company, but it’s less about looking at their experience level and how many deals they’ve done and more about how you actually feel about them as a person, and how you feel about their actual niche.

Obviously, in order to determine how you feel about them, you’re gonna want to make sure you set up an interview with them on the phone… Remembering that it’s actually a two-way street, so you interviewing them and they’re technically also interviewing you.

At the same time you wanna do all of your typical research online and determine “Okay, so if they’re investing in mobile homes, am I comfortable with that niche? Are they investing in multifamily – am I comfortable with that niche?” Retail, office, whatever – is it something that you’re actually comfortable with? Because at the end of the day, he was saying how no matter what niche you invest in, no matter who you invest with, that first deal is gonna be a leap of faith, and you’re gonna have lots of doubts just because it’s your first time giving someone else $50,000 to $100,000. So don’t let that stop you from doing it… Just make sure that you’re comfortable with the actual individual and you’re comfortable with the actual niche that they’re investing in.

And then one more thing that he said before I toss it over to Jason is obviously after your [unintelligible [00:08:04].11] you’re gonna wanna get a list of people who are investing in their deals currently, and actually in a sense interview those people as well, and talk friendly with them and just kind of determine how the deals actually performed compared to how they were projected, and then compared to how the syndicator said their deals performed during that initial conversation.

I know I’ve mentioned a lot there Jason, so you can just pick it apart… Any thoughts on that?

Jason Yarusi: Yeah, so there’s actually so much good stuff said there, and even more in the last part… Following up with people who have invested in their deals prior, just because a lot of people can put together a deal that looks great on paper, but actually when you get into the deal it’s really about the things that are gonna come up, because when you have an apartment building where there’s 100-200 people living in it, how did they react when they have to make a decision on there and how are they following back with those investors? Are the investors in tune to what’s happening on the deal?

Another point you’ve mentioned that’s key is that if that person hasn’t done this deal before or hasn’t done a multifamily deal, what’s their track record in life and in business before that? What else have they been doing, what else have they been making of themselves? Honestly, you may be a passive investor in this deal, but ultimately you’re partnering with this person from three, to five, to seven years. So if you don’t really agree with their views or agree with their take on investments, just having a good deal may not be enough for you to invest with them… Because you’re gonna be partnered with this person for that amount of time, and their reaction now is not gonna change; they’re still gonna have a reaction that may not suit you over time… So take your time to really dive into the person first, and then the deal second, because it’s gonna be the person that you’re gonna build with over the years.

Theo Hicks: Yeah. I didn’t ask this question to X-ray, but I did have a conversation with a passive investor and a syndicator – I think it was two weeks ago – and I was asking him “What would someone need to do if they’ve never done a deal before to essentially convince him to invest in the deal?” And you actually hit on that when you said that you wanna see someone that has experience in business. So have they started a business before in the past? It doesn’t have to be anywhere closely related to real estate; I wish I could remember what business he had started, but it had nothing to do with real estate… But because the act of starting a business, the act of starting something from nothing and dealing with all of the obvious hurdles that come along the way, you can take the skills that you’ve learned and then apply that to raising capital and doing a deal.

Obviously, I didn’t ask X-ray, but for people who haven’t done a deal before, and obviously, every single person who’s done a deal before has been someone who hasn’t done a deal before… And one of the best ways to get over that objection from a passive investor – “Well, I wanna wait until you do one deal first to see how it goes, because while I invest with you, it’s ideal that you have some sort of track record in some other industry that you can rely upon.” It can even be something like you got promoted every year for ten years at a company, and you’re a director, or whatever.

It’s all about how you position it to the investor. At the end of the day they have to trust you with their money, and if you graduated college and didn’t work for five years and then all of a sudden you’re wanting to raise capital, well you’re gonna have a little trouble doing that… Whereas if you didn’t do anything real estate related at all, or maybe you did a few deals on the side, but you worked for a big Fortune 500 company and climbed the ladder there, or if you started your own small business that was successful a.k.a. generated a profit, then you can leverage that to essentially convince people to trust you and invest with you.

Jason Yarusi: Yeah, absolutely. When you think about it — you’re spot on, we all start without having done a deal before, and it just comes down to what we’ve built up in the rest of the parts of our life. I was just having a talk with someone the other day – they’re successful in opening restaurants, but they want to now start raising capital to help others achieve financial freedom through investing in apartment buildings. He’s like “I don’t think people will take me seriously.” I’m like “Well, why not?” He’s like “Well, I haven’t done this before.” “Well, yeah, everybody’s gonna start at that point. But you’ve opened three successful businesses. Do you have employees there?” “Yes, I do.” “Well, are the employees now being paid, doing their job successfully because of what you’ve put together? Are they now feeding their families from what you’ve put together? Think about that track record and use that to your advantage. You’ve done that successfully, you’ve built your team, you’ve built your processes through that; allow that to transfer over to this business.”

Theo Hicks: Yeah, building a team is also a big one too, because obviously in syndications 100% of the success is dependent on the syndicator themselves… But they have to select the right team, because the team is gonna be managing the deal from a day-to-day operations perspective, [unintelligible [00:12:28].24] a business before and you’ve got  actual employees, that’s huge. Obviously, if it was successful and it was profitable, that’s also…

One more note on this one, and then we’ll probably move to the second point I wanted to talk about, which is he mentioned a big red flag that he would see. So he talked about what he does not wanna see, and the one red flag that he mentioned was unrealistically high or inflated returns. It’s kind of implying that the person who is a passive investor has experience analyzing deals. He mentioned that he analyzed a ton of deals from a ton of different sponsors. So that’s one thing that you should do as a passive investors – analyze a lot of deals – because then you can recognize “Okay, I’ve looked at 100 deals. 99 of those deals had between 8% and 10% return, but this guy is telling me he can get 15% cash-on-cash return with a very similar deal – I know something is most likely going on here.”

Or if you’re even better at crunching the numbers and able to analyze the actual — not the actual cashflow calculator, because they’re not gonna send you that, but just looking at their proforma, and seeing “Wait a minute, this expense seems like it’s really low”, or “I think they’re missing this expense” or “Wow, they’re gonna raise rents by this much money by only investing $1,000/unit?” Something that just looks unrealistic, but really the only way to know what’s realistic and what’s not realistic is to analyze a bunch of investment summaries and go on a bunch of those new investment conference calls or webinars.

Jason Yarusi: Yeah. This is a great point for people that wanna be active and wanna be the syndicator themselves and raising money and buying deals… Because ultimately, you say “Well, I can’t find a good deal” – well, you should be analyzing as many bad deals as possible, because as soon as a good deal comes across your table, you’re gonna know it so quickly because you’ve already gone through all the bad deals that are out there on sites and are just being pushed around from person to person.

Theo Hicks: Exactly. So this X-ray guy, and then other passive investors I’ve interviewed – they’re on all the email lists, so whenever a syndicator gets a new deal that gets sent to them, they’ll go on the conference call. It only takes a few hours a week. If you look at one deal a week, it’s maybe a few hours in a conference call, and then maybe another hour reviewing the deal… So spending five hours, maybe an hour a night, and over time you’ll learn what’s good and what’s bad. Not even that, you’ll be identifying what’s good and what’s bad. And then, as Jason mentioned, once that good deal comes, you’ll be able to see that.

The second point I wanted to mention – and this is short – we were talking about his blog focuses on financial freedom and helping people achieve financial freedom through passive investing… I was asking him, “Do you know a different definition of financial freedom and different ways to go about doing it?” For him, he gave me two different categories of financial freedom. One was called lean fire; Jason is lean… But I guess this is kind of the opposite of that, because the lean fire is you just doing your basic needs; so figure out exactly how much money you need to make to cover your house, your food, your family and whatnot. That’s lean fire, and where that number is, that’s your goal.

Then on the opposite end of the spectrum is fat fire, which is your basic needs plus let’s say you wanna splurge on vacations, you wanna buy a really fancy house, and buy a new car every year… So depending on what your definition of financial freedom is, you need to set a number based on that. So first you figure out your burn rate – your lean fire rate; the basic amount of money you’re gonna make per month in order to survive. And then whatever else you wanna make on top of that, you add that to your basic needs number, and those two together is your total number that you want to make per year. And then obviously you work backwards to figure out exactly how much money you need to invest passive at x% return to make that money.

Something else that was interesting that he mentioned was something called the Trinity Study. This can go either way, so let’s say you know exactly how much you want to spend each year in expenses; then your nest egg that you’re gonna need to retire is gonna be that number times 25. And the other way around is if you have a nest egg of whatever, and you wanna figure out how much money you can spend each year, you divide that by 25. And the whole idea behind that, I’m pretty sure — [unintelligible [00:16:30].15] live for 25 more years, or it’s that the return you get on that nest egg is gonna be 4%, and then that’s what you’re gonna be living off of, is that 4%.

Jason Yarusi: Huh. That’s a pretty cool way to think about it, but what’s just key here is he’s breaking it down to real actual numbers. We all talk about we want financial freedom, but what that means for me versus what that means for Theo and what it means to everybody listening to this is gonna be completely different. But if you think about that – your basic needs, if you wanna add on top of that and start breaking it down and looking at your investments, well now it becomes real and it can become concrete, because you can put steps to it, put actual steps to it.

Theo Hicks: Yeah, and I like the whole concept of reverse-engineering it, so saying “Okay, I’m gonna make 50k a year. Okay, well how much money will I need to invest from a passive investor’s perspective? How much money do I need to passively invest in deals in order to reach that number? Okay, well how many deals do I need to do per year, to passive invest in? Alright, so how many deals do I need to look at in order to passively invest in that many deals? Okay, how many syndicators do I need to talk to?” Kind of just breaking it down to “What do I need to do every single day in order to make my goal?”

We kind of talk about the same thing on Syndication School about apartment syndications. Let’s say your goal is to make 100k/year. Well, you don’t wanna just stop there and be like “Well, based on the structure of my syndicated deals, what size deal do I need to do, or total size deals do I need to per year in order to make that $100,000 goal?” I’ll just do a basic number – “I need to do a million dollars’ worth of deals per year. Well, how much money do I need to raise in order to do a million dollars’ worth of deals? Okay, so I need to raise $350,000. Okay, well how many passive investors do I need? If I need ten passive investors, how many passive investor conversations do I need to have per week or per day in order to get those ten passive investors?” So taking it from a very high level and breaking it down into what you have to do every single day, as Jason mentioned, makes it real.

Jason Yarusi: Yeah, absolutely.

Theo Hicks: It makes it more tangible and gives you probably less anxiety about achieving it. Because if I just say “I wanna make $100,000 this year in syndication.” Well, what do I need to do? Do I need to do 10 million dollars, 100 million dollars, a billion dollars worth of deals to make $100,000? I don’t know.” So if you break it down, you know exactly what you need to do in order to get there.

Jason Yarusi: Yeah, and 100% attainable. If you say “Well, I just wanna go buy a million dollar apartment building because I think that can get me $100,000”, but you don’t know if you can actually put the work to be able to find that many people you can help and raise money from… Well, now you get that, and the stress is now “You HAVE TO raise this money.” This is about going out there and finding people that align with your investment criteria and align with your investment goals and helping them across, and now you’re ready to find out apartment buildings; you’re basically building yourself backwards into it.

Theo Hicks: Exactly. So those were the two long lessons I learned from a single interview last week.

Jason Yarusi: Yeah. I keep thinking the anonymous guy is like — you know, there’s an old Chevy Chase movie where he keeps being invisible and he’s running around in a suit; that’s this anonymous guy. I wonder what he goes under when he invests in these deals.

Theo Hicks: I know what his name is… [unintelligible [00:19:25].03] his blog is anonymous, but I’m pretty sure when he invests in the deals he just goes under his real name.

Jason Yarusi: I’m gonna keep thinking it’s the other way. Just give me some good thoughts here.

Theo Hicks: There you go. Alright, so moving on to the last two items… We have the trivia question; this is the month of the global trivia questions. I guess this is gonna be the last week of the global trivia questions. Last week I asked Joe what country has the highest percentage of renters, so renter-occupied units, highest-percentage. I think he said France. I mentioned it was in Europe. The answer is actually Switzerland. In Switzerland 56.6% of the population rents.

I’m pretty sure it might be one of the only countries that has over a 50% renting rate. [unintelligible [00:20:13].17] one more, but I thought that was interesting.

So we’re gonna go at the opposite rent of the spectrum, and this week’s question is “What country has the highest homeownership rate?” This number is 96.4% of the population owns their own home. I’ll give you a hint, too; this is a European country, and it’s actually an Easter-European country, so I’ll give you something even more specific.

Jason Yarusi: Croatia.

Theo Hicks: That’s a good guess. So if you want to win a free copy of the first Best Ever book, either submit your question via email to info@JoeFairless.com, or in the comment section of the YouTube video. As I mentioned, the winner will get a free copy of our book.

And then lastly, we’re discussing the free documents that we have on Syndication School. As a reminder, Syndication School goes live every Wednesday and Thursday, where I talk about the how-to’s of apartment syndications. Right now we are on series number 20, so we’ve got almost 100 episodes of that aired now.

Right now we’re talking about how to asset-manage deals, so make sure you check out those episodes that came out yesterday and the day before… But also check out all the previous series as well if you wanna learn how to do deals.

The free document I wanna talk about this week is from series number seven, which is where we talk about the power of the apartment syndication brand. So me and Jason were talking about today one way to get credibility in the eyes of potential passive investors is to have business experience. Another way to do that if you don’t have business experience is to focus on building a brand, a thought leadership platform – something like this, where we’re talking to expert real estate investors. Through them you gain knowledge, but also you’re perceived by other people as an expert because you’re out there actually talking to experts.

We have a lot of free documents from that episode, so I’ll talk about the rest of those in the next few episodes, but the first one we gave away was a branding resources document; essentially, it’s a list of all of the websites and different tips for constructing your brand: creating business cards, creating a website… So kind of the foundation of the brand. And then we go into more details on how to actually create a website, how to actually create your podcast or your channel or whatever. All that is available at SyndicationSchool.com. The branding resources are from episode 1534, or we’ll have it in the show notes of this episode.

Jason, I appreciate it that we got you on the show.

Jason Yarusi: Awesome. Thanks, Theo.

Theo Hicks: Just one last time, where can people reach you and learn more about you?

Jason Yarusi: Sure, you can find me at YarusiHoldings.com. Follow me on Instagram at @jasonyarusi, and the podcast is The Real Estate Investing Foundation Podcast with Jason and Pili. You cand find all the notes on the website, and all the other channels you’re finding… Joe and Theo for the Best Ever Show.

Theo Hicks: There you go. Alright, Jason, I appreciate it. Best Ever listeners, thanks for tuning in. Have a best ever day and a best ever weekend, and we’ll talk to you soon.

JF1787: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 2 of 8 | Syndication School with Theo Hicks

Theo continues the long series on asset management. Today he covers more of the top 10 asset management duties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“The majority of the information is included in the free weekly review document”

Free Document:

http://bit.ly/weeklyperformancereview

Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.

 

TRANSCRIPTION

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

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

 

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

As you know, each week we air two podcast episodes that are part of  a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For nearly all of the series we offer some sort of document, spreadsheet, template for you to download for free. All of these free documents for the past Syndication School series, as well as the actual Syndication School series episodes – all that can be found at SyndicationSchool.com.

This is going to be part two of a series we started yesterday – or if you are listening to this in the future, the podcast episode before this one – entitled “How to asset-manage a newly-acquired apartment syndication deal.”

At this point in the process you’ve gone from being a complete newb to actually closing on your first deal, and now we are going to go over exactly what you need to do in order to make sure you’re able to successfully implement and execute your business plan.

As I mentioned yesterday, this is going to be the longest timeframe of the entire process, most likely, because this is when you buy the deal to when you sell the deal, which could be five years, ten years, or maybe even longer. So these are the things that you need to do in order to ensure that the deal is successful during those 5 to 10+ years.

We began by giving a general overview of the top ten duties of the person who’s responsible for asset-managing the deal. We went through the first five yesterday, or the podcast episode before this one, in part one, and we’re gonna go over the next five today.

Just to review what we went over in part one – the first five duties we went over was 1) to implement the business plan, which involves reviewing the financials on a weekly and monthly basis, and then comparing that to your budget to determine any discrepancies. 2) Have weekly performance reviews with your property management company, and we offered a free weekly performance review template that you can send to your management company so they can fill it out, so you can track all of the KPIs (key performance indicators). 3) Making sure you’re sending out the correct investor distributions on tie. 4) Manage the renovations, manage the interior and the exterior renovations. 5) Maintaining the economic occupancy rate.

Make sure you check out part one, so you know specifically what the best practices are for those first five asset management duties, and today we’re gonna finish out the top ten with duties six through ten.

Duty number six is going to be the investor communications. As I mentioned in part one, these asset management duties aren’t going to be solely the responsibility of just the asset manager. Every single aspect of these duties are not performed by the asset manager; most of them are in tandem with the management company, and then others are in tandem with the person who’s responsible for raising capital – if that person is different from the asset manager – and investor communications is one of those. This is going to be a team effort on these investor communications.

Obviously, just like you notified your investors of the new deal, you presented information in the conference call, you notified investors of the close, you’re also gonna want to notify your investors of updates on an ongoing basis.

For Joe’s business, what he does is he provides a recap email to his investors each month, that recaps the activities of the previous months. We’ve just sent out our June recap emails in July. When June ends we gather all the information during the first few weeks of July, we put it together in a nice, organized email, and then we send that out to investors by the middle of the month. I’ll go over specifically what goes in those emails in a second, but we also send out financials on a quarterly basis. So each quarter we also send out an up-to-date T12 with the income and the expenses, as well as a current rent roll.

And then on an annual basis the recap email includes the K1. That is the tax documentation that you provide to the investors, so they can file their taxes properly. For that you wanna make sure you talk to your CPA, so you can determine exactly when they are gonna prepare and complete these K1’s, so you let your investors know starting with that update that goes out in January when they can expect to receive these K1s.

More specifically, here are the things that we include, and that you should probably also include, in your monthly email. And before I go into that, the process for obtaining this information is to have the asset manager – or whoever is the interface between you, the syndicators, and the management company – reach out and say ” Hey, each month can you please send me this information?”, obviously letting them know before you close that this is what you’re going to do. So you set expectations, so that when you close you don’t say “Hey, by the way, on a monthly basis can you send me this and this?”

The majority of the information is actually going to be included in the weekly performance review document that we talked about in part one, and that is the free download, so technically, you could just use that… But it’s still nice to make sure that you’re getting the most up-to-date information, so when you click Send you know that you’ve got the best and most current data for your investors.

So the asset manager will get that from the management company, and then the asset manager will forward that on to the persons responsible for raising capital… Because you want the person who raised the capital from that person to be the person that’s responsible for the ongoing communication to them, just because it’d be weird if for the first six months, year, or however long it was you were talking to Joe, and then all of a sudden once the deal closes they’re talking to some random Billy Bob Joe, and they don’t really know who that is.

So keep the communication consistent with your investors. Then obviously the person who is responsible for  writing these emails will obviously send these emails out as well.

Now that we got that out of the way, what actually goes into these emails? Here’s a checklist that you can use in order to make sure you’re including all of the relevant information in the email.

Number one, what you wanna lead off with is any information about them getting paid. If you’re doing monthly distributions, then in that first recap email you want to explain to them – or remind them, because the information should already be in the investor guide – how they’re gonna get paid, how much money they’re gonna get paid, and when they’re gonna get paid.

It’s something as simple “Welcome to your first recap email. As a reminder, download the investor guide for information on the timing of distributions, tax timing etc. Expect to receive your first distribution by this date. Since we closed on this date, it’s gonna cover…” For example, let’s say you closed on June 15th, 2019; you’ll say “You’ll receive your first distribution by the end of August. It will cover the time we owned the property from June 15th to July 31st.” Then after that what’s it gonna be? Well, after that it’ll  be whatever your preferred return is, on whatever your frequency is. If you’re doing it monthly, you can say it will be a prorated 8% preferred return each month.

Then you’ll also wanna explain that – again, this is only if you’re doing this – “Every 12 months we’re gonna evaluate the performance of the property to determine if we can distribute money above that preferred return.” If you remember, you’ve got your preferred return most likely, and then a profit split most likely. So you distribute that 8% preferred return… At the end of the year let’s say you’ve made 9% — or let’s say you projected 9% and you made 10%. Then you can tell your investors at that 12-month point “We’ve owned the property for 12 months; we’ve evaluated our performance. I know  we’ve projected a 9% return to you, but we were actually able to hit a 10% return, so in your next distribution, in addition to your normal 8% prorated return, you’re also going to receive an extra 2%.” And then say “For example, if you invested $100,000, it’ll be this much money.”

So really you wanna lead off the email each month with any information with them getting paid. That’ll change each month, obviously. Then for the months where it’s just a regular 8% prorated return (or whatever your preferred return is), you don’t need to say that every single month. Just set expectations in that first email, and whenever it changes is when you want to actually disclose the information.

Next, if it’s on a quarterly basis, you’ll wanna include a link to the actual financials. What we do is we have a Dropbox folder for each property, and any relevant information – pictures, links etc. – goes into that folder. Then in our emails we’ll copy that Dropbox link and hyperlink it in the email so they can click on it. It’ll open up their web browser and they’ll be presented with the financials, or with a picture.

From there, you want to also make sure you’re including occupancy information. You want to explain what’s the current occupancy, and then what’s the pre-lease occupancy. If you want to go above and beyond, something else you can do is track each month to see if your occupancy is going up, so that if it does go up, you can mention that in bold.

You can say “Our occupancy rate has increased to 95%, up from 94% last month.” Or even better, “Our occupancy rate has increased for the third straight month, from this to this.”

Then you also want to mention what the pre-lease occupancy is, so that 1) your investors know what the expected occupancy is going to be  from the end of the month, just because a current snapshot is great, but what are we trending at? Is it trending upwards, is it trending downwards, is it remaining the same? Plus, in the beginning, when the occupancy level is a little bit low, they’ll be able to see that “Okay, well it may be below 90% right now, but by the end of the month we expect it to be at 90+ percent.”

Next you wanna provide an update on the interior renovations. You want to say how many units have been renovated since you’ve bought the property, and then how many units were renovated the previous months, and then you’ll want to provide information on what rental premium you’re demanding. Ideally, at the very least you say that “We are achieving our projected rents.” Even better is if you’re achieving a number which is higher than your projections.

If you remember back in the episode about the investment summary, when you’re presenting the deal to investors, you wanna make sure you’re conservative with your rental premium numbers, so that you can say “We are projecting a $100 increase in rents based on our renovations program. Properties in the area that have undergone similar renovations programs have seen an increase of $150.” That way if the deal still makes sense at $100, and you’re able to get $150, that’s just more money for you and your investors, and more positive information you can include in the email.

Then in the beginning once your model unit is done, or if you don’t have a model unit, just one of your first units that are renovated, send your investors some pictures. You don’t want it to just be a bunch of words; investors are gonna want to see exactly what you’re doing to those units. So provide them a picture of the kitchen, the bathroom, the living room, things like that.

Next you’re gonna want to talk about the other improvements, the other cap-ex projects that are going on at the property. For example, you can say that “We’ve installed all the carports, and we plan on leasing them at $25/space, which will increase our net operating income by whatever dollars per month.” Or “We’ve just rebranded our property to ABC Apartments, and are in the process of designing a new monument sign.” Then in three months, when that monument sign is done, you can say “Our monument sign is installed. Click here for HD pictures.”

So not only do you wanna provide updates and make sure that these are consistent each month… So during the first month you talk about ten different things – you want to make sure you continue to bring those ten things up until they’re done. Then once they’re done, you wanna provide pictures of the completed project.

Something else you wanna include are any type of events you’re hosting for your residents… We’ll go over this in a lot more detail in a later episode, but a very strong lead generation and retention strategy is to host resident appreciation parties, in  a sense. We’ll go over specifically what those are, but if you’re hosting any sort of party or event for your residents, you’ll wanna include that in the email.

And then lastly, and news item that’s relevant to the market that the deal is located in. If a new company has moved to the area, you can say “Amazon just opened up a new distribution center. They’re investing 100 million dollars. It’s planning on generating 1,000 new jobs, and hey, it’s actually a short ten-minute drive from the property. This reinforces our thoughts on the continued strength of the market.”

That’s really an exhaustive list of things you can include in your email. You can include all of that, you can brainstorm more things to include in the email, you can include less things… It’s really up to you. That’s what we include in our updates each month, so you can use that as a guide to creating your own emails.

A few extra things to think about for these emails… Number one is the timing. Make sure you set expectations with your investors about the timing of these updates. Whatever you tell them in the beginning in that investor guide or in your closing email in regard to the frequency of these updates, make sure you’re actually doing that. If you say “We’re gonna send updates each month by the 14th”, then make sure you send updates each month by the 14th. If you say the updates are gonna include X, Y and Z, make sure the updates include X, Y, Z. If you say that you’re going to send these emails out by a certain date, make sure you’re not waiting until the day before to write the emails, especially starting out.

Eventually, you can get to the point where you’ll probably write them with a few days’ notice, but at first, the second the month ends you wanna get that data from the management company within the first few days – or whenever they have the data inputted – and then you wanna instantly start working on those emails, so that you can send them out on time. Sending them out earlier is even better.

Then a few other things – and I’ve mentioned some of these already, but I’m just gonna reiterate… These are some important milestones, things that aren’t something that you’ll include in every single month; it’ll be something that changes in your email throughout the year.

As I mentioned, at the end of each quarter you’re gonna want to send your investors the financials; you’re gonna send them a rent roll on the profit and loss statement. Make sure you’re not including any personal investor information in those financials. Sometimes the property management company will put the money that got distributed to investors at the bottom of the rent roll, at the bottom of the T-12… So take that out of there, so that your other investors don’t know who invested what.

And then also, it’s better to put those in PDF form as well, just because people can look at PDF on their phone pretty easily, whereas Excel might be a little tough; the formatting might not work on the phone. And then if you have a monthly pay out, so if you plan on paying investors each month, in the first recap email or the recap email before that first distribution goes out, let them know when they’re gonna receive it, and provide an example of how much money they will receive based on a $100,000, or a $200,000, or a million dollar investment, depending on how big your deals are.

If it’s a quarterly payout, in the first recap email and then in the email before they get their first quarterly payment make sure you let them know “Hey, this is when you’re gonna receive your payment, and here’s how much to expect to make, based on an example.” And then the same thing for an annual distribution. The first recap email and then the month before that annual distribution goes out – when they’re gonna receive that payment and how much money are they actually going to make.

And then lastly is that tax documentation. Once you’ve had your conversation with your CPA and they say “Hey, we will have those K1’s to you by the end of February, or by mid-March, and here’s the process for sending them out”, starting that first recap email of the new year, let them know the process and then each month let them know “Hey, as a reminder, here’s the process”, so that you’re not getting an influx of emails in February, March, April timeframe asking “Where is the K1s? When am I getting the K1s? How does the K1 process work?” They’re already prepared, they already know what the process is, and the only way you’re gonna be getting a bunch of emails is if you don’t hit that date you communicated to them.

And then a few other best practices – one, how do you actually make these emails? Sure, you can use your Outlook or whatever email service you use, and make one email template and then copy and paste that into individual emails, copy-paste the emails in there, and then send those out individually. You probably don’t wanna do that, because it’s gonna be pretty time-consuming, but technically you can. What’s a better method – and we’ve already discussed this service – is MailChimp. There’s other things you can use too, like Active Campaign, Constant Contact or Aweber, or whatever other email service that you want to use… But use some sort of email service that allows you to automate these things; you type in a template and then it’ll automatically send out that email to your imported list of investors, it’ll put their name in the subject line, and things like that. You’re not gonna want to make these emails individually; that’s just gonna take too much time.

And then I kind of already mentioned this, but when you’re sending out any images, any financial documents, create a Dropbox account – if you have to, buy the upgraded storage amount – and just make an individual folder for each property, and then each month upload any documents, any  pictures to that file, and then copy and paste those into your email. The reason why is because let’s say you’ve completed the monument sign, and you’ve got really nice HD pictures that are 200, 300, 400 MB in size, and you insert that into your email… And then let’s say you’ve got ten more of those pictures in the email – the email is never gonna load for your investors. If it does load, it’s gonna eat up a ton of their data… Whereas if you just do the link, they can click on the link, go to the browser, and they’ll easily be able to see “Okay, here’s the pictures that he’s talking about.” Plus, the email might not even go through, the email might take forever to go through, a lot of emails might fail to send, the investors folder might be so big that your investors’ email can’t even handle it… So to avoid all these issues, just use Dropbox. It’s pretty simple.

And then I also mentioned the thing about converting the financials to a PDF as well.

That was just one duty that I went over, the investor communication. We’re going to stop there for today and we will wrap up the remaining asset management duties next week, and then we will move into more specifics on some of the top ten asset management duties that we’ve discussed. Again, I wanted to do first a general overview of what your responsibilities are, and then kind of not necessarily go through each one in more detail, but just provide overall “Hey, here are some more things to be thinking about when you are asset-managing your property.”

Until next week, I recommend listening to part one for sure, to learn about those first five asset management duties, and we talked about number six today, and we’ll do seven through ten next week. Listen to the other Syndication School series we’ve done so far. This is series number 20, so you’ve got 19 other Syndication School series to listen to to get all caught up… As well as download the free document that we gave away in part one, which is that weekly performance review… And then also download the other free documents we’ve given away. We’ve given away at least 20-25 documents for free at SyndicationSchool.com that will help you start, launch and grow and scale your apartment syndication business.

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

JF1786: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 1 of 8 | Syndication School with Theo Hicks

Now that we’ve talked about everything there is to talk about as it pertains to purchasing your first apartment syndication deal, it’s time to discuss asset management. This will be the longest period of time that you will be dealing with the property, and the investors. You’ll want to come with paper and pencil for this series! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The way to sell that is to tell them you are upgrading the unit at no cost to them”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

TRANSCRIPTION

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

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

 

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

Each week, as you know, we air two podcast episodes, every Wednesday and Thursday, and those are typically a part of a larger podcast series where we focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series – in fact, almost all of this series – we offer some sort of document, spreadsheet, template, some sort of resource for you to download for free, to help you in your apartment syndication journeys. All these documents and all of these Syndication School podcast episodes can be found at SyndicationSchool.com.

Now, we are at the second-to-last step in the apartment syndication process. We’ve been going in chronological order, starting from someone who really has no experience whatsoever with apartment syndications, all the way up to the point where in the last series we discussed how to close on your first deal, and the process surrounding that.

Now, as I mentioned, the second-to-last step is going to be to asset-manage that deal, to execute your business plan, with the last step obviously being selling the asset.

This is the beginning of that asset management series, and it’s entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part one. This will probably be an eight-part series; I’m not 100% sure, but it’ll likely be an eight-part series, because we’ve got a lot to cover. This is most likely going to be the longest timeframe of the entire process, depending on how long you plan on holding on to the deal for… But this is 5 to 10+ years of work.

So what we’re going to do is we’re going to start off by going over the top ten asset management duties. These are high-level ten things the asset manager is responsible for doing once a deal is closed on. If you remember all the way back to when you were forming your team, this might be the same person who did everything else – you might be a one-man team – or you might have the duties broken apart to the person who raises the capital and the person that maybe underwrites and asset-manages the deal.

So for all these duties, most of them will be done by the asset manager, but some of them will also involve the person who’s responsible for raising capital… Because ideally, the person who actually raised the capital is gonna be the face to the investors; you don’t wanna pull a Switcheroosky on them and have one person raise all the capital, build the relationship, send them the deal, send them the closing email, and then all of a sudden some brand new person is talking to them, that they either know little about or don’t know at all.

I’m gonna try to get through all ten of these duties in parts one and part two, so we can move on to other things in the later episodes. These first two episodes are gonna kind of set the foundation for this series, and then from there I’m going to go into some more details on things that the asset manager needs to think about, as well as things they can do in order to optimize the business plan.

Speaking of which, the first duty of the asset manager is going to be to implement the business plan. That’s going to be the main responsibility, and really I guess everything else falls under the umbrella of managing the business plan. So in order to ensure that the business plan is implemented successfully, obviously this starts off by making sure that your budget, from an expense standpoint (ongoing operating expenses) is accurate, that your projected rental premiums are accurate. This is done before closing by having the conversation with your property management company. To learn more about that, make sure you check out the series about underwriting and the series about performing due diligence.

At this point you should have your budget of “Okay, this is how much money we plan on spending each month and then each year, and then here’s how much we expect the rents to increase based on a set renovation or cap-ex budget.” Again, this needs to be included before you close; I just wanted to mention that again. So you’re gonna have this information in front of you, and your goal is to implement the business plan such that you’re able to achieve these projections and assumptions.

So once you close, you’re going to oversee this budget. Ideally, you’re able to gain access to the property management software, because you don’t wanna be spending your time inputting these numbers each month. That should be a duty performed by your actual property management company. So at the end of each month you’re gonna want to go ahead and access that software or ask your management company to send you the financials, so you can review the monthly financials.

The things you wanna look at – what was your projected/budgeted expenses and your projected/budgeted income figures, and how do those compare to the actual figures? Ideally, it’s something along the lines of you’ve got your actuals – this month, January, and then on the column side these are the income factors, these are the expense factors, and it’s got the numbers. Then next to that it has either your budgeted numbers, or at least a variance. So it’ll say “Hey, for loss to lease we projected a $10,000 loss, but we actually ended up getting a $20,000 loss.” Then you have that for every single income and expense line item.

Obviously, what you’re looking at are any discrepancies from your budget, compared to the actuals. If there are discrepancies, you’re gonna want to jump on top of those right away, which is why we’re looking at these on a monthly basis… And you’re gonna wanna work with your property management company to confirm 1) what is the cause of the discrepancy; why was your loss to lease budget way off from the actual loss to lease. And then 2) you wanna formulate a plan to get back on track.

This brings us into duty number two, which is to do your weekly performance reviews with your property management company. Now, technically these could be monthly or quarterly, but the best syndicators will have weekly performance reviews… Because if anything were to come up, if there were any issues, not only will you know about them within a maximum of seven days, but you can start thinking of solutions right away as well. Ideally, those solutions are in place before you notify your investors with a new recap email, which we’ll get into later on in the series.

So the purpose of these weekly performance reviews is to help you track the progress of your business plan, and more specifically, track any key performance indicators (KPIs) that you and/or your property management company has set and decided to track.

For Joe’s business, he has these KPIs that are broken into three distinct categories. The little anagram that we use in the book was MOM – money, occupancy and management. So make sure that you always are taking care of MOM. That’s the key when you’re asset-managing apartment syndication deals; making sure you’re taking care of MOM.

We’re actually gonna give away a free document with this series – there’s going to be at least one free document, and as of now, it’s going to be a weekly performance review template. It’s gonna have the money, the occupancy, and the management KPIs, so specifically what we track for money, specifically what we track for occupancy, and specifically what we track for management, in order to confirm that we are on track with our business plan.

The goal would be to send this tracker to your management company and have them fill it out each week, and then send it to you before your call. Then the purpose of the call is to review the KPIs. And I guess on a monthly basis the meeting might be a little bit longer if you did identify some discrepancies in that monthly financial document.

So just really quickly I’m gonna go over these MOMs. I’ll briefly define these terms, but if you go all the way back to the “Master the lingo” episode, we’ve kind of exhaustively gone over what all of these terms mean, and provided examples of each of them… But I’ll do my best to explain them not as well.

For Money, there’s five different KPIs we’re looking at. Number one is the gross potential income. That is how much money would the property bring in if all units were rented at market rates. Then there’s the gross occupied income, which is the actual income; so not how much money it would be bringing in if we assumed all units were occupied, but how much money are we bringing in based on the units that are currently occupied. This is kind of like an economic income.

Next, how much money was actually collected that week. Next is the month-to-date collected and the month-to-date delinquent. Obviously, a week might let you know if you’re short or high that week, but the month-to-date collected is most likely going to be more important, because you wanna make sure that you’re hitting that collection number each month. And obviously, if you aren’t, then the difference between what you should be getting and what you’re actually getting is going to be that delinquent.

So if there is a lot of money delinquent, you’ll wanna know why, and you’ll wanna know what your property management company is doing to make sure that they are going to be able to actually collect that money. So that’s the Money.

Next is the Occupancy. A few things you’re gonna want to know – and there’s 7 different KPIs for this… Number one is the number of units that are pre-leased. These are units that are either vacant currently, or have a lease expiring at the end of the month and they are already leased by a new resident. You’ll wanna know the number of notices that were given this week (eviction notices), so you know how many people of that overall occupancy are actually going to be gone by the end of the month.

Then you wanna know the total number of notices you have on the book. Obviously, if I send out an eviction the first week of the month and they’re not leaving until the end of the month, then week three that notice is not gonna be accounted for, and the notice is given that week, so you wanna know how many of those are actually going to be evicted.

Next is the number of set outs scheduled.

Next is the number of applications you have denied, just to make sure that your property management company are getting qualified leads.

Next are the number of renewals. So of the leases that are expiring, how many of those residents have actually renewed the lease for a new 12-month term.

Then lastly, the number of people on the waiting list. Ideally, you’ve got a waiting list, because the property is in such demand that you’ve got a list of people who want to move in, so that if you have an eviction or if someone is moving out just because their lease ends, you’ve already got a list of pre-qualified people that you can lease that unit to. That’s Occupancy.

Then next is going to be Management, which there’s a whole lot of KPIs for management. First there’s going to be the current occupancy rate percentage; pretty self-explanatory – what percentage of the units are occupied. Next is the total number of occupied units this week; obviously, if you’ve got a 10% vacancy rate, how many of those units are going to be occupied or were occupied that week. Also, you want the total number of occupied units from the prior week, as well… Plus total number of move-ins; who all moved in last week, how many new tenants moved in the previous week.

Next is what’s the projected total number of occupied units, and then the projected occupancy percentage. This is pre-leased. So you’ve got your current occupancy, which is today, but as I mentioned before, you’ve got some units that are pre-leased, you’ve got some people who are going to be renewing, and then you’ve also got people who are gonna be moving out for some reason or another, so you’ll wanna know what is the projected occupancy by the end of the month. That’s covered by the total occupied units projected, and the projected occupancy percentage.

Next is the number of evictions filed, number of skips, number of transfers… Skips are when people skip out; they’re supposed to be moving in, but they for some reason just don’t move in on that date. The number of transfers is pretty self-explanatory – I’m moving from unit one to unit ten. Number of units that are currently vacant, and then of those vacant units, how many of them are rent-ready and how many of them are not rent-ready.

For some of these there’s a specific number you projected. For the current occupancy you kind of have an idea of what you want your occupancy rate to be… But there’s really no absolute “Hey, if I have this many evictions filed, then I’m having an issue”, it’s more of something you wanna track. If you’re having ten evictions one week and then eight the next week, you’re trending positively. If you’ve got two evictions, and then four, and then six, and then eight, and then ten, something’s going on. You wanna track the trends, so ideally all these are trending in that positive direction, which means for example the number of units that are vacant is trending positively would mean the number of vacant units is actually decreasing… Whereas the number of skips – you want that to be as close to zero as possible.

That’s MOM. As I mentioned, we’re gonna go ahead and give away a free document, so all of those KPIs will be in this spreadsheet we’re giving away, so you can just send that to your management company, and maybe add some colors to it, add your logo to it, customize it however you see fit, add or subtract certain KPIs based on your business plan and the types of things that you wanna track, and then go ahead and send that to your management company.

One last note on the weekly performance reviews – I mentioned this in the Syndication School episode when we were talking about how to actually qualify and interview a property management company… You want to set expectations for these reviews. You don’t want to not really say anything to your management company about these reviews, and then when you close, say “Hey, by the way, I want to schedule a weekly call with you, and I want you to fill out this template each week, and I want  you to send me the financials each month.” You wanna set expectations for all of that upfront. Obviously, not during the first conversation with the property management company; you don’t wanna have a list of all these things you need them to do… But just mention “Hey, once we actually close on the deal, can we do weekly calls?” And they say “Yeah, sure.” Then once you actually find the deal, say “Hey, on these weekly calls here’s what we wanna do. Are you still on board with that?” If they say no, then you either need to not do that – but you’re gonna want to do that, so you might need to find another property management company or figure out a way to work with them in order to get that data. So that’s number two, weekly performance reviews.

The third asset management duty is going to be the investor distributions – you paying your investors. Whatever frequency you’ve determined – whether that’s monthly, quarterly or annual basis, you’re going to need to send out the correct distributions to your investors. So whatever that preferred return is that you offer to your investors, you need to distribute that to your investors each month, each quarter, each year, by the way that you set out in your investor guide, which we talked about in the previous series. That’s the guide that talks about timing, and distributions, and other important information; you communicate that to your investors in that closing email.

Ideally, your property management company handles these distributions with your oversight. They’re the ones that are collecting the money, so they should also be the ones that are sending the money out… So however your investors want to receive their returns, whether that’s through the direct deposit or a monthly check, make sure (again) you set expectations with your property management company and let them know “Hey, I wanna send out monthly distributions either through check or through direct deposit. Is that something you’re capable of doing?” They might say “Yeah, sure” or they might say “Well, we only do direct deposit and we do it quarterly.” So it’s a negotiation. If they say they can only do it quarterly and that’s okay with you, then do it quarterly. If not, then you might need to find another management company or figure out a way to negotiate those monthly distributions, and ask them what you can do to help them make that happen. So that is number three.

Number four is actually investor communications. We’re gonna skip that one for now, because that’s very detailed. We’re gonna start tomorrow’s episode by talking about the ongoing investor communications.

For implementing the business plan and the weekly performance reviews – those are gonna be the responsibilities of whoever is responsible for asset management. Whoever that asset manager is will be on those weekly calls and will be focused on implementing the business plan, reviewing the financials each month, having that conversation with the management company if there are any discrepancies.

Investor distributions can either be managed by the asset manager or the person who’s responsible for ongoing investor communications, or whoever your money raiser is… Just because this is not really something that the person who’s sending out the distributions — I mean, they’re kind of interfacing with the investors because they’re sending out the distributions, but there’s really no conversation about that; it’s more of they look at their bank account and the money is in there or it’s not in there, or they open up their mailbox and the check is in there or the check is not in there. Then obviously if they don’t have the correct distribution, they’re going to reach out to the money raiser and say “Hey, what’s going on with this distribution?” at which point they can either reach out to the management company or they could tell the asset manager, because the asset manager is the one who’s going to be in frequent communication with the property manager.

Number four is one that’s going to be the responsibility of both parties, but we’ll get more into the investor communication tomorrow, as I mentioned.

Number five – and this is the last thing we’ll talk about today; we’re going through these four, and then six through the rest tomorrow… So number five is managing the renovations. If you’re a value-add apartment syndicator or a distressed syndicator, or even if you’re a turnkey syndicator, you’re likely going to have some sort of renovation you’re going to do to the property, whether that’s interior or exterior, or just upgrading some amenity. So the asset manager is gonna be responsible for making sure those renovations are done at the right cost and on time.

There’s really two ways that these renovations get funded. They’re funded out of the capital that was raised, or they’re funded by the bank. If they’re funded by the money that was raised, then you have a bank account and the money comes out of there to pay the contractors and pay for the supplies… But if you did some sort of renovation loan where these renovation costs were included in your financing, then there’s gonna be extra responsibility, which is having that constant communication with the lender during the renovation period… Because typically how it works is you’re not gonna get a lump sum dollar amount upfront; if your renovations are ten million dollars, you’re not gonna get a check for ten million dollars at closing. It’s gonna be based on draws from the bank, based on your budget and your cap ex timeline that you provided to the lender before closing… So you’re gonna need to interact with someone at the bank in order to make sure you’re getting those construction draws, so you can pay for those cap ex projects.

Typically, your general contractor and your property management company should know beforehand 1) that you’re getting a renovation loan, and 2) they should have an idea of how that process works… Because again, you’re hiring a property management company who has experience repositioning these types of properties.

In reality, you’re managing the people who are managing the renovations, because ideally, your property management company is the one that’s doing the day-to-day work; you’re just making sure each week that they are on track.

And if your renovations are not included in the actual budget and you’re covering the costs out of the money raised from your investors, then you’ve got a lot more control on when you can get projects done and when you can pay people for doing those projects… And you won’t have to have that extra responsibility of going back and forth with the lender.

We’re gonna go over one more actually, so we’re gonna do number six. So we’ll do four, and then seven through ten tomorrow. Number six is the asset manager is responsible for maintaining the economic occupancy.

Once you’ve taken over the property, obviously you’re gonna begin implementing your value-add business plan, which requires performing renovations, both interior and exterior. If you remember, during the underwriting we accounted for a higher vacancy rate, or a lower economic occupancy rate during the renovation period, which would be the first 12-24 months, depending on the level of renovation. But even though you’re projecting a lower number, that doesn’t mean you can just not think about occupancy at all during the renovations, right? You still wanna make sure that you’re hitting that projected number. So if it was 8%, you wanna make sure that each month (technically each week) your occupancy is not dropping below 92%. If you projected 10%, that number is 90%.

We’re gonna go over in a future episode specifically how to maintain the economic occupancy; the whole list of ways to essentially bring in high-quality tenants, where a high-quality tenant is someone who pays on time and actually stays in the property, takes care of it, resigns the lease. But if you don’t hit your economic occupancy goal, then you’re not gonna hit your return goals either, which means you can’t distribute your money to your investors.

Now ideally, this is not solely the responsibility of the asset manager. Like all of these responsibilities, your property management company should be involved and should be implementing the best practices. For this particular duty, your property management company should be implementing the best practices for maintaining that economic occupancy rate, through advertising, marketing, making sure they’re adjusting rental rates properly… But you are the asset manager, or your partner is the asset manager, so it’s your responsibility to oversee and advise your management company. Specifically, you need to let them know how quickly you want the renovations to be made, and making sure that they can actually do the renovations… So you don’t wanna say “Hey, I wanna do 30 renovations a month”, and they’re like “Well, we can only do 10”, and you say “No, I’m gonna force you to do 30.” You don’t wanna do that. You need to make sure that you are adhering to their abilities.

So you don’t wanna force them to do renovations too quickly, you don’t want to be too aggressive with the pace you do renovations either… So you don’t wanna go in there with the plan of doing ten a month and then all of a sudden deciding you wanna do 15-20 a month. Stick to whatever your pre-approved renovation plan and budgets were based on your conversation with your property management company, as well as your pre-approved rental premiums that you specified during the underwriting and the due diligence phase.

Now, before we wrap up, a quick note on how to actually renovate units… Because if you’re a value-add investor, you’re buying a property that’s already stabilized, so the occupancy rate is 85%+… So obviously you can renovate those 15 vacant units pretty quickly, or ones that want to be turned over within the end of the month… But what about the other units? You most likely don’t want to wait for those 85 units, you don’t wanna wait for all those leases to expire to actually renovate the units, so here are a few tricks to renovate your units at a faster pace, without having to wait for the leases to naturally end.

One would be once you’ve renovated those 15% vacant units in our example, then you can offer those newly-renovated units to a resident who currently lives in a non-renovated unit, so that you can renovate their unit. So if you can technically transfer  15% of your unrenovated unit tenants to the 15% that are now newly-renovated, and do those next 15%, and then continue that on until you’ve done all of the units – obviously, in combination with a few other strategies…

We can also increase the rents on the unrenovated units to promote turnover.  For example, if a lease were to expire and the person wants to resign their lease, you can increase the rent by whatever your projected rental premium is… Let’s say you plan on spending 10k on a unit and raise the rent by $150. Then if someone who is living in an unrenovated unit’s lease expires, you can raise the rent by $150. If they accept it, then great; you’ve got essentially $10,000 worth of work for free. If they don’t and they move out, then you can renovate that unit.

But obviously, you don’t wanna have a large influx of vacant, unrenovated units, and if you do, don’t feel like you have to renovate every single one of them. If you take over and then 15% of the people’s leases expires and you say “Hey, I’m raising the rent by $150” and they leave, don’t feel like you have to renovate all 15% of the units. Just make sure you stick to your plan. If you’re gonna only renovate (let’s say) half of them, then lease the rest back and renovate those the next 12 months.

Another strategy is to renovate the units while someone’s currently living there. The way to solve that is you say “Hey, we’re gonna renovate your unit and you will get the new, upgraded unit for really no cost to you.” This will depend on the level of renovation, but you can do it while they’re at work, basically. If you want to, you can put them in a hotel; if something crazy happens at the unit from a maintenance issue perspective, you can put people up in hotels… Again, these are just ideas; it’s really up to you and what your budget allows.

So one is renovate them as people move out, two is offering a newly-renovated unit to someone who’s already living there for a small charge, or even for free. Three would be to renovate the units while someone is actually living there, and then four would be to increase the rent on a non-renovated unit, so that you promote some turnover.

And again, if you have 100 vacant units, don’t feel like you have to renovate all of those, ten a month, for ten months, and you’ve got all these vacant units sitting there. It’s okay if you’ve got 5-6 units that become vacant; you renovate only half of them and then lease the remaining units back to the market unrenovated, and then catch them on the next cycle… As long as your plan was to renovate these units over a 24-month period.

Overall, you want to renovate at a pace that will not adversely affect your occupancy rate, plus it will not make your property management company go insane. It needs to be based on what you and your property management company agreed to.

So those are five of the ten top asset management duties. Just to review – number one is implement the business plan. Number two is the weekly performance reviews, and we gave away that free weekly performance review document; three is investor distributions, four is the investor communications, which we’re going over tomorrow… So the real four is managing renovations, and then five is maintaining economic occupancy. In part two we’re gonna go over these last five top asset management duties – that’s six through ten.

In the meantime, make sure you check out the other Syndication School series that we have about the how-to’s of apartment syndications, and download that free weekly performance review tracker. All of that can be found at SyndicationSchool.com.

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

JF1781: Breaking Into The Industry, Creating Partnerships, Building A Team, & Raising Capital #FollowAlongFriday with Joe and Theo

Joe and Theo are back it for another #FollowAlongFriday. Theo did the interviews for the podcast last week, so we’ll be hearing his favorite lessons that he learned while doing those, with additional thoughts from Joe. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“He found all the inefficiencies from their P&L and told the boss about them”

 

Free Document:

http://bit.ly/freepropertycomparisontracker

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

We’ve got Follow Along Friday, I’m with Mr. Theo Hicks… He’s gonna talk about two lessons he learned from the interviews that he did last week, and we’re gonna obviously apply this to you, in order to help you with your real estate endeavors. So let’s go ahead and get right into it, Theo.

Theo Hicks: Alright. As Joe mentioned, I did the interviews last week; lots of good conversations. Again, as Joe always says, I learned way more than this; these are just the two that kind of stuck out to me the most, I thought were interesting and I wanted to bring up on the episode today.

One interview was with Donato. His name is Donato and I asked him if there was any relation to Donatos pizza; he said no, but one of his answers in the Best Ever Lightning Round was if he were to lose everything and had to start over, he would start a pizza place, just because it’s his first name.

But Donato is a managing partner at [unintelligible [00:03:04].13] He’s managed projects over 3 billion dollars, and he builds skyscrapers for a living, which I thought was in and of itself interesting; I’d never met someone who builds billion-dollar projects. So I asked him “How did you get in this industry? How did you know you wanted to do this, and how does one get into a development team to build these skyscrapers?” And specifically, he was able to be on the team that built one of the tallest skyscrapers in New York… And what he said is that first he went to school for engineering, and then based on that education that he received, he was able to work for a smaller construction firm; he was able to intern for a smaller owner, who developed smaller projects in New York City, and because of that experience he gained from that, he was able to get picked up on larger projects of these skyscrapers.

He said that the smaller partner that he worked for – one of the people that invested in that company was his larger construction company, and they kind of saw him and saw how well he was doing, and asked him if he wanted to join their team… And he did a few projects at first; he actually worked on the Yankee Stadium, as well as Madison Square Garden, which eventually allowed him to get pulled into this super-intense team for building this huge skyscraper.

The reason I thought it was interesting is because we talked about “How do you break into the industry? What do you need to do to get into the industry?” everybody says “Education and experience”, and that’s literally exactly what he did. He got the education from the engineering school, as well as working at a smaller firm, and then he also got obviously the experience from that, and he was able to leverage both of those to literally work on one of the biggest projects in New York City history.

Joe Fairless: Yeah, and it sounds like he was a shining example within the group that he was working, of how to do your job the right way… And then he got handpicked to then go somewhere else and do well.

Theo Hicks: Yeah, exactly. It’s always amazing when you hear the “intern, to working on this massive skyscraper.” Then something else he talked about too was about partnering. Once he worked on all these skyscrapers, he wanted to transition into doing his own deals, for all the reasons people like doing their own deals – for more control, more upside… And he partnered up with a friend, so I asked him some advice on partnerships in general, but more particular “How do you know if your friend is the right person to partner up with?” Because I’m sure you guys can hang out at the bar or whatever, or workout together, but going to business together is kind of a completely different animal… And he just said that they literally just did deals together where they had their own entities for a full year first, just to test the waters, make sure that they could actually work together.

Then once they realized that “Okay, we can work together”, they made an entity together and had a really strong operating agreement to make sure that things continued to go smoothly moving forward, so… I guess just a few tips on partnering as well.

Joe Fairless: Yeah, it’s such a relevant tip, because I get that question a lot, and I’m sure you come across it a lot, too… People ask “How do I know this is the right partner? How do I know that I should create a business with them?”, and the answer is you shouldn’t, initially, do any of that. You should simply do what Donato mentioned. Donato is his first name?

Theo Hicks: Yeah.

Joe Fairless: Okay. You simply do what Donato mentioned, and have separate entities when you’re starting out… And partner up some deals. Then after you partner up on them, then you get to see how they work, what they’re like if there are any challenges on the deal, what type of character do they have, how do they react to mistakes that are made on the team, or issues that take place, what do they prioritize – do they prioritize themselves, do they prioritize the business, do they prioritize the investors? Do they just not focus as much on the business, on the deal?

There’s all sorts of things that we’ve got to find out about potential partners. What’s their communications style? Can I get a hold of them? Do I wanna get a hold of them? Do I need to get a hold of them? Is that something that’s important to me? Are they always texting me whenever I’m trying to call them, and they don’t answer…? There’s all sorts of stuff, and it’s impossible to know what person is gonna be a good business partner when you haven’t done deals with them. Even if you’re, as you said, drinking buddies or something, you just don’t know what it’s gonna be like when there’s a snowstorm and all the pipes burst, and now you have to file an insurance claim, and you’ve got people who need to get into new apartments because of that, and you’ve got to coordinate with the management company, and it’s just all hands on deck. You just don’t know. Or a hurricane comes in the market that you’re in and increases the prices of contract labor, and then as a result your budget goes up, so now how do you handle that? What do you do?

Just simply date instead of going straight to proposing and getting married with potential partners, and be intentional about it, because this also applies to people who are creating podcasts, or thought leadership platforms like YouTube channels, or blogs, or whatever else. I see this mistake happen time and time again, where people make their podcast dependent on having a co-host, because they’re “business partners”. Well, one of you is likely gonna flake out. That’s just how it is. One of you is gonna have more drive than the other as it relates to the thought leadership platform… So if you’re creating something, don’t make it reliant on someone else. Just “I’m gonna create this, and then whenever you come on the show, or whenever I interview, or whenever you write a blog post, we’re gonna be even better together, and it’s gonna be a dynamic duo. But I’m gonna go ahead and take the lead on this”, and same with the business partnership stuff, especially starting out. Then, once you get a feel for them, and if you do like all the stuff that you experience with them, then you can get a deeper and deeper relationship with them and then do something formal.

Theo Hicks: That’s really solid advice. Just one thing to add before I move on to the next lesson… I think this advice obviously applies to all types of partnership, but this is how I felt, and I know a lot of people feel the same way, too – when we first find out about real estate, you’re really excited, and you’ll go and you’ll tell someone else; or maybe they tell you, and you’re both really excited about real estate. Then you say “Okay, how are we gonna start? Should we do it individually?” “Oh, no, we’ll just partner up.” I feel like that is where you run into a lot of problems, because you’re in what’s called the honeymoon phase, when you’re both super-jacked-up about real estate, and so you both aren’t acting how you would act in the long-term. Maybe you don’t act that way for years on end. So that’s why instead of partnering up instantly, kind of keep things separate so that once that honeymoon phases, you can see how that other person really is, and technically see how you really are as well.

At the end of the day, obviously you want someone who’s going to have as much drive as you, but also, if you’re honest with yourself, if you see that you’re not having as much drive as them, then that’s not really fair to them, and you’re not really setting yourself up for success in the long-term if they’re actually outworking you. So I guess it kind of goes both ways.

Joe Fairless: One other thing – more than four partners is way too many. More than three is pushing it… The ideal partnership is two people. And I see that mistake all the time.

Now, I wanna be on the record saying – having four people in a partnership, that can work. Having three people can work. I’m just saying the more people you introduce to a partnership, the more complicated it gets, because there are more people. So it’s just purely a human dynamic, and it’s just something to keep in mind.

Theo Hicks: Exactly. Alright, so lesson number two… I guess that was 1.a) and 1.b), so here’s 2.a) and 2.b). I interviewed Chris Salerno, who actually I think works with you, Joe…

Joe Fairless: Yeah, he’s a client in my program.

Theo Hicks: He is a very successful real estate agent. By the age of 25 he had sold more than 40 million dollars. He was the number one salesperson on his team in North Carolina.

Joe Fairless: Charlotte, right?

Theo Hicks: In Charlotte. He was actually named Charlotte’s 30 Under 30, and then he transitioned from being an agent to raising capital for deal… And the two things that he talked about – one of them I thought was great; I thought it was really funny. I asked him how was he able to obviously [unintelligible [00:11:05].22] at such a young age, and he mentioned that before he was even a manager or any sort of a success, he started working with the company and he goes to the person in charge and asks for the P&L (profit and loss) statement for the company…

Joe Fairless: Whow…

Theo Hicks: And then literally reads through it and finds all the different inefficiencies. Then he goes back to the boss and presents what they need to do in order to fix this marketing line item, this advertising line item etc. Obviously, that in and of itself is awesome…

Joe Fairless: Dang…! That’s bold. Nice work, Chris. And props to the boss for being open-minded enough to 1) give the P&L to Chris at that time, and then 2) to listen to advice from someone who probably didn’t have experience doing that stuff.

Theo Hicks: Yeah. He mentioned that before this, he really enjoyed studying businesses that had failed… And he looked at his real estate company that he worked for, as well as value-add deals at failing businesses… When he looked at the P&L, he was like “Alright, this business is failing. How can I turn this around?” But besides just looking at the P&L, I guess the overall lesson – I know we’ve talked about it before, but a lot of people ask “How do I get some successful investor to let me work for them?”, and we always say that you need to proactively add value to their business. This is a perfect example of him doing something that’s not in his job description whatsoever; he didn’t have to do this, but he wanted to do it, and he knew that he’d be adding value to this company; he’d probably make his boss look really well if his boss then took that and presented that to his boss… And then ultimately, because of this, he was able to work his way up through that company, and was able to be the number one real estate agent in that company. I thought that was interesting.

And then the second one, talking about how he transitioned into raising capital – something interesting that he said, that I want to get your take on, Joe… He has his massive list of, let’s say, 1,000 investors. Then he finds a deal, he presents that deal to the investors, and maybe 20% of them are on board to invest, another 50% say “I have no interest whatsoever”, and maybe 30% say “Hey, this is your first deal; I wanna see how this deal does first, and then I might invest in the next deal.”

So what he did is instead of segmenting off that 20% only that’s investing in the deal, and then providing them with ongoing updates, he also included that percentage of people that said “I wanna see how this deal goes first, so that if it goes well, I can invest in the next deal.” I thought he was doing it for the fear of missing out; you keep seeing all these updates, and how great the deal is going… But for him, he just wanted to educate them on the process, and – I guess, in a sense, the fear of missing out – showed them that he knows what he’s doing, he is credible, the deal went smoothly, and hopefully that increases the chances of them investing on the next deal. I thought that was interesting, and I was curious what your thoughts were on that.

Joe Fairless: It’s a savvy move. I hadn’t thought of doing that, so therefore I have not done that… And I think that’s a really good idea. Props to him for that.

Theo Hicks: Again, this was specifically in the context of him doing his first deal, and the reason why they didn’t wanna invest was because he hadn’t done a deal before. I thought that was an interesting strategy to — I guess not necessarily help you with your first deal, but help you with your second deal, to get more money on the second deal.

Joe Fairless: Yeah. And one thing I noticed about Chris is he puts himself in a position to build long-term relationships and then he delivers on adding value to those people who he puts himself in their company. I’ve just seen him time and time again — because again, he’s in my private consulting program, so I’ve seen him time and time again place himself in relationship with others who are playing at a different level, and then he adds value to their life, and then it makes people want to root for him, want him to be successful, and – oh, by the way, they are also achieving more success because he’s being more successful, because he continually gives value back to them.

He does a really good job — not a really good job, he does an outstanding job of building long-term relationships and adding value to people who are within his circle… And he’s got tremendous drive; he’s just very tenacious. Those are qualities that it takes to be successful in any business, and especially apartment syndication.

Theo Hicks: Yeah. When that interview comes out in the next few months – we went over a few examples of what you’ve just mentioned, about him adding value to relationships, and being very successful because of it.

So those are the two lessons. Moving on to the trivia question. Joe, you haven’t been here the past two months, but it’s international trivia question month, so if we’re playing Jeopardy —

Joe Fairless: [laughs] We have a theme every month now?

Theo Hicks: Yup. Right now we’re at International, for 300… So last week’s question was “What global city has the highest monthly rent?” This was based on the two-bedroom rents. I can’t remember what Danny said, and I don’t wanna throw him under the boss, but I thought he might have mentioned a country, not a city; I could be wrong. You’ve gotta fact-check me on that one next week. I thought he said Singapore.

Joe Fairless: You realize 99.5% of our audience are U.S.-based, right?

Theo Hicks: Yeah, yeah.

Joe Fairless: Okay, alright.

Theo Hicks: We’re doing these fun trivia questions…

Joe Fairless: I know, I know.

Theo Hicks: The answer was actually Hong Kong. I believe second place was San Francisco… So Hong Kong and San Francisco are the only two cities in the world that have an average monthly rent for two bedrooms over 3k.

Joe Fairless: Dang.

Theo Hicks: I think San Francisco was like in the $3,100 range, and then Hong Kong is actually $3,685 in U.S. dollars.

Joe Fairless: There was a rumor — I have a client who lives in California, and I haven’t looked into this, but he owns more than ten million dollars’ worth of real estate in California, so I assume he’s well plugged into this… And what he told me is there’s something on a ballot in California to make California rent-controlled option for local municipalities, to then vote and say “Yeah, we want this to be rent-controlled”, similar to what New York did,

Theo Hicks: Interesting.

Joe Fairless: That would put  a stop to San Francisco being at the top of this list with Hong Kong.

Theo Hicks: So this week’s question is “What country has the highest percentage of renters?” Now, before you answer, Joe, last week I was more specific with the question, just because there’s a lot of countries… So this is a European country. So that kind of narrows it down slightly.

Joe Fairless: Yeah… France.

Theo Hicks: France. Alright, so the winner of this question gets a free copy of our first book. You can submit your answer to this question either at info@joefairless.com, or in the YouTube comments below, and we will go over the answer next week.

Lastly, to wrap it up, we are going to discuss the free apartment syndication resource of the week… So make sure you check out Syndication School, which is a free podcast series we do each week, where we go over some specific aspects of the apartment syndication investment strategy… And we are always giving away free documents that accompany each of those episodes, and we’re gonna go over those on Follow Along Friday, so everyone can take advantage of those.

For episodes 1527 and 1528  we went over how to perform an in-depth analysis on your target investment market. So you pick a market, and this is when you understand that market on a street-by-street, neighborhood-by-neighborhood level… And one of the ways to do that is you literally find a list of 200+ properties and track all the different rent factors, when it was built – things like that, about that property. And in order to do so, you need a spreadsheet. We’ve provided you with that spreadsheet; it’s called the property comparison tracker, and you can find that either in the show notes of 1527 and 1528, or in the show notes of this episode that you’re listening to today.

Joe Fairless: Thank you for that, Theo. Best Ever listeners, we enjoyed our conversation, and I hope you got a lot of value from it. We’ll talk to you tomorrow.

JF1780: How to Close on an Apartment Syndication Deal Part 2 of 2 | Syndication School with Theo Hicks

Theo continues the talk about the apartment syndication closing process. We’ll move into how to notify your passive investors after you close. Next week will start asset management. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You’ll want to draft the ‘congrats we closed’ email a few days ahead of time”

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


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 – as well as two videos now – that are part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, spreadsheet, template, some sort of resource that you can download for free, that accompanies that series. All of these documents, as well as the past and future Syndication School series, can be found at SyndicationSchool.com.

This episode is going to wrap up a two-part series. This is part two of the series entitled “How to close on an apartment syndication deal.” So if  you haven’t done so already, listen to part one, where you learned about the three things you need to do before closing, so really just a summary of the last three series that we did. As a refresher, those three things are 1) confirm your interior and exterior renovation budget, as well as your income and expense budget. Those are based on the due diligence reports, as well as conversations with your property management company. That’s series 17. 2) Secure the commitments from your passive investors, making sure all funds are wired and all legal documents are signed. That’s series 18. And then 3) is to make sure that you’ve secured the financing from your lender. Make sure that you’ve gone through that entire loan application process,  everything is approved, and all you need to do is sign on the dotted line, which is series number 16.

Then we also walked through what to expect during the actual closing process, and we mentioned how it’s a little bit different than the residential, because you’re gonna go ahead and sign some documents three days before closing, and then sign one more document the day before closing, and then the day of closing all you really do is sit and wait for that notification from your lender, letting you know that the property is now yours.

At this point, the next thing that you wanna do is send out an email to notify your passive investors of the closing… Which is technically your first official duty as the asset manager of your newly acquired apartment community. Congratulations! In fact, you want to maybe title – this is how we title ours – “Congrats, we’ve closed!” We’re gonna call this the “Congrats, we’ve closed!” email for the remainder of this episode.

You’re actually gonna want to draft this email a few days before the scheduled closing date. That way, the second you receive notifications from your lender not only can your management company take over management immediately, but you can also send out the closing email to your investors, so they know within a few minutes of you knowing that the deal has closed. Then at this point you can celebrate however you see fit.

The purpose of this email is going to not just be to let your investors know that you closed – because you can just say “Hey, we closed”, and then that’s it. No, we always want to provide our investors with extra pieces of information whenever we are contacting them in any way. So you let them know that you closed, but you’ll also want to at this point set expectations for the process going forward… So what should they expect each month, each quarter, each year.

As I mentioned, a few days before closing you wanna create this email. You should have all the information you need before you actually close. You might need to tweak a few things if the closing date gets delayed a little bit, but in general you should be able to create this entire email and draft it before you actually close on the deal.

In the first sentence you’re going to want to mention “Congratulations! We’ve closed on XYZ property.” Then in the next sentence you’re gonna want to include information about the fact that  you’ve already taken ownership of this property, so the closing documents have been signed; the abstracted keys are in your hands – or really in your property management company’s hands; they’re probably in a lockbox, in the clubhouse that they’ve approached – and that your management company has already taken over operations to the property. That’s one of the advantages of having your property management company waiting in the parking lot – you know that once you let them know, within a few minutes the property is in their hands. So that’s what you wanna put in the next sentence… Obviously, wording it as if it already happened, even though you’re writing this a few days before this actually happened.

Then next you’re gonna want to set up expectations for ongoing communication. Things to think about and information to include in these next few sentences is how often you plan on providing your investors with updates. Are they going to get weekly updates, monthly updates, quarterly updates, annual updates? Will the frequency of updates change, depending on where you’re at in the business plan?

One thing you do is send out weekly or bi-weekly updates during the first year, just because you’ve got a lot going on; a lot of capital improvement projects are happening, a lot of units are being turned over, new leases signed, renovations done to units… So you might have enough information to do weekly or bi-weekly emails. Then once the major renovations are done, you might move to monthly, and then after all the interiors are done, maybe you just start doing quarterly updates. Or maybe you just do annual updates. It’s really up to you.

Joe’s company sends out updates each month. In these updates he recaps the previous month’s operations. We’ll go over in more detail about these recap emails in the next series, where we’ll talk about the actual asset management duties… But again, do let them know what you plan on sending them.

We send them the previous month’s operations, plus on a quarterly basis we send them the financials. We send them the actual profit and loss statement, and we sent them a current rent roll for that quarter.

For  you, the frequency of these recap emails and the type of information that you include in these emails is really gonna be up to you, based on your business plan and the preferences of your investors. You can send exactly what we send, you can send more, or you can send less… Again, that’s gonna be up to you. But whatever you do, you want to let your investors know upfront, and then make sure you’re adhering to those expectations throughout the business plan.

Next you’re going to want to also include some additional information about their distributions, about the taxes, and anything else that’s gonna be relevant to your investors. Now, you could technically include this in the email if you want to, but we actually have a separate document that we link to in our closing email, just so the email is as succinct as possible, and doesn’t have a lot of bullet points and data tables and things like that. So we actually have a link that you click, and you can download the investor guide.

We’re going to provide you — if you’re listening to this episode, the free document this week is going to be a free investor guide template. It’s the actual investor guide template that Joe has used on previous deals.

So after you include the information I’ve mentioned before, you can say something like “For additional information on distributions, tax timings etc. click here to download our investor guide”, and then you can leave it at that. Click on the investor guide and then you will have a PDF that hopefully (ideally) is one page long, that includes all the additional information on the distributions, on the tax timing and really anything else.

The purpose of this investor guide is to essentially proactively address any questions that your investors are gonna have about the deal process… So more information about ongoing communication and updates, tax information, distribution information, and any other relevant piece of information that your investors might ask you a question about… Because if you have 100 investors and you send out an email that just says “Hey, we closed. Congratulations! Can’t wait to work with you” and that’s it, well they might ask you “When do I get my first distribution? When do I get my K-1? When am I gonna be receiving updates about the deal? When am I gonna hear from you next? What information will those updates include?” So rather than having to answer hundreds of emails, just think of anything that your investors might ask, and make sure you include that in this investor guide.

You’ll see how our investor guide is formatted and the types of information that we include, but overall, here are some things that you’re gonna want to think about including in your investor guide. From a communications perspective – and again, some of this might be a repeat of what you’ve had earlier in the email, which is totally fine… Saying something twice is better than not saying it at all. So the first thing could be “How often do we provide those updates?” Again – monthly, quarterly, weekly, or it will change throughout the business plan.

Next, what form will they receive these updates in? Are they gonna get an email each month? Will there be a conference call they can dial into? Will it be some sort of mail document or mail newsletter, or will it be something else?

Next, what will these updates include? You can explain to them “We’re gonna send you updates each month, it’s gonna be an email, and it’s gonna include XYZ.”

Next, will you be sending them detailed financial statements or other financial or operational reports? If so, what and when will they receive those? And how will they receive those?

And then lastly, when should they expect to receive their first update? Will they receive an update in 30 days? Will it be by the same day every single month? We send our updates by the 14th of every single month. So if you close on the 31st of July, then we would send out our first update on the 14th of August.

That concludes the types of communication-related information you want to include in the investor guide. Next is tax information. What type of tax documentation are you going to provide them? Generally – this is kind of your standard apartment syndication deal – you’re gonna want to send your investors a K-1 tax document, which outlines the annual distributions that were received by each investor, as well as any depreciation. We discuss how to do this again when we start discussing asset management duties, how to send out these K-1’s.

And then when will you send these K-1’s out by? Or whatever tax documentation you send out. Obviously, tax day is April 14th, so it should be before April 14th, just so they can complete their taxes on time.

Next – and this is probably what the investors care about most – is the distribution information, so how do they make their money. How often will you send distributions? Is it gonna be monthly, quarterly, or annually, or some other frequency? When will they receive their first distribution? Will they receive it within 30 days, at the end of the next month? Typically, what we do is we will send it out about 30 days after closing, or more. Let’s say we close on a property on July 15th. The first distribution will be sent out at the end of September. It’s going to include July 15th through 31st, plus all of August. Or it will be sent out at the end of August and just include the time that property was owned in July. It really depends. If we close on the 30th, we’re not gonna send out one day’s worth of distributions at the end of the month.

Usually, you will receive the distribution for the previous month at the end of the next month. So you’ll receive August’s distribution at the end of September, September’s distribution at the end of October etc.

For you it can be whatever you want. Likely, it’s going to be based on what your property management company can do… But it’s gonna be difficult to do August’s distribution at the end of August, because you might not have all that money collected yet.

Next, what will be the amount of their first distribution? Most likely it’s gonna be prorated based on whenever you bought the property. If you closed July 15th, then the first distribution, if it’s covering just July, will be 15 days’ worth of that preferred return. So 8% divided by 12 months, divided by those days, multiplied by 15.

Another thing you wanna include is what is the distribution amount after that first distribution, which is most likely going to be just that prorated preferred return. So whatever the preferred return is, divided by 12 months, times whatever their investment was.

Also, will every distribution be the same, or will you distribute more at the end of each year? Generally, you’ve got your preferred return, and then you’ve got that profit split after the preferred return. So what we do is we will go ahead and distribute 8%, no matter how well the property performs. Then at the end of the year we will evaluate the returns; so after 12 months we’ll be like “Okay, well the property actually cash-flowed 10%”, so we’re gonna go ahead and distribute an extra 1.5% to our investors… So in that 12-month recap email you just say “Hey, the property performed above our expectations. We projected an 8.5% return year one, but we actually had 10.5%, so rather than getting an extra 0.5%, you’re gonna get an extra 1.5% at the end of the year.”

Most likely, the end of the year distributions are gonna be higher regardless. Ideally, you’ve exceeded expectations so that you’re able to distribute more than you actually projected.

And then also you wanna include information on how they’ll actually receive their distributions. Is it check in the mail, is it direct deposit? Typically, this is something that would have been set up prior to closing. And then typically what you wanna do is you wanna include a clause/disclaimer that says “Hey, if you decided you wanted a check, or decided you wanted a direct deposit prior to closing and then you changed your mind, please give us one distribution cycle for those changes to come into effect.”

Now, one more note about this investor guide – the one that we send you is really a standard Word document. It’s not the one that we actually use now. The information is included, but the look of it is different… Because we actually have ours designed, we’ve got our logo at the top, the formatting is a little bit different; you’ve got some designs at the bottom.

You might wanna consider going to a place like Upwork.com and hiring some contractor to actually create a design for you. Send them a template – you can even send them our template – and then ask them to design it based on maybe a logo you provided them, and three color schemes you provided them. Or you can just use our standard Word document. It’s really up to you. At the end of the day it’s really about the information included, but sometimes people like to see things that are a little bit more aesthetically pleasing.

So that’s the second to last thing you’ll want to include in that “Congrats, we’ve closed!” email. The last thing you wanna include is a bullet point or paragraph that references some sort of market-related update or business-related update since you’ve closed. This could be the market is in some sort of top markets list, best places to live, best places for jobs… It could be something about the city had the highest job growth in the nation, the lowest unemployment in the nation, the highest rent in the nation… Things like that. It could be about a business or a Fortune 500 company that’s moving into the area, it could be about a Fortune 500 company who’s expanding through the area… Something that reinforces your thoughts on the strength of the market.

So you’re gonna say “In related news, ABC Tool, which is number ten on the Fortune 500 company list, recently announced that they are expanding into this area. It should bring 500 new jobs over the next 3-4 years. They’re investing one billion dollars in a new facility. This reinforces our thoughts on the ongoing strength of this market.

Then you can conclude the email by saying “Looking forward to this being a successful deal. If you have any questions, please let me know by replying to this email.” If you want to, you can provide your phone number as well, if you want them to call you.

So make sure you have this email drafted prior to closing, so that the second you close you can go ahead and click Send on that email, of course double-checking one more time that all the information is correct… Especially if the closing date got pushed back a few days, you’re gonna want to update the dates in your investor guide.

From there, once you hit Send, you’ve officially started off as an asset manager by notifying investors of a deal you’ve closed on. The next step is to manage the business plan until you sell. So the next chunk is going to be from the time that you close to the time that you sell the property. That’s gonna be when you’re the asset manager. So the next series is gonna go over in detail exactly what you need to do as an asset manager. It’s probably gonna be a very, very long series, so I might not even give it a length at first, because it’s probably gonna be at least eight parts, possibly ten parts… Because there’s a lot to cover, there’s a lot of things that you’re going to need to do in order to ensure the successful implementation of your business plan.

In the meantime, you can listen to part one, where we talked about, again, those three things you need to do before closing, as well as the closing process. Also, listen to the other Syndication School series, that take you all the way from being a  complete newb to closing on your first deal. Make sure you download the free investor guide document. All of these can be found at SyndicationSchool.com.

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

JF1779: How to Close on an Apartment Syndication Deal Part 1 of 2 | Syndication School with Theo Hicks

We have gone through many steps of the apartment syndication process. If you’re following along, you should be excited to finally discuss how you actually close on an apartment syndication deal. Theo will review a lot of the content that has helped us get to this point in this episode. On the next episode he gets more into the actual closing, with asset management starting next week. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A day before closing, you’ll receive all the closing documents from the lender” 

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.   

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes, every Wednesday and Thursday, that are typically part of  a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, spreadsheet, template, some sort of 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.

This episode is part one of a new series. It’s gonna be a quick two-part series, so today and tomorrow – or for those listening to this in the future, this episode and the episode directly following this one… And we are going to be talking about how to close on an apartment syndication deal.

By the end of this episode you will learn 1) what you need to do before you actually close on the deal, and then we’re going to quickly walk through what to expect during the closing process, because the closing process for an apartment syndication deal is slightly different than your typical residential closing.

Then tomorrow, or in the next episode, we’re going to talk about the other aspect of the closing, which is you notifying your investors about a successful close, and what to include in that email notification.

The three things you need to do before closing – and these are three things that we’ve covered in extreme detail in past Syndication School series… In series 18 we discussed the due diligence reports; so what you wanna do before you close is to confirm your budget. Confirm the accuracy of your rent premiums after you’ve done your value-add renovations, confirm your other income items like the loss to lease, the vacancy, any concessions you expect to give, other income… And then on the expense side you wanna confirm all of your expenses – maintenance, repairs, contract services, payroll, admin, things like that.

And in order to confirm those things, if you remember, after you put the property under contract you did your due diligence. So we talked about ten due diligence reports in particular that you want to obtain, and you will use those reports to essentially confirm your budget.

Also included in your budget besides those ongoing income and expenses will be the upfront costs associated with your value-add business plan. Those are your exterior and your interior renovations. One of the reports helps you determine exactly what you’re going to need to do from an exterior perspective maintenance-wise, and in addition to that, any upgrades that you wanna do – clubhouse, new playground, upgrade the fitness center, things like that.

Then you also had a report where your property management company actually walked every single unit and determined what you need to do from a deferred maintenance perspective to every single unit, as well as what you need to do from a value-add perspective for each of your units. So if there were any deferred maintenance items you need to address, you’ll know what those are from your due diligence, and then you will know exactly what units need to have what done in terms of an upgrade perspective.

For example, maybe only half of the units need new appliances, maybe 75% need new floors… Whereas during your underwriting you might have assumed that you need to do new appliances, new floors, new cabinets to every single unit. So you might have actually had been able to reduce your budget at this point in time. Same thing applies to exteriors, same thing applies to your expenses, incomes… Those might be the exact same as they were during the underwriting, but most likely you had at least some minor adjustments to those numbers.

And of course, you’re gonna work with your property management company as well, because obviously, they’re gonna be the ones who are managing the property on an ongoing basis. So you want to confirm that they can operate the property at those expenses. If they’re the ones that will be performing – or at least managing – the renovations, you need to make sure that 1) they approve your renovation budget, and 2) they approve your renovation timeline. If you wanna get the renovations done in 12 months, then you tell that to your property management company and they’ll let you know that “Hey, maybe we can do it in 18 (or 16) months.”

All these things are gonna affect your model, and anything that affects your model is gonna affect your returns. So you’ll wanna know upfront if your returns are gonna go up, which is an amazing thing, because you’re gonna let your investors know about that. If the returns are going down, you wanna know how much and if you need to adjust that offer price, or maybe pursue a different type of financing prior to closing… Or if you need to back out of the deal entirely.

That brings us to the second thing you need to be doing, which is to secure financing. That is going to be series number 16, where we took a deep dive into the types of debt you can secure on apartment buildings when you’re doing an apartment syndication. At this point in the process you should have selected your loan, and then you should have gone through the entire process of applying and being qualified for that loan, and the last step is actually to sign on the dotted line, which we will discuss here in a little bit.

Essentially, you need to be knowledgeable of the loan programs, having been talking to your mortgage broker or the lender, letting them know what your business plan is, sending them your budget, and they will go ahead and underwrite that deal for you and let you know exactly how much money they can lend on that property… And then let you know exactly how much money you need to bring as a down payment for that property, which comes with the third thing you should have done prior to this point, closing, which is to secure commitments, which is series number 18. I think the due diligence is series 17, securing commitments is actually series 18.

At this point you should have 100% of the funds required to close raised from your passive investors. Not only raised, but those funds should have already been wired as well. And in that series we discuss exactly how to determine how much money you need to raise. It’s actually not just the down payment for the loan. You might need to raise extra money for closing costs. You’re probably gonna have an operating account fund for anything unexpected that comes up in the first 6-12 months of the business plan. Maybe if you’re charging some sort of acquisition fee, or a guarantee fee; you’re gonna want to raise that capital as well.

Also, the upfront due diligence costs – you’re gonna want to potentially raise capital for that, or you might be taking money out of your own pocket to pay for that, and then raising that capital from the investors to reimburse yourself at close.

And then also, you’re going to want to have all of the legal documents – the PPMs, the operating agreements – signed by any and all general partners, and any and all limited partners. As long as all three of those things are completed, then you are ready to close on the deal. You’ve reached the finished line… Or should I say the first finish line, because once you’re closing the deal, in a sense the real work actually begins – the asset management, which we’ll begin discussing next week, or in the series after this one.

Ideally, you know exactly what will happen during the closing process, because your lender or your mortgage broker has walked you through that process, or maybe a real estate broker has walked you through that process.

As I mentioned, closing on an apartment syndication deal is a  little bit different than you traditional residential closing, because in your traditional residential closing you show up, you sit there for two hours, signing a bunch of documents, and then you get the keys and you kind of take over the property. For the actual apartment syndication closing, a lot of the work actually is completed a few days prior to closing. What happens is three days before closing, you (the sponsor) will sign the loan, and you’ll sign the title documents to approve that loan, as well as approve the transfer of title. Then you will go ahead and send that information back, and then they’ll mess around with that for a day, and then a  day before closing you’re gonna receive all of the closing documents from the lender. So rather than signing the closing documents at the closing table, you will get those the day before, mailed to you, because the property might not even be in the state that you live in.

You will most likely have to go to a notary and sign all those documents in front of a notary, and then maybe go to a FedEx or UPS, so you don’t have to go to multiple places, because you’re gonna wanna overnight those documents back to the lender or the title company, whoever’s handling the closing.

You will also need to wire any of the funds that are required to close into escrow, with your lender, at that time, as well. So you’re gonna do that before the actual closing date… At which point the lender is going to review the documents, make sure that you sign in all the right spots, all the verbiage is correct, nothing is missing, make sure that all the money is there before they actually transfer it to the title company, and then they will also issue a new deed in the name of your LLC. So again, you’re most likely going to create an LLC that you are a general partner of, and that the limited partners are investors of, they own shares of. We discussed that in the previous Syndication School series about securing commitments, which is series number 18.

So then the next day after all that is done, once [unintelligible [00:12:02].24] the lender will be dotting the i’s, crossing the t’s on the day of closing, and then assuming everything is good to go, they’ll send the money off to the title company, who can then send it to the actual seller, and the property is yours.

Once you receive the word that you’ve got the go-ahead, that the closing is completed, then the first thing you’re gonna want to do is send out an email to your team – which includes your property management company – and let them know that they can take over the property. Even better, you can tell your property management company that “Hey, we expect to close between 4 and 5 PM Eastern Standard Time, so I want you guys to get there at [3:45] PM, in the parking, so the second I send you that email you can instantaneously take over management of that property.” That way not a single second is wasted, and you are able to begin implementing your business plan from not only day one, but second one; millisecond one, if you’re really fast.

So unless you are using the old property management company, which you probably shouldn’t do, unless they’re the main management company in that area and you’ve decided to use them after an interview – you don’t wanna just automatically use the old property management company just because it seems like it will make for a smoother transition. That may be the case, but that doesn’t necessarily mean that on an ongoing basis that’s the best idea.

So if you are using – which is the majority of the time – a new management company who needs to go in there and actually take over, the old management company should know that the property is being sold on this day, and that they should expect the new management company to show up between 4 and 5 EST. If this is the case, there shouldn’t really be any resistance, or them standing there with picket signs and a fence, not letting the new  management company in.

Property managers usually know each other, so it’s likely that the old management company and the new management company actually know each other, or are at least familiar with each other. But on the off chance that the old managers either don’t know that the property is sold, or maybe they’re not friendly with that management company, or maybe there’s some bad blood between those two companies, or maybe they’re just annoyed and disgruntled that they’re losing the business – that might happen, but as long as your property management company is  experienced, which means they have experienced doing transitions before, they should be able to handle any resistance and make sure that they’re able to get into that property that day.

So from there, the property is yours, and at that point you will transition from – if this is your first deal – not owning any deals at all, and kind of just being someone who’s really good at underwriting, to now actually being the asset manager of a property. As I mentioned, we’re going to discuss the asset management responsibilities starting next week.

There might be a few other things you need to do before closing, but that’s just kind of the general overview of what to expect… So the things you need to do prior to close, and then three days before closing, a day before closing, and then the day of closing, how to handle the transition. Again, there might be a few other things you need to do based off of maybe you’re doing some sort of special loan, or other circumstances… But in general, that’s what’s going to happen.

Now, the other thing that you wanna do before you actually close is you want to draft your email to your passive investors… So that the second you close not only do you notify your property management company, so that they can take over, but you also let your investors know that you successfully closed, as well. That is going to be the topic of tomorrow’s (or the next) episode.

This was a quick one, the series itself will be pretty quick – just a two-partner – before we move on to the asset management duties, because the closing process isn’t that complicated, and there’s really not much else to say than what I have said in this episode so far.

In this episode we learned the three things you need to do before closing, which is 1) confirm your budget via that due diligence, as well as your property management company. 2) Secure commitments from your passive investors, which requires having the funds and having the legal documents signed, and then 3) making sure that you’ve completed the loan application process for whatever type of financing you plan on securing on that asset.

In part two, again, we’re gonna discuss how you notify your passive investors about your successful close. Until then, I recommend listening to those three series – 16, 17 and 18 – as well as the other 15 series we’ve done so far (I can’t believe we’ve done that many series) on the how-to’s of apartment syndications. Also check out all the free documents we’ve given away so far. The next free document will be in tomorrow’s episode, so make sure you tune in tomorrow to get that free document and learn what it is. All of those can be found at SyndicationSchool.com.

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

JF1774: Better Marketing & Better Due Diligence #FollowAlongFriday with Danny and Theo

Danny Randazzo is joining Theo for Follow Along Friday again this week. He’ll be sharing some insights from his previous business week and what he learned. Theo will be sharing some advice from Best Ever Guests that he interviewed last week. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If they are pressuring you to pay them, something in wrong”

 

Free Resource:

http://bit.ly/marketevaluation2

 


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TRANSCRIPTION

Theo Hicks: Hi, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host again today, Theo Hicks. Today is Friday, we’re doing Follow Along Friday again, and  we are back with our co-host for the last week and the co-host for this week, Danny Randazzo. Danny, how are you doing today?

Danny Randazzo: I’m doing great, Theo. Thank you again, to you and Joe, for having me on. I’m happy to help on this Follow Along Friday.

Theo Hicks: I appreciate it. It went really well last week, you fulfilling the role of Theo and me fulfilling the role of Joe. You did well, and I hope that I did well too, and we’re hoping to have a repeat this week.

This Follow Along Friday we are going to go over the lessons that we learned from the Best Ever interviews from the week before. I did interviews last week, as I mentioned on the previous Follow Along Friday, so because Joe’s not here, I get to go over the lessons that I learned. Let’s jump right into it.

One individual I interviewed was named Ben Bacal, who is a literal rockstar real estate agent. One of his transactions of a residential property was 70 million dollars. I guess that was the largest ever recorded sale in Beverly Hills, which is saying something, because that’s Beverly Hills… He has actually sold over two billion (with a B) in real estate, and he created an app called Rila. The reason why he created it was based on his experience of finding buyers for one of his first deals, and then all the subsequent deals.

The way he explained it to me was his first luxury home sale was a three million dollar property, and once he found that listing, he wanted to find a way to market it that was better than just putting it on the MLS. I don’t know when this was, so I don’t think the Zillows and the Trulias were a thing yet… Because it sounds like he’d been doing this for a while. But he was willing to do more than just put it on the MLS. He did door knocking, he did face-to-face meetings with people that he would meet, he sent out postcards, he did cold-calling, he created an e-blast to all the people he had in his email list, and he created a video of the deal as well. In that video he included a bunch of personal pictures that he took of that property.

This seems like it’s simple – you just go in there and you take pictures with your cell phone or a professional camera. That really can’t make that big of a difference, right? Well, for these deals apparently, the way he explained it to me was that the pictures that you’ll find of the property are very basic pictures – the kitchen, the living areas, the exteriors… And those are the same standard pictures across the MLS, across Homes.com, across Trulia. They’re all the exact same. So if someone’s looking for this deal and they go to any of those websites, they’re gonna find the same standard pictures, whereas he would go there and take a ton of pictures with his own phone, and take pictures of things that people won’t be able to see just based on the standard MLS pictures. So the agent goes in there and kind of getting creative about it. He’d create these videos, he’d post to Instagram, Facebook, things like that.

Apparently, this was a huge help for him in selling his homes, and ultimately he made an app that kind of does the same thing; it’s like the Instagram for real estate.

Danny Randazzo: Yeah, I think that’s very interesting, because when you’re trying to appeal to a buyer for any sort of residential property, I think having those professional, awesome-looking photos on the MLS, or on Zillow and Trulia – it’s an absolute must have… But it sounds like for the market that he’s in, and his clientele, his buyer is gonna be a little bit more sophisticated… And I think those initial photos, the marketing photos that always look good, are going to tell the story of how awesome this house is, and how great the seller has kept the house, and how much value they’ve added.

So I think as a sophisticated buyer thinks about it, specifically in his market, in the high-price, high-net worth area of California and Beverly Hills, going in and taking those photos that allow his client to walk through the property without actually having to spend their time to go there is something that appeals to them.

Sometimes you can take a photo of a kitchen and it looks like this massive, open concept kitchen, but then you get in there and the feel is a little bit tight between the island and the sink. So if he’s in there snapping photos of real angles, that people are going to use and be able to visualize themselves in that space, I think that’s where you get the buyer. And they have an appreciation for it because again, time is very important. If they’re not having to spend the time to go out and tour and look at it, and they can use his app and know that he walked it and they trust him, then he’s building that client relationship and that buyer’s buy-in to purchase the property.

Theo Hicks: Great advice. That’s kind of confusing at first, because it’s like “Well, every single luxury home I’ve ever seen listed has professional photos on the MLS”, but as you mentioned, it’s about taking the pictures that are more truthful and tell a story to the buyer. As you mentioned, not trying to take some crazy angle down low, and make it look like the kitchen is  a lot bigger than it is.

A lot of times — again, there’ll just be one picture of each room, and at maybe not the best angle. From my understanding, it seems like he’s taking a lot of pictures, so that literally they could do a video walkthrough without actually having to do the video. I’m not sure why he didn’t choose the video route, but I guess the pictures were working better.

I guess he’s got this app where residents can go into the properties, take a bunch of pictures, post it to this app, and then those pictures are the listing. So you get the listing by posting those pictures, and the idea is that it’s like a crowdfunded version of the Zillows, and you don’t have to pay 10k/month to be shown in the search results. That was interesting.

Danny Randazzo: Yeah. I think the lesson here from this one is that he found a need for his clients. His clients needed to see more photos than what was just available on the MLS or on the listing, so he created a solution to fill that need. Obviously, he’s closed two billion (you said) in real estate from a transaction side, and I think a huge component of that was finding that need for his clients to buy more properties, and it was giving them more photos. So… Heck yeah, go take a ton of photos and sell two billion in real estate, and help your clients by adding value to them – I think it’s an excellent win.

Theo Hicks: And obviously, this doesn’t just apply to selling homes. If you’re a rental investor, you kind of have the same thought process when you’re taking pictures for your rentals. Don’t just go in there and quickly rush with your iPhone to take pictures so you can get your listing up. You can go to Craigslist and spend like $50 on some college student who has a major in photography, and go in there and take hundreds of pictures. Then select the ones that tell the best story of the property. Some of them are just pictures of this bookshelf, or zooming on the fireplace, or the backyard… Again, it’s not just like “Here’s the office. Here’s the bedroom. Here’s the bathroom.” It’s showing the highlights of the property.

Danny Randazzo: Yeah. If anyone out there in the Best Ever community – if you wanna be the best ever and sell your property for the most or the best ever value, you need to spend money for professional photos, period. End of discussion on that. It’s the most appealing thing that is gonna draw traffic into the home. You need to get people out of their computer first, by giving them excellent quality photos, for them to show up and go and tour and look at your property, and then buy it for top-dollar. So spend the money on professional photos.

Theo Hicks: Totally. So that’s number two. I interviewed a couple – Jay and Samara Harvey. They are actually mobile home investors. Whenever I think of mobile home investors, I think of people buying actual mobile home communities, where they just go in the communities and buy individual mobile homes and sell those… But the form they got into mobile homes – they were trying your typical real estate rentals and things like that, and they trusted a mentor that they met at a conference (I think). This is not a paid mentorship, this is a free mentorship, where you find someone who’s experienced and shadowing them, and partnering up on a deal together… So they did this and they lost $30,000 on that deal with this mentor. So obviously, I asked them “What types of things do you look for in mentors to make sure that that doesn’t happen again?” and they provided me with a really solid list of things to look at that I hadn’t necessarily thought of before, when you are looking to find a mentor.

Again, these are free mentorships, but some of these can apply to paid mentorships as well. It was kind of broken into two categories… Kind of. The first one was, obviously, do your due diligence on the mentor. More specifically, what they meant was 1) when you’re initially talking with this person, they most likely are gonna tell you about all the things they’ve done, all the deals they’ve done, the volume of transactions they’ve done, who they’ve worked with, maybe what news sources they’ve been quoted in… So don’t necessarily take a list of what they’re doing, but make a mental note of the things they’re saying, and then afterwards go online and try to figure out if what they said is actually true. Essentially, just fact-checking everything that they’ve told you. Obviously, if they’re lying, then that’s not a good sign.

The other one was to not be afraid to ask around about this person as well. This person, again, claimed they’ve worked with Donald Trump – figure out if they’ve actually worked with Donald Trump. If this person claims they’ve worked in this particular market and they’re the number one broker in this market, well then talk to other brokers and owners in that market to see if that person is even known by these people. So that was the first category, which is do your due diligence. I’ll pause there before I go to the second one, to see if Danny has anything to add.

Danny Randazzo: Yeah, I think due diligence is so important, that you actually vet what they’re saying… Because ideally, you wanna have a mentor who’s kind of been there, done that, and is still doing what you wanna do. Due diligence is important, just like you’re gonna buy an investment property – you’re gonna always make sure that there’s real tenants in place, or that there’s actual cashflow coming in, and that the property is real, and that the quality of the construction and the systems, the roof, the plumbing, the electrical, the HVAC are in good working condition. So you just need to do that same thing with a  mentor, make sure that they’ve – like Theo said – done what they say they’ve done, and there’s easy ways on the internet to fact-check them.

If they’ve recently bought and sold a property, go to the county website, the RMC or where they have the public real estate transactions and verify that they bought it and sold it.

Theo Hicks: Absolutely. And then the second category, which still comes down to due diligence, but more it’s more specific, in that you wanna find a mentor that has good character. This seems obvious, of course, but in the moment it’s something that might be overlooked, and you focus on all the great things they say they’ve done, all the great things they say they can do for you, and you don’t necessarily think about how your initial feeling is about their character.

Jay and Samara went over a few red flags to look for when you’re speaking with someone which may indicate that they have poor character. Number one – again, this goes back to due diligence – is lying about their track record. If they say they’ve done this many deals and they haven’t, that’s not a good idea.

The other one was they’re the loudest person in the room, and are the ones that want all the attention. Everyone knows – if you go to a conference or some sort of seminar, there’s always that one guy who’s obviously trying to gain all of the attention. Their explanation was someone who’s really good at being a mentor is gonna be pretty selective with who they bring on. So they’re not gonna be crazily marketing their program every single place that they go. It’s most likely gonna be them finding people to work with on a one-on-one basis. They’ll go to the conference or the seminar and they’ll sit back and observe and pick out the people that they might wanna work with, and then approach them one-on-one, rather than grabbing the mic from the MC and saying “Hey, I’ve got a great deal. Do you wanna partner up with me on it?”

That takes us to number two, which is them being overly aggressive. So even if they are talking to you one-on-one, if they’re really aggressive and they’re trying to pressure you to join, they’re saying things like “Well, this is only a one-time opportunity. The second I walk away from you right now, this deal is gone.” That’s also a red flag, that something’s amiss.

Something else too which is also very interesting was value for value. Again, these are free mentorships… And typically, when a lot of people ask me how to find a mentor, I tell them that you wanna go out there and proactively add value to their business. Because at the end of the day, the person who is the mentor is going to be adding the most value, obviously, to your business, because they are way more experienced than you… So just you alone being with them will give you credibility that you won’t have otherwise. But they should ask for something in return from you. They’re not actually gonna give away their years of experience for free. If they are, then something’s most likely going on. So if they’re not asking for something in return, that’s also a red flag.

And then two more are no referrals – you ask them for referrals and they’re kind of weird and saying how “Well, my limited partner died, and my other ones are on vacation for the next three years, so you can’t really get in contact with them… But just trust me, I’ve got you.” Obviously, that’s not gonna happen, but if they don’t have referrals they can list right off the bat, it’s also a red flag.

And then lastly – this might be more along the lines of after you’ve started working with them, but they make you feel bad for asking questions. They make you feel stupid for asking questions. They don’t wanna answer your questions, or they just straight up don’t answer your questions is also another red flag.

Danny Randazzo: Yeah. I certainly agree with all of those, and I’ll add two more points to the list here for people to consider. Number one, trust your gut. Like you were saying, Theo, if something doesn’t feel right, or they can’t get references, or there’s a lot of excuses about why their references are out of town, and your little gut inside of you is saying “Something feels funny”, it is. Move on. There’s plenty of people out there that are trustworthy and likeable, that you will feel good about working with. Because not only is it you getting value from them, but you getting value from them – you’re giving value to the mentor as well by having that relationship… So it needs to be a two-way street, where you both feel comfortable of creating value and opportunity for the both of you to work on that.

So number one, trust your gut. If it feels off, it is. Just move on and find someone else. There’s plenty of people out there. We’ve got seven billion plus and growing in the world, so you’ll find one person that can be your mentor.

Number two is a very interesting tip that one of my mentors gave me… And Theo, I’m gonna use you as an example. If you were going to be my mentor, I would really love to set up a Zoom meeting with you, Theo, so I can get to know you better after I vet your references… And most likely, the person is gonna take the meeting, a Zoom meeting, using the camera, being able to see them, in their home. So Theo, I’m gonna pick on your for a minute here – what does Theo as my potential mentor look like in his environment, where he’s comfortable?

I’ve learned quite a bit from Theo just by seeing him in his office. The shelving in his background is very organized. I see a photo in the back of his screen; that shows me that he cares about the people in his life, because he wants to see them. I see several books up on his shelf, which leads me to believe he’s eager to learn, and I see that the shelves are very organized, which leads me to believe that he’s a responsible person; there’s no trash on the ground, which leads me to believe that Theo takes care of himself and is interested in being a successful person who wants to take care of his environment.

So I would trust Theo based on the environment that he lives in and is comfortable in. I would have a really hard time personally if I called the mentor and they had boxes of junk in their background, in that environment. To me, that’s very chaotic. I wouldn’t wanna be around that. So the tip from my mentor was “Have a conversation with the person inside of the environment where they live, and you’re gonna learn so much about them just by getting onto a call, even if it’s a minute long, to see where they live and what they sit in on a daily basis.” That to me was a huge tip, to know who you wanna surround yourself with. Again, if someone’s disorganized and chaotic, it doesn’t seem like they would be very diligent at business.

Theo Hicks: Exactly. That’s a great point. I’ve thought of that, but I’ve never articulated it that way before. It’s more of an unconscious thing, where you see someone who’s super-disorganized, and you’re kind of like, “Huh… That’s interesting.” You have that certain feeling towards them right away… As opposed to someone who’s got a very clean background.

You didn’t say anything about the [unintelligible [00:19:48].12] Maybe you just ignored that one. I guess it shows I like to relax at the end of the day, too. Or maybe you just can’t see it. But that’s a great point.

With the one paid mentor that I’ve had before – I never actually did that… And now, looking back, I wish I would have. And you can really apply that to anything – relationships, in general.

Danny Randazzo: A potential business partner, or investor, or whatever you can learn about someone in their natural environment tells a huge story about who they are.

Theo Hicks: I think I’m gonna write a blog post about that concept on Joe’s website next week, because that’s very powerful. I might just take a snapshot of my background and be like “Would I be a good mentor…?” and then go through the things you’ve just mentioned.

Something else I was thinking about, too – taking a step back and not thinking about it from a real estate perspective… If you’re looking for like an author you want as a mentor, then maybe you want someone who’s got a really chaotic-looking background, with books everywhere. When I write books, in my mind it’s just complete chaos; it’s not very organized. In order to write books, you can’t think very structurally, you can’t be organized in your mind. You’re kind of all over the place, and that’s where I think most authors thrive… But particularly for real estate, you don’t want someone who’s got a bunch of crap laying around their room, for sure.

And then obviously, you said “Trust your gut.” I know that’s a huge thing that Joe talks about. We think or we wish that we make all of our decisions based on logic and reason and statistics. And obviously, if we take the time to make decisions, then we do that; but in the moment, we’re not analyzing things like that, when we’re having conversations with people. It’s mostly based on our initial feeling.

If you just trust your gut when you first meet someone, you’re going to save yourself a lot of trouble in the end… Whereas if you try to over-analyze, like “Well, I don’t feel right about this, but he has done 10 million dollars worth of deals, and maybe I can make this work; I’m gonna force it to work”, you might end up in Jay and Samara’s situation, where you’re losing $30,000 or maybe more because you didn’t initially trust your gut.

Danny Randazzo: Yeah. Well, the other thing too – and the last thing I’ve got on the topic  here – is utilize the power of the network. Everybody should be in the Best Ever community group on Facebook, and if you’re thinking about vetting a partner, post it in the community page. See what kind of feedback people have, because chances are if they are a well-known investor or entrepreneur, someone in the community is gonna know them, or know their friend, and they’ll be able to give you honest feedback without expecting anything in return. I think that’s always valuable – tap into the network and say “Who has worked with this person? Tell me about your experience.” And just create your own references after, if you want more in addition to the references that that mentor provides to you.

Theo Hicks: I think we’re gonna stop there for the lessons. So those are the two things we learned last week. The first one was about taking professional photos for your deals, whether you’re selling or renting deals… And then secondarily, we had a deep dive into what to look for when finding a mentor. I think what Danny said about having that video conversation with them – that’s very interesting. I think that’s very solid advice, that everyone should apply.

If you have a mentor right now and you haven’t seen them in person yet, should definitely call them up today and be like “Hey, I’m just curious – I wanna do a video with you and see what you look like.” Obviously, you don’t say “I wanna analyze your background to see if I wanna continue working with you”, but…

Alright, so let’s move on to the trivia questions. I’m trying to make these trivia questions each month themed. Last month was the whacky real estate laws… I think this month I’m gonna focus on some global real estate questions – questions that aren’t specific to the United States… Which I guess makes it a little bit harder.

Our last week’s question was “Name the country where it’s almost impossible to buy a pre-owned resale house, because most of the houses depreciate in value, and more than half of them are demolished after 30 years.” I think you say Bahrain… Is that what you said?

Danny Randazzo: I did.

Theo Hicks: Okay. So the answer was actually Japan. In Japan they have four times more architects and two times more construction workers per capita than in the U.S, obviously because they’re consistently building homes, and I guess demolishing homes as well. I’m not specifically sure what economical reasons are behind this depreciation in value, but I guess the demand is not there like it is in the U.S, and maybe there’s not as many real estate investors in Japan as there are in the U.S.

This week’s question might be a little simpler… This is globally now – what city has the highest monthly rent? This is gonna be based on a two-bedroom apartment. I’ll give you a hint – number two is San Francisco. So out of the entire planet Earth, San Francisco has the second-highest two-bedroom rent in the entire world. What is number one? Danny?

Danny Randazzo: Yes, I’m thinking… That pause of me kind of like looking out this way is I’m thinking through cities that are gonna have the highest two-bedroom rent in the world. I was running through a bunch of different cities here in my head. I think San Francisco is higher than New York, so I’m not gonna say New York, because it’s also a global question…

Theo Hicks: Well, I’ll give you a hint, maybe more specific. It’s not in the U.S, and it’s not in North America, it’s not in South America, and it’s not in Europe. Or Africa, obviously.

Danny Randazzo: Singapore.

Theo Hicks: Okay. So Singapore is the guess. If you are listening to this audio, you can submit your answer to info@JoeFairless.com. If you’re watching the video, comment in the YouTube section below. The first person to answer this correctly will receive a copy of our first Best Ever Book.

And then the last thing – make sure you guys check out the Apartment Syndication School; it’s at SyndicationSchool.com. We post two podcast episodes each week that focus on a specific aspect of the apartment syndication investment strategy – raising capital from passive investors to buy large apartment buildings.

Right now we’re through being a complete newb, to actually closing on your first deal… That entire process, and everything in between. We’ll start focusing on asset management starting next week. Or I guess it’ll be in two weeks, because we’re always a week behind from when I record those.

On Follow Along Friday we’re going to be giving away — or at least discussing one of the free documents that we have available at SyndicationSchool.com. This week’s free document is a free market evaluator spreadsheet. This is a spreadsheet that not only walks you through what data you should be looking at when you’re evaluating a target market, but also how to find that data, and then obviously you can log that data on the spreadsheet.

That is from series number five, which is “How to select a target apartment syndication market.” If you wanna listen to those episodes, it’s 1520 and 1521. You can find these free spreadsheets there, or you can find the free spreadsheets in the show notes of this episode.

That will wrap up this conversation. Danny, I really appreciate you coming on again. I’ve enjoyed the conversation, lots of solid advice. Before we head out, where can people find out more about you and what you have going on?

Danny Randazzo: You can check me out, I’m pretty much @DannyRandazzo everywhere. Also, if you’re interested in the apartment investing that we do, you can check us out at PassiveInvesting.com. I’m all over the internet, so reach out and get in touch.

Theo Hicks: Awesome. Well, Danny, thanks  again for coming on the show. Best Ever listeners, thanks for listening. Have a best ever day, and we’ll talk to you soon.

JF1773: How To Secure Commitments From Your Passive Investors Part 8 of 8 | Syndication School with Theo Hicks

Now that we’ve had the first conference call with our passive investors, we need to provide them with proper documentation. Theo will discuss that and a little more on today’s Syndication School episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to provide them with new information in every email”

 

Free Document:

http://bit.ly/annualincomecalculator

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

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

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

Each week we air two podcast episodes, every Wednesday and Thursday, and now we’re doing videos as well, so you can watch these videos on YouTube, or you can listen to these episodes on iTunes, or any other podcast app that you’re using.

These two podcast episodes are typically a part of a larger podcast series that’ focused on a  specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, spreadsheet, a template, something 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 part eight of an eight-part series. Yes, we’ve reached the end of the process for securing commitments from your passive investors. If you haven’t done so already, I highly recommend listening to parts one through seven, because this part may not make much sense if you haven’t gotten that far yet.

As a refresher for those who have listened to it, or to know what you’re going to learn when you listen to those, in part one and two we discussed step one of the five-step process for securing commitments from your passive investors, and that is to create the investment summary. In part three we went to step two, which is to create the email to your investor database, introducing the deal.

In parts 4-7 we went over step three, which is the eight-step process to a successful conference call. Once you create your investment summary and you send that to your investors, you also want to have a conference call where you go over the deal in more detail, as well as answer any questions your investors have. So that’s step three.

In part four we went over parts 1-5 of that process. In part five we went through parts 6 and 7 of that process, and then in part 6 and 7 we went over the 8th and final step, which is that Q&A session.

In this episode we’re going to finish off the five-step process for how to secure commitments from your passive investors, and that is going to be the follow-up. So once you’ve finished your conference call, if it’s at 11 o’clock at night then maybe you can do it in the morning, but as soon as possible you want to prepare an email to send to all of your investors, that includes a link to the conference call recording.

I’ve mentioned this on other episodes, but I’ll say it again quickly… The email service we use is MailChimp; you can use whatever email service you want. You probably don’t want to just make individual emails in Gmail, because that’s gonna take a long time… But again, that’s really up to you.

And then the conference call software that we use is called FreeConferenceCall.com. It’s free. Just go to FreeConferenceCall.com and you can get a call-in number. It’s actually the same call-in number all the time, so your investors won’t have to remember a new number, and really neither do you… And it allows you to actually record the conference call, so you can download it after the call is over… And that’s what you’re gonna want to use to send to your investors.

Due to the scheduling issues, timezones, not every single investor is gonna be able to  attend the call, even if they are really interested in investing. So you don’t want them to either not have the proper information to invest… Obviously, if they don’t, then they’re probably not going to invest anyways, so a really good way is to send them the recording. Heck, you might have people who when you first sent them the deal were not interested or maybe didn’t have the capital, so they miss the conference call, but then a week later they won the lottery or something, they got money, or they changed their mind and decided that they want to invest – well, now they can just go back and listen to that recording, rather than sending you all 30 of those Q&A’s, plus maybe even more questions because they don’t really have access to anything but the investment summary.

So don’t just send out the email to those who attended. Make sure you send it out to your entire email list. That way you’re hitting all the people who couldn’t make it because of either scheduling issues and they are interested, or were interested but now aren’t interested, or might be interested in the future.

Also, in that email you might wanna go ahead and recap some of the main highlights from your initial email that you sent out in step number two. If you remember, in the initial email to your investor database you included a link to your investment summary, and then provided 3-5 main selling points of the deal… So you’ll want to reiterate those in the email to your investors that includes the link to the conference call.

Then you can also include any extra information about the deal that has come up between that first email and this email. Maybe you’ve gotten an inspection report back that came back clean, maybe you’ve renegotiated the sale price down, maybe you secured a low interest rate debt… If you don’t have anything new, maybe you should include something about the market, but you always want to include new pieces of information each time you’re contacting investors… Although technically the conference call link is new. But as much new information as possible. The more new information, the better.

Then you’re also gonna want to reiterate any process for funding the deal. Let investors who are interested know how they can actually invest. Typically that is if they want to invest a certain amount of money, to email you that number, as well as if they’re gonna be investing as an individual or an entity. Then you can let them know that you’re gonna reserve a spot for them, so that once you’re ready to actually finalize the investment with the private placement memorandum, that they are going to obviously have a spot in the deal. So that’s more of a first-come, first-serve basis, unless [unintelligible [00:08:54].29] whoever invests the most amount of money. That’s what we do. I guess technically you could do it based off of the money, but it’s probably better to do it on a first-come, first-serve basis.

After you’ve done a few deals, that email might be enough. You might just be able to send out the first email, notifying people about the deal, and get 40% of the equity of the equity required in verbal commitments, and then after the conference call, when you send out the email, you get the remaining 60%, and then you get an additional 50% on the waiting list.

If  you’re just starting out, it’s probably not gonna be that easy. It could, but it probably won’t be that easy, so you’re going to have to do a little bit more following up than someone who’s more experienced.

A few things you can do is after a few weeks after sending out that new investment offering conference call link (that email we’ve just discussed), then you can send out another email to all the investors who haven’t committed yet. Don’t send out an email to people who have committed, because it’s gonna be weird when you say “Hey, you haven’t committed yet. What’s going on?” Obviously, you’re not gonna say it exactly like that, but… MailChimp allows you to create segments, so you’re gonna segment out all the investors who have already committed, and focus on the ones who have not.

And then keep sending them emails with new pieces of information about how great of a deal it is, and how great the market is, and how great the team is. Providing them with a new piece of information will reinforce that you yourself are confident in the deal…

Examples are “The appraisal came back above the contract price. We’ve got all this free equity.” Maybe you went ahead and did a more detailed rent comp analysis and found out that you can actually demand higher rents, maybe the occupancy rate went up at the property over the past month, maybe you discovered that the income was higher than it should have been, or the expenses were lower than they first were… And also mention how much capital you got so far, to kind of promote scarcity. You can say that “Right now we’re 60% full, so get in while you still have the chance”, and then essentially just continue to repeat this process over and over again, until you’ve filled that up.

This is why you’re talking to investors beforehand. You should have an idea of how much money you can raise, and that number needs to be greater than the amount of money you need to close on the deal, so you’re not scrambling. Worst-case scenario, you can reach out to another syndicator or another money-raiser and have them help you, but ideally you do it all yourself… Or not ideally. It just depends on what you wanna do. If you wanna raise half the money yourself, so you can do bigger deals and have other people help you raise the money, then that’s perfectly fine as well. That’s step four, the follow-up.

Lastly, step five is to finalize these investments with your investors. All the ones who have committed verbally – they actually need to sign some things and then send you their money. So once they have verbally committed, then you’re gonna want to add them to a separate list; maybe your money-raising tracker that we’ve given away for free on Syndication School… And you’re going to want to send them these five or so documents in order to finalize the investment. You also need to make these documents, and I’ll explain what these documents are, and who makes these documents.

First – and I’m sure everyone knows what this is – the private placement memorandum (PPM). The PPM is a legal document that highlights all the legal disclaimers for how the investor could lose money in the deal. So the PPM is there to protect you as the syndicator and your personal assets from your investors in the event of them losing a portion or all of their capital invested. It also gives your investors all of the potential risk factors included in the deal, whether or not each of these is likely to happen. So it’s literally page after page after page of every single risk that can happen, every single potential thing that can happen that would make the investors lose their capital.

Generally, the PPM is broken down into two major components. First will be the introduction, which will include a summary of the offering, a description of the asset being purchased, the minimum and maximum amounts, key risks involved in the offering, and a disclosure on how the sponsor (the syndicator) makes their money.

Then the second component is where it covers all the risks and disclosures. It includes information about the sponsor, the offering description, and literally a list of all of the risks associated with the offering.

The PPM also has instructions for how they can fund the deal, whether that’s via check or via wiring. It has instructions on how they can actually submit their capital to make sure that they are indeed investing in that deal.

So your first PPM should be prepared by a securities and a real estate attorney, and then all of the future PPMs can probably just be created by your real estate attorney, and for each deal  you just review it.  So you don’t need to make a brand new PPM for each deal; you just need to use your existing template and then essentially fill in the blanks… Because obviously, it’s gonna be more expensive to make a new one each time, plus it’s gonna be time-consuming, hence why it’s more expensive. So that’s number one, the PPM, and that’s something you’re gonna send to your investors.

Next is the operating agreement. For each new apartment deal, Joe’s company will form a new LLC. Joe’s company is the general partner of the LLC, and then all of the passive investors buy shares of that LLC to become limited partners. So the operating agreement essentially just lists out the responsibilities, as well as the ownership percentages for the GP and for the LP. And usually, this will just be included as an addendum to the PPM, or it might be separate… It really depends on how your attorney makes these documents. But you’re gonna have your real estate attorney prepare a new operating agreement for each property; and it’s even better if you have your securities attorney review it at the end. So again, this could be a separate document, or it could be included on the private placement memorandum.

Number three is the subscription agreement. The subscription agreement is a promise by your LLC to sell a specified number of shares to your investors at a specified price, and it’s a  promise by your investors to pay that price. For example, you’ll most likely be selling $1 shares; so if you need to raise a million dollars, then you’re selling a million shares. Someone who’s investing $50,000 will be buying 50,000 shares, so the subscription agreement is saying “Hey, we will sell  you these $50,000 at one dollar, as long as you agree to pay $1 for each of those $50,000 shares.” Again, this is something that you’re gonna want to have your real estate attorney create for each deal, as well as have your securities attorney review as well. Again, this might be an addendum to the PPM. So it might just be one long document, that the PPM and all these other smaller documents are attached to, just so you don’t have to send your investors a bunch of different forms.

Next is the accredited investor qualifier form. This is required based on whether you’re doing the 506(b) or 506(c). There are other offerings – I believe we’ve gone over this already before – like Regulation A, I think… But these two are the most common. So most likely you’re gonna be selling private securities to your limited partners under rule 506(b) or 506(c), with the key difference being that 506(c) allows you to actually advertise or solicit your deals to the public, whereas 506(b) offerings do not, which means you have to rely on people that you already have a substantive pre-existing relationship.

So if you’re doing a 506(c) offering, then you must have a third-party service actually review the tax returns, and bank statements, and other financials of the investor in order to confirm their net worth… Or there needs to be some sort of written confirmation from that person’s broker or attorney or certified accountant. If you’re doing 506(b), a third-party is not required, so they can just self-verify that they’re accredited or sophisticated, and just say “Hey, I’m accredited” or “Hey, I’m sophisticated.” So if you want to have a form that your investors can fill out to self-verify if you’re doing the 506(b), then you can send them your own accredited investor qualifier form… But if you’re doing 506(c), then you need to do more than just that.

Again, this is a form that you can have created by your securities attorney, and unless the accredited investor qualifications change, you can just keep it the same.

And then lastly – again, this isn’t like a requirement, but if your investors don’t want to have a check sent to their house every month or every quarter, then you can set them up on direct deposit, and that’s something you wanna do before you close. So you can send them a document that essentially allows them to fill out all the information that you need from them in order to set them up on direct deposit.

So again, you’re gonna have your securities attorney and your real estate attorney create the PPM, the operating agreement, the subscription agreement, and then you’re gonna want to send those to your actual investors. This is when another email comes out, and this is, again, one when you’re gonna segment out people that have not committed or are not investing, and just send it to people that are investing. At this point is where you want to actually make a list for that specific deal.

Before you were most likely sending out the new investment offering email, your conference call recording email and any subsequent follow-up emails to your massive investor list, whereas now you get to the point where you’ve got your commitments, so people who are investing don’t really care about what’s going on with this deal, so you’ll want to create a specific list for this deal… And this will be your first email to that list.

Here’s a sample email that we send out to our investors… And again, don’t copy this exactly. Put it in your own words. Obviously, you’re not gonna use the emails and the deal name that we have in here, but again, these things are all supposed to be used as guides. Don’t just copy things verbatim… Although I guess I can’t stop you.

The title is “Legal docs timing + Next steps.” The body is: “You’re a confirmed investor in this deal. We are sending out the PPM today for this deal. If you do not see it in your inbox, please check your Spam folder and there is a good chance it is in there. Once completed, you’ll get an email that is from *your company name*.”

We use DocuSign. We include the email that should be the From. And the title of the email will be “Please DocuSign *deal name* Private Placement Memorandum”, and then the individual’s name or the entity name. “When you receive that email, please review, sign and complete via DocuSign. The funding instructions are in page one of that document. Once we receive your funds, you’ll receive a confirmation email approximately 24-48 hours after you send that email [unintelligible [00:19:20].05] will come from this email address. We are looking forward to a successful partnership on this deal with you. If you have any questions in the meantime, feel free to reply to this email or call me at *number for Joe & the Ashcroft team*.

Again, once the PPMs are done on your end and you know when you’re gonna be sending them out, then you want to — obviously, have this email drafted beforehand, and just click that Send button once you’re ready to go. Once the investor has actually signed and funded the deal, then they’re locked in. That’s the only point where actually they’re locked in. You might wanna have maybe a “Hey, please do this within seven days, or else you’re gonna lose your spot”, depending on if in the past you’ve had trouble with investors actually funding the deal. It really just kind of depends on what you’re comfortable with.

Then once you have the money in hand, then it’s time to close. So the three things you need to do between contract to close is 1) secure your debt from a mortgage broker or a lender; 2) perform your due diligence, and then 3) secure commitments from your investors. We have done all three of those on the Syndication School podcast.

That concludes this episode, as well as the series of how to secure commitments from your passive investors. Eight parts, we did it. To listen to parts one through seven, and to listen to the other Syndication School series about the how-to’s of apartment syndication, and to download the free documents for this series, as well as previous series, visit SyndicationSchool.com.

Thank you for listening, and I will be back next week to talk about closing.

JF1772: How To Secure Commitments From Your Passive Investors Part 7 of 8 | Syndication School with Theo Hicks

Part seven of this Syndication School Series will be covering more Q&A and how to follow up after you hold a successful conference call. Tomorrow Theo will cover sending proper documentation after the call. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“IRR is tied to time if I can get $1000 tomorrow, it’s worth more than $1000 a year from now”

 

Free Document:

http://bit.ly/annualincomecalculator

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

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

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

Each week we air two podcast episodes that are part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, resource, spreadsheet, template – something for you to download for free. All of these episodes, all of these free documents can be found at SyndicationSchool.com. If you’re watching this on YouTube, you’ll notice that this is the first time we’re doing a video-based Syndication School series. Moving forward, you can watch the Syndication School episodes on YouTube, or you can just listen to the audio on the podcast.

Right now we’re in the middle of an 8-part series entitled “How to secure commitments from your passive investors.” Two more episodes to go, today and tomorrow, or if you’re listening to this in the future, this episode and the one directly after this one.

Just to catch you up to speed, so far we’ve discussed the first three, and then a part of step four of the overall five-step process for securing commitments from passive investors. So if you haven’t done so already, you really need to listen to parts one through six of this 8-part series, if you caught up to speed.

So far in parts one and two we discussed step one, which was to create that investment summary, which essentially summarizes the investment, hence being called the investment summary. Then in part three we discussed step two, which is how to create the email introducing the deal to your investor database. For part one and two we gave away a free investment summary template, so make sure you download that at SyndicationSchool.com. And then in part three we gave away a sample email that Joe has sent to his database of investors to introduce that new deal.

Then in part four we went over step three of the five-step process, which is the eight steps to a successful conference call. So I guess we’re only at step three right now, because we still haven’t finished that eight-step process yet. In step four we went over parts one through five of that, in part five we went over six and seven, and in part six we began to talk about the final step (part eight) for a successful conference call, which is that Q&A.

In this episode we’re gonna finish up going over the Q&A session. There’s 30 frequently asked questions that you can expect to receive from your passive investors during the Q&A portion of the conference call, and we wanted to provide you with those, so that you can make sure that you’re adequately prepared to answer those questions.

So we got through the first 15 questions in part six, and we’re gonna get through the next 15 questions of 16 through 30 in this episode, and then we are also going to move on to step five of the five-step process, which is discussing the follow-up. Then tomorrow we’re gonna finish up the five-step process by discussing the proper documentation you need to send to your investors in order to finalize and make their investments actually official, when they actually send you money.

So let’s just jump right back into these Q&A questions. As a reminder, right now we are in step three, which is where we are presenting our deal to our investors on the conference call. We have our investment summary created, we’ve sent the email introducing the deal to our investors, and they have the information that they need to call into the conference call. Then at this point I guess you’ve started your conference call and you’re in the Q&A session. As a reminder, these eights steps of the conference call are:

  1. Get your mind right. This is obviously before the call; make sure that you’re going in with a serving mindset, so that you aren’t a ball of nerves and stumble over yourself talking.
  2. Step two is to determine your main focus, which should be capital preservation, because people are more averse to loss than they are to gain. We discussed the principle of loss aversion, which is people have a greater negative feeling when they lose five dollars, compared to the same positive feeling they get by gaining five dollars. Or probably even gaining $100.
  3. We actually dive into the call, beginning with the welcome. That’s pretty simple – just a one-sentence “Hey, I’m Theo. Welcome to my call.”
  4. Summarize the actual call, so discuss what you’re actually going to be talking about on the call. Kind of like a table of contents.
  5. Introduce yourself and the team.
  6. Talk about high-level why it’s a good deal, in a good market, managed by a good team. Then you get into the detailed business plan that proves why it’s a good deal, in a good market, and managed by a good team. Then at that point you’re gonna open up the floor to Q&A’s.

I’ve broken the Q&A’s down into kind of just frequently asked questions that are general and can be asked at any time, for any deal, and then the next category, which we’ll get to today, are more deal-specific questions, more specific to the type of deal that you’re doing, or what time of the year it is, whether there’s an election cycle going on, things like that.

You don’t want to just script out your answers. The idea is to go through these 30 questions, make sure that you know how to answer all of them, so that as they come up, you can quickly recall in your mind what the answer to the question is, and then spit it out in an articulate fashion. Or if you’re not good at that, even have an outline in front of you, and just reference that outline to remind yourself how to answer that question… But don’t just read from a script… Unless you’re actually reading the questions as you’re getting them; you’re gonna wanna read those exactly.

Alright, so – frequently asked question number 16 – what improvements, repairs, upgrades have already been done to the property? So it’s not necessarily asking what you’re doing, they wanna know what’s been done already. If that’s the case, then outline the interior and exterior improvements made by the current owner. You don’t wanna make a list of everything they’ve done since they bought the property 15 years ago. What’s more relevant is what they’ve done in the past few years, just because those are things that you aren’t going to have to most likely address or touch, unless the current owner or the current property management company was neglectful and did not keep up with the deferred maintenance on those new items.

Let’s say for example they upgraded the clubhouse, and they replaced 80% of the roofs, and they renovated 50% of the units. Let them know that. Then also – this is not necessarily what they’re asking, but let them know how much extra in rent they are getting as a result of those upgrades. You can say “Hey, they replaced 80% of the roofs, so we’re gonna replace the remaining 20%. We  also don’t need to touch the clubhouse, because they’ve just spent a million dollars renovating the clubhouse, and the business center, and they’ve put a sauna in there”, or whatever. “Also, they’ve spent $6,000/unit in interior renovations to half the units, and they’re able to demand a $150 rental premium. We’re actually planning on doing above and beyond that and investing an additional $1,500 into each of those units, and then $7,500 into the remaining 50 units, and we’re still only projecting a $100 rental premium.”

  1. What is the overall project strategy timeline? What is the exit strategy?

Obviously, you can point them to the spot in the investment summary, as well as once they get the PPM, the spot in the PPM that goes over your strategy, and the timeline. So right here they essentially wanna know when’s the close, and then when’s the sale, and then in-between there what are some of the major milestones, like when do you expect to have the renovations done, when do you expect to actually have your rental premiums in place, when do you expect to have the property stabilized from a vacancy perspective, when am I gonna get my distributions, when am I gonna get my investor updates, is there gonna be any kind of supplemental loan or refinance at some point, when is that gonna come in?

This really depends on the business plan, so obviously you wanna hit on when you plan on selling – in 5 years, 7 years, 10 years; maybe explain why. Also, explain if you plan on refinancing or if you plan on obtaining a supplemental loan. Then also mention – and we’ve talked about this numerous times – that you’re not including those in the return projections. So you’re not gonna see a 40% cash-on-cash return in year three, because 1) it’s technically not a return on investment, but a return of capital, so it’s not really a cash-on-cash return. Plus, secondly, it will throw off your annualized projections if you’ve got 8% and 9% and then 40%, and then back to 11%. They’re gonna ask why is year three the best, and so why aren’t you just selling at year three. Thirdly, if you don’t do the refinance, then your return projections are gonna be thrown way off as well.

You could also maybe explain to them how you’re calculating your sales proceeds. You plan on selling at this time, maybe you’ll do refinance at year three, but you’re not including that in the projections; year five you plan on selling at this cap rate, so “This is the cap rate we expect, and it’s higher than the cap rate we’re buying at, and here’s how much money we expect to make at that point…”

Something else you should mention in this section is if you would consider selling the asset early. We’ll learn this a little bit later on in Syndication School, when we talk about the asset manager’s duties after you’ve acquired the property, but one thing that you wanna do (a sneak peek) is consistently evaluate the market. Not every day, not every week, but maybe every few months, and just take a look and see what similar properties are going for, from a cap rate or [unintelligible [00:12:25].07] perspective, to see if it makes sense, or if you’re gonna hit your IRR goal sooner if you sell year 3, or year 1,5, or year 4, or sometime earlier. Because remember, IRR is tied to time, so if I give you $1,000 tomorrow, it’s worth more than me giving you $1,000 two years from now. So if you can sell it for the same price  a year early, then technically getting that money now is worth more than getting that money in the future.

  1. What is your ideal investor’s investment strategy?

Since we are value-add investors, then the ideal passive investor would be someone who wants a value-add deal monthly cashflow from day one, and they also are interested in getting the potential for pretty big upside at either refinance and/or at the sale.

If you’re a distressed investor, then you’re gonna want a passive investor who is willing to forego the monthly cashflow in return for a large upside at sale, or at refinance, whenever the construction is done… So they don’t necessarily need cashflow for a few years, plus they’re willing to risk all of that capital being gone, for the potential for those huge gains.

And for a turnkey investor – these people just want to beat the market. They want to invest their capital into a deal that’s already stabilized, and they don’t have to worry about renovations, they don’t really care about getting a large profit at sale; all they wanna do is get 3%, 4%, 5%, 6% return on their capital each year.

So it depends on your business plan, it depends on what you’re doing, who your ideal investor is.

  1. Do I (this is from the perspective of the passive investor) have to stay in the deal the entire time, or can I sell my interest?

This is gonna depend on how you dictate terms with your investors… But generally, you have a clause that allows limited partners to sell all of their shares to a third-party that needs to be qualified by the GP.

Let’s say I am investing in one of Joe’s deals, and I wanna sell early, for some reason. I can go tell Joe “Hey, I wanna sell early”, and he can say “Well, we need to find someone else to invest with, and then we need to qualify that person and make sure they actually have the money before we give you your money back.” Or it could be dictated in another way.

But generally speaking, investing in apartment syndication is not liquid. You can’t just demand your capital back the next day or the next week, or early, because it’s locked in, and really the only way to return that capital is to take that capital from somewhere else, which means that the deal will be at risk if you have to return a large chunk of capital to someone. So you wanna go ahead and make that be known upfront, but also let them know if there is a process in place for them to sell their shares, what that process is and where they can find that information, which is generally somewhere in the private placement memorandum (PPM).

  1. What is the funding schedule?

Ideally, you have this in the initial email you sent to your investors. Essentially, it’s “The day after this call, until we’re filled up, or until a week”, or whatever. But typically, especially if you’re just starting out, people are gonna officially begin wring funds once that PPM is created, because that’s what the instructions for wiring are. As long as you have that done before the conference call, or if you have the bank account setup already, the funding can start at that point. It really depends on what you wanna do. Just make sure that investors know when they can send you money, because the worst thing is if someone comes to you and says “Hey, I’m ready to wire you funds”, and you’re like “Oh, it’s not for another week”, and then they don’t end up investing because they forget, or something else happens.

For Joe’s deals, he wants to see 100% of the money in the account at least 30 days before closing. But again, if this is your first deal, that’s not gonna be the case. You’re gonna be scrambling, on your way to the closing table, to get those last few 50k commitments in order to close on the deal.

  1. How will I be able to stay updated on the project after closing?

Generally, you’re gonna want to send your passive investors monthly recap emails, that recap essentially what happened at the property over the past month. For us right now, we’re in the month of July, so we’re gonna put together our June recap emails, where we can include things like occupancy rates, pre-lease occupancy rates, number of units we’ve renovated thus far, how many we’ve renovated last month, what rental premiums are we getting on those, what are some resident appreciation parties we’re doing… In the beginning of our business plan, what exterior cap ex projects are going on, when’s the playground equipment being delivered, when’s the pool furniture being delivered, when’s the clubhouse gonna be renovated… Things like that.

And then we also on a quarterly basis provide the financials – the profit and loss statement, as well as the rent rolls. Then we’ll provide some piece of information about the market. Maybe a new Fortune 500 company just moved five minutes away from our properties.

You can include that information, all of that information, some of that information, additional information, but at the end of the day you wanna be sending something to your investors on a monthly basis. The worst thing you can do is just take their money and then never talk to them again.

Especially if you’re doing quarterly distributions, you might just wanna do quarterly updates, but again, it’s much better to do monthly updates, because you can address potential problems much sooner. Heck, you might even wanna host conference calls every single year, to go over the deals. It’s really up to you, but you wanna do something, and then let them know if they ask that question what you’ll be doing.

  1. When will the distributions begin?

Again, this is completely up to you. For us, we usually send out the distributions at least a minimum of 30 days after the closing date, depending on when we close. Let’s say today is the 2nd of July. If we were to close today, then we would most likely send the first distribution by the end of August, and it would cover the time we own the property in July.

Now, if we closed July 30th, then we wouldn’t send a distribution for one day, at the end of August. We would most likely  send the first distribution at the end of September, and it would cover the days we owned the property in July and in August.

If you do it quarterly, obviously that would be different. It might be the month after the quarter ends. If you do it annually, then it might be in February. It really depends. You wanna make sure that you’ve consulted with your property management company, because they’re likely gonna be the ones that are doing these distributions, and make sure that the frequency, the timing is all aligned with what they can actually do.

  1. Can I review a projected return scenario?

Essentially, they wanna know “If I invest $100,000, how much money are you projecting me to make?”, which is why you wanna include that $100,000, that million-dollar, if you’re a baller that 10-million-dollar ROI sample. It’ll say “Okay, so you invested 10 million dollars; year one, your cash-on-cash return is 8.9%, so you’ll make $800,000. Year two is this, you’ll make this much money. Year three, boom. Year four, boom. Year five, boom. At sale, boom. Overall, here’s how much money you’re gonna make, here’s your return on investment, here’s your equity multiple.”

Again, technically people can just make that calculation themselves, but it’s much easier if you give them a sample calculation with actual dollar figures, and not just the percentages. You might have people that like math, or are good at math, investing in your deals.

  1. How do you do renovations with people currently living there?

That’s a really good question. Obviously, if you’re doing distressed and you’re buying properties that are entirely vacant, then you might not get this question, but… You’re telling your investors that you’re planning on doing all these renovations to the interiors – you’re gonna replace appliances, and floors, and paint walls… So how the heck are you gonna do this without evicting people? How are you gonna do this without having to wait until their leases end?

Again, you can do whatever you want, but a few strategies that you can do is 1) when their lease ends, you can renovate the unit, and then re-lease it to someone else at that new rate. 2) Obviously, you can just go in there right away and renovate all the vacant units. That’s another option. Also, if someone is living there, depending on the level of renovations and how long they’ll take, you can do it while they’re at work. Or let’s say 10% of the units are vacant – you’re gonna renovate all 10% and then you offer those units to someone who’s already living there. So then 10% of those people move into other units, or maybe only 5% do. So there’s 5% more of the units that you can actually renovate. And you kind of keep doing the same thing, and eventually you’ll be able to renovate all the units by either that method, or people moving out from their lease ending.

If you really don’t know what to do – because obviously, your management companies are responsible for this… So if you don’t know what to do — well, first of all, you’re gonna want to confirm with your management company that they’re able to do the renovations, because if they’re not, then you’re probably gonna want to find someone else… Or at least if they’re able to manage these renovations. But also, let them know your plan. Say “Hey, I wanna do all the vacant units within the first 30 days, and then I want to offer those units to people who already live here, at a reduced rent premium than what you would do otherwise, or just the same rent premium. And then once they move out, I wanna do theirs. I see that 30% of the units – their leases are ending in 3, 4 and 5 months, so we’ll hit those there and then. What do you think about this business plan?”

Or you can say “Hey, property management company, what should we do?” and they might be able to give you some advice as well.

  1. This is the last general FAQ – Can you please discuss the tax benefits for the deal?

Obviously, people are interested in investing in real estate because of the tax benefits. At this point you can say that most likely the depreciation – unless you’re doing some sort of accelerated depreciation like a cost segregation – each year is going to be greater than the distributions that are sent out, so they most likely will not have to pay taxes on those ongoing distributions. However, they will have to pay capital gains tax on the sales distributions. So let them know that, but I’ll mention that I’m not a CPA, so this is just a kind of high-level discussion. If you want more specifics based on your current situation, make sure you speak with your CPA.

We’ve got five more questions to go, and then we’ll wrap up this first-ever video Syndication School episode. These are now moving into the property-dependent or deal-dependent questions. These are questions that come across on a deal-by-deal basis.

  1. What is the most likely risk with the property?

If you remember, in the previous episodes (probably parts 4-6) we said that the main three risk points of apartment syndication is the deal, the team, and the market. So the entire conference call is surrounding why it’s a good deal, in a good market, managed by a good team.

Now, there might be some other specific risk to this property that is not covered by those three. I guess technically it should be covered by the deal, but if there’s any unique risk for this deal, maybe there’s a risk of some new development — here’s an example; this isn’t really a syndication example, but… [unintelligible [00:23:05].28] duplex in an up-and-coming market. It wasn’t in the greatest area, but it was a pretty cheap deal, and it would cash-flow well. So he bought it, and then two years later they literally built a warehouse – you can almost touch it – out of the living room window. It was this massive three-story windowless meta sheet at the side of their house, and just towering over the house. That might be a risk.

Maybe there’s some sort of development that’s proposed, that might be coming to the area. Maybe there’s a history of flooding… I can’t think of any other specific examples, so that’s why it’s dependent. If there’s some specific risk that’s specific to this property, make sure you bring that up, and then communicate that to your investors.

  1. What is the current vacancy rate?

Mention that the current vacancy rate is listed on the rent roll. Maybe let them know how current the rent roll actually is, because typically, if it’s still the same rent roll from when you were underwriting the deal, then it’s probably 2-4 months behind.

Then also explain to them that “Hey, I don’t care as much about what the current vacancy rate is, because here are our vacancy assumptions, and here’s why these are our vacancy assumptions.”

  1. How does this deal in terms of projected returns, risk and purchase price compare with deals in the past?

If you haven’t done a deal before, then the answer is “Infinitely better.” [laughs] No, if you’ve never done a deal before – again, it’s when you wanna rely on your team; your consultant, any projects your management company has done, or your business partner… But if you have, this is a great reason to include the case studies in your investment summary. So you can say “Hey, we’ve done this many deals before in the past. We’ve actually included the results of those deals in the investment summary. Here’s just one example of one of the deals that we did. We projected a 10% annualized return, and a 16% IRR, at a five-year exit. We actually ended up selling after 2,5 years, and the cash-on-cash return was 12% and the IRR was 20%.”

  1. Who will be the buyer you’re aiming for at the end of the business plan?

Again, this is another really good question, because a lot of people just focus on underwriting, and due diligence, and all the things you need to do before you close, and then they also focus on the asset management… But where you actually make the most money is at sale. I know people say “You make the money when you buy”, but this is because you need to do proper due diligence… But you don’t buy it and then get all that profit right away. You actually get the profit when you sell.

So they’re gonna wanna know “Okay, who are you selling this property to? Do you have an idea of who you’re gonna sell it to? Or are you just gonna hope that someone buys it?”

Again, this is gonna depend on your business plan, but if you’re a distressed investor, then you’re likely gonna be selling your deals to a value-add investor. So you’re gonna buy the property, stabilize it, but not go above and beyond, and then sell that deal to someone who actually will go above and beyond and make it a turnkey property.

If you’re a value-add investor, then you are going to be selling to a turnkey investor, maybe something like a family office or some institution that wants to buy properties that are turnkey, so they can get cashflows that beat the market.

And also, if you’re a value-add investor, you might sell it to another value-add investor, depending on how much value you add, or depending on how the market changes whilst you’ve had that deal.

And then if you’re a turnkey investor, you’re probably just gonna have to sell it to another turnkey investor, unless you really screw things up; then you might be selling to a value-add or a distressed investor. But I guess you can sell it to a value-add investor too if the market changes, and it was a turnkey but now it needs to be upgraded.

  1. Are you and your partners putting money in the deal?

We strongly recommend for alignment of interest/purpose that people on the GP put money in the deal, that they have skin in the game… Because if not, then sure, if the deal goes sour, you’re not gonna make money, but you’re also not gonna lose money either. It’s an opportunity cost, but you’re not gonna lose any of your own personal capital, whereas if you’ve invested at least with the minimum investment amount  into the deal, and the deal goes sour, then you’re gonna lose that capital. That will make your investors feel more confident and comfortable investing with you, as opposed to someone who’s not really exposed to the same level of risk as them, in which case maybe in the eyes of the investors you may be perceived as not being super-confident in the deal, and just trying to make a quick buck.

I guess it’s actually a nine-step process to the successful conference call, because you’ve gotta close. You can’t just end on that last Q&A question, drop the mic and hang up… So once you’ve answered all the questions on your list, you can go ahead and conclude the call by thanking everyone for participating. Let them know that they can email you any additional questions they might have once the call has concluded. Maybe for some reason they didn’t get their question to you, or something comes up in bed while they’re staring at the ceiling. It happens to all of us… Then you will let them know the process for submitting those.

Then also let them know that you plan on sending out a recording of the conference call in the next day or the next few days… Which is why we use FreeConferenceCall.com, because that allows us to record our conference call, and then right when it’s done, we can download the mp4 and create a new email to send out to investors, with a link to that.

Then also let them know about the next steps for investing. “If you’re interested in investing, please email us the amounts, as well as if you’re gonna be investing as an individual or an entity, to info@theohicks.com.”

We’re gonna end there for today, but from there, the next steps, the next parts of the process for securing commitments from your passive investors are to follow up, and then to send the proper documentation so that you can finalize these investments from your passive investors. So we’re gonna talk about that tomorrow.

Until then, make sure you listen to parts 1-6, as well as the other Syndication School series about the how-to’s of apartment syndication. And make sure you download those free documents. All those can be found at SyndicationSchool.com.

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

JF1766: How To Secure Commitments From Your Passive Investors Part 6 of 8 | Syndication School with Theo Hicks

Theo covers the last step to hosting a successful conference call with your passive investors to secure investments for your apartment syndication deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“They want to know if you are trying to balance multiple deals at once, or focusing all of your efforts on this one particular deal”

 

Free Document:

New deal offering email from one of Joe’s actual deals: http://bit.ly/newdealhighlands

 


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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’m your host, Theo Hicks.

Each week we air two podcast episodes, every Wednesday and every Thursday, that are a part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we will be giving away a document, spreadsheet, template, something for you to download for free.

All these free documents, and past Syndication School series can be found at SyndicationSchool.com.

Right now we are on a series about how to secure commitments from passive investors. At this point you have a deal under contract, and while you are securing  financing from the lender, as well as performing additional due diligence on your property, you are also going to begin the process of securing the financial commitments from your passive investors.

Now, if you haven’t’ done so already, I highly recommend listening to parts one through five of  this series, as we’ve covered the majority of the five-step process for securing commitments from your passive investors.

In parts one and parts two we went over step one of this five-step process, which is to create your investment summary. The free document for that episode is a free investment summary template that you can use as a guide to creating your own investment summary presentation. Then in part three we discussed how to create the email notification to your investor database. That’s step two of the five-step process. And right now we are still on step three of the five-step process, which we began to discuss in part four, where we went over parts one through five of the eight-step process to a successful conference call. This is when you actually are speaking directly to your investors.

Then in yesterday’s episode, or if you’re listening to this in the far out future, the episode directly before this one, we went over parts six and seven of the eight-step process to a successful conference call.

In this episode we’re going to discuss the last step to ensure that you put on a successful conference call, which is the Q&A section. Just really quickly, we’ll go over the eight parts of that eight-step process:

  1. Get your mind right before the call.
  2. Determine what your main focus is going to be on the call
  3. Welcome everyone during the call
  4. Provide an outline or a summary of the information you plan on presenting in the call
  5. Introduce yourself and your team
  6. Discuss high-level why this is a good deal, in a good market, that will be managed by a good team
  7. Go over your detailed business plan, which you go into more detail on why it’s a good deal, in a good market, that will be managed by a good team. That concludes the formal aspect of the conference call, and you should end with step eight, which is the Q&A.

As I mentioned in step two of the five-step process to secure commitments from your passive investors about when you were creating your email database to your investors, you wanna include information for the conference call in there. And when you were providing a summary of the conference call earlier – that was in part four, we discussed that you want to explain to your investors that you will have time at the end for a Q&A session… And we recommend that for your Q&A session you provide all of your investors with an email address to submit their questions to.

Then whenever questions come up during the conversation, or if they have questions that were prepared before they hopped on the call, they can send all those to you, just so that people aren’t interrupting you in the middle of your presentation to ask a  bunch of questions, because then the presentation would probably never end… Plus, you are gonna wanna have everyone that’s listening in mute themselves, because if you’ve got 100 people on the phone and they’re all unmuted, it’s going to sound like absolute chaos.

So rather than having questions be asked throughout the call, you wanna save time at the end to go over all of these questions. As you become more experienced, these Q&A sessions might last 5-10 minutes; for your first few deals, expect the Q&A session to last a little bit longer than that.

So we compiled a list of some of the most commonly asked questions that Joe has received on these conference calls. Since you know these questions beforehand, you can try to incorporate these into an earlier aspect of the conversation; maybe when you’re talking about your business plan, or some of the risk points of the deal, you can bring up some of these questions. But if you can’t hit them all or if you don’t know where to cover them, you can cover them during the Q&A session. You could even start off with a list of frequently asked questions if you know you don’t have any questions submitted from your investors… But it’s really up to you.

So these 30 questions – it’s not like on every single conference call all 30 of these questions are gonna be answered. Sometimes they might ask all those questions, sometimes they might not ask any of these questions. It really depends on you and your investors, but the more prepared you are for these calls, the better… So I’d just go ahead and prepare to answer all 30 of these questions. If they’re not all asked, great; but if they are all asked, you’re prepared and you can minimize the number of times you have to say “Hey, I don’t know the answer to that question. I will look that up and get back to you.” Which is fine to say; you’re being transparent and honest. But it’s better to have the answers right away, to seem more professional, more of an expert.

So I’ve broken these questions down into two categories. One is just going to be frequently asked questions that you can expect for any deal, and then the other category are gonna be property-dependent questions. So the FAQs are just gonna be general questions that most likely will be asked on every single investment offering call you host, whereas the other category, the property-dependent questions are gonna be questions that are unique to the deal itself. So dependent on the deal that you have under contract will determine whether or not all these questions or which of these questions will be asked.

The majority of the answers to these questions will be in your investment summary somewhere. Some of them might be related to current events, so you’ve gotta make sure that you’re constantly staying up with the news, and learning about the economy, or interest rates, or a new presidency, or some natural disaster in the area… But what we’re gonna do is I’m gonna go over each of these questions and I’m going to go over also how you should think about answering these questions as well.

So without further adieu, let’s hop right in, starting off with the frequently asked questions. Again, these are general questions that will most likely be asked on every single investment offering that you host.

Number one, what damage is covered by property insurance? In order to find the answer to this question you’re gonna have a conversation with your insurance provider, to understand what is and isn’t covered under your plan. You’re also gonna want to know if there is business interruption insurance. That is if the property were to come down, for some reason, will your insurance company cover the loss of income, which allows you to continue to distribute returns to your investors.

Does your insurance plan include wind, [00:10:35].13] and storm damage? And overall, what is and isn’t covered by your property insurance is what you’re gonna want to determine… And that is how you can formulate your response to that question.

Number two, is there any concern with this property from an environmental perspective? Again, as I mentioned, you should be well into your due diligence at this point in the process, and one of those due diligence items is the environmental survey. If you’ve already had your environmental survey, then you can explain what the results of that survey were, and if there are any concerns. If the inspection or the survey has not been completed yet, then you can mention that you are getting an environmental survey done, and that if any issues come up, you will adjust the business plan accordingly, as well as notify your investors of any changes via email.

Question number three, what is the flood history of the property? If you are investing near a coastal city, or a large body of water like a lake or a river, then there might be a history of flooding in the area. If you are in one of those locations, you’re gonna want to go ahead and determine if there’s been any past flooding that has affected your property in particular, or the area. If there’s been flooding at the property, you can mention that; if there’s been flooding in the area, but not at the property, you can mention that.

Then of course, if there is a flood history, you’re gonna want to go back to question number one about the insurance – [00:12:10].08] wind damage, flooding damage covered under your insurance policy?

Number four, when was the property built? Pretty straightforward. You can tell your investors when that property was built, and then let them know that all additional details about the property description can be found in the investment summary you provided via email, and inside of the private placement memorandum, which we will discuss probably either next episode or one of the next two syndication episodes when we go over that final part of how to secure commitments from your passive investors, which is to formalize your commitments by having them sign all of the different legal documents… One of which is the PPM (private placement memorandum).

Question number five, what is the compensation structure for how you (the syndicator) get paid? Is that compensation structure incentive-based?

At this point you can outline how you get paid on the call – what upfront fees do you charge, what ongoing fees do you charge, what percentage of the profits do you get on the back-end, and any other fees you charge on the back-end. Explain to them why you’re charging those fees, and then also let them know that all the information about how you get paid is in the PPM (private placement memorandum). If you don’t remember why you’re charging each of these, that is a previous Syndication School episode. I believe it was in the series where we discussed building your team and finding investors in the first place, because that’s likely a question they’re gonna ask when you’re initially interviewing investors (“How do you get paid?”). So some of these questions are gonna be repeat questions, some of these questions are gonna be ones that you’ve already answered on an initial call with the investors, but expect for them to come up again, just because they might think that something has changed. Maybe something has changed.

Okay, number six – how much did the previous owner pay for the property? Tell them what the previous owner paid for the property. In reality, they’re not really asking this question because they wanna know how much the owner paid; maybe they do wanna know how much the owner paid for the property, but from your perspective it doesn’t really matter how much the owner paid; you’re not basing your offer price, or the contract price was not based off of how much the owner paid. Instead, you looked at the net operating income, the market cap rate, and used your value-add business plan to determine the offer price. So if they ask that question, let them know how much the previous owner paid for the property, but also let them know why you don’t really care how much the owner paid for the property.

Number seven – why are the current owners selling? If you know why they’re selling, tell your investors. Maybe the seller is distressed, maybe they just reached the end of their business plan, maybe they are looking to purchase another property and they need the equity. Those are kind of the three main reasons why someone would be selling. Again, one, they’re distressed, for some reason. Two, they’ve reached the end of their business plan, or three, they just wanna buy another property and need the equity.

If applicable, you can also provide an example of why you or someone else on your team has sold a property in the past, either in addition to why the current owner is selling, or instead of, if you don’t really know why the current owner is selling, or if they reason that you’re provided with just doesn’t seem right.

Question number eight, what is the liability insurance policy? Who is liable on this deal? Again, you’re gonna want to have a conversation with your insurance provider to ensure that you can answer any and all insurance-related questions… But for this question in particular you’re gonna want to also talk with your real estate attorney to confirm that obviously your investors don’t have any personal liability in the deal… Which if they are limited partners, limited partners do not have any liability, whereas the person that’s signing on the loan might actually be personally liable if the deal were to go into foreclosure. Also, you wanna know if you have an umbrella policy under your insurance.

A lot of these insurance-related questions are because investors are afraid of the risks that come with real estate. “If this really bad thing happens, what type of things are in place to mitigate that risk or that financial damage?” and insurance is one of them… So you could also at this point, if you get a lot of questions about insurance, you can go over what you and your team are doing to mitigate the chances and to protect your investors from a negligent suit from a potential resident.

For example, you can say that you are doing certain things to eliminate trip hazards. During the inspection you’ve discovered some things weren’t up to code, so those are some of the deferred maintenance items you have in your business plan. Any maintenance issues that come up during the business plan will be addressed in a timely manner. You plan on maintaining the property overall, so maybe doing frequent inspections to make sure everything’s okay, and then if something were to come back, you are gonna go ahead and address that within 30 days, or whatever. Then maybe you put the property into an LLC too, which also mitigates some liability.

Question number nine – what happens if the property is wiped out completely, down to the foundation? In this case, you need to know if you have replacement coverage under your insurance, and then kind of explain what you would actually do if this were to happen. Will you sell the land, or will you actually rebuild the property and continue with the business plan?

Question number ten – can you provide details on the upgrades and the repairs? At this point you should have already done this, but if you forgot and someone asked you the question, you can provide an overview of any of the upgrades and repairs you plan on doing at the property, provide them with a cost, as well as what you expect to get in return for those upgrades. And of course, you can direct them to the investment summary and the PPM, which will have more details on the cap-ex projects and the cap-ex budget.

Question number eleven – what other offerings do you have in the pipeline in the next year? Maybe investors are thinking ahead and trying to plan for their current year, and their return goals, and they wanna know if you’ve got any other deals on the horizon. Or maybe this is a trap question where they wanna know if you’re trying to balance multiple deals at once and aren’t necessarily focusing all of your efforts on this one particular deal.

If this question is asked, your response should be something along the lines of the fact that your primary goal is to focus on your existing portfolio, so the deals you currently own, as well as this current deal. But if you happen to be in negotiations on another deal, you can feel free to mention that fact here. But just always let them know that “Hey, our primary focus is our existing portfolio and this deal. There are other people on our team who are maybe working on other deals, but right now this is what we’re focusing on.”

Number twelve – is this non-recourse or recourse debt? This is like a yes/no question; it’s either recourse or non-recourse. But either way, explain that the limited partners, the passive investors are gonna have no debt liability and no legal liability, whether it’s a non-recourse or a recourse debt. From their perspective, if it’s recourse debt or it’s non-recourse debt, it doesn’t change anything for them.

Question thirteen, what are the terms of the loan? Will they change throughout the course of the project? So what are the terms of your loan? Again, what type of loan is it? Is it agency debt or is it a bridge loan? Is the interest rate fixed or floating? What is the interest rate? Is there an interest-only period? If so, for how long? And then will there be any changes to the loan throughout the course of the business plan?

Is it a floating rate? If so, did you buy a cap on that floating rate, or will the interest rate rise indefinitely if the market interest rates increase? Is there a refinance or a supplemental loan planned in the future?

Question number fourteen – what are the pros and cons of the market, specifically in terms of industry and jobs? If you forgot to do this earlier, then at this point you’re gonna go over the overview of the market. A lot of the information should be in your investment summary. Essentially, go over what the major industries are, if they asked specifically about the industry and the jobs. Go over what the major industries are, maybe what percentage of that population is employed within that industry, and then discuss how stable or unstable those main industries happen to be.

And then the last question that we’re gonna address in this episode – and then we’ll finish off the remaining 15 questions next week – is what is the minimum investment. I guess this is a two-part question:

15.a) What is the minimum investment. If you have a minimum investment, explain what that is. Is it 50k, 100k, 25k, 5k? Maybe explain why you have that minimum investment amount. But then also explain to them that you also set a maximum investment amount (if you happened to do that), and the reason why is because if one person brings more than 20% of the equity to the deal, then the lender is gonna perform extra due diligence on that person, and not all investors wanna go through that additional scrutiny.

15.b) What is the typical investment? If you’ve done a deal in the past, you can tell them what the average investment size is. If you haven’t done a deal in the past, you can tell them what the average verbal commitment you’ve received is. If you’ve done a deal in the past, you can say “Well, the average investor on my past three deals have invested 250k, with the minimum obviously being the minimum investment amount, which is 50k, and the maximum being a million dollars.”

If you haven’t done a deal, say “Well, this is our first deal we’re doing together with this team. However, the average verbal commitment we have for this deal is 100k.”

We’re gonna stop there. Again, those are the 15 frequently asked questions to expect during that Q&A section. Again, what you wanna do is you wanna review these questions, have answers prepared, and try your best to actually cover those answers somewhere during the actual presentation. Then anything you left out or forgot – r don’t worry, your investors will let you know and they will ask those questions.

That concludes part six of the eight-part series now… I said it’d be a six-part series, but now it’s an eight-part series… Entitled “How to secure commitments from passive investors.” And then of course, listen to the past Syndication School episodes. All of those can be found at SyndicationSchool.com.

Thank you for listening.

JF1765: How To Secure Commitments From Your Passive Investors Part 5 of 8 | Syndication School with Theo Hicks

Theo gave us the steps one through five for hosting a successful conference call with your passive investors. Learn two more steps to that process today, steps six and seven will be broken down for you. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“While you are securing commitments from passive investors, you should also be securing debt and doing due diligence on the deal”

 

Free Document:

New deal offering email from one of Joe’s actual deals: http://bit.ly/newdealhighlands

 


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TRANSCRIPTION

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

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

 

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

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

Right now we’re doing a series about how to secure commitments from passive investors. This episode will be part five, so if you haven’t done so already, I highly recommend listening to parts one through four. Again, those can be found at SyndicationSchool.com. The entire process for securing commitments – we’ve broken it down into five steps. Right now we’re on step number three. In parts one and two of this series we’ve talked about step one, which is to create the investment summary. Now, again, this is after you have a deal under contract… And while you are securing commitments from your passive investors, you should also be securing debt from a lender or mortgage broker, as well as  well as performing due diligence on the deal.

So step one, create the investment summary – this was discussed in parts one and two, and we also gave away a free investment summary template for you to use in order to create your own investment summary.

Then in part three we moved on to step two, which was how to create an e-mail to your investor database. So you’ve got your investment summary created, and now it is time to present the deal to your investors, or at least let them know that you have a deal, and some high-level details about that deal… And then invite them to the conference call, which is step number three.

So in part four we began to discuss the eight steps to a successful conference call. We went through steps one through five, which to quickly summarize, are:

  1. Get your mind right prior to the call.
  2. Determine what your main focus is going to be on the call.

Those first two are more for you to prepare for the call.

  1. Welcome the investors on the call.
  2. Provide a table of contents or a high-level summary of what you’re going to be discussing on the call.
  3. Introduce yourself and your business partners.

Most likely, we’ll get through parts six and seven, and maybe parts of step eight; we shall see how it goes. Let’s just jump right back into it.

This is step six of the eight-step process to ensure you have a successful conference call to investors. And again, listen to parts one through four to catch up to where we’re at today, for more details on what I’ve just summarized in the first few minutes of this episode.

So how should you structure your conference call? Syndicators, sponsors will start their conference calls differently. This is what we do, so you can either follow this exactly, or you can just pick a few, depending on the deal, and what markets you’re in, and your team, and your experience level, and things like that… But typically, what we’ll do is we’ll structure our calls around three main categories. The deal itself, the market, and the team.

Essentially, the entire purpose of the call is to explain how we have found a great deal, in a great market, that’ll be managed by a  great team. The reason why we use these three categories is because these are the three major risk points in the deal. Risk number one is the deal, risk number two is the market, and risk number three is the team.

If the project were to fail, it would fail because of the deal, it would fail because of the market, and it would fail because of the team. So during the conference call, we attempt to answer any and all questions proactively that a potential investor might have about the risks associated with each of those three categories.

So for each of those three categories, here are some questions to think about on your end, that you’re going to want to include at some point during the conference call conversation. After you provide a summary and explain that you’re gonna have a Q&A, you can jump into this part and explain “Here is why this is a good deal, in a good market, that will be managed by a good team.” Then, obviously, you’re not gonna be like “Why is it a conservative deal?” “Well, this, this and this.” “What stands out about this deal?” “Well, this, this and this.” These are just questions you wanna ask yourself prior to the call, write out some answers, and then use those answers as a guide to how you’re gonna present the deal.

So here are some things to think about for the actual deal. I’m just gonna pose the questions, and we’re actually going to go over how to answer these questions yourself, and the type of information you’re gonna want to present a little bit later, when we get into the Q&A.

For the deal, a few questions you wanna think about is “Why is it a conservative deal?” Well, I guess I’m gonna go into the answers. Is it conservative because you bought the deal under market value? Maybe an off market opportunity that you’ve secured for 20% below market value, so that’s making it conservative, because it automatically has equity built in. Maybe your rent premiums are below the competitors, so maybe you did your rent comp analysis to determine that you can most likely demand a $100 rental premium, but to be conservative, you’re doing a $75 rental premium.

Maybe it’s conservative because of the debt, maybe it’s conservative because of insane rent growth in that market, but you’re only predicting a rent growth of a few percentage points… Again, it really will vary from deal to deal, but ultimately, you want to make sure you’re conservatively underwriting these deals, and then when you’re conservatively underwriting those deals, make sure you communicate that to your investors.

Number two, what stands out about this deal – so what are the one or two main highlights, main selling points about this deal? You should already have the answer to that in your investment summary. Maybe it’s that this particular property — maybe not a single unit of that property is updated yet, so it’s 100% value-add deal. And then maybe you identified some operational improvements. Maybe you can reduce the expenses by 500k, or 100k, or 50k without having to invest any additional capital into the deal.

Next, “Has the business model that you plan to implement been proven?” Not only has it been proven by you, so have you and/or members of your team – your property management company in particular, or maybe your consultant, or your business partner – have they implemented this business plan before? If you are a value-add investor, have you, your business partner and/or your property management company taken a value-add deal full cycle? Did you identify the opportunity, underwrite it, create return projections, bought the deal, were able to implement the renovations maybe faster than you expected, maybe at a higher rental premium than projected? Did you stabilized the property, held on to it for a few years and then you sold it, and then you can explain how that compared to your projections? …ideally, since you were underwriting that deal conservatively, you exceeded your projections.

Next, what is the upside potential? What is the value-add play? How are you going to increase the income and/or reduce the expense to add value to the property?

And then lastly, what will you be doing from an upgrade perspective? What are some of the upgrades you plan on doing, both interior and exterior, and then how is that going to affect the bottom line? Maybe you’re going to invest $6,000 /unit on the interiors, and are able to raise rents by $100, and then maybe you’re going to install some new amenities that might bring in additional income, or maybe you think that you can get $25 extra per month per unit by upgrading or renovating the clubhouse, or maybe you can get a higher occupancy rate by renovating the clubhouse… Things like that. Those are the things to think about when you are presenting the deal aspect. So that’s category one, the deal.

Number two is the market. Some things to think about for the market is how well do you know the market? If you remember, back in earlier Syndication School series we went over the in-depth process for evaluating a market, and selecting a market. Here you can explain why you picked that market overall. That’d be the MSA. If you’re investing in Richardson, Texas, then you could explain “Okay, well we selected Dallas, Fort Worth because of these reasons.”

The next thing to think about is how does the submarket that you are investing in compare to other submarkets in the area? So within that larger MSA, you’re selecting a street, so why is that street better than other streets? Why is that neighborhood better than other neighborhoods? Why is that submarket better than other submarkets? It could be demographic information, job information, or maybe a new company just moved there, maybe there’s a lot of investment going on there… Things like that. Maybe it’s a C property in a B market… Again, it just depends on the deal.

Something else to think about is what makes this submarket in particular a good location to invest in? 1) Why is it better than other submarkets, but 2) just in general, why is it a good submarket to invest in?

And then something else to think about is what is the demographic that will live in the property. Things like where do they work, where do they go to school, where do they shop… And then based on that demographic and what they want to do, how close are those things to the property?

If you’ve got a demographic that enjoys going to bars and restaurants, what’s the closest bar and restaurant hub to the property? That could be a good selling point. Or maybe the majority of the people that live there work for a particular company – how far away is that company from the property? What’s the state of that industry in general? Things like that.

Then something else you wanna think about in the market is do you own any other properties in the area? Either do you own other properties in the area, or does your management company own other properties, or manage other properties in that area? The reason why this is beneficial is because of economies of scale.

If you own three properties within  a one square mile radius, you have the economy of scale of maybe having one maintenance team, maybe you’re able to have a leasing agent cover multiple properties, which ultimately reduces your expenses. Those are some things to think about for the market.

Then lastly is the team. You wanna go over who is a part of the team – who is on the GP side, who’s your business partner, and what are they doing; who is your property management company, do you have any consultants or mentors that you’re working with? Next, you wanna explain if and who on the team is actually investing in the deal. If you, your business partner, the management company, maybe even the broker who found the deal are all invested in the deal, it promotes an alignment of interests with your investors, because you and others have skin in the game.

Next, what is their track record with apartments? For you, your business partner, maybe your consultant or mentor, your property management company – for each of those people, what is their track record in apartments, and how many deals have they completed before? That means how many deals have they taken full-cycle. How many units do they currently control? And then how do the actual business plan and the actual returns compare to the return projections?

Then lastly, have you worked with them in the past? Your investors are gonna be a lot more comfortable if you’ve worked with your business partner and you’ve worked with your property management company in the past, as opposed to it being your first deal. If it is your first deal, this is not a disqualifier; you’re just gonna have to focus on other positives of the deal, that are gonna offset the fact that you’re lacking in that area. There’s gonna be additional risk when you’re working with people for the first time.

Overall, the purpose of this portion of the call is to address any risks in your investors’ mind proactively  about the deal, about the market and about the team. This part right here should take approximately 10-15 minutes. You’re not gonna go into extreme detail, going over numbers and financials. The goal here is just to introduce these concepts, introduce the risk points of the deal, introduce the risk points of the market, and introduce the risk points of the deal, but more specifically how you plan on addressing those risk points. Then later on in the investment call you’ll go into a lot more detail on all three of these points.

That brings us into step seven of the eight-step process for securing commitments from your passive investors, and that is to go over the business plan in details. For Joe, at this point he passes the hypothetical mic to his business partner, who is the one that goes over this aspect of the deal. Depending on how your partnership is structured, if you’ve got one person who’s focused on the underwriting and is doing the due diligence, you’re probably gonna have them be the person that is discussing the detailed business plan, just because they know it a lot better… Whereas if you’re more focused on finding the deals, you’re more focused on the equity raising or the back-end asset management, obviously you would be able to talk about this… So if your business partner for some reason can’t be there,  then you should be able to cover this adequately. But it’s much better if the person who actually did the underwriting does this aspect of the presentation.

Now, again, when you’re going over the business plan, the entire point is to tie everything back to those three main selling points, those three main highlights. Or how you’re gonna address those three main risk points, which are the deal, the market and the team.

For this particular section, here are some questions to ask yourself, some questions to answer on your end, and to make sure that you include all this information in your presentation. I wanna pause here for a second and mention that you don’t want to script out everything. You can, but it’s better to have bullet points or just highlights that you wanna discuss, and then use those to guide the conversation.

This isn’t a back and forth, so yeah, you could technically script it, but it’ll flow better and it’ll sound less robotic if you just speak extemporaneously, but you’ve prepared adequately, so that you’re not missing anything, you’re not pausing, getting nervous, or anything like that. So again, it’s up to you, but we recommend not scripting out everything.

Okay, so in this section you first wanna go over the overall plan in detail. First, what is your overall business plan? For example, you plan on adding value through renovations in order to increase the rents. In this case, what are those renovations, and what are going to be those rental increases, how did you determine those renovations, how did you determine those rental increases?

Next you’re gonna explain how the specific deal fits into that strategy. Your overall business plan is to add value, and through renovations, increased rents – this is the point where you go into detail. “For this particular deal we’ve identified these ways to add value, and these ways to increase the rents.”

Next you can discuss your target market, so what are your target markets, what are your target submarkets, and why are you deciding to invest in those specific markets?

Then for that market, this is where you’ll wanna go into a lot more detail on why you selected that market. Talk about the overall economy, the jobs, the rent projections in that market, the vacancy projections in that market… Here again you can mention if you own any additional properties in the area, and go into details on why that is going to be advantageous… And again, that’s because of the economies of scale.

You can then go over any other location advantages. Include information about maybe the property is really close to a highway, maybe it’s really close to downtown, maybe to some other public transportation nearby… Maybe, again, based on the demographic, there’s a new retail hub being created that you know your residents are going to go to… Things like that.

Then you wanna discuss what is the competition like in the area, and how does your property quality-wise compare to the competition, and rent-wise compare to the competition. You can go over the demographics in more detail, and then at this point you’re also gonna wanna go over your rental comps in detail… So “Here are the rental comps that we used, here’s the average rent per square foot that we discovered from these rental comps, and here’s the average square foot per [unintelligible [00:19:48].06] for our properties. They are X amount of dollars below the average rental comp, because we stay conservative on our deals.”

Next you wanna go into a lot more detail on your exterior and interior renovations… That is if you are doing exterior and interior renovations. First of all, you can start off by saying what the current condition of the property is, how many units have been renovated so far, is there any deferred maintenance that you’re gonna need to address…

Also, you can explain what – if any – recent upgrades have already been performed at the property, because a lot of times on these value-add deals the owner, in order to increase their sales price and make their deal a little bit more attractive, they’ll implement a value-add program on a small percentage of the units. Maybe 10%, maybe 25%. If that’s the case, you could mention what percent of the units are already renovated, what types of upgrades were performed, and how much these upgrades actually cost. Then if you plan on doing the same level of upgrades, or if you plan on going above and beyond their upgrades.

So what specifically do you plan to upgrade? What specifically do you plan to fix, and what specifically do you plan on replacing on the exteriors? Then explain how this will have a positive impact on either the expenses or the income.

Then same thing for the interiors.  What specifically do you plan on upgrading, fixing or replacing in the interiors, and then explain how this will have a positive impact on the income or expenses. And then any other projects that aren’t covered in those two categories.

I guess this is more focused on the amenities – are you going to renovate or install an exercise room, a pool? Do you plan on repaving the parking lot? Do you plan on implementing a RUBS program, or a water conservation program? Then explain how these other projects will have a positive impact on the income or the expenses at the property.

And these last ones kind of fall into the category of Miscellaneous or Others. So these are some other things that you wanna think about before your call, and then provide the relevant information to your investors… So what aspects of the exterior/interior business plan make you attracted to that property? How do you plan on mitigating risk overall, whether it’s the economy risk, the market risk, the deal risk, the team risk? What are some of your underwriting projections? What’s your annual rent growth number that you’re using? What vacancy rate are you projecting? Is vacancy rate different while you’re doing renovations versus after renovations? What’s the exit cap rate that you are using to determine your sales projections? Not only providing them with the actual number, but also why you picked that.

You can say “Well, the historical rent growth of the past five years in Richardson, Texas has been 5%, but to stay conservative we’re gonna project a 2% rent growth each year. The average vacancy is about 5%, so we’re projecting an 8% vacancy during renovations and a 6% vacancy after renovations. The in-place cap rate (the cap rate you’re buying the property at) is 6%; we plan on holding on to the property for five years, so we underwrote a 100 basis point increase in the cap rate, so we’re expecting the cap rate to be 7% when we sell.”

Then something else you wanna think about is to discuss the debt. What is the debt situation? Are you assuming the loan, or are you getting  a brand new loan? What type of a loan is it? Is it agency debt or is it a bridge debt that you’re gonna convert to agency debt? What are the terms? What’s the amortization, what’s the actual term of the loan? Is it a 5-year loan, 10-year loan, 12-year loan, 13-year loan? Are there gonna be balloon payments on the loan? Are there any prepayment penalties on the loan? What about the interest rate? Did you buy a lock on the interest rate? Is it a floating interest rate or a fixed interest rate? And then any information about projected refinances or supplemental loans, always remembering to not include the refinance proceeds or the supplemental loan proceeds in your return projections, because that will throw everything off. If you have a year three return of, say, 40%, and then you don’t do a refinance year three, or you don’t do a refinance at all, and now you are drastically below your return projections for the deal.

And then lastly, what’s your exit strategy? What year do you plan on selling the property? Who do you expect the buyer to be? Things like that. This should be the second-longest aspect of the call, and it should take approximately 20 minutes to present this portion.

That’s step seven, the meat of the conversation. At this point, hopefully you’ve covered 99% of any questions investors have. As you do more and more deals, you’ll get more comfortable and confident during this section. You’ll know specifically what information your investors are going to want to know, but if it’s your first few deals, maybe you’ll only hit half of what your investors wanna know, which is why you wanna conclude the call with a Q&A session.

If you remember, back when you summarized the call, you explained the Q&A section at the end of the call, how they can fit their questions. At this point, you will move on to the Q&A section. So this concludes the formal part of the presentation, and now we’re gonna move on to the Q&A, and then begin that process… Which we will go over tomorrow.

We actually are gonna go over a list of the 30 most frequently asked questions on these investor calls based on the 10, 20+ investor calls that Joe has done thus far… And we’re gonna go over as many of those as we can tomorrow, and then most likely that will leak into next week’s episode.

Until then, I recommend listening to parts one through four on how to secure commitments from your passive investors. Make sure you download that free investment summary document, and we also provided you with a free link to download an actual email to our investor database, that you can use as a guide to create your own e-mail.

And then of course, listen to the past Syndication School episodes, and you can download those free documents as well. All of those can be found at SyndicationSchool.com.

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

 

JF1759: How To Secure Commitments From Your Passive Investors Part 4 of 8 | Syndication School with Theo Hicks

We’ve created the investment summary, we’ve created an email to send to our investor database. Now it’s time for a conference call with your investors to secure those investments for your apartment syndications. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Determine what your main focus is, which should be capital preservation because that is the most important thing to your investors”

 

Free Document:

New deal offering email from one of Joe’s actual deals: http://bit.ly/newdealhighlands

 


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

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


TRANSCRIPTION

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

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

 

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

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

This episode is a continuation of a series we started last week, or if you are listening to this in the future, the episodes that were seven and eight, before this episode. So this is gonna be part four of the series entitled “How to secure commitments from your passive investors.”

As always, if you haven’t done so already, I recommend listening to parts one through three in order to catch up, because we are building off of those first three episodes. In parts one and two we discussed the first step of the five-step process for securing commitments from your investors once you actually have a deal under contract. And again, you are doing this concurrently with performing due diligence and securing your financing. But in those first two parts we discussed step one, which is to create an investment summary, and we also provided a free investment summary template, that you can use to either use exactly to create your investment summary, or to use as a guide to create your own. What’s really important is making sure that you include all of the proper information.

Then yesterday, or the episode preceding this one, which was part three, we went over step two, which was how to create the e-mail to your investor database, and we included a link to an actual e-mail that has been sent out to Joe’s database of investors for a new deal. We went over the four goals of that, and how to accomplish those four goals.

One of those goals – the fourth goal, actually – was to invite your investors to the new investment offering conference call. The e-mail lets them know that you have a  deal, the conference call lets them know more about the actual deal (or at least more than what was included in the e-mail) and it gives your investors an opportunity to ask you questions. So that’s step three, and we actually have a nine-step process for how to successfully implement and execute (and prepare, I guess) for your new investment offering conference call.

One thing I wanted to mention before I go into the conference call was one last part about your e-mail to your investor database that I forgot to mention, but if you actually click on the link you’ll realize and see what I’m going to say and you’ll know to do that – that is to use images in your e-mail. That’s one of the reasons why you wanna use MailChimp, because you can very easily upload an image to the e-mail just to show your investors a few images of the property.

So you can either just do one image, of the front of the building that shows the monument sign that says what the property’s name is, and then that’s it… But what we recommend doing is to obviously use that picture, but you also wanna use a few other pictures. What you’ll see in the sample e-mail is that the main image is actually a collection of four pictures; it’s got one big picture at the top, and then three smaller sub-pictures below. The main picture will be a picture of the actual monument sign, and below that you can do a picture of any aesthetically-pleasing aspects of the property. It could be the pool, it could be inside the clubhouse, the fitness center, the barbecue area, maybe an office or a business center… Anything that gets the point across that this is a very nice-looking property.

You also wanna include your  logo. We have the Ashcroft Capital logo also included in that image… Again, just to give it an additional level of professionalism. So make sure you’re including at least one picture in your e-mail, and make sure that you have your logo.

If you wanna learn more about how to create that e-mail and what to include in that e-mail, and the four goals we accomplish, make sure you check out part three, which again, was aired yesterday, or if you’re listening to this in the future, the episode directly before this one.

As I mentioned in the episode about creating the e-mail, your fourth goal is to invite your investors to this conference call. In that e-mail you wanted to obviously invite them to the conference call, and then you wanted to provide the information about how they can actually join the conference. So the date of the conference call, the time of the conference call, making sure you put in the time zone, and then the phone number to call in, as well as the pass code to use once you dial in, depending on the service you use; most of them will have a dial-in number and then a pass code.

On this call you’re  going to want to provide an overview of the opportunity to go over the deal in more details, as well as have some time left over at the end to answer any questions that your investors have.

Now, as I mentioned, we use FreeConferenceCall.com, because as the URL implies, it’s free, but more importantly, it actually records the conference call, which will come in handy once you are actually completed with the conference call.

Of course, there are other providers you can use, like Zoom, or Skype, or Google Hangouts, or whatever… It really depends on what you wanna use, what you’re comfortable with. If you’ve never used one before, FreeConferenceCall.com is very simple, so I’d just go ahead and use that. But if you’ve used Zoom in the past, then go ahead and use Zoom. It doesn’t really matter. The whole point is essentially can someone hear you is what’s important, and does it record the call.

So before you actually hit Send on the initial e-mail to your investors, you obviously need to set up your conference, so you  can include that information on the e-mail. If it’s your first deal or you’ve only done a couple of deals, we highly recommend having your investment offering conference call at at least two weeks – or I guess it could be exactly two weeks after you’ve sent out that initial e-mail, because you’re gonna need some time to prepare if it’s your first call.

Once you’ve done a few deals, then you can schedule it the next day, or later that night, or you can kind of prepare beforehand… But if this is your first deal, you’re not gonna be as efficient at due diligence, securing financing, creating the investment summary… So you wanna give yourself as much time as possible, because really, this investment offering call is your once chance to get your investors interested in investing.

Also, after that two-week period you’re gonna have some of your due diligence reports back, maybe you’ll have some information about the loan, and so that’s some extra information you can include in the conference call; you’ll be able to answer more questions without having to say “Oh, well, we haven’t gotten to that point yet. I’ll get back to you.” But also, if you came across any disqualifiers, like the environmental didn’t come back clean, and you back out of the deal, then you aren’t wasting your investors’ nights by talking to them about a  new deal, and then you end up having to back out because of title issues, or survey issues, or something like that.

Plus, since you’ll have more time to prepare, you might be a little less anxious during this call… Because again, you’re talking to people who want to invest in your deal, so that could be nerve-wracking. So the more time you give yourself to prepare, the better, overall.

So the process for making sure that your new investment offering call goes as smoothly and as successfully as possible is 9 steps. This is essentially exactly what Joe does when he is preparing and executing his new investment offering calls. Now, he’s done 20+ calls, so if you’ve never done a deal before, I highly recommend following this advice, because it’s been a process of trial and error. All the good things, Joe has kept, and all the bad things, he’s no longer done… So everything we’re going to explain here is how to essentially perfectly execute your call.

I recommend using this as a guide. Any quotes, or anything that I say “This is exactly what Joe says”, you don’t want to say verbatim. You want to customize it based on how you personally communicate, as well. So this is a guide, not something that you want to use as a script.

We’re gonna go through as many of these steps as possible. I don’t think we’re gonna get through  all nine in this episode, so we will finish off the remaining steps in next week’s episode, and then we will move on to the fourth part of the process for securing commitments from your passive investors… So let’s jump right in.

The first thing you wanna do is get yourself in the right frame of mind. For Joe, this means answering the question “Why am I presenting this opportunity to my investors?” That answer is gonna vary from person to person, but what you wanna do is you wanna open up a Word document – this is going to be your guide during the entire investment call – and at the top of the guide, in bold letters (you can underline it, you can make it a size 50 font, if you want to) you want answer the question and write out the answer to that question.

For Joe, it reads “I’m here to serve. I’m here to help my investors preserve their capital and then grow it. When they get the returns we’re projecting, then they’re going to be able to spend their time the way they want to spend it, and the world will be a better place because of it.” That’s what Joe reads and says to himself before he starts his call, to get him in the right frame of mind.

Obviously, you pick your own reason. It could be something similar, it could be something completely different, but ultimately, Joe thinks it’s best to have a purpose, a reason for raising capital, for syndicating deals that is much larger than just you and your business. That really gets you out of the way, and instead of you focusing on yourself and thinking “Oh, am I saying this right? What if I mess up?” – instead of focusing on that, you’re focusing on your investors, which is ultimately where it needs to be.

One thing that I remember Joe has talked about on Follow Along Friday before is how he’s so comfortable and confident speaking in front of people… At first, obviously, just like everyone else, he was a ball of nerves, and he realized it was because he was focusing on what he was going to say, he was focusing on how he was gonna feel, how it was gonna come across… Which is again, him focusing on himself. Whereas when he decided to say “Wait a minute, I’m actually presenting to these people. They’re all here to learn something, and they wanna learn something, so if I focus on how I can help them learn, how I can add value to them, rather than focusing on myself, all those nerves go away.”

Now, again, that works for Joe, and it might not work for everyone, but that’s why he has that as his reason… As well as he mentioned if people are able to make money, then that can free them up from spending time at work, and because he believes people to be ultimately good, if they have more free time they’re going to do more good. And if they’re doing more good, then the world will be a better place because of it.

Now, make sure that you remind yourself — I mean, I highly doubt you’ll do this, but remind yourself that this statement is for you, it’s not for your investors. So you don’t want to lead off the call by saying “Alright everyone, I appreciate you joining the call today, but I wanted to just say a quick little statement before we begin… I’m here to serve. I’m here to help you preserve your capital and then grow it. When you get the returns we’re projecting, you’re gonna be able to spend your time the way you wanna spend it, and the world is gonna be a better place because of it.”

Maybe you can get away with that, but you don’t wanna read that to your investors; it could sound a little crazy and maybe turn some people off.

So for Joe’s particular statement, he knows that if he is able to accomplish this goal, if he’s able to serve and get that point across to his investors during the call, then it’s going to be a win/win for both Joe, because he’s gonna get the capital he needs to buy the deal, but also for their investors… Again, because of the fact that they’ll have more money and won’t have to focus on just raising capital, and they can focus on other things that they like.

Overall, part one is whatever you need to do to get yourself in the correct mindset, and to not be anxious and to make sure that you are focusing on adding value to your investors; that’s what you need to do before the call. That could be a statement, that could be you just reciting something in front of a mirror, that could be you meditating… Whatever you need to do to get your mind right needs to be the first step before you even prepare for the actual call. So that’s number one.

Number two of nine is to determine what’s going to be your main focus. So instead of getting in that service, that other mindset, you also want to determine what’s going to  be the main points of focus for the investment call. Again, this could vary from person-to-person. However, from Joe’s experience, the main focus for all of this calls is capital preservation. Not making them money, but making sure that at the very least he preserves the money that they’ve given him, and not losing their money.

The reason why this is the main point of Joe’s conference call – or at least a part – is at least in part due to the interesting psychological concept which you may or may not have heard of before, which is called loss aversion.

Essentially, loss aversion is people’s preference to avoid losing money more than actually gaining money. In other words, the feeling that people get from losing five dollars – the magnitude of that negative emotion from losing five dollars – is of greater magnitude than the positive feeling they get if they’ve made five dollars.

So from Joe’s experience, and also after interviewing over 2,000 different real estate professionals on his podcast, this concept of loss aversion definitely plays itself out in real estate. People would much rather not lose  $100,000 than actually make $100,000. So that’s one reason why capital preservation is the main focus.

The second one is pretty obvious,  but if Joe or if you lose your investors money, then it’s a lot harder for you to reach your financial goals, and it’s a lot harder for you to continue to grow and scale… Because if you lose your investors money, again, you might be able to get them to invest again, depending on how you handle that situation, but you’re likely not going to retain 100% of those investors, which means you need to go out and find more money, but now your credibility has taken a hit and you have issue finding capital, so… You’re kind of hurting yourself as well.

So number one, your main focus is the preservation of your investors’ capital. The two reasons why is 1) that concept of loss aversion, and 2) the fact that you’re losing other people’s money doesn’t work for you, giving you selfish reasons, like “Well, then I’m not gonna make money either, because of the fact that they’re probably not going to invest in my deal again.”

So those are the two things you wanna do before the call. Number one is to get your mind right, to get in that service, that other mindset, and number two is to determine what your main focus is, which should be capital preservation. Maybe you can have a couple other things you wanna focus on as well, but the number one thing should be capital preservation, because that is the number one most important thing to your investors.

Number three – pretty simple, and this is when we actually begin to execute the conference call… So you call in, you make sure everything’s working, maybe test it the night before to make sure that it’s actually recording the call… Maybe have your friends, or your wife, or your husband, or your girlfriend/boyfriend or whoever, call in and stay on the line for five minutes, maybe sing you a song, and then you can go back in, make sure that they actually recorded it and the recording is clear… Maybe you sing a song too, to test out that your audio clear on  your end; make sure that you’re in a place that’s got good cell phone service, because you don’t want the call dropping while you’re doing it. Or if you’re doing a Zoom or something online, make sure you’ve got good internet that’s not gonna be interrupted.

Then obviously call in, and once you call in, step three is going to be to start the call with a welcome. What Joe does is at the start of the call he welcomes everyone who is on the call, thanks them for taking the time to attend, because typically these things are occurring at night, because the investors have jobs during the day… So “Thanks for stopping by at 8 o’clock at night for a few hours in order to attend the call.” Unless you’re a neurotic mess, you probably don’t need to prepare the welcome, you’re one-sentence opening; just say “Hey, thanks everyone for joining the call today, and welcome”, and that’s it.

Then once you’ve actually welcome everyone, a good next step – number four – is to provide a summary of how the conversation is going to flow. [unintelligible [00:18:20].08] what you should do as well is let them know right from the beginning that there’s going to be a Q&A session at the end. So it’s not a chronological summary; you wanna get the most important thing out of the way first, and probably the number one thing that they’re thinking of, which is “Well, are you just gonna talk at me, or do I have an opportunity to ask you some questions about the deal as well?”

What’s great about the Q&A is that most likely if one investor has a question, then other investors probably have that exact same question, so rather than answering the same question via e-mail 50 times, you can just get it out of the way one time. And of course, as I mentioned, your investors are likely going to want to ask you some questions, because we’re talking about $50,000 or $100,000+ that is on the line, and they’re not just gonna do it based on information you’re providing to them, because you might be leaving some things out… So they can go ahead and ask you really whatever question you want, and in a sense put you on the spot to answer it.

We’ll go over a little bit more about how to prepare for that Q&A session later on into the process, but one quick tip and something else you wanna do before – or at least be prepared to do before the call – and this will help you make your Q&A session more efficient, which is to provide your investors with an e-mail address (or an e-mail address), and again, you can do this at the beginning of the call, after the welcome, when you are summarizing the call… So you wanna give them an e-mail address and tell them that they can e-mail you their questions as they come up during the conversation, or any prepared questions that they’ve prepared to ask before the call. The reason why you want to do that is so that you don’t forget any of the questions, and so they don’t have to interrupt you during the conversation.

Now, I’m pretty sure using FreeConferenceCall.com you can automatically mute everyone except for the host… But if you’re using a service that doesn’t do that, 1) you probably wanna use the service that does that, because if you’ve got 1,000 people on the phone at once, and 1% of them aren’t muted, that’s 10 people that don’t have their cell phones on mute, which means you’ve got background noise from ten different phone calls. So if a baby cries, or if they just don’t realize they aren’t muted and start talking, if they’re in noisy areas, it’s gonna bother everyone else. Plus, again, you don’t want the call to be constantly interrupted by questions. You’d rather just gather all of them and then answer them at one point towards the end… Because from your perspective, that’s gonna interrupt the flow, and secondarily, it can make the call last a lot longer than it needs to be.

So ask them to e-mail you the questions, and then depending on how you’re gonna go about doing the FAQ section, either one person can have access to that e-mail and they’ll do all of it, or you have one person that’s reading through the e-mails… I think what Joe does is he gets them on a Facebook message. I think his business partner collects all of the questions, and then messages them to Joe one at a time, so that he can go through each and every single one of them one at a time, without actually missing a question by reading through the entire list.

That’s just one quick tip, and you don’t have to do that. You can have people interrupt in the middle, you can just have them ask questions at the end… You can say “Hey, has anyone got any questions?” and then let people butt in, but again, that can get confusing and tricky with thousands of people on the call. What if you ask for questions and all 1,000 people ask a question at once? So the best way to go about the Q&A is to tell them in the beginning “Hey, we’re gonna do a Q&A session at the end of the call. The way it’s gonna work is please e-mail us any questions you have, either right now or as they come up throughout the call, to abc@gmail.com. Then at the conclusion of our presentation we will go through and answer those questions one by one.”

So that is number four… You wanna summarize the flow of the conversation, specifically explaining that there’s gonna be a Q&A session, and then whatever else you’re gonna talk about during your call, explain that as well.

Number five, and this is where we’ll end today’s conversation, is to introduce yourself. After you’ve welcomed everyone, after you’ve summarized the call and explained how the Q&A session will work, then go ahead and provide a brief biography of you and your business partner, or anyone who is going to be presenting on the call. If it’s just you, give  a bio on yourself. If it’s you and your business partner, give a bio of you and your business partner, or let them give any introduction… Again, you can approach it however you want to, but the point is to introduce yourself and why the investors should be listening to you.

Explain your background, specifically what’s your business and real estate background as it relates to raising capital, and why they should be giving you their money; explain what you do for the syndication business – do you raise capital, are you gonna be the asset manager, are you the one who underwrote the deal…? Explain your strengths as it relates to this particular deal. If you’re the person that’s gonna be doing the asset management, you can mention your asset management experience; if you underwrote the deal, explain how many deals you’ve underwritten, and dollar amounts… And then you can also explain your overall investment goals – how many deals you wanna do this year, things like that. Then have your business partner or business partners do the exact same.

That’s number five… That’s more of the preparation for the call and some logistics of the call. Six through nine are the meat of the presentation, and we’re going to stop here for today and get into the meat of the conference call conversation next week.

In this episode we got through steps one through five of the nine-step process to a successful new investment offering conference call. To listen to parts one through three, as well as the other Syndication School series about the how-to’s of apartment syndication, and to download those free documents for this series and all other series, visit SyndicationSchool.com.

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

JF1758: How To Secure Commitments From Your Passive Investors Part 3 of 8 | Syndication School with Theo Hicks

We learned how to create a quality investment summary to show to our investors with the two Syndication School episodes from last week. Now we’ll start learning more about emailing our investor database. How to build a list, when to mail to them, what to send them, etc.. So grab your notebook and hit play, get ready to learn more about the apartment syndication process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“This is why we have the two cash-on-cash return factors, one including the profits from the sale and the other excluding the profits from the sale”

 

Free Document:

New deal offering email from one of Joe’s actual deals: http://bit.ly/newdealhighlands

 


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

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


TRANSCRIPTION

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

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

 

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

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

This episode is going to be a continuation of a series we began last week. This will be part three, and that series is entitled “How to secure commitments from your passive investors”. If you haven’t done so already, I recommend listening to parts one and two, which were aired last week, or if you’re listening to this in the future, the episodes that were seven and six episodes ago, where we introduced the five-step process for securing commitments from your passive investors.

Now, at this point in the process you should have a deal under contract, and if you remember from the previous two series, there are three things that you should be doing concurrently, after you place a deal under contract. Number one is to secure financing on your deal, number two is to perform due diligence on the deal, and then the third is to secure commitments.

At this point you really  need to have listened to all of the Syndication School series, or at the very least the previous two episodes. Or if you’re just interested in learning specifically how the process of actually funding the apartment deals happen, then this episode and the series is good for you as well.

As I mentioned, this is the continuation, part three. In parts one and two we focused on step one of the commitment securing process, which is to create that investment summary. Now we’re gonna talk about step two, which is to e-mail your investor database. Once you have your investment summary created, and you created that long 20+ page PowerPoint presentation that highlights the entire deal – the numbers, the financials, the property description, your business plan, the market, things like that – then the next step is to actually let your investors know about the deal you have under contract. Logistically, the best way to do this is to create some sort of automated e-mail.

When Joe first started out, he actually sent each of his individual investors an e-mail. So he went into Gmail and then he had his list of investors, and so he made 10, 20, 30+ different e-mails and e-mailed all of them individually. Obviously, this is technically possible if you’re doing your first deal and maybe only have a handful of investors, but eventually when you get to Joe’s level and you’ve got thousands of investors, that’s gonna take an entire day to write e-mails, to send out the e-mails. So again, if you wanna do that, more power to you, but in order to save yourself a lot of time, and also to make your new investment offering e-mails more professional, then you can create a nicely-designed e-mail using an automated e-mail service. The one that we use and that we obviously recommend is MailChimp.

If you go to MailChimp.com and create an account, I believe it is free up to a certain amount of people on the list – maybe 50 – and after that you have to pay a monthly fee… But MailChimp allows you to import a list of as many people as you want, and then they have a process that guides you through creating your first e-mail campaign, and there’s a lot of built-in templates and things you can drag-and-drop to make your e-mail look very professional.

I think I’m going to a link for this episode that is an example of one of Joe’s e-mails, just so you can see how it flows, how it’s designed. Obviously, when you take a look at that, it’s something that you can’t do using something like Gmail, for example.

So MailChimp isn’t the only one, but that’s just the one that we use, and so for the rest of this conversation today I will go ahead and assume that you’re using MailChimp.

The goals – there’s actually four goals of this initial e-mail to your investors. Now, at this point, unless you’re doing a 506(c) offering, your investors should know who you are; they should have received a few e-mails from you already, and you should have had conversations with them on the phone… So this e-mail is not gonna be completely out of the blue. If it’s your first deal, then all these investors have been anxiously awaiting this first e-mail, so they can invest in your first deal.

The four goals of this e-mail is to 1) notify your list of investors that you have a deal under contract; 2) provide your investors with a summary of the investment; 3) send them or offer to send them the investment summary; 4) invite them to a conference call.

I’m gonna go ahead and actually use an example e-mail – this is actually the most recent e-mail Joe has sent out for one of his deals – just to walk you through exactly how to accomplish those four goals, and to talk about a few other things as well.

Obviously, number one, to notify your investors that you have a deal under contract – that’s really just accomplished by you sending the e-mail… But what’s important is how you actually label the e-mail. The e-mail comes in, and what does the e-mail say? Does it just say “Hey, you’ve got a new deal”, or does it grab their attention?

In a sense, you want to use some of your branding expertise that you learned in some of the earlier Syndication School episodes, in order to create a title that grabs their attention.

An example would be “Off market opportunity under contract at 25% below recent sales.” Someone sees that and they’re like “Okay, this is an off market deal”, which obviously comes with another perception, that it’s a better deal. And not only that, but we have the deal under contract for 25% below recent sales, which tells the investor that we’re automatically going to have essentially 25% of equity in the deal the second we actually close on the opportunity.

Another example would be “Significant value-add opportunity in an A+ location”. Again, it’s letting them know that this is a value-add deal. According to this title, there’s a lot of opportunity to add value, so I’m expecting there to be a large increase in rental premiums, which lets me know that the cashflow and the equity [unintelligible [00:08:49].13] is going to be very high… But also it’s in an excellent location, it’s in an A+ location.

Essentially, when you’re creating the title, you want to include one or two of the most important highlights of the deal. In the first example it was the fact that it was off-market, and that it was under contract at 25% below the recent sales comps. In the second example, it was 1) a significant value-add opportunity, and 2) in a very strong market. Again, that makes me think “Okay, maybe this current asset is like a B or a C, that we’re gonna convert into an A, and it’s already in an A+ market, so it’s a huge opportunity to add value.” That’s one.

Not only do you want to notify your investors that you have a deal under contract, but you want to grab their attention right away with the most important one or two highlights of the deal.

Number two is to provide your investors with the summary of the investment, or some of the investment highlights. This is when your investment summary comes in handy, which we created last week, because if you remember, the executive summary of the investment summary package listed out seven (really depending on the deal) highlights of the deal that you wanted to get across right away, and then everything else in the actual deal package… It went into more detail on why it’s an A+ market, or why it’s a great value-add opportunity.

Essentially, what you wanna do is you wanna go back to that investment summary, and even while you’re creating the investment summary, you wanna keep in mind that you’re going to be including this information in that first e-mail to your investors. So go ahead and grab a few of the main highlights and include them in the beginning of the deal package. So I guess that’s step 2.a) to include those highlights.

Step or goal 2.b) is to obviously include the specific returns about the deal. For the example that we have here, it says “We are purchasing this property, this many unit apartment community located in this market.” So we kind of described the characteristics of the deal, but now this is where we go into the highlights. “All the unit interiors are inferior compared to the surrounding competition.” That’s where the significant value-add comes into play. “The asset is located in an A+ location, which has one of the most desirable school districts in the state, is a top market in the nation for jobs, and has an average household income of $100,000.”

Again, right away in that first paragraph we address specifically what we mean by “Significant value-add opportunity in an A+ location.” So why is it a significant value-add opportunity – well, because every single unit is inferior to the competition. And then why is it in an A+ location? Well, it’s because it has the most desirable school district in the state, it’s a top market in the nation for jobs, and it has an average household income of $100,000.

In the next paragraph we go into the business plan. Okay, this is the description of the deal; now, what do we plan on doing? Well, our business plan will be to renovate 100% of the units, to bring the interiors up to the higher standard demanded by the upscale demographic. Our projected rental premiums will be up to $400/month, less than properties that have undergone similar interior renovation programs in the surrounding area.

If you remember back to the series about underwriting, you perform your detailed rent comp analysis in order to determine what is the average rent per square foot for each unit type after it’s gone through its renovations, and then you take the average, and that is going to be the rent premium that you can demand at your property.

I mentioned that in order to be conservative, you kind of wanna round that number down. If you indeed get the average, then it’s more power to you and your investors and your returns… But if you don’t, you’ve already projected it conservatively, so you’ll still be able to hit your returns.

So the fact that you did that, that’s definitely going to be a highlight of your deal, and you wanna include that. So whatever that reduction is, you want to mention that. In this case, the reduction was up to $140/month; I think it was something between $60 and $140, depending on the unit type.

After that, we actually include a few other things. Those are the two main selling points that we included in the title, so we had to go ahead and explain those right away. The other two highlights of this deal – going into more detail on the market, as well as the type of debt that was secured.

In the e-mail we say “Other notable aspects of the deal – the market. This market has been the epicenter of job growth in the Dallas-Fort Worth market. Fortune 500 corporations who have recently relocated or expanded to Plano include Toyota, Mutual Liberty…”, and we go on with the 5-6 other Fortune 500 companies. “Dallas-Plano-Irving was named the number one best market for jobs by Forbes two years running. Additionally, Plano’s 5-year projected population growth is 14.1%, compared to a 3.9% national average over the same period.”

So all that information is included in your investment summary, or at least it should be somewhere in the investment summary, and you wanna go ahead and pull it out, because those are very important highlights for saying “Hey, the market we’re locating in is not only in an A+ location because of the school district and the average household income, but look at all these Fortune 500 companies that not only are there currently, but have either relocated there or have expanded there because of how powerful the job market is.”

Also, it was named number one best market by Forbes, so that’s why I mentioned in the investment summary episode who you want to include information about the market being included in any top lists. Then we also mentioned the population growth, because if you remember back to the podcast series about market analysis, one of the things you want to track is the 5-year population trend – the previous five years compared to now. You also wanna take a look at the projected population growth. Again, this is not something that’s set in stone, but it is based on a pretty detailed calculation. And the fact that this particular market is expanding at a rate almost four times greater than national average is a great sign for the demand of rentals in multifamily in this market.

And the other one was debt. For the debt we said we’re assuming a low-leverage loan, with a certain amount of time remaining on the loan, and at a historically low interest rate, and we mention what the remaining time is and the interest rate. Why is this good – because this loan will provide investors with a limited risk, given the low interest rate, and our ability to hold the asset long-term.

“Although this has not been modeled in our projections, once we’ve implemented our value-add renovation program, we’ll focus on obtaining  a supplemental loan to return significant equity to the investors.” Two big things there. Number one – it’s describing how great the loan is that they’re getting on this deal. It’s assumed, it’s got very low leverage, which reduces the risk; it’s got a remaining loan term that is greater than our projected hold period, so we won’t be forced to refinance or sell, and the interest rate is extremely low compared to how it is currently today if we were to be securing a regular loan. Essentially, another value-add opportunity at this property, because the debt service is gonna be a lot lower than it would have been if new debt was secured. And then additionally, we also mentioned the fact that we plan on securing a supplemental loan, so that the investors will be receiving a portion of their equity back… But most importantly, that was not included in the actual projections.

I also said this during the episode about underwriting – if your plan is to refinance or get a supplemental loan, you do not wanna include that in your projections, because… Let’s say for example your plan is to do a refinance at year three, and based on your projected NOI at the end of year three and your projected cap rate at the end of year three, you project that you’re gonna return 40% of your investors’ capital. Well, if you did that, then the five-year returns to your investors would look like 8%, 9%, and then 48%, and then back down to maybe 10% and then 11%.

So that annualized cash-on-cash return is gonna be extremely high, and it’s not necessarily a realistic reflection, just because 1) that’s technically a return OF their capital, it’s not a return ON capital. So they’re essentially going to receive 40% of their initial equity back at year three, and they’re only gonna get 60% at the end of the actual business plan. And also, because you might not actually do that. If you don’t do that, then your projections are gonna be off and your investors are gonna be disappointed, because they’re not getting that 40%+ return year three.

And I guess thirdly – and this is why we have the two different cash-on-cash return factors, one including the profits from the sale and the other one is excluding the profits from the sale… Just saying “Okay, this is how much cash I’m actually making on my equity, and then here’s how much I will get at the sale.”

Long story short, if you do refinance/do a supplemental loan, do not include that in your projections.

Now, this is just one example of  a deal that we present to investors, where we talked about the market and the debt… But what you include here depends on the deal. Another example could be any sort of operational improvements you’ve identified. Let’s say you’ve determined that you can decrease the expenses by 20%, or 15%, or whatever. Then your title would be “100% value-add opportunity” or “Off market deal with significant operational upside.” And then in your description of the deal, those first few paragraphs, you mention “Hey, we’re gonna be able to reduce our expenses by 15% because the current owner is doing this, and we’re not going to do this.”

So again, you wanna go through your investment summary and pick out those top 2-3 highlights and include those here.

Now, the second goal is to provide your investors with a summary of the investment highlights. So I guess goal 2.a) was to describe specifically why this is a great deal, and then goal 2.b) is to actually describe their returns. So at this point you want to provide some additional information about the returns and the maximum investment amounts, the closing date, the funding date, so when they can actually submit money, and then what they need to do if they want to actually invest.

For this particular deal we’ve got a bullet point that says “We’re projected to exit in 5 years, so we’ve got our exit strategy, with the following returns. Here’s the cash-on-cash returns to the investors excluding the proceeds from the sale, here are the cash-on-cash returns to the investors including the proceeds from the sale, and here is the IRR during those five years.”

We also list out information about the maximum investment. For the minimum investment, that’s completely up to you. It could be 25k, it could be 50k. We talked about the logic behind that in the episode when you were actually gaining verbal commitments; essentially, it takes time to raise capital, to answer questions. If you’ve got no minimum and someone wants to invest five bucks, it’s not necessarily worth your time to go through the process with them, answering the questions, if they’re only investing five dollars, when you could be spending that time with a person that’s investing a million dollars.

So $50,000 is pretty standard for a  first-time investor. You might wanna make it 25k depending on who you’re raising capital from, and eventually you might wanna raise it up to 100k, 500k, a million dollars once you’ve become more established.

For the maximum investment, the reason why you want to include a max investment is because if one individual is accounting for more than 20% of the equity raise — so if you have a million dollar equity raise and one individual is bring $200,000 or more, then the lender will perform additional due diligence on that person, just because they’re the ones that are bringing most of the down payment… And a lot of investors don’t want to go through that; they don’t wanna send in their bank statements, and tax returns, and things like that.

So in order to make it easy on your investors, just set a max investment amount equal to 19% of the capital raise. If you’ve got to raise a million dollars, then mention that your max investment amount is $190,000… Just to keep things simple and just to keep your investors from having to go through that additional due diligence, and you not having to inundate them with extra sentences, explaining “Hey, if you invest more than this, then you’re gonna have to go through this process with the lender.” Instead, just say “Max. investment – this amount.”

You’ll also wanna include an approximate closing date, because of course, it might change, especially if you put in some contingencies in your contract. “Okay, our closing date is 60 days from now, but we’ve got two 30-day extensions.” So you don’t want to say to your investors “Hey, we’re definitely closing on this date” and then you end up closing 30 or 60 days later, because again, that’s just going to confuse them and frustrate them. So you wanna be as transparent as possible and say “Hey, this is the approximate closing date. That’s subject to change.”

And then a funding date… Typically, you’ll want to set a date where you’re gonna begin accepting funds. We do this the day after the conference call, and then up to three weeks later. It really depends on the close and when the lender needs proof of funds by. So you kind of wanna determine that from your lender, and then base your funding date off of that.

We’re gonna go over this I think next week, when we talk about how to actually secure the commitments after the conference call. You wanna include in your e-mail something along the lines of “If you’re ready to commit to this deal, here’s how you should go about doing it.” For us, we say “Please reply to this e-mail with your investment amount, and if you are investing as an individual or as an entity. If you’re investing as an entity, please let us know the name of that entity.” We’ll leave it at that for now, and we’ll talk about how to actually follow up on this once you’ve actually done the conference call. Because for Joe, he’s in so many deals that once he sends out this e-mail, people will begin to reply and say “Hey, we wanna invest”, whereas if it’s your first deal, you might not necessarily be able to fill up the entire equity raise just by sending out this e-mail.

So that covers goal number two, provide your investors with your summary of the investment highlights. Three is to provide them with the investment summary. Now, when Joe first started out, he didn’t actually include a link to the investment summary. He asked for them to reach out if they want an investment summary. I believe the reason he did this was something along the lines of if someone actually e-mails you and reaches out, asking for more information about the deal, increases the likelihood of them investing. Plus you know exactly who requested it, whereas if you do a link, you don’t really know who clicked on it, or you don’t know if someone just clicked on it by accident, or if they actually wanted to look at it… The only way to know for certain is if you send it to them. However, if you’ve got – as Joe does – thousands of investors, then it’s not realistic or time-efficient to manually send out all those e-mails, just like it’s not time-efficient to manually send out overall e-mail.

Instead, we now include a link to the investment summary package, so they can just click on it and they can download it themselves, and we can technically see on the back-end because of a functionality on MailChimp, we can determine who exactly clicked on it… But again, this is more of a time-saver both for us and the investors, to make sure that every single investor who wants the investment package can see the investment package.

And then the fourth goal is to invite them to a conference call. So you don’t want to just send out an e-mail and that’s it, and have your fingers crossed that people will actually invest. You also want to set up a 60 to 90 (minutes) to two-hour conference call, depending how long it takes, to actually present the deal in much more detail, and investors can call in. Then you can conclude the call with an FAQ section, where investors can ask you questions. We’ll go over exactly how to prepare for this call, how to execute the call, and then obviously what to do after the conference call, starting — actually, tomorrow we’re gonna start discussing the actual conference call, and we’ll complete that next week.

Essentially, what you wanna do — again, you can technically use whatever service you want, but we use freeconferencecall.com, just because it’s free. It gives you a call-in number that you continue to use for every single deal, and it records the call. We’ll discuss why you wanna record your call starting tomorrow, or likely next week.

The last part of this e-mail says “Because I anticipate a high level of interest, we are hosting a conference call to go over the deal and answer any questions you might have. Here are the call details. Here’s the date of the call, here’s the time of the call, here’s the phone number to call and here’s the pass code to enter once you actually call.”

That accomplishes the fourth and final goal, and then you wanna end it up by just kind of closing it out… We say “Either way, I hope you’re doing well, and if I can help you out in any other way, please let me know.”

Essentially, that is how you create your new investment offering e-mail. And again, you want to 1) notify your investors that you have a deal under contract, and you wanna do that with a very strong subject line. 2) You want to provide your investors with the summary of the investment, so you want to first explain in more detail why you created that particular subject line. 3) You want to go over any notable aspects of the deal, and 4) you want to include information about the returns, the min and max investments, the closing data and the funding dates.

Goal number three is to offer to send them the investment summary. We include a link in our e-mails, but you can either do that – upload it  to Dropbox and then copy that Dropbox link and hyperlink that in your e-mail, or you can just say “If you want to read the investment package, send me an e-mail and I will send that to you.”

And then number four is to invite them to your conference call. We use freeconferencecall.com. You wanna include the date, time and the call-in information at the end of the e-mail.

That concludes part three, which is discussing the second step of the five-part process for securing commitments from your investors, and that is to send an e-mail to your investor database.

Tomorrow we’re going to begin to discuss step number three, which is that conference call where you go over the deal in more details. Probably we won’t get through that entire process tomorrow, so we will finish that off next week, and then go over the final two steps of the commitment-securing process.

Until then, I recommend listening to parts one and two of this series. I recommend listening to other Syndication School series about the how-to’s of apartment syndication, and make sure you take a look at that link that we provided, that has an example of how our new investment summary e-mail flows. Also, download the template we provided last week for how to create your investment summary package. All that can be found at syndicationschool.com.

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

JF1752: How To Secure Commitments From Your Passive Investors Part 2 of 8 | Syndication School with Theo Hicks

Theo continues the conversation from yesterday about securing commitments from investors. We’ll be hearing more about how to create an investment summary. 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’m your host, Theo Hicks.

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

This episode is a continuation of a series we started yesterday, or if you listen to this in the future, the episode before this one, which is “How to secure commitments from your passive investors.”

In part one, which I recommend you listening to before this episode, because we are continuing off of that episode, we introduced the five-step process to securing commitments from your passive investors, which is to 1) create an investment summary, 2) e-mail your investor database, 3) conduct a conference call of seminar, 4) follow-up with your investors, and 5) send the proper legal documentation. Then we also began to discuss step one, which is to create the investment summary. We got about halfway through that, so we’re going to continue and hopefully finish up going through the investment summary, so that next week we can move on to part two, which is to e-mail your investor database.

In the first episode we went through the different parts of the investment summary. First we talked about the executive summary, which is like 1-2 pages of the actual report. It essentially summarizes all the important information in the investment summary. Everything below that essentially goes into more detail on what’s included. We went over examples of things that you’re gonna wanna include on that, and again, we also offered you a free template to download, a free investment summary template that you can download, so everything that I’m discussing on the show is actually on that template.

After the executive summary we go into the investment highlights, which discuss things like the business plan, the interior renovation projects, your capital improvement budget, your debt summary, things like that.

The third section is the property overview. It goes through the description of the property, the interior/exterior amenities, the unit mix information, as well as the site plans.

We’re going to continue on today, starting with the financial analysis. If you remember, I said this on the previous episode as well – the investment summary is very similar to the offering memorandum structure that was created by the broker. Obviously, the information is different, because it’s your information, based on your business plan, and based on your underwriting… But the structure is very similar, and a  lot of the data that you will include on the investment summary can be pulled from the OM – pictures, property descriptions, things like that.

So the financial analysis — if you remember, you underwrote the deal with either the simplified cashflow calculator that is available for free at SyndicationSchool.com, or you took that simplified cashflow calculator and went ahead and customized it to your liking, or using some sort of other calculator, but… Essentially, you want to get across the main highlights of that cashflow calculator without actually sending your investors a cashflow calculator, because that’s gonna be a little overwhelming.

That’s why it’s ideal that your cashflow calculator has some sort of summary tab or summary page that you can easily pull information from to include in your investment summary. You can really pick and choose what information you want to include. Obviously, you wanna focus on the important returns information that’s relevant to your investors, but as you’ll see in our template, on the first financial analysis page you’ve got three data tables. The first data table focuses on the equity returned at sale, so essentially it goes over all of our disposition assumptions. And again, for the example that I’m looking at we projected an exit sales cap rate of 7.5%. So based on the exit NOI in five years, on a 7.5% cap rate, we went ahead and put in there our projected sales price, as well as the sales price per unit.

Then we included any sales expense – closing costs, disposition fees, broker fees, things like that. And of course, we’ve gotta pay back the rest of the loan, so we’ve got that… And then we have to give the remaining investment back to our investors, which leaves us with a gain at sales, or sales proceeds. Then based on whatever the partnership structure is, here’s how much money we expect to distribute to our investors at sale. That’s pretty important.

The other data table is the yield projection. If you remember, in the executive summary we included the cash-on-cash return and the internal rate of return. This yield projections data table shows you where we got those numbers from. We’ve got “Hey, here’s the net cashflow, plus your net profit at sale, so here’s your total net return, and then based on your initial investment, here’s what the ROI is, as well as the internal rate of return.”

Now, you wanna make sure that when you’re discussing these ROIs that you distinguish whether you are including the sales profits or not including the sales profits… Because if you are doing an average annual cash-on-cash return, and you aren’t including the sales proceeds, then it’s gonna be a little bit lower. But if you are including the sales proceeds, you’re gonna be making 100-something percent return in the year five, or something like that. A pretty high return, like 50% return at year five, and it’ll throw off your returns. So make sure you either just include one and say “Hey, this is not including the sales proceeds” or “Hey, this is including the sales proceeds.”

And then the last one is the operating income and cashflow statement. As you see at the top of the data table, there is a section for the members’ return on investment, so the ROI to the LPs for that year. Then it just goes down and lists the profit and loss projections. You’ve got your effective gross income, and your operating expenses; the difference between those two is your net operating income. You’ve got your projected debt service and your projected cap ex reserves, [unintelligible [00:08:13].23] reserves… The difference between the net operating income, debt service and cap ex is your net operating cashflow, and then based on whatever partnership structure you have with your investors, “Hey, here’s how much of that net operating cashflow is going to you.” It’s got that for years one through five, as well as the overall total. Obviously, you’re gonna want that members’ return on investment on that total to equal the total return on investment in your yield projection data table.

If you also remember, in the executive summary there was the sample $100,000 investment return. In this next page it goes into a little more detail on how that was calculated. In the first row it’s got the total distributions to the members, then it does another ROI, which should match the ROI on the previous page, and then it’s got projected profits at sales, which gives you the next row, a total projected return, which is the cashflow plus the sales proceeds. Then you’ve got your return on investment based on the total projected return, and then at the very bottom it just says a snapshot of the cashflow each of those years. The next data table has those return percentages. “Based on the total cashflow, plus the profit at sale, here’s the estimated return on investment, here’s the estimated return on capital/equity investment/equity multiple, and here’s the internal rate of return.”

Then on the next page you’ll see that there’s actually a snapshot of the full proforma. This is essentially the summarization of your underwriting. You’ve got all of your income and all of your expense line items for each year on this data table. For rental income you’ve got your growth potential rent, your loss to lease, you’ve got your concessions, vacancy, employee units, model units, bad debt, and other income, to get you a total income. Then other expenses – you’ve got your payroll, contract service, maintenance, advertising, admin utilities, management fees, taxes, replacement reserves and insurance, to get you  a total expense. Then the difference between the total income and total expense is your net operating income.

For all of these that I just mentioned, if you wanna learn more about how to determine what your proforma number should be, check out the episode about how to underwrite value-add apartment deals. Now, as you’ll see at the bottom of the data table there’s a bunch of small little numbers. On rental income is a 1, on gross potential rent is a 2, on loss to lease is a 3, and then below the data table you’ll see for number 1 through 9 (on this one) it explains how you came up with those assumptions, or just kind of extra notes on that factor.

For example, rental income has got a 1. The assumptions on the sample investment summary says “Unless otherwise noted, based on T-12 at 3% growth.” For growth potential rent “Based on rates they’re achieving and growing at those same rates as renovations occur.” For loss to lease there’s a 3, it says “Currently at 3.8%, but we’re assuming 4.2% year one.” Essentially, just you explaining how you came up with those assumptions. You don’t need to do it for every single one; just anything that’s essentially different. You can kind of make universal comments. For example on rental income and expenses it says “For income, unless otherwise noted, it’s based on the T-12. For all the ones that there’s not a note next to, we base this assumption on the T-12. We’re expecting everything to grow by 3% each year. For expenses, unless otherwise noted, we’re assuming a 2% growth each year.” You get this proforma information from your cashflow calculator.

Now, going back one page to the sample $100,000 investment, unless you actually had that on your cashflow calculator, you’re gonna have to actually do some additional calculations [unintelligible [00:11:55].22] but it’s pretty simple, because on your cashflow calculator it should say “Hey, here’s how much money the LP will be making each year, and then based on the investment, here’s the cash-on-cash return.” As long as you have that cash-on-cash return, then you can easily calculate the distribution based on a sample $100,000 investment. So if the cash-on-cash return year one is 8.9%, 8.9% times $100,000 is $8,900. If year two is 13%, then year two cashflow is $13,000. Then obviously the profit at sale is something that’s outputted as well, so then you add everything together, profit at sale plus all of that cashflow – it gets you a number; then you can divide that number by the initial equity investment to get a percentage. Then multiply that percentage by $100,000.

The only other thing that you might want to include in the financial analysis that I didn’t mention would be a debt summary. You need to put a data table about the debt terms. Again, this is repeated, because you might have had that earlier in the investment summary, but this is gonna be more detailed. You wanna outline the overall debt structure, you wanna say “Okay, here’s the starting loan balance. Here’s how much money we have in the future for renovations. Here’s the interest rate. Here’s the number of interest-only months. Here’s the terms of the loan, here’s the amortization period, here’s the prepayment penalty, here’s the interest rate, the cap, the max interest rate we can have, maybe some refinance information, some supplemental loan information…”, things like that.

After the financial analysis section there’s a market overview. This is gonna be very similar to the offering memorandum, because you’re probably gonna include a lot of the same information that they included in theirs. So definitely use that as a starting point. Now, also remember that you did a pretty detailed market analysis. If you want to listen to that Syndication School series, it is series number 6 and series number 5. You’ve got a lot of data, you’ve found a lot of information about your market, so you’ll want to obviously include that information in this investment summary… But you don’t wanna include a bunch of data tables in here. You mostly wanna have visual graphs; they’re a lot better for the market overview.

For example, here’s some things that you can include… And again, it really depends on the market, but information you can include is does your market appear in any top city in the nation lists? Top city for jobs, top city for living, top schools, things like that. You can look at the status of the current business climate… Again, take a look at some business reports and see where the job growth is, what’s the unemployment, what’s the job diversity… Mention if the apartment community is located near any major highways or transportation hubs, like a train station or a busing route. Mention any nearby mass employment centers, any nearby retail centers… Mention any construction that’s either currently underway or coming in the near future; is there a new retail center, a new apartment/retail center being built? Things like that. Mention any new businesses that have moved to the area recently, talk about the job growth, population growth unemployment reduction, the GDP… Really, anything that’s not related to the actual apartment, but the actual surrounding market, you wanna include in this section. Demographic highlights, things like that.

Take a look at that analysis you did back in series 5 and 6 and then Google, for example, “Dallas Texas business news”, “Dallas Texas job news”, and then also looking at the OM, you should be able to come together with enough information to include.

On the sample document we actually only have one page, but you could probably include  a few pages to highlight that market.

And of course, you’ve got your rent comp and your sales comp section. This is where you want to essentially just include your detailed rent comp data table. And again, we actually provided a free rent comp template during the series about how to underwrite value-add apartment deals, which was series number 14. For that, you’ve got your first data table of all of the rent comps that you used, so include that; you’ve got your subject property, plus rent comps one through ten. It explains “Here’s when they were built, here’s the address, here’s the distance from our property.”

Then you’ve got your detailed rent comp data tables that show the actual rents for all those rent comps. You’ve got your one-bedroom rent comps, your two-bedroom rent comps, your three-bedroom rent comps… Essentially to show that “Hey, here are the comps that we used, here are the rents at those comps; here’s the average rent based on all those comps. Then we took the average rent and multiplied it by the square footage of the same unit type in our property in order to determine what our rental premiums could be… And hey, we even were more conservative and projected a rental premium below that.”

It could be as simple as just including a data table, or you could also have multiple pages where you actually show images of each of the properties to say “Hey, here’s how our property is now, and then here’s all of our comps. Look how much nicer these comps are than the subject property.”

Earlier in the document you might have included a picture of a renovated unit, so your investors know “Okay, the subject property – it’s nice now, but once they perform their renovations, it’s gonna look exactly like this property… And we’re still renting at $50 below. Wow, this is a great deal.” Or you can just leave it as a simple data table… It’s really up to you.

Then you also will want to include some sales comps too, if you want to… But the requirement is you wanna include your rent comps, because earlier you said “Hey, here’s my unit mix, here’s the current market rents and here’s the renovated rents.” Well, how did you come up with those numbers? Boom – detailed data table that explains exactly how you came up with those numbers.

The next section that you’re gonna wanna include in the document is going to be portfolio or case studies. Again, this is gonna be either blank or pretty short if you haven’t done a deal before, but… At this point you’re gonna want to show off your apartment experience. Obviously, if you haven’t done a deal before, then you’re not going to be able to include your own deals, but you might be able to include a deal from your property management company, that they’ve done before; or include a deal that your mentor/consultant/loan guarantor has done. You wanna include something in the case studies.

For Ashcroft, every single deal they’ve done is highlighted in that section. Essentially, each deal has one page. It says “Hey, here’s the deal, and here’s where we’re at” or “Hey, here’s the deal. We sold it. Here’s how much money that we made.” And again, this is to show off your apartment experience.

Also, in this section or in the next section you wanna include information on your team, and obviously on yourself. And at this point, I believe we already made the bios for our teams, which would have been in series 8. And then obviously you have a bio for yourself, that you’ve made for your brand, so you wanna include that information at the end of the investment summary. That will be included in the Appendix. I guess that’s the last part of the investment summary, the Appendix.

There you can include information about your team, and yourself, you can include a section that defines any of the terms you’ve used throughout the presentation – what’s an accredited investor, what is a cap rate, what is cashflow, what’s an internal rate of return, what’s cash-on-cash return, things like that. And that’s it for the investment summary.

Again, you can download the free investment summary template at SyndicationSchool.com or in the show notes of this episode on iTunes, or if you’re listening to it at JoeFairless.com. The majority of what I went over is in that investment summary. But again, I recommend getting your hands on that few example investment summaries; maybe sign up to a few syndicator lists, so that whenever they have a new deal, they send out their investment summaries… And you always wanna be tweaking yours, to make it the best it can be, and making sure that you’re providing all the important information, because eventually you’re going to be doing an investment call, and any information that’s not included in that investment summary will likely come up on the call… And if it’s not in the investment summary, maybe it’s because you forgot, or didn’t even think it needed to be included, and you won’t have an answer… And that’s not gonna be good, if you can’t come up with an answer to an investor’s question. Because if you can’t, then why would they invest with you. It’s showing that you don’t necessarily know everything about that particular deal. We’ll get more into that in a future episode in this series, when we focus on how to conduct that investor call.

That’s gonna conclude part two, and that’s gonna conclude us going over step one of the five-step process for securing investments from your passive investors, which is that investment summary.

In the next episode we’re going to move on to step two, which is how to create that e-mail to your investor database after you’ve created your investment summary. Until then, I recommend listening to part one of this series, as well as the other Syndication School series about the how-to’s of apartment syndications, and download your free investment summary template. All that is at SyndicationSchool.com.

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

JF1751: How To Secure Commitments From Your Passive Investors Part 1 of 8 | Syndication School with Theo Hicks

We’ve heard a lot about the apartment communities and due diligence process for your apartment syndication acquisitions. Now, Theo starts covering how to secure commitments from your investors. There is a lot to go over here, so this will be a six parter. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Don’t tell them no, the deal is full, come back next time. Add them to your waiting list”

 

Free Document:

http://bit.ly/investmentsummarytemplate

 


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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we will be offering a document, spreadsheet, PowerPoint template, some sort of resource for you to download for free. All these free documents and past Syndication School series can be found at SyndicationSchool.com, or you can check in to the Best Ever Show podcast page or your podcast app on iTunes, on every Wednesday and Thursday, because that’s when we release these episodes.

Today we’re beginning a new series entitled “How to secure commitments from your passive investors.” If you haven’t done so already, I highly recommend listening to all of the previous Syndication School series, but more importantly the previous two, because after you put a deal under contract – that’s where we’re at right now, the three things that you need to do is 1) secure financing, 2) perform due diligence, and 3) secure commitments from your passive investors. We’ve already done the first two, and now we’re gonna focus on the third.

In this episode we’re going to introduce the five things that you need to do in order to secure the financial commitments from your passive investors, and then we’re gonna begin by focusing on step number one.

At this point, as I mentioned, you should have a deal under contract, as well as verbal commitments from your passive investors. So if you remember all the way back in series number 9, a long 8-part series, so four weeks of how to raise capital from passive investors, how to find passive investors; at that point you didn’t have a deal, but we discussed how you want to actually get verbal commitments, or at least interest from people, because you don’t want to be scrambling for capital once you have a deal under contract, but also you needed to know how much money you’re capable of raising in order to determine what sized and type deals you can go after.

So at this point in the process a deal is under contract and you’ve got your list of passive investors. If you do not have a deal under contract, don’t have  a list of passive investors and wanna find out how, go to SyndicationSchool.com and check out those podcast series.

Now, overall for your first deal or your first few deals expect to be fairly proactive when you are in the commitment securing phase, because — we’re gonna go over this, but once you’ve sent out and presented a deal to your investors, you’re likely going to have to do some following up, because none of these people have invested with you before. Once people become comfortable investing with you, once they’re confident in your ability to provide them with the returns, and ideally you have a waiting list — ideally, once you send out the deal, you’ve got people e-mailing you their commitments on their own. But in the beginning – and we’ll discuss how to follow up, but I just wanted to mention, overall expect the process to be more proactive in the beginning and become more reactive as you gain more and more experience.

Before introducing the five steps I just wanted to also mention how to determine how much money you actually need to raise. If you remember, during the underwriting phase one of the data tables – the output of that data table was the amount of money you need to raise, and we also discussed specifically what the different factors are that make up the initial equity investment. Little things like, obviously, the down payment for the loan, any construction costs (if those are not included in the loan), closing costs, financing fees, acquisition fees and then the operating account fund.

So once you’ve underwritten your deal, if you use the simplified cashflow calculator or a different calculator, and that simplified cashflow calculator is available for free at SyndicationSchool.com, then you will essentially automatically have the output for how much money you need to raise. If for some reason you’re doing it manually, then you’re gonna have to go back and listen to that series about how to underwrite a value-add apartment syndicated deal to determine how to calculate those 5-6 factors that make up the equity investment… But that’s how much money you’re going to need to bring to the table at closing in order to close on a deal… But we always recommend that you raise capital on top of that.

That doesn’t mean that you’re actually taking money from people, but once you’ve reached 100% of your equity investment, and those people are sending you their money or their capital, don’t turn away someone else who comes and says “Hey, is there still availability? I wanna invest 100k in the deal.” Don’t tell them “No, the deal is all filled up. Come back next time.” Instead, say “Currently we’ve raised 100% of the equity, but I will add your name to a waiting list. Obviously, the first person is the first on that list, the second person is second on that list, so that if someone drops out, you can take their place.”

Now, the reason you wanna do this is because if someone does drop out, which is possible, you don’t want to be scrambling for capital. You want to have a list of people that are already interesting in investing that you can reach out to, rather than sending out the e-mail to everyone again. So a good rule of thumb is to have 150% of the capital required to close raised. So if you need to raise a million dollars, then once you’ve hit that million-dollar mark, then your goal would be to get a waiting list with $500,000 on it.

So let’s now transition into the meat of this series, which is going to be how to secure commitments from passive investors. We’re just going to go through each of these steps one by one, and kind of go into as much detail as possible, and kind of continue on for however long it takes us. This might be a six or an eight-part series. I’m not 100% sure yet.

As I mentioned, there’s five steps. The first step is for you to create an investment summary. Step two is going to be for you to e-mail the deal to your investor database. Step three is going to be to conduct the conference call/webinar for the deal with your investors. Step four, which again, is going to be more for the beginning syndicators – that will be follow-up to actually secure the investments, and then step five is going to be to send the proper documentation to formalize your investors’ investment.

As I mentioned, we are going to be focusing on step one in this episode, in the next episode, and maybe even in the third episode of this series. That is going to be to create that investment summary.

So as the name implies, the investment summary is going to be a document — it’ll actually most likely be a PowerPoint presentation, just so you can design it, rather than sending a simple Word document… But it’s gonna be some sort of document that provides your investors with the details on the investment.

So step two is e-mail your investor database. In that e-mail you’ll want to include — we’ll go into more specifics when we get to that point, but you’re gonna want to include high-level highlights of the deal, and then you’re gonna want to include a link to an investment summary that you’ve created.

In this episode we’re gonna walk through an actual investment summary. I’m gonna explain to you what the information is and why it’s in there. We’re also going to be giving you a free investment summary template that we have, so that you can download that and follow along, or you can download that and use it for your own deals.

So the investment summary — it’s really gonna vary depending on the syndicator, but the one that we have that we’re gonna be offering the template for free has seven different sections. There’s the executive summary, there’s the investment highlights, there’s the property overview, there’s the financial analysis, there’s the market overview, there’s the portfolio and case studies, and then there is the appendix.

Now, when you actually download this, you kind of recognize it from one of the earlier Syndication School series about underwriting, because the investment summary looks fairly similar to the offering memorandum put together by the broker.

So you have in your investment summary the deal/investment highlights, property description, financial analysis, market overview, and all those things are also included in the OM… But unlike the OM, this is your information based on your underwriting. So let’s go ahead and go through this template together, and we’ll go until we hit the 30-minute mark for this.

First page – we’ve got a couple pictures of the property, title of the property, the location of the property, number of units… You wanna mention that it’s a confidential investment summary, so people can’t send this information to whoever they want. You’re asking them that it’s only for prospective investors, and that’s it.

The next page, page two, is where we get into the actual details on the deal. That’s going to be the executive summary. On this you’re essentially going to provide all of the valuable, important information that your investors need to know. If someone just looks at this page right here, they could essentially make their investment decision off of that. Then everything else in the investment summary is going to essentially be how you got to all these numbers.

On the executive summary, the first paragraph explains “This is the property name, this is the number of units, the deal is on market or off market”, maybe it’ll have some information about the business plan, so any upgrades that you’re doing to the property… So it’s gonna have some written words, but the meat of it will be the data table.

As you’ll see, there’s a few data tables on there. First, there’s the investment snapshot, which goes over the high-level numbers of the deal – purchase price, how much money we’re spending on the renovations, the closing costs, and then the total project cost, total capitalization, number of units, the year the property is built and current occupancy. Then based on the business plan, what are the returns gonna be – overall it gives you a total equity multiple, a total average annual return, and an internal rate of return. So if you remember during underwriting, the average annual return and the internal rate of return were the two major factors that you used to determine whether or not you should invest in that deal or not.

And then it goes into detail on the average annual return and the internal rate of return… Usually, you’ll want to include the project cash-on-cash return and the project IRR, as well as the IRR and the cash-on-cash return to your investors, just because the investors don’t necessarily care how the overall project will perform. They wanna know what the return to them will be.

At the bottom of the executive summary page we have a breakdown of a sample $100,000 investment. “Here’s how much money you will make each year based on a $100,000 investment.” Then there’s also the partnership structure data table, which essentially just explains the structure of the partnership between the LP and the GP. So what’s the preferred return, what’s the IRR, are there any hurdles – if so, what’s the equity split before that hurdle is reached, and what’s the equity split after that hurdle is reached. For example, if the preferred return is 8% and the IRR is 20%, then the split might be 70/30 to the LP/GP up until you reach 20% IRR, and then that changes to 50/50.

That’s the executive summary. Then the next page goes in the table of contents. There’s more pictures on there as well, so you wanna make sure that at least every other page there’s some sort of picture, just so people aren’t inundated with text.

As you’ll see here, there’s a quick risk and disclosures page. For this, you need to input the property name and the address and anything else that’s specific to the property, but these risks of real estate investing are pretty general. You’ve got “In general, here are some risks, here’s some selling or refinancing risks, here’s some government regulation risks, and here’s some environmental liability risks.” And there’s even more risks on the four or five pages of risks on here.

The next important part of this report is going to be the investment highlights. Again, as I mentioned, you’ve got your executive summary – that summarizes everything that’s in the investment summary. The investment highlights is going to be something that the main points of this are in that executive summary.

For this particular example that I’m looking at, the investment highlights are broken into the business plan, how solid the asset is, and then the school district and location highlights – market highlights, they kind of talk about our underwriting, it talks about the proven track record of the team, and it talks about the returns.

Other examples could be information about the debt, information about the renovation program, information about the exterior program… It really just depends on what the highlights are of this deal. If you aren’t performing renovations, then you probably don’t wanna talk about it. If the market is not very good, you probably don’t wanna talk about it. If the asset currently isn’t very solid, then you don’t want to put “Solid asset.” So some examples of things you’re gonna highlight for each of those different sections that could potentially be in the investment summary…

For the business plan, you’re gonna focus on the interior renovations. For example, what percentage of the units have already been upgraded, and what percentage of the units still need to be upgraded… Because if 98% of the units have been upgraded, then there might not be enough meat on the bone for a value-add program.

What types of upgrades will you be implementing? How much will these renovations cost for each unit? What’s the renovation timeline? What rental premiums do you expect to demand after you’ve upgraded those units?

You can also highlight operational improvements. How – if you are – will you improve the operations of the apartment? Are you gonna rebrand the apartments? Will you have someone taking over operations that has experience? What strategies will you implement to improve the operations? Did you identify anything during the underwriting process that you know you can improve upon pretty quickly?

As I mentioned, financing… You can discuss the type of debt you’re securing on the property. Is it low interest rates, fixed debt, is it an assumable loan? Do you plan on doing a refinance or supplemental loan, and if so, is that included in your projections? Did you buy a cap on the interest rate if it’s floating? Again, you wanna highlight things that are actually positive about this deal. So if you’ve got a really bad loan, then you probably don’t wanna talk about that in the investment highlights. Or if you do, you wanna mention why the loan is not very good.

Also, you could talk about — and this is all under the business plan… You can talk about your exit strategy; when you plan on selling the property. Do you plan on refinancing? If so, when? Is the refinance included in your return projections? Which is something you don’t want to do, because it’s [unintelligible [00:17:14].23] return of capital, but if you’ve got a refinance projection at year two, and they’re getting 50% of their capital back and you [unintelligible [00:17:21].22] cash-on-cash return that year, it’s gonna throw off all of your returns.

Those are things you can add in the business plan. If you have a category specific to the actual interior renovations, then you can for example include a picture of a non-renovated unit and a renovated unit, so the investors can visually see the types of upgrades you will be implementing. If the current owner has already started a renovation program, then the renovation picture could be of an actual unit. If they haven’t, then you should either pull a picture of a similarly upgraded unit from a different property you have, or ask your management company for an image to include.

Also, below that you wanna include a little description of the renovated unit and the non-renovated unit. On the non-renovated unit you could say “White appliances. Cheap laminate flooring. Terrible countertops…” Obviously, you don’t say it like that, but just whatever the materials are… And then on the upgraded it could be “Stainless steel appliances. Luxury laminate flooring”, things like that.

You could also have a category for your capital improvement budget, so you’re gonna have a data table that outlines all of the interior and exterior capital improvement costs. As I mentioned, you could do something about the debt summary. You could do a school district and location highlights… These are really just market highlights, so anything important about the market, whether it’s the market ranks really high in jobs, the school district is ranked really high, what’s the demographic, what’s the average household income, what’s the average property value, you can talk about your underwriting… For example, let’s say your rental premiums that you’re projecting are $100/unit, but the comps are $150/unit; that’s something you obviously want to highlight.

You can also talk about your team – how many units does your property management company own, how are those compared to this property, things like that.

And then as you’ll see on the template, after they go through bullet points, there’s actually a section called Investment Strategies, which goes into more — not necessarily specifics, but essentially takes the things that aren’t necessarily the main highlights and describes them in paragraph form. It talks about “Here’s our exit strategy. Here’s the returns we expect. Here’s our improvement plan. Here’s our debt summary”, things like that.

Next we’ve got the property overview section, which is essentially just a bunch of data tables about the property. You’ve got your property information, which is the purchase price, the number of buildings, number of units, rentable square feet, price per unit, year built, land size, what’s the water situation, what’s the utility situation, what’s the construction of the property, what’s the parking situation… And then it lists out “Here are the community amenities and here are the standard unit features.” And again, you wanna make sure you’ve got some pictures as well.

Next we’ve got the unit mix information. It shows you “Here are the different unit types, here are the number of each of those unit types, here’s what they are from bed/bath perspective, here’s the size, the square footage, here’s the current market rents and here’s the rent per square feet.”

Then you’ve got your site map. Under Template it’s blank, but on this particular example I’m looking at the property site map that shows you where all the buildings are and where all the amenities are, and the surrounding streets. Then we’ve also got kind of a Google Map view of the apartment, with a red line around the boundaries… Then you’ve got your standard map zoomed out, that shows “Here’s the subject property, here’s all the surrounding landmarks.” On this one [unintelligible [00:21:02].05] industrial park with a bunch of businesses in it, here’s an airport, here’s the major highways… Again, it’s gonna vary from deal to deal, but you wanna include a site map of the property, you wanna include that Google Map image, and you’ll also wanna include something that  highlights visually the different types of landmarks, retail, restaurants, jobs that are surrounding the property.

And again, for the property information — I guess I should specify where you find that from; you need to find that on the OM. Typically, the information will be listed by the broker. If not, you’ll find it by looking up the property on Apartments.com. Then for the community amenities and the state of unit features – that’s something you should have gotten either from the OM, from the property website, or when you actually visit the property in person.

I probably should have gone over this earlier, but for the executive summary, the investment snapshot, the partnership structure, the yield projections, the sample $100,000 investment – all those numbers are from your cashflow calculator.

Same with some of the investment highlights and the investment strategies. Look at the numbers from your cashflow calculator and then put together your business plan – that’s something you should have done already. We talked about that in the chapter on underwriting.

After the property overview, it goes into the financial analysis, and we’re gonna stop here for today and we will pick up on the financial analysis on tomorrow’s episode.

So far in this episode we discussed obviously where you should be at this point in the process, which s have a deal under contract and have those verbal commitments from your investors.

On your first deal, expect your the money-raising process to be more proactive on your part. We’ve talked about how you wanna make sure that you’ve got 150% of the capital required to close in verbal commitments. You wanna have 100% of equity lined up, and then after that you want to create a waiting list of 50%; it could be 33%, or 100% more… It really depends. The rule of thumb is 50% extra, so that if someone backs out you’re not scrambling for capital.

Then we’ve introduced the entire money-raising process, which are five steps, which are create an investment summary, e-mail your investor database, conduct the conference call, follow up with your investors and send proper documentation. And we got about halfway through the investment summary in this episode. As I mentioned, we will pick up back with the investment summary tomorrow.

In the meantime, make sure you listen to some of the other Syndication School series about the how-to’s of apartment syndications, and make sure you download that free investment summary template at syndicationschool.com.

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

JF1731: How to Secure Financing for an Apartment Syndication Deal Part 4 of 4 | Syndication School with Theo Hicks

We’ve heard Theo explain in great detail all the different loan options we have as apartment syndicators. How do you decide which is best for you? Luckily, Theo is going to cover that today so get your pen and paper ready to take notes! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A good starting approach is to reach out to your mortgage broker and tell them what you plan on doing”

 

Free Loan Program Spreadsheet:

http://bit.ly/toploanprograms

 


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

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


TRANSCRIPTION

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

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

 

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

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

This episode is going to wrap up a four-part series that is entitled “How to secure financing for an apartment syndicated deal.” If you haven’t so already, I recommend listening to parts one through three. In part one we talked about the two different types of debt, which are recourse and non-recourse. We had a conversation about how to approach qualifying for the loan as a loan guarantor, either as yourself or finding someone else, and if you’re finding someone else, how to compensate that person/people. Then we also introduced the two main categories of financing, which are the bridge loans and the permanent loans.

In parts two and three we went over the top most popular/most common loan programs that apartment syndicators secure for their apartment deals. In part two we discussed the Fannie Mae and Freddie Mac loan program, so we discussed the agency programs. Then in part three we discussed the remaining top loan programs, which were the HUD, the CMBS, the traditional bank and the life insurance companies. Then we also had a discussion on how to approach assumable loans, as well as how to approach supplemental loans.

Now, I wanted to begin this episode by finishing off the last episode, which is to talk about what documents you need to bring to the lender in order to begin the process of qualifying and securing that loan. Then we’re gonna conclude with walking you through the thought process of selecting the ideal loan for you.

Really quickly – the things that you need to provide to the lender to initiate the process of securing that loan… Number one is your biography. Taking a step back, some of these things you might have already sent to the mortgage broker or the lender that you’re working with prior to finding a deal. So if you remember back in an earlier Syndication School series we talked about putting your team together, and one of those team members is going to be a mortgage broker or a lender… So you should already have a list of potential mortgage brokers to reach out to, that should already know who you are, that should already know what you’re trying to do, but now you actually have a deal, so the information you need to provide to them needs to be more specific.

So if you haven’t done so already, they’re gonna need a biography, they’re gonna want to know about you and your team members, and the information they wanna know about you and your team members needs to be relevant to the deal and the business plan. I’ll talk about that here in a second.

Next you’re gonna need to send them your personal tax returns. Pretty simple. Then you’re gonna need to provide them with a personal financial statement for each loan guarantor. Anyone who’s signing on the loan. If it’s just you, then you send them your personal financial statement. If it is you and someone else, then you’re gonna need to get your hands on their personal financial statements as well.

Typically, the mortgage broker should send you a template to fill out, maybe the Excel spreadsheet to fill out with all the information, prior to you finding a deal, just so they can qualify you preliminarily for a loan amount… But at this point, they’re gonna want actual documentation and actual evidence to support the information you already provided. Obviously, if you didn’t provide the information already, then this is when you do so.

They’re also gonna request the financials for the subject property. Typically the T-12 and a current rent roll. Then they’re gonna want a breakdown of your budget. This might mean they just want you to send them your cashflow calculator, which probably is not going to happen because all cashflow calculators are different… But they’re going to want to see your hold period projections; if it’s a five-year hold period, they’re gonna want to see the proforma for that, so an itemized list of the incomes and the expenses, and then the NOI at the end.

They’re also gonna want to have a list of what you plan on doing to the property after acquiring it, as well as the costs. That’s going to be your cap ex budget. A list of the interior upgrades, the estimated costs, a list of the exterior upgrades and the estimated costs, and then any contingency budgets that you’re accounting for, and anything else that you plan on raising capital for.

Then lastly, they’re gonna want to know what your business plan is. This can be a formal business plan, or you can just describe to them “Hey, I plan on buying this property, I plan on investing a million dollars into the interiors, and based on these rental costs we’ll be able to demand a premium of $150. I plan on stabilizing the property at a 95% occupancy within 24 months, and I plan on selling after 5 years at this cap rate, and here’s how much money I expect to make at sale.”

So depending on what your business plan is – let’s go back to the biography here for a second. If your business plan is to add value and then sell, then in your biography you’re going to want to provide evidence that supports your ability to execute that business plan. So if you have experience with that specific business plan, outline the experience; maybe even provide some case studies. If you don’t, that’s when you need to rely on the experience of your team members. If you have a consultant or a mentor, if you have a partner, if you have a property management company, that’s when you want to talk about them.

So that’s generally what you’re gonna need to give the lender. They might have additional items that they request, so make sure — and I believe I mentioned this during the Syndication School series where I talked about types of questions to ask the mortgage broker and the questions they’re going to ask you… Ask them what information they need from you in order to qualify you for  a loan once you actually have a deal under contract.

Now, to the conclusion of this series is — alright, so you gave me all the information about all the different loan types, the pros and cons of each, what I need to bring to the lender… But how do I know what loan to get? Which loan program is going to be a deal for you. Of course, like the majority of answers to these general questions, like “What’s the best thing for me to do?”, is it really depends.

Obviously, if you remember from parts 3 and 4 when I went through the different loan programs, they all have different requirements, they all have different terms… So you’re gonna want to go through a list of questions, so to speak, to ask yourself; based on your responses to those questions, you will eventually land on the ideal loan. We’re gonna go through that right now.

First, I wanted to mention something which is an issue that I ran into, and I’m sure others have run into as well… If you talk to a lender and they say “Hey, these are the types of deals I’m looking for. Can you give me some estimated loan terms for this value-add deal at this size?” They might say “It’ll be between 70% and 80% LTV. The interest rates right now are around 5.5%, so they’ll be somewhere around there… The loan term can be anywhere between 5 and 12 years.”

Now, when you’re underwriting a deal, before you actually have the deal under contract and you’re getting specifics from the lender, how do you determine what your debt service is going to be? I spoke with a lender and he gave me a very interesting solution to this problem. Essentially, what you wanna do – and this is after you fill out your cashflow calculator, following the steps that I outlined in a previous Syndication School episode… And if you don’t know what your interest rate is going to be, you don’t know what the LTV  is going to be, there is kind of a workaround to calculate the debt service. There’s a term “debt service coverage ratio” (DCSR), which is a ratio that is a measure of the cashflow available to pay the debt obligations. This ratio is calculated by dividing the net operating income by the total debt service.

As we learned in algebra, or maybe it was calculus, if you have a formula with three variables, as long as you know two of the variables, you can calculate the third variable. At this point in the underwriting process you have your net operating income, so you have the current net operating income based on the owner’s financials, and then you also have a debt service coverage ratio. Now, at this point you need to have an idea of what loan program you’re going to be pursuing. Fannie and Freddie? Are you going to be going for some sort of renovation loan? This is all based on your business plan, and we’ll get into that in a little bit… But once you know which loan program you’re going to pursue, then you know what their minimum debt service coverage ratio requirement is.

For example, if you’re pursuing an agency loan, then the debt service coverage ratio is 1.25. That’s the minimum. Since this is a ratio, when I’m gonna say “minimum debt service coverage ratio”, that’s actually going to be what your maximum debt service is going to be… Because as the debt service coverage ratio goes up, the debt service goes down. So again, based on the calculus, if you know the current net operating income and you have an idea of what the minimum debt service coverage ratio is going to be, you can calculate what is going to be the estimated or really the maximum amount you’re gonna have to pay for debt.

Again, if you don’t have all the terms for the loan while you’re underwriting the deal before you put it under contract, a simple way to get an idea of what your maximum debt service is going to be is to take the current net operating income and divide it by that debt service coverage ratio. That will give you an annual debt service. Divide that by 12, and that is going to be your monthly mortgage payment.

Now, this is a worst-case-scenario analysis, so if the deal doesn’t make sense at that debt service, it doesn’t mean you should automatically eliminate that, because you might be able to get a lower debt service once you’ve actually talked to a lender. So this isn’t perfect, but it’s better than just making up a number yourself, and it’s better than leaving it blank, and it’s better than just not looking at a deal at all until you know exactly what your loan terms are gonna be, because they always change.

Now, with that out of the way, let’s talk about how to select your ideal loan. The first thing that you’re going to determine is if you qualify for a non-recourse loan. That happens by having a conversation with your mortgage broker. Ask them, based on that personal financial statement that you provided, based on how you plan on raising money for this deal, based on the types of deals you’re looking at, do they believe you can qualify for non-recourse debt? Because if you can’t qualify for (let’s say) agency non-recourse debt, then you’re either going to have to pay a loan guarantor a lot more money, because they’re going to be personally liable, or you’re gonna have to find a loan that you do qualify for the non-recourse. Or you’re gonna have to figure out what you need to do in order to qualify for that agency non-recourse loan.

Let’s say you qualify for non-recourse. The next question you’re gonna ask yourself is “How long does the loan need to be?” If you’re a long-time Best Ever listener or if you’ve read the blog, or if you’ve read any of our books, you know about Joe’s three immutable laws of real estate investing – law number two is to secure debt that is longer in term than the hold period. That means if you have a five-year projected hold period, which means you’re planning on selling the property after five years, then you’re gonna want your loan to be able to be greater than five years.

Now, if you remember in the top loan program episode, some of those renovation loans, those bridge loans had a term of three years. So if you plan on holding on to the property for five years and the loan term is three years, then according to the three immutable laws of real estate investing, that alone will not work for that project.

However, you have to remember the extensions. So if you do have a five-year hold period, then you can secure a bridge loan or a renovation loan with a three-year term, and the ability to extend it by a year two times. That means that the total potential length of the loan is five years, and that does meet the three immutable laws of real estate investing… Which is actually — it needs to be equal to or greater than the project hold period. The reason is because you don’t want to be forced to refinance or forced to sell at a loss.

Once you have that question answered, that might eliminate some loans from contention. If you wanna hold on to the property for 10 years, then a loan program that has a maximum loan term of (say) seven years isn’t going to work.

Next is you’re going to want to ask yourself if you want the renovations to be included in the loan or not. The first thing that you need to ask yourself about that is what is your budget per unit. If you remember, some of the renovation loans, or some of just the regular agency loans, have a minimum or a maximum per unit cap ex cost. So if the maximum per unit is, for example, $6,500, which I believe is what it was for the 221 HUD loan, and your budget is $10,000 per unit, then that HUD loan is automatically disqualified.

You also want to keep in mind that if you do not include the renovations in the loan, then you’re gonna have to raise capital to cover the renovations. So if you have a large renovation budget and for some reason you can’t qualify for a renovation loan, it’s going to throw off the cash-on-cash return to your investors by a lot… Because rather than, for example, getting a 80% or a 75% loan to cost renovation loan, or to bring 25% down of the total project costs, instead you’re going to be stuck with, say, an 80% LTV loan. So you put down 20%, plus you have to raise an additional 10 million dollars for renovations.

Now, sometimes that might come out to be lower than the down payment for your renovation loan, but more likely than not it is going to be higher. And if the deal still makes sense by you raising money, then great. If not, then you’re gonna have to consider getting one of the renovation loans that meet all of your requirements.

Something else you’re gonna want to ask yourself is if you want a fixed rate or a floating rate. As I mentioned, the fixed rate means that the interest rate stays the same throughout the entire hold period. For the floating rate, it is typically based on the one-month LIBOR rate. We’re going to be doing a “Ask the expert” blog post on the pros and cons of the fixed interest rate versus the floating interest rate. That should be live by the time this episode releases.

But just at a high level, both are good options. One’s not absolutely bad and one’s not absolutely good, but at a high level you’re typically going to want to pick either fixed or floating based on your business plan. For deals that you plan on adding a lot of value to and drastically improving over time, then a floating interest rate might make the most sense, because it provides the most flexibility for you to sell or refinance the deal once you complete that business plan… Whereas for deals that you plan on maybe improving a little bit or not improving at all, then it is likely going to be better to have a fixed interest rate… Because it might be a little bit more difficult to refinance the fixed interest rate early on. You’re gonna be able to offset that by securing a supplemental loan to capture some of that value instead.

The reason why it’s more difficult to refinance the fixed interest rate compared to a floating rate is based on how the lenders actually create their loans. The longer-term loans like Fannie Mae and Freddie Mac, that offer the fixed interest rates, they tie their loans to Treasuries. And since these lenders have priced their loan with the expectation of that loan being in place for a long period of time, there’s going to be a higher pre-payment penalty to either sell or refinance the loan early… Which again, it doesn’t make it difficult to do, but it makes it costly to you, which I guess in turn makes it difficult… Whereas as I mentioned, the short-term lenders who offer the floating rates, tie them to them one-month LIBOR rate; since it’s tied to such a short-term security, they offer a lot more flexibility for refinancing or selling, without that large of a prepayment penalty.

Again, based on your business plan, fixed and floating rates might be better. And then if you determine that  “Okay, I plan on holding on to this property for a while, and I’m not necessarily doing a lot of improvements, so I wanna go with a fixed interest rate”, then you’re gonna find a loan program that has that long-term fixed interest rate.

Something else to keep in mind in regard to the floating interest rate – which is typically going to be lower than the fixed interest rate at the start – is that since it’s floating, you might want to consider purchasing a cap. In that case, again, it’s kind of crystal-balling here, but you wanna ask yourself, “Okay, do I think this interest rate is going to shoot through the roof? And if it does shoot through the roof, how much more will I be paying per year compared to how much money will it cost to just buy a cap of, say, a few percentage points instead?” So it’s kind of a pros versus cons, risk versus reward analysis.

Something else you wanna consider is if you want to do interest only. For interest-only — let’s say you buy  a property that is not stabilized at all, and you still want to be able to distribute some cashflow during the renovations process; then doing an interest-only loan might be your best option, because as the name implies, you’re only paying interest on the principal, rather than paying down the principal, so your debt service is going to be lower, which means your cash-on-cash return is going to be lower.

And it might even make sense if the property is stabilized, and you plan on drastically increasing the rents, and you still wanna hit that preferred return year one, get an interest-only loan for one or two years while you’re doing those renovations, so that you can distribute cashflow. Then by the time that interest-only period expires, you’ve increased the income to the point where the increase in your debt service does not eat into your cashflow.

Something else to keep in mind about the interest-only as well is that as I’ve mentioned, one of the return factors is the IRR. All things being equal, if you give me $10,000 and I give you $1,000 at the end of year one, versus $1,000 at the end of year two, the IRR in scenario number one is actually higher because of the time value of money. Similarly, with the interest-only, since your debt service is going to be lower, if you look at the difference between “Okay, so if I have an interest-only loan, it’s $10,000/month, whereas if I don’t have an interest-only loan, it’s $15,000/month”, you’re able to distribute that $5,000 earlier on in the business plan, which again, based on the time value of money, is worth more than paying down that principal, paying down that $5,000 and then distributing that $5,000 five years later, at sale.

So when you think about interest-only, you wanna think about “If I do interest-only, will I be able to distribute my preferred return to investors earlier?” and also you want to consider that time value of money.

If you decide to go with the interest-only loan, like all the other factors I’ve discussed, then you’re gonna have to pursue a loan program that offers interest-only, and the ones that do not, automatically get eliminated from contention.

You also want to consider whether or not you want an assumable loan – and I recommend listening to part three for the pros and cons of the assumable loan – essentially, it might make your deal more competitive on the back-end when you sell, if all the pros are in place. If the terms now are better than they are at sale, and if the buyer can actually qualify for that loan.

Based on all those factors I discussed, you’re gonna be able to narrow down the programs that are right for you. A really good starting approach is, again, to reach out to your mortgage broker, tell them what you plan on doing, give them background on yourself, and then ask them what they believe is the  best loan program for you, and then ask them what are a couple other loan programs that you think would be a good fit as well, and then what you can do is you can create a loan matrix. You can do that upfront, but then you’ll also wanna do that on the back-end, when the deal is under contract, and you’re going out to different mortgage brokers and lenders and sending them all that documentation, asking them to provide you with a quote. You wanna drop all those quotes into the loan matrix as well.

Then we’re also gonna be giving away another free document, which will be a loan matrix template, where essentially you input all the loan terms and it spits out your monthly debt service. You might not necessarily wanna go for the one that has the lowest debt service, because other factors need to be considered, like interest-only, fixed versus floating interest rates, are there renovations included in the loan or not, how long are the loans, is it recourse versus non-recourse? Things like that. That’ll give you a snapshot of the various loan, and you can look at those, analyze those and then move forward with the best loan for you, again, based on your specific business plan. Of course, you can download that free document at SyndicationSchool.com, or in the show notes of this episode.

That concludes this podcast, as well as the overall podcast series for how to secure financing for your apartment syndication loan. In the next episode we’re going to be talking about the second thing you should be doing during the contract to close period, which is performing your due diligence. We’re gonna take a deep dive into that process. Then, as I mentioned, the third thing you’ll be doing from this contract to close period is securing those commitments from your investors, which will be the podcast series directly after the next one about due diligence.

In the meantime, I recommend listening to parts one through three of this podcast series, as well as the other Syndication School series we have on the how-to’s of apartment syndication. Make sure you download your free loan matrix, as well as the other free documents we have available at SyndicationSchool.com.

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

JF1730: How to Secure Financing for an Apartment Syndication Deal Part 3 of 4 | Syndication School with Theo Hicks

We’ve covered the two different types of debt (recourse and non-recourse) in part one of this series. Theo talked about the two most popular forms of financing and the most popular agency debt available. Today, we’ll hear about the other loans that are available to finance your apartment syndication deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“Time from contract to close with these programs is at minimum 120 days and 6-9 months is common”

 

Free Loan Program Spreadsheet:

http://bit.ly/toploanprograms

 


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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’m your host, Theo Hicks.

As you know, each week we air two podcast episodes that are typically a  part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series, we will be offering a document, spreadsheet, some sort of resource for you to download for free, that accompanies that podcast series.

All of these free documents, as well as the free Syndication School podcast episodes can be found at SyndicationSchool.com.

This episode is going to be a continuation of last week’s series. This is going to be part three. That series is entitled “How to secure financing for  an apartment syndication deal.” Just for a refresher, if you haven’t done so already, I recommend listening to parts one and two. In part one we first discussed the two different types of debt – the recourse and the non-recourse. We described those, and the pros and cons of each.

We also discussed the loan guarantor or the key principal – the person who signs on the loan. We talked about the requirements of the loan guarantor to qualify for the loan, as well as how to compensate that person or group of people if you yourself are not able to fulfill that loan guarantor role. Then we introduced the two main categories of financing, which are the bridge loans and the permanent loans, with the bridge loan being the shorter-term loans, and the permanent loans being the set-it-and-forget-it loans.

Then in part two we began to discuss some of the top loan programs out there that apartment syndicators use on their apartment deals. The first two that we talked about – or I guess the only two we talked about – in part two was the Freddie Mac loan programs and the Fannie Mae loan programs. Those are the two agency loans; those are permanent loans, but they also offer some renovations loans as well… Technically, it could be considered a bridge loan. But if you want the characteristics of those loans, I recommend listening to part two.

We are also giving away a free document for this episode, which is going to be the Top Loans Program Matrix. It’s a spreadsheet that has the top loan programs, and it describes the loans and goes through some of the loan terms, as well as the pros and cons.

Now, in this episode, part three, we are going to finish up discussing some of the top loan programs that apartment syndicators use on their deals, and then we are also going to discuss what types of information you’re going to need to provide to the lender in order to secure financing for your deal.

Now, keep in mind thus far in the Syndication School series we’ve essentially gone in chronological order of how to complete a syndication, so at this point you should have a deal under contract. This is when you are now going to work three different things. Number one is securing the loan, number two is performing due diligence, and number three is securing commitments from your investors. This series, as I’ve mentioned, is focusing on number one, securing the loan, and then in the next two podcast series we’ll talk about due diligence, as well as how to secure the money from your investors.

Continuing with the top loan programs… Another top loan program – or common loan program – that you might come across is HUD. Those are government loans, and there are really two loans that you will secure, that we’re gonna discuss in this episode, and then we’re also gonna talk about the loans that they have for refinances, as well as the supplemental loans.

The first loan, which is the permanent loan, would be the 223(f). It’s gonna be very similar to the agency loans, except for one major difference, which is the processing time. Plus, the loan terms are actually a little bit longer.

For the 223(f) the loan term is going to be lesser of either 35 years or 75% of the remaining economic life. So if the property’s economic life is greater than 35 years, then your loan term is actually going to be 35 years, and it’ll be fully amortized over that time period. So whatever the loan term is is what the amortization rate will be.

Loan size – the minimum is going to be one million, so if you’re dealing with a smaller apartment community under the one million dollar purchase price, then this is not going to be the loan for you.

In regards to the loan-to-value (LTVs), they will lend up to 83.3% for a market rate property, and they will also lend up to 87% for affordable. That’s another distinction of the Housing and Urban Development loans, which is they are also used for affordable housing.

There’s going to be an occupancy requirement, like most of these loans. They define it as stable occupancy for six months. The assumption is that’s around 80% to 90%.

The interest rate will be fixed for this loan, and then you will have the ability to include some repair costs using this loan program. For the 223(f) loan you can include up to 15% of the value of the property in repair costs, or $6,500/unit. If you’re doing not necessarily a minor renovation, but if you’re spending about $6,500/unit – overall, so that’s not just for the interiors, but overall – then you can include those in the loan.

For the pros and cons based on what I’ve just mentioned, the pros for this loan is that they have the highest LTV. Again, you can get a loan where you don’t have to put down 20%. You can actually put down less than 20%. It also eliminates the refinance, as well as the interest rate risk, because it is a fixed rate loan, and the term can be up to 35 years in length. So you don’t have to worry about refinancing, or the interest rate going up, if something were to happen in the market.

Like most of the loans we’ve discussed, these loans are non-recourse, as well as assumable, which helps with the exit strategy.

Number four, another pro is that there’s no defined financial capability requirements, no geographic restrictions and no minimum population. So there’s no limitation on them providing you a loan for a deal if the market doesn’t have a lot of people living in it, or the income is very low, things like that.

Also, supplemental loans are available, and we’ll discuss that here, later on in the episode. Then as I mentioned, funds are available for renovations.

Now, the list of cons/drawbacks or things to think about when you’re considering a HUD loan is… Number one, as I mentioned, the longer processing times. The time from contract to close is at minimum 120 days, and 6 to 9 months is actually common… Whereas if you remember for the Fannie and Freddie debt, those processing times are between 60 and 90 days.

So these loans take a little bit longer to process. They also come with higher fees. You’ll also be required to pay mortgage insurance premiums, and they are also going to be annual operating statement audits. That is the most common HUD loan, the 223(f).

The  other one is the 221(d)(4). These are for properties that you either want to build, so these loans can be secured for development… Or if you wanted to substantially renovate an apartment building, then this would be an ideal loan for you. Similar to the 223(f) loan, these do have very long terms. The length of the loan will be however long the construction period is, plus an additional 40 years, and that is fully amortized.

Now, this isn’t for smaller deals, because the minimum loan size is going to be five million dollars. If you have a deal that you want to renovate and it’s got a one million dollar purchase price, you’re going to have to look at some other options.

Similarly, this is for market rate properties, as well as affordable properties; the same LTVs of 83.3% and 87% respectively. These loans are also assumable and non-recourse, as well as fixed interest rate, with interest-only payments during the construction period.

Now, the cap ex requirements are essentially the opposite of the 223(f). For the 223(f) it was up to 15% or up to $6,500/unit, whereas for the 221(d)(4) loan it actually needs to be greater than 15% of the property value, or greater than $6,500/unit. Again, these are for — not necessarily heavy renovations, but these are for properties that you need to invest a good amount of money into to stabilize.

Now, some of the pros and cons – again, they’re pretty similar to the 223(f) pros and cons. You’ve got that elimination of the refinance and interest rate risk because of that fixed rate and a term of up to 40 years. They’re also higher-leveraged than you traditional sources. Again, you can put down less than 20% in order to secure this loan. And they are non-recourse and assumable, which will help you on the exit.

The cons are, again, those longer processing time and closing times. There’s gonna be higher fees, and you also have those annual operating audits and inspections.

Now, HUD also offers refinance loans, as well as supplemental loans for their loan programs. Their refinance loan is called the 223(a)(7). Essentially, once you secured the either 223(f) loan or you secured a 221(d)(4) loan, you’re able to secure this refinance loan. So it has to be one of those two; it can’t be going from a private bridge loan to this refinance loan. That’s now how it works.

So the loan term for the refinance loan is up to 12 years beyond the remaining term, but not to exceed the term. That means if your initial term was 40 years and you refinanced at 30 years, then this refinance loan will only be ten years, because it can’t be greater than 40 years. For the loan size, it’s either the lesser of the original principal amount from your first loan, or a debt service coverage ratio of 1.11, or 100% of the eligible transaction costs.

These loans are also fully amortized, and the occupancy requirements are going to be the same as the existing terms for the previous loan. These are also going to be assumable and non-recourse, with that fixed interest rate.

Now, they also have the supplemental loan program available, which is the 241(a). Again, these are if you already have a HUD loan, so that 221(d)(4) or that 223(f). I wanted to take a step back and talk about what a supplemental loan is… First, let me discuss the actual terms of this loan, and then we’re gonna discuss overall what a supplemental loan is and how you actually secure a supplemental loan.

The loan term is coterminous with the first loan. Whenever you acquire it, it’s just going to be the length of the remaining loan, so you’re essentially just adding a  million dollars to five million dollars to your existing loan.

The loan size can be up to 90% of the cost of the property, so essentially a 90% LTV. So you need to have at least 10% of equity in the property at all times. It’s gonna be fully-amortized, again… They’re also gonna base the loan size on a debt-service-coverage ratio, so it needs to be 1.45. Again, that’s the ratio of the net operating income to the debt service. And then the minimum occupancy requirements are going to be the same as whatever the terms are for the existing loan. Like all the loans, they’re assumable, they are non-recourse, and the interest rate is fixed.

Now, what is a supplemental loan? If you don’t know what that is – it is a multifamily loan that is subordinate to the senior indebtedness. So that means that it is positioned behind the original loan. Typically, the supplemental loan can be secured after 12 months from the origination of the original loan, or sometimes you can get multiple supplemental loans. If that’s the case, then it must be 12 months after the origination of the first or the most recent supplemental loan.

A supplemental loan is not the same as a refinance, because for refinance you’re getting a brand new loan, whereas for a supplemental loan you’re effectively getting just a second loan in addition to your existing loan.

The benefits of getting a supplemental loan compared to simply refinancing is there’s going to be a lower cost associated with it. Going through the process of getting a brand new loan is more costly than the cost of going through the process of securing a supplemental loan. There’s also the certainty of execution. You might not necessarily know if you’re gonna be able to actually secure the refinance once you actually buy the property, because you don’t necessarily know what the market is gonna be like, whereas you’re gonna know upfront when you can secure a supplemental loan, and how much you’re gonna be able to get with a supplemental loan.

Then the processing time is a lot faster, because again, you’re not going through the process of being qualified by a new lender or the same lender for a new loan.

Generally, I guess this is a requirement – the supplemental loan must be secured from the same debt provider as the original loan. So if the original loan was Fannie Mae, the supplemental loan comes from Fannie Mae. Same with Freddie Mac, same with HUD.

I believe in the first two episodes — I believe in the previous episode we discussed the top loan programs. When I discussed the top loan programs and we talked about Fannie and Freddie Mac, I believe I discussed the terms of the supplemental loans.

Now, how do you actually secure a supplemental loan? I know we’re kind of getting ahead of ourselves, because at this point we just have a deal under contract, and you’re not necessarily securing a supplemental loan until after the deal is purchased… But essentially, you’re able to request the supplemental loan any time after your original loan has been seasoned for 12 months. So 12 months and one day is when you’re able to secure that first supplemental loan. And in order to do so, you reach out to your mortgage broker or the lender, whoever provided that original loan, and ask them what they need from you in order to underwrite and size out a supplemental loan.

Typically, they’re gonna want a trailing 12 months operating statement (T12), they’re gonna want the year-end operating statement of the most recent full year, they’re gonna want a current rent roll, and they’re gonna want a list of the capital expenditures that you invested into the property since acquisition.

At that point, they are going to perform an appraisal, as well as what they call a physical needs assessment, which is essentially a property condition assessment, which – you don’t know what that is yet, because we haven’t talked about that yet, but essentially it’s an in-depth inspection of the property, with recommendations for what you need to do, as well as the costs. That’s what they use in order to determine the size of the supplemental loan.

You’re also gonna want to ask your broker or your lender upfront how many supplemental loans you’re able to actually get, and then how long you need to wait between those two loans. For some deals you can just get one supplemental loan, others you can get two, others you can get more than two. So that’s essentially all you need to know about the supplemental loan.

Something else I wanted to go over as well, because I kept mentioning assumable loan… I just wanted to discuss what that means, as well as the pros and cons of the assumable loan.

An assumable loan – I guess it’s kind of self-explanatory, but if you’re buying a property and the loan is assumable, that means that you can just take over the loan at those existing terms. And if you’re selling the property, then a buyer can take over the property with the same loan, at the existing terms.

Again, for most things there’s not really any absolute pros and cons, or benefits and drawbacks; it really is based on the buyer’s financials, their experience, the terms of the existing loan, the type of the existing loan, the market conditions, the person’s business plan… So there’s a lot that goes into it, but just  high level, these are some of the potential pros and cons of assuming a loan.

Some pros – obviously, time-saving. An assumable loan can be approved in as little as 30 days, maybe even sooner, whereas some of these loans can take up to 9 months (HUD loans) to finish and be secured.

Next is money savings. Since the loan process for the assumable loan is shorter and requires less documentation, the costs are also going to be lower. There’s the opportunity for better terms, because if you’re buying a property and the current terms in the property are better than the market terms, then your debt service is going to be lower, and therefore your cash-on-cash return is going to be higher.

Maybe there’s a lower interest rate, maybe it’s a fixed interest rate, whereas you can only qualify for a floating interest rate… Maybe the term is longer than you can qualify for, maybe it’s non-recourse and you can only qualify for recourse… There’s lots of different ways that the terms can be better. We’ll talk about the opposite side of that in the potential cons.

Next, it could be a lower down payment. When a buyer assumes the loan, the down payment is equal to the difference between the amount owned in debt and the sales price, so essentially the equity. So if the owner doesn’t have a lot of equity in the deal, the down payment may be lower than the down payment of a new loan.

And then five, you can just make the deal more attractive. If you yourself are selling your property and you have an assumable loan, because of those potential pros that I just went over, your deal might be more attractive to other people… Whereas if they had to secure a brand new loan and the interest rates are really high, then they might not be able to buy your property at the price that you want.

Now, for the potential cons — and in reality, the reason why I call these “potential” is because all of those pros can be cons as well. The approval process might actually be longer if the current loan is overly complicated. So it could take longer to secure this assumable loan than it would be to get a brand new loan.

Also, there’s another potential con – you’re only dealing with one lender. The buyer – either you, or a buyer of your property – who’s assuming  the loan is really forced to work with that one lender that holds the debt, so that could be a potential con.

The pro could be a lower down payment, but it could also be  a higher down payment if the owner has a lot of equity in the deal. There could also be worse terms, if the market was worse when the current owner or you secured the loan, than it is in the current time.

And then lastly, you might not even qualify for the assumption, or the buyer might not qualify for the assumption. Lenders have pretty broad discretion when qualifying a buyer for an assumable loan. For example, they are gonna want the buyer’s financials and experience to be similar to those of the owner. If that’s not the case, if the owner is very experienced and the buyer isn’t, then they might not be able to qualify for that loan assumption.

Overall, because of these potential cons, make sure that if you’re a buyer and you are under contract with the financing being the assumable loan, make sure you have a financing contingency in place in your contract, as well as a few lenders on back-up just in case you don’t qualify for that assumption.

I should have covered the assumable loan, as well as the supplemental loan in the last episode, but I covered them now, so we got that out of the way and you know generally how to approach supplemental as well as assumable loans.

Now, the last three top loan programs I wanted to discuss quickly are the CMBS (commercial mortgage-backed securities), the traditional bank loans, as well as loans from life insurance companies.

For the CMBS loans – these are essentially for loans that don’t fit into that agency box, that Fannie or Freddie box, or that require maybe faster closing times, or maybe you don’t wanna have a lot of red tape, or things that are more focused on the property income than the borrower, or the current condition of the property, then the CMBS financing might be the ideal loan for you.

Loan terms are 5, 7 or 10 years. Loan sizes are a minimum of 3 million dollars. The pros and the cons of the CMBS loan… Pros – it’s non-recourse. There are attractive fixed rates for the relatively longer-term loans. The loan size – there’s a wide range of loan sizes, so there’s no maximum loan size. And then you also have the ability to do a cash-out refinance with the CMBS loan.

The cons – there’s less autonomy in the operation of the property, and limited flexibility to deviate from the terms of the loan documents. These loans have lots of structural requirements for what you do with the property than other loans. There’s also difficulty in releasing collateral. They are expensive to exit (high pre-payment penalty), and taxes, insurance, replacement reserves and leasing costs reserves are required for those loans.

Next is the traditional bank loan, like getting a loan from PNC for your property. If you wanna know the loan terms for those, check out that top loan program document. The pros will be that they will do smaller loan amounts. The minimum for this is 2 million dollars, and there really is no ceiling. They can finance distressed assets, so again, more flexibility on the entrance, and the closing time is faster than that of agency debt.

The cons – occasionally more rigid down payments, income verification and credit score requirements. The max LTV for a traditional bank is 75%. Sometimes the loans are going to be recourse, so they’re not necessarily going to always be non-recourse. The amortization period may be shorter, and the fixed interest rate times might be shorter than CMBS, than agency loans. They’re also stricter with cash-out refinances. For traditional banks, it can really be all over the place. It really just depends on the bank.

And then lastly, our life companies. Life companies offer an interesting alternative to Fannie and Freddie Mac financing. They have longer loan term options, and as they say, “exceptionally competitive rates.” Loan terms are 10 to 25 years or longer than agency. Loan size is a  minimum of two million dollars.

Some of the other pros for the life company loans – they will consider loan modifications or special requests during the loan term. So you can kind of go back and negotiate the terms of your loan throughout your hold period, rather than being something that doesn’t change from day one. And then they’re also non-recourse.

The cons – they tend to be less aggressive on max dollar deals. These are better for relatively smaller deals. They tend to focus on just higher asset classes, so not necessarily good for C or D class properties… And they’re less likely to do cash-out refinances.

That’s the conclusion of the top loan programs. As I mentioned, you can download that free top loan program document and you can review all of the pros and cons, as well as the terms that I discussed in part three, this episode, as well as part two, the previous episode.

Now, we’re gonna stop there for today. I know I said at the beginning of this episode that we were going to talk about the documents and information you need to provide to the lender in order to qualify for your loan. We are going to discuss that in the beginning of tomorrow’s episode, as well as also talk about how to select your ideal loan based off of our discussions in parts one through three.

In the meantime, I recommend listening to some of the other Syndication School series, where we focus on the how-to’s of apartment syndications. Make sure you download that free Top Loan Programs document at SyndicationSchool.com. Or for the Top Loan Programs document – you can also download that in the show notes of this podcast episode.

Until next time, thank you for listening, and I will talk to you tomorrow.

JF1724: How to Secure Financing for an Apartment Syndication Deal Part 2 of 4 | Syndication School with Theo Hicks

Time to get back into financing for apartment syndication deals. Today Theo will be discussing the top agency loans available. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“There is a required occupancy of at least 90%”

 

Free Loan Program Spreadsheet:

http://bit.ly/toploanprograms

 


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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes, every Wednesday and Thursday, that are typically a part of a larger podcast series that focus on a specific aspect of the apartment syndication investment strategy… And for the majority of the series we will be offering a document/spreadsheet/some sort of resource for you to download for free. All of the free documents, as well as the past Syndication School series can be found at SyndicationSchool.com.

This episode is a continuation of yesterday’s episode. This will be part two of the series entitled “How to secure financing for an apartment syndication deal.” If you haven’t so already, I recommend listening to part one, where we discussed the two main types of debt – the recourse and the non-recourse debt. We talked about the loan guarantor or the key principle, who is either going to be your or someone else that meets the lender’s requirements to qualify for the loan… And then we started to talk about the two main categories of financing, which were the agency permanent loans and the bridge loans.

As I mentioned in that episode, that was a general overview. In this episode I want to get into more specifics and talk about some of the most common and most popular loan programs that are offered by some of the most popular and common debt providers used by value-add apartment investors… Which if you don’t know already, a value-add apartment investor is someone who is going to find a deal that is distressed in some minor way – all the main mechanicals are either fine, or only a few of them need changing; maybe you need to restripe a parking lot, maybe you need to replace a few roofs, but nothing insane, nothing major. The property is already stabilized, the occupancy is at least 85%, but the rents are low, or the units are outdated, or the management isn’t as good as it should be and the value-add investor will go in there and add value by fixing those things and increasing the rent.

So these main loan programs that I’m gonna talk about today are going to be the agency debt, which is going to be the Fannie Mae and Freddie Mac; also the government program which is HUD, and then I’m gonna talk about a few other types of loans you can secure – CMBS, traditional banks, or life companies.

This is actually going to be a free document. It’s going to be essentially a matrix that goes over all the characteristics of these loan programs. Description of the loan, term, size etc. But I wanted to go over these on the podcast as well, just for those of you who just listen and don’t wanna download the document, so that you’re gonna have at least a basic understanding and a familiarity of different types of loans, so that when you’re actually reaching out to your lenders — first of all, you can start to think about “Okay, I wanna be a value-add investor. Here’s my business plan. Okay, so these are the types of loans I can potentially pursue, and based on those loans, here’s how much money I’m gonna have to put down, and here’s how much money I’m gonna pay on an ongoing basis, and here are some of the other risks of that loan.” And so that once you are talking to your mortgage broker, when you’re talking to your investors and they ask you questions about the loan, you know what you’re talking about.

The spreadsheet is not gonna be completely exhaustive. I did not include every single loan program that there is. There’s actually a really good website out there that goes over essentially every single loan that there is. Just google “multifamily loans”. The website is literally www.multifamily.loans. If you want to find all of the loans that are out there or learn more on these particular loans, I recommend going to that website.

Now, the first category of loans I mention are those agency loans – Fannie Mae and Freddie Mac. We’ll start with Fannie Mae. Fannie Mae – they have the top four loans, and I’m not gonna go over all the different characteristics; I’m just gonna go over the description, and then we’ll kind of talk about the pros and the cons of these loans.

The first one is gonna be the Fannie Mae Small Loan program. What’s nice about this one is that for their main loan program, their DUS program – which we’ll go over in a second – the loan size minimum is going to be 3 million dollars. So before this Small Loan program, unless you found a deal that was above 3 million dollars, then you couldn’t pursue a Fannie Mae loan. So they created this small loan program, which has a loan size as low as $750,000, which means that people that are buying these smaller multifamilies can still use Fannie Mae. Also, the application process is very streamlined, so there’s a lot less paperwork and a lot less fees associated with it… But overall, for the description – it’s just a loan that has a minimum size of $750,000, and the process of securing that loan is a lot more simple and a lot less expensive compared to their other programs.

For the actual pros for this loan program – you’re gonna be facing competitive interest rates, which I feel like all of these say “Competitive interest rates.” Some of them say “Very competitive interest rates.” Maybe those are the ones that are the best… But most of them just say “Competitive interest rates.”

You’ve got a loan-to-value of up to 80%. Again, the process is very streamlined. The capital improvements can be included in the loan; it is possible. The debt is going to be non-recourse, as well as assumable. Supplemental loans are gonna be available after 12 months, and there’s no processing fees.

The cons – these aren’t necessarily cons. Maybe some drawbacks, or extra-requirements for this loan. One, you’re going to have to have replacement reserves that are equal to $250/unit, which if  you remember, during the underwriting podcast series, we were already taking that into account, so that’s not that big of a con.

Something else that’s pretty important is that there’s a required occupancy of at least 90% for 12 months before closing. That’s gonna be physical occupancy. So if you’re buying a 100-unit property, then over the previous 12 months the average physical occupancy needs to be 90 units occupied.

There’s gonna be a $10,000 application deposit required, and the lender fees are gonna be anywhere between $4,500 and $13,000. That’s that first Fannie Mae program, the Small program.

The next one is gonna be the DUS, or the Delegated Underwriting Service loan. This is one of the most popular loans for multifamily investors that use Fannie Mae, or really in the industry in general. The difference between the Small and the DUS is going to be that minimum, as well as the application process. The minimum for the DUS is gonna be higher, and the process is a little bit more in-depth than for the small. But other than that, the majority of the loan terms – debt service coverage ratio, LTVs – are all the same.

I’ll just go over the pros really quickly… Competitive interest rates (same as Small). Up to 80% LTV (same as Small). Non-recourse and assumable (same as Small). Supplemental loan available after 12 months, but for this one there is interest-only available. It is available for the other one as well, but that’s kind of a selling point for the very popular DUS  Fannie Mae loan.

The drawbacks of this loan are gonna be you’re still gonna need replacement reserves. The occupancy rate requirements are a little bit better for this loan program. The requirements are an 85% physical occupancy and an 80% economic occupancy, 90 days before closing. Then the application deposit is gonna be $20,000, and unlike the Small, there is a processing fee of 3k for this one.

Then something else that’s interesting is that if you’re gonna be an absentee owner of the property, then in order to qualify for this loan program you need to hire a third-party property management company, and you’re gonna need to have a strong track record… Whereas for local owners, this [unintelligible [00:09:33].23] doesn’t apply. I thought that was pretty interesting.

Now, Fannie Mae does offer a rehab loan. It’s called a Moderate Rehabilitation Loan. They say if you currently own or want to purchase, this is something that could be secured when you already have a deal and you want to do some renovations.

This essentially allows you to include a minimum of $10,000 per unit in the loan. These are for — not heavy renovations, but not just a few cosmetic updates. These are things where maybe you’re redoing the entire kitchen, redoing the entire bathroom, doing new floors, things like that. The loan size is going to be a minimum of 10 million dollars, so this doesn’t work for smaller deals. If you’ve got a million dollar property you’re not gonna be able to do this moderate rehabilitation loan. It allows you to loan up to 80% of the stabilized value. That’s not necessarily an LTV or an LTC, it’s just based on the ARV, in a sense.

So the pros for this one, besides obviously the renovation costs being included in the loan, $10,000 premium or higher, there’s gonna be also competitive interest rates; it is still non-recourse and assumable. Typically when you do these types of rehab loans, you’re gonna have a floating interest rate, whereas for this there’s a possibility of having a fixed rate and there’s also a possibility of interest-only.

Some of the cons or drawbacks or extra things to think about – there’s the $25,000 application fee. Expect to pay anywhere between $15,000 and $20,000 in the legal fees, and then if you are doing $20,000 or more per unit renovations, then there’s something called a Rehabilitation Work Evaluation Report that you’ll be required to fill out, or have filled out and it’ll probably require inspections… And then you’re also gonna provide them with a scope of work before you qualify for the loan.

The fourth loan that I wanted to talk about is called the Near Stabilization Execution Loan. This is when maybe you secured a bridge loan, or maybe you developed a property, or recently renovated a property, and the property is expected to achieve stabilized occupancy within 120 days. That’s above 85%-90%. Then you can secure this Near Stabilization loan. Essentially – and I mentioned this in the last podcast episode, in part one – this is what you would get after your bridge loan has expired. Let’s say you put your three-year bridge loan on the property, then this is the type of loan that you wanna secure after you’ve stabilized the property.

But again, some of the important loan terms to think about – there is a 10 million dollar minimum, so it’s not gonna work on those smaller properties… But everything else is gonna be very similar to their DUS Loan program. So from a pros and cons perspective… Pros – that competitive interest rate comes back again; they’re gonna be non-recourse and assumable. You still have that ability for the supplemental loan after 12 months. A pretty big difference is the occupancy requirement. The requirement is 75% physical and 60% economic occupancy over the past 12 months. Again, this is a loan that you can secure before the property is even stabilized, so it’s eligible for properties that are partially leased, that are recently built or newly-renovated.

And then some of the cons, and drawbacks, and other things to think about – there is a $12,500 application deposit required, as well as a $3,000 processing fee. Then there’s a 1% origination fee for the loan. Those are the top Fannie Mae types of loans.

The other agency is Freddie Mac. For Freddie Mac there are going to be five loans that I wanna talk about. As you’re listening to this, you’ll realize that the loan programs are fairly  similar to the loan programs offered by Fannie Mae, with slightly different terms, but it’s nothing too different.

The first one – Fannie Mae has their Small Loan, Freddie Mac has their Small Balance loan. The Small Balance loan is going to have a minimum of $750,000. Remember, for Fannie Mae, their small balance loan had the exact same minimum… But for the Freddie Mac Small Balance loan, the maximum is actually gonna be a little bit higher. Their maximum is 7.5 million, compared to the 5 million for Fannie Mae.

Similar to the Fannie Mae loan, this is gonna be a streamlined loan. There are substantially compressed costs and rates for this loan program.

The pros and cons for the Small Balanced Loan… Pros – LTV up to 80%. Again, you’re gonna have that streamlined application process, it’s gonna cost you less money and take less time. The loan is gonna be assumable as well as non-recourse, and there is that interest-only available. Again, if you download the free document (it’s called Top Loan Programs), you’ll see exactly how they determine the interest rates for all the loans that I’m discussing.

And then the cons, the drawbacks, some things to think about – there are replacement reserve requirements for this loan, between $200 and $300 per unit. Expect to pay a $7,000  application fee, as well as  a processing fee equal to approximately 0.1% of the loan amount. You are required to obtain a variety of third-party reports during the due diligence process, that need to be signed off on by the lender. Then there’s going to be a net worth requirement, so a net worth equal to the loan amount, as well as a liquidity requirement, with a liquidity equal to nine months of debt service, as well as an experience requirement, which they state as effectively having one year’s worth of experience with a similar size sized deal. So that’s the Small Balance loan.

Their standard loan is called the Fixed Rate Conventional loan. This is going to be their most popular loan program. For this one, you’ve got a loan size between 5 million dollars and 100 million dollars. But besides that, pretty standard loan terms. I’ll go into the pros and cons.

The pros – you’ve got competitive interest rates, LTV up to 80%, non-recourse, unassumable; supplemental loans are available after 12 months. You’re actually able to secure this loan not only for apartments, but also for mixed-use properties as well. And then the closing process is under 60 days, so it’s a pretty quick process.

The cons, things to think about, some drawbacks – there are, again, going to be replacement reserves required, as well as third-party reports, and then from a cost perspective there’s a $2,000 application fee, or 1% of the loan amount plus $15,000, so at least $17,000 for the application fee. And then there’s also gonna be a loan origination fee, and then also legal fees between $8,000 and $12,000.

Now, the mirror image of the fixed rate conventional loan is going to be the floating rate. So really the only difference between the fixed rate and the floating rate is going to be the interest rate. So for the fixed rate conventional, there’s a fixed interest rate. For the floating rate, there’s a floating interest rate, and the floating interest rate is based on the one-month LIBOR index.

The pros and cons for this are essentially the exact same, except a potential con for the floating rate is that the interest rate is not going to be locked in; it could go up and down based on, again, that one-month LIBOR rate/index.

And the last two loans are going to be [unintelligible [00:16:55].01] two value-add type loans. The first one is called the moderate rehab loan, and the second one is called the value-add loan. For the moderate rehab loan they will fund up to 80% of the renovations, and they will fund between $25,000 and $60,000 per unit. That includes interiors and exteriors. So you need to spend at least $7,500/unit for the interiors for this loan program. The debt service coverage ration must not go below 1, and the projects need to be completed within three years, so 36 months… Whereas for the value-add loan, this is a property that is high-quality and requires only moderate renovations; unlike the moderate rehabilitation loan, which it’s interesting that it’s called moderate, because it is their actual top rehab loan that they have… Because for the value-add loan you are only able to get $10,000 to $25,000 per unit, and you must spend half of that money on the interiors.

The maximum number of units is 500 units, so if you have a 501-unit property, you can’t get this loan… And the renovations must start within 90 days, and must be completed within 33 months. So a total of three years.

For the moderate rehab loan, some of the pros and cons… The pros – they’ll fund up to 80% of the renovations; there are gonna be competitive interest rates again, with interest-only payments during renovations, and it’s also gonna be non-recourse.

Some of the cons, drawbacks, things to think about… There is additional documentation that’s going to be required, since you are doing those renovations, and the borrower should be well-funded and experienced in the successful completion of some other renovation projects.

And then lastly, monitoring is going to be required. You’re going to have to send quarterly progress reports and inspections, as well as the rent roll operating statements on a quarterly basis. For the value-add, you are able to secure up to 85% LTV.

Something else that’s nice for a pro is that the budget can be increased by up to 20% without approval. So if your initial budget is a million dollars, then you can do 1.2 million dollars in renovations without having to get additional approval. You’re also able to spend up to 50% of funds on the exteriors. So at least 50% needs to be spent on the interiors.

The loan can also be extended for one year, with a 0.5% extension fee, and another year at the lender’s discretion for a 1% fee. Typically, the value-add loan term is three years, but you can pay for up to two one-year extensions.

In regards to the drawbacks of this loan, your underwriting needs to support a 1.3 debt service coverage ratio, and a 75% LTV based on the stabilized value. That’s essentially the end of year three. Debt service coverage ratio and LTV need to be 1.3 and 75% respectively. The engineering review is required at the loan maturity, so at the end of that 36 months. Then there’s gonna be an engineering review. There’s also replacement reserves required. The loan is not assumable, and there is a $2,000 or 0.1% of the loan amount required as a fee.

Now, I think I’m gonna stop there for today. I think this is a good stopping point, because we were able to cover both of those agency loans, the Fannie Mae loan and the Freddie Mac loan. In the beginning of next week’s episode I’m gonna finish up talking about these loan programs. That is going to be the HUD loan – the HUD loan actually has four different programs, and as you will see, their loan programs are going to be relatively similar to the Fannie Mae and Freddie Mac, with one pretty big difference. We’ll talk about that on the next episode. And then also there’s a few other ones, not necessarily one-off, but — not super-common, but they’re out there, they exist, and you might hear these terms out there when people are discussing debt and loans.

That concludes this episode. I recommend listening to part one, which was posted yesterday, or if you’re listening to this in the future, the podcast episode directly before this one. I also recommend listening to the other Syndication School series about the how-to’s of apartment syndications, as well as to download the free Top Loan Programs document. All of these can be found at SyndicationSchool.com.

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

JF1723: How to Secure Financing for an Apartment Syndication Deal Part 1 of 4 | Syndication School with Theo Hicks

Another week, another syndication school series. This week, Theo is discussing financing for your apartment syndication deals. He’ll be covering all the different options, recourse vs. non recourse, and discussing a loan guarantor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Different loan officers specialize in different loan types”

 

Free Loan Program Spreadsheet:

http://bit.ly/toploanprograms

 


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

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


TRANSCRIPTION

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

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

 

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

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

This episode is going to be part one of a new series entitled “How to secure financing for an apartment deal.” In this episode we’re going to focus on more of the educational background of apartment financing, just to kind of give you an idea of the different types of debt that are available, the different types of financing that are available, and then we’re also going to talk about the loan guarantor as well.

In part two, tomorrow’s episode, we’re going to actually go over some of the most common, popular actual loan programs that apartment syndicators will pursue. Then later on in the series, next week, we’re going to go over how you can determine what is going to be the ideal loan for you, based off of your deal, your background, your business plan, and things like that. I want to set the foundation first, and do an overview of all the different types of debt that you might come across, so that you have a basic understanding of what’s available to you.

At this point in the process you should have already completed the majority of the steps. You should have your apartment syndication education down, you should have your team, and you should have already talked to a mortgage broker, at this point. If you remember when we discussed creating your team, one of the team members — again, they’re not gonna be on your payroll, but one of the people that you’re going to need to work with is a mortgage broker or a lender.

Now, we had a conversation about that, about finding a mortgage broker — I mostly focus on how to find them and what types of things that they’re going to ask you, and how you can respond to those questions in order to win them over… But I didn’t necessarily go into the actual types of debt.

Usually, when you’re initially having that conversation, a good question to ask would be what types of loan programs they specialize in. For example, some mortgage brokers might focus only on agency debt, while others might include agency debt, but they specialize in renovation type loans, or rehab type loans. Or maybe find someone who specializes in HUD loans, or loans from insurance companies.

So that’s definitely gonna be a question that you’re gonna ask, and by the end of the series you’ll know why… Because different loan programs are ideal for different business plans. If your business plan is to buy highly distressed apartments, renovate them and increase the value that way, then you’re going to want a certain type of loan that probably includes some of the renovation costs, so that you don’t have to raise all that extra capital, and that’ll eat into your cash-on-cash return.

So if you are working with a mortgage broker and you decide to do the highly-distressed business plan, but you didn’t ask about the types of loan programs they offered, and when you finally find a deal and send it to them, they say “Oh, we only do agency debt, so here’s the long-terms I can give you for that…, but you’re gonna have to raise 50% of the project costs, because we only finance the purchase price and not the actual renovations.” Or they might not be able to give you a loan at all, because for agency debt the property needs to meet certain requirements.

There’s a lot that goes into it, so let’s just jump right into the first part that I wanted to discuss, which is going to be the two different types of debt. That’s the word that I’m using, but essentially it’s going to be the recourse debt and the non-recourse debt.

According to the IRS, with recourse debt, the borrower is personally liable, while all other debt is considered non-recourse. In other words, if you are securing a recourse loan, then the lender is allowed to collect what is owed for that debt even after they’ve taken the collateral. In this case, that’d be the apartment building.

Let’s say you owe the bank 5 million dollars, but the property is only worth three million dollars,  so they foreclose on you, they take the property, they get the three million, and you still owe them two million dollars. If it’s a recourse loan, then they’re able to actually come after you personally for that two million dollars. So they technically have the right to garnish your wages, or to levy accounts in order to collect what is owed to them.

On the other hand, there is the non-recourse debt, and that means that the lender cannot pursue anything that the actual collateral. In the example if you owe five million dollars and the property is worth three million dollars, then they can take that property from you but they can’t come after you for the two million dollars. The only exception to that is what are called carve-outs. The common term is “bad boy carve-outs”, and that means that if one of these carve-outs are triggered, then they are allowed to collect and pursue what is owed to them above and beyond the collateral.

The two most common carve-outs are going to be gross negligence or fraud. So if you are unable to pay them the full amount on a non-recourse loan, and the reasoning is because of gross negligence on your part or fraud on your part, or your business partner’s, then the lender is able to go after that extra (in our example) two million dollars.

Obviously, after learning about those two, one could easily come to the conclusion that non-recourse debt is going to be preferable to recourse debt. Then on the other hand these lenders might prefer the other way around; they might actually prefer the recourse debt, because they can always collect what is owed to them… But there are also — not necessarily drawbacks, but there’s also extra things that come with the non-recourse debt.

For example, you might have a higher interest rate for a non-recourse loan compared to the same recourse loan. Something like this could be more relevant to people that are just starting out – you might not be able to actually qualify for the non-recourse. You’ll take a look at some loans, and they will say “Non-recourse available.” That doesn’t mean that the loan is going to automatically be non-recourse; they’re going to take a look at you, your background, your team, your financial history, your credit history, and determine if they are willing to give  you that non-recourse loan versus the recourse loan. Now, that is where the loan guarantor comes in handy.

Before we move on to the next section of this episode, which is to talk about the main two categories of the actual financing, I wanted to quickly talk about the loan guarantor. Whenever you’re securing a loan for a multifamily deal, someone is going to have to guarantee that loan. That can be a person, that can be an LLC, but someone is gonna have to actually sign on the loan and guarantee that loan… And this person is going to be referred to as the loan guarantor. That’s what I call them, or what we call them, but sometimes they might be referred to as a sponsor or a key principal. These words are kind of interchangeables. A sponsor kind of covers the entire GP sometimes… But typically if you’re a loan guarantor or key principle, or the person essentially guaranteeing the loan.

Again, if you’re first starting out, you’re likely not going to meet  the lender requirements to qualify for the loan… Whether it be qualifying for the loan in general, or qualifying for the non-recourse type of loan. Obviously, one option is to either find a limit you do qualify for, or just accept that recourse… But the third option is to find a high net worth individual if you personally can’t qualify and your partner can’t qualify; find a high net worth individual to become that loan guarantor, sign on the loan, and once they do that, then you will actually qualify for the loan, or qualify for that non-recourse loan.

I’ve already gone over the differences between those two, recourse and non-recourse, but the loan guarantor – the characteristics of this person – they should have some experience in multifamily real estate; even better, they should have previous experience with the specific type of deal and business plan you’re planning on implementing. So if you plan on doing the value-add business plan, then ideally the loan guarantor is someone who has executed value-add business plans… And they’re also  going to have to have some financial requirements. So there’s experience requirements, and then financial requirements that you’ll need in order to qualify for the loan.

Again, ideally, if you don’t have either one of these, you’ll wanna find one person that can cover both of these… But there’s no reason why you can’t find one person who’s really experienced, but can’t help you qualify for the loan on the financial end, and then have someone that doesn’t have experience, but does have the bank statement and net worth to support the lender requirements.

Now, these financial requirements are typically going to be liquidity, net worth and credit requirements, but they’re gonna vary from deal to deal, from lender to lender… But there are some general requirements to keep in mind, again, when you’re searching for this loan guarantor. These are the requirements set forth by Freddie Mac, who’s one of the agency lenders.

If you’re pursuing a loan from Freddie Mac, then you or someone is going to have to have a minimum net worth that is equal to the mortgage amount. If you’re buying a property for a million dollars and it’s an 80% LTV loan, which means that you’re getting a loan of $800,000, then you’re gonna need someone (or a combination of people) that has a total net worth of $800,000. And also a liquidity requirement; for Freddie Mac, this is going to be a minimum of liquidity equal to nine months of debt service. If your mortgage payment is $10,000 a month, then the person is gonna have to have liquidity of $90,000 to equal that nine months of debt service.

Then they also have a credit score requirement. For the credit score it’s gong to be a FICO score of 650 or better with at least two of the national credit bureaus, or an average FICO score of 650 or better with all three of the national credit bureaus.

And then lastly, this person is gonna have to be a U.S. citizen.

Again, as I mentioned, this can be one person, this can be multiple people, but together you’re gonna have to have people on the GP that are signing on the loan that meet the net worth, meet the liquidity, meet that citizenship, meet that credit and meet that experience requirement.

The financial requirements are more specific, the experience once are a little bit more vague, and you’re gonna have to essentially explain to the lender or the mortgage broker your experience and the other loan guarantors’ experience, and they’ll tell you “Okay, you qualify” or “Okay, you don’t qualify. You need more experience.”

But generally, from my understanding, they want someone signing the loan that has previous experience with a similar size deal, following a similar business plan.

Now, of course, if you’re going to ask someone to sign on the loan for you, you’re going to have to compensate them in some way. Like most compensations, it’s gonna vary based on the loan type, the deal, your relationship with this person. But in general, in terms of the recourse loan – that’s the one that they are personally guaranteeing, and if for some reason you owe more than the collateral, then they can come after that person for that additional money. Since that’s going to be riskier relative to the non-recourse loan, then you’re gonna have to compensate the loan guarantor more if you’re obtaining a recourse loan, compared to a non-recourse loan.

Now, the two main ways you’re gonna compensate this loan guarantor  – or the two main ways you CAN compensate them – is going to be either an annual fee and/or a percentage of the general partnership.

For the annual fee, if it’s a non-recourse loan – and again, these are general numbers… For a non-recourse loan, a fee of 0.25% that’s paid out annually could be acceptable. Or it could be more of an upfront fee, where they get 1% of the loan at closing. Or they can receive a piece of equity. They could get 15% of the general partnership for signing on the loan.

Now, again, if it’s non-recourse, maybe 10% of the equity. But if it’s recourse, then you might have to give up 30% of the equity. It’s flexible, it’s negotiable; it really depends on, again, the variables like who your team is, your relationship with this person, the business plan, the loan type, and everything like that.

Now, how you actually find this individual – again, it’s really going to vary. If you’re gonna go the route of having one loan guarantor, then you’re likely going to need to find an apartment syndicator who has been doing this for a while, that meets that experience requirement, obviously, but also meets the liquidity and net worth requirements. So that’s one option.

Another option is to have a combination of those two things. Maybe you personally have done some deals before in the past, or you’ve got a business partner who has done some deals in the past, but together you’re maybe trying to do a really big deal together, and your liquidity and net worths aren’t enough; then you can maybe have one of your passive investors, or a family or friend who’s passively-investing in your deal be the loan guarantor.

Essentially, you need to find someone who a) has the experience, b) has the liquidity, and c) has that net worth. Again, either a combination of people, or one specific individual.

Now that we’ve talked about the loan guarantor, the last thing I wanted to talk about briefly were the two different types of actual financing. What I mean – these are two main categories of loans that you’re going to be able to secure when you’re looking at apartments, and that is going to be the permanent agency loans and the bridge loan. A permanent agency loan is going to be a loan that is secured from either Fannie Mae or Freddie Mac. This is gonna be anything that’s a longer or a less expensive, more expensive, relative to the other category, which is the bridge loan. These agency loans are gonna be longer-term, typically; they could be anywhere from 5 to 30 years. They’re going to be amortized over 20-25 years. You’re gonna see a loan-to-value anywhere between 70%-75%, up to 85%. Generally, these are going to be non-recourse types of debt, and you’re not going to be able, most likely, to include — if you’re doing a heavy renovation, you’re not gonna be able to include all those renovation costs in the actual loan.

And there are also going to be lower interest rates for agency loans. You might be able to get a few years of interest-only, really depending on your experience level… And overall, these are gonna be your set-it-and-forget-it types of loans. So you secure it upfront, it’s got a loan term that is longer than your projected hold period… Let’s say you get a ten-year loan and your business plan is only five years – you secure the loan, you pay it every month, and that’s really it. Maybe you might get a supplemental loan at some point, if you are doing some light renovations and are including any of those in the actual loan, but generally, these are gonna be your set-it-and-forget-it types of loans.

On the other hand, the category of the bridge loans… A bridge loan is going to be a shorter-term loan, that a borrower is going to usually use until they’re able to secure long-term financing on the property, or after they sell the property. The most common time a bridge loan is used is when someone is going to be repositioning an apartment deal, like following the value-add or the distressed.

Typically, what will happen is the syndicator will get a bridge loan – let’s say that’s three years – and that bridge loan is going to be interest-only for that entire three-year period. Maybe they buy a few extensions, just in case the stabilization period takes longer, or something happens in the market and they wanna make sure that they’re still able to have debt on the property, at least till the very end of their business plan. And they are going to include some or all the renovations in that loan.

For the agency loan, the loan amount is based on the loan-to-value (LTV), whereas for a bridge loan it’s going to be based on the LTC, which is the loan-to-cost. Loan-to-cost includes a purchase price and the renovation costs. Those two together is what the lender is gonna base the loan off of.

For example, if the purchase price is gonna be $800,000 and you are spending $200,000 in renovations, just to make the numbers simple… Well, let’s say the purchase price is 8 million dollars, and then the renovations are two million dollars. For the bridge loan, if you get an 80% loan-to-cost, then they’re going to give you 80% of that total project cost. So 80% of the 8 million, plus the 2 million. The total is of 10 million dollars, so they’ll loan you 8 million dollars, and you need to bring the 2 million dollars down.

Now, if you look at it from an agency loan perspective, the exact same deal, if the purchase price is 8 million dollars and the renovations are 2 million dollars, and you plan on getting an agency loan at 80% LTV, then they’re gonna loan you 6.5 million dollars of the 8 million… So whatever 80% of 8 million dollars is, is what they’re gonna loan, and you’ve gotta make up the difference, plus you’re gonna raise the additional 2 million dollars to cover all the renovation costs. I think that comes up to 3-4 million dollars capital raise for the agency loan, as opposed to getting a bridge loan where you only have to raise 2 million dollars.

Now, bridge loans are also going to be non-recourse to the borrower… But again, you have to meet those requirements, and it really depends. It could be recourse, it could be non-recourse. It really depends on the lender, and it depends on you the borrower.

Another advantage of the bridge loan is going to be the interest-only period. You’re likely going to be paying interest-only the entire length of that loan… So that monthly debt service is going to be a little bit lower, which means that obviously you are going to be able to have a higher cashflow, and you will be able to distribute money to your investors while you’re repositioning the property.

And the disadvantages are kind of obvious. One, it’s going to be a riskier loan, since they are shorter-term in nature. If you get a bridge loan that, with all the extensions, is only five years, and you end up having to hold on to the property for seven years, then you’re gonna be forced to refinance at some point… Whereas that permanent loan is kind of a set-it-and-forget-it.

So those are the two main categories of loans. A bridge loan, which are shorter-term in nature, and are better for repositioning projects. And the permanent debt, which is going to be longer-term in nature, and is more of a set-it-and-forget-it loan, where you’re not doing very heavy renovations.

Now, if that was confusing, all of this will make sense in tomorrow’s episode, because I’m actually going to go over the specific types of loans that are most common. That’s gonna be those agency loans, HUD loans, and then a few other loans that are available for you to secure from a lender.

So that’s gonna be it for this episode. To listen to the other Syndication School series about the how-to’s of apartment syndications and to download those free documents, please visit SyndicationSchool.com.

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

JF1717: How To Submit A Syndicated Apartment Deal Offer Part 2 of 2 | Syndication School with Theo Hicks

Now it’s time for the second and last part of this Syndication School series on submitting your apartment syndication deals. Theo is diving deep into the details so you can walk away from these two episodes know exactly how to submit your offers on large 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 syndication. As always, I am your host, Theo Hicks.

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

This episode is going to be part two of a two-part series entitled “How to submit an offer on  a syndicated apartment deal.” If you haven’t done so already, I recommend listening to part one, which aired yesterday, or if you listen to this sometime in the future, the podcast right before this one, where we discussed how to create a letter of intent. So we went through what a letter of intent is, what information you should include in your letter of intent, and we also provided you with a free LOI template that you can use to create your letter of intent based on the information I discussed in that episode.

In this episode, part two, we’re going to talk about what happens after you actually submit your letter of intent. So you put your LOI together and you e-mail it over to the listing broker if it’s on-market, or the seller if it’s off-market. Well, what happens next? In reality, one of four things will happen.

Number one, your letter of intent will be accepted. Number two, your letter of intent will be rejected. Number three, your letter of intent will be countered, or four, in the case of it being an on-market deal, you will be invited to the best and final offer round. In this episode we’re gonna walk through kind of how to approach each of those four scenarios.

For scenario number one, if  your offer is accepted, congratulations. Good work. You’ve got your first deal, or you’ve got another deal under contract. If you do receive a notification that your letter of intent was accepted, then the next step is going to be signing the purchase and sales agreement. Now, unlike the letter of intent, which is a non-legally-binding agreement, where you’re just essentially saying “Hey, here are my offer terms”, the purchase and sales agreement (PSA) is a binding contract to purchase the apartment and the terms and conditions defined in your letter of intent. That means that — I guess the selling side is most likely gonna be responsible for the purchase and sales agreement; they’ll have that prepared and they’ll send that to you.

Make sure you review the purchase and sales agreement, and make sure that the terms are the same as the terms defined in the letter of intent. Make sure the purchase price is the same, the earnest deposit is the same, any other items that you requested are on there… Things like that.

You might also want to have your attorney look over it as well, because if you’re just starting out, purchase and sales agreements are pretty long; a lot of technical, legal jargon in there that you might not clearly understand, so you just wanna make sure that you dot all your i’s and cross all of your t’s before you actually sign the PSA. Also, make sure that you are not delaying that process too much, because there’s likely something outlined in the PSA that says that “This is valid until this specific date”, which was something you defined in your letter of intent. The purchase and sales agreement must be signed within two weeks of the letter of intent being accepted. So that’s scenario one, pretty straightforward.

Scenario number two, if your offer is rejected outright and there is no counter, then you have a few options. Number one, you can re-submit a stronger offer. Again, ideally, your first offer isn’t your highest and best offer, so if it’s rejected outright and they just say “No. Thanks for submitting your offer, but we’re not gonna move forward with your LOI at this time”, then you can go back to your underwriting, determine what your highest and best offer is, maybe tweak some of the terms to make your offer a little more competitive, and re-submit that offer. Or you can just walk away and move on to the next deal.

Emotionally, don’t get discouraged or upset if your offer is going to be rejected, because 1) this is something that should be expected. Every single offer you submit is not gonna be accepted. But 2) for those of you that have attended Best Ever conferences in the past, or are loyal listeners to this podcast, Joe has interviewed plenty of people who have submitted an offer on a deal, has been rejected, and they either got that deal later on down the road, or they ended up finding another deal.

Maybe the seller rejects your offer because they had a better offer, and maybe you’re number two, but then for some reason that initial best offer that they received falls through, and then they come back to you and say  “Hey, are you still interested at these terms?”

Or you could be awarded a different deal from either the same seller, or a different seller. Instead of spending your time fretting about being rejected, you go ahead and find another deal, underwrite that deal, and you receive that offer… Or a few months down the road, or maybe a year later, that seller is selling another property and you end up buying that deal. So that’s scenario number two, how to approach having your LOI rejected outright.

The third scenario is if your LOI is countered. So if they come back and say “Okay, well, we want this purchase price instead”, then the first thing you’re gonna want to do is go back to your financial model, your cashflow calculator, and input that new purchase price, and then determine whether the deal still meets your return criteria.

Again, remember, this is why you did not initially give them your highest and best offer. So if they do come back and counter, you will likely have some wiggle room on the terms or the pricing of the deal. Now, if it does still meet your criteria, then you can  go ahead and accept that counter-offer, and kind of go back to scenario number one, and get that purchase and sales agreement.

If the deal does not meet your investment criteria, your return goals at that new price, you can either counter again, or you can walk away. And finally, the fourth scenario would be you are invited to a best and final sellers’ call, or best and final offer round. Again, I talked about this in the last episode – the best and final offer round, you’ll typically have that on most on-market deals that are mid-sized to larger apartment deals, like 50-60 units and above, and the seller is going to invite either one person or multiple people who submitted the most attractive offers to a best and final offer round.

If you are invited to this best and final offer round, this is when you want to, as the name implies, re-submit a letter of intent with your highest and best offer. That’s price and the terms.

Now, of course, based on your conversations with the listing broker, or if it’s off-market with the owner, you’re gonna have an idea of what you’re gonna need to do to be awarded the deal, but you won’t necessarily know exactly what the seller wants out of an offer… So based on the information you do have, based on the seller’s motivations to sell and based on the information you gather during the underwriting process, go ahead and either at this point create a best and final offer – again, price and terms; it’s not just “The best price wins.” Or you can just decide to walk away, depending on if you know that you’re gonna have to go above the price and terms that you can actually buy the property at.

Then after submitting your best and final offer, one of three things will likely happen – you’ll either be awarded the deal, you’re gonna be notified that you were not awarded the deal, or they will invite you to a best and final call with the actual seller.

It’s pretty self-explanatory – if you are awarded the deal, congratulations. PSA time. If you’re not awarded the deal, again, don’t get upset; just find another deal to underwrite. If you were invited to the best and final seller call, then in the rest of this episode we’re gonna talk about what preparations to make before you actually attended that call.

So the purpose of the best and final seller call, from the perspective of the seller, is for them to vet you. The last thing the seller wants is essentially to sign a contract with a buyer who is not gonna be able to close on the deal, because that’s gonna be a huge waste of their time and a huge waste of money, because time is money at this point. Because the longer they wait to sell the property, technically the less money they’re going to make. So that means that you, the buyer, are going to need to convince the owner that you are going to be able to close… And you will do this by discussing your experience of you and your team, as well as your business plan for what you will do once you’ve taken over operations at that property.

Of course, you’re not going to want to wing this best and final sellers call. You’re gonna want to be as prepared as possible, because the more prepared you are, the more confident the seller is going to be in your ability to close the deal.

Let’s run through some questions that will most likely be asked. Again, not all of them are gonna be asked, they’re not gonna be asked in this exact same order, but these are things that you’re gonna want to not only think about, but write out some bullet point answers to before you actually have that call with the seller. So here are those questions… And we’re gonna put them in the categories of your background, your business plan, and then some miscellaneous questions that might be asked.

In regards to your background, some questions that you’re gonna want to write out answers to is what is your prior real estate experience? At this point, if you haven’t done an apartment syndication deal before, then you’re most likely not going to be focusing on yourself, but more focusing on your team. So what is your property management company’s background? If you have a mentor/consultant, what is their background and experience in real estate? And then any relevant real estate experience that you actually have, you wanna discuss that as well… But again, if you haven’t done a deal similar to this one before, the seller doesn’t necessarily care about a single family home that you bought three years ago. What’s gonna be more important is the experience that’s relevant to them, which is going to be management experience, buying properties, if you’re raising capital, raising money for them, things like that. So have a good script for what you’re gonna say when they ask about your prior real estate experience.

Next they might ask you to explain any prior transactions you have completed – where was the deal? What were the numbers? What was the partnership type for this deal? Did you buy it yourself, did you raise money for the deal, was it a JV? And then they’re gonna want to know what the outcome is.

Next they might ask you what is your future deal outlook. Are you someone who’s just buying one deal and that’s really all you’re focusing on, or do you plan on buying this deal and then continuing to buy more deals? …with the latter giving you a little bit more credibility than the former.

Then as I mentioned before, they’re gonna ask questions about your team. If you’ve got a mentor/consultant, if you’ve got a partner, if you’ve got a property management company – don’t just say “Well, I’ve got a property management company, and I’ve got a partner, and I’ve got a consultant.” Just say that, but then mention what relevant skills they’re bringing to the table based on their track record, that will allow you to successfully close any manage this deal. Those are the questions they’re gonna ask about your background.

Next they’re gonna focus on your business plan. They’re likely gonna ask you what is your overall business plan for this property. Are you gonna be conducting rehabs, and if so, what’s your plan? What’s your interior/exterior renovation plan for the property? They’re gonna want to know what your capital budget is going to be, so how much money do you plan on spending on the interiors? How much money do you plan on spending on the exteriors? What is the budget for both of those, as well as what is the plan for both of those?

They might also ask you what’s your contingency budget. Are you just accounting for “It’s gonna be a million dollars for the interiors, a million dollars for  the exteriors, so my budget is two million dollars”? Or are you gonna say “I’m expecting two million dollars for the interior and exterior, and I have a 15% contingency of $300,000 for any overspends.”

Next they’re gonna ask you how you’ll be securing the debt… So who are you gonna be using? Are you using a mortgage broker, securing agency debt, or are you getting a bridge loan? What are the terms of your financing? Is it interest-only for a few years? How long is the loan? Do you plan to do a refinance? Are there any supplemental loans going on there?

And then they’re gonna want to know if you’ve actually used your debt source before in the past, with the answer being yes giving you more credibility than the answer being no.

On the flipside, they’re also gonna want to know where the equity will be coming from, so how do you plan on securing this debt. Since you’re an apartment syndicator, you might want to explain how many investors you have, you may wanna explain what your relationship is with these investors. They might also want to know if you’re investing your own personal funds, or if you’re using institutional funds.

Then another important question is gonna be what is your back-up plan if your primary investment source doesn’t follow through. If you remember, kind of what comes first, the chicken or the egg, the money or the deal – this is why we discussed the importance of getting those verbal commitments prior to looking for deals… Because once you have verbal commitments, not only do you know how much capital you have to deploy, but you can use that to determine what size deal you can actually buy. So if you don’t have any investors yet at this point, then you’re not gonna be credible in the eyes of the seller, because if they talk to someone else who says (let’s say for example the down payment is one million dollars) “Well, I’ve got a list of 1,000 different investors who understand that my minimum investment is $50,000. I’ve worked with them on deals in the past, and once I have the deal under contract, I’ll present that deal to them… But right now I have more than enough money from investors to buy this deal. In fact, I always make sure that I have 50% more in verbal commitments that I’ll need to actually close on the deal.”

They’re also gonna want to know who your property management company is that will be helping you implement this plan. Are they actually partners in the deal, or are they a third-party? Again, we talked about this when we talked about team members and the importance of alignment of interest. A property management company who has equity in the deal has more alignment of interests than a property management company who doesn’t have any equity in the deal, or is just managing the deal. So if the property management company plans on investing in the deal or plans on having some other role besides just managing the property – maybe the loan guarantor, or maybe they’re bringing their own investors in the deal – that’s something that you’ll want to express to the seller.

They’re also gonna want to know if you’ve actually worked with them in the past; again, similar to the debt source, you’re gonna be more credible in the eyes of a seller if you’ve actually worked with this company in the past, rather than if it’s your first time working with them. And then they might want to know if the property management company has reviewed and signed off on your underwriting.

Before I go to the miscellaneous, something else that I wanna mention is that they might not ask you all these questions; they might just say “What’s your overall business plan for the property?” and that might be it. If they do that, then you need to proactively explain to them “Okay, here is my overall business plan for the property. These are the renovations I plan on doing. Here are the costs for those, and this is my contingency. I plan on securing debt from this source. Here are the terms. And I’ve worked with them before. I plan on raising capital for this deal; I have this many investors. I plan on putting money in myself. I’ve worked with these investors before in the past, and I have verbal commitments from investors of 50%-1,000% greater than the amount of money I need to raise for this deal… So if some of my investors were to fall through, I still have back-up investors.

I’ve got my property management company who is going to be investing in the deal and they’re bringing on their own investors as well. This is the third deal we’ve done together. And before I even submitted my offer to you, I made sure that we reviewed my underwriting together and they have signed off on my underwriting.”

Don’t say it exactly like that, but I think that kind of flowed pretty well. But again, they might not ask you specifically what your exterior budget and plan is; they might just ask you what your overall business plan is. So these are things that you want to be prepared to say, and that you’re gonna want to say on the best and final seller call, even if they don’t specifically ask you for that information.

With that said, the last category is gonna be the miscellaneous questions. They’re gonna want to know if you’ve actually toured the property already, for obvious reasons. They might ask you if you are pursuing any other deals… Because at this point you haven’t signed a PSA; maybe they plan on doing some special kind of contract, like an REO contract, or a Fannie Mae contract, so they might as you if you’re familiar with a certain contract that they plan on presenting…

If it’s an off-market deal, they might ask you why they should sell directly to you and not take their chances putting it on the market. This is if you’re the one that reached out to them; so they weren’t listing it off-market, you were the one that convinced them to list the property for sale, and so the might say “Well, now that I wanna sell this property, why am I selling it to you off-market? Why don’t I just go to market and find a listing broker?”

The answer to that is — if you go back to one of our previous Syndication School series, we talked about the benefits of selling a property off-market from the seller’s perspective. Those are things like potentially faster closing, less headache, lower broker fees, they’re not gonna have to worry about a bunch of people touring their property, which might mess up relationships with their vendors and their tenants… Things like that.

And then they might ask something along the lines of “Is this really your best offer? Is there anything you can do to sweeten this offer?”, things like that.

Again, the overall idea of the best and final seller call is for the seller to vet you. And they might ask you very specific questions, they might ask you general questions… Regardless, you wanna come in with the information I’ve just explained, prepared, so that if they do ask these specific questions, you’re gonna answer; and if they don’t, then you have a script to run through your business plan, your background, your team, and proactive provide information that you know the seller wants to hear.

At the end of the call, before you hang up, a very powerful question to ask the seller, whether it’s just you in the best and final call round or if it’s more people in the best and final round, ask them “Is there any reason why we would not be awarded the deal?”

Once you’ve completed this best and final seller call, your fate (so to speak) is really in the seller’s hands. Again, at this point you’ll either be awarded the deal or not awarded the deal.  If you aren’t awarded the deal, again, don’t worry about it. Find a new deal and restart the entire underwriting process from scratch. And if you are awarded the deal, then you’ll go through that PSA process.

Once you actually have that purchase and sales agreement signed, the next step is to move into that due diligence period. Now, the next series will be focused on due diligence. I know I said yesterday that I will do a series about debt beforehand, but I’m going to go ahead and – since you’re going to be securing the debt during that due diligence period, I’m just going to make the next series all about the process from contract to close, from your perspective. That includes performing due diligence on the property, that includes securing your debt, and that includes securing your equity from investors. That’ll probably be anywhere between four and eight part episode.

Until then, I recommend listening to part one of this series, about how to submit an offer on an apartment syndicated deal; I recommend listening to the other Syndication School series we have posted about the how-to’s of apartment syndication, as well as check out all of the free documents that we’ve posted so far. All of those can be found at SyndicationSchool.com.

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

JF1709: How To Underwrite A Value-add Apartment Deal Part 7 of 8 | Syndication School with Theo Hicks

Theo is picking up where he left off last week with rental comps. You’ll need to have accurate rent comps so that you can set accurate assumptions in your underwriting. Today we’ll learn how to ensure we have good comps, and what to do with them once we have them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

Start investing with as little as $500 at https://www.buybits.us/


TRANSCRIPTION

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

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

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

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

This episode is going to be part seven of an eight-part series titled “How to underwrite a value-add apartment deal.” To catch you up to speed on what we’ve discussed so far – we’ve gone through a portion of the eight-step process for underwriting a value-add apartment deal. I might have said it was seven steps in the past, but as you know, these things expand as we do the episodes, and I realized that it makes more sense to break a couple of the steps into multiple steps, and that’s what we’re going to be doing. So instead of it being seven steps, it’s now an eight-step process. In this episode, part seven, we’re going to be discussing step seven.

So far we’ve gone through steps one through six. As a refresher, step one is to read through the offering memorandum. That’s the sales package put together by the listing broker. Of course, this only applies to on-market deals. If it’s an off-market deal, you can skip that step and go straight to step two, which is to input the rent roll information into your cashflow calculator. If you haven’t done so already, I recommend going to SyndicationSchool.com and downloading that free simplified cashflow calculator model. It’s an Excel template, one tab that allows you to fully underwrite a value-add apartment deal. Then as you get comfortable with the model and as you learn and grow, you can customize it to your liking. But again, step two is to input the rent roll information into that cashflow calculator.

Step three is to input the T-12 information (that’s the trailing 12 months of income and expenses) into the cashflow calculator. Step four is going to be set your stabilized assumptions. Those are the income, expense, purchase and disposition assumptions, based on your business plan, for the deal. That’s going to vary from person to person, and as always, if you’re just starting out, you’ll wanna rely on your mentor or consultant and your property management company to help you come up with the assumptions, or at the very least to confirm these assumptions once they’re set.

Step five is to determine an offer price. If you remember, typically for these larger apartment deals – I’m talking 150, 200+ unit – there’s typically not going to be a listed price. Typically, there will be some sort of statement explaining that the purchase price will be determined by the market, or based on the market… Which means that you underwrite that deal and you input the rent roll, input the T-12, set your assumptions, and as long as all the formulas are correct, you can via an iterative process (plugging in numbers and seeing how it impacts the cashflow calculator) come up with an offer price, based on the return goals of you and your investors.

Step six is going to be to perform that rental comparable analysis. Those have been discussed in the previous Syndication School episode. That requires either using the properties listed in the offering memorandum, in combination with, or instead finding your own properties that are comparable to the subject property, and determining a price per square foot for the rent, and then using that average price per square foot across multiple comparable properties to determine what the rent will be at your property, based on the square footage of each of the various unit types.

That brings us where we are today. In this episode, we’re gonna talk about step seven, which can technically be a step 6.B., but we’re gonna call it step seven, and that’s going to be confirming your rental comps via a phone call.

Then tomorrow we’re going to complete this series with part eight, which is also going to be step eight of the underwriting  process, which is having a conversation around what to do when you are visiting the property in person.

Now, steps six and seven, the rent comps, may be before you determine an offer price. It really just depends on how competitive the situation is, and it depends on the actual deal itself. If the owner has not implemented any sort of value-add renovations at the property already – because for some value-add deals the owner would have started the renovations already maybe on 20%, 50%, 60% of the units, and you can use those rent premiums demanded as your rent premiums. So if they’re getting a $100 rental premium on their two-bedroom units, then you can assume that you’re gonna get that same premium. You’re gonna confirm that with the rental comparable analysis. But if there’s been no value-add program initiated whatsoever, then you’re probably gonna need to do the rent comp analysis first, before you set an offer price.

So steps five through eight are kind of interchangeable… So this technically isn’t a step-by-step exactly how to go through it. These are all the steps that you need to do in order to fully underwrite a deal.

If you remember, in step six when you’re doing the rental comp analysis, you performed it online. Essentially, what you did is you had your list of properties – and we discussed how to find those comparable properties – and then you went online to Apartments.com, for example, and you found the rental rates and the square footage for each of the units at your comparable properties. So 1-bed/1-bath, 2-bed/2-baths, 3-bed/2-bath, whatever unit types are at your property – you found comparable properties and determined the rents for those, and you also confirmed that they actually are comps; and again, we talked about that in the previous Syndication School series episode last week.

You calculated a rent per square foot for each of those properties, and then you took an average of all the properties to get an average rent per square foot. Then you multiplied that by the square footage at the subject property to determine what the rent premium will be after you’ve initiated your valued-add business plan.

Now, that’s very important to do, and it provides you with very important information. However, at the end of the day you are trusting in either the rent solicited by the broker, which we said you shouldn’t do, but you’re still trusting in the rents listed online. Maybe on Apartments.com they haven’t updated the rents in a long time, or maybe the unit was listed at that price for a long time and hadn’t been rented, so that means that in the first situation the rents might be a little low, and in the second situation the rents might be a little bit high.

In order to confirm that the rents listed online are actually accurate, you’re going to need to actually contact a representative at the comparable property in order to confirm those numbers.

Now, a problem is you can’t just call up a property and say “Hey, I’m buying a property down the street from you. I’m gonna be your competitor. Can you tell me what your rents are, so that I can figure out how much I can rent my units for?” They’re probably not gonna give you an answer. And that property manager’s leasing agents are told to sniff out those types of people and not provide that information. So instead, we’re going to have to put on our Broadway shoes and do a little bit of performing.

Essentially, you’re going to play the role of  either a resident who is interested in renting a unit, or you are going to play the role of you are calling on the behalf of a family member or friend. You can say that you’re calling for a rental unit for your son or daughter, and ask them a bunch of questions. The goal of this call in this Broadway performance is to confirm the information that you gathered during that online rental comp analysis investigation in step six.

So the first aspect or the first thing you’re gonna need to do is create an Excel document to capture all this information… But being SyndicationSchool.com, we’re gonna go ahead and give you that Excel template for free. We actually gave it away already in last week’s episode. I included that on the free document that we gave away with the template for the online rental comp analysis, as well as the template for that amenities checklist, so that you can actually confirm that the comparable properties are similar to the subject property.

But if you go ahead and download that free document, you’ll see that the information that you’re going to be gathering are going to be the rental rates for the 1-beds, 2-beds, 3-beds, 4-beds. Essentially, the rents for any of the unit types. You’re gonna want to get an understand of any rent specials that are being offered, which are the actual concessions. If you remember, back in step three and four, one of the incomes, which is technically an income loss, but is categorized in the income category, is concessions, which are specials offered to residents in order to attract them to your property. Those could be referral fees paid to residents who referred someone. Those could be discounts on security deposits, discounts on rent, things like that. Amenities packages offered is another thing you’re gonna wanna learn about; the unit upgrades, you wanna know about the parking situation, any local points of interest, you wanna get some information about the demand, and then you’re going to take some notes on customer service.

After you’ve done this call, or if you’re in the market you can do this in person, you should be able to obtain enough information to fill out the template and answer those ten things. Now, before we get into how to do the Broadway performance, how to actually obtain the information, one thing you might wanna do first if you don’t really have a background in sales, or cold-calling, or you don’t feel comfortable doing this on the phone, then call up a few properties that aren’t comps, or do a few in-person visits to properties that aren’t comps, and go ahead and do a test run with those. Then also, so you don’t forget, you might want to get a print-out of that Excel document and bring it with you, or have it in front of you when you’re doing the phone call, or at the very least have a notepad in front of you with questions. Or you can write out verbatim what I’m going to explain for each of those ten points.

So in order to obtain the rental data and the demand data, something you can say — and again, you don’t need to use this as a guide or an exact script; if you want to, you can, but you don’t have to. You can adjust this based off of the situation. But you can say “Hi, I’m relocating to the area in the next couple of months, and was calling to see if you have any units available, or if there’s a waiting list.” That right there, number one, it lets you know the demand and the vacancy of that property. If they say “Oh yeah, we’ve got plenty of available units”, then you know the demand in that area might be a little bit lower at that price point. Or if they say there’s a long waiting list, you’ll know that the rents might be a little bit too low, or the demand is really high.

Now, if the apartment consists of one and two-bedroom units, then you can say “I’m interested in renting a two-bedroom unit. How much do those rent for?” They might say “Our two-bedrooms are $800.” Or they might say “We have a variety of two-bedroom units that range from $700 to $900.” Then you can respond by saying “Okay, that’s a little bit outside of my price range. I was hoping to have an extra bedroom to use as an office… But how much do the one-bedrooms rent for?” That way you’ve got either the actual rent of a two-bedroom unit or a range of rents for the two-bedroom units, and the same for the one-bedroom units.

Now, if the property has one, two and three-bedroom units, you wanna do that same approach as above, so ask about the two first, and then ask about the one second. Then call back a few days later and ask about the three-bedroom, unless you can think of a creative way to get the answer to all three.

So that’ll go ahead and knock off numbers one, two and three, which will be the one-bed rents, two-bed rents and three-bed rents, as well as give you an understanding of demand. Number four is that rent special, so in order to understand any types of rent specials offered, you can ask “Do you currently offer any rent or move-in specials?” For example, maybe there’s a security deposit special that they’re currently offering, so the security deposit is cut in half. Maybe there is some sort of rental discount if you sign a longer lease… So it’s $800 for a one-year lease, $775 for a two-year lease. Or maybe it’s some other type of concession that they’re offering.

Maybe there’s a move-in special that they’re offering, like you get a free TV on signing a lease. Maybe they’ve got a referral program, as I’ve mentioned before, so people that are living there – they might ask you if someone referred you, and if the answer is yes, then that person that did the referral will get $300, or will get a reduction off of their rent. Or there might be a military, law enforcement or first responder discounts… So rents 10% every single month if you’re in the military, if you’re in law enforcement, if you’re a first responder. So that covers that fourth bullet point, the rent specials.

Next is the amenities package. Essentially, you’re gonna want to know what types of amenities are offered at the property from an exterior standpoint, as well as an interior standpoint. Again, the whole entire purpose of this is to confirm the information you gathered during your online analysis, and one of the things you did was to create an amenities checklist. So you went to the website, or Apartments.com, and you determined what types of amenities were offered at that property, and now you wanna confirm that, either on the phone or in-person.

Something you can say is “Something that will weigh heavily into my decision are the amenities that are offered. What are the amenities offered in individual units, and then what are the amenities that are offered property-wide?”

Examples of individual amenities would be the property is pet-friendly, there’s wood flooring, there’s washer and dryers in the units, the kitchens have been updated, you’ve got your own storage/locker outside the unit or somewhere on the property, or maybe there’s a fenced-in backyard in some of the units, or balconies, or patios offer… And then examples of some property-wide amenities would be a fitness center, a pool, online rent payment (which is probably gonna be pretty common everywhere), online maintenance requests (same thing, should be pretty common everywhere), different types of parking situations, different types of common areas that are offered, events offered at those common areas…

Then an important follow-up question is gonna be “Are there any additional monthly fees for any of these amenities, or are they included in your rent?” Maybe the units that have balconies rent for $25 more per month. Or maybe you have to rent out a parking spot for $50/month. You’re gonna want to know about that, because again, if you plan on selling balconies, or if you plan on installing carports, or you’re interested in increasing the other income line item by charging for parking, you’re gonna want to know what the competition is doing. Because if they’re not doing that, then that’s not necessarily indicating demand for that in that market. So that covers number five, which are the amenities package.

Number six is unit upgrades, which is kind of covered in the amenities package, but is more specific… So you can say something like “Have you done any unit upgrades recently, specifically to the kitchens or the bathrooms?” That kind of covers the interiors. And you can ask, “Is that available at all the units? How much does it cost to rent a unit that’s got a common kitchen and bathroom, and how much does it cost to rent one that has an upgraded kitchen or bathroom?” Then ask about any property-wide upgrades – was the fitness center recently renovated? Was the pool recently renovated? Was the clubhouse recently renovated? Things like that.

Again, not necessarily “Is there a new roof?”, because that’s gonna be kind of weird, because residents shouldn’t necessarily care about there being a new roof… This is more focusing on the actual upgrades, so that you can confirm whether or not you can increase your rent, or whether there’s demand for things like  a new fitness center, new clubhouse. That covers number six, unit upgrades.

Number seven is gonna be parking. Ask them “What’s the parking situation? Do I have a free spot near my unit? Are there garages?” Again, this is gonna be based on information you got online. If it says there’s garages available, ask them “Are there garages available? How much would it cost to rent?” That covers the parking situation.

Number eight is gonna be the points of interest. Again, you’re out of state and you’re relocating in the area, so you don’t know the area… So you ask them what are some popular attractions or points of interest that are within a few miles of the property, and ask if there’s anything worth noting that is within walking distance – is there a local coffee shop that everyone likes to frequent? Is there a strip of bars or restaurants in the immediate area? Because again, all those things impact the rent, and impact whether or not it is a comp or not.

If you call in and they say “Oh yeah, you can walk to an area that’s got a bunch of bars and restaurants”, but at your subject property you’ve gotta drive there [unintelligible [00:19:24].12] slightly different and you might want to try to find a comp that’s also within driving distance and not walkable to that area.

And then really for number nine, demand, most of those questions kind of cover demand… So questions about rent specials will let you know how in demand the units are. The same with the upgrades, amenities packages, parking… Anything that’s done at the property that they charge for indicates demand.

Then that last step, which is the notes on the customer service – once you hang up the phone or once you get back to your car after visiting it in person, take a few minutes to make some notes on the quality of customer service that you actually received, just because this is most likely going to be your competition once you’ve taken over the operations at the subject property… So you’re gonna want to know – are the property managers at my competition amazing, or are they not so good, and not very friendly?

So once you’ve gathered all that information, essentially you want to compare the information you get on the phone or in person – compare that to the information that you gathered during your online investigation. Do the amenities match up? Do the unit upgrades match up? Do the rents match up? If they don’t, then you’re going to go back and adjust the rents, or you might have to actually eliminate a property as a comp on your rental comparable analysis.

Then once you’ve done that for one property, you’re gonna want to repeat that same process for the remaining rental comps that you have on your list. At that point, you can be pretty confident in your rental premiums, because you’ve done the online investigations, and you’ve confirmed everything either on the phone or in person, so you can say essentially without the shadow of a doubt that this property is a comp or this property isn’t a comp. And you can say without the shadow of a doubt that these are what the rents are, and these are what the other fees are, here’s the demand, here’s the customer service, here’s the amenities, everything like that.

Once you’ve finished that step, the last step in the underwriting process is going to be to actually visit the asset in-person to perform some pre-offer due diligence. That’s going to be discussed in the next episode, and then in the next week we’re going to talk about how you actually submit an offer, or how to determine whether you wanna submit an offer, and then how to actually submit an offer on one of these deals.

But again, tomorrow we’re gonna talk about the last step, step eight of the “How to underwrite a value-add apartment deal” process, which is going to be to actually visit the property in person for due diligence purposes. This is going to be different than you visiting the rental comps, so you might actually want to do these at the same time. You visit the property and then you visit the rental comps afterwards, or you make it a weekend trip where you visit this other property first, and then you spend an afternoon going to half the rental properties, and then the next day you go to the remaining rental properties. Or you can do the rental comps on the phone and just visit the subject property in-person. It really depends on what you wanna do, but we’ll talk more about that tomorrow.

Until then, I highly recommend if you haven’t done so already, listening to parts one through six… Because if you haven’t, then much of this episode might not necessarily make a lot of sense, because this episode is built off of those previous six episodes.

I also recommend going and downloading the free documents that we’ve given away for this series so far, which is that simplified cashflow calculator and that rent comp spreadsheet. We also have free documents from the other Syndication School series. All those free documents and the past Syndication School series can be found at SyndicationSchool.com.

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

JF1703: How To Underwrite A Value-add Apartment Deal Part 6 of 8 | Syndication School with Theo Hicks

Time to cover more on apartment syndication underwriting with Theo. We all know it’s important for apartment syndication. Even if you know what you’re doing, it never hurts to hear how others underwrite, you might learn something new. Today Theo will comer how to run a good Rental Comp Analysis and what to do with it. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can assume that if you perform the same level on renovations on the remaining units, you’ll achieve that same $100 rental premium”

 

Free Document:

http://bit.ly/RCAforsyndication

 


How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

Start investing with as little as $500 at https://www.buybits.us/


TRANSCRIPTION

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

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

 

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

As you know, each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer a document, resource or spreadsheet for you to download for free. All of these free resources, as well as past Syndication School series are available for free at SyndicationSchool.com.

This episode is going to be part six of what’ll likely be an eight-part series now. I know these sometimes off as two or four-part series, and then they end up being eight-part series, but there’s a lot of information to pack into these episodes, so it’s better to have more parts to each of these series, because the more details the better.

This is going to be part six of the eight-part series entitled “How to underwrite a value-add apartment deal.” Now, if you haven’t done so already, I highly recommend – it’s almost a requirement – that you listen to parts one through five first, because each of these episodes builds off of the last, and this is a seven-step step-by-step process for how to underwrite these value-add apartment deals. If you haven’t listened to the previous episodes, then this one might not make total sense… Although this particular episode might be able to be used as a standalone, because it is how to perform a rent comp analysis, or a rental comparable analysis.

Now, I’m sure everyone has heard of a sales comparable analysis, which is what residential appraisers use to determine the value of a residential property. Well, the rent comp analysis is what multifamily investors use to determine the market rent of their units… And in particular for this series – we’re talking about underwriting value-add deals – we are gonna perform a rental comp analysis in order to determine what the market rent of our units will be once they are stabilized, after all of the interior and exterior renovations have been completed.

Now, I believe we talked about this in earlier episodes, but there are a few ways to determine that your stabilized rents – or those rent premiums from how the unit is currently rented to what the unit rental premium based on the current quality of unit and building to the stabilized quality of the unit and the building… One way is to just base it on the rental comps that are provided in the offering memorandum. Typically, the broker will perform their own rental comp analysis, and that’s what they will base their performance on. As you remember, we don’t wanna do that. We don’t want to rely on the broker’s rental premiums, because at the end of the day, the broker is working with the seller in order to sell the property at the highest price possible… So you don’t necessarily want to completely trust that the information is accurate. We’ll talk about that a little bit later in this episode.

Another way is to wait to perform your rental comps until you actually have your rental comp analysis and you actually have the property under contract. So you do all your underwriting, you go ahead and just input placeholder rental premiums, or you base it off of something else… And then once you have the deal under contract, you go ahead and perform a more detailed rent comp analysis.

You’ll also wanna do that because you’ve already put in all this time – and once you have the deal contract, money as well – and you don’t want to have to back out of the deal and lose all that time (and potentially money) because you failed to perform that rent comp analysis early enough to catch some issue, or whatever.

Another way – and this is a way that you could actually use; the first two you don’t wanna use – is to base them on the proven rental premiums that the current owner has received/achieved. Let’s say that you’re looking at a property and it says that the current owner has performed renovations on 25% of the units, they’ve spent 5k per unit, they installed new appliances, new floors and new light fixtures, and they’ve been able to achieve a rental premium of $100 on each of these units. Then you go to the rent roll and you actually confirm that this is true, that 25% of the units are renovated, and that the market rents on the renovated units are $100 more than the market rents on the unrenovated units. Then you can go ahead and assume that if you perform the same level of renovations on the remaining 75% of the units, then you will achieve that same $100 rental premium.

Then the fourth way is to perform your own rent comp analysis, whether to confirm the proven rental premiums by the owner, to confirm the broker’s rental comps, or if the owner hasn’t done any renovations and it’s an off-market deal, to just figure out what the rents are gonna be in the first place, because you don’t have any information to base it off of.

So you’re gonna do a combination of three and four… Even if the current owner has those proven rental premiums, you can definitely assume that that is the case  and go ahead and set your offer price. But then you’re gonna wanna go back and confirm that those rental premiums are accurate. Now, maybe they are accurate, because they’re likely not gonna be too high, because they’re actually getting them from residents, so they’re likely not gonna be too high (they could be). But they could be too low; the owner could be renting out those units at a rent below the market rates. If that’s the case and you catch that, and you realize “Actually, I can raise them by $150 as opposed to $100”, then that’s gonna, again, increase your ability to get that deal under contract, because maybe not every person looking at the deal perform their own rental comp analysis and saw that they could increase the rents by an additional $50, which allows them to pay more for that property.

The whole point of what I’m saying is that you wanna perform some sort of analysis on your own, no matter what; even if just to confirm that the information that was provided to you is accurate.

Now, there are actually two steps to performing this analysis. The first one is you wanna perform an analysis online, at your computer. The other one is going to be an in-person analysis, which covers the rent comps, but it also helps you confirm your renovation assumptions, as well as analyze the market and a few other things.
In this episode we’re gonna talk about that online analysis, and then next week we’re gonna talk about what to do when you actually visit that property in person. For this episode we’re gonna give away a free document; it’s gonna be an Excel spreadsheet that will help you perform this online rental comp analysis, as well as the in-person rental comp analysis. So it’s gonna be one spreadsheet that will cover what we talk about in this episode, as well as the first episode of next week.

The first step for performing this online rental comparable analysis is gonna be to build a list of comparable apartments in the area. And when you’re thinking about building this list, here are a few criteria you wanna keep in mind, to make sure these properties are actually similar and of like kind.

First is gonna be the year of construction, the year that that property was built. You’re gonna want the comparable property to be built around the same year as the subject property, the property that you’re actually looking at… Because if you are looking at properties that were built much earlier, or much later, they might be too dissimilar. They’re gonna have different levels of deferred maintenance, they might have different unit layouts, they might have different amenities offered, different construction materials… A 1960’s property is gonna be a lot different than a 2000’s property when it comes to quality. So if you’re looking at an 1980’s property, find a property that was built plus or minus 5 to 10 years.

Next is going to be the distance from the subject property. Again, this isn’t gonna be a set number, a set mileage, because it’s gonna depend on the size of the market, as well as the density of apartment communities. But we want them to be close. If you’re looking at a very high-density area, whether it’s 100 apartment communities in a one square mile radius, then the property should be within a mile of the property. But if you’re in the middle of Iowa, then 10, 20 miles might actually be okay.

In some cases, if you’re looking at a property that is very unique, you might have to find a rental comp that’s in a completely different state. For example, if there is some beachfront property in — I actually learned this when I was taking my appraisal class when I got my real estate license… But if you’re looking at a beachfront condo in Cincinnati that’s highly unique, you might need to go to a city like Pittsburgh and find a similar riverfront property in Pittsburgh.

So the distance really varies, but most likely if you’re looking in a major MSA, you’re gonna want the comparable properties to be within a few miles.

Next is gonna be the number of units. The comparable properties should have a similar unit count to the subject property. If you’re looking at a 300-unit property, you don’t wanna use a fourplex as a rental comp, and vice-versa. It comes more into play when you’re under 50 units and then above 50 units. If you’re looking at an 80-unit, you don’t wanna use a 20 unit; you wanna use a 120-unit. But if you’re looking at a 20-unit, a 30 or 40-unit is okay, but you don’t wanna use a 100-unit property… Because the operations are gonna be different, the amenities offered are gonna be different, the expenses are gonna be different.

Next is gonna be the unit type and the unit size. The comparable property should have similar unit types and square footage. Let’s say that you’re looking at a property that has all one-bed/one-bath units and that’s it; then using a property that only has two-bath/two-bed units is not going to be a good idea.

For the square footage, it doesn’t need to be the exact same, but if you’re looking at a property with one-bed/one-baths that are 500 square feet, then you probably don’ t wanna look at a property that has one-bed/one-baths that are 1,600 square feet, or some massive one-bedroom units.

Next is going to be the interior renovations performed at the comparable property. The quality of the interior renovations at this comp should be similar to the quality of renovations that you plan on performing at the subject property. If right now the subject property has a lot of deferred maintenance and it’s got very poor quality, but you plan on going in there and putting in stainless steel appliances, putting in granite countertops, putting in nice floors, renovating the clubhouse, redoing the pool, putting in playgrounds and kind of going the whole nine years, then you’re gonna wanna use a comparable property that has granite countertops, stainless steel appliances, a really nice pool, a really nice clubhouse… As opposed to using a comp that is similar to the quality of how the property currently is.

And then lastly it’s going to be the amenities offered, which I’ve kind of hinted at, but… The quality and type of amenities offered at the comparable property should be similar to the quality and the type of amenities that are offered at your property, that you’re looking at purchasing, once it’s fully updated.

Most of the factors we’ve talked about kind of hit on that, but for example if you’re looking at a property that has a pool, then you want your comp to have a pool. If you’re looking at a property that doesn’t have a clubhouse, then you don’t wanna look at a rental comp that has a clubhouse. Same thing with the playgrounds, barbecue areas… Any amenity – you wanna make sure that those are the same at the subject property and the comparable property. Now, it doesn’t have to be the exact same, but the large ones should be – the clubhouse, the pool, the fitness center; those should be. But if the only difference is the barbecue pit area, then you can still use that property as a comp.

Those are the main things to look at. There are a couple other things you wanna look at too, like the types of fees that are charged to the tenants – who pays for utilities, who pays for water, are there pet fees, is there utility fees, things like that. But overall, those factors that I discussed should be enough to help you have a better idea of how to actually find a comparable property.

Now, a really good way to help you have a visual comparison of the subject property to the potential comps is to create an amenities checklist. Essentially, you go in Excel, you create a list of all of the interior and exterior upgrades that will be offered at your property once it’s fully updated, and then make a column and create rows for each of those. On the columns you’ll put your subject property pre-renovations and post-renovations, and then check off “Okay, right now I’ve got these ten amenities, and then once I’m done I’ll have all 20.” Then create a column for each potential comp and do the same thing – go through and check off “Okay, they have 18 of the 20 that my property will have.” Or “This one has five, so I’m not using that one.”

You can find all that information pretty easily if you just go to the actual apartments’ website. They should have some sort of section that talks about amenities offered. I might even be able to find it at Apartments.com. But overall, you wanna take this checklist and use that to eliminate properties that aren’t comps, and to keep the properties that are comps. This amenities checklist will be included in the free document you’re getting, so… If what I said didn’t make 100% sense, it will make perfect sense once you actually see the document.

Now, for those other factors I discussed besides the amenities – the interior renovations, number of units, distance, year built – since you’re first starting out, you’re likely going to want to talk to your property management company or your mentor/consultant to see what is an acceptable range/distance from a property, number of units, in order to qualify as a rent comp.

Now, if you remember, way in the beginning – I think it was in part one – when I talked about reading through the offering memorandum and how you want to stop at the financial analysis section, because you don’t want that to impact how you underwrite the deal, this is the time where you wanna go back to that, and in particular you wanna go back to their rental comp section, and instead of having to find all of your rental comps from scratch, you can start by using the rental comps that are listed by the broker. So you can go ahead and input those into your amenities checklist, and go ahead and perform that analysis I discussed, go to their website (or Apartments.com) and figure out what amenities are offered, to make sure that they actually are like properties.

A few other things you wanna look at  – three things in particular that you want to look out for when you’re looking at the broker’s comps… Because again, the broker is trying to sell the property, so they might use really nice comps to bump up that rent premium. So the first thing you’re gonna look at is how far are the comps from the subject property. For example, Joe was looking at a property where the rent comps were in a completely different neighborhood; and since he was local to the area, he knew that one of the comps was located in a neighborhood that had a lot of college graduates, while the subject property was not a place that had a lot of college graduates.

So you wanna make sure — and again, it’s based on the size of the market and the density of the market, but you wanna make sure that the comps provided by the broker are close, in the same or very similar neighborhoods. They don’t have to be in the exact same neighborhood as long as that neighborhood has  similar demographic.

The second thing you wanna look out for is the year the property was renovated. Sometimes you’ll look at properties that have those proven rent premiums, so they’ve renovated 25% of the units and they’re getting a $100 rental premium – then you ask them, or you look at the rent roll to see when those units were last leased. That will help you know when they were most likely renovated, but your best bet is to ask when they were renovated… And you find out that those 25% of the units were renovated over a five-year period.

Well, if a unit was renovated five years ago and they’ve had the same rent at that unit for 3-4 years, then that’s not going to be the same as the rent that they could get today, or if you renovated that unit today.

So you wanna make sure that the renovation timeline is close to your timeline. If you plan on renovating 75% of the units in two years, then they should have renovated 25% of the units at a maximum of a year; ideally less than that. Ideally, they renovated it really quickly, because 1) that will show you that “Hey, I can get these rents”, but it also shows you that there is a demand for those, as opposed to renovating 25% over five years – you don’t know if those rents are actually reflective of the current market, and you don’t know if there’s going to be demand for those units, because there were enough available at one time to prove that.

Lastly, you wanna take a look at the operations of the comparable properties to see if they match up with the operations at the subject property. For example, something else that you may come across is you’ll look at the rent comps section and let’s say the subject property – the owner currently pays all of the utilities. Then you look at the rent comps and you see that half of them the owner pays all the utilities, but then the other half of them the renters pay the majority of the utilities, except for let’s say water.

Well, if the owner is paying all utilities at the subject property, those rents are going to be higher than at properties where the renters pay all of the utilities… So that’s not going to be  a good property to use as a rent comp analysis.

So once you’ve kind of gone through those three questions and the comps kind of pass that initial smell test, then you can use the free rent comp analysis. If they don’t, then you’re gonna have to find your own properties. But regardless of whether you use the broker’s rent comps or your own rent comps, you’re gonna want to do your own research and find out what the actual rents are on your own. Just because the actual apartment community is  a comp doesn’t mean that the rents that the broker listed are accurate.

Once you’ve created your list of properties, then in the Excel document that we’re giving you for free you’re gonna wanna go ahead and input a few pieces of additional information. First, you’re gonna wanna put the property name, the property address, the year built and the number of units. Then next you’re gonna wanna go ahead and determine what are the rents for each of the various unit types at these comparable properties. The best way to do this is going to be just Apartments.com, because typically they’ll have their units listed for rent, and you can pull the data from there.

For unit types you’re gonna have one-bed/one-bath, two-bed/two-bath, three-bed/two-bath, whatever unit types are offered at the subject property. Then for each of those units you’re going to want to input your square footage for your property, as well as the current rents, if the current owner has implemented the value-add program and has proved rental premiums. Then you wanna do the same thing for your comps. For example, at comp one they’ve got a one-bed/one-bath that’s 700 square feet, that’s rented at $600/month, and then they have a one-bed/one-bath at 800 square feet that’s rented at $700/month; you’re gonna enter both of those. Same thing for rent comp 2, rent comp 3, rent comp 4… And you wanna do the same thing for the two-beds, the three-beds, and if they have, the four-beds.

Once you do that, then you can determine what is the average rent per square foot for each of those unit types. So for the five, or six, or ten comparable properties, what is the average rent per square foot for their one-bedroom units, what’s the average rent per square foot for their two-bedroom units.

Once you have that average rent per square foot and you know what the square footage is of your units, you can determine what will be the approximate rent of the subject property. Then you can take that and you can compare that to the proven rental premiums that the owner did, or the rental premiums that the broker calculated, and see if they were accurate. But if they were accurate or weren’t accurate, regardless, you wanna use the actual data that you pulled.

At the end, you should have a renovated rental rate for each of the unit types at your property. If you want to, you can round the number up or down based on how aggressive or conservative you want to be.

That concludes the online portion of your analysis. The next step is going to be to go ahead and actually visit the property in person and do a secret shopping of sorts to confirm that the rents you found online are actually accurate, as well as to gather other pieces of information that are going to be important to confirm your rental premiums, as well as to confirm a few other aspects of your underwriting process. That’ll be it for this episode. We’ll discuss that in-person analysis next week.

Just to summarize what you’ve learned this episode – we went over the step six of the seven-step underwriting process, which is performing the online rent comp analysis, which is essentially finding like apartment communities in the area in order to determine what the average rent per square footage is, in order to use that number to calculate what you can rent out your fully-renovated units for once you’ve implemented your value-add business plan.

In the meantime, if you haven’t so already – which you probably have – you can go ahead and listen to parts one through five of this “How to underwrite a value-add apartment deal series.” Or you can go ahead and go back to some of the older Syndication School series about the how-to’s of apartment syndications… And make sure you also go to download your free document. You can do all of these things at SyndicationSchool.com. The free document should also be in the show notes of this episode.

Until then, thank you for listening, and I will talk to you next week.

JF1702: How To Underwrite A Value-add Apartment Deal Part 5 of 8 | Syndication School with Theo Hicks

Syndication school is back! We’re just going to jump right back into it today. Theo will pick back up where he left off with underwriting. Specifically, today he’ll be talking about how to determine your asking price. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You’ll know how much money you should pay for the deal, and how much you need to raise”

 

Free Simple Cash Flow Calculator: http://bit.ly/simplecashflowcalculator

 


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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’m the host, Theo Hicks. Each week, as you know, we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these episodes, we offer a document, a spreadsheet, or some sort of resource that accompanies the episode, for free. All of these free resources, as well as the past Syndication School series can be found at SyndicationSchool.com.

This episode is gonna be a continuation of the series we’ve been doing for (I guess now it’s been about) two months, since we took about a one-month break, because I’ve been off for the past month… But I’m back here, to talk more  apartment syndication. This is gonna be a continuation of the series entitled “How to underwrite a value-add apartment deal.” This is gonna be part five.

I highly recommend, if you haven’t so already, going back and listening to parts one through four; we might have a lot of new listeners since we haven’t recorded for about a month…

To start this episode off, I’m gonna quickly do a synopsis of steps one through four, just to give an idea of what we’ve discussed so far, because everything we’ve discussed so far is gonna be the foundation for specifically this episode; in this episode we’re gonna talk about how to actually set the offer price.

Once you’ve done parts one through four in the case of the seven-step underwriting process steps one through four, then we are going to be able to set an offer price, and see if we can actually get this deal under contract.

In part one we discussed what you actually need in order to underwrite a value-add apartment deal. That’s gonna be the T-12, which is gonna be that 12-month summary of the income and expenses at the property. You’re gonna need a rent roll, which is a summary of the units and the amount of money each of those units are bringing in.

Third is gonna be the offering memorandum, if the deal is on market. That’s that sales package put together by the listing broker. And then lastly, you’re gonna need some sort of financial model to input all of this information into. And being Syndication School and we give away free stuff on this podcast all the time, one of the free documents we gave away is that simplified cashflow calculator… So if you haven’t done so already, go to SyndicationSchool.com and make sure you download that model… Because a very common question I see is “Can I get my hands on the financial model you guys use to underwrite your deals?” This is not the model that we use, but is a simplified, condensed version of that model, that you can use to get started, that you can use to fully underwrite deals, and that hopefully you are able to customize as you get more familiar with the cashflow calculator, as well as the underwriting process, to make it a powerful tool based off of what you need and how well you are using Excel.

Also in part one we went ahead and introduced the seven-step underwriting process. To quickly review, step one is to read the offering memorandum, step two is to input the rent roll data into your cashflow calculator, step three is to input the T-12 information in your cashflow calculator, and step four is to set the underwriting assumptions. Step five is to determine the offer price. Step six is to perform an online rent comp analysis, and step seven is to visit the property in person.

Now, as I mentioned already, we’ve done steps one through four so far, and in this episode we’re gonna be talking about step number five. But in part one, if you listen to that, we discuss steps one through three, which is, again, read the OM, input the rent roll and input the T-12 data.

Then moving on to part two, the second episode in this series, we began setting our assumptions; so step four – setting the  underwriting assumptions. Specifically in that episode we focused on how to calculate how much money you need to raise in order to take down the deal. That requires knowing 1) what your acquisition fee is going to be; 2) how much you need to pay in closing costs; 3) how much you have to pay in financing fees; 4) how much money you’re going to raise for an operating account fund; 5) how much money you’re gonna need to raise in order to perform the interior and exterior renovations, and 6) how much money you need to put down in order to secure financing.

So we’ve reviewed how to calculate each of those factors… Then in step three we went into more detail on how to calculate those renovation, those capital expenditure costs, so those interior costs and those exterior costs, as well as a contingency budget… And to do so, we went over a list of 27 different ways that you can add value to apartment communities. Again, not every single way to add value, but these are some of the most popular and common ways to increase the value of your apartment community by performing those interior renovations or exterior renovations in order to demand more rent, or others sorts of income through fees.

Then the most recent Syndication School episode was part four, and that is where we finished up step four, setting the assumptions, and we discussed the remaining assumptions, which were those growth assumptions, from appreciation, how much is the income going to increase each year, how much are the expenses going to increase each year.

We talked about the various project assumptions – how long  do you think it’s gonna take in order to perform all the renovations and get those new, stabilized rents, how long do you plan on holding on to the property… And then we discussed the stabilized income and stabilized expense assumptions – that is what are going to be the income (loss to lease, vacancy, bad debt, concessions, things like that) as well as the expenses (payroll cost, insurance, taxes), what those are going to be once you actually take over the property.

The last set of assumptions we discussed were those debt assumptions – what type of loan are you getting, what’s the interest rate, what’s the amortization period, is there an interest-only period, how long is the loan… So we went ahead and discussed where to find that data and how to input that into the cashflow calculator.

Now, at this point, since we have all the information about how the property is currently operating, and we’ve inputted all the information about how we plan on operating the property, we’re able to go ahead and figure out how much money we can pay for the property; we can figure out how to set an offer price. That’s what  we’re gonna talk about for the remainder of this episode. Then in the next episode, as well as next week, we’re gonna finish off the seven-step underwriting process.

With that being said, let’s jump right into how to determine an offer price. If you listened to the episodes, typically for these larger apartment deals (100 units, 200 units, or more) whether it’s off-market or on-market, there’s likely not going to be a purchase price or a sales price listed.

Typically, if you read through an offering memorandum, it’s going to say that the price is going to be determined by the market. Or it’ll just be left blank, or they won’t even really address the sales price at all. Now, “determined by the market” means that they’re likely going to have some sort of bidding period, where all the people who are interested in buying the deal will do their analysis, submit their offers, and then once they collect all those offers, they’re going to pick the strongest offer; not necessarily the highest priced offer, but the strongest offer. We’ll discuss that most likely next week, how to create a  strong offer. But they’re gonna review all of those, and then sometimes they’ll have a best and final sellers call, where the seller and the broker will have a conversation with the top few buyers, to get an understanding of their ability to purchase, as well as what their business plan is going to be… And then they’ll pick the strongest offer to have a purchase and sales agreement signed for.

Typically, that number is going to be based on the buyer – what are the buyer’s return goals, and how much value can they add to the deal? The more value you can add, the more you can pay for the deal. Those are the two main factors that will determine the sales price.

When it relates to the return goals, because we’ve already talked about adding value when we discussed the 27 ways to add value – but the other one is the return goals… So what are the return goals that either you and/or your investors have for the apartment deals? So since we are raising money, the goals of our passive investors are gonna be pretty important, so you’re gonna want to know what returns they want.

For Joe’s business, when they’re analyzing deals, the two factors that they take into account when determining how much money to pay for a deal are gonna be the cash-on-cash return, and the internal rate of return.

When they’re underwriting deals, they wanna see a cash-on-cash return of at least 8% each year, and one of the reasons why is because the preferred return that they offer to their investors is 8%. So if the deal doesn’t cash-flow 8% each year, they’re not able to hit that preferred return, so the deal is not going to make sense.

Now, sometimes you don’t necessarily need to hit that 8% or whatever that factor is year one; you can make up for it in other ways. It can accrue, you can pay your investors in other ways… But ideally, you wanna see an average return of at least 8% each year, if that’s what your preferred return is going to be.

The other one is internal rate of return, which is gonna be based off of the hold period. For Joe’s business, they wanna see an IRR of around 13%-14% for a five-year hold.

Now, when you’re underwriting it, from a strictly analytical perspective, the way that you’re gonna figure out what the offer price is going to be is through an iterative process. So at this point, you fill out your entire cashflow calculator. You have all the formulas set up, and if you don’t input a purchase price, you’re gonna get some errors, you’re gonna get some zeroes, some undefined cells in your cashflow calculator, particularly when it comes to these return factors – the cash-on-cash return and the IRR. That’s because the cashflow calculator is waiting for you to input the last piece of information, which is what the purchase price is going to be, and then once you input a purchase price, it’ll go ahead and do his thing, run all these formulas and spit out a cash-on-cash return and an IRR.

So what you wanna do is you’re going to want to essentially just input a number, and see what the cash-on-cash return and the IRR is. If the cash-on-cash return is 50%, and the IRR is 100%, then you’re going to want to likely increase that number, because it’s not going to be a strong enough offer to the seller. If the cash-on-cash return is 1% and the internal rate of return is 3%, then you’re gonna want to go ahead and reduce that offer price.

You wanna keep messing around, inputting different numbers, until you get to the point where you’ve got a purchase price that results in the deal meeting or exceeding your return goals.

Now, one more thing that you’re gonna want to do before you get to this point, because the cash-on-cash return is not necessarily dependent on when you actually sell the property, because that’s just based off of the ongoing cashflow… But of course, once you actually sell the property, since you’ve added value, you’ve increased the income and/or decreased the expenses, then the value of the property is gonna go up, which means that you’re gonna have hopefully a large lump sum of cash to distribute at sale. The amount of money you’re able to distribute at sale affects the internal rate of return, so that’s why you want to input – if you remember back to step 4, one of the assumptions you inputted was your projected hold period; so five years, seven years, ten years, or how long you plan on holding on to the property. Once you input that, then you’re going to know “On this date in the future I plan on selling the property”, so based on that you can determine how much profit you’re going to make once you actually sell the property. These are what are known as disposition assumptions, or sales assumptions; it’s just a fancy way of saying sales assumptions. Once you set those, then you will have that IRR number populated.

Here’s a few things you need to know in order to set your dispositions assumptions. Number one is going to be what will be the exit cap rate? The value of the property, of multifamily, is based on the net operating income and the market cap rate. So you’re going to know what the exit net operating income is, because if you filled out your cashflow calculator properly, then every single year should have a total income, a total expense, subtract the two and you’ll have your net operating income. So if the goal is to sell a property after five years, then you can use the net operating income from month 60. Whatever the annualized net operating income in month 60 (which is five years) will likely be an estimate or an approximation of what the net operating income will be when you sell that property in five years. Of course, it’s not going to be perfect; that’s why we want to input conservative assumptions, and it’s why I said to input conservative assumptions. That way, you know that that net operating income is not necessarily a worst-case scenario, but it’s a conservative estimate, and not something that’s super-aggressive… And you’ll notice this when you have your cashflow calculator. Just the slightest change in that net operating income will impact the profits, as well as the ongoing cashflow. So if you’re super-aggressive and you don’t hit those numbers, then you’re not going to hit those return projections that you presented to your investors, and that’s gonna at the very least give your credibility a hit.

So in order to calculate that exit cap rate, this really depends on how you wanna do it. Different operators have different methods and strategies for determining what that exit cap rate is. For Joe’s business, they’ll typically assume that the exit cap rate is going to be 20 to 50 basis points worse than the in-place cap rate. What that means is they believe that the market is going to be worse when they sell than when they buy. Now, if that holds true – again, this is being conservative, and kind of going for that worst-case scenario – if the market is worse when they sell compared to when they buy, will they still be able to hit those return projections? If they do and the market remains the same or gets better, then they’re going to blow away their projections… But just to be safe, they assume that the market is going to be, in this case, 20 to 50 basis points worse at sale, compared to the purchase.

In mathematical terms, that means that the exit cap rate is going to be 0.2% to 0.5% higher than the in-place cap rate. So if the in-place net operating income divided by the offer price that you set – let’s say it’s 5%, and you plan on selling after five years, then the in-place cap rate being 5%, you’re going to assume an exit cap rate of 5.5%.

A few of the other strategies I’ve seen is ten basis points per year, so every year they hold the property, they assume the market cap rate is going to get worse by 0.1%. Some people just keep it the same. Again, it’s really up to you, but our recommendation is to assume, whether it’s 20, 50, 100, whatever you wanna do, but just assume that the market is going to be worse at sale than at the buy, just to keep everything conservative.

Once you have that exit cap rate and you’ve got your exit net operating income, you take the NOI and  divide it by that cap rate in order to determine what you’re likely going to be able to sell your property for after five years.

Of course, you didn’t buy this property all cash, and you likely didn’t pay off your entire loan. You might even refinance and have a larger loan on there now, so you’re gonna have to subtract the remaining debt from the sales price… And again, I’m just explaining how the math is working in the cashflow calculator; in the simplified cashflow calculator, all of this is already done for you. All you really need to do — well, actually, the cashflow calculator automatically assumes that the exit cap rate is 50 basis points worse… So I’m kind of just explaining what’s going on in the cashflow calculator, just in case you wanna tweak things.

So it’ll subtract the remaining debt, and that will be what your profits will be at sale. Then there’s also a few other things that need to come out of that before you’re able to distribute to investors. So you’re gonna have your closing costs – if you’re the seller and you’re paying the closing costs, you’re gonna have to take that into account. As the general partner, you might also charge a disposition fee, which is a percentage of the sale for essentially all the work you’ve done, from day one until you actually sell the property. Then you’re gonna take out some taxes, and really any other fees that are involved with the selling of property. That could be a broker’s commission… This really just depends on how you go about selling the property. Once all that money is taken out, the remaining profit is going to be your sales proceeds. That is going to be the money that is able to be distributed. Then based on how you’ve structured your agreement with your passive investors,  some of that money goes to them and some of that money goes to you.

For example, you’re likely going to need to distribute the remaining equity to investors. Let’s say for example you’re holding the property for five years, and the total investment is of a million dollars, and you’ve given that 8% preferred return, which is usually considered a return on capital; anything above that is considered a return of capital. So anything that was distributed above that preferred return will be get subtracted from their capital balance, and then whatever is remaining is owed back to them at sale. So you subtract that from the sales proceeds, and then the remaining profits are split between the GP and the LP based on whatever that profit split is  (a 50/50, 70/30), and that’s how much money is going to be going to your passive investors at the sale. At this point, in the cashflow calculator, it will automatically calculate that internal rate of return based on all the cashflow they’ve received from day one, plus that entire lump sum profit they receive at sale, plus how much money they invested initially, and it will calculate that internal rate of return for you.

So at that point, you will have the entire cashflow calculator filled out, you’ll have your disposition assumptions set, and you’ll go ahead and do that iterative process with the offer price. Once you’ve gotten to the point where you’ve gotten that cash-on-cash return and the internal rate of return to the point where it meets your investors’ goals or your goals if you’re buying this yourself, that is going to be what you can offer on the property.

At this point also, all the other cells that were undefined, or zeroes, will automatically populate. For example, the equity requirements, so how much money you need to raise, because that number is going to be based on the purchase price, because of the acquisition fee, the closing costs – all those are usually just a percentage of the purchase price, and that’s how it’s set up in the simplified cashflow calculator.

So you can go through and say “Okay, this is how much money I’m going to pay for the deal, this is how much money I need to raise, and here are going to be what the return factors are going to be.” Now, you’re not ready to submit an offer yet; there’s still a few more steps. But at this point, something that would be helpful for you, especially if you’re just starting out, is to go ahead and ask your mentor and/or your property management company to review your underwriting.

Now, depending on the expectations you set with your mentor or property management company during those conversations – that will determine how you have them analyze your underwriting. You probably don’t wanna just send them your cashflow calculator and that’s it. That’s just gonna be more work on their part, because just because you’re familiar with the cashflow calculator doesn’t mean that they’re necessarily familiar with the cashflow calculator… So anything that you have questions on or you’re not 100% sure on, just ask them.

For example, you can say “Hey, these are my stabilized expense assumptions. Here’s my payroll costs. Here’s my property management fee. Here’s my maintenance and repairs. Here’s my contract services. What are your thoughts on that? Here are my growth assumptions, here are my income assumptions. I think the vacancy is gonna be this, loss to lease is gonna be this; what are your thoughts on that? Here are the interior and exterior renovations I think are going to be needed at the property and here’s the cost associated with each of those. What are your thoughts on that?” Summarize your cashflow calculator in words, and then send them a few bullet points and ask them to give you their feedback based on that, instead of just sending them the entire Excel model… Because they probably wouldn’t appreciate that that much, but they’d appreciate you putting forth the effort to underwrite the deal, as well as you putting forth the effort to make your questions more clear and concise.

So at this point you’ve got your offer price. You’re gonna want to do steps six and sever concurrent with determining the offer price, because it really depends on how you are determining the stabilized rents, how much money you’re gonna be able to collect once you’ve actually done all of your exterior and interior renovations. This strategy is assuming that you’re buying a property that has the proven rent premiums. That means, as I’ve said in previous episodes, that the current owner has implemented a program already on maybe 20% of the units, and they’ve gotten a $25, $50 or whatever rental premium, and you’re going to assume that you’re going to get that same premium on the remaining units, and you’ve inputted that into your cashflow calculator.

If that’s not the case, then you’re gonna have to do steps six and seven first – that is the rent comp analysis and the in-person analysis. Just step by step, a seven-step process. Usually, you’ll follow it straight through, but sometimes you might have to do the rent comps first, before you’re able to set an offer price… But we’ll talk more about that in tomorrow’s episode, when we discuss how to perform the rent comp analysis.

That’s gonna conclude part five of how to underwrite a value-add apartment deal, as well as step five of the underwriting process, and that is how to determine that offer price. Again, this is gonna be based off of the return goals; once you know those and you’ve set your disposition assumptions, you’re gonna want to determine what the offer price is going to be through that iterative process, which means you change that input on the cashflow calculator until you are achieving those returns that are desired by you and/or your investors.

As I said, in part six tomorrow we’re gonna discuss step six, which is going to be the rent comp analysis. Until then, to listen to other Syndication School series about the how-to’s of apartment syndications and to download that free simplified cashflow calculator and other free documents, visit SyndicationSchool.com.

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

JF1696: How Can You Work On Your Business Rather Than In It? With Terry Ogburn

Terry helps business owners quit being an employee in their businesses, and start getting to work as actual business owners. He also has experience in real estate investing, everything he shares with us today, relates to real estate investors. As real estate investors, we pretty much run small businesses, often times the owner is doing too much in their business to really work on their business. Terry has some tips to share with us today to start reversing that issue. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“We think in pictures, this is why vision boards are so important” – Terry Ogburn

 

Terry Ogburn Real Estate Background:

  • Owner and Lead Business Coach of Ogburn’s Business Solutions – helps business owners work on their business, not in it
  • Worked with Century 21 for 6 years, turning offices around
  • Specializes in recruiting, training, and managing, took one office from #382 to #56 in closed volume within one year
  • Based in Tampa, FL
  • Say hi to him at https://www.terryogburn.com/
  • Best Ever Book: Think And Grow Rich

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Terry Ogburn. How are you doing, Terry?

Terry Ogburn: I’m doing great, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad you’re doing great, and it’s my pleasure. A little bit about Terry – he is the owner and lead business coach of Ogburn’s Business Solutions, where he helps business owners work on their business, not in their business. He worked with Century 21 – we all know what Century 21 is – for six years, turning offices around, and specializes in recruiting, training and managing, and actually took one office from being ranked #382 in closed volume to #56 in closed volume within one year. That’s a big ol’ increase in closed volume, and also climbing the ladder in the rankings… Based in Tampa, Florida.

With that being said, Terry, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Terry Ogburn: Sure, I’d be glad to. My background started as most people getting into business. I was fired out of the car business, and I could work on air conditioners, so I became an air conditioning service company, based on the fact that I could work on air conditioning. And through that, that led to me understanding that we need to work on the business, not in it; that’s all I was really doing, is being a technician. So after a few years, a few mentors, I got a lot of good people under my belt giving me direction, and I learned how to work on my business. So I took that into the corporate world, did some turnaround stores for Radio Shack, I did some traveling in the travel industry, to help them introduce my plan to their world, and that worked… I took a company public…

Then in 2005, after the real estate adventure, I found myself wanting to help small businesses, so I started my company in 2005.

Joe Fairless: When you bring on a new client, what are the questions that you ask them initially?

Terry Ogburn: That’s a good intro there. I have an intake form. The first thing I wanna know is what would be the three outcomes that the prospective client would want from the call. That’s first. Then I need them to explain briefly to their business and how it works, and then I go through a series of questions, such as “Do you have a business plan? Do you have a strategic plan? Operations manual? Budget proforma? Job descriptions?” All of these are typically answered in no, but it’s reflecting back to the client that they need these things.

Then I get into some more questions, like “What is your biggest challenge you’re facing right now? What kind of improvements would you like to see? What’s the single best revenue generator you have?” And I have 15 total questions, but it all gives me a good background, so that I can lay out a strategy for them.

Joe Fairless: Got it. Okay, so you’re asking questions, you learn more about the business, both what they need to have but likely don’t have, as well as what they currently have, like the revenue generators, so you’re getting to know where they’re making most of their money… So once you get those questions answered, do you have a process that you typically go through in order to turn a business around?

Terry Ogburn: I do. It’s called an 8-step business development plan. This can be customized to any person, whether it’s an individual or a company. Then from that business development plan, we abstract an operations manual, which consists of 8 components. The business development plan is number one, and then you have an action plan, or what I call a strategic plan, number two; an organizational strategy, including your organizational chart and job descriptions. A checklist section, so any job function, any task that you do should have a checklist written for it. Then you need a budget proforma; most people don’t know what proformas are these days; they rely on QuickBooks. A proforma is forecasting the income you want, not just the income that you’ve got coming in, but you can build towards that, manifest that into place.

Then you have a policy and procedures manual section. This is your rules and regulations to your game. Then a direct marketing plan and a social media marketing plan. That rounds up eight sections. Once you put this manual together, you can actually take it and duplicate it. You could open a store in San Francisco, California, anywhere you want – you just take your operations manual with you and open up a new store.

Joe Fairless: Wow. You got it down to science. I got most of them… What were the first couple in the operations manual?

Terry Ogburn: It’s my unique business development plan, and then the strategic plan or action plan is the pathway that you’re gonna take. What I do there is I take all the job description line items, the tasks that need to be done, and those then are transformed into a strategic plan or an action plan, and we can actually grade that from 0 to 5 for each of the line items. Basically, if all your team is performing at their optimum, then you should be scoring anywhere from 3 to 5 on each one of your line items.

Joe Fairless: So that’s something that’s assessed after the plan is implemented?

Terry Ogburn: Right. Every quarter. My process is that you grade yourself every quarter. And not verbally or with emotions, you grade it with specific numbers. If you’re supposed to have 20 sales this month and you come up with 15, then you are 75% of goal. I use the SMART method, and I’m sure you’ve heard of it  – specific, measurable, attainable, relevant and time-bound. Every task must be orchestrated in that way.

Joe Fairless: For a real estate entrepreneur and business owner – I’ll just speak for myself, and then perhaps other might be thinking this – this sounds phenomenal. The challenge I’d have is it seems like a bunch of work that on me, to put this together, like the org chart… Well, the org chart is not that bad, but policies and procedures, and direct marketing plans, social media – I definitely need all this… So do you put this together for them, and if not, how much work is involved on your client’s part to assist you in this?

Terry Ogburn: Good question. We can actually get this done in a one-hour one-on-one meeting for 13 weeks. The manual will be put together in a 13-week period. Now, you as the individual, you’ll probably have 2-4 hours a week that you’re working on this manual concept, but there’ll be other tasks that you have to do, like prospecting, and things like that.

The one thing about the real estate business is prospecting, and that’s a tough thing to do. Most realtors want buyers. The reason we did so good in those rankings, as you’ve described, was we focused on listings, and that’s troubling for a lot of realtors, because that means they have to actually get out there in the street, knock on doors, and do that.

Now, I have a great system, that I even implemented in a general contracting business in Chicago. We did the same thing, we just created a farm; most realtors know a farm. So I created a farm for them…

Joe Fairless: I don’t know what a farm is. What’s a farm?

Terry Ogburn: A farm would be where you take a neighborhood – what I did in real estate is we took condo buildings and we divided the up until everybody had about 200 properties, and their job was to talk to these people once a month. Through that, we could convert them into listings.

So a farm would be like if you were assigned a particular neighborhood, then it would be your job to become known as the representative for that area, and you knew everything about that area… And knowledge is power.

Joe Fairless: Okay. So you take your clients through the 13-week plan… I imagine it’s a 13-week process, it sounds like…?

Terry Ogburn: Correct. It’s a thing that we do, a regimen; a one-hour call every week. You leave with homework, and then you have stuff to do; we check the homework the next week, and then we keep moving forward. Now, once you get the meat and potatoes, so to speak, so the manual put together, it takes about 18 to 24 months to implement it… So it’s not just create the manual, you’ve gotta actually implement the actions that are in there, too.

Joe Fairless: Oh, you can’t just write it down, you’ve actually gotta do it, too?

Terry Ogburn: Yeah, that’s the bad part…

Joe Fairless: Ugh… So there’s a catch.

Terry Ogburn: Yeah, there is.

Joe Fairless: What, if anything, is different about the process when you work with real estate companies? It might be a brokerage, like you described, or it could be a company that’s doing wholesaling and it’s scaling, or an apartment syndication company.

Terry Ogburn: The plan works regardless of what venture you’re in… Like my guy in Chicago – he buys rental properties, and we put the same thing and plan in his place, where he buys multi-unit facilities, and then we use the plan to grow with.

It’s as simple as franchising. How I came up with this concept, Joe, if you don’t mind me sharing…

Joe Fairless: Sure, please.

Terry Ogburn: In the beginning of the ’90s I moved to Miami to help create a franchise from scratch… And in franchising, once I give you an offering circular, I can’t ask for any money for 14 days. So I had to create a process that would keep them busy for that length of time. [unintelligible [00:11:21].17] And understanding franchise law, the Federal Trade Commission says that you have to prove your business on paper before they will ever let you sell it as a business opportunity. What that means is that they don’t want you to have any more than a 2% failure rate. So if you patent yourself after the Federal Trade Commission, any business just follows that same process, your business has to be successful.

Joe Fairless: Okay. That makes sense.

Terry Ogburn: So why go and try to reinvent the wheel? Why don’t we just follow what the Federal Trade Commission says you have to do? Well, you have to have training manuals, you have to have checklists, you have to have all the i’s dotted, all the t’s crossed; you have to make sure that this business, before you sell it – you can’t make any earnings claims, but you certainly don’t want anybody losing, because if you lose, then you have to report that loss, and then that becomes a deterrent from anybody buying your franchise.

Joe Fairless: With each of those eight steps, which one takes the longest amount of time for the individual? I understand that there’s a one-hour call each week, so it sounds like they’re all created equally during the call, but there’s gotta be some that take more time after the call than others.

Terry Ogburn: The job descriptions, coming up with the task… I can give your listeners the way I do that. Let’s say you want a position for a receptionist. So you would go out and you would google “job description for a real estate receptionist.” And it’s gonna list your jobs, your rules and responsibilities and your duties. You capture all that, then you take it back to a Word document and then you tailor those lines to meet your specific needs. You personalize it, so to speak.

You do that for your sales rep, you can do that for your accountant, your bookkeeper… All these job descriptions are out there. All you have to do is pull them, and then you have to make them into your own personal stuff. You have to identify your stuff. That takes a good bit of time, because there’s a lot of research in that.

The other thing that takes time is writing a checklist for each line item. That’s important to a business owner, because if I need you to come in and all I need you to do is get the mail out today, then there’s a checklist that you could follow to be able to get that to happen.

Joe Fairless: I imagine that checklist for the job functions can be quite extensive…

Terry Ogburn: It can be, because I get you to write them and broken up into sections. The first section is the objective, so what is the objective of the task. So you state your objective. Then why is that important to the company; you list the why. Then you want to understand what tools it’s gonna take for you to accomplish this objective, how much time should you allocate for this objective, and then you put in a step-by-step – “This is the first step you do, this is the second… Open the computer, launch QuickBooks program,” and then you just follow each step. Then at the end you should be able to complete the task that was originally stated.

Joe Fairless: What’s something in that process that your clients have the most challenging time putting together? We just talked about what tends to take the most time, but that might not necessarily be the most challenging to think through… So what’s the most challenging to think through and come up with?

Terry Ogburn: That would get into your marketing now. Your direct marketing and your social media marketing – those are two distinctive animals, or processes, so to speak. Direct marketing is not mass marketing, it’s about singling out, as I call it, your dear – what is your ideal client, where do they hang out, and then go directly to them; go directly to where they hang out. That can be tedious, because again, bringing in to my guy in Chicago, we singled out these little strip centers where they need the interiors built out. Well, if you can imagine, there’s a big sign at the end of the driveway that says “We will build to suit, 30,000 square feet.” I’m sure, Joe, you’ve seen those types of things out on the highway, right?

Joe Fairless: Sure.

Terry Ogburn: Well, that is nothing more in the real estate business than a for-sale-by-owner sign. It needs a tenant, and it needs somebody to build the thing. So  you’re gonna provide the build-out service… So you go and build rapport, and knock on their door, you get to know them, and that type. That’s your direct marketing plan. Something that puts you to earn the business, not buy it.

And then social media is a whole different marketing concept, as well. That is more mass advertising, putting out to the mass market. Some people buy ads, and do that stuff; some just grow their business organically. Either way can be done, but you need a sophisticated plan and know how to execute it. If you’re gonna send out an e-mail and newsletter every month, send it out on the same day, each date, same time, so people are gonna be like “The fourth Thursday of every month, at ten o’clock, expect Joe’s e-mail.”

Joe Fairless: Based on your experience working with business professionals, as well as real estate professionals, what is your best advice ever for professionals who are wanting to take their company to another level?

Terry Ogburn: I’ll give your listeners a formula that I use. It’s a four-step formula. If you don’t mind. Is this gonna be okay?

Joe Fairless: Yeah, please.

Terry Ogburn: The first thing – you’ve gotta be committed, and commitment means burning the boats. That means you’re in it to win it; you’re not fooling around, you’re committed. If you wanna be the best real estate company in the area, then you’re committed to being that.

Number two, we must put disciplines in our life that leads to that commitment. That means if you’ve gotta get up an extra hour earlier to get your knowledge base under you, or whatever disciplines – whatever it is, you have to put disciplines in place to make sure that your commitment gets completed.

Number three would be decisions. Your decisions should be taking you towards your commitment. I give any person that I work with permission to procrastinate on anything that doesn’t take them towards their goal. If this decision isn’t moving towards their end goal, then question yourself why you’re doing it.

Then number four is vision. We must visualize that we’re already in this success, we have to visualize that we’re already in possession of whatever it is that we’re trying to acquire. We think in pictures, so this is why vision boards are so important, and visualizing your outcome… I will even ask a salesperson to get to the meeting 15 minutes early, visualize exactly how this meeting is gonna go.

I have some little things that I do different for real estate. One of the things would be if I’m gonna presenting an offer to a client, I would make a copy of that offer for every person that’s gonna be at the meeting. I want my salespeople to go there and present their offer; I don’t like the other agent presenting my offer. I wanna present it there. I have a chance to build rapport… Not that I’m gonna have to say anything to the owner, I just wanna be there and explain my customer and why they want their house.

I have a different approach for sale by owners. Everybody knows that a for sale by owner is nothing more than a listing that’s just waiting. Most of the time — the statistic says that the house will become  a listing.

For a realtor, my approach to that is quit trying to get their listing, and try to help them sell their house. So I would call you up, Joe, and I would say “Hey, Joe, is that house that you have for sale on 2nd Avenue – is that still for sale?” And you would say yes, and I would say “Listen, I don’t have a buyer right now, but if I could find someone that could pay you your price for your home and pay me my commission, could you and I do business?”

Joe Fairless: Yes.

Terry Ogburn: Of course you’re gonna say yes, right?

Joe Fairless: [laughs]

Terry Ogburn: Okay. So then I make a call every week, keeping in touch with them, and I have little scripts to go with that… And finally, I call and I say “Listen, I wanna preview your house. Would it be okay for me to meet at the house and go through it?”Then I have a little checklist that we go through, and all the time I’m building rapport.

Then I send a little thank-you note that says “Thank you for your time.” Then a couple weeks later, after the calls I make, I may call the next time and ask if I could hold the house open. Now, if I hold your house open for you and I [unintelligible [00:19:53].21] the area by calling the neighbors in the neighborhood and get them to come over to the house, and we create this buyer’s list of 8-10 people, who gets that buyers list?

Joe Fairless: Well, I think you do.

Terry Ogburn: I do, not the homeowner.

Joe Fairless: Right.

Terry Ogburn: So I’ve used that for sale by owner’s house to get me my leads for my buyers, for me, and at the same time I might sell his house… And after doing all this work, I might call up and say “Listen, I know you’ve been trying, Joe, to sell this house for the last 6-8 weeks. Would you consider me listing the house for you and seeing what I can do?” Well, I just gave you all this free work for nothing, and now your wife is gonna say “Man, if this guy does that for free, what  will he do if we pay him?”

Joe Fairless: Right.

Terry Ogburn: Because to me, when you walk up to a for sale by owner and you ask them for their listing, you’re just really walking up to him and asking them for their wallet. Now, if I walked up to you on the street and I said “Hey Joe, listen, how about giving me your wallet?” You’re now gonna start fighting right away; verbally, I mean, not physically… You’re gonna be against that idea right now.

Joe Fairless: Yup.

Terry Ogburn: Now, in all reality, there’s no real estate person that’s ever argued with me about that – who pays the commission for the house anyway?

Joe Fairless: The buyer.

Terry Ogburn: Of course. The buyer always pays the commission. What I want my realtors focused on is what do they want at the closing table? Forget the asking price, forget all that stuff, forget the middle; what do you wanna walk away with at the end of the day? That’s the figure we wanna focus on.

Joe Fairless: Yeah. That’s great. It’s a very smart approach. Thank you for sharing that. That will be helpful for a lot of Best Ever listeners who are real estate agents… And not even real estate agents; I don’t wanna downplay it. It’s the approach of adding the value and giving–

Terry Ogburn: Sorry to interrupt, but I have a rule – you’re not supposed to offer price until you’ve established the value that’s ten times the price.

Joe Fairless: I like that.

Terry Ogburn: Now, once I’ve got that value built into it, then I can paint a dream with it. I’ll just give one little quick story with a real estate agent. We had a proved buyer on a $500,000 home. She had a home picked out on the beach, and she had a home picked out in the mainland… And the customer wouldn’t make up their mind, so I told my agent, I said “Which house do you wanna sell them?” He said, “I want them to buy the house on the beach.” I said, “Well, then invite them over to the house at sunset.” She said, “Terry, they’ve already seen the house.” I said, “[unintelligible [00:22:25].15]  the house. Invite them to the house at sunset. Sell the sunset.” But you know which house they bought…

Joe Fairless: Right.

Terry Ogburn: Because it wasn’t the house at all; the driving factor was that emotional attachment to the sunset. So sell the value, not the bricks and sticks.

Joe Fairless: Alright. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Terry Ogburn: I’m on it.

Joe Fairless: Alright, I know you are. First, a quick word from our Best Ever partners.

Break: [00:22:57].20] to [00:23:56].06]

Joe Fairless: Okay, what’s the best ever book you’ve recently read?

Terry Ogburn: The book that I would read more than not is Think and Grow Rich. I’ve read it 12-15 times.

Joe Fairless: What’s a business transaction that you made a mistake on, and it’s something that you learned from?

Terry Ogburn: Selling a house twice.

Joe Fairless: How does that work? What do you mean by that?

Terry Ogburn: Well, one of the companies that I worked for, the realtor, the owner of the company, she actually got two contracts on the same house. You can’t do that, it’s illegal, right?

Joe Fairless: [laughs]

Terry Ogburn: But s