JF1871: How To Send Your Direct Mailer To The Owner Of An LLC | Syndication School with Theo Hicks

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Many times when you are trying to get in touch with the owner of an apartment community, you’ll find that the asset is held in an LLC. Unlike sending mailers to single family homes where there is one non entity owner, you’ll have to dig a little bit to find out where to send your mailers. Theo will explain how to find an address to send to. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Some states have a fee to view the articles of organization”

 

Related Blog Post:

https://joefairless.com/8-step-process-for-finding-the-owner-of-an-llc/

 


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


 

JF1870: How Creating A Lemonade Stand Can Help You Become A Better Apartment Syndicator | Syndication School with Theo Hicks

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Today’s syndication school is a little bit different than normal. Theo is discussing Joe’s response to a Facebook post about a lemonade stand and how the same advice can benefit apartment syndication investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to keep in mind of where you are going to find investors”

 

Related Blog Post:

https://joefairless.com/the-2-secrets-to-a-successful-lemonade-stand/

 


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

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

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


 

JF1865: Getting Rid Of Security Deposits & Overcoming The Fear Of Investing Out Of Market #FollowAlongFriday with Theo and Chris Salerno

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Theo is telling us two great lessons he learned last week while doing the interviews for the podcast last week. He is joined by Chris Salerno (https://qccapitalgroup.com/) today. The lessons they will be discussing are coming from Adam Weiner (https://www.sayrhino.com/) and Christopher Stafford (https://theagentunleashed.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“To find out if someone is driven and motivated, don’t ask generic questions”

 


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.


 

JF1864: 3 Reasons Why Joe Invests In Other Peoples’ Apartment Syndication Deals | Syndication School with Theo Hicks

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Not only does Joe put together his own deals and help others do the same, he invests in other peoples’ deals as well. He has three main reasons for doing this, which can benefit everyone who wants to be an apartment syndicator. Tune in as Theo reviews the benefits that active investors can receive by being a passive investor too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It allows you to test drive other markets”

 


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.


 

JF1863: The Three Main Apartment Syndication Accounts | Syndication School with Theo Hicks

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When you’re putting together large deals with multiple people involved both passively and as general partners, you’ll need to focus a lot of organizing everything. Theo will be covering what kind of accounts you need and how to keep it all organized. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Contingency is to cover things that you may have miscalculated”

 


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.


 

JF1858: When To Downsize, Networking With Brokers, & Money Raising Relationships #FollowAlongFriday

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Theo is joined by Aaron Butcher (https://www.butcherblockinvestments.com) today as Joe had to be out of town for a property. Theo did the interviews last week and is sharing three lessons he learned from the Best Ever Guests last week. Lessons learned are coming from Mark Owens (https://markowens.com/), Maurice Philogene (https://www.linkedin.com/in/mauricephilogene/), and Jacob Busani (https://www.jacobbusani.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Whenever you are meeting someone new, always ask them to introduce you to someone”

 


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.


 

JF1857: 5 Creative Ways To Raise Money With A 506c Offering | Syndication School with Theo Hicks

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Theo will get into some creative ways that people will raise money with 506c offerings. It’s always a good idea to hear as many different ways to raise money as possible, you never know when you’ll need another way to get capital. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“People tend to like investing locally”

 


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, every Wednesday and Thursday, we release Syndication School series on the Best Real Estate Investing Advice Ever Show Podcast. They’re also available in video form on our YouTube channel as well. Each of these series is focused on a specific aspect of the apartment syndication investment strategy. For the majority of the series we offer some sort of resource for you to download for free, whether it be a PDF file, a PowerPoint presentation template, an Excel calculator – something for you to download for free to help you in your syndication journeys.

This episode is going to be a standalone episode, entitled “Five ways to raise money with a 506(c) offering.” These tips come from a syndicator who raises money for development deals, and he focused on 506(c) offering type, as opposed to the 506(b).

A quick rundown of those differences – we do have a Syndication School series that focuses on that, which you can find at SyndicationSchool.com, searching “506(b) 506(c).” The main difference between the two is that with 506(b) offering the money-raiser (sponsor, GP) must have a pre-existing relationship with the passive investors, whereas for the 506(c) you can raise money from strangers and advertising for your deals are allowed.

This episode is going to be five ways to essentially advertise for money from investors. Again, this comes from a developer; his name is Mark, and he actually developed over a billion dollars’ worth of deals before he started transitioning to raising money for his deals.

So these are the five ways to raise money with the 506(c), and before I go any further, keep in mind – obviously, we’re not attorneys, so when you are raising with money with 506(b) or 506(c), or raising money for some other offering type, make sure you consult with a securities attorney to make sure you are following all of the proper laws.

Number one is crowdfunding. The first way Mark uses to obtain new investors is through crowdfunding. He says “For every deal we do, we do a portion of it crowdfunded, which is really nothing more than just advertising online through one of these third-party platforms for new investors.”

You likely know what a crowdfunding platform is. If you want to learn more about crowdfunding, we actually have a crash course available on our website. It’s episode 152, so one of the earlier episodes, entitled “Every single answer to every single crowdfunding question you have.” It’s a four-part podcast; I believe it’s four parts… And it’s Joe interviewing the people over at Patch of Land, which is a crowdfunding site.

So essentially, what you do is you put your deal on a crowdfunding site. Mark doesn’t have a particular crowdfunding site that he thinks is best. At the time he used CrowdStreet, there’s also Patch of Land… If you just google “real estate crowdfunding” you should be able to find one. Go on their website to find the procedure for posting your deal on their website to generate money.

Mark said that a benefit of crowdfunding is that he can find investors that he would not have been able to find otherwise. He says “These are people that I would otherwise have never met in my life, that are interested in investing with us, and some of us have already invested with us. It’s a great opportunity to grow your network of individuals that either might be interested or are definitely interested in investing.”

Since it’s online, he can get his deals in front of people all across the United States, people that he might not have found through one of these other four tactics I’m gonna go over today. The crowdfunding for Mark is basically filling in the gaps and just making sure that his deal gets in front of as many people as possible. So that’s number one, putting the deal up on a crowdfunding site.

Number two is Facebook. For a recent project, at the time we interviewed Mark, it was the first time he opened up his deal to Facebook. He said he was gonna try Facebook because “We’ve heard in the past a lot of great reviews from friends about how they acquired investors that way, because you can be super-targeted.” We know very clearly that 90% of our investors are 40 years and older, live all over the country, but mainly in population centers of 100,000 or more…” So Facebook advertising allows you to hyper-target a specific audience. Mark knows his passive investor demographic – in this case 40-year-olds who live in population centers of over 100,000 people, so when he creates his Facebook advertising, he types in 40 years old age, location – population over 100,000; other factors to target would be educational attainment, so people that have a college degree, and then people who are working professionals: doctors, lawyers, executives and small business owners are also their criteria.

So Facebook advertising in general could be a great way to generate leads no matter what you’re doing, but when you’re allowed to raise capital for your deals, you can explicitly use the Facebook advertising function. You don’t have to be subtle about it, you don’t have to [unintelligible [00:08:15].03] The way that they would use Facebook is creating content and displaying their expertise, answering questions passive investors have, with the goal of directing them and pushing them up their funnel into capturing their contact information and then talking to then, building relationships with them, and then raising money that way… Whereas for 506(c) you can forego all of that and just go straight to “Hey, here’s a deal that we have. Do you wanna invest?” and you don’t have to worry about not advertising and being subtle about it. So that’s number two, Facebook advertising.

Obviously, for the Facebook advertising there’s a dollar amount associated with that; pay-per-click, or other charges… So make sure you take that into account if you are gonna use Facebook advertising.

Number three – and this is kind of unexpected, but the way that Mark explains it, it definitely makes sense… They advertise their deals in newspapers. Mark puts up advertisements in local newspapers. You guys know what newspapers are, right? So Mark says “We are also trying old-school newspaper advertising, because our investor base tends to be a bit older. In some cases we have investors 70, 80, 90 years old, and newspaper still happens to be a very relevant source for those people.

In this case, Mark is thinking about what his target demographic uses. As he mentioned before, the average age is about 40, but he does have investors who are 70, 80, 90+ years old, and those people are likely not using the internet. Obviously, they’re on the internet, but they probably still like their tangible newspapers, and magazines, and maybe even TV to get their information.

So just focusing on crowdfunding and just focusing on Facebook you’re gonna miss out on some opportunities because of the demographic that isn’t on Facebook, or isn’t on crowdfunding websites. They don’t know how to use those websites. So Mark got around that by putting his deals in newspapers.

For a recent deal they did, they took out ads in North and South Carolina for a deal that was in South Carolina. He says “I’ve taken ads out in markets that are very close to these areas. Charlotte is in our way, Greenville is about 45 minutes way, Charleston… Those types of things, because people tend to like investing locally. Even though long-term I that’s a bad strategy, it’s a great gateway if they can drive by the property and see it.”

Mark is saying that from his perspective only focusing on deal locally isn’t the best strategy if you wanna grow your capital, but that’s how people tend to think; they want to invest in something that they can actually go drive by and see. So he’s advertising in these newspapers because people like a tangible thing to read their news.

Similarly, they want to actually see the property; they’re maybe not okay with investing in a deal all the way across the country, at least not right off the bat. Maybe they can be convinced to do so based on the returns. And he was explaining to them the ways you mitigate risk of investing out of state… But to find these first-time investors through the newspapers, they are more likely going to invest in the local area. So if you’ve got a deal, in this case in South Carolina, then you’re gonna wanna focus your newspaper ads in North and South Carolina, rather than taking out an ad in California to get the most bang for your buck. So that’s number three, the newspapers.

Number four are webinars. So in addition to crowdfunding, Facebook and these newspaper ads, the fourth thing that Mark does to generate money from passive investors using the 506(c) offering is to host webinars. In adherence to the “Be everywhere” blanket or carpet bomb marketing strategy, you wanna advertise on as many platforms and have as much marketing as possible. That obviously makes sense from a cost standpoint.

Mark says that “The webinar was helpful because we get one-on-one questions, we get a bunch of people and interest built around that specific concept of hosting a webinar, and you can record it and then send it out to others… So it gives you sort of a platform and another contact point to reach out to investors.”

So as you know, we’ve talked about the new investment offering conference call that you wanna host if you’re doing the 506(b) or 506(c). If you’ve got a new deal, you create your investment summary and then you present the deal, you go over the highlights of the investment summary in this new investment offering conference call, which of course, is a Syndication School episode – both of those, creating the investment summary and the how to make a new investment offering call; that’ll be at SyndicationSchool.com. And in fact, for the investment summary we provide you with a free PowerPoint presentation to use as a guide to creating your own.

The conference call obviously is just audio. The webinar is going to be audio and video. And he’s saying that he’s creating these educational webinars directed at passive investors to get people who are interested in passive investing to come into the webinar. For example, maybe he is advertising on Facebook and in newspapers, and then once he gets a lead from there, he directs them to either a live webinar or a recorded webinar, and then from there they get a little more comfortable, they know a little bit more about the deal, about the business plan, about the team, and they end up investing in one of the deals… Which is why it’s important to do this in combination with the other three methods – the crowdfunding, the Facebook and the newspaper ads are generating leads, and then you’re pushing the leads to your webinars so that they are more comfortable investing in your deals.

Lastly, number five – and this really holds true for raising money using any offering type, and that is referrals. Mark’s final strategy is the good old-fashioned referrals. He says that “The referral is probably in everyone’s experience why you start you with your friends and family, because they know you; if you perform for them, they will refer you to their friends and family, and so on and so forth. That’s been typically the best source for us overall.”

So you can do referrals for 506(b), just making sure, again, that you have to create a relationship with that individual before you bring them on as an investor, whereas for 506(c) all you need to do is get the referral and you can automatically bring them on as an investor. So if someone comes to you through a newspaper ad, for example, they invest in one of your deals, you hit all your return projections, they’re happy, they tell their brother, their sister, their best friend about you, and they reach out to you and say “Hey, I wanna invest”, you can take their money right away; you don’t have to worry about building a relationship with them.

So referrals – obviously a great way to have that snowball effect where you’re bringing in all these leads from crowdfunding, from Facebook, from newspapers, you’re pushing those leads to your webinars, they invest in your deals, and then those people, rather than you having to find more people through the previous four methods, they just refer their colleagues to you, they invest in your deals, then they refer people, and so on and so on.

So the referrals are obviously something that you always wanna focus on, and think of ways to generate referrals. Mark says that when he’s finding investors through referrals, the most effective method he’s found to generate these referrals is through social proof. So Mark says “What I’ll try to do is some of the family offices that didn’t know each other – I introduce them to each other. Now they know each other, so when I say ‘XYZ Family Office is investing, don’t you guys want to invest as well?’, they go ‘Oh yeah, of course. If they’re invested, we’ll do it, too.’ So there’s a little bit of trying to get people in the same room, or some social network of some sort, even if it’s just because I introduced them, so that there’s that social proof aspect where people feel obligated or inclined to invest because of someone else.”

That’s why the referrals are so important, because they’re already getting the proof of concept, the social proof from their friend. So Bob invests in Mark’s deals, Bob likes Mark’s deals, Bob likes the returns he’s getting, Bob tells Bill “Hey, you should come invest in these deals. I’m doing it.” Bill says “Oh wow, if you’re doing it, I trust your judgment, so I’m definitely gonna invest in these deals.”

On a larger scale, what Mark is saying is that he has a family office investing in one of his deals, and he wants another family office to invest in the deal; rather than going to them directly and maybe sending them a webinar, or just sending them a sample deal explaining them the ins and outs of the deal, explaining their business plan, explaining their team – instead, he just gets the family office that’s already investing in his deal to meet with his other family office so that he can provide social proof to that other family office. So if this one family office is investing, they’re getting the returns that they want, well then why wouldn’t XYZ family office also invest in that deal? Because it’s working perfectly fine for this other family office.

So those are the five methods for raising money and generating private capital using the 506(c) offering. Again, 506(c) – allowed to advertise; 506(b) – not allowed to advertise. So if you are doing 506(b), then you can’t use these strategies specifically, but you can still use referrals, you can still use webinars, you can still use Facebook. Newspapers – you can probably figure out a way to do that. Crowdfunding probably won’t work, because you can’t explicitly advertise for your deals… But these do work for 506(c), because you are allowed to advertise.

Again, if you wanna use newspapers, Facebook, crowdfunding, webinars, referrals, whether you’re 506(b) or 506(c), make sure you run your marketing strategy by your securities attorney first, before you implement any type of strategy or marketing plan.

Alright, that concludes this episode. Again, it’s “Five creative ways to raise money with a 506(c) offering.” Until next time, check out some of the other Syndication School series about the how-to’s of apartment syndication. I mentioned a lot in this episode, so you could start with those… Or you could start from series number one and work your way through. I think this is series 30 or 31, so we’ve got a lot of them that you can listen to… And for most of those there are also some free resourced for you to download.

All of those episodes and free resources are available at SyndicationSchool.com. Thanks for listening, have a best ever day, and we’ll talk to you tomorrow.

JF1856: 4 Tips To Raise More Money From Passive Investors | Syndication School with Theo Hicks

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The most frequently asked question that we get is “how can I raise more money?”. Well Theo has put together a list of four ways you may not be currently using. Even if you are utilizing one or two of the ways, you can raise more money by using all four ways. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Pick a frequency you’re going to create content and stick to that for at least a year”

 


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.


 

JF1850: Benefits Of Buying The LLC That Owns An Apartment Community | Syndication School with Theo Hicks

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A strategy for buying apartment communities that we haven’t really covered is to purchase the LLC that owns the community. There are advantages and disadvantages to this of course, and Theo will break those down in detail on today’s episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can keep the current tax valuation when you purchase the LLC”

 

Free Document:

LLC Purchase Transfer: http://bit.ly/llcpurchasetransfer

 


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

Theo Hicks: Hi, Best Ever listeners. Welcome to 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 Syndication School series episodes, every Wednesday and Thursday. They can be found in audio-only form on the podcast, as well as video on YouTube. We focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these series we offer some sort of resource for you to download for free, whether it be a PowerPoint presentation, Excel template, Word document, PDF document – something that accompanies the episode that you can use as a resource to download for free. All of these free resources, as well as free Syndication School series, can be found at SyndicationSchool.com.

Today we are going to be talking about the membership interest transfer. So we’re gonna be talking about the who, what, when, where, why and how of this thing called the membership interest transfer.

Now, simply put, the membership interest transfer is a method of acquiring an apartment – in this case an apartment, but it technically can be used for residential as well – either all-cash or with a loan, and using this method, you’re able to 1) shield the purchase of the property from the general public, so it’s not going to be a matter of public record, it’s not going to be something that shows up on the auditor or appraisal site, for example, of the properties owned by ABC LLC, and you implement this membership interest transfer, then it will still say it is owned by ABC LLC on the appraiser site.

The second thing that happens when you use the membership interest transfer is that it is a tax-exempt transaction, which means that instead of the property being directly transferred to the buyer, the seller’s membership interest in the property is transferred into a new entity created by the buyer… And because of this, you’re able to preserve the current tax evaluation of the property upon acquisition. This isn’t permanent, but if the current owner is paying $100,000 in taxes based on the ownership of this property in their LLC, then once that ownership is transferred to your LLC, you’ll still be paying that $100,000 until you have your next appraisal. So that’s quickly the What of the membership interest transfer.

Moving on to the next step, which is Who should use the membership interest transfer. Real estate investors who are wanting to shield the purchase price of the acquired property from anyone who might be interested in knowing what was paid for the property can use the membership interest transfer. This is one example.

Investors who would like to, for example, buy and flip a property… So if you’re planning on buying this property and it is highly distressed, and you want to implement a quick value-add business plan and then quickly resell the property at a profit, this might be a strategy that you want to implement. Because if you’re looking to get into a deal at value, and then turn it around in a quick period of time, this could be beneficial… Because typically, when a property is listed for sale – if you look at it from your perspective, if you’re looking at an apartment for sale, one of the first things that at least I do is I go to the appraiser site, I type in the property address, and I look to see when the property was last bought and at what price it was bought at. That way, if I see that it was bought a year ago, and they’re trying to sell it for a 50% uptick, I can ask them why they’re doing that.

But when you are using this strategy, no one knows what you paid for it originally because of the membership interest transfer. So the number isn’t on there, that way you’re not gonna have any of those conversations of “Hey, you bought this property a year ago. Why are you selling it for so much more one year later?” or “Why are you selling it one year later in general?”

Another example of Who should use a membership interest transfer is someone who is wishing to preserve the current tax evaluation of the property that is being acquired. Typically, when a property is purchased above its current tax evaluation, which is the majority of the time, the auditor will shortly after the purchase reevaluate the property, and  will do an evaluation of that property for tax purposes. For the times when the property is purchased for a below tax evaluation, there are a few more steps that must be followed to get the county to modify its valuation, like appealing the value, showing that it was a fee-simple transaction at a below valuation price.

This should remedy the problem fairly quickly, because the auditor and the board of revision cannot argue with an arm’s length transaction, which is what this membership interest transfer is. However, when a property transacts at an above valuation price, say in the case of a property that’s purchased in an extremely distressed state was turned  around through management and value-add and through numerous upgrades, the seller deserves the upside of doing that. The buyer may be willing to pay for this upside, however a barrier to transaction with the seller’s desired purchase price is the tax evaluation basis, which means that you might have issue buying the property at the purchase price because of the fact that you know taxes are going to go up once you’ve implemented your value-add business plan.

Upon the sale, the auditor and the board of revision will immediately jump the tax evaluation  of the property from its lower taxation basis to its newer, higher basis, because of the fact that it was an arm’s length transaction. The problem here is that it may appraise for a higher price, but when it comes time to transact the property, a new buyer is going to look at the purchase price taxable value instead of the current taxation basis, which messes up the future sales price of the property.

So all that is avoided by doing the membership interest transfer, because they can’t see the purchase price anyways, and you’re able to preserve that current tax evaluation.

I know it was a mouthful, but I’m actually reading this straight from a broker who specializes in these types of transactions, and that’s the wording that he used.

So when should a membership interest transfer be used? The best time to use this method is when an investor wishes to keep the price that was paid for the property confidential. If the purchase price of the property is above the taxable value, as I just explained, and the buyer wishes to shield the purchase price, they may elect to use the membership interest transfer, and we’ve just explained why you wanna do that if you’re  buying the property above the current taxable value.

Where can a membership interest transfer be used? It can be used in any real estate transaction where the purchase price is higher than the current taxable value. To this individual’s knowledge, this method is legal in all 50 states, but like any legal advice offered, we’re not attorneys, and this person’s not an attorney; we have no legal training whatsoever, so if you are gonna do this method, make sure you don’t do it on your own, and consult with an attorney in your state, your real estate attorney, before you do this, just to see if there’s gonna be any other unintended consequences by implementing this strategy.

Why is the membership interest transfer used? It is used to shield the purchase price of real estate, as we’ve mentioned a few times in this episode so far.

In the case of avoiding the increased tax evaluation, the effect, as I mentioned, is not permanent. So it’s not like you’re always gonna be taxed at that lower valuation. Typically, the taxes are reevaluated every 3-4 years. When they see a transfer in ownership, which means that they see a change in the name on the title, as well as a change in the tax mailing address, which is what you see in the public record, that is usually an indication that a change in ownership has taken place from the perspective of the auditor… Which isn’t technically always the case. Maybe there were two partners and they’ve split, or maybe they moved offices… But overall, if there is a new entity name or a new mailing address, the auditor assumes that the property was transferred, which means that they might go in there and audit it right away.

When the auditor does come calling, demanding that you pay more for the property than you are currently paying, because they think it’s worth a certain value, he’ll not have the fee simple transfer of the property as evidence of the value… Which means that he won’t have the purchase price that you paid as evidence. Instead, he will have to dig deeper to prove why he thinks the property is worth a certain amount, using an appraiser or some other valuation method – income approach, sales comp approach. It’s a little bit harder for them to come up with a new valuation of the property, because they don’t have whatever the purchase price that you paid for as evidence. So that’s another reason why the tax benefits, but again, it’s not permanent; eventually, the tax guy is going to have evidence to increase the rate… But again, taxes cost a lot. Taxes are a pretty large portion of the expenses paid for a property, so the longer you can delay that increase, the more money you can make on the deal.

How is the membership transfer used? It occurs as follows — and again, this is gonna be some technical jargon, because this is what the individual that talked to me about this strategy said.

Number one, a contract addendum is drafted, outlining the purchase between buyer and seller will now be conducted as a membership interest transfer between the respective parties. The entity being sold is a newly-created LLC, with a name chosen by the buyer, that will be formed in the Secretary of State’s office, with the seller’s LLC as a sole member of the entity. This formation must occur before the closing, and the sooner, the better.

In the contract it says “Hey, we’re doing a membership interest transfer. Hey, me, buyer man, has created an LLC”, and that’s what the property will be transferred into at closing. And this must be done before closing, obviously.

Two – an operating agreement for the newly-formed entity will then be signed and executed by the seller’s LLC by and through its authorized members prior to closing, establishing the new entity’s governance. So the seller has to sign some documents in order to actually execute the transfer.

Three, a deed and affidavit in support of tax-exempt transfer will also be executed at the same time as the operating agreement by the seller’s LLC, transferring the property into the newly-formed LLC… Which, along with any personal properties associated with the property that is currently included with the sale will be the new entity’s sole asset. The deed will be recorded with the Recorder’s Office prior to closing. The affidavit will tell the auditor the transfer is not taxable as a transfer to an entirely solely owned by the granting entity. This is a specific tax-exempt transaction outlined by – in this case – the Ohio Revised Code, or whatever state that you’re living in. Basically, you’re not only signing an operating agreement, but also an affidavit that this is indeed tax-exempt because of the fact that you’re transferring it to an entity.

By  recording this deed in advance and transferring the membership interest and the property itself at closing, the seller will save on conveyance tax that the county would have charged if the transfer of the property had been made to a third-party. So even more tax-saving.

Number three, a membership interest transfer agreement, resolutions, a bill of sale and any and all other documents necessary to transfer the membership interest held by the seller’s LLC in the newly-formed LLC over to new LLC will be executed on the day of closing. Disbursement of funds will follow the normal closing process for a sale of real estate, but the property being sold on the settlement statement will be referred to as the 100% membership interest in the entity.

Four, the buyer’s LLC will become the sole owner of the newly-formed entity, the membership interest transfer, and will execute a mortgage and any other required document to its lending, securing the purchase in the newly-formed entity’s name. We’re just talking about the process of securing financing, and how it’s basically the exact same, except rather than it being a person, it’s an entity.

The county will simply have made a transfer for no consideration on its books, and barring any meddling from outside entities, will continue to value the property at its current appraised valued for taxation purposes. The purchase price for the membership interest will not increase the taxable value of the property in the auditor’s records. Future tax savings are not possible to calculate, but future savings are possible. And again, it’s going back to the fact that the taxman doesn’t have access to the purchase price, so they cannot use that as evidence when increasing taxes.

Six, the cost of the membership transfer agreement documentation and filing is approximately $1,200 to $1,500.

Seven, no liability will be  assumed by the buyer for the seller’s current entity’s potential liabilities, nor will the seller’s current LLC retain any liabilities for the newly-formed entity.

That is just a very fancy way of outlining how the process actually works, but again, you’re gonna be using an attorney for all of this anyways, so this is just something for you to reference and understand “Hey, this is what should happen.” But again, make sure you’re speaking with your attorney before you are pursuing this option.

Now, the last thing I wanna talk about is a quick common question that this broker typically gets when discussing membership interest transfers. The question is “Will the new buyer take on the original basis of the previous owner?” For instance, if a property is sold for 12 million dollars to a new buyer, but the buyer took title to it at an evaluation of 2 million dollars, will the new buyer (the one who bought it for 12 million) would his basis be for 2 million? And the new answer is no. The new  buyer’s basis, as far as the IRS and the state are concerned, when it comes to capital gains, own the asset for 12 million.

If they acquire that property via a 1031 exchange, then their basis would be based on the chain of transactions in the 1031 exchange, not the previous owner’s taxable basis for capital gains purposes.

Essentially, what he’s saying here is that the basis is not based on whatever the seller had bought the property for. In this example, the seller had bought the property for 2 million, but you bought it for 12 million; is your basis 2 million or 12 million? Because, again, if they can’t see the purchase price, does that count towards your basis? The answer is yes; you own the asset for 12 million dollars, and when it comes to capital gains tax, you own the property for 12 million, not 2 million. So that’s something that you cannot do. You can’t lower your basis by using this strategy.

The two benefits are 1) the shielding of the purchase price, and 2) the avoidance or at least the delay of the increase in taxes.

I’m going to put this document that I have referenced as a free document for you to download. That way you can kind of read through all this yourself. It’s got the contact information of the individual who wrote the document, or at least helped me write the document, so that if you have any extra questions, you can contact them.

But again, overall, the membership interest transfer is a way for you to buy a property without you technically actually buying it, and instead transferring it into an LLC, with the two benefits of shielding the purchase price and delaying the increase in taxes.

That concludes this episode on the benefits of buying the LLC that owns an apartment. Technically, it’s a transfer, but it’s kind of the same thing. I guess you’re buying the LLC or you’re buying the ability to transfer the asset from one LLC to another LLC.

But in the meantime, make sure you check out some of our other Syndication School series on the how-to’s of apartment syndication. Download the free document that I referenced throughout this episode. All those can be found at SyndicationSchool.com.

Thank you for listening, and I’ll talk to you tomorrow.

JF1849: How To Instantly Gain Credibility With Passive Investors On Your First Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:17:12)
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Finding deals is one thing, closing the deal and bringing the required capital to the table is another. One thing we have hammered home with Syndication School is the need to gain credibility with investors. Theo will cover more ways you can accomplish this in today’s episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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 to 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, every Wednesday and Thursday, we release the Syndication School series, on the podcast as well as on YouTube, and we will focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer some sort of resource for you to download for free, whether it be a Word document, PowerPoint presentation, Excel template etc. The free documents, as well as all of the past Syndication School series episodes can be found at SyndicationSchool.com

This episode is going to be a standalone episode, entitled “How to instantly gain credibility with passive investors on your first deal.” So we’re gonna focus on how to increase your credibility in the eyes of your investors, as well as your other team members as well – real estate brokers, mortgage brokers, attorneys… Anyone that you are trying to work with, anyone who you are trying to convince that you’re the real deal, and that you are serious about closing on an apartment community, if you haven’t done so already… Because as we’ve talked about before at Syndication School, one of the biggest barriers of entry into apartment syndication is going to be your credibility… Or in this case the credibility that you lack.

There’s lots of different ways for you to build up your credibility, but some of them take some time. For example, you can create a thought leadership platform, which is what you’re watching right now. So you can create a YouTube channel, a blog, a podcast, and you can either talk about things that you know, and your expertise, or if you don’t have expertise yet, you can interview people in order to gain that expertise, as well as transmit the guest’s expertise out to the world, with the purpose of gaining a following, and with that following comes credibility in the eyes of potential investors.

You can say “Hi, I’ve got this podcast.” In our case, the world’s longest-running daily real estate investing podcast. We’ve been doing it for 5+ years, we’ve got thousands of episodes; here’s our metrics. That will give you some credibility with investors, and they’ll have more confidence investing with you. But it’s not gonna happen overnight. It’s gonna take months, most likely even years to build up a thought leadership platform. That’s just one example.

You can do a conference, a meetup group, but still, those things take some time. So I wanna talk today about something you can do in order to instantly gain credibility in the eyes of your investors, as well as, again, in the eyes of other team members as well… And that is to create a partnership. Now, not just any partnership; I don’t mean go out and find a friend to partner up with, or find someone you’ve just met to partner up with who also hasn’t done a deal…

The purpose of this strategy is to partner up with someone that you know will instantly give  you credibility in the eyes of your passive investors, and there’s really two different types of people or groups that will accomplish that.

Number one is going to be the property management company who is going to be managing the deal, and number two would be some sort of other apartment professional. Someone who’s already proven themselves in the industry. This could be a local owner in your market, this could be a consultant or a mentor, or it could be someone that you met that is not necessarily in that particular market, that’s not a mentor or a consultant.

Now, when it comes to the level of credibility, the property management company will give you more credibility than the local owner, just because the property management company has more skin in the game. Unless the local owner is themselves investing – which we’ll talk about that in a second – the property management company is the boots on the ground, the party responsible for the day-to-day operations of the property… So if you follow this strategy that I’m going to outline, you wanna focus on trying to get it with the property management company first, and if that doesn’t work, then your second option would be a local owner, a mentor or consultant, or some other apartment professional.

Now, the strategy overall is to partner with them, but what do we mean by that? So there’s four different ways for you to partner with the property management company or the apartment professional in order to instantly gain credibility on your first deal. Number one is going to be the property management company signing on the loan. The property management company essentially guaranteeing the loan. When they do this, they will officially become  a general partner in the deal. They’ll be on the GP side, hence that’s why they are your partner.

Now, this is the ideal strategy if — of course, all of these strategies are if you don’t have the credibility, but this strategy is ideal if you don’t have the liquidity, or the net worth, or depending on the type of loan that you’re getting, the experience requirements in order to qualify with that commercial mortgage broker.

Now, if you have the property management company signed on the loan, then you can leverage the property management company’s liquidity, the property management company’s net worth, and the property management company’s experience in order to get approved for that loan. And since it’s a property management company, if it’s large enough, it will most likely have that. Of course, that’s something you’re going to need to determine before you have them sign on the loan, because it’s not gonna be worth it if you can’t qualify with them signing on the loan.

Now, in order to compensate them for signing on the loan – they’re not doing this just for free – you can either offer a one-time fee called a guarantee fee, that you can distribute to them at the purchase; so once you close on the deal, you can send them anywhere between 0.25% up to 2% of the loan balance to them at closing… Or you can offer them an ongoing ownership interest in the general partnership, anywhere between 5% to 10%, to maybe even upwards of 30%, depending on how badly you need them to sign on the loan in order to close on the deal… Because 70% of the GP is better than 100% of no GP at all.

Or you can do a combination of the two. You can offer maybe a smaller fee upfront, and then you can offer an ongoing chunk of the GP as well. So that’s number one, and again, this could be the property management company or the local owner, but for this we’re gonna focus on the property management company… So if your property management company is not on board with this, just in your mind interchange property management company with another apartment professional, someone who has experience doing whatever types of deals you plan on doing.

So number one, sign on the loan as a loan guarantor. Number two way to partner with your property management company to gain instant credibility on your first deal is to have them invest in the deal themselves. If they invest in the deal themselves, they are a limited partner. So they’re not a GP in this case, they’re just a limited partner, because all they’re doing is bringing capital to the deal. If this is the case, the conversation is pretty simple. You just compensate them in the same way you would compensate the passive investor. So whatever your structure is, whatever your preferred return or profit split is, that’s what will be offered to the property management company. So that’s number two, have them invest in the deal.

These are going up in levels of credibility. The lowest level of credibility is just having them sign on the loan. The next is having them invest in the deal. The third and the highest would be for them to bring on their own investors. So the third way to partner with a property management company is to have them bring on their own investors. This could be done in combination with them investing in the deal.

If they’re bringing on their own investors, they’re most likely gonna be investing in the deal themselves, so you’ve kind of got the double credibility going on here… But the benefit of them bringing on their own investors is that it just adds another level of credibility, obviously, to you, because you can present to your investors and say “Hey, not only is our property management company investing in the deal, but the deal is so great that they’re bringing on their own investors as well.” But it also adds another level of alignment of interests with the property management company.

So the property management company has their own money in the deal – there’s obviously alignment of interests there, because they’re a passive investor, so if the deal doesn’t perform well, then they won’t make as much money, so they are motivated to make sure that they’re maximizing the income and minimizing the expenses, making sure the operations run smoothly, the value-add business plan is being implemented properly, so that they can get paid.

But there’s another level of alignment of interests, because not only is their money on the line, but their investors’ money is on the line. And since their investors’ money is on the line, their own credibility is at stake as well. So if the deal doesn’t perform and their investors don’t get paid, maybe those investors won’t invest with that property management company in the future.

So if you’re able to get your property management company to invest and bring on investors, there’s a very high level of alignment of interests, which is kind of a side effect o also credibility that is gained.

Now, the fourth way to partner with a property management company if those first three ways don’t work — and again, number one is to have them sign on the loan, number two is to have them invest in the deal, and number three is to have them bring on their own investors… Number four, if all else fails, is to just give them an ownership interest in the GP. Just give them an ownership percentage, without investing themselves, without bringing on investors, without signing on the loan. You’re just giving them a stake in the general partnership.

Again, this creates credibility, because you’ve got an experienced party who is also on the general partnership side. So it’s not just you, who has never done a deal before; you’ve also got a property management company who (list off their statistics) owns as many properties, has done this many deals, is this sized etc. and they’re also a partner on the deal… So you can leverage their experience and in return you’re gonna give them a small percentage stake in the GP.

So one of these four methods should work. Ideally, you can do methods one through three, but if all else fails, you’ve got method four in your back pocket, which is to provide them with an ownership interest.

Now, just to quickly go over the benefits, again, of this way to instantly gain credibility with your passive investors by partnering with a property management company and/or a local owner/consultant/mentor/other apartment professional… Number one is it establishes credibility right out of the gate for all parties, since the experienced property management company is a part of the GP. So they’re your partner, they’ve got experience, you can leverage that experience when discussing your deal with your passive investors.

Number two, the first-time investor is able to leverage not only the experience, but also the financials, so the liquidity, the net worth of the property management company in order to qualify for the loan. And then number three is that since the property management company is gonna be investing in the deal and/or bringing on their own investors, that is less money for you to raise yourself. So technically speaking, you could do a much larger deal if you get your property management company on board.

Now, you can just do one of these methods, or you can do a combination of these methods, or you can do all four of these methods. So you can have the property management company sign on the loan, so that they’re on the GP side, have them invest on the deal, and bring on their own investors, and then obviously give them an ownership interest in the GP in return for signing on the loan. It’s really up to you and what your property management company agrees to.

Now, there is one downside to this strategy, and that is if you’re doing one of the strategies/methods that results in the property management company getting a chunk of the GP, meaning that they are  a partner in the GP, well then you’re essentially in a sense stuck with that management company. You’re married to that management company for the duration of the deal.

So in the event the property management company is not doing a good job, or even worse, kind of just disappears and you can’t get a hold of them, and completely forsakes the property, or if they turn out to be bad people – there’s lots of different things that can go wrong with property management companies – you’re in a very sticky situation… Because you can’t just fire the property management company. You can, but at the end of the day you can’t fire them from the GP unless you buy them out, which they have to agree to… And if you’re going through all these issues, that’s highly unlikely. And even if it is, it’s going to be a headache for you to go through the process of firing them, buying them out, finding a new management company, finding the money to buy them out, things like that.

So if you are going to approach this strategy, make sure you’re doing adequate due diligence on that property management company upfront. We’ve got some Syndication School episodes where we discuss this, how to find the property management company, what questions to ask them, what questions they should be asking you in order to gauge whether or not you should bring them on as a partner. But as long as you do your due diligence, this strategy is a great way to gain credibility with your passive investors, especially if it is on your first deal.

That concludes this episode. In the meantime, check out some of our other Syndication School episodes on the how-to’s of apartment syndication, download some of our free documents. All that is available at SyndicationSchool.com.

Thank you for listening, have a best ever day, and we’ll talk to you tomorrow.

JF1843: How To Effectively Network At Multifamily Meetups & Conferences | Syndication School with Theo Hicks

Listen to the Episode Below (00:18:16)
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Theo will be sharing a few stories with us today. A couple of stories come from Joe, and you may have heard them before, if you’re a loyal Best Ever Listener. The other story is his own. These stories are all focused on networking and how to add value to others, which will ultimately help you and your business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It’s about going to the conference and putting yourself in position to find partners”

 


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 to 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 the Syndication School episodes, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of free resource for you to download for free. These episodes air every Wednesday and Thursday on the podcast, and we also are airing these in YouTube video form, so you can listen to them either way. All of the episodes can also be found at SyndicationSchool.com, along with those free documents as well.

This episode is going to be another standalone episode, and it is entitled “How to effectively network at multifamily meetups and conferences.” Before we get into the meat of the episode, I want to tell a quick story. You might have heard this before if you’re a loyal Best Ever listener. It is a story about someone that Joe got lunch with.

Now, before I tell this story – I guess I’m doing multiple befores – the entire purpose of this conversation today is to get you thinking about different ways to actually break into the syndication industry. To get that mentor, or to get that local owner, or to get that experienced apartment syndicator to work with you. Because at the end of the day there really isn’t a blueprint for “Here’s exactly what you need to do every single day in order to work with Joe”, or “Here’s what you need to do every single day in order to do your first deal”, because a lot of it is situational.

A lot of it is putting yourself into situations that sometimes may result in opportunity to get that partnership, to form that relationship… Or maybe it won’t happen that time; maybe it’ll happen the next time. So it’s not as simple as saying “Go to a conference and you’re going to meet your future partner”, it’s about going to the conference and putting yourself in the position to potentially get that partner and continue to do that over and over again until that happens. I just wanted to say that before I go into this specific story.

I also wanna tell my story in this episode as well, of how I met Joe, but I wanted to give that context first, because that’s essentially how I work for Joe, and the moral of this story I’m about to tell. So the story is Joe went to lunch with someone who wanted to meet Joe in person. This individual Joe met with was interested in raising capital for their fix and flip deals, and the purpose of meeting Joe was to learn how he raised money.

He asked Joe a lot of questions about how to find investors, where to find investors, the paperwork and legal documents that are needed to raise money properly, how to structure investor partnerships, how to talk to investors… Really every question that you could possibly think of, this guy came prepared to ask, and Joe answered all the questions that he asked.

At the beginning of the meeting, before asking all these questions, this individual also asked Joe if there was anything that he needed help with, and true to his word, at the end of the meeting he asked Joe what he can do to help out. And Joe gets this question a lot, of course, because he is a big investor, he is a big podcast guy, and so everyone knows that he likely has some sort of need that he needs help with, and they are happy to help out with that and greatly appreciate that. So typically, when he gets this question, he’ll say one of three things.

He’ll either say “Buy one of our books, listen to the podcast and leave a review, and be on the lookout for a certain size deals.” [unintelligible [00:06:36].20] “Thanks for asking to help me out. Here are the three things you can help me out with. Anything that you could do will be appreciated, so you can pick one of those. That’s what I need.” So this guy said that he’s interested and he really enjoys listening to audiobooks, he really enjoys reading books, and that he would buy the audio version of one of Joe’s books after he finishes the current  two or three other books that he’s listening to. They shook hands, the meeting ended, and they parted ways.

Now, the question that we pose is how good did this individual do at adding value to Joe’s life? And the true answer is “Well, it’s to be determined.” Of course, he had really good intentions, he asked what he could do to add value, but the execution in this particular case was lacking… And here’s why – because the added value is a potential right now. He may or may not buy the audiobook. Joe really may never know, unless the person buys the audiobook and sends them a screenshot.

So the whole point is that when you are in these opportunities, when you’re meeting with a big-time investor, a big-time podcaster, someone who is doing what you wanna do, someone who could be a very valuable asset in your business, you wanna make sure that when this person asks themselves “How good did you do at adding value to my life?”, the answer should be “You did an amazing job.” It shouldn’t be “You did an okay job” or “Well, I don’t really know” because he hasn’t actually added value yet.

What this person should have done differently, and what you should do differently if you’re in similar situations, is to rather than say “I’m in the middle of listening to a few other audiobooks. Once I’m done listening to those, then yeah, I totally plan on buying your book”, instead say “Well, I’m listening to two audiobooks right now, and I’ll listen to your audiobook when I’m done, but I’m going to buy your book right now”, and pull the phone out and buy the book. So now Joe knows that he said he’s gonna buy the book, he says he’s gonna listen to the book, which he may or may not do, but the value-add is actually purchasing the book. So now Joe sees him purchase the book, and boom – now he’s answered the question; “This guy added a ton of value, because I want people to buy my book, and he bought my book.”

I guess a strategy that’s slightly below that is saying “Oh, I’m gonna buy your book once I get back in my car.” Still better than saying “I’ll buy it once I’m done reading my 2-3 books”, but not as good as saying you’re going to buy it immediately. Huge difference in the perception of the value that is being added.

So the reason why he told this story about immediately adding value is because he was able to get an investor this way. One of the investors on his deals he got using this strategy. His story was that he was on someone else’s podcast, and someone listened to that podcast and reached out to Joe; they needed help with something, they needed some sort of referral to be helped out with some issue they’re having in their business… And Joe immediately referred him to the people that he thought could help him. Because Joe, in this particular case, wasn’t the person that could help him out the most.

So again, rather than this person calling up or emailing him saying “Well, I can’t help you, but I’ll look and see if I can find someone else”, instead he got the message, he heard the message, he said “Okay, this person needs help with XYZ. That’s not something I specifically specialize in, but I do know Billy Bob Joel over here who’s really solid in that aspect of real estate, so okay, I’m gonna refer Billy Bob Joel to this guy.” So “Hey, thanks for reaching out, thanks for listening to the podcast. I personally can’t help you out with this, but my good friend Billy Bob Joel is really good at this part of the business. I [unintelligible [00:10:28].09] his email, so you guys should definitely connect and he can help you out.”

Very simple, didn’t take too much time, but extremely effective. This person ended up investing in his deal, and an argument can be made that it’s because of how quickly Joe replied with the value already added.

Another story that I wanted to tell is how you can use this approach specifically at real estate meetups, at a conference, or just when you’re meeting someone in general. And again, this is slightly different than the story of Joe getting coffee with someone, but it’s kind of in the same line of thinking. So you go to a conference, and what you shouldn’t do is you shouldn’t print out a bunch of business cards and hand out as many business cards as possible. That shouldn’t be your goal. Your goal shouldn’t be “I’m gonna print off  1,000 business cards, and by the end of the conference I’m gonna hand out all of them.” Or “I’m gonna go to this meetup group, I’m gonna have 20 business cards, and my goal is to give my business card to every single person.” Instead, a better approach would be to focus on creating one new relationship at the conference.

Focus on creating one new relationship at the meetup. If it’s a multiple-day conference, then you can do one relationship per day. And you want to get to actually know this person. You don’t want to have a surface-level conversation with someone for a few minutes, hand them a business card and then move on to someone else. Or at breakfast, [unintelligible [00:11:54].15] say “Hey, by the way, this is my business card”, and start tossing around business cards. The idea is to get to know them on a personal level, and the goal is to pinpoint some issues that they’re facing currently in their business, that ideally you can help them solve.

We’re gonna be very vague here, but let’s say someone wants to know how to raise money for deals at a conference. So I’m talking to someone at a conference, I find out that they have done  a bunch of fix and flip deals, they then transitioned into smaller multifamilies, and now they wanna expand and do an apartment syndication, but they just don’t know how to raise money for deals… Or let’s just say in general how to do an apartment syndication.

So what I would do is I would say “Well, we actually wrote a manual. The world’s only comprehensive book on the apartment syndication process from start to finish.” I’ll pull my phone out, “I’m gonna order you a  copy right now. What’s your address?” If someone did that to me, I would be impressed. If you’re listening on the audio, my jaw is dropped. I can’t think of a better way to add value to someone’s life than to literally buy them a manual on what they would actually want to do.

Or another I could say as well – and again, this is me particularly, but I’d say “I can help you out. Let’s schedule an hour call for sometime next week and I can answer any questions that you have.”

The idea is to meet one new person at this conference and immediately add value to their lives. Now, if for some reason you can’t immediately add value, if it’s not something as simple as buying their book, or something as simple as sending them a book, buying a book for them, or scheduling a follow-up call with them, another thing too – a good strategy would be that if you want to actually meet up with someone after the conference, put that on your calendar at the conference, one face-to-face with this person. But if you can’t immediately add value, then what you should do is say “Well, I don’t know exactly how I can help you, but I’m going to figure it out and I’ll let you know when I get back home.” Make sure you follow up on that, obviously…

So when you get home, figure out exactly how either you can add value, or someone you know can add value to this person’s life, and then go to LinkedIn, find them, send them a friend request, and then message them. Mention some sort of personal thing that you learned about them during the conference, maybe talk about how you met or what you first talked about, and then say either how you are gonna add value or how this person that you’re referring to them can add value.

Taking a big step back, again, the entire idea is if you’re meeting with someone, anyone, even better if it’s someone who’s above, someone who you wanna be, someone who’s doing what you want to do, you need to take full advantage of that opportunity. Figure out what they need help with, whether it’s them telling you through the natural course of conversation, or you specifically ask them “How can I help you?”, and then whatever they say, do it. If it’s possible to do it immediately – which most of the time it should be possible to do it immediately – then do it right there and then. If you can’t do it immediately, then make sure you go back home and you do it as quickly as possible.

Giving a personal anecdote, when I first met Joe, he was just asking for help with his podcast, and I offered to help. What he said is “I want to grow my podcast. How can we do that?” So instead of me replying to him saying “I’ll go figure it out and I’ll let you know”, I didn’t reply; I instantly sat there and did a bunch of research on how to grow podcasts, I went through and logged every single one of his iTunes reviews and categorized them based on what people liked and what they didn’t like, and then based on all of that I put together a plan of what specifically we can do in order to grow the podcast… Which is newsletter, take the podcasts and turn them into blogs, things like that. I had all that information ready to go, so literally it was Joe tells me in-person “Hey, here’s what I need help with”, and then a few days later he gets an email with basically a business plan of exactly how I’m going to do what I’m going to do.

Again, I could have just sent him a few links to articles, like “Hey, we can do this”, and I could have kept going back and forth with him saying “Well, I don’t really know what to do”, but instead I tried to do my best to immediately add value and specifically say “Here’s exactly what to do.” Joe liked it, so I implemented that solution for maybe six months for free. So I just did part-time after my job until Joe offered me a full-time job.

That’s my story. I’ve talked about specific example of what to do at meetups and conferences, I’ve talked about something Joe did to proactively add value to get an investor, I’ve talked about the experience that Joe had where someone didn’t necessarily do it correctly, but what he should have done… So lots and lots of tactics on how to immediately add value to someone you meet at a multifamily conference, multifamily meetup group, if you meet someone in person etc. When you’re meeting with someone who could potentially be a  huge asset, or maybe even can’t be a huge asset; that’s another thing too, you really don’t know who’s an asset.

You might meet someone at a conference who you’re talking to them and they say they’ve never done a deal before, and you might be like “Oh, I don’t wanna talk with this person because they don’t know what they’re talking about.” Well, maybe you find out that this person has a massive net worth, and they could have invested in your deal. Or maybe it turns out that they have a massive network of high net worth individuals who could have invested in your deal. So you should be using this strategy on really everyone. You shouldn’t be picking and choosing who you do this with. If you come across someone who’s interested in real estate, if you go to a meetup and you’re talking to someone, ask them how you can add value, do it, and see what happens. Maybe nothing happens, maybe you find a new partner, maybe you find a new money investor… You really never know until you actually do it.

That concludes this episode on how to effectively network at multifamily conferences and meetups. Until next week, check out the other Syndication School series about the how-to’s of apartment syndications, check out our free documents. All those are available at SyndicationSchool.com.

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

 

JF1842: Where Does The Majority Of Joe’s Investor Capital Come From? Syndication School with Theo Hicks

Listen to the Episode Below (00:20:12)
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Theo is back with some important syndication information. He will be covering where the majority of Joe’s (Ashcroft Capital’s) investor capital comes from. This information is being shared with you so that you can take the information and use it for your own syndication business. Even as I write these notes, it’s hard to believe that Joe is okay with sharing all his “secrets” but nonetheless, here we are, telling you exactly where Joe finds investors to invest in his deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“People who have already invested with you will be more inclined to invest more money than a first time investor” 

 

Free Money Raising Tracker:

http://bit.ly/moneyraisingtracker 

 


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 to 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 our Syndication School series that’s focused on a specific aspect of the apartment syndication investment strategy, and for the majority of these series we also offer a free resource for you to download, that accompanies the series. These episodes air every Wednesday and Thursday on the podcast, and they will also be available on YouTube for the video version. All of the Syndication School series can be found at SyndicationSchool.com, along with all of those free resources.

This episode is going to be a standalone episode, and we are going to talk about where the majority of Joe’s capital comes from for his deals. We’ve definitely hinted at this in the past, but we don’t have a dedicated episode that focuses specifically on where Joe’s money comes from. And since they’ve done over 20 years – I think they’re getting close to almost 30 deals now – I’m sure that a lot of people out there are interested about where Joe gets his money from. So we’re gonna go over that today in this episode, so by the end of this episode you’re gonna learn some lessons Joe learned when he did an analysis of his investors.

Now, the document Joe uses to track not only the people who invest in the deals, but the amounts that they invest as well, is the Money-Raising Tracker, which is one of the resources we have available for free at SyndicationSchool.com. So if you go to SyndicationSchool.com, you can download that free Money-Raising Tracker, and you can essentially perform the same exercise that Joe performed.

So where does Joe’s money come from? The first thing that he looked at during this analysis was breaking the investors into two categories. The first category is going to be new investors, so the people who have never invested in a deal before; once they actually invest, they’re [unintelligible [00:05:22].03] as a new investor.

The other category is returning investors. These are people who were obviously originally new investors, but they’ve either come back for a second deal, a third deal, a fourth deal etc.

The first thing he looked at was the total number of new investors versus the total number of returning investors on the deal… And he determined that approximately 70% of the people who invested in the particular deal that he did a breakdown on were new investors. Then obviously the remaining 30% were returning investors.

One interesting thing that he did, that maybe most people wouldn’t have done, but  it’s a more important metric than just the absolute number of new investors versus the absolute number of returning investors, and that is the proportion of capital that was invested by these two groups. So of  the entire money-raise, how much of that was invested by new investors, and how much of that was invested by returning investors. When Joe did his analysis, he determined that the returning investors actually invested more than the new investors. It wasn’t by much. It was actually 49.6% of the total raise, was from new investors; 50.4% came from the existing investors.

So before we get into where these people came from, Joe had two important takeaways from that. Number one was that a new investor is likely not going to invest — now, there’s obviously some cases where they do, but they’re most likely not going to invest as much as a returning investor. So with this particular deal, even though 70% of the total number of investors were new, they only accounted for a little bit under 50% of the total raise… Whereas the returning investors accounted for 30% of the total number of investors, and invested 50% of the total equity raise.

So what does that mean? Well, that means that we should be focusing on getting new investors, of course, because those new investors are going to ideally become returning investors… But the goal should be to retain as many investors as possible. When you do your first deal, 100% of those people are gonna be first-time investors, and throughout the business plan you’re doing all of your other  asset management duties, but one thing you should be focusing on is “What should I do in order to maximize the total number of returning investors. What can I do to maximize the number of investors who come back for my second deal?” Just off the top of my head I can think of a few…

We’ve definitely talked about this a lot on the Syndication School series, but number one is going to be transparency. Just an example – if something goes wrong at the property, whether it be some sort of physical issue where there’s a fire, or a flood… If you are not hitting your occupancy projection, if you’re not hitting your rent projection, the first thing you need to do is make sure you let your investors know. But before you let your investors know, you don’t want to just say “Hey, we’re not hitting our occupancy goal” or “Our occupancy rate is 80%”, when you projected 90%. You want to also include the reasons why it’s so low, or so high, depending on what the metric is, and then what you plan on doing to fix it… And even better, you’re already in the process of implementing that solution.

So if it’s an occupancy issue, you can say something along the lines of “The reason why our occupancy level is below our projections is because of X, Y and Z.” Maybe there’s a property nearby who’s offering some sort of rent special… There’s plenty of reasons why occupancy could be low. And then “Our plan to fix this is to do X, Y, Z.” So if it’s a rent special at a nearby property, you would also offer a rent special as well. Maybe it is you creating a specific marketing plan that your property management company and you both create for you to increase marketing spend by offering a referral program, maybe doing some corporate outreach, maybe printing out some fliers and dropping them off at local businesses… Things like that. So transparency is obviously important.

Number two is going to be to make sure you’re conservatively underwriting your deals. That way you minimize the risk of running into some sort of issue with your projections versus the actuals. So if you’re aggressively underwriting, then you’re more likely going to have the actual performance of the property be off from your projections, which is going to be an issue, especially if there’s nothing you can do to fix it, because of the incorrect projection.

So there’s a lot of different things you can do to make sure you’re retaining your investors. Those are just a few examples. But overall, it’s just – do what you say you’re going to do and you should be fine. As long as you say you’re gonna do X and you do X, as long as you’re gonna distribute this much money to them and you do it on time, if you’re making sure you’re replying to emails quickly… Things like that. Just pretty normal things that anyone would do common-sensely when raising money from people.

Just think about it from your perspective – if you were giving your money away to someone, what would you want in return, in order to give them more money again? And it’s not just making money, and it’s not just preserving money… It’s also how they’re treated as well. Because if they’re making all the money in the world, but they never hear from you, they’re more likely gonna go to someone else who actually explains what’s going on and keeps them up to date, so they know what’s going on.

That was the first lesson. I’ve talked about that one for a while, but the first lesson was that the returning investors invest more than new investors… So when you have people investing in your deal, make sure you’re taking care of them, and don’t just say to yourself “Well, they’ve invested, so they’re gonna keep investing forever.” That’s not necessarily the case.

And then the second lesson is to always have at least three ways to bring in new investors. Use the strategy that I’ve mentioned before, and  some other strategies we’ve talked about in previous Syndication School episodes to convert them.

Now to the money part, which is where does Joe raise his money from, so what are Joe’s three ways to bring in new investors. Here’s are his three largest lead-generation sources. Number one are going to be referrals from his current network. Before we go any further, make sure you’re thinking about these from your perspective. When I say referrals from Joe’s current network, think “Okay, well maybe my number one source of capital can be referrals from my current network.” So think about it that way, but I’m just gonna explain it in the context of Joe… But make sure you’re extrapolating to yourself.

So it’s not like he actually asks them like “Hey, can you invest in my deal?” or “Do you wanna invest in my deal?” That’s not how he’s actually getting referrals. It’s more indirect. One example of how Joe generates referrals from his current network of investors – it’s not going up to his investors and saying “Hey, do you have anyone else you know who wants to invest in this deal?”, instead he does things that make them want to proactively refer someone. It makes them say “Wow, this is such a great investment. Joe is such a good guy. He’s very helpful. I think this will be a really good opportunity for you, my friend, to also talk to Joe and see if it makes sense to invest in his deals.”

And one thing that we did that was very successful is when we wrote our first book, the Best Real Estate Investing Advice Ever volume 1. I remember Joe bought 50 or 100 copies of the book – maybe even more than that – and he mailed two copies to each of his investors. He handwrote a personal note in one of the books, directed towards that investor, and then told them to give the other book to a friend of their that they think would be interested in the book.

So one book was for the actual investor, with a personal note thanking them for investing, referencing something about their personal life that Joe knows… So it was more personalized, not just the same note for every single person. And then when he sends the book, he says “Hey, do you mind giving this book to someone else?” Very powerful. Now the person isn’t just saying “Hey, Joe’s a really good guy. Do you wanna invest in his deal?”, instead they’re actually giving them something tangible; they can read the book, they can see what Joe knows… Or at the very least see that Joe’s an author, and they see his name on the book, and they are more likely to invest at that point, rather than just the referral… Which, of course, is important. Word of mouth referrals are very important, but this is just kind of an added layer on top of that.

Examples for you – if you have a book, you can give a book out to your investors, even if they’re not actually investing in your deals yet. The idea is to give them something that you created, for free, that shows your expertise about what you’re doing. So that’s number one.

Number two is the podcast that you’re listening to right now, The Best Real Estate Investing Advice Ever Show. By having a podcast – and again, if you wanna learn more about how to create a podcast, why to create a podcast, things like that, make sure you check out the Syndication School episodes about thought leadership platforms… But essentially, having a podcast allows you to have a strong online presence. So if someone were to google Joe Fairless, it would bring up a podcast that is the world’s longest-running daily real estate podcast. The fact that it’s daily is also important, not just for the fact that he can say it’s the longest-running daily real estate podcast, but he’s able to get in front of people every single day. So rather than just once a week in front of people, he’s getting in front of people every single day, without actually having to talk to them one-on-one.

He talks about his business on the podcast, but more importantly, he just displays his expertise and he displays his willingness to help others and to add value to others. So someone who’s listening to that, hears Joe and knows about Joe, likes Joe, then goes to the website and sees that he raises money for deals, they’re interested in investing in deals, the connection is there. Without the podcast, that person might not have ever found him.

So that’s number two, the podcast. Again, this kind of trickles over into the blog, YouTube channel, conferences… Really just thought leadership in general. So if you don’t have some sort of thought leadership platform – that’s Joe’s number two way of raising capital, so you might want to take his advice on that.

And then lastly, number three is Bigger Pockets. Kind of a thought leadership platform, but a little bit different. Bigger Pockets is great because it is specific for real estate entrepreneurs. A lot of people on Bigger Pockets are active, but some of them are interested in passive investment opportunities. So by Joe obviously having previous deals done, having his thought leadership platforms, and including that information in his biography, then he takes it a step further and he goes on Bigger Pockets and he goes on the forums and answers questions, and posts blog posts to Bigger Pockets…

So anyone who is interested in learning an answer to a specific question, they go by, they read Joe’s name, they see at the bottom that he’s an apartment syndicator, that he’s an author of books, that he’s the host of a massive podcast, they click on his bio, learning more about he does, and then there’s a link – because if you have a Bigger Pockets pro account, you can have a link to your website – they go to his website and they see that he raises capital, and they submit a Contact Us form and the next thing you know is they’re investing in a deal. Then, of course, there’s also the added aspect of all of the friendships and relationships that Joe has formed on Bigger Pockets.

So those are the three main ways that Joe is able to get capital. Number one is referrals from his current network – we talked about more specifically from current investors or current clients, but this is also just people that he knows. In the Best Ever Apartment Syndication Book we talked about his first deal, and every single person that invested in his deal was someone that he knew for a long time, and none of them were family members.

Then from there, once you actually get your base of investors, that is where the referrals start to come into play. So that’s number one.

Number two is the podcast. For Joe, it was the Best Real Estate Investing Advice Podcast. For you it’s gonna be some sort of thought leadership platform in general. And number three is Bigger Pockets. The strategy here is to create a Bigger Pockets pro account, make sure you create a very strong bio that lets people know who you are and what you do as quickly as possible, without dragging on too long. One of my biggest pet peeves is people that have that super, super-long Bigger Pockets bio. I like it to be concise, so that I can learn exactly what you do right away, and then learn more about you once I reach out to you.

So create your Bigger Pockets pro account, make sure you have a strong bio, a link to your website, which requires you to have a website in the first place, which we’ve talked about on previous Syndication School episodes (the one about thought leadership platforms), and then make sure you’re posting to Bigger Pockets on a consistent basis, answering questions in the forum, repurposing your thought leadership platform content on the blogs… And then from there, don’t expect to have instant results, but if you do that consistently and build up a reputation on Bigger Pockets of being someone who adds value, if you do it every day, you’ll be able to get on the Top Contributors, which will increase your visibility even more, and that will eventually lead to investor leads.

Then again, the other main takeaway from this episode I want you to come away with is that people who have already invested in your deal are more likely to invest more than people who are first-time investors. In this specific example, 30% of the investors on one of Joe’s deals were returning investors, but they accounted for 50% of the capital that was raised.

That concludes this episode. Now you know exactly where Joe gets his money from, and we also talked about some strategies of how you can replicate Joe’s success. In the meantime, until we come back tomorrow for more Syndication School series, check out the other Syndication School series. The majority of those have free documents for you to download as well, so make sure you check those out. All that is available at SyndicationSchool.com.

Thank you for listening, have a best ever day, and we’ll talk to you tomorrow.

JF1836: Syndication Tips #3 Providing Feedback On A Live Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:26:41)
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Theo is reviewing an offering that someone sent us, asking for feedback. We’ll hear what he did great, and maybe what could have been better. A recurring theme in Syndication School and on this podcast in general, is learning from others, and incorporating the lessons they have learned into your life and business. That is exactly what we are doing today by reviewing this persons offering. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to make the email with the expectations that the majority of investors are not going to read through the whole thing”

 


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 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 – every Wednesday and Thursday – we release two episodes; those can be found on our podcast, as well as our YouTube channel. They go over a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer a resource, whether it’s a PDF document, a PowerPoint presentation template, Excel template – some sort of resource for you to download for free. All of the past Syndication School episodes, as well as free documents, can be found at SyndicationSchool.com.

In this episode we’re going to do something new. Someone – an aspiring apartment syndicator – sent us a new investment offering email that they created for a deal they are currently looking at. They asked us to provide them with a feedback – positive and negative  – about the email, so that they can improve, optimize their email moving forward. And rather than  talk with this individual on the phone or send them back an email with my notes, I thought it would be good to actually go over this feedback (partially live) on the Syndication School series, because this is something that we’ve actually recently gone over in series number 18, where we discussed how you want to secure commitments from your passive investors… And one of those steps is to create the new investment offering email.

So after you have the deal under contract, you create your detailed investment summary presentation, which you can download for free at SyndicationSchool.com, or in series number 18. Then based on that investment summary, you want to distill all of the important information into one simple email that you can then send out to your list of passive investors, so they have all the pertinent information of that deal, so that they can not necessarily decide whether to invest or not, which of course that might happen, but they know if they want to move on to the next step, which is to go to the new investment offering conference call, where you (the syndicator) will go over the details of your email, as well as the details of your investment summary in more detail.

So this email was sent to us by Alex. He is an apartment syndicator. I’m not 100% sure if they actually have this deal under contract, but I think they do, because it’s an off-market deal… And he effectively sent us his new investment offering email that he has and asked us to review it and let him know if we have any feedback of things that are good and things that need to be changed.

What I’m going to do is I’m going to read through this email, I’m going to describe the aesthetics of it as much as possible, just because I want to keep Alex’s contact information and this deal obviously confidential… So I’m not going to say the name of the deal, the address, any specifics of the actual deal, but I’m going to read what is said in the email and then provide my feedback, based on my experience creating a ton of these new investment offering emails. Let’s jump right into it.

The first thing that I see is the image at the top of the email. It is an image which like it is — it’s basically a blown-up logo of the  actual current property, and the property name. So the property name is on there, and then the description is X Unit Multifamily Investment Opportunity, the name of the property, and then the address of the property.

One thing that’s great is that you have a picture; it’s not all just words. But my first feedback just based on this is two things. Number one, rather than having just the logo of the property, I would have your company logo instead. We put our company logo at the bottom right-hand corner of the picture. So if you’re watching on the video, it would be right here. And then the overall picture is actually a collage of pictures of the property.

So the top picture will be maybe the monument sign, or maybe the picture of the clubhouse… Typically it will be the monument sign, because that’s where you wanna have the name of the property; so rather than putting the logo of the property on the bottom right-hand corner (I keep getting them mixed up on the camera, if you’re watching  you put your company logo there instead, and then the name of the property is actually at the top, in the picture, on the monument sign.

Then below that we have three different smaller pictures that highlight other aspects of the property. So whether it’s a fitness center, a pool, and the clubhouse. Or a model unit, the playground, and some sort of barbecue area.

When I’m looking at this picture, it’s not really sticking out to me, it’s not really showing me what this property looks like. So at this point all I have are words of the property; but personally – and I’m sure other investors will say the same – if I actually see the property, I see how nice it looks, I see what I’m investing in, I’m more likely to invest.

And then the second thing is the title. I’m not sure if the title of the email is “X Unit Multifamily investment opportunity”, the name and the address. But since it’s in this image, I’m assuming that it is… And you want to make a more attractive title than that, because that’s not really telling me much about the investment opportunity from a financial perspective, or why I should invest. All you’re telling me is the number of units, and that it’s a multifamily, and that it’s an opportunity. So you wanna be more specific, at least mentioning one or two of the main highlights of the deal.

I’ve already read through this email, so at this point I can say that you wanna include something about it being an off market opportunity, and then you could also mention something about the market that it’s in, because according to your email, the neighborhood in which the investment opportunity is located in is highly desirable.

So at the very least you wanna say that it’s an off market opportunity, but I’d also say something about the market or some other highlight of the deal. Maybe as I read through it again I can come up with an actual specific title by the end of this episode, but don’t hold me to that.

So those are my first two pieces of feedback, just by looking at the pictures. Number 1.a) is to put a picture of the actual property, and 1.b) is to put your company logo rather than the deal logo, because you might change the name of the property anyways. And then number two is to have a better subject line for the deal. At the very least saying it’s an off market, X unit multifamily opportunity, but even better would be “Off market deal located in highly desirable submarket.”

Okay, so now to the body of the email… Again, I’m gonna say a  lot of X, because I don’t wanna say the name of the property; or subject property. So subject property is under contract on an off market basis, with a private seller, to acquire *address* an X-unit, two-story garden-style apartment building located within the flourishing *submarket* or *blank* Texas.

So right off the bat you’re telling them that it’s an off market deal, which is great. I don’t wanna get too much in the weeds, but — I don’t want to, but I’m going to… So this looks like something that you see in a PSA, a contract, because it has the property address, and then in parentheses the quotation property. You don’t need to put the address in there; you already have the address in the title, and the address isn’t something that’s super-important. They can look up the address by looking at the investment summary… So it’s just not something that you want to put in the first sentence.

I should be able to read the first sentence and know “Do I want to invest in this deal or not?” And right now you’ve done a good job of saying it’s an off market deal, you’ve done a good job of saying it’s in a flourishing submarket, but you’ve kind of added in the middle there information about the address and the property description, which is not very relevant to me as the investor.

Okay, next paragraph… So “The *address* is situated in one of the most highly desirable areas of the city in Texas, *submarket*, offering outstanding nearby amenities within a short walking distance (5-10 minutes), including high-quality shops, restaurants, bars, a park, a [unintelligible [00:11:21].16] with three baseball fields, hiking and biking trails, swimming pool and indoor gym.”

I think that paragraph is great. Maybe move that a little bit lower down… Again, this kind of depends on what you have as your subject line. If your subject line is “Off market deal in highly desirable submarket”, then this is fine to have here… Because you wanna highlight that it’s off market, and you wanna highlight why it’s a highly desirable submarket, and you went through all the nearby amenities.

One thing that you wanna confirm is that these amenities are actually relevant to the demographic at the property, your target demographic. Based on what you’re saying here, there’s probably a higher-income white-collar demographic… So make sure that those are the actual type of people at this property, and not a different demographic that these aren’t really relevant to.

Next paragraph, “The property’s location and access to major [unintelligible [00:12:14].27] places it within only a ten-minute drive to downtown, and a 20-minute commute…” – I think this might be a typo… “A 20-minute commute of city’s largest employment hubs, enhancing the appeal for the area’s affluent white-collar demographic.” So there you go, it is a white-collar demographic. But I think there’s a typo there. I think it’s supposed to be “and a 20-minute commute to this city’s largest employment hubs.”

“The historic submarket neighborhood and acclaimed corridor offers its residents an unapralleled live, work and play environment with a charming character, in a high barrier to entry market, given intense supply constraints from historical designations.”

That entire paragraph sounds like it got pulled straight out of an offering memorandum. You wanna be as specific as possible in this. You’ve gotta keep in mind that this is the first thing that your investors are gonna see, and so every single sentence should give them some important piece of information about the deal itself. So your second paragraph that talks about all the different amenities within walking distance is great; talking about how close you are to downtown, how close you are to the largest employment hubs… But the next paragraph about the neighborhood and the corridor is kind of a mouthful; it’s describing it, but it’s not specific enough. “It offers  the residents an unparalleled live, play, work environment, with charm and character, in a high barrier to entry market, given intense supply constraints from historical designations.”

If you want to, you can be more specific on supply constraints, you can be more specific on the high barrier of entry… But you’re kind of just saying things that are reiterating what you’ve said before.” You’ve mentioned that there’s work, you’ve mentioned that there’s play, and there’s live, but you don’t really need to mention that again. So I’d probably just delete that entire sentence in that paragraph, starting at “The historic submarket neighborhood, and acclaimed…” — I’m not sure what that is, but the corridor… I would just delete that entire sentence.

At this point, this person goes into talking about the business plan. So if you’re gonna have the highly desirable submarket in your title, you wanna get into more specifics on the submarket and why it’s highly desirable. I understand that you’ve talked about the jobs and the amenities, but why else is it desirable? What top lists has the submarket been on? What’s the submarket known for? What’s the job growth been? What’s the income growth been? What’s the unemployment reduction been? There aren’t any numbers in here, besides the distance to the amenities… So you wanna put some percentages in here, some historical trends, and be more specific on why it’s a good neighborhood.

For example, I’ve got one of our deal emails pulled up over here. One of our deals is in a Florida market, and we said that “The *blank* market has experienced some of the nation’s highest annual rent growths, with rents growing an average of over *this much* annually since 2015. This submarket has also experienced one of the highest population growth and job growth in the nation. Over the past decade, the population has grown by x%, and is expected to grow by x% over the next five years, compared to the national average of 3.5%. The number of jobs have grown by 27%, more than double the national average of 13%.”

Now, that’s the first paragraph in this new deal email, and as you can see, we go into specifics right away of what metrics we have as evidence as to why this is a highly desirable market to invest in.

So what I would do is —  your first sentence is fine, except for the weird contract language… But the second paragraph I would move down; or between the first and second paragraph I’d put in some of those metrics I’ve mentioned – population growth, rent growth, employment growth, new jobs growth, things like that first… And then mention “Also, they’re really close to these shopping centers.”

And then harping on this point even more, you mentioned it’s really close to the largest employment hubs – what companies are there? Maybe mention some of the companies, so I can relate to what these companies actually are. I have deeper questions from reading this, and you wanna proactively address those questions so that you’re not getting a  bunch of emails from investors, and it makes you look more professional overall.

Going back to the beginning where I talked about the picture – it looks like the company logo is actually in the picture. I confused what the name of the property was with what your actual company name was.

“The company plans to reposition the asset by renovating the exteriors, interiors and common areas, which will allow for substantially higher rental rates, that meet or exceed other comparable properties within the submarket that have upgraded improvements.” I think “they have similarly upgraded improvements.”

So again, there’s no specifics here. I know you’re telling me that you’re gonna be able to increase the rents, that are going to meet or exceed the rents at other properties… So if you actually think about that, [unintelligible [00:17:01].27] that’s not actually a positive. Having a higher rent is good, but you don’t wanna be the market leader. You don’t wanna say that “We’re projecting rents that are going to be higher than the comps.” You want your rent projections to be actually lower than the comps, and then hope that they actually meet or are higher, so that you’re able to return that much more money.

So you wanna reward that to say something along the lines of “We plan to reposition the asset by renovating the exteriors, unit interiors and common areas, that will allow for substantially higher rental rates, that will still be below the rents of other comparable properties within the submarket that have gone through similar upgrades.” That’s kind of a mouthful, but something along those lines of explaining that you’re gonna do similar upgrades to properties in the area, but you’re still projecting rents that are lower than what they’re getting. And then you wanna say what those actually are. You can say that “We project a $100 rental premium, which is $75 below the comps.” So more specifics.

The next sentence – “This value-add opportunity aligns well with our company’s core strategy to acquire non-institutionally-owned operated or targeted assets, where our management efficiency and capital renovations can be executed to enhance NOI and overall assets.”

I’d probably just delete that sentence altogether… Because you’re kind of just saying things that should be already known. They should already understand what your strategy is, they should already understand that of course you’re gonna increase the net operating income, and increase the value of the property. Because hopefully this isn’t the first time you’re talking to these people, so they already know about your company, the types of deals that you look at, you already know about their return goals, so that once you have a deal, you send it out and you’re just describing the actual opportunity, and not explaining the specific business plan for that opportunity, but not your grand vision, because they should already know that.

The next sentence – this company sourced the deal on an off market basis, through direct connection with the seller, and intends to co-venture with our local partners for operations, construction and management. That sentence is fine… Unless they already know this.

The next sentence “The venture is seeking indications of interest for equity investment in the property alongside a contribution from our company and its partner, with capital commitment by this date. Please review the attached investment overview summarizing the opportunity and the valuation model.”

I’m not necessarily sure exactly how this email was sent, but I would recommend in that sentence linking to the presentation, rather than attaching it. If you’re just sending this through email, you should be able to upload that presentation to Dropbox and copy and paste that link at this point, and then send out your email.

Alright, now we’re getting into the estimated investment returns. It’s got the purchase price, the acquisition cap rate, the estimated annual investor IRR, which is actually a range, which is interesting… I’d be curious to see why it’s a range and not a specific number that was outputted from the model. The estimate investor multiple – another range. An estimate average cash-on-cash (five-year hold), estimate stabilized cash-on-cash, estimate hold period.

So for our deals, what we do is we put in cash-on-cash return and IRR to the investors. IRR based on what the hold period is, and then cash-on-cash that does and does not include the sales proceeds… And I guess you’ve got some more stuff down here, so… This is just the returns.

So you’ve got the IRR, and you’ve got average cash-on-cash return, and then stabilized cash-on-cash, which I’m assuming means once you’ve actually stabilized the deal. So you’ve got a lot going on here… You’ve got the estimated hold period of 3-5 years on here as well… I would probably just put the returns. So you say it’s the estimated investment returns, but you’ve got purchase price, cap rate, hold period… So I would just put the IRR and the cash-on-cash returns, with and without profits from sale. You can keep the equity multiple in there as well if you want. But I’d take out purchase price, I’d take out cap rate, I’d take out the hold period.

Next is deal structure and fees. Estimated equity required you’ve got on here… I probably wouldn’t put that on there, because that’s not something that’s super-important for your investors to know. Minimum investor commitment – of course, keep that in there. Investment terms – the structure is 8% preferred return, compounded annually; 70% split to investors above the preferred return… And you’ve got more details on the companies that co-invest, how much equity they’re putting in the deal, and then the acquisition fee, asset management fee, construction management fee, disposition fee charged… We don’t put this level of detail in our emails, because again, we just wanna get all the highlights of the deal to them first. They can read all that stuff in the investment summary. So I would probably remove the majority of that and just keep the minimum investment amount, and then you can keep the preferred return in there as well, if you want to… But when you go into your fees, I probably wouldn’t put that in there.

And then deal timeline, capital call, and then closing date. You’ve got both of those on there as well. What I would do is I’d probably condense this section, to just having the returns – the IRR, the cash-on-cash, then the equity multiple if you want to. Minimum investor commitment amount… If you want to, you can keep the 8% preferred return and 70% split in there, and then the deal timeline.

And then lastly, “Feel free to reach out with any questions or discuss the investment opportunity in further detail.”

One thing that I see right off the bat that’s missing from here is explaining what they should do if they want to invest. You wanna put in a sentence that says “If you want to invest, here’s what you should do. Reply to this email with your investment amount.” Also, I don’t see any information here about an investment conference call. So if  you’re hosting a conference call, you wanna have all that information set up, so that investors will be able to know when you’ll be hosting this conference call, so they can sign up for it.

Besides that, you’ve got a lot of information here. I think maybe you’ve got too much information in here, especially if you plan on doing a conference call, and especially since you’ve got a summary investment overview attached; and it looks like you even attached your model, which I probably wouldn’t attach your model, just because that’s just going to generate way more questions, because you’re giving them access to your financial model. So you just wanna summarize the result of your model and then make sure you’re inputting all the assumptions you made in the investment summary… But you don’t wanna confuse them by showing them a crazy Excel document. Instead, you wanna summarize the model in your investment offering.

I do see that in the email you sent us you did go into more details on some of the things I mentioned. I see you went into the details on your rental premiums that you’re gonna demand, it looks like you went into a little bit more detail with metrics on the submarket… But you just wanna make sure you include this stuff in the email. You wanna make this email with the expectation that the majority of investors aren’t gonna read through the investment summary. So what’s all the information that you want them to know about this deal to get them to invest – you wanna put all the information in this email, and the most important information should be upfront.

That was interesting… Hopefully the feedback I provided was helpful. At the end of the day, it depends on what the goals are of your investors and what they care about. Our emails are curated based off of the goals of our investors.

If I said something to take out or to put in that you know is not relevant to your investors, then of course, don’t do it. Overall, I think you did a really good job, but my overall feedback – it feels like you copied and pasted certain aspects of the investment summary into this email. Instead, you want to write this from scratch, and make sure that you’re including all of the most important information about the deal to your investors. That’s gonna be about the business plan (which you’ve talked about in a little bit more detail), the market (which you’ve talked about, but maybe just in a little bit more detail), maybe a little bit about the type of debt that you’re putting on the deal, if that’s important… You’ve mentioned your team a little bit, but overall I’d say that if you say something and you read it, and it’s not really adding value to the email, then just don’t put it in there. You want every single word in that sentence to add value, and if it doesn’t, you can take it out.

So yeah, Alex, that is my feedback for your new investment offering email. Again, for those of you who are listening, everything I’ve talked about is based on the information I shared in series 18, where I talked about the entire process of creating a new investment offering email… So I essentially analyzed this one through that lens. If you wanna learn why I think certain things should or shouldn’t be included, make sure you check out series 18. I believe we also have a sample email for  you to download as well.

That concludes this episode. In the meantime, check out our other Syndication School series. I believe this is series 24, so we’ve got 23 other Syndication School series you can listen to, about the how-to’s of apartment syndication. Make sure you check out those free documents as well. All of that can be found at SyndicationSchool.com.

Thanks for listening. Alex, I hope this was helpful. Best Ever listeners, I hope this was helpful. Have a best ever day, and I will talk to you soon.

JF1835: Syndication Tips #2 Two Lessons Learned From A 250 Unit Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:15:40)
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We’re hearing a couple of lessons from a 250 unit apartment syndication deal that an investor completed. The two lessons are, getting your property management company to put equity in the deal, and priming private money investors prior to finding a deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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 to 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 episodes; you can find those on our podcast, as well as on our YouTube channel. Typically, these episodes are 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 also include a link to download a free resource, whether it’s a Word template, PDF, PowerPoint presentation template, Excel template, something for you to download that accompanies that series. All of these free documents,  as well as past Syndication School episodes can be found at SyndicationSchool.com.

This episode is going to be another syndication tip episode. It’s a standalone episode, and we will be going over two things that a syndicator learned after completing an actual syndication deal.

As I mentioned in last week’s episodes, we’re going to be doing some standalone episodes where we focus on either going back over some of the previous tips we’ve talked about on this Syndication School series in more details, or we’re gonna go over some case studies. Right now we’re gonna be focusing mostly on case studies, and then we’ll move into going into more details on some of the past steps.

This episode we’re gonna learn two things that were learned from an actual deal. It was a 250-unit deal in Texas. The two things were – first, one way to create an additional alignment of interests with your investors and with your team, and then the second tip is talking about whether you should raise money before you find a deal or after you have a deal under contract.

Let’s jump right in. Lesson/tip number one is to get your property management company to put equity in the deal. I’m gonna talk about this specifically, and then we’ll take a step back and talk about how this could be used more broadly.

Most likely, especially if you’re doing a 250-unit deal — maybe if you’re doing a smaller syndication deal, 4 or 12-unit, maybe even up to a 20-unit, you might manage it yourself. Now, when you are considering doing a syndication in that deal size, you have to remember all of the added legal costs that are associated with putting together a syndication, and the increase in down payment will likely push the deal below your return expectations.

So if you think about it, if you’re buying a four-unit deal, and you’re gonna have to put $15,000 extra down just to make the legal documents, it probably doesn’t make sense. Most likely, you’re going to have some sort of property management company managing your deal… And if you’re just starting out, the highest probability is that it will be a third-party management company.

Now, at some point you might get big enough where you wanna bring management in-house, but when you’re first starting out, it definitely makes sense to have a third-party property management company, because they’re the experts… And unless you have previous property management experience, you aren’t the expert. Of course, once you become an expert by doing a few deals yourself, you could bring management in-house.

Long story short, you’re gonna have a third-party management company, and one way to create an additional alignment of interests between you and that management company is to have them put money in the deal, and bring them on as essentially a limited partner. That way, they have skin in the game. If you remember, on a previous Syndication School series – I believe it was series number 8 – we talked about creating alignment of interests with your team members, and how one of those tiers of alignment of interests was having a team member invest money in the deal.

Those team members could be the management company, some sort of local owner, or the actual real estate broker that brought you the deal, or who you were working with. In that case, since they have their own money in the deal, then they want the deal to be more successful than if they didn’t. So from the property management perspective, of course, they get paid their ongoing management fee, which means they want to make sure they’re maximizing income, because their fee is based on the money that’s brought in. But if at the same time they are also going to be compensated based on the cashflow, which takes expenses into account, then it also behooves them to reduce the expenses… Whereas before all they really financially cared about is maximizing the income. So since they’re the ones that are going to be doing the day-to-day operations, if you can get them to invest in the deal, and their compensation is based on the cashflow, then you will have a better chance of them working harder to reduce those expenses, because of course, they want to make more money.

Now, of course, you always want to make sure you’re doing your due diligence on anyone you’re bringing into the deal investor-wise, and you also wanna do due diligence on any team members you bring on, like the property management company. For more details on questions to ask the property management company before hiring them just to manage a property in general, you can check out Syndication School series number 8.

Something else that you could do as well is rather than just give the management company a stake in the LP, you could also negotiate a reduction in fees. So rather than them investing actual in the deal, you could just give them a piece of equity, and in return for that equity, you can ask them to reduce their management fee by a few percentage points. Or they can forego or eliminate certain fees, like lease-up fees, or construction fees, maintenance up-charge fees… So you have to do some calculations and determine “Okay, so I’m giving you this much equity, so you’re gonna make this much money, so let’s reduce the ongoing fees by whatever.” That way they’re still making more money than they would if they just were charging out those fees, but you’re able to reduce the ongoing fees, which helps you increase the net operating income, which in turn helps you increase the value of the property.

And then of course – this is obvious anyways – if you are just doing a smaller syndication deal, you’re still gonna wanna bring on other investors. You don’t want the property management company to be the only investor in the deal. You still wanna bring on other investors, because that adds another layer of accountability and alignment of interests.

So that’s tip number one. Specifically for this deal, it was bringing on the property management company as an equity partner… But more broadly, you can bring them on and just give them equity and in return reduce some fees. You could also replicate the same strategy with other team members – your real estate broker, or some local owner, or mentor, or a consultant that you have. Because the more experienced team members you have, the higher likelihood you have of success, especially when you’re first starting out, and you are also going to increase the likelihood of success if those experienced team members have their own money in the deal, or at the very least are compensated based on the overall performance of the deal. So that’s lesson number one.

Lesson number two is about whether you should find investors before you have a deal under contract, or after you have a deal under contract. The lesson was the former, which is to make sure you have investors before you put a deal under contract. This particular investor did the opposite; he had to raise a million dollars for a deal, and did not have that money lined up before putting the deal under contract, and it was a scramble. Of course, he was able to do it, because if he didn’t, he wouldn’t have been able to do the deal… But it was a character-building experience, and he decided to never do that again, to always have investors lined up before finding a deal.

This doesn’t mean that you’re gonna have hard commitments from them, it doesn’t mean that you’re gonna have their money in your bank account. The entire point is to get them to verbally commit to a hypothetical future deal if it were to meet a certain set of return parameters. Essentially, what you wanna do is you’ll want to have conversations with your list of passive investors and get them to agree to invest in a deal if you were to come across one. More specifically, things that you can do to prep your investors is to schedule phone calls with them; talk with them on the phone and talk to them about a hypothetical deal. Ask them questions to learn about their financial goals, and how they evaluate the success of investments, so you know the type of investment that they would likely invest in, and the type of investment that they would not invest in. Talk to them about your team specifically, about your background, your experience, what types of deals you invest in and why you picked multifamily syndications. Give them the whole rundown of your team and why you picked this particular investment strategy.

Then at the end of the conversation an important follow-up question to ask is “If I find something that meets your financial goals, would you like me to share it with you?” If the answer is yes, then they’re primed and ready to go. That way, once you find a deal, all you need to do is create your new deal email, send it out to your list of investors; maybe half of them said yes to this. That way they already know and they’re expecting the deal to come, and they’re not going through this entire process once you have the deal under contract. [unintelligible [00:12:46].17] while you’re trying to perform due diligence and secure financing, and secure investor commitments; you’re having to do all these phone calls and asking all these questions, talking about yourself to these investors and getting them to agree. You’re much more likely to set yourself up for success if you do all of this before you find a deal. That way once you have a deal, you send it out, all the legwork is done; all they need to do is review it, make sure that it meets their financial goals, and they can either decide to invest or not to invest. So those are the two tips that were learned from this 250-unit apartment syndication deal.

Again, to reiterate, number one is to create alignment of interests by having team members invest in the deal, and number two is to make sure you have your investors primed before you have a deal under contract. If you wanna learn more about alignment of interests, check out series number eight, which is “How to build your all-star apartment syndication team”, where we go into how to screen potential team members, and then how to create alignment of interests with those potential team members.

And then to learn more about raising money – just in general how to raise money – check out series number 9, “How to raise capital from passive investors.” Then learn more about securing commitments once you have a deal under contract – so you do the upfront legwork, but it’s not as simple as just sending them an investment offering and then expecting them just to say yes to invest. There’s other follow-up things you need to do – conference calls, follow-up emails… So to learn all about that, you want to listen to series 18, “How to secure commitments from your passive investors.”

That concludes this episode. I know it’s a short one, but in these case studies we’re talking about quick-hitting tips on how to effectively do apartment syndications, especially when you’re first starting out.

In the meantime, until we come back for tomorrow’s episode, I recommend listening to the other Syndication School series about the how-to’s of apartment syndications, and download some of those free resources that we have available. All that can be found at SyndicationSchool.com.

Thank you for listening. Have a best ever day, and we will talk to you soon.

JF1829: Syndication Tips #1 Lessons Learned from 155 Unit Syndication | Syndication School with Theo Hicks

Listen to the Episode Below (00:19:56)
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Moving further away from the Syndication process, Theo is now diving into different stories from himself, Joe, and different guests on the podcast. Today, we’re hearing about a deal that taught an investor a couple of valuable lessons (creating alignment of interest and raising money before or after the deal). Hearing their experience and learning from it, can save you from having to learn those same lessons the hard way (like this investor did). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

Each week we air two podcast and video episodes – every Wednesday and Thursday – 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 offer some sort of document, PowerPoint presentation template, Excel template, some sort of resource for you to download for free. All of these documents and Syndication School series can be found at SyndicationSchool.com. Of course, all of it is free to listen to and to download.

Moving forward, we’re most likely going to be focusing on standalone episodes. Series 1 through 21 went through the entire apartment syndication process from start to finish, from essentially having no experience and no education, to selling your first apartment syndication deal on the back-end of the business plan.

Moving forward, we’re going to focus on, again, standalone episodes that either go into more details on a specific step, so examples of how to find deals, how to raise capital, how to find team members… Or case studies on actual deals that were done by actual syndicators. We’ll keep the names anonymous, of course, on those case studies.

This episode is gonna be one of those. We’re gonna go over a case study of a deal, a 155-unit syndication deal in Texas, and specifically we’re going to go over the three takeaways that the syndicator learned from this particular deal.

I think – and I hope you think this as well – that these types of episodes are going to be very powerful, because these are not theoretical. These are people who’ve actually done a deal, they’ve gone through the entire syndication process, then they sat down and evaluated what they did good, what they did wrong, what they want to do better the next time, and then are sharing those lessons with people who haven’t done a deal before. Obviously, lessons that are pulled from actual experience are very important for those who want to replicate that individual’s success… So let us jump into this case study.

This is a 155-unit deal. It’s this investor’s third syndication deal. They had done two deals previously, so obviously they learned lessons from those deals as well… And we’ll go over those lessons in future Syndication School episodes. But first, a lesson from this 155-unit deal that this investor learned was that you will go further by playing to your strengths.

Again, this was this person’s third deal, but on their first deal they did all of it – they found the deal, they underwrote the deal, they performed due diligence on the deal, they closed on the deal, they asset-managed the deal, they put the team together, they secured financing for the deal, they sold the deal on the back-end. They did all of it. Every single role, every single duty that needs to be fulfilled in order to execute the business plan was done by one person. And of course, going through this is a great learning experience. There’s always some sort of silver lining, no matter how thin and how small… But doing everything by himself did not set him up for optimal success for this particular deal, or for the business in general.

In this particular example, this individual was not an expert at all of the duties that I just went over – finding the deal, underwriting the deal etc. One example would be underwriting. This person was not the best underwriter in the world; they knew how to underwrite, they knew what they needed to look at to underwrite, but they were not expert underwriters. They had not spent hundreds and thousands of hours underwriting deals, and like most things, the more you do it, the better you get at it, usually… So he identified the need to find an underwriter.

Now, taking a step back, there are a few different categories of the main GP team. We’re gonna break it down into the money-raiser, the asset manager, and the acquisitions manager. The acquisitions manager needs to be really good at math, really good at underwriting. The money-raiser needs to be really good at networking, and the asset manager needs to be really good at management.

Now, of course, you might be a person who’s really good at math, who’s really good at managing, and who’s really good at networking. Maybe you’re amazing at all three of those. Even if that’s the case, as this person learned, you’re not gonna set yourself up for optimal success if you’re doing all three of those. Sure, if you were spending 100% of your time on each of those tasks, you could do them amazingly… But you can’t focus 100% of your time on all three of those tasks. You can’t spend all day underwriting, because then you’re neglecting raising money. You can’t spend all day raising money, because you’re not out there finding deals. You can’t just be finding deals, because you’re not asset-managing your current deals.

So even if you are amazing at all of these things, you’re still going to want to find a partner, or at the very least find people to work with you as employees, that can cover some of these duties, so that you can focus on the one or two things that you are completely phenomenal at doing, and quite frankly enjoy doing the most.

This investor decided to partner up with someone who had these underwriting skills – as well as other skills – on the second deal. Then on this third deal example it reinforced the need to do this again moving forward, to continue to partner up with this individual… Because, as I mentioned, it allowed him to do what he was good at, and allowed his partner to do what they were good at. Even though they could both do each other’s roles, they decided to split them based off of who was better at which one, and they were able to do a much better job by focusing on one thing and another thing, than one person focusing on both things at the same time.

This allows your business to go a lot further, faster – because that’s the lesson here. Go further by playing to your strengths… Because you’re focused solely on what you are good at. Of course, there’s gonna be overlap between the two roles. This person who had a partner who underwrote also checked the underwriting, reviewed it, and then his business partner also was — if he had someone that could raise money, then they would refer those people to him. But it’s better to have someone who has a lot of experience working on the, for example, underwriting, or working on the asset management, than someone who’s kind of good at it, but is much better at something else.

So the overall summary here is figure out what you’re good at and what you enjoy doing, and if it’s everything – if you say “Oh, I’m good at everything” – then figure out what you’re the best at of those everythings. Focus on that, and then find a business partner or some sort of employee to do the other things that you’re either not as good at, or you don’t want to actually do.

A business partner is probably a little bit better, just because they’re less likely to leave, and they are going to most likely be more experienced than someone who wants to actually work for you. So that’s number one – go further by playing to your strengths.

Number two is do something consistently on a large distribution channel. If you’re a real estate investor, then broadly speaking, you’re in the sales and marketing business. If you’re a fix and flipper, if you’re a wholesaler, if you’re a multifamily syndicator, if you’re a real estate agent, you’re in the sales and marketing business. Maybe buy and hold investors aren’t… But they are, because they’re trying to find deals or trying to close on deals, or trying to find tenants, things like that. So they’re still in the sales and marketing business.

So since you’re in the sales and marketing business, then you need to have some sort of daily, consistent presence online in order to gain exposure and credibility with any of your customers, your clients, or leads… Because that’s what salespeople do – they’re always out there; if you’re in direct sales, you’re actually out there, knocking on doors, getting your face in front of the customer. If you’re in online sales, you’re constantly creating ads to get your advertisements in front of the customers.

So since you’re in sales and marketing, you need to get you, your business, your brand, in front of potential customers. Again, the specific customer depends on whatever investment strategy you’re doing. So if you’re a wholesaler, then it’s fix and flippers or buy and hold investors. If you’re a multifamily syndicator, then it’s investors. If you’re a rental investor, then it’s tenants. If you’re a real estate agent, then it’s people who are looking to sell or buy homes. One way to do this is to tap into a large distribution channel with your content.

We’ve talked about in series number seven the power of the apartment syndication branch. We’re not gonna go into how to actually create this content, what content to create; we’re just gonna say create a thought leadership platform. If you wanna know what a thought leadership platform is, check out series number seven, where we went into extreme detail on all the different types of thought leadership platforms, why it’s important, and how to set yourself up for success.

But one of the steps of this was to tap into a large in-place distribution channel with your thought leadership platform. For example, Bigger Pockets. Bigger Pockets has millions and millions of active real estate investors, so rather than starting from scratch, starting your own blog or your own forum, why don’t you go and post to Bigger Pockets to get your face out there. Amazon.com – you can self-publish your own book and get your name out there. You can do podcasting on iTunes. You can do video blogs, tips or interviews on YouTube. You can create a community on Facebook, or post content on Facebook. You can post content on Instagram, you can post content on Twitter.

Overall, the idea is to find some sort of distribution channel that’s already massive, that’s already used by your potential clients, and rather than starting from scratch, just use that to post your content to. And whatever content you decide to create, whatever distribution channel you decide to tap into, you’re doing this every single day. If you’re doing something like Instagram or Twitter, maybe multiple times per day, and you’re doing it consistently, and you’re doing it on this large distribution channel, of course.

Many people want the shiny object, the golden nugget, the top-secret plan that will let them create massive levels of wealth, and retire on a beach… Anyone who’s reached any level of success knows that that’s not true; there is no secret, special pill you can take that will make you a successful investor. It’s all about the daily grind. It’s about doing things consistently, every single day.

The reason why I say this is because for the thought leadership platform these things take a long time to pick up momentum, to gain a lot of followers, a lot of viewers, a lot of conversions.

I was interviewing someone a few months ago who said that when you are doing a thought leadership platform you need to have a multi-year plan. You want to look at it in terms of multiple years, and not  a few months, not a few weeks. Don’t expect to have a million views on your blog in a few months or a few weeks. Expect to have maybe 1,000 views by the end of the first year, and then double that by the end of two years, and then let the snowball effect help you take off, and launch, and get even more viewers to your content. Again, you need to do it every day, and don’t expect any sort of instant results.

The third lesson from this deal is that there is major power in doing a recorded conference call when raising money. If you wanna learn more about this strategy in particular,  that’s series number 18, “How to secure commitments from your passive investors”, where we went over in extreme details – I believe it was 3-4 30-minute episodes that focused specifically on this conference call. But this is something that you might be saying “Well, obviously I should record my conference call”, but for this person, they did not do that for their first two deals. They just did the conference call, and figured that the people that were serious about investing would attend the conference call, and that they would just invest their money in the deal, the fund would fill up, and he’d be able to close on the deal. He figured that he didn’t really need to do it, and that it wouldn’t help him raise money… But the tip that he learned on his third deal was “Have a conference call with the qualified investors, and then record that.”

So when he was in the middle of raising money for this 155-unit deal, they decided to have a conference call, and unlike the similar calls that they’d done, they decided to record that call. It was very helpful in raising capital for that deal, for two reasons. Number one is that most people in general are busy, but people who are high net worth individuals are most likely even more busy – with personal life, with business, with making money – and that’s why they’re actually being a passive investor in the first place; they don’t have time to do active investing themselves, so they need to have something that is a pre-built system that is essentially hassle-free, that doesn’t take up a lot of their time.

So the expectation in your should be that “They might not be able to make my conference call. If they’re out there doing other things and that’s not allowing them to invest themselves, then what makes me think that they’re gonna be available for a three-hour conference call on this particular day of the week?” So if you record it, it lets them listen to it on their own schedule.

And then secondly, the questions that are being asked are from a group of other investors, which is beneficial to others who are listening but didn’t ask those questions. That basically means that if they weren’t there, and they have questions about the deal that aren’t covered in the investment summary package that they’ll see – because if there’s no recording, then all they’re gonna see is either your initial email or the investment package – they can get answers to questions that maybe they have, that they didn’t have the opportunity to ask, but someone else who’s similar to them asked that question; they listened to the Q&A section on the conference call and had that question asked.

So specifically how to record the call – listen to series 18 on how to secure commitments from your passive investors to learn the logistics of this call. The whole point of this was to say why it’s a powerful way to help you raise more money, and that is 1) it allows people to listen to and learn about the deal on their own schedule, and 2) it allows them to hear the answers to questions that they themselves might have, that aren’t covered in the actual investment summary. Either something that you as the syndicator brought up, or something that another passive investor who is interested in the deal brought up.

Again, the three lessons on this 155-unit case study were 1) You go further by playing to your strengths, 2) Do something consistently on a large distribution channel (for more details on that, series seven), 3) There is major power in doing a recorded conference call on raising money. More information on that on series 18.

Again, this is a standalone episode, so that concludes this series, in a sense. Thank you for listening. I recommend checking out the other Syndication School series we’ve done so far, especially if you’re new. If you’re new, make sure you start at series 1 and work your way through the 21 series that focus on the main body of the syndication process, from start to finish. Make sure you download the free documents that we have available as well, and make sure you keep coming back to listen to these episodes again every Wednesday and Thursday. All of those things can be found at SyndicationSchoo.com.

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

JF1828: How An Investor Raised Over $1 Million For First Two Apartment Syndication Deals | Syndication School with Theo Hicks

Listen to the Episode Below (00:21:46)
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Theo has walked us through the entire apartment syndication process in previous episodes. You can find all of those at SyndicationSchool.com. Now we will begin to discuss miscellaneous, tips and lessons that the team has learned over the years. We’ll share stories from Ashcroft Capital (Joe’s investment company with his business partner Frank Roessler), guests of The Best Ever Show, and Joe and Theo’s own experience. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are typically part of a larger podcast series – we also release these on YouTube as well – 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 free resource, document, spreadsheet, presentation template, something for you to download for free, that accompanies the series or episode. All of these free documents, as well as the free Syndication School series can be found at SyndicationSchool.com.

This episode is going to be a standalone episode. Moving forward we’ll most likely be doing mostly standalone episodes, because in the first 21 series we went through the entire syndication process from start to finish, and now we’re going to go back over certain aspects of that process in more detail, and just extra tips and strategies and case studies that will help you on your syndication journey.

Today we’re gonna be talking about a specific case study on raising money. This episode is entitled “How an investor raised over one million dollars for their first two apartment syndication deals.” Now, most people who are starting out will likely put in a ton of effort into their first deal and maybe raise a couple hundred thousand dollars, or 500k; this particular individual raised over a million dollars for their first deal. And not only did they do it for their first deal, but they did it for their second deal as well, which equates to about a 3 to 3.5 million dollar deal both times… Because as you know, you typically need to raise about 30% to 35% of the total project cost in order to close on the deal.

So it is possible to raise over a million dollars for your first deal, as well as your second deal, as long as you have that education and experience and you tap into your natural network, which is what this particular investor did.

So here are the three things this investor did that enabled him to raise over a million dollars for, again, not only his first deal, but also his second deal as well. All three of these strategies were in some form or fashion him tapping into his current net worth, so the people he already knew, and leveraging skills and experiences that he already had. The first place that he went to to raise this capital was his personal network.

Again, I’m gonna explain this from his perspective, and then we’re gonna take a step back and explain how this is relevant to you. This individual’s personal network included his family, his friends and his work colleagues. These were individuals who already knew who he was on a personal level, which meant that they already knew about his real estate background and real estate education.

Before raising money for these two deals, before raising that million dollar plus number, this individual’s previous real estate experience included over five years of purchasing single-family homes, so he was a single-family investor for about 5+ years, and then also in a previous corporate role he was responsible for managing a 2.5 billion dollar investment portfolio, and was responsible for raising over one billion dollars in funds for acquisitions. So obviously knowing that this individual had five years of investing experience on the personal side, as well as having a previous career where he was also responsible for investing, in this case 2.5 billion dollars worth of properties, his personal network knew that he was a successful real estate entrepreneur.

Within this particular personal network, the two main money-raising avenues were his past business associates, so people that he knew from work, and then actually people that were within his wife’s network.

Before we get into that, let me stop and talk about this first aspect… As  you know from one of our earliest Syndication School series, the two things that you need to do before you’re ready to become an apartment syndicator is you need to obviously get the education, which you’re doing through Syndication School, but also you need to have experience. We broke that  experience down into two categories, which was business experience or real estate experience. So you need to have past experience that you can leverage, while explaining to potential investors why they should trust you with their money.

So if you’ve never held a job before and you’ve never invested in real estate before, why would someone trust you with their capital? When they ask you “What previous experience do you have that should make me believe you’re capable of executing this business plan?” and you can’t say — in this person’s example, “Well, for the past five years I’ve been investing in single-family residential myself, and here’s how many deals I did, here’s the returns I received using my own capital, here’s the roles that I played, here’s the things that I learned while doing that… But also, I have experience managing a massive real estate portfolio. In fact, in my previous role I managed a portfolio of over 2.5 billion dollars, and raised over one billion dollars in funds for acquisitions. Here are the types of deals that I did, here is my specific roles in that management and in that capital raising.”

That sounds a lot better than saying “Well, I listened to a lot of podcasts, I read a lot of books in the process, and I’m looking forward to putting that education into practice.” You need that, but you also need to have that experience as well. The reason why is because, as I mentioned, the number one reason why people invest with you is because they trust you, and they’re going to trust you 1) if they know you on a personal level, of course, but 2) if they know that you’re gonna be able to preserve and grow their money, and they’re gonna know that you can preserve and grow their money if you’ve done that in the past with either your money or someone else’s money, or had some sort of experience managing a project that involved actual money.

In doing so, once you’re talking to an investor, you can leverage this experience and explain to them how you’re gonna be able to use those skills to transition into raising money for deals.

The next thing, as I was mentioning, is that the two avenues this individual used to raise capital through their personal network was people from work, and his wife’s network. His wife’s network was a natural path, because she knew many people that were already interested in real estate, and had cash readily available, and she had also built trusting relationships with these individuals.

Another really powerful way to raise capital is to think of not only the people that you know, but the people that know the people that you know. People that are multiple degrees of separation away from you. So who’s someone that you have a strong relationship with, that you could in a sense partner up with so that you can tap into their personal network of high net worth individuals?

A perfect example of this would be if you were someone who had very strong operational experience; you had a lot of experience underwriting deals, doing due diligence on deals, maybe even asset-managing deals, but you don’t know many people with high net worths, and you don’t have any experience raising capital… So you cover most of the important aspects of the operational side, but you don’t know how to get the actual capital to get to the point where you can do underwriting, do due diligence, and asset-manage the deal… So a good solution to that would be to partner up with someone who focuses specifically on the investor relations side, and actually raising the capital. So we’ve got one person who’s responsible for the day-to-day operations of the deal, another person is out there generating interest for investing in these deals.

In this case, this individual didn’t have to go too far, because his partner, in a sense, lived with him. It was his wife, and his wife had a network of high net worth individuals that he was in a sense able to tap into in order to raise money. So he had the experience, she had the network, they came together to raise over 2 million dollars for those two deals.

The second avenue was work. This individual had a past business associate he used to work with in the high tech sector (so this was a tech guy). This person was actually this individual’s biggest investor. So another avenue is to not only tap into someone one or two degrees of separation away from you, that knows a lot of high net worth individuals, but think of people that you already know who are working a high-paying W-2 job, that know you, maybe have an idea about your real estate investing experience, and ask them if they’re interested in an opportunity, if it were to meet these certain criteria.

In summary, find someone who you know has a network of high net worth individuals, as well as focus on people that you already know from either your previous jobs, or friends or family members that you have that have high-paying jobs. So that’s number one, personal network.

The second way that this individual was able to raise over a million dollars for deal one and deal two was Bigger Pockets. Social media outlets like Bigger Pockets, that specifically focus on real estate education, or just entrepreneurship in general, tend to attract people who are looking for investment opportunities. Another example would be a place like LinkedIn. This is where the type of offering you plan on doing comes into play; if you plan on doing a 506(b) security, then you’re not able to explicitly advertise for money, and you need to have a pre-existing substantial relationship with your investors. You can’t post on Bigger Pockets, or you can’t post on LinkedIn, saying “Hey, I’ve got this great deal. Do you wanna invest?” Or “Hey, I’m a syndicator and I’m looking for investors.” You’re not allowed to do that. Whereas if you’re doing a 506(c), that is something that you are in theory able to do. But again, make sure you’re checking with your securities attorney on all of these, to make sure you’re generating investor interest the correct way, and legally.

For this individual, they did a 506(b), so they were not able to go on Bigger Pockets, or able to go on LinkedIn and just post their deals. Instead, what this individual did was he portrayed the same message by posting valuable content on Bigger Pockets, and by creating a strong biography page. A very powerful strategy to generate interest in you and your business is to create a Bigger Pockets Pro account, which allows you to put links in your signature, and then make a bio that explains exactly what you do. Don’t say “Hey, I’m looking for investors”, say “Hey, I’m an apartment syndicator. I raise money from accredited passive investors, or people who are interested in getting into real estate larger projects, but don’t have the time or skills to do it themselves, and we use that capital to buy deals and share in the profits.”

Then you can put a link to your website or a link to your LinkedIn page or wherever you want to send people who are interested in learning more about you… And then you just post content on Bigger Pockets. You answer questions in forums, you repurpose your thought leadership content and post it to the blogs. You’re just constantly putting out valuable educational resources. Ideally, you are posting information that is relevant to people that you want to reach out to you, which are accredited passive investors. So you can write about things that will help people make good passive investment decisions. And in doing so, whenever you post your content to the forums, or respond to someone else, or post a blog post, then whoever comes across that will see you obviously being engaging and answering people’s questions, but also they will see the link in your signature, or they will click on your profile to learn more about you.

Obviously, not every single person who comes across your profile is gonna click on it, but it’s all about getting as many eyeballs on your profile as possible, and sending those people to your website, and then making sure of course you have a website that directs them to any sort of a lead capture form that you have, or any sort of call-to-action that you have. So that’s number two, Bigger Pockets, or similar social media sites; you can do the same thing on LinkedIn – you can post your blogs there, and make sure that you have strong keywords in your bio, like “passive investing, accredited investing, apartment investing, apartment syndicator”, so that anyone who’s out there searching for passive investment opportunities, accredited investment opportunities, will be able to find your profile easily. Then of course, having a link to your website, so that they can go to your website.

The third way that this investor was able to raise over one million dollars for deal one and one million dollars for deal two were local multifamily meetups. So he’s got the virtual realm covered via Bigger Pockets and LinkedIn, and then he’s got the real world covered by attending these local multifamily meetups.

This individual expected to be a lot more successful at raising money at these meetups than he actually was. Meetups are going to attract people who are interested in passive investing, of course, but more likely they’re going to attract people who are active investors that are looking to network with other active investors, they’re looking to find deals, they’re looking to form partnerships… But there may be opportunities to meet  passive investors, there may be opportunities to meet accredited investors.

The reason why he added this one is because he did raise a portion of money from the local multifamily meetups, but not as much as he initially thought, and it was only a small part of the pie. But that could just be location-dependent. You might be in a large market, that has meetups that are specific for accredited investors, for passive investors… Or even better, you can start your own meetup group, that focuses on educating passive accredited investors. That’s probably the best way to use the multifamily meetup strategy to generate interest in your deals… Again, making sure you’re not explicitly advertising. So you’re hosting a meetup where you’ve got people coming in and presenting valuable content, and they’re networking with people that are there, forming relationships for bringing up your business and any deal that you have.

So those are the three different ways that this individual raised capital for their first two deals. One was that personal network, two was Bigger Pockets, and three were local multifamily meetups. Here is a breakdown of the percentage of dollars raised from each of these three categories, for deal one and for deal number two.

For deal number one, this individual had 13 investors. 70% of the money, of the over a million dollars, came from his personal network. Of that 70%, half (35%) came from his wife’s network, and then the other 35% came from his past business associate. Another 25% came from Bigger Pockets, so 95% came from personal network and Bigger Pockets combined, and another 5% came from the meetups.

The next deal, between his wife’s network, the business associate and Bigger Pockets accounted for over 90% of the capital, and then the rest came from the multifamily meetups or referrals. So on the second deal he had 15 investors; of the original 13 investors, 5 were repeat investors for the second deal, so obviously people came from the wife’s network and the business associate.

A few other interesting points about this individual’s deal… He said that he didn’t really have much success with referrals. He asked for a few referrals but didn’t feel confident enough to ask for too many, since it was his first deal. But he does believe that referrals and repeat investors will be a larger portion of the money-raising pie moving forward. Then also, the number of investors from his wife’s network and Bigger Pockets were essentially the same; he had 13 different investors, so say 5 came from his wife’s network and 5 came from Bigger Pockets, but the amount of money that was actually invested from these individuals were different. So he believes that this difference comes from the trust factor; people from Bigger Pockets don’t necessarily know him as well as people from his wife’s network. The more you know someone, the more likely it is that they’re going to invest a larger amount of money.

Lots of lessons learned here. The biggest takeaway is that the majority of your money for your first few deals are gonna come from your personal network. And again, that could be things like family, friends, or past business associates, or people that are a few degrees of separation away from you, that have a pretty large network of high net worth individuals.

That concludes this episode. Again, it’s standalone, so I guess that concludes this series as well. Again, you learned how an investor was able to raise over one million dollars for his first few deals.

In the meantime, until we get back to the Syndication School tomorrow, I recommend listening to some of our other Syndication School series about the how-to’s of apartment syndications. Download the free documents for those series, and start to put some of the lessons that you learned in those series, as well as this series, into practice.

Thanks for listening, have a best ever day, and we will talk to you tomorrow.

JF1822: How To Sell Your Apartment Syndication Deal Part 2 of 2 | Syndication School with Theo Hicks

Listen to the Episode Below (00:23:37)
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We’ve looked at all the factors to help us decide if we should sell, and decided that it is time to sell our first apartment community. Now what is the process to sell it? Theo explains our 8 step process for selling your apartment deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“You might have some sort of prepayment penalty”

 

Free Document:

http://bit.ly/letterofdisposition

 


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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 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 and video episodes that are usually a part of a larger podcast 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, PowerPoint template, Excel template, some sort of resource for you to download for free. All of these free resources, as well as past Syndication School series can be found at SyndicationSchool.com.

This episode is a continuation of a two-part series entitled “How to sell your apartment syndication deal.” If you haven’t done so already, I recommend listening to part one, where we discussed the thought process for determining when it is actually time to sell, and some of the factors/variables you should consider when determining if it’s time to sell your deal early, or even at the end of your business plan.

In this episode we’re going to talk about what to actually do once you’ve made that decision to sell your apartment community. We’re gonna go over the 8-step process for how to do that, so let’s jump right in.

As a refresher, one of the duties that the asset manager – you or your partner – should be doing is analyzing the market on a frequent basis. The purpose of doing that is to determine the current, as-is value of your property, so that you can do some return calculations to determine if it makes sense to sell your property early, as well as taking into account the six variables we discussed in yesterday’s episode.

Even if your plan is to sell at the end of five years, seven years, ten years, whatever your projected sales date was when you initially underwrote the deal, it doesn’t mean you should wait to do an analysis until that time. You should be doing it a few times a year, to determine if you can achieve a higher return to your investors by selling early.

Again, I went into extreme detail on that in yesterday’s episode, in part one of this series, so if you wanna learn more about that and the facts that go into determining whether it’s time to sell, definitely check out that episode. The rest of the episode we’re going to assume that you’ve already made the decision to sell, and these are the things you need to do in order to successfully execute that sale.

Number one is to be mindful of the sale. Once you’ve made that decision to sell, then there’s a few things that you’re going to want to do in order to maximize your chances of selling the property, and maximize that sales price… Keeping in mind that the value of the property, and therefore the sales price that you’re likely going to get is dependent on the market cap rate, which is effectively outside of your control, or you can decide at what cap rate you wanna sell at based off of a time and point you decide to sell; I guess that’s in your control. But if I wanted to sell right now, there’s really not much I could do to change the cap rate… So the other end of that calculation is the net operating income, and that is something that you do have control over… So in order to maximize the value of your property, you want to maximize the net operating income, which means you want to maximize the income and minimize the expenses.

So once you’ve made that decision to sell, one thing you should do is not start certain projects if the payback period extends past the sales date. For example, if you plan on selling your property in three months, then it doesn’t make sense to spend $5,000 to renovate a unit if you’re only going to get $100/month rental premium… Because you’re investing $5,000 and you’re really only getting back $300.

Now, of course – and I mentioned this in yesterday’s episode – you’re gonna want to determine… Because it’s not just the rental premium, you’re also increasing the value of the property as well. So you wanna take into account whatever cashflow you would get, as well as whatever that equity you’ve received at sale. So by increasing the NOI by $1,200 per month – will that equate to an increase in value, and is that more than $5,000? That’s a specific example; this could be applied to really any of the amenities at the property as well, not just the interior renovations.

You should also consider spending a little bit more money on marketing if your occupancy level is a little bit low. You can offer more concessions than you usually would, to increase your rental revenue. You could pursue collections a little bit harder. Those are examples of things you could do to increase your occupancy, because more paying people that are living at your property, the higher that income is going to be, and hence the higher the property value is going to be.

So overall, a good practice would be to take a look at your profit and loss statement and see which income and expense line items can be improved over a few months period, and have a conversation with your property management company as well, because they’ve likely – if you hire the right company – gone through this process before and should have some best practices on what to do when you are selling the property. That’s number one.

Number two is going to be to send your letter of notification of disposition to your lenders. Once you decided to sell, you need to let your lender know, so they can start the process of releasing the loan. And to do so, you need to send them an official notification of your disposition. Typically, you’re going to want to do this a few months before the closing date, and you’ll likely want to work with an attorney to draft this letter, and then send that to the lender.

Depending on the loan program that you used – I mentioned this in part one as well – you might have some sort of pre-payment penalty. Make sure you’re keeping that in mind as well when you are sending this letter of disposition, requesting what that pre-payment penalty is going to be, or if you already know what it is, then subtracting that amount from whatever your projected sales proceeds are going to be.

And since this is Syndication School, we give away free stuff all the time, so the document that we’re gonna give away for free for this series is going to be “How to create a letter of disposition.” I’m not gonna go over that on the episode now, but the free document will just probably walk you through what should be included, and there’ll be a little template that you can use to create your own letter of disposition… Making sure that you run it by your attorney first, to make sure that all the i’s are dotted and t’s are crossed. So that’s number two.

Once you send the letter of disposition, you also want to request a broker’s opinion of value. So you’ve done your analysis and determined what you think you can get for the property. The next step is gonna be to find a listing broker to actually list the property for you, and have them get you a value… Because it’s easy for you to just write down “10 million dollars” based on your NOI and what you think the market cap rate is, and that makes me feel happy to sell… But you wanna get a second opinion before you go through the  process of listing the property, putting it under contract, or even before that, spending money on getting an appraisal yourself, a full appraisal, which is like a few thousand dollars.

So find a broker that is a good fit for the type of property that you’re selling. Loyalty is pretty important in this business, so you’re probably just gonna use the broker that represented you when you purchased the property in the first place, so that’s likely the person who actually listed the deal for sale… But there might be reasons why you wanna go with someone else. Again, it’s really up to you, but that’s just one way.

Another one would be to reach out to a few of the best brokers in the market and let them know that you’re selling the property, and that you want a broker’s opinion of value.

Once you do that, they’re gonna request information from you – probably T-12, rent roll, maybe a few other financial documents as well… And then they’re gonna send you their broker’s opinion of value. The BOV typically will be a high, a low and a medium price. They’ll say “I think you’ll be able to sell the property between this range and this range, but what I think the sales price will be is this.” Obviously, the range is a low and high, and what they think it’ll actually go for is that medium range.

Once you’ve received a few of the brokers’ opinion of value, you’ll wanna ask the broker a few follow-up questions. You don’t wanna just take it for face value. A few things to ask them so that you’re confident that they can sell your property at that price would be to ask them what valuation approach did they use, so how did they actually calculate the value. Ask them what types of buyers they typically sell to; the characteristics would be what’s the size of the properties, the number of units, what’s the price range that they look at… So kind of get an idea of the types of buyers that they have. Ask them why they feel confident that those buyers will buy this property at whatever price they stated in their broker’s opinion of value, and then ask them if they sold similar assets in the past.

Based on whatever values you’ve received and based on their answers to these follow-up questions, you can select a broker to list the property. Those are just a few questions to ask them, but again, the whole entire idea of the BOV and the follow-up questions are to determine “Okay, what value do they think they can sell this property at? What evidence do I have that they can actually fulfill that commitment to sell it at that price?” That’s gonna be based on how they determine the value, what types of buyers they work with, do those buyers buy this type of property usually, are they confident that based on the buyers they have, they could sell it to them, and then have they actually sold properties of this size and quality before in the past?

Step four is to start a bidding war. Over the next six weeks or so, your broker – once you’ve selected the broker – should be working on creating the offering memorandum and then marketing the apartment to the public, to whip up a lot of interest. The interested parties will visit the property, and essentially follow the exact same approach that you followed when you initially purchased a property. So they’ll talk to the property management company, they’ll tour units, they’ll inspect exteriors and interiors, they’ll analyze rental comps, they’ll run the numbers, underwrite the deal and then submit an offer to you.

The goal is for your broker to create a bidding war, because that will push the price higher and higher. You’ll wanna make sure that they’re implementing the best practices, and they’re attracting and generating as much interest as possible, and getting you as many offers as possible. Typically, they’ll have some sort of a timeline, like “Offers are due by this day. Hey, here’s an open house that we’re doing”, continuously send updated financials, that are ideally better than the ones that were received before, and things like that.

Again, all the things that you saw when you were looking at deals, and are continuing to look at deals when you’re reading through offering memorandums. What things are attracting you to deals, and then making sure that your broker is doing those things when marketing this deal to the public. So that’s step four.

Number five is to screen out any newbies with a best and final call. Once you’ve stopped accepting offers, you’ll review all of the submissions and then you will want to set up some sort of best and final round. So you might go back to people and say “Hey, submit your best and final offer”, and then based on that they’ll take a few of those and actually have a conversation with them; if you’re stuck between three different offers, you call them up on the phone and have a more personal conversation with that buyer, to get a better understanding of their capabilities of taking down the asset.

We discussed when you were preparing for the best and final sellers call the types of things you should be prepared to answer, so you wanna make sure you go back and listen to that episode, because you’re gonna wanna ask those exact same questions to your buyers, to determine essentially “Do they have the capability of actually closing on this deal?” Because at the end of the day, the purchase price obviously is important, but if you have a newbie who has the best offer but they don’t end up closing on the deal, that’s time and money wasted on your end.

The things you’re gonna wanna know is what is their track record, what are their funding capabilities, so how are they going to fund the equity, how are they going to fund the debt… And then what’s their proposed business plan – what are they gonna do with the property once they actually take it over? All that is used to gauge their ability to actually close on the deal. If they have no idea what their business plan is going to be, they’re probably not gonna close on the deal. If they have no idea where their money is gonna come from, they’re probably not gonna close on the deal. If they’ve never done a deal before, they’re probably also not going to close on the deal.

Ideally, you sell to someone who has a large track record, has their equity and debt not necessarily lined up, but they know where it’s coming from, and they actually have a sound business plan for once they take over the property… Because again, you don’t want to have someone backing out after you’ve put the deal under contract, because they can’t fund the deal, they didn’t know how to underwrite it, things like that.

So after you’ve done the best and final seller’s call and you’ve selected who you want to go under contract with, then you’re gonna negotiate a purchase and sales agreement, which is the PSA. And again, you’ve gone through this entire process before; it’s literally the exact same thing, but from the other end. So all the things that you need to do to show the seller that you could close on the deal – you’re gonna want someone to do that to you. The whole entire process that you went through when you were buying the deal – as a seller, that’s the process your buyer is going to be going through as well.

So for the PSA, make sure you have your experienced attorney draft the PSA. Don’t let the buyer draft the PSA, because you want to start the negotiations on terms that are closest to where you need them to be, not the other way around.

Obviously, you’re going to want to use their LOI for certain terms like due diligence period, inspection period, things that they requested, the purchase, and then you can change any of those things that you want and then send that PSA to them, for them or their attorney or their broker to review. Most likely, there’s gonna be some back and forth negotiation. You want due diligence to be 30 days, they wanna do 45 days; they want these certain documents requested by a certain date, but you want them to provide them at this date… Things like that.

There’s gonna be some back and forth negotiation, but the main terms are gonna be set by that LOI. You’re not gonna be able to change the sales price or the down payment equity, things like that. It’s gonna be these smaller terms that you’re gonna be negotiating. And then hopefully, at the end of the day, they sign it, and you sign it. This could take  a week; sometimes shorter, sometimes longer. And then eventually they sign it and you’ve got a fully executed purchase and sales agreement, which takes us into step seven, which is for you to fulfill your obligations during the due diligence period.

During the negotiation process, once you came to the conclusion on what the due diligence timeline is going to be – once that contract is signed, the timeline essentially starts… So they have a certain number of days to do due diligence, they have a certain number of days to close, they have a certain number of days to make the earnest deposit. All those terms we outlined in the PSA. So whatever they agreed to in the PSA, they are going to be doing. But then also whatever you agreed to, you need to be doing as well. So maybe the terms are that they can come to the property within 24 hours’ notice, they can look at your bank statements, financials, your leases, your marketing materials… Any documents that they requested in the PSA, you need to provide to them, in the timeline that was set in the PSA.

Best-case scenario for you as the seller – nothing comes up during the due diligence period, and you sell the property at the price and terms defined in the PSA. However, just like when you were buying the property originally, you know things come up. And if something does come up, there may be additional negotiations back and forth with the seller on the terms, the purchase price, or both. And again, making sure that they are adhering to the schedule and you are adhering to the schedule. So if they still have time to do due diligence, then you have to give them time to do their due diligence. But if that period expires and they aren’t allowed to do due diligence anymore, they’re not allowed to use that contingency to back out of the deal – well, that’s set in stone on their end as well.

So once that due diligence process is completed, all the contingencies have been signed off on, then the buyer will be in the process of working with their lender and the title company to finalize the things in preparation for the closing.

Then step eight is to actually close on the deal. You know how it works from the buyer’s perspective, as we’ve talked about this before, and you’ve already gone through this process if you’re at this point in the business plan, because you’ve bought the property yourself… But for you, a few days prior to the official closing date you’re gonna assign all the documents, and then on the day of closing you will be wired all of the sales proceeds. Once you receive those sales proceeds, you will distribute those to your investors based on what you and your investors agreed to during the initial structure, so whatever that profit split was after they’ve received their initial equity back.

A good process for approaching the sale with your investors is once you know you’re going to sell, you wanna continue to send them the monthly recap emails, but just mention “Hey, we’re no  longer doing renovations because we are selling.” And then whenever you know the actual sales date, just make sure you include that in your email to investors. Then you’re going to want to send an email to them, letting them know how much money they should expect to receive, and how they will receive it. There also might be some documents that you need for them to sign after the fact in order to cut off any ties to the LLC that owned the property.

But effectively, you want to keep them up to date on what’s going on, and then any info you need from then on how they want their distribution, obviously you need to request that before the closing date, so that once you’ve closed, you can have your property management company wire or mail out the checks for those distributions. At that point, your investors are gonna be super-excited because they got their money back, and they got a huge profit, ideally. And you should be really excited, because you’ve sold your first deal… And now the process essentially starts all over again. You go back to the drawing board and find  a new deal, and kind of rinse and repeat, either after selling, or most likely you’ve already bought a few more deals at this point.

That concludes this episode on how to sell your apartment community, it concludes the series on how to sell your apartment community. This is the end of the main structure for the apartment syndication process.

We started all the way back in series one with education, and now we’re all the way at the point where you’ve sold your first apartment deal. What we’re gonna do moving forward is we’re gonna go back over some of the previous Syndication School series and go over those in more details, and kind of fill in the grey areas that we missed. Until then, make sure you listen to part one of this series, and make sure you download the free document on how to create the letter of disposition that you need to send to your lender.

Check out all of the other Syndication School series, one through twenty, as well as download those free documents. All of that is at SyndicationSchool.com.

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

JF1821: How To Sell Your Apartment Syndication Deal Part 1 of 2 | Syndication School with Theo Hicks

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Now that we’ve completed the business cycle with our apartment syndication deal, is it time to sell? Theo will cover what you need to look into with each deal before making that decision. It may make sense sometimes to sell early, other times it won’t. How do you know when is the best time? Hit play to find out. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You never want to get forced to sell”

 

Free Document:

http://bit.ly/letterofdisposition

 


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 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 and now video episodes that are typically a part of a larger podcast video 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 Microsoft Word document, Excel template, PowerPoint presentation, something for you to download for free, that accompanies that series. All of these free documents, as well as past Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part one of what will likely be  a two-part series entitled “How to sell your apartment syndication deal.” So we’re finally here, we’re finally at the end of the business plan on your first apartment syndication deal. Now it’s time to sell.

Again, this is most likely going to be two parts. In part one, which you’re listening to right now, we’re going to discuss the thought process of determining when to sell. We’ll get into that here in a second. Then tomorrow or in the next episode, in part two, we’re actually going to discuss the actual process of how to logistically sell your property at the end of the business plan.

One of the duties that we discussed for the asset manager is to frequently analyze the market that the apartment is located in. The purpose of analyzing the market is 1) to make sure you are staying up to date on some market rents, but secondarily, you are looking at properties that have recently sold, so that you can determine what you could potentially get if you were to sell your apartment community.

You don’t really care about the price that it sold at, it’s more what was the market cap rate the deal was sold at, because that is how you calculate the value of your property. You take a look at your current net operating income, you divide that by your market cap rate, and that is the current as-is value of your property. So that’s one way to determine the value.

A more formal way is to request a broker’s opinion of value; we’ll talk about a little bit more in tomorrow’s episode on how to actually do that… But essentially, you request an evaluation from your commercial real estate broker, and they will provide you with an opinion of what they believe the current value of your property is.

Now, you should be doing this, as I mentioned in the episodes about asset management – you should be evaluating the market in this capacity at least a few times a year, just so you know exactly what the value of your property is now, and you can determine what you could get if you sold the property, to see if it makes sense to sell early. However, the actual sales price, the amount of money you can get for the apartment is just one variable that you need to take into account when you are going through the process of determining whether or not you should sell  your apartment community. There’s actually going to be six other variables, factors, whatever you wanna call them, that you should be looking at when you are, again, determining if you should sell your apartment deal, and that’s what we’re gonna focus on for the remainder of this episode. Obviously, one is the actual price that you can get.

Number two — before we go into this, the purpose of this is to determine if you should sell early. When you initially underwrote the deal, you stated to your investors your underwriting  was based on a projected hold period. Maybe you determined that you were gonna hold on to that property for five years, and that’s what your projections are based off of. Or seven years, ten years. Whatever that number was, that is what your IRR, your cash-on-cash return calculations were based off of. So the purpose of this exercise is to determine if you should sell before the end of the hold period, before your projected sales date.

Something else you want to consider is the status of your loan. What type of loan did you initially secure on the property? A few things that you should consider about the loan is 1) the interest rate. Did you secure an interest-only loan? If you did, at this moment in time when you’re considering selling, how many more months or years are left on that interest-only portion? Because generally, during the interest-only portion of the loan your cashflow is going to be higher, because you’re not paying the principle. And it might make sense to wait until the end of the IO period to sell, because you can essentially get all that cashflow upfront, and then once you have to start paying down the principal and that cashflow is gone, or at least reduced, the principal that you’re paying to that lender that used to be cashflow is coming to you; once that’s gone, then you can consider selling your property.

Something else to think about is when this loan is actually due. You don’t ever wanna get forced to sell. We talked about this way back in the Syndication School series where we talked about the three immutable laws of real estate investing, with law number two being securing long-term debt, because you don’t want to get forced to sell or refinance the property.

So if you think it’s time to sell and your loan is going to be due pretty soon, then it might make sense to sell at that moment in time, rather than waiting until your loan is due and being forced to sell or refinance at that time… Because maybe the market turns from the time you decided that you wanted to sell, to when you actually do it, because you wanted to wait for  your loan to expire, for some reason.

So overall, if your loan is due soon, then it might make sense to actually sell the deal early, to avoid being forced to sell or refinance. And then lastly, you wanna also know about the prepayment penalty on the loan. If there is a prepayment penalty, what is that amount going to be if you were to sell now, as opposed to selling a year from now or two years from now, and how much longer until the prepayment period expires. So if there is going to be a large prepayment penalty, or a prepayment penalty in general, you need to make sure you’re subtracting that from the sales proceeds. So when you’re doing your typical disposition analysis and determining how much money you’ll be left over after paying back your investors, paying the loan, paying the closing costs etc, you need to add in that prepayment penalty to that calculation, because you’re going to have to pay that.

If the prepayment penalty is expiring soon, or the prepayment penalty will negatively impact your returns, you wanna wait. If it’s vice-versa, if the prepayment penalty is not expiring for a long time and you paying it is not necessarily going to significantly decrease the returns, then it might make sense to sell.

So those are just three things to keep in mind about the loan – one will be the IO period, number two would be when the loan is due, and number three would be that prepayment penalty.

The next thing that you want to consider when you are determining to sell early is  the status of your business plan. We are doing the Syndication School assuming that you are going to be a value-add investor, and all of the information we’ve provided is based on that specific business plan. If you’re doing a different business plan, the logic is still the same, it’s just the actual tactics are slightly different.

Assuming you’re doing the value-add business plan, that means you’re making physical improvements to the property in order to increase the income. So you’re upgrading interiors, you’re upgrading amenities, maybe adding in other amenities… Some sort of physical improvement to the actual property in order to get more money in rent and other income.

So each time you do one of these improvements, each time you renovate a unit and lease it up, each time you get a new amenity, the income at your property is going to be increasing. So if you haven’t completed your entire value-add business plan yet, you need to determine what you would be able to sell the property for if you were to wait and complete those value-add improvements.

So how many more units do  you need to renovate, and how many more units could you renovate if you were to wait 6 months, 12 months, 18 months? And then based on that, what would be the overall returns to your investors if you waited to sell, once those units were renovated, 12 months, 18 months, 6 months? Just do a sensitivity analysis based on continuing your value-add business plan; maybe not to completion, but maybe it makes more sense to wait 12 months, because you can renovate 25% more of the units, the income is gonna go up by X, which means the value of the property is gonna go up by Y, and you could exceed your investors’ returns by even more.

If you’ve already completed your value-add business plan, then this point is not necessarily as important. But if you still have a large majority of units to renovate, it may make sense to capture that value first, and then selling the property at a later date, at a higher price.

A third thing to consider, outside of the actual sales price, is going to be the status of the market. The net operating income is only one of the factors that is used in the value calculation. The other is going to be the market cap rate. So you want to do some research to determine where the market and where the submarket is heading. This can be accomplished by analyzing a variety of research reports created by third-party companies like Marcus & Millichap, CBRE, places like that. Or you can have conversations with your team members, property management companies, mortgage brokers, to determine what the cap rate is now and where they think the cap rate is going to be trending.

Obviously, this is all a projection, this is all estimates, it’s not going to be guaranteed; but if you believe the market is just going to improve, which means that the cap rate is going to reduce, then you’re going to be able to sell the property at a higher price, at a later date.

Another way to look at it is that if the trends are better than what your projections were, so if the exit cap rate projection that you assumed when you underwrote the deal is a lot higher than the trends, then it may make sense to wait to sell. And then obviously vice-versa – if the trends are not as good, then you might want to sell now, before the market turns.

So the next one is going to be pretty simple, and that’s just the age of the property. If the date of construction is before 1980’s, so the property is 30, 40 years old, then you are going to want to consider the fact that capital expenditures and deferred maintenance are going to be an ongoing issue. So more than likely you’ve got a number budgeted for cap ex, you’ve got a number budgeted for reserves, a number budgeted for maintenance or repairs.

Keep in mind that the longer you hold on to the property, the more cashflow you’re going to lose to those items. So if your budget is a lot less than what’s actually going on – so you projected $100/unit, whereas in reality you’re spending $200/unit, then each year that goes on and you’re spending that extra $100/month or per year, that’s eating away at your investors’ returns, so it might make sense to sell early, so that you can give them their returns back at a higher number than if you were to wait and continue to bleed out money to those cap ex issues.

Number five is going to be your investors’ risk tolerance. When you initially underwrote the deal you had your cash-on-cash and IRR projection, or whatever return projections that you used. So let’s say you projected an 18% IRR, with a 5-year exit, but after three years you determine that if you were to sell the property now, the IRR would actually be 27%. Obviously, continue to do what I said before – look at the age of the property, status of the market, status of the business plan and status of the loan, and use all those things to determine what the IRR would be if you waited 6 months, 12 months, 18 months etc, depending on how much longer your hold period is… And then based on those IRR numbers perform a sensitivity analysis using a varying cap rate. So what would happen to those IRR numbers if the market got better, and what would happen to those IRR numbers if the market got worse?

Now, if you sensitize those IRRs, and even if the market gets significantly better, the IRRs are not significantly better than that 27% number, then you are risking the chance of the market either remaining the same or getting worse, and you not being able to hit that 27% number.

So most likely, since your investors are passively investing, they have a lower risk tolerance, or at least a relatively low risk tolerance, compared to maybe let’s say an active investor… So if you’re not confident that you’re gonna be able to achieve a significantly higher IRR selling later compared to selling now, or whatever return factor is important to your investors – it might not be IRR – then if you wait to sell, you’re putting your investors’ capital at risk, and they might not want that. They might be happy with you selling early, getting that higher return, rather than waiting and maybe getting them a return that’s a few percentage points higher, but also maybe a few percentage points (or a lot of percentage points) lower.

That brings us into point number six, which is you want to also understand your investors’ investment goals, which you should already know when you had a conversation with them… Because at the end of the day, the decision to sell or not to sell is based off of the returns you can provide to your actual investors. They’re the ones that are the number one priority here. So what are their goals? Are their goals to receive their money back and profits back pretty quickly, so within 3-7 years? Is IRR something that’s really important to them? Or are they more focused on a longer-term hold that cash-flows, and they just wanna donate their equity back after 10-12 years?

If they care more about getting their money back sooner rather than later, then the IRR is likely going to be that important measurement, because the IRR is a time-based return measurement. So all things being equal, if you sold the property for $100,000 profit today, that $100,000 is worth more than $100,000 a year from now, or two years from now, or three years from now. And the IRR factor actually takes the time value of money into account. So the longer you’re holding the deal, the lower the IRR is going to be, unless obviously you’re significantly adding value and increasing the income at the property.

And then vice-versa – the faster the equity is return, the higher the IRR is going to be. So if that’s what they care about, it might make sense to sell sooner rather than later.

On the other hand, if your investors are more focused on that long-term cashflow, then you might want to wait to sell, because they don’t necessarily care about getting the upside, they don’t care about getting the money back; they just want a place to park their capital, receive 5%-10% return, and then at the end of the projected hold period they get their capital back… Because maybe this is how they planned their money, and they planned on that money being in there for ten years; then getting it back early – they don’t necessarily know what to do with it. If they say they planned on hold on to it for ten years and you get it back to them after five years, I’m sure they could repurpose that money, but maybe that’s something that they actually don’t want to do.

Overall, if you are confident that selling the property now will get you the highest return for your investors, then you should sell. And each of the factors I discussed are what you can use to determine if it is truly the best time to sell, or if you have a better chance of getting better returns to your investors by waiting.

So let’s say you determine that right now is the time to sell. What are the next steps? That’s what we’re gonna talk about in part two. In part two we’re gonna focus on the actual eight-step process for selling your apartment community.

Until then, I recommend listening to the other Syndication School series. I believe this is series 21, so we’ve got 20 other Syndication School series that you can listen to, a bunch of free documents as well… All of those can be found at SyndicationSchool.com.

Thanks for listening, and we will talk to you tomorrow.

JF1815: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 10 of 10 | Syndication School with Theo Hicks

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Securing a supplemental loan. That is how we will be wrapping up this series of the syndication school episodes.. Without further ado, hit play and learn the next step of the apartment syndication process.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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 video episodes as well on YouTube – every Wednesday and Thursday, that are part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For all of these series we offer some sort of document or resource – whether it be a Microsoft Word document, an Excel template, a PowerPoint presentation template, a PDF – something for you to download for free that accompanies that series. All of these free documents, as well as the Syndication School series can be found at SyndicationSchool.com.

This episode is finally here – it’s part ten of the ten-part series entitled “How to asset-manage a newly-acquired apartment syndication deal.” If you haven’t done so already, I recommend listening to parts one through nine. At the very least, listen to parts one through three; in parts one, two and three we introduced the top ten asset management duties. These are the ten things that you as the asset manager need to do in order to ensure that you are successfully implementing your business plan after closing on the deal.

You’ve put a lot of work into getting to this point, so you wanna make sure that you are implementing the best practices to make sure that you’re actually able to bring the deal full-cycle and sell it at the end, and send a large distribution to your investors, as well as their capital back. That’s parts one, two and three.

Then in parts four through nine we went into more detail on some of those ten asset management duties. In part four you learned how to maintain economic occupancy; in parts five and six we’ve talked about property management companies – in part five how to manage your property management company, and then in part six how to fire them if they aren’t doing what they’re supposed to be doing. In part seven we learned some strategies on how to attract high-quality residents; in part eight we learned some strategies to keep those high-quality residents and retain them at the property. Then in the last Syndication School episode (episode #9) we talked about some of the questions that you might have surrounding sending out the distributions to your investors. We answered eight questions that you might have about sending distributions to your investors.

Now, one of the last things that you might do, that we haven’t talked about already, during the time that you’ve owned the property, is to get another loan on the property. That’s gonna be the focus of this episode.

We’re not gonna talk in extreme detail about refinances, just because the process of getting a refinance is very similar to the process of securing a new loan. So if you wanna learn about that, check out the series on how to secure financing for your apartment syndication deal. But essentially, you’re going to want to refinance your deal if you either did a bridge loan on the deal, so you did a shorter-term, maybe a three-year loan with two one-year extensions, just because you wanted to include the renovations in the loan, and then you knew since you’d be adding value to the property and forcing appreciation you could pull out a large chunk of equity by doing a refinance and then returning that equity to your investors, so giving them their money back sooner… Which increases the internal rate of return based on the time value of money.

Generally, if you do a bridge loan, you’re most likely going to refinance; but of course, if you are doing a bridge loan, you wanna make sure that you’re not forced to refinance, which is where those extensions come into handy. So you wanna make sure that you’ve got a bridge loan that is as close in length to your projected hold period as possible. If you’re planning on holding on to the property for five years, you’re gonna want to get a bridge loan that you could potentially hold on to for five years, which is where that three-year plus one plus one comes in handy… But of course, you also wanna have the ability to refinance if you’ve forced that appreciation because of the fact that you can pull that equity out.

So refinance is one, but the other type of loan you can get on the property instead is a supplemental loan. So the supplemental loan is not something that you’ll get on a bridge loan. Generally, for bridge loans – they’re gonna expire, and once it expires, you’re gonna go ahead and refinance into a permanent loan, like a Fannie Mae or a Freddie Mac loan. But let’s say that you decided that it made more sense to secure a Fannie Mae or a Freddie Mac (agency) loan. Maybe they did or didn’t include some or all the renovations, but you wanted to secure long-term financing so you didn’t have to worry about a refinance, but you still wanna have the benefits of being able to pull out some of that hard-earned equity that you’ve received by adding value to the property. That’s where the supplemental loan comes into play.

A supplemental loan is a multifamily loan – this is the textbook definition – that is subordinate to the senior indebtedness. Essentially, what that means is that it is a loan on top of the existing loan, and it is in second position to that loan. You’ve got your initial Fannie Mae, Freddie Mac debt on the property, and then you get a supplemental loan on top of that; essentially, a second loan on top of the first loan, that is in second position behind that first loan. So you have to pay that first loan first, and then you pay the second loan.

Generally, these are secured 12 months or later after the origination of the first loan, or if you are getting multiple supplemental loans after the supplemental loan. So if you close on the debt January 1st, 2019, then your first supplemental loan is available at January 1st, 2020. Then if you’ve got a second one, and if you actually take it on January 1st, 2020, and you have the option to get a second one, you can get that one January 1st, 2021.

Now, as I mentioned, a supplemental loan is not the same as a refinance. A refinance is a brand new loan. So you’re closing out the previous loan and you’re starting a brand new loan. A supplemental loan is a second loan on top of the existing loan. So you’re keeping the existing loan, you’re still paying that existing person, and then you’re also paying the second loan, which is on top of that first loan… And I guess technically you’re not paying two different parties, because the supplemental loan is going to be serviced through whatever lender you used initially. If you used Fannie Mae, then Fannie Mae will do the supplemental loan. If you did Freddie Mac, then Freddie Mac will do the supplemental loan.

Now, the benefits of a supplemental loan compared to a refinance is going to be lower closing costs. The costs of closing the smaller, second loan with the same company is going to be a lot less than the costs of underwriting a brand new loan for the property.

Also, there is certainty of execution. So you might not necessarily know if you can refinance, you can get that new loan. Obviously, it happens all the time, but there’s not 100% certainty that you’re going to close on this new refinance loan at the exact terms that you want… Whereas for the supplemental loan, there are terms, obviously, but as long as you meet the requirements and as long as it’s 12 months, then you know that you can get that supplemental loan.

Then there’s also going to be a faster processing time, which goes hand in hand with the lower costs, because the process of underwriting a supplemental loan is not as in depth as a new refinance loan, plus it’s the exact same lender.

Now, I guess I should have mentioned this earlier – I’ve kind of already hit on this, but the purpose of getting a supplemental loan is twofold. One, most likely it’ll be to return some capital to your investors without having to refinance, so you can pull out some equity and return that to your investors.

Secondly would be to cover any expense that you need to cover. Maybe you underestimated the amount of money that it’ll cost to fix up the property, or for some reason you need some money to invest back into the property and a supplemental loan is a great way to get that capital without having to do a capital call.

As I mentioned, the supplemental loan will be secured through the same provider as the original loan. So if you went through Fannie Mae for your first loan, well, your supplemental loan will be through Fannie Mae; same for Freddie Mac.

Now, Freddie Mac and Fannie Mae are the main two ones we’ll talk about. They have some specific terms for their supplemental loans that I’m going to go over relatively quickly. I’ll differentiate between the two when there are differences, because they’re pretty similar.

So the terms can be between 5 and 30 years. For Fannie Mae, the loan size minimum is $750,000, and the minimum for Freddie Mac is a million dollars, so these are pretty big supplemental loans that you’re doing on larger properties. If your property is only worth $750,000, then you’re most likely not going to be getting a supplemental loan, or a Fannie Mae loan in general.

Both can be amortized up to 30 years. Both expect to have an interest rate on that loan that’s around 100 to 125 basis points above whatever the going market interest rate is. So 100 to 125 would be 1% to 1.25% higher.

The LTV for Fannie Mae is up to 75%, and the LTV for Freddie Mac is up to 80%. What that means is you’ve got a property that’s worth – let’s use easy numbers – 100 million dollars; then Freddie Mac is going to loan up to 80 million dollars on that property. And Fannie Mae is willing to lend up to 75 million dollars on that property. But that includes the original loan. So if you’ve got a Fannie Mae debt, and let’s say you still owe 70 million dollars, so you still hold debt worth of 70 million dollars, then your supplemental loan can be up to 5 million dollars. Or for Freddie Mac it could be up to 10 million dollars, to equal that 80 million or that 75 million dollars.

So it’s not like they’re gonna give you 75% of the property value; I guess technically they’ve already given you some money, it’s just they’ll give you more up to a certain percentage of the cost, which means that you need to have at least a certain amount of equity in that property at all times.

Debt service coverage ratio for the Fannie Mae will be a minimum of 1.3%, and 1.25% for Freddie Mac. So if you’re getting multiple supplemental loans, then it will include the previous supplemental loan as well, when they’re doing that debt service coverage ratio calculation. Both Fannie and Freddie Mac are offering non-recourse with the standard carve-outs. The timing is 45 to 60 days within the application. Then the cost for Fannie Mae is about $10,000 application fee, 1% origination fee, and then between 8k to 12k in legal fees.

The difference between Fannie Mae and Freddie Mac is that the application for Freddie Mac is a little bit higher – 15k. And then they actually have another application fee, which is the greater of 2k or 0.1% of the loan amount. Plus, you’ve got the 1% origination fee and then the same 8k to 12k in legal fees. As I mentioned, typically you’re going to take this capital and return it to your investors, or use it to reinvest into the property.

The last thing I wanted to talk about when it comes to supplemental loans is how you actually secure the thing, logistically… So what specifically do you do once it’s time to go out and secure that loan. As I mentioned, you can request it after 12 months. Once the loan has seasoned for 12 months, you can start the process of applying for a supplemental loan.

So you’re gonna reach out to whoever provided you with the original loan, whether the mortgage broker or you work directly with Fannie Mae or Freddie Mac… And you wanna ask them what they need in order to size out a supplemental loan, that is to determine how much money you can get from the supplemental loan. Typically, the four things that they’re gonna wanna see is a trailing 12-month operating statement, so your profit and loss statement for the last 12 months, they’re gonna want the year-end operating statement for the most recent full year, they’re gonna want a copy of a current rent roll, and they’re gonna want a list of all of the capital expenditures that you invested into the property since you bought it.

Once they have that information, the process is essentially similar to a regular loan, except not as in-depth. So they’re gonna do an appraisal, and then they’re gonna do what they call a physical needs assessment, which is effectively a property condition assessment – a detailed inspection of the property. They’re gonna use that to essentially determine the value of the property, and then based off of whatever their loan requirements are, they can determine the size of the supplemental loan. At that point, you’ll get the money.

One last thing is that you’re gonna wanna also ask your mortgage broker or lender, whoever provided you with the original loan, if you can get  supplemental loans, and if you do, how many you can get… Because sometimes you can get more than one. Every 12 months you can just continuously pull out equity and get another  supplemental loan and continuously distribute capital back to your investors, which again, helps with that internal rate of return.

And that’s it for the  supplemental loan, and we also talked about the refinance as well… And that is  it for this ten-part series, which is how to asset-manage a newly-acquired apartment syndication deal.

Now, next week we’re going to, in a sense, conclude the apartment syndication cycle with the sale of your property. Then from there, as I mentioned yesterday, we’re going to kind of go back through the process and talk about some of these steps in a little bit more detail, and cover really anything else that we missed and anything else that you needed to know in order to learn the how-to’s of apartment syndication.

Until then, I recommend listening to parts one through nine of this series; listen to one of the other 19 syndication school series we’ve done thus far. Check out the free document for this series, which is that weekly performance review template that you will send your management company to make sure that you’re hitting your KPIs at the property. All that can be found at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week, when we will conclude the cycle with the sale of your property.

JF1814: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 9 of 10 | Syndication School with Theo Hicks

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Investor distribution FAQ. That’s the topic for today’s Syndication School, I don’t think I need to explain much more about what’s inside this value packed episode. Without further ado, hit play and learn the next step of the apartment syndication process.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You pay the preferred return to investors, after that, the profits get split”

 

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 they’re also in video form as well, on YouTube – that are part of a larger podcast or video series that’s focused on a specific aspect of the apartment syndication investment strategy. For all of these series we offer some sort of PDF document, an Excel template, a PowerPoint presentation template, some sort of resource for you to download for free. All of these free documents, as well as past and future Syndication School series can be found at SyndicationSchool.com.

This week and this episode is going to be a continuation of a series entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part nine. This is gonna be a ten-part series, so we’re gonna end it in the next episode that we do for the Syndication School. If you haven’t done so already, I highly recommend listening to parts one through eight. Again, those are available at SyndicationSchool.com.

The episodes for this series can be seen as a standalone after you go through parts one through three. So at the very least listen to parts one through three, where you learned the top ten asset management duties – the ten things that you need to do in order to execute the business plan successfully after you’ve closed and before you sell. So that’s parts one through three.

Then in parts four through eight we went into more details on those ten asset management duties. In part four we discussed in more detail how to maintain the economic occupancy – the rate of paying residents – and we went over 19 different ways to market your rental listings and make sure that you are attracting the right residents to your property.

Parts five and six were all about the property management company. In part five we talked about some tips on how to effectively manage a property management company… Because in  reality, one of the main duties of the asset manager is to manage the property management company who’s actually at the property on a daily basis.

Then in part six we talked about what happens if you’ve determined that your property management company is not doing what they’re supposed to be doing, and what they’re supposed to be doing we discussed in that episode as well. If that happens and you need to fire them, how to go about doing that so that the transition from the old management company to the new management company is as smooth as possible.

Then in parts seven and eight we focused even more on how to maintain that economic occupancy, because at the end of the day the economic occupancy is going to determine how much money you can distribute to your investors.

So in part seven we talked about how you can attract high-quality residents to your apartment community, and then in part eight we talked about some resident appreciation ideas for how you can actually retain these high-quality residents once you’ve attracted them and gotten them into the actual building.

In this episode, part nine, we’re going to go over some questions that you might have about distributing the money to your investors. So we’re gonna go over eight different questions that you might have, or eight frequently asked questions that we received about the logistics and how to go about distributing your money to your investors.

And for the purposes of this episode, we’re going to assume that the structure you have with your passive investors is a preferred return and then a profit split. We’re gonna assume that you have an 8% preferred return, and then after that the remaining profits are split 70/30; 70% of the profits go to the limited partners or the investors, 30% go to you, the GP. Just because I’m gonna use some examples and some numbers, and I don’t want to have to give a million different calculations, we’re gonna assume 8% preferred return, 70/30 split.

Now, we’re not gonna talk about how to structure the actual partnership, so why we’ve selected this 8%, 70/30. That’s in a previous episode, where we’ve talked about creating your team, attracting investors, setting up the compensation structure, and at this point in the process your passive investors have already agreed to the compensation structure, because they’ve invested their money in the deal. The deal is closed, and now they are getting their distribution, so here are some things you should think about, or questions you might have about how to actually go about distributing the money to your investors. Again, these are eight questions.

Number one is “How do you know if you can make a distribution?” First you have to know where the distributions come from. The distributions come out of the cashflow. The cashflow is calculated by essentially all of the income, minus all of the operating expenses, so things like maintenance and repairs, payroll costs, paying the property management company, taxes, insurance etc. We talked about during the underwriting section. And then the debt service as well is taken out of the income; it’s the monthly payment to your lender for the loan, to service the debt. That cashflow number should be calculated for you automatically on your profit & loss statement that is provided to you by your management company. Then below that they might have some non-operating expenses, like any interest that’s accrued and the asset management fees that are paid out, any lender reserves that are saved, things like that. So that cashflow is what the distributions come out of.

In order to calculate how much money you need to distribute, you need to know how much money was invested in the deal. That initial preferred return is what the investors receive first. Let’s say for example you’ve got a limited partner who invests $100,000 into the deal. 8% preferred return is $8,000 per year. Then depending on your frequency of distributions, that could be $666,67 per month, or that could be 2k every single quarter, or it could be a  lump sum of 8k per year.

Knowing whether or not you can make a distribution actually depends on the frequency. Because just because you would have in this example $8,000 in cashflow cumulatively for the entire year, but maybe it increases gradually throughout the year. So maybe the first six months is below 8%, and then the next six months is above 8%.

If you’re doing annual – great; if you’re doing monthly, you might run into an issue where you can’t distribute the full 8%; obviously, pro-rated, so 8% divided by 12 months, each month.

Let’s say you’ve got ten investors who all invested $100,000, a million dollar investment. That means that you need to distribute, at the 8% preferred return, $80,000 a year. That’s a million dollars times 8%, equals $80,000. The same logic applies that I mentioned before about the monthly versus quarterly versus annually.

Now, let’s say that that property cashflow is 80k. 80k divided by 12 each month, and you’re doing monthly distributions – then you know “Yes, I know I can distribute the 8% to my investors.”

Now let’s say that it does more than $80,000 that year. Then you distribute the 8%, and then you can distribute the additional profits based on what the profit split is.

Now, what happens if it cash-flows below 80k? Let’s say it cash-flows 60k. Then you can only distribute 60k, because that’s all you have; the investors technically didn’t hit the preferred return, so at that point it either rolls over to the next year, or it rolls over to the sale, depending on how it was outlined in the PPM, and you can’t make that distribution.

Again, the question is “How do I know if I can make the distribution?” That’s the long way of saying whatever the initial investment was, multiply that by your preferred return; that’s how much money your property needs to cash-flow for that year. If it does, the answer is “Yes, I can.” If it doesn’t, the answer is “No, I can’t.”

Number two, what happens if I cannot make a distribution? I guess I kind of already answered this. Following the example from before, if you need to cashflow $80,000 to hit the distribution number, but you only cash-flowed $60,000, then that gap of 20k can either roll over into the next year, or it can roll over at the closing. So when you close on the property, assuming, you have this catch-up provision in your PPM, however it’s outlined… If it’s at closing, then once you pay off the debt, you pay off the closing costs, whatever that lump sum profit is before it gets split between you and the investors, you have to pay that preferred return; then after that, those remaining profits will get split. But again, the process is whatever you have outlined in the operating agreement, the PPM, with your investors.

So it’s something you need to think about before you close on the deal, and figure out “Okay, if we cannot hit a distribution, what do we do? Is there a catch-up provision? Do we just never pay it out? What are we going to do?”

Number three, how do I calculate the distributions? I’ve already mentioned this as well – it is based on the preferred return that you offer to your investors, and their additional investment amount. So you take the initial investment amount and you multiply it by whatever that preferred return is, and that’s the annual return that they get. So if you’re doing quarterly distributions, you divide that number by four and distribute that quarterly. So $80,000 – that’d be 20k per quarter. If you’re doing monthly, then it’d be $80,000 divided by 12, which is the $6,666,67 number.

Obviously, if you’ve got ten investors, you divide that by ten, and each of those ten investors get their chunk. So it’s based on how much money that they actually invested times the preferred return, and that’s the annual distribution they get.

Number four is when do I pay out the actual distributions? As I mentioned, obviously you’ve got that preferred return if 8%, but what happens if the deal cash-flows 10%? What happens with that extra 2%? The answer is you don’t just get it; it’s based on the compensation structure. In this example that we talked about, the compensation structure, the profit split is 70/30. So of that 2%, the passive investors get 70% and you get 30%.

Logistically, what Joe does – for the first 12 months of the deal, so month one through twelve, he’ll just distribute the 8% prorated. Each month will get 8% divided by 12, multiplied by their investment. So $100,000 investment – that’s $666,67/month. Then at the end of a full 12 month of ownership, they will evaluate the profit and loss statement, as well as their bank statements, see their cash balance, things like that, and see how much money they cash-flowed above that 8%. Then whatever that is, the investors will get 70% of that, or how you structured the deal.

Let’s say for example you have ten investors who invested $100,000 each, at an 8% preferred return, and the property cash-flowed $100,000 year one. That’s 10%. So you distribute the 8% each month, and at the end you say “Okay, we’ve got $20,000 remaining. That means that each investor will get 70% of that $20,000.

So if you have ten investors, each of those investors will get $1,400 each. That’s calculated by $100,000 cashflow minus the $80,000 you’ve already distributed, which is $20,000. And then $20,000 multiplied by 70%, which is their portion of the profit split, is $14,000. If you’ve got ten investors, 14k divided by ten equals $1,400.

Then for your investors, this would actually equal 9.4% return for year one, because they got that 8k plus 1,4k. That’s $9,400, divided by their initial investment of $100,000, which is 9.4%. So you can say to your investors, “Hey, we’ve projected 8% for year one, but we were actually able to distribute 9.4%, and you’re gonna get an extra $1,400 for your first distribution of the year two.”

Question number five, who sends out these distributions? We’ve already talked about this before in parts one through three, when we talked about the asset management duties, as well as part five, where we talked about how to manage your property management company. The answer is ideally, your property management company is the party responsible for sending out these monthly distributions, or quarterly distributions, or annual distributions.

Obviously, you tell them “Hey, this is how much we distribute”, but logistically, they’re the ones that are actually sending out the checks and sending out the direct deposits to your investors, so you wanna make sure that you have set expectations with your property management company about these distributions before you’ve closed on the deal. So let them know “Hey, we wanna send out distributions via check, or direct deposit, on a monthly basis. It should be this much, but each month we’ll confirm that with you. At the end of 12 months of ownership, we want to reevaluate the performance and I want you to let us know how much money we can distribute extra. That will be distributed the same way as the regular distributions – direct deposit or check in the mail.”

Question number six, when do I send out the first distribution? Generally, Joe sends out the first distribution at the end of the third month of ownership, and it’ll cover the time that the property was owned during that first month and the second month.

As an example, let’s say that the property was closed on January 15th. Then the first distribution will be send at the end of the third month, which is going to be March, and it’ll cover the time the property was owned from January 15th to February 28th. So it’ll be a full month, plus half a month. Then after that, each distribution will cover one month fully, and then it will be sent at the end of the following month. So the distribution that covers the month of March will be sent by the end of April.

That just gives your property management company time to send out distributions, make sure the money is there… So you don’t wanna send that March distribution at the end of March, because you might not have collected all of the money, you might not have paid all of your bills until maybe mid-April. So you make sure all of your ducks are in a row before you send out those distributions.

And then of course, make sure that when you’re setting expectations with your investors, they know that the first distribution is going to be a little bit larger, just because it’s covering multiple months of ownership.

Second to last question, number seven, is how do I send the distribution? I’ve kind of already mentioned this, but the two main ways to send distributions are 1) direct deposit, or 2) check in the mail. You can either just send them via direct deposit, you can either send them just through the mail, or you can do a combination of both and let your investors pick an option. But as I said before, make sure that your property management company is capable of doing whatever method your investors want, or whatever method you decide on.

If they, for some reason, don’t wanna send out checks, then you can’t offer checks to your investors. If for some reason they don’t wanna do direct deposits, then you can’t offer direct deposits to your investors. The last thing you wanna do is have them fill a direct deposit sheet, you tell them that they’re gonna get their first distribution by the end of March, for example, and then when the time comes, your property management company says “Hey, by the way, we can’t send out direct deposit, we can only do check in the mail.” Then you have to go back to your investors and let them know why they can’t get direct deposit, which makes you look bad, it makes everyone look bad… So make sure that you know exactly how your management company can send these distributions before you set that up with your investors.

And then lastly, question number eight, which might be the most important question to you, I don’t know – it is “When do you actually get paid?” So depending on how you structured the deal with your investors, you might get an acquisition fee, which you would be paid at closing. You might have some other fee that you charge for putting the deal together, and you collect all those fees at closing. So think of it as similar to the broker’s commission. They get their check at closing, you get your check at closing.

From an ongoing distribution perspective, you might get paid an asset management fee each month, or each quarter, depending on how you decide to set up these distributions with your investors. If you have an asset management fee, that’s considered a non-operating expense. What Joe does is he puts that in second position to the preferred return, which means that if the investors don’t get their preferred return, then Joe doesn’t get his asset management fee… Which is a little bit extra alignment of interests with the investors, to say “Hey, I’m not getting paid unless we get paid. I’d rather invest with someone like that, than someone who takes their money first and then tells me that they can’t pay me because they took 2% out of the deal already for themselves.”

So whatever that percentage is, you want to collect that after you’ve sent out the preferred return, if that’s what you want to do, and if you want to have that alignment of interest with your investors.

The other way you’ll get paid on an ongoing basis is if you’re able to exceed that preferred return. Again, you can do this on a monthly basis or you can do it whenever you calculate the extra distributions you send to your investors.

Going back to our previous example of the preferred return being 8%, so you owe your investors 80k per year, but the property cash-flows 100k, so 14k of that extra 20k, which is 70%, goes to your investors; the 6k which is the 30% go to you. So you’re gonna collect that each month, each quarter, or you can collect that once you send out that 14k to your investors.

And of course, you’ll get paid at closing based on that profit split as well. So if there’s a million dollars of sales proceeds after paying everything off, the investors get 70% of that, which is $700,000, and then you, the GP, gets $300,000.

Those are some of the questions that you might have about investor distributions. Some things we haven’t exactly talked about yet, kind of going into the details of the logistics behind how you actually calculate distributions, how you send them out, what happens if you can’t hit them, what happens if you exceed your cashflow amount, how do you approach that… So we’ve hit on all of those in this episode.

If you have any other questions about distributions, feel free to email me, theo@joefairless.com. I’ll be happy to answer those for you, or make them a topic of a future Syndication School series.

Now, this concludes part nine. I’m really excited, because tomorrow is going to be part ten, and that will be the conclusion of the second-to-last step of the syndication process, which is the asset managing a newly-acquired apartment syndication deal.

Tomorrow we’re gonna talk about how to secure a supplemental loan. We’ll talk about what that is and how to do that tomorrow. Then next week is going to be the start of the last series, and in fact it’s probably just going to be a two-part series, which is how to sell your apartment community at the end of the business plan. That will conclude the entire apartment syndication cycle.

At that point, we will just kind of go back over the entire cycle and focus in more detail on certain aspects of the process, but by the end of next week you should have an entire overview of the entire apartment syndication process, from start to finish. I think it’s 21 series that have between two episodes – and this one’s the longest, so ten episodes. Hundreds of hours of content that teaches you the how-to’s of apartment syndications, and at least 21 free documents as well. All of those are available at SyndicationSchool.com.

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

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

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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 – we also release these as videos on YouTube as well – and these two episodes (every Wednesday and Thursday) are a part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy.

For all of these series we offer some sort of document, a template, a PowerPoint presentation, an Excel, some sort of resource for you to download for free, that accompanies the series. All of these free documents, as well as the past Syndication School series can be found at SyndicationSchool.com.

Right now we are on series number 20, which is entitled “How to asset-manage a newly-acquired apartment syndication deal.” If you haven’t done so already, I recommend checking out those first 19 series, because everything we’ve talked about so far is leading us up to this point.

Now, this is going to be part seven, so you should also – if you haven’t done so already – listen to parts one through six of this series. As I mentioned, again, this is part seven. As a refresher, in parts one through three we talked about the top ten asset  management duties. These are the things that you need to do after you’ve closed on a new deal. Then we started to get into more specifics on those ten duties.

In part four we talked about how to maintain economic occupancy, so we went over 19 different ways that you can market a vacant unit in order to bring in a high-quality resident.

Then in part five and six we moved on to the asset management duty which focuses on how to actually manage your property management company, because for the majority of those ten asset management duties, you as the asset manager are working in tandem with your property management company.

In part five we talked about how to approach actually managing the company that is in charge of your property, and then in part six we talked about “Well, okay, my property management company that I found, for whatever reason, isn’t working out”, and we went over what some of those reasons could be. And if you have determined that you want to part ways with that management company, we discussed how to approach doing that in order to make sure that the transition to the new company is as smooth as possible.

Now, in this episode, part seven, we are going to go into even more detail on how to maintain economic occupancy. In part four we went over 19 different ways that we’ve seen other syndicators do, and what Joe and his company does, but I wanted to go into a little bit more detail on those strategies, just because during that part four I just listed all of them out and was not able to go into more detail and explain specifically what you should do, and then talk about the ones that Joe and his company actually do.

So we’re gonna go over seven different ways to attract high-quality residents. Now, first let me define what a high-quality resident is to you. Someone who is a high-quality resident is a resident that will pay on time; so they obviously are paying, but they are paying on time. They are someone who treats your building as a whole, as well as the specific unit that they live in, as if it were their own home… And they are courteous to the neighbors. So those are the three qualities of someone who is a high-quality resident.

Now, obviously, a low-quality resident would be someone that’s the exact opposite of that – someone who either doesn’t pay their rent at all, or just doesn’t pay it on time; they’re constantly late. They do not treat the unit or the building, community, the amenities at the property as if it were their own home, and they’re not very nice to their neighbors.

Obviously, you wanna have high-quality residents and not low-quality residents, because having high-quality residents will not only make your life easier, but it will make your passive investors more money in the long run… Because sure, you can fill your apartment up with 100% occupancy at all low-quality residents. Let’s say you’re at 75% occupancy when you take over, and you want to quickly get 100%, so you just essentially lease your unit to anyone who walks through the door. And sure, your occupancy rate will increase in the short-term, but there’s also going to be the other negative financial impacts on the property for bringing in these low-quality residents.

One is you’re most likely going to have higher turnover costs due to either more people leaving, either at the end of their lease, or just skipping or leaving in the middle of the night… Or, in addition to that, once they do leave, since they’re not treating the home as if it’s their own, then you’re likely going to have higher costs. Usually, if the turn costs more, it’s going to take longer to do. So that’s not only a financial impact, but also an occupancy impact as well.

Also, you’re likely gonna have more evictions, you’re likely gonna have a higher bad debt, so that’s uncollected moneys, uncollected funds after someone moves out. So if they owe you a bunch of money and move out – that’s gonna be considered bad debt, because you’re most likely not gonna be getting that money back. And then, of course, a higher amount of delinquent rent, which also leads to a higher amount of bad debt.

The whole point of saying all that is you and your property management company are going to want to proactively implement different marketing strategies and policies at your apartment in order to make sure you are attracting these high-quality residents, and that you are filtering out the low-quality residents.

So what are the seven things that Joe does at his property in order to not only make sure that he is maintaining economic occupancy, but to make sure that he is actually attracting high-quality residents. Some of these are going to be repeats of what we discussed in part four; however, we’re going to go into a lot more detail on these in this episode, so let’s jump right in to those seven different ways to attract high-quality residents to your apartment community.

Number one is going to be advertising. Some interesting facts about how people actually find places to live… Online tools, as determined by Zillow’s Consumer Housing Report, online tools were the number one way that renters were searching for their home.

When a group of renters were asked “What were you doing when you were searching for your home?”, 83% (8 out of 10 people) said that they were using online tools like Zillow, Craigslist, things like that, in order to find their actual rental listings. Then a second one was referrals, which was referral from a friend, relative, or neighbor; that was 57%. Obviously, 83% plus 57% isn’t 100%, just because people are using more than one way to search for homes. People aren’t just looking online, or aren’t just looking at referrals.

So since the vast majority of people are searching for their rental homes online, you’re going to want to have a strong online presence for your apartment community. Obviously, this starts by having a website for your company, and a website for each of your individual properties, depending on the size of deals that you’re doing. For Joe, they have their main company website, and then for each individual property they have a website; so Mira Vista Ranch will have its own website, and [unintelligible [00:12:09].29] will have its own website.

We talked about how to create these websites in an earlier Syndication School  series about building your brand.

So that’s kind of the foundation… But you also want to have the online presence for actual rental listings. So once you have a for-rent unit, then you’re going to want to make sure you are advertising those online. Obviously, you wanna have people capable of finding units on the property website, and applying for units on the property website, but how do they find the property website? Are there other ways for them to find your units that’s not through the property website? Well, of course there are.

So you wanna make sure that once you have a for-rent unit, you want to list the units on all of the online real estate and apartment listing services. Your most effective ones are Apartments.com, Craigslist, Realtor.com, Trulia and ApartmentFinder.com.

Something else you can also do is market your listings on social media – Facebook, Twitter and Pinterest. This could be something like you’ve got your company website, you’ve got a website for each property, and you also have a Facebook group for each property that you can work on getting all of the current residents to join, to like, have their friends like it, and then any new resident obviously like it as well, and then you can post your rental listings on there, so that people who follow it know that you have a listing available.

You can also do a paid advertisement. You can target someone – your target demographic – on Facebook. So if you’ve got a unit that’s available, you’re targeting a certain age group, that makes a certain amount of money, that lives in a certain area, that maybe has a certain job or interest, and you can actually target those people specifically on Facebook with your ad.

Now, in order to make sure that these online listings are optimized, make sure that it includes a clear and accurate description of the unit and the community; highlight any of the major selling points of the unit and the property, and then make sure you are investing money into taking professional pictures. Don’t have you or your property manager go in there with an iPhone and take pictures… Make sure you’re paying someone – it could be as little as a few hundred dollars, if you find someone who’s majoring in Photography at the local university to come by and take pictures for you, and send you 200 pictures, and you pick the best 5-10 pictures. So that’s number one, internet advertising.

Number two – the second way to attract high-quality residents to your apartment is to hire a locator. A locator is going to be a company, apartment rental agency more specifically, and literally all they do is help implement the best marketing tactics in order to attract people who are looking to rent a unit, and then they will place that person into a unit based on what is ideal for them. For me, if I was moving back to Cincinnati and I wanted to rent a unit, I could find one myself, or I could go to a locator and say “Hey, I’m moving in three months. Here’s what I need. Can you please find me a few units?” Obviously, because of that, locators can be great resources for landlords, or apartment syndicators and asset managers.

In order to find a locator – it’s pretty easy; just like you find anything these days, you just google it. Whatever market you’re in – let’s say you live in Tampa – just google “Tampa apartment locators” or “apartment locators in Tampa”, and then you’ll get your search results. Reach out to a few of them and see if they are a good fit. Determine what types of residents they find, what their average rent they’re looking for is, maybe what the timeline is… Things like that. The kind of questions you’d ask to qualify a potential resident, you’re just asking it through a third-party.

Then you can either offer them compensation, or generally they’re gonna have their own compensation structure. Usually, it’ll be something along the lines of the first month’s rent for a converted lead, or maybe 50% of the first month’s rent. Somewhere between there, for finding you a resident.

Make sure that when you hire – or if you decide to hire – a locator, you want to try to set up either weekly phone calls, or more likely weekly emails, just to provide them updates on the units you have available. Maybe just each week say “Hey, I’ve got this many one-bed/one-bath, 600 sq. ft. units available. I’ve got this many two-bed/one-bath, 800 sq. ft. units available. Here are the rents. Let me know if you have anyone who’s interested.” So just a quick email each week to make sure that they are up to date on your unit availability. That’s number two.

The third thing that you can do in order to attract high-quality residents is to target local employers and businesses. So based on whatever your target renter demographic is, which you should either know from doing your market research, or you can determine that by reviewing the applications of people who have applied to live in the apartment, and determine where they work; or if they’re university students, where do they go to school; where are they spending the majority of their time. Then you can make a list of either specific employers — again, this depends on the market, because if you live in a really large market, then  it’ll be specific employers, but if you live in a smaller market, it might just be like a retail center or a mall. Again, depending on where you live, but creating a list of all the places where your residents work or go to school, or are spending most of their time… And then you are going to want to target those with marketing pieces.

Once you’ve got your list – and it can also include things like tax preparation offices, bus stops and train stations. Anywhere there’s a high traffic and people are spending a lot of time, that are your renter demographic, you can print out and drop off fliers; you can drop off business cards, you can drop off price sheets, floor plans, site maps – whatever marketing material you have about your property, at these locations. But of course, make sure you’re asking for permission first. So don’t walk into the front office of a major employer — don’t walk into Facebook and just walk up to the front desk and drop off a bunch of fliers and walk away. Ask them permission first.

Something else you could do, kind of a level above that, is to actually send a small gift basket with – again, depending on the target demographic – gift cards, it could be wine, toolkits, things like that… To your actual current residents who are employed at the businesses on your target list… And you can thank them for living at your property and then ask them to refer people that they work with. So a little more indirect way of getting people from your target business list, or in addition to just going there and dropping off fliers. You can target a specific resident who works at or goes to this location, and then ask them to be your boots on the ground marketing person, in a sense. Don’t say it like that, but that’s what they are going to do, hopefully. That’s number three.

Number four is pretty simple, but also powerful, and that is to have a referral program. Every single person who owns units should have a referral program, because it’s really no effort on your side, besides initially and an ongoing basis communicating the details of the referral program to your residents.

As I mentioned earlier, the number one way that people are finding homes to rent are through the online tools, but number two, half of the people are searching (in a sense) or are finding their rentals through referrals; they’re asking people “Hey, what’s a good place to live?” So of course, you’re gonna want to have a referral program, so you can capture that half or almost 60% of the rental pool.

So create a referral program. Have either a flier that goes out to residents every few months, let all new residents know about the referral program, send them an email about the referral program… I remember one of the apartments I live in, they always had some theme to it. Thanksgiving they would say — I don’t know what they said, but Thanksgiving, or Christmas, Halloween… Each month they had a theme for their referral program. Be creative about it, but essentially what it is is if a resident refers someone who ends up signing a lease, then you will pay them $300. It’s better to actually pay them money, rather than give them a  discount on their rent. So rather than say “Hey, if you refer someone and they sign a lease, 30 days after the execution of that lease, your next month’s rent will be $300 off.” Well, they’re just paying less money, whereas if you actually give them money, it’s a better tactic. That’s why you hear all the car commercials say “Buy our car today and you’ll get $1,000 cash back”, rather than saying “Buy our car today and get $1,000 off.”

As I mentioned, in order to advertise this referral program, make sure that you deliver notes to your resident doors, send out emails, and you can also notify anyone who signs  a lease, “Hey, by the way, here’s our referral program.” So that’s number four.

Number five is to financially incentivize your leasing staff. If you have an apartment that’s 50-100 plus units, then either you (if you’re managing it yourself, which is probably not the case) or the property manager on-site manager likely has their own leasing staff, or has hired out people who exclusively focus on leasing out your units, and doing leasing-related activities like marketing, going through the paperwork, showing the units etc. So one thing you can do is you can financially incentivize them to actually lease your unit. Obviously, they’re getting paid a salary; maybe they’re not. Maybe their compensation is based off of their conversion rate, or how many people they lease the unit with, but on top of that you can give them a little bit more of a financial incentive. For example, you can offer them a small bonus every time someone moves in. Something like $50. And again, they might already be getting this from your management company, without you having to say it, but…

Something else you can do, too – rather than every time someone moves in, instead you can set a monthly or a quarterly goal of number of move-ins. You wanna see 50 move-ins this month, or 10 move-ins this month. Or we want to increase our occupancy by 5% by the end of the month – whatever that metric is, set a goal, and then if they hit that goal, they get something along the lines of a $100 gift card, or they get $250 bonus cash if they hit that target. Again, this incentivizes them to lease your units at a faster rate.

The last two – number six is going to be online reviews. The online rating of your apartment community will probably be the first thing a prospective resident is going to see during their apartment search. Remember, 87% of people are searching for apartments online. So if they are searching for apartments in Tampa and they see your apartment come up and it’s got a one-star review, they’re probably just gonna look over it and move on to the next apartment. Whereas if they see a five-star review and you’ve got 100 reviews – well, me personally, and I’m pretty sure the majority of people would investigate that property further.

So the more four or five-star reviews you have for your property, the better. Getting organic reviews are obviously amazing. If you’ve got 100 organic reviews, which means you’ve done nothing to directly gather reviews, that’s fantastic. But regardless, you’re gonna want to implement strategies in order to capture these reviews.

Here are two things you can do in order to proactively attempt to directly gather reviews from your residents. Number one is to ask a resident who has recently filed a maintenance request and had that maintenance request fulfilled very fast and adequately – ask them to review about the service they received. Obviously, you’re gonna have to reply to their message quickly and fix the issue quickly in order for them to leave you a good review. You don’t want to not reply for a week and then not fix a problem for a month and then ask them to leave a review, because you’re probably not gonna get a five-star review.

Also, you wanna make sure that it’s a minor maintenance issue. You don’t want them to write a review about the roof collapsing in on them, even if you fixed the roof pretty quickly, because that’s gonna turn some people off if they think “Oh, the roof could collapse on me at any moment.”

And then another strategy is to set up a laptop station in the clubhouse, in a central location, and kind of transitioning now into the last one, which is resident appreciation party – so if you host monthly resident appreciation parties at the clubhouse, or wherever on site, make sure you have a laptop there and direct people to leave reviews. Have the site open, so they can quickly just leave a review on the property on the laptop, before they leave. So those are two ways to directly gather online reviews, and we’ve talked about the reason why you want to do that.

Number seven, as I’ve kind of already mentioned, is to host resident appreciation parties. This not only helps you retain residents who are already there, but it’ll also help you get more residents, because you can either have people — maybe say “Hey, invite one person you think would be interested in living here to this party”, or just in general, someone’s getting more likely to refer the property to someone else if there’s a sense of community. But we’re gonna go into a lot more detail on resident appreciation parties tomorrow, including essentially an exhaustive list of all the different types of resident appreciation parties you can host at your property.

One last note on the strategies before we close out for the show – make sure that you are not waiting until you actually have the property close before making a marketing strategy, before determining what tactics you’re gonna implement in order to attract these high-quality residents. This is something that you want to create before you have the deal close. Once you put a deal under contract – because the marketing plans are gonna vary depending on the deal… But you should have a general idea of what you wanna do before you put a deal under contract; then once the deal is actually under contract, you should have a more specific plan created with your property management company to determine “Okay, once we close, day one, here’s what we’re gonna do so we hit the ground running.”

That concludes this episode. This concludes the detailed explanation of the seven ways to attract high-quality residents to your apartment community. Now, as I mentioned in the beginning of this show, make sure you listen to or watch parts one through six on how to asset-manage a newly-acquired apartment deal. Check out the other 19 series that we’ve recorded so far; check out all of the free documents from those series, and make sure you tune in to the next Syndication School episode where we will go into detail on those resident appreciation parties.

Thank you for listening, have a best ever day, and we will talk to you tomorrow.

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

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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 episodes (a podcast and a video series) that are 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 give away some sort of document, PowerPoint presentation, Excel template, some sort of resource for you to download for free. All these episodes, as well as the free documents 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 six, and – well, if you haven’t done so already, I recommend listening to parts one through five, where first we discussed the ten asset management duties in parts one through three, then in part four you learned more details on one of those duties, which is maintaining economic occupancy. We went over 19 ways to list and market your rental listings in order to make sure you’re maximizing not only the physical occupancy rate, but the actual economic occupancy rate (the rate of paying tenants). Then yesterday or an episode before this one – part five – we went over how to manage your property management company.

So in parts 1-3 we went over the best practices for being the asset manager, and then one of those is obviously managing your management company, so we went into more details on that yesterday, and specifically what you need to do in order to make sure you’re getting the most out of your property management company. Well, what happens if you’re not? What happens if you are implementing those practices and they aren’t sending you the reports you’re asking for, they’re not showing up to the weekly calls; maybe all of your variances are way off, the occupancy is really low, lagging behind… Well, what do you do then?

One option is to do a performance plan with them and try to figure out how to get them back on track, but another option is to fire them and to find a new management  company. That’s what we’re gonna talk about in this episode. It’s gonna be about how to approach firing a property management company. Essentially, we’re gonna talk about 1) when you should fire a management company, and then 2) if you’ve made that decision, how to actually go about doing it so that you’re ensuring a smooth transition from the company you’re firing to the new company that you’re bringing on.

There’s really only three reasons why you would want to start the process of firing a property management company. One is if they’re committing some sort of crime or fraud against you. If you discover that they are committing a crime or if you discover that they’re committing fraud – maybe they’re stealing money, embezzling funds, or whatever – then obviously you should begin the firing process immediately. And of course, if you’re not staying on top of your management company, if you’re not doing these weekly performance reviews, if you’re not requesting different financial reports – well, you’re not gonna know. And if you’re not visiting the property frequently… You’re really not gonna know if they’re committing fraud or committing a crime. That’s why in part five I’ve mentioned the reports you should request and here’s how often you should visit the property so that you can determine if some sort of crime or fraud is being committed… Plus talking to the residents as well. So that’s one – if they’re committing a crime or fraud, you should start the process of firing them immediately.

Number two is going to be lack of execution. That’s the second reason why you might want to consider firing your property management company. But before you instantly jump on them and blame them for your projected budget and your actuals being so far off, you first wanna make sure that it is indeed your property management company’s fault. You wanna make sure that it’s something they are doing or not doing that is making such a large variance between what you projected and what’s actually happening.

For example, let’s say you projected a $150 rental premium on the renovated units, and then you realize that you’re only getting $50. Well, the failure to meet that $150 rental premium might be because your occupancy is a lot lower on the property. Or maybe it’s because you have a high loss to lease. Well, that could be the fault of your management company because they’re not marketing properly, or they’re not targeting the correct people. Or it could be because of the market conditions. Maybe when you bought the property the market was in a completely different state, and after you’ve closed, after a few months something happened where the market took a turn and the rents dropped, and the demand for your particular unit dropped. Well, that’s not necessarily your property management company’s fault, and if you fire them, it’s not really gonna fix the problem, because firing your property management company is not going to fix the market.

Let’s say, for another example, you are having a lot of deferred maintenance issues, or let’s say you have deferred maintenance issues and they’re not getting resolved quickly enough, or they’re not getting resolved properly. Or let’s say that the renovations performed on the interiors are not good, things are falling apart after a few months or a few weeks, or whatever. Well, that could be the fault of the management company, but it also just could be because of a poor vendor, and instead of firing the management company, you can just fire that particular contractor, and that will solve that problem.

Overall, if you’ve identified some lack of execution somewhere at the property, before jumping to firing the property management company, the next step is to actually figure out what’s going on, to figure out exactly why there is a lack of execution, and make sure to confirm that it actually is the property management company’s fault, and that if you were to fire them and to bring  on someone new, that would actually fix the problem, and it’s not something that’s a vendor’s fault, it’s not something that’s just the fault of the current market conditions… Because – well, if you fire them and it’s the contractor’s fault or it’s the market conditions’ fault, then you’re gonna keep seeing the same issue with the new property management company, and you’re gonna fire them again, and you’re never gonna really get to the root cause of what’s happening… And if you don’t ever get to the root cause of what’s happening, you can never really fix the problem. So that’s the second reason you might wanna fire the management company – a lack of execution.

The third one would be a lack of communication. Obviously, we all have different wants and we all have different preferences in regards to the level of communication and the frequency of communication we have with our management company, so this is kind of subjective… But it’ll be kind of a gut feeling and you’ll be stressing out about it if your property management company is an ineffective communicator. So here’s a few examples of things that would be an indication that they’re not good at communicating. Obviously, you’ve got your weekly or monthly meetings; well, are they prepared for those meetings? Are they showing up on time, or are they always late? Are they always having to reschedule to a different time of the day or a different day of the week? Are they not prepared with the reports or have they not reviewed their reports at all? Does it just seem like they have no idea what’s going on?

How long does it take them to reply to your emails? If you email them with a question that an investor asked you, do they get back to you that same day, or the next day, or a week later? Do they never respond at all? How easy is it to get them on the phone? If you call them, is there someone that’s always on the phone that answers it, or does it go straight to voicemail? If you leave a voicemail, how quickly do they return your phone call – the same day, the next day, a week later? Do they communicate with you immediately if something goes wrong at the property? If there is a really big storm and there’s some water damage in some of the units – well, when do you find out about that? Do they call you that day and say “Hey, we’ve got water damage at the units. Here’s how much it’s gonna cost to fix. Do I have your go-ahead?” or do they say nothing? And if they say nothing, do they actually fix the problem? When do  you find out about it? Do you find out about it when you come there in a month and you realize that half the units have had water damage for a full month?

Those are some examples of things that your property management company could do that indicates that they’ve got poor communication skills? …and I guess in the sense of that last one, if there’s water damage and they’re not fixing it, that’s kind of a lack of execution as well. These are all signs that you might want to fire the management company.

Now, this is an important distinction – unless you’ve determined that they are committing fraud or some sort of crime, then we recommend waiting at least one quarter (three months) before you begin the firing process. So let’s say you determine that the reason why the rental premiums are $100 below your projections is because of a lack of execution on your management company – well, let them know about that issue and try to brainstorm a way to fix that problem and have them actually execute, so that you’re achieving that number. And if after a quarter they still aren’t executing, they still are doing the same thing they were doing before, then you can begin the firing process. Same thing for a lack of communication. If say for a month they stop showing up for the weekly calls, don’t fire them right away; get them on the phone and see if they change their behavior. If they do, great. If not, after a quarter then you can start that firing process.

The first step, if you’ve determined that it’s time to fire your management company, is before you actually reach out to them and say “Hey, you’re fired”, make sure you have a replacement property management company… Because you never really know how that conversation is going to go. If you fire them and they leave that day and you’ve got no one else to manage the property – well, then you’re kind of screwed; you’re kind of in a worse situation. A horrible management company is better than no management company, at least for the time being… So make sure you’ve got a replacement on deck and ready to take over the second you have that conversation with the management company.

If you remember all the way back to one of the earlier Syndication School series episodes we talked about how to find a property management company; so if you just go to JoeFairless.com and search “How to find a property management company”, you will find that episode, and I believe we also have a blog post on the questions to ask as well.

So you’ve determined that your property management company is a terrible communicator, they’re not executing on what they said they’re going to do, and maybe they’re embezzling funds, so it’s time to fire them. After you make the decision to fire the management company and you’ve found that replacement, here are five things that you need to think about and address in order to make sure there’s a smooth transition.

Number one is staffing. You need to figure are you going to fire all the existing staff at the property, that’s on site? Or are you going to allow some of them to stay under the new management company? So are you just firing the site manager or are you firing all the leasing agents and all the office staff, all the maintenance people as well? Everyone on the payroll – are you firing all of them as well, or just the actual overall property management company, but you’re gonna keep these little subcontractors and allow them to stay?

In order to determine who stays and who goes, have your new property management company interview and vet the current staff. Once they take over, they’ll interview and vet everyone who’s there, and then let them decide who should stay and who should go, just because they have a lot more expertise on that than you likely do, especially if it’s your first few deals.

Now, keeping some of the existing staff can be very helpful and ensure a smooth transition, because they already have previous experience and they likely also have inside knowledge on operating the actual property… But of course, if the current staff is not performing, then the property management company might need to bring on an entirely new staff. So for the staffing there’s pros and cons of keeping them on. The best bet is to just have your management company interview them and let them decide who stays and who goes.

The second thing you wanna think about are the financials. Your new property management company should – ideally, if you screen them properly – proactively request all of the financial documents from the previous property management company that they need in order to effectively take over the operations of the property. They don’t wanna just go in there and have a blank slate and not know what’s happened the past month, the past year, the past two years, depending on how long you’ve owned the property.

If you remember, in part five I’ve listed all of those reports that you wanna request from the management company; well, your new management company should request those reports from the old management company as well. They’re gonna want the historical profit and loss statements, they’re gonna want a copy of all the current leases, they’re gonna want the current rent roll, they’re gonna want a chart of the accounts which lists all of the income and expense line items, they’re gonna want to know about bad debt, delinquency, the occupancy status, the leasing status, the leasing activity… They’re gonna wanna know everything about the property leading up their firing, so that they can take over from where the old property management company ended, identify the issues and resolve them as quickly as possible.

If they don’t have that, they’re not gonna know what’s wrong at the property, and they’re gonna have to manage it for a few months, six months or maybe even a year in order to determine exactly what the issue was with the last management company. So that’s number two, financials.

Number three are renovations. The new management company is going to need a list of all the units that have and haven’t been renovated. Also, they’re gonna need to know exactly what was done to each of these units, preferably as detailed as possible, because the new property management company needs to know what units were entirely renovated and what those upgrades were; what units have been partially renovated or are in the process of being renovated, or I guess maybe were in the process of being renovated and then your property management company stopped doing it… Then from those ones, what else needs to be done with those units. And then what units have not been touched at all. That way, once they take over the property they can finish up those partial units and bring those to full, and they can begin and complete the non-renovated units… Whereas, again, if they don’t, they’re gonna have to walk every single unit, they’re gonna have to ask a bunch of questions on what you want done in the units, and it’s not gonna make it a smooth transition.

Obviously, if the old property management company doesn’t have that, then the new management company is gonna have to walk all the units and bug you, obviously… But ideally, again, this is all about making a smooth transition. There’s a list of all of the units and their current upgrade status.

Number four is vendors. The new property management company is gonna need a list of all the vendors who currently work on the property: the maintenance person, a plumber, a painter, the go-to appliance repair person, carpet person, drywall person, HVAC person, things like that. Then similar to the staff, you’re gonna want to have the new management company interview all these people to determine if they should stay or if they should go.

Then lastly and similarly to vendors is the service contracts. The new property management company is also going to need a list of all the contractors who work on the property: the pest control, pool person, landscaper, security, things like that. Then they’re gonna want a copy of all the actual contracts as well, just because they need to know who are they obligated to work with and who can they actually replace and find someone else.

So those are the find things that you wanna think about and do in order to ensure a smooth transition. Again, that’s 1) staffing, 2) financials, 3) renovations, 4) vendors, and 5) service contracts.

Now, here’s a few other things to think about when you are going through the process of firing a property management company. Number one, firing anyone (not just a management company), the firing process in general isn’t easy, and unforeseen difficulties are going to arise. You should go in knowing that, and knowing that however you think it’s gonna go in your mind is most likely not how it’s actually going to play out in reality.

In order to minimize the negative impacts of firing a management company, here’s three things you can do. Number one, when you’re actually firing them, use what we’ll call soft communication skills when you’re explaining why you’re firing them. Don’t call them up on the phone and say “Hey, this is Theo. I just wanted to call you and let you know that you’re fired” and then hang up. Obviously, you’re not gonna do that, but don’t do it anywhere near that. Instead, you’re gonna be closer to, for example, talk to them in person, ask them how their day is going, whatever, and then say “You know what, I’ve really enjoyed working with you, but at the moment I’m getting a lot of pressure from my investors to find a new management company to manage our property, so we’re gonna have to part ways.” You can blame your investors, so it’s not necessarily you are saying you wanna fire them, it’s your investors… So the conversation can go a little bit smoother. Something like that.

Overall, the point is you don’t wanna just aggressively say “You’re fired!” and then walk away. You don’t wanna be really aggressive and get mad and say “Well, you did this, this and this, and that’s why I’m firing you. I hate you, and I’m gonna write a terrible review for you online”, and things like that.

You’ve gotta keep in mind that when you’re going to fire them, they still have a lot of control over your property, and you don’t want them doing anything crazy, which — obviously, if you’ve screened them upfront properly, that shouldn’t be an issue, but you never know.

Next you wanna make sure you actually read the contract that you signed between you and your management company, just to make sure that you are certain about whether you can actually fire them. Sometimes the contract says that you signed a 12-month contract and you have to pay them for those full 12 months. So if you fire them after six months, you have to pay them six months additional worth of management fees. Or if you want to cancel the contract, you need to give us 60 days notice. So make sure you read through the contract first, to know what you are allowed to do, or if you are to take an action to fire them, what you’re going to have to do extra to actually get out of the contract.

And then lastly, have a representative from your new management company do those five things that I mentioned above: interviewing the staff, getting all the financials information, getting a  list of renovations, getting a list of the vendors and getting a list of the service contracts. Have them do that. You shouldn’t be doing this yourself.

You also might wanna have the new management company actually get that information by talking through a neutral party. So rather than talking to the actual on-site manager who you’re firing, have them talk to the regional manager instead, who isn’t as emotionally involved with the property, just because they’re probably managing hundreds of properties… Whereas the onsite manager, that’s their job, and they will be a lot more emotional about the firing than the regional manager.

Overall, number one, when you’re firing them, use soft communication skills. And you should be the person that does this; don’t have the new management company come in there and do an up in the air type situation.

Number two, make sure you’ve read the contract between you and your property management company to make sure that you’re going through the process the right way… And then three, have the person from the new management company who’s actually going to request all the financials and lists of vendors etc. – have them do that through someone who’s not the actual on-site manager that you’re firing. Make sure it’s someone that’s like the regional manager or someone that’s not involved emotionally with the actual property.

As I mentioned, obviously firing a property management company is not gonna be  a fun process, but if there is fraud, if there is crime, if there is a lack of execution, if there is a lack of communication, it just needs to be done, sooner rather than later. There’s lots of horror stories out there about terrible property management companies that could have been resolved by obviously screening them better upfront, but by also firing them sooner than later. It might be a rocky few months to transition from the old to the new, but once the new property management company is up and running, you’re gonna be grateful that you were able to make the transition.

That concludes this episode, where we talked about the process for firing the management company. Make sure you listen to parts one through five of this series. I’m not exactly sure what we’ll talk about next week, but we’re gonna continue talking about how to successfully asset-manage a newly-acquired apartment syndication deal. We’re probably gonna talk about different ways to make sure that you are not only attracting high-quality tenants, but you’re retaining high-quality tenants at your property as well. That’s probably gonna be what we talk about next week. But again, until then, listen to parts one through five, listen to some of the other Syndication School series; we’re now in series 20, so there’s 19 other series that you can listen to about the how-to’s of apartment syndication.

Also, make sure you download the free document for this series, which is that weekly performance review template. We’ve also got 20+ other free documents for you to download for free. All of that can be found at SyndicationSchool.com.

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

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

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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 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, as well as video episodes that are 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 some sort of document, resource, spreadsheet, template, something for you to download for free that accompanies that series. All of these free documents, as well as the past Syndication School series episodes – podcast and YouTube videos – can be found at SyndicationSchool.com.

This episode is going to be  a continuation of a series we’ve started the previous two weeks. This is gonna be part five, and this series is entitled “How to asset-manage a newly-acquired apartment syndication deal.” If you haven’t done so already, I highly recommend listening to parts one through four. Again, those are at SyndicationSchool.com.

At this point in the process you’ve done everything up to the point where you found a deal, put the deal under contract, did all of your due diligence, raised all the capital, closed on the deal, and now you are in the asset management phase. The last step after that is going to be closing, which will be the next series. So this is going to be a series focused on everything you need to know about asset-managing the deal. Now, in parts one through three we actually started off by discussing a general overview of what you’re going to need to do as an asset manager. In parts one and two and three we went over the top ten asset management duties. As a reminder, the person who is the asset manager may have also been the person – and is likely the person – who also found the deal, underwrote the deal, and managed the entire due diligence process. Then the other partner raised the capital.

So during this asset management phase, as I discussed in parts one through three, the asset manager is going to be doing the majority of the duties, but the person who raised the capital also has some responsibilities as well, so it’s a team effort.

Then also you’ve got your property management company, who’s actually going to be the boots on the ground, doing the day-to-day management. So it’s a  three-person team; or if you’re a GP, it involves multiple people raising capital, multiple people asset-managing, so then it’s gonna be more than three people… But overall, it’s a team effort. Make sure you check out episodes part one, two and three, because we went over in extreme detail – those ten asset management duties and who’s responsible for what and what you’re supposed to do.

Then in part four we focused in on one of those duties, which is to maintain the economic occupancy at the property. We went over 19 ways to market a rental listing, so definitely check out that episode as well.

As a refresher, your property management company should be implementing the best marketing practices, but if for some reason they are not, then these are 19 things that you can recommend that they do.

Now, I mentioned in that episode (part four) that one of the reasons why you might be more involved in maintaining the economic occupancy is if you hire the wrong property management company. And I told you that we’re gonna discuss how to go through the process of letting go and firing a management company, which we’re going to talk about in tomorrow’s episode.

In this episode we’re actually going to focus on how you actually manage the property management company. So whether the company is good or bad, these are the things that you need to do in order to manage them either forever, or until you find a new property management company. So part five is going to be all about how to manage your property management company, how to interact with them. Some of these things are going to be a repeat of what we’re discussed in parts one through there. The reason why they’re repeats is because they are extremely important and they are things that you’re going to want to keep top of mind when you are asset-managing your deals… So let’s jump right into it.

So it’s going to be broken into five different parts. First we’re going to talk about how often you should interact with the management company. At an absolutely minimum you’re going to want to have monthly performance calls with your property management company… But as I mentioned in parts one through three, you are going to want to set up a weekly call during the value-add phase of the project.

I’m assuming you’re a value-add investor, which means you’re buying deals that are stabilized from an occupancy perspective, but for some reason or another the income or the expenses are not actually optimized… So either the rents are low, the unit interiors are outdated, there’s some sort of operational expense that’s too high, and you’re gonna go in there and you’re gonna fix that, with the purpose of increasing the net operating income and therefore increasing the value of the property.

As I mentioned in parts one through three, the property management company that you hire ideally will help you with the renovations. If you’ve got interior renovations, exterior renovations, and then also maybe some operational improvements, your property management company ideally is going to help you out with this.

During that time – it could be a few months or it could be up to 2-3 years – you’re gonna want to perform weekly calls with the property management company. Then once you’ve stabilized the property, once the renovations are completed, the operational improvements are implemented, at that point you can either continue doing weekly calls, or you can change to monthly calls, or you can just have calls on a as-needed basis… But at a minimum you wanna talk to them at least once a month; and at a minimum you’re gonna talk to them once a week during the stabilization period.

Now, during these calls, who should attend? Well, the asset manager on your team obviously should attend. That’s you or your business partner, or one of your business partners. Then you also want to  have the on-site manager on the call as well. That’s the person who’s at the top of the food chain at the actual property. Ideally, you can have the regional manager on the call as well, assuming that you are working with a large property management company, that is located in more than just the market that you’re in.

Typically, how property management companies – if they’re national companies, they’ll have national headquarters where they’ll have the CEOs and CFOs and things like that, but then they’ll have regional hubs. For example, for the East they might have a regional hub in Miami. So you wanna have the person who’s the regional manager who’s in charge of that Miami office on those calls as well; maybe not every week, but at least once a month.

Then during those calls – we’ve already talked about this in parts one through three, but we’ll go over it again in the later parts of this episode… You’re gonna want to review property reports, and then review your key performance indicators (KPIs) during these monthly or weekly performance calls.

Number two is what reports should you expect from the property management company. If you go to parts one through three, we gave away a free weekly performance review tracker, which has all of the important KPIs on it, for you to track. So you send that to your management company upfront, obviously setting expectations and letting them know before you close that that’s what you want to do – you want them to fill out this tracker. You send that to them once, and then you ask them to fill it out each week before the call.

Now, here are a few other reports or a few other things you’re going to want to get from your management company. All of these should be on that weekly performance review tracker that we gave away for free; if they are not, or if you want to get these as an actual separate document, as opposed to filling out the template, here’s what you can ask for. Number one, you can ask for  a box score. The box score is a summary of the leasing activity at the property, including the number of move-ins and move-outs, the unit occupancy status – out of all the units at the property, which ones are vacant, but are re-leased, which ones are vacant and are ready to be leased… Maybe a unit has been given an eviction notice, but you already have that unit leased, or you don’t have it leased… It’s a model unit, it’s a down unit, it’s being used for something else… All these different codes you can have for the unit to describe its current status. So you’re gonna wanna do all that, and that should be included on the box score.

It’s not gonna be a list of every single unit, it’ll just be a list of “Okay, out of the 100 units, this many are vacant and leased, this many are vacant and not leased, this many are models, noticed but leased etc.”

Next you’re gonna want an occupancy report, so you wanna know what the physical occupancy is at the property – the total percentage of units that are occupied, as well as the economic occupancy… So of those occupied units, what is the rate of paying residents. These are likely going to be different; typically, physical occupancy is going to be higher than economic occupancy. Let’s say you’ve got 100 units, and 90 of those are occupied, but only 80 of those are actually paying rent, and then 10 aren’t… Well, then your physical occupancy is going to be 90% and your economic occupancy is going to be 80%.

You’re also gonna want an occupancy forecast. This is similar to the occupancy report, but this is projected. So by the end of the month or by the end of the next 30 days what’s the projected occupancy based on, as I mentioned in the box score, the units that are vacant but already leased, the ones that have a notice to be evicted but they’re already leased, and then obviously on the other hand the units that are down, so the units that are actually vacant, and you know they’re gonna be vacant at the end of 30 days. Expiring leases as well, things like that.

Next is a delinquency report. So if the economic occupancy is lower than the physical occupancy, the details of that will be listed on the delinquency report. So it’s a list of all the residents who are late on rent, or other fees you’re charging them, and then what those amounts actually are.

Then you’ve got your leasing reports. This is a summary of the actual leasing activity. These are things like what’s the traffic at the property, what’s your current leasing information, your current concession information, marketing information, projections… Essentially, all the information you know about what’s being done to lease the units.

Another report you’re gonna want to see is accounts payable. This is just the amount of money that you or the property owes to your vendors, and that’s including the property management company.

Then lastly you’re gonna want to have a report about cash on hand, which is essentially the liquidity at the property – how much money do you actually have in your bank account.

Now, here’s some other reports that you’re gonna want to receive… So those reports are what you want on a weekly basis, just because if something is off on those, you need to catch it sooner rather than later. These reports are things you’re gonna want to get on a monthly basis. We’ve talked about this before, but you wanna get the income and expense statements, the profit and loss statements, the T-12, however you wanna call it… This is the detailed monthly report with all of the income and expense line items listed out in extreme detail; all of your income line items, all of your expense line items, and then the dollars associated with each of those, as well as a final column that has the variance of the actuals compared to your budget. That’ll be something important to track and we’ll discuss that here in a little bit.

You’re gonna want a report of all the deposits. This is just a summary of the security deposits information – the current balance, any forfeits, any checks that were returned, any tenants who moved out and were refunded.

You’re gonna want a general ledger, which is a summary of all the financial transactions for that month. Any money that went out, it’ll list out what that was spent on. A balance sheet, which lists out a summary of all the assets, liabilities and capital. A trial balance, which is a summary of all debits and credits. The rent roll, which we’ve talked about before, which is a summary of all the unit information – for each of the unit what’s the occupancy status, market rent, current rent, when are they going to move in, when does their lease start, when does their lease end, what other fees are they being charged, what’s their security deposit and what’s their balance.

You’re also gonna want to see the expiration report, which is a summary of the expiring leases, and then finally a maintenance report, which is a summary of the maintenance issues at the property currently, as well as the costs associated with fixing those issues.

That’s a lot of reports, and all of these reports are essentially allowing you to track the performance of the property, and make sure that your actual expenses and your actual incomes (and your actual future expenses and incomes) are on point with your projections. If they aren’t, then you will be able to catch those by reviewing these various reports.

Now, these are a lot of reports, and obviously, your property management company may or may not send you all of these, which is why it’s very important that – I’ve mentioned this before, and I keep mentioning it over and over again – you set expectations with your property management company before you close on the deal, and ideally before you even have  a deal. So you initially are interviewing property management companies – say you interview ten management companies – and one of the things you wanna bring up is that “Hey, I would like to receive weekly and monthly reports. Is that something you guys can do?”, and they say yes or no. The ones that say yes, you end up hiring them.

After you hire them and you’re starting to look at deals or you have a deal under contract – at that point you wanna send them an email, “Here’s a list of the reports I want on a weekly basis, here’s a list of reports I want on a monthly basis, and then can we have weekly performance review calls to go over these reports during the stabilization period? Once we’re done, we can go to monthly calls.” If they say “No, we don’t do any of that”, then you might need to find another property management company. If they say “Well, we can do this, this and this, but we can’t do this, this and this”, then you have to decide, “Well, do I wanna continue with this property management company or do I need to find someone else who will actually send me all of this?” These aren’t all the reports you can request, these are just ones that are pretty common, and since they are common, the property management company should send you these, they should have some sort of software, which brings us into number three, which is how to actually obtain these reports… And the best way would be to ask your property management company to just create some sort of custom report in their management software that automatically sends you these reports on a weekly or monthly basis.

So someone at their company types in all the information for the property anyways, and then based on all that, they should have some sort of option to say “Hey, I want a general ledger, I want a balance sheet, I want a rent roll, I want a maintenance report; I want to send the delinquency report, occupancy stuff, every single week.” That way it automatically sends you an email; they have to set it up one time and that’s it. That’s the best way to go about doing it, which is why it’s nice to have a management company that actually has their own software, and they’re not just sending you a scanned piece of paper with all of this written out; ideally, it’s in PDF or Excel form, so you can open it up and easily see all the information that you need to see.

Another way to find these reports is to actually get access to the property management company’s software. That might be another good question to ask your management company, “What software do you use, and will I have access to the software?” That way all they need to do is input the data each month and then you can go in there and download each of those reports on your own.

Now, if your management company does not use a software, or if you don’t like the way their reports look for some reason, then the third option is for you to actually create your own custom spreadsheet. Essentially, you use that weekly performance review template that we provided in parts 1-3 and ask them to fill that out on a monthly and a weekly basis. But overall, you’re gonna want a management company that does this, and if they don’t, you need to know before you close on the deal… Because then if you end up closing on the deal and you realize they’re not gonna send you this information, you’re gonna have a hard time tracking the performance of the deal. So that’s number three.

Number four is “What metrics should you focus on the most?” I’ve mentioned 10+ reports, and on each of those reports there’s probably 100 different KPIs to look at, so which ones are the most important? Well – and I’ve mentioned this before – the most important is to track the cashflow coming in relative to your cashflow projections; those are the projections you offered to your investors when you were securing commitments from them. So you’re gonna wanna take  a look at the income and expense report that  you get on a monthly basis, and you’re gonna want to look at that far right column, which is the variance, and see how similar or how off your forecasted projections were compared to the actuals.

For each line item there’s going to be a variance number – a positive or a negative number – and you wanna focus on the items that have the greatest variance, or at the very least that have the highest magnitude of variance. So if you expected to have an income of X and the other income is Y, and X minus Y is $100,000, then you’ll probably wanna focus on that, as opposed to something that’s maybe a $10,000 or a $5 variance.

So if you get your monthly report and you see that there’s a massive variance in your income – well, then you’re gonna want to create a strategy with your management company during your weekly performance call on how to bring that line item back on track.

For the value-add business plan – again, that’s you doing some sort of improvement to the income or expenses in order to raise the property value – the number of units that you projected to renovate each month, relative to what you’re actually doing, is something else that you want to focus on, especially during the first 12-24 months, which is most likely going to be your stabilization period. And not only that, you’ll also want to make sure you’re tracking the actual rental premiums that you’re getting for those renovated units, compared to what you projected. So those are the two things you’re gonna wanna focus on, and all the reports will help you identify why those are off – why you have a high variance, why your rental premiums are off.

So you essentially wanna look at those two reports – the reports of the income and expenses and the renovation report – and if something’s off, that’s when you wanna go through all of your other reports and see if you can identify exactly why that is off. Obviously, there’s other metrics like leasing metrics, capital expenditure cost, total income and others that may vary from what you projected during the actual value-add portion of the business plan, just because you’re doing renovations… And just because there’s a variance doesn’t necessarily mean there’s an issue.

For example, let’s say you’ve got your cap ex budget broken down by month, and you realize that month six your actual cap ex expense is way higher than the actual budget; well, it doesn’t necessarily mean that you’re spending too much money on the renovations, or your renovation estimates were too high… It could just mean you’re ahead of schedule; it could just mean that instead of renovating 10 units a month, you renovated 15 units a month, so over the six-month period, that’s [unintelligible [00:22:19].26] so whatever that cost is is gonna be your variance. So every single variance isn’t necessarily a problem, unless obviously you don’t have the cash to be ahead of schedule. That’s just one example.

Another example could be that your total income at the property may be lower than you forecasted, because during the first three months you had a higher number of move-outs than you anticipated. So if that happens, then you need to ramp up your leasing and rent those units back out. That’s something that may happen when you buy a new deal that’s kind of outside of your control; it isn’t the end of the world, but obviously, if for example you projected a rental premium of $150 and all you’re getting is $50, then that’s a pretty big issue and you need to figure out what went wrong and how to fix that… Because $100/unit across all 100+ units is a huge variance in cashflow.

As I mentioned, the key metrics that you wanna focus on are going to be the forecasted versus the actual rent premiums on those renovated units. Other metrics that you can track that may cause a high income/expense variance are a higher turnover rate than expected; take a look at your economic occupancy rate, take a look at the average days to lease a unit, take a look at the revenue growth assumption that you had versus what’s actually happening, take a look at the traffic of potential prospective tenants coming in, take a look at the number of evictions, take a look at your leasing ratio and other metrics in those reports I’ve mentioned above… And just make sure you work with your management company; if there’s a variance, they should help you out.

And then lastly, number five is what are some other things that the best asset managers do. I gave a list of ten of those in parts 1-3, but here’s just a few other things I wanted to briefly touch on. Number one is that you wanna look at your property management company as an actual partner. They’re not just someone who’s working for you, but they’re a partner in the deal, because their actions have a very strong impact on the success of the deal.

When you are initially screening them, as well as on an ongoing basis, ask yourself questions like “Is this company someone that I would want to work with for a long time? Does their track record speak for itself?” What are the tenants – either your tenants, or tenants from other properties – saying about them? How professional are they when they’re speaking with a potential tenant, which you can determine by actually role-playing (or have somebody you know roleplay) as a tenant and see how they interact with that person. Are they willing to make any changes? Do the employees that work for them like working there? Are they engaged on social media? Things that you would want a partner to do are things that you want to determine on an upfront basis and on an ongoing basis with the property management company.

Next, the best asset managers also always look ahead. I mentioned this in parts 1-3 about those ten asset management duties. You should always be evaluating the market, you should always be evaluating the competition to compare your property to them, you should be tracking and maximizing the income growth and expense decline on an ongoing basis, and you should ensure that your tenants that are living there are actually satisfied, by checking your reviews, checking what people are saying about you on social media, as well as hosting community events.

For the community events – we will talk about that probably next week, a list of different events you can host for your residents to maximize their satisfaction and your retention rate.

Also, just like you would a business partner, since your property management company is your partner, you want to watch what they’re doing like a  hawk, in a sense, or like a snake, or some other animal that has amazing vision… Because a lot of people for the apartment syndication investment strategy focus on the front-end activities. They talk about how to find deals, how to find money, how to know whether to form an LLC and when to form an LLC, thought leadership platforms, building a team, securing funding from lenders. Obviously, all those things are very important, but the asset management side of the syndication is not focused on as much, because it’s not as sexy… And also, it’s something that you’re gonna be doing for years or even decades, whereas you’ll be looking for deals for six months to a year; you find a deal, and that particular deal you’ll be asset-managing for a long time. And so much of your company and the asset’s success is going to be dependent on the property management company and their staff at the actual property. So if you don’t watch them like your career depends on it – because it does – then you’re not going to be able to scale as quickly as you want, and you might not be able to scale at all.

Tomorrow we’re gonna talk about exactly what you need to look at, and then depending on what you see, if it makes sense to actually fire the property management company… Because firing a property management company and going through the process of finding a new one and maybe having a few down months is going to be way better than having a really bad property management company for the entirety of your career, no matter how short it will be. So we’re gonna talk about that tomorrow.

The last thing I wanted to mention before we wrap up is make sure you’re visiting the property at least once a month in person. If for some reason you just can’t make it out one month, a good strategy is to buy a GoPro and have someone that you know in the area – or maybe even someone on your property management company – drive the property and walk the property with the GoPro and then send you the video so you can look at it. Obviously, not the best approach, but better than not seeing the property at all… Because again, I’ve said this before in the previous parts – you can look at all the reports in the world, but they always say a picture says 1,000 words, or however the saying goes… You need to actually see the property in person to know exactly what’s going on. Maybe there’s some issue on their report that you have no idea what the problem is, and then you visit the property for five minutes and you identify exactly what the issue is; and if you didn’t visit the property – well, you never would have known.

Those are the best practices for managing your property management company. As I mentioned, tomorrow we’re gonna talk about – okay, so you’re managing your property management company, watching them like a hawk for six months, and identify that they’re doing this, this and this, and you want to fire them. We’re gonna talk about what this, this and this are, as well as how to actually fire the property management company. We’ll talk about that tomorrow.

Until then, I recommend listening to parts one through four, I recommend listening to other Syndication School series on the how-to’s of apartment syndications, and download the free property weekly performance review tracker. All that can be found at SyndicationSchool.com.

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

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

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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!

 

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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 – 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

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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!

 

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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

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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

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

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

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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!

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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 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

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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!

 

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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, 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

Listen to the Episode Below (00:19:56)
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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

 


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: 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

Listen to the Episode Below (00:20:35)
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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

Listen to the Episode Below (00:17:43)
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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!

 

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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes, every Wednesday and Thursday, that are 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

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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!

 

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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

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

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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 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

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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!

 

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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, 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

Listen to the Episode Below
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Best Real Estate Investing Crash Course Ever!

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

 


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 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

Listen to the Episode Below (00:26:50)
Join + receive...
Best Real Estate Investing Crash Course Ever!

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

 


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, 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 we̵