JF2095: Coronavirus Impacts On May 2020 Rent | Syndication School with Theo Hicks

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Coronavirus has impacted the real estate market in many ways from home buying, selling, to collecting rent payments. In this episode, Theo Hicks will be sharing information on how May rent collection was with so many Americans out of work.

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

 

JF2094: Everything You Need To Know About Waterfalls | Syndication School with Theo Hicks

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In today’s episode, Theo will be sharing the ins and outs of waterfall structures. Waterfalls are also known as a waterfall model or structure, is a legal term used in an Operating Agreement that describes how money is paid, when it is paid, and to whom it is paid in commercial real estate equity investments.

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

 

JF2088: Pros and Cons of Securing A Supplemental Loan | Syndication School with Theo Hicks

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In this Syndication School episode, Theo Hicks, will be going over the pros and cons of securing a supplemental loan. These episodes are to help you become a better syndicator so we hope you enjoy the help and let us know by sending us a message. 

 

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

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TRANSCRIPTION

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

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

 

Theo Hicks: Hi Best Ever listeners, welcome to another episode of the Syndication School series, a free resource focused on the how-tos of apartment syndication. As always, I am your host, Theo Hicks. Each week we air two Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy, and for most of these episodes, we offer a free resource to you. These are free PDF how-to guides, free PowerPoint presentation templates or free Excel calculator templates, some free resource to help you along your apartment syndication journey. So all of the past free documents as well as past Syndication School series episodes can be found at syndicationschool.com.

In this episode, we are going to talk about the pros and cons of securing a supplemental loan. So on a previous Syndication School episode, I had gone over how to actually secure a supplemental loan, but I didn’t go into the pros and cons. I briefly mentioned how it’s different than a refinance, but I wanted to do another episode that went in depth into the pros and cons of securing a supplemental loan compared to, say, a refinance or a sale, because the supplemental loan falls into the category of when the passive investors in your deals receive a large chunk of capital back or a large chunk of money back. Obviously, one of those is the supplemental loan, another one is a refinance, another one is when you sale. So if passive investors receive all or a large portion of their equity back at sale, at a refinance and/or at securing of a supplemental loan. So in this episode, I wanted to just highlight what a supplemental loan is again, go over the pros and cons of the supplemental loan and then also briefly talk about why Joe and Ashcroft prefer to secure supplemental loans.

So first, what is a supplemental loan? It is a type of loan that is subordinate to the senior indebtedness. So it’s the fancy definition of a supplemental loan, but basically what it means is that the senior debt, which is the original debt used to acquire the apartment community, so the agency loan that was put in the property, that is the senior debt, and that must be paid first by the general partners.

The supplemental loan is a separate loan that is obtained, and then it is paid after the senior debt is paid. So year one, you pay your monthly debt service for the agency loan, and let’s say you secure a supplemental loan at the end of year one – you’ve got a new loan now. So the way that it works is you pay the same debt service you paid before first, and then the next portion of the cash flow goes towards paying the debt service on the new supplemental loan.

Now, a supplemental loan is only available if the original debt is a agency loan, so Fannie Mae or Freddie Mac. Those are the two that offer the supplemental loans. You’re not going to be able to get a supplemental loan on any other loan but those two. That doesn’t mean that you can’t take out equity in different ways, but the actual word supplemental loan only applies to agency loans, and it can be secured at 12 months after the origination of that original loan or the most recent supplemental loan.

You can’t get your first supplemental loan until after 12 months, and then you can’t get another supplemental loan if available for another 12 months after that, so 24 months after the first loan, and then supplemental loans are not the same as a refinance because a refinance is replacing the original debt with a new loan. So that agency loan is paid off entirely and then a new loan is put on the property for a refinance. Whereas for a supplemental loan, the original agency loan is still in place and an additional supplemental loan is also put in place. So there’s two loans, as opposed just one.

So let’s go over the pros. So there’s five benefits of getting a supplemental loan. The first is that it converts the equity created in the property to cash that can be distributed or used for further capital improvements. So the entire purpose of a supplemental loan or refinancing or selling is to access the equity that is created, and supplemental loans is one of the ways to do that. So you buy a property, you increase its value, and one of the ways to tap into that value without having to sell or get a brand new loan is to do a supplemental loan.

Another benefit of this supplemental loan is that it closes quicker and has less risk than a refinance.  So now we’re going into why the supplemental loan might be a better option than refinancing. So first, supplemental loans require less due diligence and underwriting than the refinance. So for a typical supplemental loan, the lender is gonna order an appraisal, a physical needs assessment, which is a property condition assessment or inspection, as well as reviewing the previous 12 months of financials. Whereas with a refinance, the same is required, but there’s also additional full underwriting of the sponsor and more due diligence required. So basically the same due diligence you did when you initially acquired the property will be done again by the new lender, but since you’re getting a supplemental loan through the same lender, all that has been done. They just need to make sure that nothing has changed during the first 12 months. So obviously, it’s faster because you have to do less due diligence, and there’s also a little bit less risk, because you’re not necessarily guaranteed to get that refinance, whereas you’re more likely to get the supplemental loan again because you’re getting it through the same lender that you’ve got your first loan. So that’s number two.

Number three is that supplemental loans are also less expensive. So since they’re faster and they require less due diligence, they’re also going to be less expensive, with lower closing costs compared to the refinance. Number four, the increased LTV that comes from a supplemental loan helps make assumable debt more attractive to a buyer. So what does that mean? So securing a supplemental loan increases the loan to value on the property, and the loan to value being — an 80% loan to value means that the bank hold 80% of the property value as debt, and then you have 20% in equity. So normally, agency loans are more stringent on their LTV requirements, and are capped at around 70% at origination, which means that they will lend up to 70% of the purchase price, and then you, as the general partner needs to put down the remaining 30%. And then as you implement your value-add business plan, you increase the value of the property. And when you increase the value of the property and the loan amount stays the same, then the LTV actually is reduced. So let’s say you buy a property for a million dollars, you put down $300,000 and the bank puts down $700,000. Let’s say you double the price of the property to $2 million. So the value of that property is $2 million, but the debt is only $700,000. So the LTV was originally 70%. Now it’s cut in half to 35%, and it’s calculated by taking that $700,000 divided by that $2 million number.

So now you’ve got the 35% LTV. Now generally suppplemental loans allow for up to 75% LTV. So going back to our $2 million example, now that the property is worth $2 million, the bank is willing to lend up to $1.5 million. So since they originally loaned $700,000, they loan you $1.5 million. The difference between the two is $800,000. So you could technically secure a supplemental loan for $800,000 and have an LTV of 75% as opposed to the 70% LTV at purchase. This allows you to increase the leverage. So now you’ve got 75% leverage as opposed to 70% leverage, which allows you to pull out more equity, but it also allows a potential buyer to assume the senior and supplemental loan with less money down. So as opposed to having to put down 30%, they can put down 25%. So the higher the LTV, the less money a buyer who’s going to assume that debt has to put down to obviously buy you out of the deal.

So if you’ve got 40% equity in the deal and  a 60% LTV, then they’re going to have give you 40% to buy the deal from you they assume the 60% loan. But if it’s 75%, then they need to put down 25% and buy you out and assume that 75% LTV loan. So overall, higher LTV makes an assumable debt more attractive to a buyer, and that’s accomplished by doing the supplemental loan, because it allows you to push up that LTV from 70% to 75%.

Then the fifth benefit is the ability to secure multiple supplemental loans. So I mentioned this a little bit earlier – so I get my first loan on May 13, 2020 from Fannie Mae, and I can get my first supplemental loan on May 14, 2021. So 12 months after the first loan. Now, Fannie Mae limits the supplemental loans to one, unless the loan is assumed, and then the person who assumed that loan gets another supplemental loan; so they can get their one supplemental loan as well. But for Freddie Mac, they allow unlimited supplemental loans as long as the most recent supplemental loan was secured 12 months or more before.

So I buy my property and I close and I get my debt on May 13, 2020 through Freddie Mac. I can get my first supplemental loan on May 14, 2021. I can get my second supplemental loan on May 14, 2022, or later, and I can keep repeating that process over and over again as long as obviously the LTV requirements are met. So those are the five benefits.

What about some cons of the supplemental loan? Obviously, it increases the debt service. So since you are taking out more debt, then the debt service, the monthly mortgage payments on the property increases. However, this is going to be the same case for refinance as well obviously. So it’s not just if you do supplemental loan, it goes up or if you do refinance, it doesn’t. Additionally, since these are amortizing loans versus interest only, monthly payments tend to be a little bit higher, even at lower interest rates. So there’s not gonna be an interest-only supplemental loan. You’re gonna have to pay principal and interest, so it’s gonna be a little bit higher compared to an interest-only refinance type of situation.

Another potential con is they’re only available through the agencies. So you can only get your supplemental loan if you’ve got Fannie Mae or Freddie Mac debt on your property. So only having two lenders available limits your ability to have lenders bid against each other to offer the best terms, but because both lenders are government-backed entities, rates are already generally going to be lower than private lenders. So it’s not that big of a deal, but the con here is that unless you have a Fannie Mae or Freddie Mac loan, you’re not gonna be able to secure a supplemental loan.

Number three is there’s limited flexibility with exit strategies. So agency loans are ultimately sold to investors as bonds. So they’re securitized and then sold to investors as bonds. So because of this, it adds a hurdle to the exit of the property. So a loan assumption [unintelligible [00:15:42].16] that the terms of the existing loan are better than market at the time of sale, so this is not gonna be a problem. So if your loan has a lower interest rate than the market interest rate at the time of sale, then it should be fine. But if the market rates are lower at the time of sale, a defeasance fee is going to be required to sell the property free and clear, which is a type of prepayment penalty, and this fee is typically paid by the seller. So if you want more information on defeasance and yield maintenance and prepayment penalties, check out everything you need to know about prepayment penalties on Syndication School. What it’s saying is that, sure, your loan can be assumed by a buyer, but if you need to actually sell the property free and clear and get out of that loan, you’re most likely going to need to pay a prepayment penalty, especially if you secure a supplemental loan.

Then number four is that interest rates can be higher. So the spread on floating rate supplemental loans tends to be higher than the spread on the same type of loan on the senior debt, making the supplemental loan’s interest rate higher. For fixed rates, senior and supplemental loans, the rate fluctuates with the market at time of origination. So compared to refinancing, you’re probably gonna have a higher interest rate. So these are the four cons.

Now why does Ashcroft Capital secure supplemental loans? Well, because they’re great tools for deals that have long term agency financing on them, because it allows Ashcroft and Ashcroft’s investors to get rewarded for executing the business plan by adding value to the property. So as I mentioned, typically agency loans are more stringent on their loan to value requirements, compared to private bridge types of financing. Those are normally capped at around 70%. But as Ashcroft continues the business plan and the overall value of the property increases, that LTV shrinks below the original 70%. I’ve already given an example of that by saying if you buy a property for $1 million at a 70% LTV and increase the value to $2 million, that LTV is now 45%; and since you can get a supplemental loan at 75%, that creates an opportunity to obtain a large amount of money back for investors.  So those are the pros and cons of supplemental loan. That is what a supplemental loan is, and that is why Ashcroft Capital prefers to secure supplemental loans.

That concludes this episode about the pros and cons of securing a supplemental loan. Until next week, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications. Make sure you check out some of the free documents we have available on there. All that is at syndicationschool.com. Thank you for listening and I will talk to you soon.

Website disclaimer

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

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

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JF2087: How To Find and Qualify an Executive Assistant | Syndication School with Theo Hicks

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At some point during your journey into real estate investing you will want to hire some help. In this episode, Theo Hicks will go over how to find and qualify an executive assistant that will help you in your business.

 

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

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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 Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy, and for most of these series, we offer some free resource to you. These are free PDF how-to guides, PowerPoint presentation templates and Excel calculators. These free documents will help you along your apartment syndication journey. All of these free documents, as well as past Syndication School series, can be found at syndicationschool.com.

Today, I wanted to talk to you about finding what might potentially be your first hire, and that is a executive assistant. So in this episode, we are going to focus on how to find an executive assistant as well as how to qualify an executive assistant.

Now, I was interviewing someone on the podcast about a month ago, and I believe he was involved with a VA servicing company, or he started it… I think he started it, a VA servicing company. So he helped businesses find virtual assistants for whatever they wanted to do, and one of the questions I asked him besides when to hire a VA – is  what do you have them do? So I wanted to quickly talk about that really quick, because he had a very interesting strategy that he thinks people could do right away today to figure out what types of things they can have their first hire, their first VA, their first executive assistant do.

So the exercise is very simple. What you do is you pull out a piece of paper and you make a vertical line right down the middle. So you’ve got a column on the left side and a column on the right side. On the left-hand side, you write down every single thing that you either aren’t good at doing or that you don’t like doing, that you currently do in your business, and on the right-hand side, you write down everything that you like doing and are good at doing in your business as well.

So on the left-hand side, you have the things you don’t like or are bad at. On the right-hand side are the things that you’re good at or you do like, and this is something you can do either one time, just sit down for 10 to 15 minutes and write it all out, or it’s  something – and this is probably the better approach, you can walk around with this piece of paper or take notes on your phone and then write it on a piece of paper at night throughout the week. That way you can track, okay, during the week, here are the 50 different things that I do. I’ve got 10 things on the left-hand side that I don’t like to do, that I’m bad at, and 40 things on the right-hand side that I like to do and then I’m good at. And that is going to be your document that tells you what you should outsource first.

So all the things on the left-hand side are what you should be focusing on outsourcing to other people first, and all the things on the right-hand side are what you’ll have more time to focus on once you’ve actually outsourced the left side things. So I would definitely recommend doing the exercise. I really like that. It’s very practical and something you can do right away. So once you’ve got that exercise done and you know what you don’t like doing or what you’re bad at, then you know what types of things you could have your executive assistant do.

So let’s start off by first talking about how to find an executive assistant. So we’ve got four different ways to find your executive assistant. Number one is to use your social network and ask for recommendations from people that you already know. Obviously, the best way to find really any team member or someone to invest with, someone to work with, someone to be involved with is through recommendations, through someone in your current network. So if you like that person in your current network and they refer someone to you, you can assume that you’re going to, most likely, like that person as well. So you should provide a few details of the position to people in your social network or anyone in particular that you know has contacts with executive assistants, and then obviously, give them some contact information so they can contact you if they are interested. So these are things like LinkedIn, Facebook or people that you already know in the real estate industry. So that’s one way, is just someone in your current social network.

Number two is to use Indeed, ZipRecruiter or similar websites to post the position. So just create a job listing and post it to an online job listing website. You can customize the job listing to suit your needs, and it can even be down to the preferred location of the candidate. So if it’s something that you want them to come to your home office, then obviously you’d want them to live near you. Or if you don’t really care, these types of websites give you lots of customized features to select different types of characteristics you are looking for.

For these sites, unlike Facebook and LinkedIn, which you already probably have an account, you’re going to need to set up an account on these if you don’t already have one; and then once you have your account, once you have your job listing, just like if you’re posting a unit for rent or have a property for sale, be prepared to receive a lot of contacts. So that’s why you’re going to want to focus on understanding exactly what you want this executive assistant to do and who you want them to be, and that, in part, comes from doing that left side/right side exercise, because you don’t want to waste time talking to a lot of people who could easily have been screened out if you would have created a better job listing. So make sure you know and narrow down the scope of the position before you post to a place like Indeed or ZipRecruiter. So that’s number two.

Number three is you can just consider hiring a staffing agency. So there’s a lot of companies out there whose sole purpose is to find employees that you need. So for example, I know in a previous job that I got, I got it through a staffing agency. So a business goes to a staffing agency and says, “Hey, I have a job opening, here are the requirements for the job, here’s what I’m looking for. Go out and find me someone,” and then the staffing agency goes out and finds someone, interviews them, pre-screens them, and then if they are a good fit, they will pass on the information to the business owner. So in this case, you would go to a staffing agency, tell them the scope of the position you’re looking for, for an executive assistant, a staffing agency will go out there and find multiple people, interview them based on the criteria you provided them, and then if two, three, four people makes sense out of the 50 people they talked to, then you’ll just be speaking to those four people, as opposed to having to talk to 50 people if you were to do it yourself.

Some of these staffing agencies also do temp-to-hire situations. So something where you don’t have to hire them full time right away, they can work for you temporarily as a test and if you like them, you can hire them. If not, you can go ahead and find someone else through that staffing agency. But the major pro of the staffing agency is that most of the candidates will come pre-screened already, as opposed to you having to do all of that on your own.

Then the fourth way to find an executive assistant – and this will be more if you need someone immediately; you don’t have a few weeks or a few months to go through the hiring process with a thing like Indeed or ZipRecruiter or through social media or through a staffing agency, but you need someone working for you next week or tomorrow – then you can use a website like Fiverr or Upwork and just hire a virtual assistant in the meantime.

So let’s say you do your left side, right side exercise, then you realize that, “Man, I really don’t like doing this one thing and I don’t want to do it ever again. I’m just completely done,” then you can go on a website like Fiverr, create a posting for that particular thing. Maybe it’s you don’t like scrubbing lists or something for direct mailing campaigns. Well, you can find someone on Fiverr to do that for you. They’re gonna be a lot less expensive than hiring a full-time executive assistant, and you’ll be able to get them on your payroll, in a sense, immediately.

So those are the four ways to find an executive assistant. Now, what types of things do you ask them when screening them once they’re actually found. Now, obviously, it’s going to be very specific to your real estate niche. So an executive assistant who’s working for, say, an apartment syndicator might be a little bit different than an executive assistant who’s working for a wholesaler or fix and flipper, or someone who just sends out a lot of direct mailing campaigns. So obviously, you’re gonna want to add to this list specific questions on whatever niche that you’re in.

You’re also going to want to add specific questions based off of the result of your left side/right side exercise. So if there’s ten things you don’t want to do or you don’t like doing, you’re not good at doing, and you want an executive assistant to those ten things– well, obviously, when you’re talking to them, you’re going to want to know if they are actually capable of doing those things, but besides those two things, these are a few general questions that you can ask a executive assistant regardless of what real estate niche you’re in, or regardless of whether you’re in real estate or in some other line of business.

So the first question is  what software programs have you used in the past and how would you describe it your computer skills? Obviously, we live in the age of technology. So an executive assistant who’s doing administrative tasks is going to need to know how to navigate a computer. Especially if you are doing really complicated real estate strategies like apartment syndications, there’s a lot of different softwares and programs that they will have to use, rather than having to do everything manually. Maybe a system you’ve already put in place that you want them to take over. Well, if you don’t have computer skills, then it’s not going to be a good fit. Again, assuming that you want someone that has good computer skills.

Number two – describe a time you had to adjust a schedule due to unforeseen circumstances. So executive assistants are typically responsible for managing the schedule, the calendar of the person they’re working for, and if you need to change something on your calendar or if someone needs to reschedule something with you, how are they going to handle that situation? Can they handle that on their own or will they need you to be involved in that? Because at the end of the day, the purpose of the executive assistant is to make your life easier. So if you have to be involved in tasks you don’t want to be involved in, like scheduling, then it defeats the purpose of having an executive assistant.

Number three – what are your strategies for managing your time when dealing with multiple urgent tasks simultaneously? So asking about their ability to multitask – because again, being an executive assistant isn’t a job where you do the same thing every single day. Things that come up that are higher priority, so how do they prioritize things? How do they make sure they get the higher priority things done first, while also addressing other things that need to be done at the same time?

Next question – describe a time you identified a problem and proactively created and implemented a solution. So again, very similar to the second question about describing a time you had to adjust a schedule due to unforeseen circumstances. The purpose of the executive assistant is to make your life easier. So if they’re able to identify problems and fix problems without you even being aware of it, that’s gonna make your life a lot easier, as opposed to them finding problems and then needing you to actually fix that problem. Obviously, there’s gonna be cases where they can’t fix everything, but there are times where they should be able to do that on their own.

Next – how would you deal with an angry person demanding to speak with an unavailable executive, or wanting to speak with you, who’s unavailable? So if someone calls the executive assistant that’s really upset, how do they handle that situation? What are their communication skills like? What are their people skills like? Can you give me an example of when this happened in the past? This is especially important if you’re doing things like cold calling. Whenever I talk to someone about cold calling, they always say, “Well, most of the time, they don’t answer, and if someone does answer, it’s oftentimes they’re angry with you, they get mad. And then there’s other times where obviously, we make a deal.” So if you’ve got an executive assistant who’s screening phone calls for you, most likely, eventually, they’re going to speak to someone who’s angry. So how do they handle that?

Next – what do you believe an executive assistant brings to a company? So just getting an understanding of what their expectations are of an executive assistant. The next question – how do you anticipate the needs of an executive? So again, making the executives’ lives easier, making your life easier by anticipating things and being proactive as opposed to reactive.

Next – why do you think you’re well suited for this position in particular? Pretty self-explanatory.

Then lastly – what do you enjoy most about administrative work? So all those questions, at the end of the day, are trying to accomplish – one, are they capable of doing what you need them to do, and then two, are they going to be able to make your life easier? That’s really the two questions you need to have answered. Are they capable of doing what you need them to do, and by hiring them, is your personal life, is your business life going to be easier? Also, getting an understanding of what their expectations are of the position. So you can get understanding of what they’re going to do once you actually hire them.

So just to finish off the episode, I wanted to go over — I’m not going to read it in its entirety, but I do have a sample posting that Ashcroft Capital has used in the past for finding an executive assistant. So obviously, Ashcroft Capital is an apartment syndication business. So some of the wording will be a little bit different based off of, again, your particular real estate niche. But at the same time, the structure of this, I think, can apply to all positions, and then obviously, a lot of the stuff in here can be used as well.

So the way that the job posting is structured, it starts off with a bio of Ashcroft Capital, and then it goes into a bio of them as an executive assistant. So these are the characteristics that we want to see in our executive assistant. The third is the responsibilities of the executive assistant, and then the fourth are the requirements. So obviously, in the bio, you want to put the name of your company, what your company does, some of the statistics of your company, and then also in that section is what you’re hiring for. So it says, “We are hiring an experienced, reliable, task-oriented executive assistant to a co-founder of our company. The executive assistant will be responsible for performing a number of business, as well as personal administrative duties. This is an ideal position for a well-qualified candidate to get in early and grow alongside of a powerful and entrepreneurial investment firm.”

Basically, just summarizing the entirety of the other remaining three sections. So who will you work for, what do you need you to do, what’s the benefit to you? Boom, boom, boom.

So the section two is the ‘about you’ section. So this is a paragraph that describes ideal characteristics of the executive assistant. So it reads, “You are a highly motivated professional and capable of managing your workload and prioritizing tasks in a fast-paced environment. You take initiative and think through questions that might be asked and proactively address them before they are asked. When it comes to completing your tasks, you’re consistently reliable. You’re a self-starter and can start and can work autonomously. You want to be a part of something special. You want to a career, not a job. You want to work with a small, but dynamic team that is accomplishing big things.” So as you can see, in that ‘about you’ section, that corresponds with a lot of the questions that you’re going to ask during the interview process.

Next are the responsibilities. So whatever responsibilities you want them to do, make sure you list those out as well. So for example, completes projects or special assignments by establishing objectives, determining priorities, managing time, gaining cooperation of others, monitoring process, problem solving, making adjustments to plans.

And then lastly, the requirements– so obviously, read these just so you have an understanding of what the requirements were for the executive assistant role that Ashcroft Capital is hiring for, because again, you don’t want to hire just anyone. You want someone who has experience, who has certain skills, and then you’re also gonna want to mention the pay.

So requirements, “This is primarily a work from home position, but might require working from an office one or two days a week.” So are they capable of doing that? Two is polished, written and verbal communication skills. Three is at least five years of being an executive assistant. Now this, obviously, is going to depend on where you’re at in your business, because at this point, Ashcroft has 22 properties, 8000 units worth over $900 million, so they could demand someone who had experience.

If you’re just starting out and looking for a executive assistant, you’re probably gonna have a hard time hiring someone who has a lot of experience, but you might be able to. So this part’s really up to you. Then lastly, experience in real estate finance and/or legal is preferred, but not required. So ideally, they have an understanding of the base understanding of finance, in general, if they’re gonna be working for a real estate company… But at the end of day, that’s not a absolute requirement, especially if they are a solid executive assistant and are able to learn on the fly.

Then the last requirement would be, how do they actually apply? So for this listing, it says, “When you apply, please provide a cover letter with your resume,” and then it has a salary of $45,000, plus the opportunity for up to $25,000 in bonuses… Just to give them an idea of how much do you pay an executive assistant.

So that concludes the episode. Now you know everything you need to know about hiring, finding, qualifying an executive assistant, and also, you learned the left side of the paper/right side of the paper exercise for actually figuring out what you would need an executive assistant to do.

So thanks for listening. Until next time, make sure you check out some of the other Syndication School series about the How-tos of apartment syndications and check out some of the free documents we have as well. All of that is available at syndicationschool.com. Thank you for listening and I will talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

 

JF2074: Ashcroft Underwriting Adjustments During COVID-19 | Syndication School with Theo Hicks

Listen to the Episode Below (00:14:41)
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Theo is back with another Syndication School episode and this time he is going over how Joe and his team at Ashcroft Capital are making adjustments to how they underwrite future deals during this pandemic. 

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

Click here for more info on groundbreaker.co


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 focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer a free resource that will help you along your apartment syndication journey. All of these free resources, as well as free Syndication School episodes can be found at SyndicationSchool.com.

In this episode we’re going to go back to talking about the Coronavirus. We took off about a week or so, and we’re gonna jump back into it because today I want to talk about some of the changes that Joe and Ashcroft Capital are making to their underwriting of value-add apartment deals during and then probably after the Coronavirus pandemic.

The purpose of this episode is going to be to outline the four main changes that Ashcroft Capital is making to the underwriting of new deals currently, and then for the — I won’t say foreseeable future, but at least for maybe the next few months after the Coronavirus pandemic is over.

Overall, the underwriting changes really need to be on a deal-by-deal basis, because different markets have different rules as it relates to Coronavirus. This means that the economy is being impacted differently… But there are a few items – four items in fact – that Ashcroft thinks are important to consider.

First is going to be year one operations. It should be expected that there will be an increase in things like vacancy, bad debt and concessions throughout 2020. And then once things settle down a bit and the economy reopens, it is also possible that some residents will no longer be able to afford living at the property. So the two things – number one, some of the income loss items, like vacancy, bad debt and concessions. When you’re making your assumptions, you should be projecting that they will be higher than usual. Based off of the T-12 or current market rates, you can’t really use those for vacancy, bad debt and concessions right now, because it’s a different environment, and once the Coronavirus ends, it will also likely be a different environment.

Secondly, once the economy reopens, the residents that are currently living at that property – so if you buy a property now, once rent repayment programs are ended, or rent delays are ended, evictions are allowed again, maybe expect to have to evict more tenants than you usually have to, because they’ve just been living there and maybe paying partial rent, or just doing what they could… But once it’s over, they can no longer pay the full amount. That’s year-one operations.

Number two is rent growth. The rent growth for 2020 in the vast majority of markets is projected to suffer, as unemployment rises. But the silver lining is that most of any rent lost in 2020 is expected to be recovered in 2021. From my understanding – I believe I’ve talked about this in one of the episodes – the rent growth is supposed to suffer; rent growth isn’t gonna go negative, it’s just going to be less. I’m pretty sure the most recent calculation I saw was about 1.3% percent, as opposed to 2%, 3%, 4% we’ve been seeing for the past decade or so.

Apparently, this dip is supposed to be temporary… So this dip in rent growth to the 1% range is temporary, and then in 2021 it’s supposed to go back to what it has been before. Obviously, when you’re underwriting a deal, the year one rent growth and year two rent growth should reflect the immediate area and the demand in the market. So obviously, you don’t wanna just use the 1% average. You wanna figure out “Okay, what do the experts think will  happen to rent in this specific market in the next two years?” And then probably be even more conservative and assume that it might be less than that. That way if it’s better, great. If not, then you’re still able to hit your returns to your investors.

Where does this information come from? Your management company. We’ve talked about the importance of your property management company, how to find a property management company, so you can find all that information at SyndicationSchool.com.

Number three is going to be debt. As of right now, most private lenders – these are basically the bridge lenders; the ones that do the 2-3 year renovation type loans – are taking a pause from lending. But lenders that are still active are being extremely conservative with their loan proceeds and terms.

I talked in a previous Syndication School episode about JP Morgan Chase, for example, has changed their lending criteria; this is for residential loans, I understand that, but it’s just an example of a lender becoming extremely conservative. They’re only lending to borrowers with a credit score of 700 or more, and who can put down 20% or more. So that definitely limits the pool of people who can get residential mortgages.

Similarly, other lenders are doing the same for commercial loans. I think one of the biggest changes is the reserve amounts that are required. Now, the agencies are lending, but they are also being conservative on their underwriting and requiring large upfront reserves for debt service payments. So the reserve requirements are changing. Typically, you create an  upfront reserves account called an operating account for unexpected things that happen at the property, but now in addition to that you need another upfront amount of reserves that are a lender requirement.

So more conservatives proceeds should be underwritten, and the underwriting needs to include these upfront reserves, as they will  impact the equity required to fund. So you’re gonna need to raise additional money now from your investors, even though the cashflow is not going to be going up. Typically, if the deal is cash-flowing $100 per door and you need to raise X amount of money, well now that deal might be cash-flowing $75 per door and you need to raise even more money from your investors. That’s why if you’re looking at deals right now, you’re gonna have to negotiate a lower purchase price because of these new lending criteria, and the rent growth, and the year-one operations that I’ve talked about previously.

So what does that mean more practically? Make sure that you ask your lender or your mortgage broker about the new loan-to-value requirements, the new upfront reserves requirements, and other terms that you need before you submit an offer on a deal. So you need to have an understanding of whatever lender you’ve been using or you plan on using, what are the terms of the loans they’re offering, what are the LTV terms, how much money do you need to put down, how much money do you need as upfront reserves, what are the interest rates, what’s the amortization? Is there anything that I need to  know that’s changing, so that I can underwrite my deals properly? Because if you don’t know what the debt is going to be, it’s gonna be impossible to submit correct offers on deals.

And then lastly, for value-add deals, depending on the deal, many owners are pausing their interior renovation programs until the market is restabilized… So when you’re underwriting a deal, it may be wise to assume that the value-add program does not start until the overall market stabilizes.

Now, this is something that’s gonna be obviously up to you, depending on the state you’re investing in, or the local area you’re investing in, if construction is considered an essential service, if construction companies are still working, things like that… But you need to think about “Okay, I plan on going in there, renovating all these units and doing all these exterior upgrades”, but what are the typical ways that you renovate interiors? Exterior renovations are likely fine, assuming that business is essential in your state, but interior renovations is the one that might be delayed because of the fact that residents aren’t able to move out right now.

So again, to summarize, the four changes that Ashcroft are making – and again, these four points came straight from the director of acquisitions at Ashcroft Capital – is the year-one operations. Things like vacancy, bad debt and concessions should be assumed to be higher, at least during year one. Rent growth should be assumed to be lower than  previous years, so whenever you’re underwriting your annual rent growth increases, or even when you’re determining what your rent premiums are going to be, you need to have a detailed conversation with your property management company to determine how to calculate that. So annual income growth is typically 2%-3%. You definitely wanna be underwriting maybe a 1% or 1,5% at least for year one and year two… And then when it comes to rent premiums, again, you have to see what’s the demand for those units in the immediate area? What are the prices on the newest leases in that area? It can’t be leases from a year ago or six months ago, or really even two months ago. It needs to be probably within the last few weeks to a month – what are the rents being demanded for those specific units?

Number three is debt, so making sure you have a conversation with your lender, so you know exactly what types of terms they’re offering on their loans now, including what sort of upfront reserves requirements are needed.

And then lastly, for the value-add deals, understanding that you’re likely going to need to delay any interior renovations until the market restabilizes and Covid is gone, because you’re not allowed to evict people, tenants are probably moving a lot less because of the Coronavirus… So those are four things to keep in mind when underwriting deals.

Obviously, if you are out there underwriting deals, I’d love to hear from you what you’re doing, so we can maybe add to these four points. So if you have any advice, any things that you’re doing differently when underwriting, please let me know by emailing Theo@JoeFairless.com. And of course, anyone who reaches out and I include their information – obviously, it won’t be in this episode, but I’m gonna turn this into a blog post, so I  will definitely give you a contributor status for the blog post, since you contributed to underwriting advice to the document.

That concludes this episode. To listen to other Syndication School series about the how-to’s of apartment syndication and check out some of our free documents, please visit SyndicationSchool.com.

Thank you for listening, have a best ever day, and I will talk to you soon.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

 

JF2073: How To Calculate Class A and B Return Projections | Syndication School with Theo Hicks

Listen to the Episode Below (00:22:44)
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In this Syndication School episode, Theo will first review the difference between Class A and Class B investors. Afterward, he will share with you how to calculate the projected returns for each class, and to follow along with Theo you can download his free excel document below.

Free Class A and Class B document

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

 

Click here for more info on groundbreaker.co


TRANSCRIPTION

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

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

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these episodes we offer a free document. These are free Excel template calculators, free PDF how-to guides, free PowerPoint presentation templates, some sort of resource that will help you along your apartment syndication journey. All of these free documents, and past free Syndication School series are available at SyndicationSchool.com.

In this episode we are going to talk about how to calculate the returns to limited partners when you have a two-tiered path of investment structure. What does that mean? Well, generally when people get started as syndicators, they offer one investment tier to their investors, and it’s either a preferred return only, a profit split only, or a combination of the two, with the most common being an 8% preferred return, and then a 50/50 or a 70/30 profit split.

Now, as you gain more experience, or even at first, you might decide to offer two investment tiers – class A and class B. Our episode is focusing on what are the differences between class A and class B. I’m gonna do a quick refresher on that, talking about the advantages and disadvantages of each, and then I’m gonna talk about how to actually calculate the return on investment and the internal rate of return to investment tiers.

For this episode, I’ll be giving away a free document. It will be a  calculator that will allow you to automatically calculate the ROI and the IRR based on the steps I discuss in this episode. So I’ll talk more about that free document here in a little bit.

First, let’s just do a refresher on class A and class B. Class A, investors sit behind the debt in the capital stack, which means that when all expenses are paid, including the debt, the next cash goes to the class A investors. Class A investors are offered a preferred return that is generally higher than the preferred return offered to class B investors.

On Ashcroft deals, the class A preferred return is 10%. Class A investor have virtually no upside upon disposition or capital events, nor do they receive a split of the ongoing profits. So they are getting the 10% or whatever the preferred return is, and then that is it. But in order to be taxes the same as class B investors, they do get a very small piece of the upside, that varies from deal to deal… So they do get a small piece of the upside for tax purposes, but overall they’re not given a large upside in the deal.

In Ashcroft deals the class A tier is limited to 25% of the total equity investment, and the minimum investment is $100,000. So the reason why is because let’s say year one the project cash-on-cash return is only 7%, and you may say “Oh, well I can’t pay my 10% preferred return then.” Well, if only 25% of your investors are offered a 10% preferred return, then you can hit that preferred return of 10% to that portion of investors. I’m not sure exactly how that math will work out, but as long as these class A investors aren’t making up a large portion of your investor pool, then you don’t need to have a 10% project cash-on-cash return to distribute 10% to the class A limited partners.

Now, of course, other syndicators may offer a different preferred return, or have different equity percentages or different minimum investments. That’s just what Ashcroft does currently, and I just wanted to give you an example.

Class B investors sit behind class A, so all expenses go out, including debt, and then class A investors get paid, and then class B investors get paid with what’s left. But they sit in front of the general partners generally in the capital stack, so they get paid before the GP is paid.

Class B  investors are offered a preferred return that is lower than the preferred return offered to class A investors. On Ashcroft deals that return is 7%, compared to that 10% for Class A. If the full preferred return cannot be paid out each month, or each quarter, or each year, depending on what the payment frequency is, then it accrues over the life of a deal.

Class B  investors do participate in upside upon disposition or capital events. On Ashcroft deals the split is 70% of the profits up to a 13% IRR, and then 50% of the profits thereafter. The Class B  minimum investment for Ashcroft is 50k for first-time investors and 25k for returning investors. Actually, now that I’m thinking about it, I think that Ashcroft recently reduced the class A minimum investment to 50k. [00:09:04].21] and really all other types of tiers offered. Syndicators may offer different preferred returns, profit splits, different minimums for these class B investors.

So since class A investors are in front of class B investors in the capital stack, they are paid first, plus the class A investors are offered a higher preferred return, therefore the class A tier is a deal for investors who prefer a stronger ongoing cashflow… So they’re more likely to get this cashflow, and it’s higher than what it would be if they were class B.

Since class B investors are sitting behind the class A investors in the capital stack, they are paid what is left over after the class A have received their preferred return. So if the full preferred return isn’t met, it accrues and is ideally paid out upon disposition or a capital event. So class A investors are offered a lower preferred return, but they do participate in the upside upon disposition or capital events like  a supplemental loan or a refinance… So the overall return over the life of a deal is higher for class B investors, compared to class A.

Class A is gonna get 10% a year, or whatever that percentage is, class B might get less than their preferred return year one, maybe 5%, but maybe eventually their cashflow goes up to 9% or 10%, but then they’ll get a massive 20% return on investment at sale over the life of the investment. It’s really at the end where they surpass the class A investors.

So the class B tier is ideal for investors who want to maximize their returns over the life of the investments. And if I’m the person who wants both – if I want strong ongoing cashflow AND to participate in the upside, typically that passive investor will be allowed to invest in both. So if you have a passive investor that wants to do both and you’re offering class A and class B, they should be able to invest a portion in class A and a portion in class B. So that’s what class A and class B are, as a reminder.

Now, how do you calculate the returns? I recommend downloading the document and having it open right now in Excel, but I will assume that you don’t have it open, and I will do  my best to explain exactly how to calculate. At the end I will discuss in more detail how the free document works. So the first thing that you need to know in order to calculate the returns to class A and class B investors are 1) total equity investment. So this is the total amount of money that you as a syndicator raised from investors for the deal, because that’s what’s gonna be their capital account and that’s what their return is gonna be based on… And then assuming it’s a five-year hold, you need the project-level cashflow; that’s income minus expenses gives you the NOI. NOI minus debt service gives you the cashflow. So you need the cashflow for year one through year five, as well as the sales proceeds.

Basically, you have year zero a negative amount of money technically, because that’s what the investors are paying, and then year one, year two, year three, year four, year five you’ve got your cashflow coming in positively, and then for the sales proceeds it’s just the profit remaining after all expenses are paid at sale. If you’ve downloaded the simplified cashflow calculator, it should be as easy and copy and pasting these figures into this model. As a reminder, the sales proceeds is the sales price minus the debt owed to the lender, minus any closing costs you need to pay for, minus any other costs associated with the sale, like disposition fees, broker’s fees… And then what’s remaining is the total sales proceeds. So that’s one bucket of numbers that you need.

Next you need to determine what the structure is going to be for class A and for class B. So for each, you need to know what the preferred is going to be, and what the profit split is going to be. So for the purposes of this document, the preferred return to class A is 10%, and the profit split is zero. For class B the preferred return is 7% and the profit split is 70%.

Now, the next step is to determine what that preferred return amount looks like for class A and class B. Basically, for class A you need to determine of the equity investment which portion is class A. To keep things simple, in this calculator it’s just set at 25%; obviously, you can go in there and manually adjust it if you want to. Class B is set at 75%, but you can go in there and manually-adjust it, if you want to.

So you’ve got 25% of the equity investment, you multiply that by the preferred return percentage of 10% to get the preferred return amount. Same thing for class B. So Class B  you take 75% or whatever percent of the equity investment, multiply it by the preferred return, which is 7%, and you’ve got the preferred return amount owed.

Now, if you remember, class A is paid first. So when you’re looking at your year one cashflow number, you take your year one cashflow and you subtract the class A preferred return amount completely out of there. And then what’s left over is what goes to class B investors.

Now, let’s say that year one you are able to cover the entire preferred return amount to the class A investors, but the cashflow that’s remaining is not enough to cover the preferred return owed to the class B investors. Obviously, they’re still going to get paid, but it’s not gonna be full. So in the sample cashflow calculator that you download it shows that the class B investors only get a 3% return on investment year one, as opposed to 7% preferred return that they’re owed. Every time that happens, for every year that happens, you need to track how much of the preferred return is actually accruing. So if they’re given a 3%, then they’re owed an additional 5%. So that’s going to accrue.

Now, for this particular document the way I have it set up is that it accrues and then it is paid out at sale. I’ll talk about how that happens later, but it’s not gonna be paid out the next year, it’s gonna be paid out at sale. If you want to have it paid out the next year, you’re gonna have to do some manipulations to the cashflow calculator.

Basically, you repeat that process for each year. This is how it works in this cashflow calculator. Let’s say at year two you take your full cashflow  for year two, you pay your class A investors their preferred return if the remaining amount is greater than the preferred return owed to the class B investors. So class B gets their full 7%, so the profits remaining after the 10% is paid to the class A, after 7% is paid to class B, that extra cashflow is going to be split. In this case, 70% goes to class B and 30% goes to the general partners.

Now, typically, profits are considered a return of capital, preferred return is considered a return on capital. So whenever capital is returned to them, then their capital account reduces. Now, in Ashcroft deals the preferred return is always gonna be based on the original investment, and then the general partners will catch up at sale. So what that means is whenever the class B investors are receiving a profit split, you need to track that so that you understand “Okay, after five years I’ve returned a  total of $15,000 to investors from this profit”, because they’ve got $15,000 in profit, therefore they’ve been returned $15,000. Therefore at sale, I’m gonna return them their full equity minus that $15,000 they’ve already received.

Basically, the two things that you need to track whenever you’re paying out your class B investors is if they’re not receiving their full preferred return, how much is accruing that year, and then number two, if they received a profit split, how much profit do they make, because that’s something you need to track, because that’s considered a return of capital.

So you repeat that process for years one, years two, year threes, year four and year five. When you do that, you should have a total class A accrued preferred return number, and a total return of capital from the profit split for the class B investors.

Obviously, if you aren’t able to distribute the full 10% preferred return to the class A investors, then the same concept applies… But since they’re not receiving a split of the profits, you only need to focus on the preferred return accrual and not anything about them receiving a return of capital, because they’re not.

Alright, so now you sell the deal and you have your sales proceeds calculation… So you’ve already copied and pasted the sales proceeds into the cashflow calculator… So now you need to determine which portion of the sales proceeds goes to class A, and which portion goes to class B. If you remember, class A is in front of class B in the waterfall, so class A gets their equity back first. That one’s pretty simple, because class A did not get a return of capital, so they receive their entire equity investment back. So the sales proceeds are a little bit less.

Next is the money that goes back to the class B investors. If  you remember, they’re owed three things at sale. First, they’re gonna be owed their equity back. So the equity they receive is going to be their total equity investment minus whatever capital they’ve received thus far as profits. So if they’ve received $15,000 in profits, it’ll be their total equity investment originally, minus $15,000 which is returned.

The second thing that’s returned to them is the preferred return that they’re owed. So whatever the total accrued preferred return number is, that is also owed to class B investors. So it’s the equity owed, plus preferred return owed. Lastly, it’s going to be the profit split. So whatever is left over after the class A is paid, class B has received their equity investment back, class B has received their accrued  preferred return, the  remaining profits are split 70/30 between the class B investors and the general partners.

Now, if you have some sort of tier structure where it’s based on IRR, and once there’s a 13% IRR it drops to 50%, you’re gonna have to do that calculation on the back-end, because that’s not what this does. This is just a straight-up profit split, just to keep things simple.

So the remaining profits are multiplied by 70%, and that also goes to the class B investors. So if you’re got profits of class B investors, plus preferred return owed to investors, plus equity to class B investors. So now you have a total proceeds to the class A, which is just their equity investment, and a total proceeds to class B.

Now what you wanna do is you wanna create a data table so that you can do your IRR and your ROI calculations. The ROI calculation is pretty simple – it’s just their initial equity investment divided by the money that they’ve received each year; so year ones, two, three and four it’s just the cashflow they’ve received… So for the class A it’s always gonna be 10%, for class B it’s gonna be ideally 7%, maybe lower at first, and maybe eventually higher… And then same thing for year five, but this actually includes the sales proceeds as well, so it’s gonna be a number that’s ideally over 100%. Then you can average all those to get your annualized cash-on-cash return.

Then for the IRR calculation, it’s just an Excel function where you basically do =IRR and then you highlight year zero through year five, and then it’ll give you what the IRR is.

Now, let’s talk about how to use this model. On the document that you’ll see there are a few locations that you need to input data. Basically, everywhere you input data, it’s gonna be in red, to make it very simple for you.

So you need to input the initial equity investment year one, two, three, four and five, project-level cashflow, the total sales proceeds for project-level, and then the preferred return percentage and the profit split for class A and class B. Once you input those numbers, it’ll automatically calculate year one through five cashflow for class A and class B, as well as the return on investment and the internal rate of return. So it’s essentially a very simple calculator.

And again, where you get the equity investment year one, two, three, four and five and sales proceeds numbers from – that comes from your simplified cashflow calculator that you gave away a while ago now. So if you wanna find that, go to SyndicationSchool.com to download that document.

That concludes this episode of Syndication School. Thanks for listening. Make sure you download your free calculator for calculating class A and class B return projections. Check out some of our other Syndication School episodes and those free documents as well.

Have a best ever day, and I will talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

JF2067: Rent Or Own Post Coronavirus | Syndication School with Theo Hicks

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Coronavirus pandemic has been a disruption to normal living; from social distancing, to working from home, and even how you look at someone when they cough. We have also seen how banks have been changing the way they lend money, Theo goes over a recent article JP Morgan Chase released on the new rules around borrowing for home loans and how this could be the beginning of how all banks could change. He explains how this could impact the housing market and provides additional studies on what we can expect in terms of house sales.

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

Best Ever Tweet:

“Obviously they will not live on the streets, therefore, they are more likely to move into an apartment and rent. ” -Theo Hicks


TRANSCRIPT

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

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

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

Each week we air two Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy. And for the majority of these episodes we offer a free resource. These are free PowerPoint presentation templates, Excel calculator templates, PDF how-to guides, documents that will help you along your apartment syndication journey. All of these previous documents, as well as previous Syndication School episodes are available for free at SyndicationSchool.com.

In this episode I’m gonna try something a little bit different than what we usually do, maybe a little bit more speculatory – if that’s even a word – than usual. I was reading some articles about the ways that banks have been adjusting to this new Coronavirus world… And I came across some interesting things that I thought would have a future benefit to apartments… So I kind of wanted to run through some of those, and then I’d love to hear anyone’s thoughts about what I talk about today.

So if you have thoughts, either in agreement or disagreement with me, I would love to know… So you can send those to me at theo@joefairless.com, or you can just message me on Facebook, or post something in the Facebook group and tag me in it. That way, if what you think I’m saying today is absolutely crazy – which I don’t think it is, but maybe you do – at the very least I can know that and maybe we can have a follow-up next week or in future weeks about what I’m gonna discuss today.

I don’t think this is anything too crazy. I think a lot of people will agree with my logic… It all started when I came across an article stating that J.P. Morgan Chase, who is the largest lender by assets in the U.S, as well as the fourth largest lender overall, made two announcements. The first announcement – I’m recording this on the 22nd of April… This one came out on the 13th of April, so about  a week ago. It says “J.P. Morgan Chase to raise mortgage borrowing standards as economic outlook darkens.”

Basically, the key point from that article is that customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value.

So I did a little research… Okay, 700 seems high, and 20% is obviously a lot higher than the 3.5% for your typical residential homes… So I took a look and found out that according to Experian, approximately 58% of Americans have a FICO score of at least 700. And then I also wanted to figure out what the average down payment is for a home, and  it is 10%. Obviously, average isn’t the median, but I think it’s safe to assume that the majority of people aren’t putting down 20% for their homes. Most people are  putting down 5%, 3.5%, and I’m sure the average is 10% because some people are putting down 20%.

So J.P. Morgan Chase is basically only allowing people who have a credit score of 700 and the ability to put down 20% to buy a home. So based off of the Experian numbers and the average down payment numbers, potentially the vast majority of people can no longer afford to buy a home through J.P. Morgan Chase. Obviously, this is just one bank… But the assumption would be that if they’re doing this to hedge against risks, then other banks will probably follow in suit in the coming months, which — obviously, it’s only been a week, so it’s too hard to tell. So that was one interesting thing that I saw.

And then secondly – and this is more recent, too – this is the article that came out within the last few days… And it says that J.P. Morgan Chase temporarily terminates HELOC loan offerings. So Home Equity Line of Credits.

So not only is it more difficult to get a new loan through J.P. Morgan Chase, but it’s also impossible to pull equity out of your existing home if you have a loan through J.P. Morgan Chase. Now, again, as I mentioned before, one bank – I understand. But typically, from my understanding, if one bank does something, other banks are more likely to follow in suit.

So why am I talking about residential loans? Well, obviously, if residential loans are more difficult to secure, then people who would typically be in the market to buy a new home or need to buy a new home, or people who are in the middle of a move, or maybe once they begin to allow banks to foreclose on people, they aren’t gonna be able to qualify for a new home, and obviously they’re not going to live on the streets. They’ll cut other expenses, and that’ll be one of the last expenses they cut, therefore they’re more likely to move into an apartment and rent… Because maybe their credit score isn’t high enough, maybe they can’t afford the down payment for a new loan.

And even if they do have the 20% down payment to pay for a home, and they do have the 700 credit score or higher, because of the surge in home values during the most recent recession, they might not be able to get the quality of home they want, and therefore resort to renting a home or renting an apartment of that quality. So that’s another interesting observation that I had.

Say I’m used to living in a $500,000 home, and maybe I was putting down 5%. That’s $25,000. Well, now if I need to put down  20%, and all I have is $25,000, I can really only afford a $125,000 home. So I’ve reduced the amount of house I can buy by 400%. So if I’ve got $25,000 in cash, that’d be something I get per year on a house, then that’s 2k/month. Would I rather rent for 2k/month, or would I rather put a down payment for a $125,000 house? That’s another interesting observation.

Now, something else that’s interesting too is that one of the main benefits of buying a home, especially during the most recent economic expansion, was the insane increases in property values that came from natural appreciation. So I looked it up and according to Zillow, the average home value increased from 175k on March 2010 to 248k in March 2020. So that is an overall increase of 47%, or about 4.7% per year. So that means that on average, every single year, my house value grew by 5%.

So if I had, again, a 175k house, in ten years that house is now worth 248k. So 4.7% return per year just by living in your own personal house – it’s a pretty good return. However, when the Federal Reserve came out with their March consumer survey, they said that they expect home values to only grow by 1.32% this year, which is the lowest reading since this survey began in 2013.

So again, not only is it harder to buy a home, but even if I were to scrape together my 20% down payment, one of the main financial benefits of owning a home, which is that increase from natural appreciation, is basically gone… Which again, makes renting more attractive.

Now, once the Coronavirus occurred and people had to shut down their businesses, the number that was floating around for number of people who were out of work was about 16 million. I’m sure it’s a lot higher, but that’s one of the original numbers. I think it started off as 9, and then it was 16. So because of this, the number of borrowers on residential mortgages who requested to delay mortgage payments rose by 1,900% in the second half of March. Obviously, these are the types of people that can’t pay their mortgages and are asking for help, which the federal government has done by halting foreclosures.

So the question is “Will foreclosures resume before or after these borrowers are able to secure new employment?” Because if it resumes before, and these people need to delay their mortgages but they can no longer delay their mortgages without being foreclosed on, then these people may potentially lose their homes and have to rent as well.

So overall, because of this tighter lending criteria – again, that is the 700 credit score, 20% down payment, just J.P. Morgan based currently, and also the ability to not pull your equity out of your own home anymore, which I guess is another benefit of owning a home, is that the equity that is created you can pull out, which J.P. Morgan Chase is not allowing people to do at the moment… So that’s the tightening lending criteria.

We’ve also got the lowest projected home value increase since 2013 of 1.32%, compared to 4.7% in average the previous ten years. You’ve got the massive increase in the mortgage delay requests, which is 1,900%, you’ve got 16 million people – probably way over 16 million people now – who had jobs a month ago that no longer have jobs. This indicates that more people are going to be renting, as opposed to buying… At least in the next few years.

And to end, another interesting statistic from the National Association of Realtors – in March they announce that they expect home sales to be around 10% lower compares to the historical sales for this time of the year. So in March the previous  years – this March is 10% lower. So again, we’re already seeing right away that less people are buying homes. Obviously, that means that they might just be staying in their current homes, or renting, but obviously as more and more people don’t have the ability to  buy a home, renting is going to automatically become the default attractive option to these people.

So I’d love to know what you guys think. Do you think that more people are going to be renting or buying in the next few months, and maybe the next few years, after this is all over hopefully? You can let me know either on the Facebook group by tagging me, or you can privately message me on Facebook, or you can email me at Theo@joefairless.com.

Until then, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndication. Make sure you check out those free documents we have on there as well. Those are at SyndicationSchool.com.

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

 

Website disclaimer – Should be prominently displayed on website

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

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

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

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

Oral Disclaimer – To be read at or near beginning of podcast

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

JF2066: 11 Questions Passive Investors Want to Know | Syndication School with Theo Hicks

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Theo is back with another Syndication School episode and this time he will be going over the 11 questions most passive investors will ask you before they invest in your deals. Theo hopes he can arm you with the right mindset when answering these questions to put you in a good position to find investors.

Click here for more info on groundbreaker.co

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

Best Ever Tweet:

“Making sure you let them know what your financial review process is very important because if you aren’t reviewing your financials your investors are not going to like that.” – Theo Hicks


TRANSCRIPTION

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

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

Theo Hicks: Hello, Best Ever listeners, and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these episodes – sometimes they’re part of a larger series – we offer a free resource. These  are Power Point presentation templates, Excel template calculators, PDF how-to guides, something that accompanies the episodes that will help you on your apartment syndication journey. All of these free documents from past episodes and series, as well as those past episodes and series can be found at SyndicationSchool.com.

In this episode we are going to talk about some of the questions you should be prepared to answer when you are speaking with potential passive investors. Way back in the day when we did the original series, we did an episode that talked about how to prepare for potential objections from investors, especially when you’re first starting out. So you’ll definitely wanna  check out that episode. I think it’s over 50 objections, and we go through those in multiple episodes, and talk about “Hey, these are things that your passive investors might ask you either upfront, or when you actually have a deal.” Then we talked about the ways you should be responding to those questions.

This episode we are going to go over 11 more questions. Some of them are repeats from before, some of them are new, but these are questions that the Ashcroft investor relations person has come across more recently, with the Coronavirus pandemic. So these aren’t specific to the Coronavirus pandemic, but these are the types of questions that you should expect investors to ask whenever there’s a looming recession, or thoughts of a looming recession, or something is going on that’s not your economic boom, whenever things are just kind of naturally going well. So let’s just jump right into those questions. We should be able to get through all of them today, in this episode.

The first one, and probably the most important question that you’re gonna get asked during potential recession times is “How are you adding value or hedging against valuation reductions and rent reductions.

More specific to the Coronavirus, in January everything looked great. In February everything was fine; it was a normal year as an apartment investor. And even the beginning of March was pretty normal. But by about mid-March things started to change, and by the end of March there were stay-at-home orders, businesses were closing or shutting down, or at least reducing their hours of operation… Some sort of change that affected the workforce.

Obviously, as an apartment investor the residents are able to pay for rent and pay you by their jobs. So if they can’t leave their homes or if they lost their jobs, then how are they gonna pay rent? So these are things that passive investors are definitely thinking about right now. How are you ensuring that you’re going to be able to collect rent, and in turn make sure that you’re able to maintain the value of the apartment? So you need to have an answer to that, you need to have specific answers to what exactly you are doing.

We’ve talked about ways to do that in previous episodes, where I talked about how to make sure you’re able to collect rent, so definitely check that out… But you’re gonna wanna have a specific answer to that proactively, because your investors are gonna be asking you that question.

Number two – and this is more of a general one, but “Can I run a  background check on your key people?” Obviously, you should always answer yes to this question without hesitation. These people are investing a large amount of money with you, and they wanna make sure that there are no red flags for you or other sponsors on the deal. Basically, the same way that you would be screening a potential resident, they’re gonna be screening you, because it’s even more important, because they’re giving you a lot more money proportionally than the residents are.

Next question, how frequently are you communicating with your investors? This is on an ongoing basis, so proactive communication, but also how quickly do you commit to responding to investor inquiries?

Right now, in a time like the Coronavirus, investors are probably reaching out to sponsors a lot more than they usually do. So you’ve gotta make sure that in times of economic certainty, if you say that you’re gonna be replying to questions within 24 hours, and then something like the Coronavirus happens and you’re no longer responding to questions in 24 hours – well, then that’s not gonna reflect good on you and your business.

This applies to all these questions, but when you’re replying to investor questions, you wanna make sure that your replies apply to times of economic expansions and recessions. And if they don’t, you need to make sure that you’re distinguishing between the two, because if you are getting a new investor during an expansion, and you say “Oh yeah, I send out emails every month, and then I’ll reply to you within 24 hours”, and then a recession occurs and you’ve got all these investors reaching out to you and it’s actually impossible for you to reach out within 24 hours, what are you gonna do in that situation? Probably let your investors know that “Hey, I’m not gonna be able to reply to you as soon.” But having some sort of communication and letting them know what’s typical, and then obviously if something happens, here’s how it will change.

Next question, “What is your financial review process?” Every month or every quarter – ideally every month; maybe even every week – you should be reviewing the financials of the deal. These are the T12’s, the rent rolls, the bank statements, making sure that all of your i’s are dotted and t’s are crossed… So make sure that you let your investors know specifically what you do when you’re reviewing the financials. So what financials do  you look at? Who else is able to look at these financials? Is it also being checked by some third-party? Is  your property management company look at it? Do you have someone on the team that specifically analyzes these financials? What do you look for? Typically, you wanna look for the variance between your projections and your actuals… Things like that.

So making sure you let them know what your financial review process is is very important… Because if you aren’t’ reviewing your financials, your investors are not going to like that, because you won’t be able to catch issues sooner.

Next question, “What is the worst-case scenario, and how do you try to mitigate that?” Obviously, the worst-case scenario is you lose their money, and then you do a capital call, and you lose their money again. So what types of things have you put in place to make sure that that doesn’t happen? What types of things have you put in place to make sure you don’t need to do a capital call? What types of things are you doing to make sure that you’re able to preserve your investors’ capital? We’ve talked about this countless times on Syndication School. Obviously, it starts with the 3 Immutable Laws of Real Estate Investing, which is buy for cashflow, not appreciation, make sure you secure long-term debt, and make sure you’ve got adequate cash reserves. So those are the three most important and best ways to make sure you’re conserving investor capital. So again, not making the money, but also not losing their initial capital.

So they don’t really care what the worst-case scenario is, they care how that worst-case scenario affects them; how much money could they lose. And again, the answer is they could lose the money they invested, you ask for more money, and they lose that. And I guess the worst-case scenario is they give you more money and you lose it again. So what types of things are you doing to mitigate the risk of that happening?

Next, “Can you send me investor references? Current, and on deals that have sold.” That’s also important. Typically, when you think of references, you think of just the current deals, but also investors that maybe invested on a deal that sold, and did not reinvest. So make sure that if they ask for references, you say yes. If they ask specifically for people who no longer invest with you, then give them those references as well.

Next, “In your return projections, are the numbers presented project-level, or net to LP?” Obviously, whenever you are underwriting your deals – and we’ve talked about this on the Syndication School before – you’ve got your overall cash-on-cash return and your IRR, which are the two most important metrics… And then you’ve got your LP level IRR and cash on cash return. Those are not gonna be the exact same, because even if the investors invested all of the capital into the deal and the GPs had no money invested into the deal, you as a GP are still getting fees upfront, you’re getting ongoing fees and profits, and you’re getting fees and profits at sale. So not all the profits are gonna go to the limited partners.

So if you’re presenting project-level returns, and you aren’t projecting LP-level returns, then you’re not setting yourself up for success, because what’s gonna happen is once you begin to send out distributions, or maybe even all the way up until you sell the deal, and the investors are getting returns that are below the project projections, because the project projections are going to be different than the LP projections, they’re gonna be confused and ask you “Hey, you told me that the returns are gonna be 20%, but they’re actually 15%. What’s going on?” And obviously, one of the answers could be that you didn’t meet your projections… But another answer could be that “Oh, I gave you the wrong projections”, which is probably even worse.

So make sure that whenever you are sending numbers or projections or returns to your investors, you’re sending them returns to them. They don’t really care what the overall project returns are, they wanna know what money they actually get.

Next, “How much liquidity do you keep as reserves in each deal?” Right now that’s huge. People who did not have liquidity are struggling right now, and those who had liquidity and reserves are not struggling as much. So how much money are you saving upfront, at closing, when you purchase the deal, and how much money are you saving on an ongoing basis? Because if something happens unexpected, you’ve got enough cash in reserves to cover the expense of that, or to cover any reductions in income, reductions in rent collections that come from some sort of event like the Coronavirus.

So the rule of thumb is about 1% to 5% of the purchase price as an operating account upfront, and then $250 to $300 per unit per year in reserves. So the first one is upfront, the second one is like an operating expense that comes out before you calculate your cashflow.

Next question, “How much do the principals or company invest in each deal, and at what level?” I’m pretty sure when I originally talked about the GPs investing in the deals, Ashcroft was not doing the class A, class B. So there’s an extra layer to this question, which is 1) how much money are they investing, and 2) are they as class A or class B?

Actually, I had a conversation with Frank, who’s one of the founders of Ashcroft, at the Best Ever conference, and I was asking him about class A and class B, and he mentioned that he invests as class B, because that creates a lot more alignment of interests… Because for the class A they get the 10%, but they do’t participate in any upside. Whereas class B gets a lower preferred return, but they do participate in the upside. So if the deal does really well, they do really well. If the deal doesn’t do very well, then they don’t do very well.

So when you are thinking about whether or not you wanna invest in your own deals, the answer should obviously be “Yes. You need to invest in your own deals, so that you have skin in the game, so that you have alignment of interests.” Because if an investor asks you “Are you in investing in your own deals?” and you say “No”, you’d better have a good answer — and I don’t even know what a good answer could be that would alleviate any concerns that they had.

But going above and beyond that, not only do you wanna invest, but you wanna invest in the class that is benefitted by the deal doing well, and suffer from the deal not doing well, which creates even more alignment of interests. So let them know how much money you have in the deal that you’re investing as the class of investor that participates in the upside and the downside.

Next, “Who will be managing the property, and how long have you been working with them?” So we’ve done countless episodes on property management companies. Obviously, the property management company is going to be managing the property, and the one question they’re asking here is “How long have you known them?” So obviously let them know how long you’ve known them for and how long you’ve worked with them for, how many deals you’ve done with them… Check out the Syndication School about “The ultimate guide for finding a property management company” for more on that, because that was basically the entire episode, or maybe two episodes talking about how to find a property management company, how to screen the property management company, and also how to be prepared to answer the questions that they have about you.

But obviously, the property management company is the most important team member besides the members of the general partnership, because they’re the ones that are responsible for the day-to-day operations of managing the day-to-day operations at the property. And especially at times like Coronavirus, you wanna make sure you’ve got a property management company that’s rock-solid, because a lot of adjustments need to be made in a health crisis like this, and if you don’t have a rockstar property management company, you’re gonna be in trouble… Especially when it’s harder to collect rent, people are working from home, so you can’t really do in-person tours, things like that. So you wanna make sure you have a property management company who’s flexible enough to handle these types of unknown events that occur.

Last question is “How many deals have gone south or sideways, and how do those affect your strategy?” Obviously, if you haven’t done many deals before, then you aren’t going to have an answer of a deal that’s gone south or sideways… But I guess if you have only done one deal and that deal went south or sideways — they don’t really  want a horror story; you’re not supposed to scare them about what went wrong. What they wanna know is what was the mistake that was made or what was the problem, and was it your fault or was it not your fault, and then what did you do to solve that problem?

So if it was a really small or minor mistake, then let them know that it was a small, minor mistake. “We’ve implemented the solution and we’re still able to provide our investors with returns.”

Essentially, all these questions – they wanna know “Is my money safe?” and “Will I be able to make money?” So when you’re replying to these questions, keep that in mind. Remember that that’s why they’re asking these questions. They’re not asking it because they wanna know a funny story about  a deal that went sideways, they wanna know “Okay, what happened to people’s money in that deal? Is this something that could potentially happen again?”

So those are 11 questions that every passive investor is most likely going to ask you before investing in a deal with you, especially if they’re not a family or a friend. Obviously, if you’re doing 505(b) you need to have a pre-existing substantive relationship, but maybe you only know them for a year, and they’re gonna ask you these questions.

Families and friends will probably ask you most of these questions too, but basically what you wanna do is make sure that you’ve got answers to all these questions. You don’t wanna read a script to these people. If they ask you “What is your financial review process?”, you don’t wanna go to your Word document and read “Well, my financial review process is…” You don’t wanna read it to them, you wanna just sound natural and genuine, but at the same time you also don’t want to not have an answer, or not have a clear answer, or have one of those runaround answers, where you don’t necessarily work your way around the answer, but you don’t actually answer the question…

So have everything written out in bullet point forms before you hop on a call, or before you even start doing calls; make sure you know exactly how you wanna answer each question, or at least the main points you wanna hit for each question. That way, when they come up you have an answer that, again, is actually hitting at what they’re actually asking you, which is “How are you gonna protect my money?”

So that concludes this episode. Until next time, make sure you check out some of our other Syndication School series, as well as all the free documents that we have. Those are at SyndicationSchool.com. Check out our Coronavirus blog landing page, where all of our blog posts related to the Coronavirus are. That’s joefairless.com/coronavirus.

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

 

Website disclaimer – Should be prominently displayed on website

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

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

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

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

Oral Disclaimer – To be read at or near beginning of podcast

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

JF2061: What to Look For in Mobile Home Parks With Jimmy Johnson

Listen to the Episode Below (00:23:04)
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Jimmy is the founder of Sanddollar Communities, a mobile-home park acquisition firm. Jimmy shares how he was able to wholesale 14 mobile home parks in less than 12 months so if you’re interested in getting into the mobile home park scene, this is an episode you will want to listen to since Jimmy gives his way of finding the right mobile home parks to invest in.

 

Jimmy Johnson Real Estate Background:

  • Founder of Sanddollar Communities, a mobile-home park acquisition firm
  • Has wholesaled 14 mobile home parks in less than 12 months for a total of 471 sites in 7 states
  • He has also partnered on 149 sites across 4 parks where he helps run daily operations
  • Based in Tampa, FL
  • Say hi to him at: jimmy@jimmyjohnson.co 
  • Best Ever Book: Four Hour Work Week by Tim Ferriss 

 

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Best Ever Tweet:

“Anyone can pick up the phone and call but offering to meet in person is very influential.” – Jimmy Johnson


TRANSCRIPTION

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

Jimmy Johnson: Great, Joe. How are you doing?

Joe Fairless: I’m doing great as well, and looking forward to our conversation. A little bit about Jimmy – he’s the founder of Sanddollar Communities, a mobile home park acquisition firm. Jimmy has wholesaled 14 mobile home parks in less than 12 months, for a total of 471 sites in seven states. He’s also partners on 149 sites across four parks, where he helped run the daily operations of those parks. He’s based in Tampa, Florida. With that being said, Jimmy, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jimmy Johnson: Yeah, definitely. Thanks for the intro. As Joe said, about a year ago I got started in mobile home parks, and wanted to figure out how I could provide the most value to the industry. Everybody needs deals, so I thought the best route to go would be in wholesaling parks and providing those off-market deals. So I kind of jumped right in, and started full-time doing it, working 24/7, just trying to get the parks.

It took a couple months to get the first one, but since then it’s kind of snowballed, and now I’m just 100% focused on just growing the business and continuing to do more and more deals, and just marketing, and trying to find the best ones as things get more and more competitive.

Joe Fairless: What were you doing before this?

Jimmy Johnson: Before this I was working for a multifamily company, and that was kind of my first experience in real estate. Then once I left there, I had a virtual assistant agency where I was connecting entrepreneurs with VAs in the Philippines. I sold that, and then got started in mobile home parks. I went looking for something new to do.

Joe Fairless: What were you doing for the multifamily company?

Jimmy Johnson: Just acquisitions, so helping with the marketing, looking at database building, working with brokers… The whole nine yards, from start to finish, from selecting the areas that we wanted to target, up into naturally closing on the deals.

Joe Fairless: I knew there had to be a competitive advantage you were bringing to the table, because I don’t know of anyone who has started looking for mobile home parks and has gotten as many deals as you did, within the time period that you did, having just started out. So that makes sense; your background was in acquisitions on multifamily, plus you have had a virtual assistant agency… So my guess is – and I’d love for you to elaborate – that you used some of your experience in acquisitions for multifamily and combined that with virtual assistant help, and that’s how you got up and running so quickly… But please, tell us about it.

Jimmy Johnson: You hit the nail on the head. I pooled some of the experience from both. I have done [unintelligible [00:03:41].04] obviously not alone; I have some full-time VAs that work for me and help. They do a lot of the admin stuff, especially the database building, and just helping with transaction management. So I definitely piggybacked off of the experience of both, and it’s been great to just kind of bring that knowledge to the table. O couldn’t imagine having started without either one of those… So it’s been very influential and very helpful.

Joe Fairless: If I want a VA, what’s the best way to find one and bring them on board?

Jimmy Johnson: There’s a lot of agencies out there now. It’s one of the reasons why I got out of that business. You can go with the more boutique companies, or you could obviously go to Fiverr or Upwork. I think still the best way is to go to Upwork and post some ads there, and you’re gonna probably go through a couple dozen before you find that one good person. It’s all about just — you have to have them through task to task. So you wanna give them a couple hours of what a day in the life of working for you would be. If you give that to 100 people, maybe ten will actually do it, and out of the ten, two or three will do it right.

So it’s [unintelligible [00:04:50].04] but once you have the right person — I’ve had a couple who have been working for me for years and years now, and they really know all the ins and outs of the business… So it’s very helpful working with them, and it’s fun. They know so much about mobile home parks, and they don’t even have mobile home parks, obviously, in the Philippines.

Joe Fairless: [laughs] And what’s their compensation?

Jimmy Johnson: Between $2 and $4/hour as the base. I hire people that are more in the rural provinces, not right in the city, and then I give them a bonus for every deal closed that’s pretty substantial, so they make a good living there.

Joe Fairless: And what’s a bonus for a closed deal about?

Jimmy Johnson: $500. Over a month’s salary for them.

Joe Fairless: With your background in acquisitions for multifamily and with having owned a virtual assistant agency, talk to us about your specific approach that you take — or let’s talk about when you first started. What did you do exactly to get your first deal and get those leads coming in?

Jimmy Johnson: Nothing too fancy… It’s just the cold-calling, direct mail, meeting with sellers… You have to kind of put yourself in the shoes of who you’re reaching out to. I knew I wanted to target mom and pops, and out of the 14 last year, the average age was over 70, of the sellers that I worked with. So you’ve gotta think what does your seller — what kind of marketing are they gonna respond to. They’re not gonna probably respond to ringless voicemail, or texting. These are people who want cold-calls, and they want you to see them in person.

Joe Fairless: Okay. Well, in order to cold-call and direct mail and meet with them and know who they are – average age over 70 – you’ve got to be able to find them. What did you do exactly to put together your database?

Jimmy Johnson: I kind of picked the states and the areas that I wanted to do after doing some research on BestPlaces.net. It’s one of the good websites for metro research. After deciding, then I would figure out how many counties comprised that area, and then I would go county to county, go to their website… And some of them were easier than others, where you could search a list of mobile home parks, others you have to call them…  So kind of just getting a base list of what are the 100 mobile home parks in the area, just what’s their address. Then a lot of them, just due to these mom-and-pops, if you just google the name of the park and the address, it’s their cell phone number that’s often associated with the Google listing, because they don’t have a lot of technology and systems in place. It’s often them who is answering everything, from leasing calls, to maintenance… So just kind of calling that way is how I got started quick. And then since then, I’ve developed some systems with the VAs for different paid softwares and whatnot, for doing skip-tracing… One of the easiest, quickest ways in how I got started was just county research and then googling parks.

Joe Fairless: What was the easiest experience finding the mobile home parks in the county, and then can you describe the hardest experience?

Jimmy Johnson: The easiest, depending on state and the county, was just going on their website, and you could just search “multifamily, 2-5 units, or 5-10 units” etc. So they  had a listing that was just mobile home parks. So that was perfect, because —

Joe Fairless: It distinguishes between apartments and mobile home parks?

Jimmy Johnson: Yeah, as well as commercial and retail and industrial. They just had everything broken out, and all you had to do was download a list.

Joe Fairless: Okay.

Jimmy Johnson: So a lot of the more tech-savvy counties have that. That’s maybe 30 minutes total to get to that, and get the data downloaded. So that’s the easiest.

Then the hardest was counties that don’t have anything at all, and kind of having to call them and see what they could provide. And even harder on top of that is the counties that won’t provide the data at all, and then having to actually go on Google Maps and just search street-by-street to pick the parks, and then google. That’s a couple-day to a week task to get that done.

Joe Fairless: And when you create your database, what are the fields that you input for information?

Jimmy Johnson: The basics are obviously address, and then city/state ZIP, the whole nine years; always parcel ID number, because that’s the easiest way to look it up, especially when you’re digging deeper into the data. A lot of people will forget to put that.

In addition to that, you want as much info about the owner as possible. So whatever corporation they own it in, or if it’s in their personal name, the husband or wife’s name, any partners… And a lot of this you could find on the county’s site when you’re looking up ownership.

I wanna know where they live, because that can always be a talking point. I live down in Florida; a lot of sellers often do, even if it’s a park that’s in Georgia – I could say “Oh, it looks like you live in Orlando”, and then that can get the ball rolling for communication and whatnot. So just as much info… Google the park and see what’s near it; if it looks like there’s any new development, or if there’s something prominent that’s right around the corner… Just anything that you can kind of stand out with a talking point, compared to just “Hey, I wanna buy your park” and that’s it; so it looks like you don’t even have any info.

Joe Fairless: Besides mentioning that the area code is Orlando, so it’s “Oh, you live in Orlando”, is there any other way of saying “I see you live in Florida” without acting creepy to them, because you’ve been internet-stalking them to get all this information?

Jimmy Johnson: It kind of depends on the person. A lot of times they’re like “How did you  get my number? How do you know who I am? How do you know I own the park?” They’re like “I thought it was hidden.” And you’re like “No, you could look it up in two minutes online.” So there’s always that kind of creepy right off the bat feel if it’s the first time somebody’s calling them… But I always just say “Oh, we just get it all from county records. It’s all public data.” You just notice that “You live in Florida. I do, too. Are you down here now?” I try and segue it into an in-person meeting.

Then they kind of open up more and they’re like “No, I’m only down there in the winter. I love fishing”, and then we start talking about that… So it’s really just “Hey, it’s public records data, that anybody can look up.”

Joe Fairless: Okay. So that is building the database and putting together the team… But then you’ve got to actually close on the deal, and I introduced you earlier as having wholesaled 14 parks in less than 14 months for a total of 471 sites across seven states… So what are some tips you have for taking it from initial conversation to actually closing on it, or in your case wholesaling it?

Jimmy Johnson: Great question. Right off the bat, like I said, you wanna have some conversation points ready about the area… Especially if you’re not super-familiar with it, you wanna do research, even if it’s a new major employer is coming to town… Just anything to talk about. Or if you have friends or family or partners in the area. So just getting started with those talking points. And then one of my biggest tips is you wanna try and meet these sellers, with any type of wholesaling, I think, as soon as possible… Because anybody can pick up the phone and call, but offering to meet is very influential.  So I kind of start planting the seed right away. You know, “Hey, if you wanna get together in person”, and you kind of talk through the details. Because with a park, there’s a lot of info that you need, from how many park-owned homes, how many tenant-owned homes, if it’s private or public utilities… So it is a bare minimum 30 minutes to an hour of just exchanging information.

Once I have those basics, I then start to come up with my offer, where we have to be, and make sure we’re in the same ballpark, and then just start pushing for that in-person meeting.

Joe Fairless: Okay, so you mention what your initial offer is on that first call?

Jimmy Johnson: A lot of times they want to know, but I try not to. I think with anything, you want the other person to name the price first, just because you never know what’s gonna be said… But I’ve been most successful with one that doesn’t come up until actually in-person; because they see you have some skin in the game, you’ve taken the time to meet with them, where maybe 9 out of 10 other people haven’t.

Then once maybe walking the properties or sitting over lunch or coffee, then towards the end it’s “Alright, let’s talk numbers”, and that’s when I most address bringing up the actual final offer.

Joe Fairless: You wholesales properties in seven states over a period of first 12 months… How do you determine which people to go fly to meet with or drive to meet with, versus not?

Jimmy Johnson: Another great question. You lose some of them, because you get there and they want quadruple of maybe what it’s worth, and that’s why a lot of people wanna just shoot off that offer right off the bat. But the ones where I know I’m definitely going is — I had one where I was working them for 6-9 months, and we were talking every week or two, and it was “I’ll sell them next month” or “I’ll sell in a couple months. I’m not ready yet”, and then finally something just clicked after six months of talking. I had the rapport built up… And he goes “Yeah, I’ve had a rough couple weeks health-wise, I’m getting older… I’m done. Can you meet this week?” And I’m like “Okay, this park is across the country. I’m down in Florida. How about next weekend?” And he’s like “No, Friday is good for me”, and it’s Thursday. And I’m like, “Um, how about Saturday?”, and he’s like “No, it’s tomorrow. I have Bingo on Saturday.”

So I went online as we were on the phone and looked up tickets to Kansas City, booked the flight, and met him there the next day. So when they’re ready, they’re ready, and time [unintelligible [00:14:49].17] so you’ve gotta jump on it.

Joe Fairless: Yeah, I would hope most people would find the way to get themselves to Kansas City in that scenario. Earlier on — and you answered this, so I guess we won’t talk about it much more, but how do you determine who do you got meet with and go fly with… But certainly, that was a hot lead, to say the least.

Jimmy Johnson: Yeah. They’re not all ones, though… I drove eight hours two weeks ago, up to Northern Alabama, to meet with an owner, and it was one I was working for a while; I thought I had it in the bag, and he ended up selling it to a  college friend of his, so… A lot of times the time is wasted, but I stop at other parks on the way and kill a couple birds with one stone, or get lunch with some investor… So I try and make it where it’s 4-5 things happening, and not just a one-stop sort of thing.

Joe Fairless: Let’s talk about the four parks that you help run daily operations… What is your role?

Jimmy Johnson: Two of them are with one partner, two of them are with another. One group is much more out there, looking to grow. They have six parks total, so I’ve kind of assigned one to them, and we enjoyed doing business together and wanted to keep working together… So we ended up doing two more I partnered on with them. With that, there were more turnarounds, heavy lifts, and we all play our role. One person’s in charge of leasing the property up, another person is in charge of dealing with contractors… So for that one, I kind of just have my one lane, and I’m helping with just infill, bringing homes in, leasing homes, selling homes.

The other two, it’s more with a passive investor, so I’m kind of running 100% of things. They’re more stabilized. Still value-add deals, but not needed for a five-person team. So with that I’m taking everything from tenant calls, down to taking visits to the property, and moving in homes, and really everything, A to Z.

Joe Fairless: What’s your least favorite part of managing the operations?

Jimmy Johnson: I wish they were all closer. I wish I could basically be there more often. I have one park that’s only five minutes away from my house, so that’s great, and it’s the one that’s running the bust, because I can be there. And then I have another one that’s in Oklahoma, and that one – I just wish I could be there more. It’s tough to fly out there for a day just to do something that’s maybe not a high priority… So I think when you’re not there as often, obviously things kind of fall behind. So really, the least favorite part is missing out on some of the more day-to-day stuff by being remote.

Joe Fairless: And what do you think is the monetary benefit to the park for you being closer? You mentioned some of the smaller day-to-day stuff that’s not as much of a priority, but you said it is operating the best when it’s closest to you… So what exactly is it that you’re doing that is helping with operations?

Jimmy Johnson: I meet with my manager there once a week. It’s just walking through — I park the car, and then I kind of walk. The tenants see me there, and it’s kind of — not that fear of “The owner is here”, but more of like it’s more active, and there’s a presence… So just kind of less problems, less complaints; they all know me. So it’s that, and then… We’ve just had somebody move out last week and we had a tenant moving in there the next morning. So it’s just quicker turnovers. We’re doing a small expansion there, and it’s just easier to manage that. We’re adding eight homes in… So it’s just a lot easier to pop into the county and do what needs to be done.

The on-site managers do this at the out-of-state properties, but just being able to oversee this one — I think it’s running more efficiently, and I work a lot closer with the manager there. He does other kind of side-projects at the other parks, and he actually travels to them… So it’s just kind of better relationships, and more smoother communication, just being on-site more often, and doing that  weekly walk.

Joe Fairless: Do you have weekly phone conversations with the Oklahoma manager?

Jimmy Johnson: Yeah, with all of them. It’s a minimum of once a week. So we typically do Friday afternoon, and it works well. I think it’s good for both sides. They like to kind of update and share what’s cookin’, both good and bad, and then of course, I like to stay on top of it equally. So it might be overkill to some, we could probably do it twice a month, but I think a quick 15-minute call is worth its weight in gold.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

Jimmy Johnson: Definitely trying to meet sellers in person. I think it’s one of the biggest reasons why I’ve done 14 parks in the first year… Because I’ve gone the extra mile and I meet these people when nobody else is.

Joe Fairless: And I’m guessing at the beginning you chose to wholesale just to build up some cash reserves. Is that something that you are continuing to do? And if so, why? …compared to just buying them with a partner and doing it yourself?

Jimmy Johnson: Yeah, definitely, this year the number one focus is still wholesaling parks. About double the number that I did last year. And with wholesaling, everybody wants the deals… So just for like being the guy with the deals, then you’re able to partner. A lot of times people will say “Hey, instead of the fee, how about I give you a piece of equity in the deal?” So I’m building up ownership in multiple parks, as well as building up the cash with the assignment fees. I’m learning a ton and getting to know everything, from people buying their first park, to the institutional groups who are [unintelligible [00:20:19].16] ten or twenty. So it’s a great way to meet just so many people, in really any market that you want.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Jimmy Johnson: I’m ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:20:39].16] to [00:21:23].24]

Joe Fairless: Best ever resource that you use to stay sharp in business?

Jimmy Johnson: I really like BestPlaces.net for staying on top of what’s cooking in areas, and metros, and cities, and just the demographic.

Joe Fairless: What’s some mistake you’ve made on a transaction?

Jimmy Johnson: Time kills deals. Dragging my feet on a couple things and kind of letting things fall behind. You’ve gotta just stay on top of it and just put in the hours to get them done quick.

Joe Fairless: Best ever book you’ve recently read?

Jimmy Johnson: Pretty generic, but 4-Hour Workweek. I always revisit that one. I think it’s good for anybody in business.

Joe Fairless: Best ever way you like to give back to the community?

Jimmy Johnson: Super-simple, but once in a while just buy something for somebody behind you in the line at Starbucks. I do it about once a month, and it’s always just such a feel-good moment.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Jimmy Johnson: You can email me, jimmy [at] jimmyjohnson.co, or you can also go to my website, sanddollarcommunities.com. You could reach out that way. I’m on top of both of those every day.

Joe Fairless: You came into this business just ready and raring, hitting the ground running. It’s impressive how you got 14 mobile home parks in less than 12 months wholesaled.

Jimmy Johnson: Thank you.

Joe Fairless: It really is. They’re tough to find, as you might know… I don’t know if you agree with that or not. I know some people in the industry and they have a hard time finding them. Bravo to you. And thank you for going through your process in detail for how you did it. So any mobile home park investors listening, they can learn. And I’m sure everyone has an abundance mentality, so thank you for sharing that.

Jimmy Johnson: Yeah, I appreciate it. Thank you.

Joe Fairless: I really appreciate you being on the show. I enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Jimmy Johnson: Right back at you. Thanks, Joe.

 

Website disclaimer – Should be prominently displayed on website

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

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

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

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

Oral Disclaimer – To be read at or near beginning of podcast

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

JF2053: 3 Ways to Get Cash From The CARES Act | Syndication School with Theo Hicks

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In this episode, Theo shares three ways to get cash from the CARES Act. He explains the 401k distribution, Paycheck protection program loan (PPP), and the Economic Injury Disaster Loan (EIDL) in detail so you will be better prepared during this pandemic. To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 

 

Best Ever Tweet:

“Understanding the CARES Act can help many individuals.” – Theo Hicks


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, we air a podcast episode or two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes, sometimes they’re part of a larger series, we offer a free resource – PowerPoint presentation templates, Excel template calculator, PDF how-to guides, something to help you on your apartment syndication journey. All of these free documents from past Syndication School series episodes as well as the episodes themselves can be found at syndicationschool.com.

In this episode, we are going to talk about three specific aspects of the CARES Act, the Coronavirus Aid, Relief and Economic Security Act that was recently passed, three aspects of that that can help you get cash to hold you over if your properties are struggling and you need some cash to pay investors to cover expenses to your mortgage and things like that. So we’re going to go through those three in this episode today.

The first one is going to be some changes they made to retirement accounts such as a 401(k) and an IRA. So if you have a 401(k) and IRA, this applies to you. Obviously, if you don’t, then the other two, I think, will be much more advantageous. But the first change is that you are going to be able to take out a large withdrawal of up to $100,000 from your IRA or 401(k) without having to pay the early withdrawal fee or the income tax right away. So usually, if you wanted to pull money out of your 401(k) or your IRA early, you’d be required to pay the withdrawal fee, which is 10% as well as the income tax on that distribution. Whereas now, you are able to take a coronavirus related hardship distribution of up to $100,000.

People who qualify for this coronavirus related hardship are people who are diagnosed with coronavirus, have spouses or dependents who have been diagnosed with coronavirus or those experiencing financial consequences from the quarantine, which is pretty vague. So the rules are actually really loose.

So if you’re an investor and you’ve seen a reduction in rent, then you’re experiencing a financial consequence from the quarantine, and are able to pull out up to a 100k out of your 401(k) or IRA without paying the early withdrawal fee. So this provision may help, as I mentioned, you, but this is also something that might be able to help your residents, depending on what type of properties you’re investing in. If you’re investing in Class A properties, maybe your residents have 401(k)s or IRAs they can tap into to pay for their rent. It’s another way to pay rent as well. But of course, obviously this is something that can help you as an apartment syndicator, cover expenses as well, and it could also cover living expenses too.

If you are putting everything into a property to pay your investors, but you’re not making money yourself, well, pull some money out of your 401(k) if you need to, to hold you over until the property turns around. The up to $100,000 distribution – not only do you not have to pay the early withdrawal fee, but it’s also tax-free for three years, at which point you need to either replenish the money, put it back into your account or you need to pay the income tax on that. Now, if you haven’t experienced a Coronavirus-related hardship, which if you’re a real estate investor and based off of the loose requirements, you should be able to be considered having faced a Coronavirus related hardship… But let’s say, for some reason, you haven’t, your properties are perfectly fine, your business is perfectly fine – well, you can still access up to $100,000 from your 401(k), and you do this through a loan.

So in the past, if you wanted to take a loan against your 401(k), the max was 50%, or 50% of the vested amount, whichever was higher. With the CARES Act, the maximum amounts has been doubled to $100,000. So the loan process is the same, which means you need to pay back the loan with interest, or else it will be treated as a withdrawal and will be subject to the income tax and the early withdrawal fee. But instead of being able to pull out only $50,000, now you’re allowed to pull out up to $100,000. And similarly, this loan may be used to cover– this can be something that your residents can use to cover rent, you can use it to cover business expenses or living expenses. Plus, you could also use it to potentially acquire a property.

A lot of people use their 401(k)s to buy properties. So you could also take up to $100,000 out of your 401(k) to buy more real estate. So the two 401(k), IRA retirement-related things that the CARES Act allow is number one, if you’ve experienced a Coronavirus-related hardship, you can pull up to $100,000 out without paying the early withdrawal fee and then not having to pay taxes for three years. Whereas before, if you pulled out a 100k, not only would you have to pay the early withdrawal fee, but also income tax immediately. And then secondly is, if you have not experienced a hardship or if you have and you want even more money, you can take up to $100,000 from your 401(k) as a loan as opposed to the previous $50,000. So that’s 1A and 1B.

The second way to get cash from the CARES Act is going to be the Paycheck Protection Program Loan or the PPP Loan. So this is something that is new. The third thing we’ll talk about is something that’s previously existing, which is expanded upon us, the Economic Injury Disaster Loan. But first, we’ll talk about the PPP loan.

So the PPP loan, as the title points to, helps you pay your payroll costs, during the coronavirus. So who qualifies? Small businesses. So this is a small business loan; you need to have under 500 employees. It can be an S Corp, a C Corp, an LLC… It can even be a sole proprietorship or an independent contractor or someone who’s self-employed. So that applies to basically all real estate investors. And then when you are obtaining the loan, in order to qualify, you need to certify that your business has been economically affected, or there’s economic uncertainty to make the loan necessary. So there’s a portion of the application you fill out that you need to basically prove that you are being economically affected by the coronavirus.

With this PPP loan, you can get up to $10 million, but the amount is going to be based on your payroll costs. So in order to calculate how much money you can get as a PPP loan, you want to determine what your average monthly payroll cost was for the past 12 months, and then multiply that by 2.5. So if your average monthly payroll is $100,000, then $100,000 times 2.5 is 250k. So you can qualify for a $250,000 PPP loan.

Things that are included in this payroll calculation are salary, wages, commissions, payment of vacation, sick parental family, medical leave, payment of retirement contributions, group health coverage premiums, state and local taxes. It doesn’t include federal taxes and it doesn’t include payroll costs for those making more than $100,000. And these are things that apply to you and your employees. Obviously, if you’re an independent contractor, you probably don’t have employees, or if you have your property under the single purpose entity, you can still qualify for the PPP loan. It would just be whatever salary wages that you yourself got.

What can the money be used for? Payroll for you and your employees. But what’s nice is, you can also use the money for rent, mortgage obligations, utilities, and other debt obligations you may have. So you can pay the mortgage on your apartments or you can pay utilities on your apartments with the PPP loan.

The interest rate is essentially interest-free; it’s only half a percent, so 0.5%. And the repayment period is two years, and loan payments are deferred for the first six months, and there’s no prepayment penalty, so you can pay it back whenever, and there’s also a way to have the loan forgiven.

So there is a loan forgiveness provision which states that you’re eligible for loan forgiveness for the amounts you spend over the next eight weeks after receiving the loan on certain qualifying expenses. And these qualifying expenses of the business over the eight week period include payroll costs, rent, interest item, mortgage debt, and utilities. So depending on how you use the loan, you could have the majority of it or all of it forgiven, meaning you never have to pay it back if it’s one of these qualifying expenses. And if the amount that could be forgiven is determined by the bank who actually grants the loan, and once you request forgiveness, the bank will have 60 days to approve or deny the loan. What’s also nice is that you are able to have more than one small business loan. So you could get the PPP loan, you could also get the EIDL loan, which I want to talk about next.

So just to summarize, the PPP loan, the Paycheck Protection Program, is for small businesses, so you have to have under 500 employees. That applies to most entities, but you can get up to $10 million. That loan amount is based off of the average monthly payroll for the last 12 months multiplied by 2.5, and the money can be used for payroll, but it can also be for rent, mortgage obligations, utilities, and other debt obligations. Very, very low interest and needs to be paid back within two years. Payments are deferred for six months and you have the possibility of having most or all of the loan forgiven, depending on how you use the proceeds. So that’s number two – the PPP loan.

Third is going to be the Economic Injury Disaster Loan, the EIDL. So the EIDL is an existing program that was expanded upon through the CARES Act. So in order to qualify for the EIDL loan, you need to meet the definition of a small business, which is something that’s organized for profit… and this applies to the PPP loan, too. You have to be a small business, because these are things that are gonna apply to most of you – organized for profit, has a place a business in the US, operates primarily within the US, is independently owned and operated, and is not dominant in its field on a national basis. So assuming you meet those criteria, you meet that definition of standards, the size standards are 500 or fewer people, and then you need to be located in the US. So assuming you meet those three, then you could qualify for the Economic Injury Disaster Loan. I’m not sure what’s easier to say – the Economic Injury Disaster Loan or the EIDL. Well, probably EIDL.

So you can borrow up to $200,000 through this program without a personal guarantee and you can be approved just based off of your credit score. You do not need to prove that you can’t get credit or money anywhere else. So you don’t need to prove that this will be your last resort and you need this loan to survive. If you’re getting a loan over $25,000, then you’re going to need to have collateral, which can be your small business. It doesn’t need to be your property, doesn’t need to be anything that you personally own. And probably one of the things that most people are talking about this is that you can get a $10,000 loan advance very, very quickly to provide for immediate support while you wait for the proceeds from your EIDL loan.

So the EIDL loan, you can get up to $2 million to provide working capital for your payroll costs, debt, expenses like that. The interest rate is 3.75% and the loan term can be as long as three years.

There’s one year of payment deferrals, although the interest does begin to accrue right away. And then as I mentioned, you can get a $10,000 advance, which is effectively a grant. When you request that, when you fill out your EIDL application, it should arrive within a few business days. And the money is yours and does not need to be repaid whether or not you qualify for the EIDL loan. So it seems like it’s just free $10,000 that you can get by just applying, assuming you meet the criteria. I went to the website and it said that it takes about two hours and 10 minutes to complete, but I know a few people who filled it out very, very quickly. So basically for this EIDL loan, the majority of it remains the same of how it was before, the biggest change is the $10,000 advance.

So when you apply, you can get a $10,000 advance in a few days that you do not need to payback. So it’s basically a grant given to you. And then after that, you can apply for up to $2 million to pay for things, assuming you can prove that you’ve been financially impacted by the coronavirus.

So those are the three main ways to get money from the CARES Act. The first is being able to pull money out of your IRA and 401(k) without paying the early withdrawal fee and the larger loan amount that you can take against your 401(k).

Number two was the PPP loan, which will help you cover payroll costs, but also rent and mortgages and utilities and things like that. And then the Economic Injury Disaster Loan, the EIDL loan is another loan that gives you a $10,000 advance. The loan terms are a little bit higher interest rate, but a longer payback period and a longer payment deferral, and you can get up to $2 million for the EIDL loan compared to the up to $10 million for the PPP loan.

So again, those are the three main ways to get cash from the CARES Act. There’s a lot more things in the CARES Act that are going to positively impact your investing business, but I think those were just kind of the main three that most people are talking about now, that we wanted to talk about today.

So thank you for listening. In the meantime, make sure you check out some of our other Syndication School series about the how-to’s of apartment syndication, make sure you check out our coronavirus page on our website – this is joefairless.com/coronavirus, where we post all of our blog posts about the coronavirus and different developments in regards to that, and also make sure you check out some of the free documents we’ve been giving away for Syndication School. That’s available at syndicationschool.com. Thank you for listening and I will talk to you tomorrow.

JF2046: 11 Tips for Collecting Rent During The Coronavirus Pandemic | Syndication School with Theo Hicks

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In this episode, Theo shares 11 tips for collecting rent from your tenants during the coronavirus pandemic. These ideas and tips are from research around the real estate investment community, from some of our previous guests, and from the Best Ever FaceBook community.

 

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

 

Best Ever Tweet:

“During this pandemic, one idea is to apply your tenant’s security deposit towards rent and apply a discount to help your tenant’s out.” – Theo Hicks


TRANSCRIPTION

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

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

 

Theo Hicks: Hello, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s apartment syndications. As always, I’m your host, Theo Hicks. Each week, we air to podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes we’ve been releasing free documents as well; how-to PDF guides, PowerPoint presentation templates, Excel calculator templates, things that will help you along your apartment syndication journey. All of these free documents and past Syndication School series episodes can be found at syndicationschool.com. Today, we will be continuing with our coronavirus-focused episodes and talking about how to collect rent. So some tips on collecting rent.

When this episode airs, the first of the month of 1st of April will have arrived, and in previous months, apartments syndicators really knew that the vast majority of the residents were going to submit their rent on time and in full, something that we didn’t really have to think about at all, unless we were just buying a property and knew that tenants weren’t the best and the plans have turned them over. But the majority of the time, they’re going to pay on time; that’s not really something that was focused on. Whereas now with the coronavirus pandemic, a lot of people losing their only source of income, being furloughed indefinitely, laid off from their job, hours cut back, it’s the first time that rent is due during this pandemic time. So we wanted to provide some tips on how to collect rent.

So they did pass the $2 trillion Stimulus Bill, which is going to extend a direct cash payment to certain individuals if you qualify. So it’s $1,200 bucks for most American adults and $400 or $500 bucks for each child, as well as some money for businesses, cities, states and small businesses, hospitals, things like that. So that is obviously one option. If your residents are able to get that direct payment, then that can help them cover rent for a month or two. But besides that, I wanted to provide some other tips on how to collect rent that’s not the direct cash payment that’s coming from this stimulus bill.

In this episode, we’re gonna focus on 11 ways that you can still collect rent during the coronavirus pandemic. This comes from research that we did across the Internet and things that other investors are doing, plan on doing. So that’s where this information came from.

So the first piece of advice came from our Best Ever show community on Facebook, which I highly recommend following or liking if you aren’t already, because we’re posting some coronavirus related content every day and we are asking for people that are currently following the page to provide their input on things that they’re doing. So a lot of active investors are providing some very solid advice, and these first three approaches are coming directly from that group.

So the first came from Justin, and this one’s pretty simple. He’s just going to offer a small discount to residents who pay their full rent early or on time. So if they pay their rent a week early, a few days early, and it’s in full, then he’s going to give them a minor discount. So obviously, the discounts and the timing of how early, it is up to you, but the goal is to motivate residents to pay their rent before it’s even due; so pay it early. That way you have an understanding of how much you’re going to be collecting for that month and in return, you’re giving them a small discount. So that was number one.

Secondly, Justin’s also going to set up a repayment plan for residents who cannot pay their full rent on time or pay their full rent early. This is going to allow residents to make up for their unpaid rent later. So that’s another strategy that I’ll talk about later in this episode about a potential repayment plan, but if they don’t pay rent, then you create some plan for them to repay it in the future before their lease expires. So just helping people out that aren’t able to come up with rent. Justin is offering a small discount if they pay early, and also creating a prepayment plan rather than evicting them, or you’re charging them money with interest or something. So those are the first two strategies.

The next strategy comes from Julie, also from the Best Ever show community. It’s a very unique approach to collecting rent. I believe I talked about this on last week’s Syndication School, but first thing she’s doing is allowing her residents to apply their security deposit towards a reduced monthly rent payment. For example, if you have a resident who owes $1,000 per month in rent and has a $1,000 security deposit, well, what Julie did is she allowed them to use that security deposit to cover two months’ rent. So she discounted their rent each month for two months by 50%, so $500 each month, and they were able to apply that $1,000 security deposit to their rent. So at the end of the lease, they won’t get that $1,000 back, because the $1,000 should be sitting in a bank account somewhere. So you just take money from the security deposit bank account, and deposit that into your rent collection account.

Now in return for this discounted rent and with the ability to apply the security deposit to the monthly rent, Julie was making the residents sign a new lease. So six months or twelve months depending on what their current lease is, as well as sign up for some security deposit insurance. So the service she uses is called Rhino, and it’s $10 per month per $1,000 in the security deposit insurance, and then depending on the residents, she wants to see two to three times, the security deposit amount in coverage. So if they owe $1,000 for security deposit, then they’ll pay $20 to $30 per month for security deposit insurance, and security deposit insurance covers damages and unpaid rent. So if they can’t continue to pay rent, well then Julie can make up for that by having that security deposit insurance and collecting rent that way.

So she had just started this during the coronavirus pandemic and hasn’t actually filed a claim yet so you’ll want to check out Rhino or some other security deposit insurance company. The strategy here is to allow your residents to use their security deposit to pay their rent. Julie did a reduced rate just because she wanted to cover two months as opposed to one month, so pushing the problem away two months as opposed to one month. So you can reduce it by 33%, or you don’t have to reduce it at all. You can make them sign a new lease or not sign a new lease. You can make them sign up for security deposit insurance, you can make them do something else, but the overall strategy is to have them use their security deposit to pay rent in return for doing something else that you want them to do. So that is strategy number three.

The next two strategies, four and five, they came from actually a Best Real Estate Investing Advice Ever Show podcast interview that I did with Daniel, which actually aired this past weekend. So I think it aired the 29th or the 28th of March, and the first tip that he provided is to communicate with all of your residents to understand their ability to pay rent in full and on time. So you don’t want to skip this step. You don’t want to just not say anything to your residents in general. Obviously, you want to communicate them with the safety precautions that need to be taken by them and that you are taking during this time, but you also want to communicate with them about their ability to pay rent, because not every single resident is going to have a problem paying rents.

So you don’t want to assume that every single person at your apartment community is not going to pay rent, and then apply whatever solution to everyone. So if you’re gonna do Julie’s solution, for example, and allow them do their security deposit and reduce the rent by 50%, you don’t want to do that to every single person. You only want to implement some solution for residents who will have a problem paying their rent. For the ones that don’t have a problem paying their rent, you don’t really need to do anything. If they’ve kept their job, if they already work remotely or work for an industry that’s not affected by the coronavirus, then nothing really changes for them. It’s for the people who cannot pay rent on time. If you don’t communicate with the residents, you’re not going to know, and you might end up losing more income that way.

So, Daniel, he had a long-term rental portfolio and he has a short-term rental portfolio, so all of his long-term residents are able to pay rent on time. So since he’s a sales manager, he had the conversation with his residents or he knew from past conversations with residents, whether or not they were financially impacted by the coronavirus. And fortunately for him and his residents, none of them were financially impacted by the coronavirus. They all had their jobs and were still getting paid, and so they were all able to pay rent on time.

Obviously, his short-term rental portfolio was a different story, and that’s something that I’ll talk about in the next tip, but if he didn’t communicate with residents or if he wasn’t a sales manager and didn’t know that all of his long-term residents could pay on time, well, first of all, he might have been surprised come April 1st, but secondly, he might have applied the solution that resulted him losing income that he didn’t necessarily need to lose, because some of his residents might have been able to pay him on time. So this is a very important step, very important tip, which is to make sure you understand where your residents are at financially before implementing or offering some discounted rate to them.

So, Daniel’s other tip was very interesting. So as I mentioned, half of his portfolio consisted of long-term rentals, so 12-month leases, which as I mentioned before, he didn’t expect to be impacted by the coronavirus. Obviously, it’s still really early, but at the time of the interview, he knew that the residents were gonna be able to pay their rent on time.

The other half his portfolio were Airbnb rentals. So obviously, with all the stay-at-home orders, most people aren’t traveling and staying in short-term rentals anymore. I did interview someone in North Carolina, I believe, who said that the little municipalities he said he’s in actually started to ban any lease that was less than 90 days. So short-term rentals are completely shut down in his local area. So for Daniel in particular, since all of his short-term rental clients canceled the leases, he pivoted and is trying to market his properties to traveling nurses, because all of his properties that he uses for short-term rentals are really close to hospitals. But he’s not able to do that for every single property.  Some of these properties are still vacant.

So what he said, and what I thought was really interesting, was that he plans on volunteering up his units to volunteers that are coming to the hospital. So people that work for Red Cross or other professionals that are traveling to the hospital to volunteer and help with the coronavirus. Something he said that was very interesting was that the worst-case scenario is that you would help someone else. So for him, he’d much rather have someone living in his unit and being able to use it to do good than just have it sit there vacant, because he’s gonna lose money regardless. So in his mind, he wanted to help people, rather than to have it to sit vacant. So I thought that was a really interesting, altruistic strategy. So another tip you can use, not necessarily to collect rent, but a way to give back and help people during this crisis.

These next tips come from Brandon Turner over at BiggerPockets. He created a YouTube video with the strategy that he is going to implement for collecting rent during the coronavirus pandemic. He had a five-step plan or five tips, and I really liked three of them. So the first one was to keep an eye out for federal and local programs that will be created to help residents pay their rent. So a perfect example would be the direct cash payments to qualifying individuals in the $2 trillion Stimulus Bill that passed March 27th.

So research online and figure out what other programs there are available. I’ll talk about another program on the Syndication School episode tomorrow or directly after this one, and that was included in the $2 trillion Stimulus Bill. So that was number one, or Brandon Turner’s first tip, which was number seven overall.

Another idea that he had, so eight overall, is to have residents pay rent with their credit card, so very simple straightforward. It allows them to delay paying their rent in a sense, by a month or longer than that, as long as it makes the minimum payment on their credit card bill… And I believe Brandon said that he was going to waive the 3% credit card fee that is incurred when you use your credit card to pay rent on their portal. So you might have to set up a portal or do some extra steps to accept credit cards for rents, but Brandon waived the fee. You can or can’t do that, depending on what you want to do, but that’s another way to collect rent, is to have them use a credit card.

Then his third, which is number nine overall, is to offer his residents an emergency rent deferral program, which he said was a last resort and something that he only brings up if all the other options don’t work. So for his program, as I mentioned earlier in this episode, Justin also had a repayment plan, but he didn’t get into specifics. Brandon got into specifics of his repayment plan.

So what he does is he allows his residents to defer paying their rent for up to two months. And then, once that two months is over, or one month is over, they are able to pay the rent back over a 10-month period. So let’s say, for example, a resident misses their $1,000 a month of rent payment on April 1st and on May 1st. So there are $2,000 in the hole, they’re not allowed to miss it in June. So they must pay their rent in full in June, but they’re also going to owe 10-month installments for the $2,000 that they didn’t pay. So it’ll be $1,000 plus 200 bucks for a total of $1,200 per month, starting in June, and then ending after 10 months. So that’s the plan.

Actually, I think he delayed the 10-month repayment program by a month. So for example, if they’re gonna miss April and May, they wanted to pay 1,200 bucks until July. So they [unintelligible [00:16:13].17] at June, as long as they pay their $1,000 a month, they’re fine, and then starting in July, they’ll give him 1,200 bucks.

A few other tips that I came across – some of these are pretty simple, but one is just to offer free month of rent to residents, as long as they can provide you with a financial hardship letter from their employer, stating that they have been laid off or furloughed due to coronavirus, or a note from their doctors saying that they have coronavirus. So this really could be applied to all these.

So if you want to, you can only apply these types of things to people who can prove that they’ve been hit financially from the coronavirus. So a letter from their employer saying that “Yes, we’ve had to lay off employees because of this reason, and Billy Bob is one of them.” Or, “Yeah, his hours have been cut because of the coronavirus and his pay’s been reduced because of the coronavirus,” things like that. So again, that’s up to you. You can apply these solutions to all residents or you can apply them only to people who can prove that they’ve been hit financially by the coronavirus. It’s really up to you. These are all just strategies that we’re throwing out there. You can use them or not use them.

The other one is to reduce your rents to the point where you don’t make any money, but are still able to cover all of your expenses. So let’s say that you’ve got a 100-unit property and you find out that 30% of the residents have been laid off from their job and can’t pay rent. And then let’s say that the breakeven economic occupancy is 70%. Well, 30 units is 30% of the total units that are there. So if none of those units could pay rent, then you’re at 70% economic occupancy, assuming that all other 70 units are paying their full rent. So you could technically offer no rent to those people and still not lose money. So figure out what your break-even point is and then know that you’re able to reduce rents by that much, but no lower, in order to continue to cover all of your expenses.

So those are the 11-ish tips for how to collect rent or help out your residents during the coronavirus pandemic. To summarize, it was, one, offer a discounted rent to those who pay early or on time. Number two is offer a repayment plan. Number three is to allow residents to apply their security deposit to their rent. Number four is ask residents to pay for security deposit insurance. Number five is to communicate with residents to see who can and cannot pay rent. Six, is volunteer your units for free to coronavirus volunteers. Seven is to use federal or local programs created for landlords and renters. Eight is to ask residents to pay rent with a credit card. Nine is to offer an emergency repayment program. Ten is to provide free rent to residents who lost their job and 11 is to reduce rents to break even.

Now before we go, we did create a page on our website, where we post all of our coronavirus related content. It’s joefairless.com/coronavirus, it’s pretty simple. We update that every single day with blog posts and different articles. So if you’re interested in learning more tips on how to maintain your properties during the coronavirus pandemic, I recommend checking out that.

Also, check out our other syndication school episodes and those free documents. Those are available at syndicationschool.com. As always, thanks for listening, have a best ever day, and we will talk to you tomorrow.

JF2033: SOS Approach to Managing Your Investment During Coronavirus | Syndication School with Theo Hicks

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In this episode, Theo will give you a three-step approach to what you should do during a crisis event, and when it passes. The three-step approach will be easy to remember by using the acronym S.O.S, which stands for Safety, Ongoing Communication, and Summary. Theo breaks down each step so you will know in detail so you have a better idea of what you can do during today’s pandemic. 

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

 

Best Ever Tweet:

“Until this goes away you want to make sure your continuously communicating with your investors and with your residents” – Theo Hicks


TRANSCRIPTION

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

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

 

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

Each week we do two Syndication School episodes. Sometimes they’re part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we give away something for free. These are free PowerPoint presentation templates, Excel calculators, PDF how-to guides, something to help you along your apartment syndication journey.

All of the past syndication school episodes, as well as these free resources, are located at SyndicationSchool.com. Today is going to start a new longer series about the current Coronavirus epidemic we’re going through.

As I’m sure you’re aware, the CDC is responding to an outbreak of respiratory disease caused by a novel/new Coronavirus that was first detected in China, and which has now been detected in almost 70 locations internationally, including the U.S. as of today, which is March 24th.

The virus has been named SARS-CoV-2, and the disease it caused has been named Coronavirus disease 2019 (Covid-19). As a result, the main economic factor that everyone tracks, the Dow Jones, dropped more than 10,000 points over the past 30 days. It looks like as of this recording it has popped back up over 20,000, but still, essentially a 10,000-point drop.

According to the CDC, the best way to prevent infection is to avoid being exposed to this virus, therefore social distancing has been one of the main methods to combat the virus. Some states are issuing stay-at-home orders, like the state that I live in, Illinois.

As a result, many people are working from home, and others have been either laid off or furloughed, so don’t have money coming in.

As real estate investors, this is really one of the main concerns, in addition to obviously the safety of themselves, their team members and the residents… Are the residents – if you’re a multifamily investor/apartment syndicator – can the residents pay rent on time? So what’s gonna happen on April 1st if nobody pays their rent?

Obviously, this is a crisis, and from a business perspective whenever a crisis occurs, you need to have a process for approaching the situation. Since we are apartment syndicators, we need to have  a process for approaching our passive investors.

I’ve talked about this approach before, it’s called the SOS approach to managing an investment during a crisis. We originally came up with this during Hurricane Harvey two years ago, but the same overall concept applies. So this is the overall 3-step approach you want to use once a crisis like the Coronavirus begins, and then what you should do right away, what you should do during it, and what you should do once it has passed.

In the coming weeks, the goal would be to talk about more specific things that multifamily investors can do based on if people don’t pay their rents; what if you can’t pay your mortgage, should you be buying, should you be selling? We’ve kind of compiled a whole long list of questions that we plan on answering… And not only us answering, but we’re gonna share it on our Facebook group. So if you haven’t done so already, make sure you join the Best Ever Show community on Facebook and reply to those questions in order to add value to the community, provide others with solutions that you’ve come across, find solutions, as well as have the opportunity to be featured on the Best Ever Blog, as well as on the podcast.

The acronym for this 3-step process, as I mentioned, is SOS. It stands for Safety, Ongoing communication and Summary. The first step when  a crisis occurs is to ensure the safety of both the people involved, as well as the money. So from a people perspective, for the Covid-19 crisis, it involves the safety of your residents, and then your team members… So obviously reaching out to your team members and making sure they’re okay, offering to, if they don’t do so already – for real estate investors it’s a little bit easier, because they most likely don’t have an office, but offering or allowing them to work from home… And then when it comes to the residents, what we did is we sent out a couple of websites, as well as a note to all of our residents…

So I’m just gonna go ahead and read that note here, just so if you haven’t done so already, you wanna make sure you’re notifying your residents of anything they’re supposed to be doing, important safety information, and then what you’re doing to ensure that the virus does not spread at your apartment community. So our letter read:

“Dear residents,

With the recent reports surrounding the 2019 novel Coronavirus there is an increased concern with the health and well-being of our families, loved ones, and communities. We would like to take this opportunity to remind everyone of the resources in which you can follow the preparedness, prevention and developments. For the most up-to-date information on the Coronavirus, please visit the CDC website at *link to the CDC website* or international updates at *link to the WHO website*.

We are continuing to work closely with our property teams and vendors to take extra precautions. We would request that any resident that is experiencing symptoms of illness, stay home and contact their local health provider, in line with the CDC-recommended guidance.

Additionally, please do not enter any public common areas or leasing office on the property if you are ill, running a fever, or experiencing symptoms of Covid-19. If you require maintenance services and are experiencing symptoms of Covid-19, please advice the management personnel prior to their entry into your home, so appropriate precautions can be taken for the staff and other residents.

If you are Covid-19 positive, only emergency maintenance requests will be addressed, until further notice. We appreciate your understanding and efforts to promote healthy communities for everyone who lives, works and visits the community. We are committed to providing you with the highest quality of service and we will continue to stay informed about the situation to ensure recommended measures are followed. Should you have any questions, please do not hesitate to contact the property management through your resident portal, by phone, or by email.

Sincerely, our property management company.”

In addition to that we sent out a health flier, a workplace and home handout, as well as an additional letter to the residents.

So that covers the safety side for the residents and for the team members. Obviously, the other end of that would be the investors as well, which is kind of in line with the money aspect, because it’s the passive investors’ money from the deal, so you’re obviously worried about their health, but also making sure that you’re able to keep them from losing money.

At this point it’s difficult to tell what’s actually going to happen, how it’s going to impact multifamily… Obviously, the stock market has been going down; it’s briefly going up today, with talks of federal government intervention in the economy, but it’s still down overall for the past 30 days, which typically means that more money will flow into real estate. However, at the same time many people are losing jobs or being furloughed, which means they might not be able to pay rent on time. We’ll have to see how collections are impacted over the next few months and what people are saying… But one interesting strategy that we did come across as of now – and it is posted in our Facebook group – comes from Julie Fagan. Basically, she’s going to allow residents who have lost their jobs or lost income to use their security deposits to pay for rent.

For example, if a resident owes $1,000/month in rent and put down $1,000 security deposit – well, then she’s going to discount the rent to $500/month, and that security deposit will cover two months’ worth of rent.

Now, in exchange for this help, the residents are required to sign a new lease, so a new 12-month lease or a 6-month lease, depending on what the original lease was… As well as sign up for security deposit insurance. Basically, it’s an additional $10-$15 per month to cover the security deposit experience.

This is a good strategy, because it helps the residents, but it also allows you to not necessarily get your full month’s rent right now, but over time you make up the difference with that security deposit. I’m sure we’re gonna hear a lot of interesting strategies over the next few months, of what people are doing to collect rent in this time, so definitely stay tuned to our Syndication School series, as well as our Best Ever Show community on Facebook, because we’ll be having conversations with actual investors about that in the future.

So that covers S of the SOS, so Safety of the people. Safety of the money is something that’s to be determined, and we’ll really need to determine if your property is gonna be impacted by these lower rent collections.

Number two is Ongoing communications. Obviously, you initially let your residents know about the crisis, make sure they’re okay. Any initial safety precautions that need to be taken… And then obviously, on an ongoing basis, give them updates if anything changes. So if the local government or the state government or the federal government makes any changes at things that you’re required to do, any new safety information, make sure you’re continuing to communicate with your residents… But also make sure that you communicate with your passive investors.

For us, we’ve sent out one notification to our passive investors so far. It’s pretty similar to the information we sent to the residents about important safety information, but we also obviously talked about the money situation.

What we said in our email is:

“We have been working closely with our property management partners; it’s too early to tell what impact the pandemic will have on our properties, but we will have a better idea during the April monthly email update, and will provide a status update at that time. That gives us a chance to see how April rent collections look, and also what impact the virus has on the markets, and some markets where our properties are located. As a reminder, your monthly update is sent out by this date.

For March,  you will receive your monthly distribution as planned. If you would like to read the official communication our residents have received, you can click the links below to view documents that our property management companies sent out to residents” and then we’ve got links to those.

“Lastly, our team and our property management partners are getting updates via CDC and WHO, and local health departments in the cities and states in which we own. Our teams are then communicating the information to on-site staff to adhere to. Some of those updates are…” and we go through a list of things like “Stay home if you’re sick. Wash your hands with soap. Avoid close contact with people.”

Then we ended up with saying “We will send a more informed update on any business implications during our next monthly update, which will be received by this date.”

Obviously, that’s the first point of communication. Once we see how rents are impacted, we send another update in a month from that communication, so in about 20 days or so… And again, if any of the safety information changes, you obviously wanna include that in there. And then just continuing to monitor the situation, and letting them know that you’re continuing to monitor the situation. “Here’s what we’re actually doing to alleviate any issues if there are any problems that we come across” and then when you will contact them again.

Basically, the structure of the ongoing communication is make sure you’re addressing what you said you were gonna do before. In our first email we said “Hey, we’re gonna reach out on this date. And here’s the information that we’re gonna include in that correspondence”, so making sure that you are actually doing it on time, and doing what you say you’re going to do… And then also explaining in that email what you plan on doing in the future, and then when you’ll follow up with them again.

It’s hard to tell how long this will go on for, how long the ongoing communication, the O aspect of the SOS will continue for, but until this goes away, you wanna make sure that you’re continuously communicating with your investors and continuously communicating with your residents… But make sure you’re not over-communicating. You don’t wanna send daily updates. Make sure you’re only sending updates when you have substantive information to provide, as opposed to doing hourly updates or daily updates.

And then lastly, once we’re past this, a summary. Once things return back to normal, obviously send your residents a notification that things are going back to normal. We go back over things that had changed, that are now going back to normal – because who knows how long this will take [unintelligible [00:14:25].12] At the same time, with your  passive investors, you wanna summarize any actions that were taken during this time. If distributions or operations were disrupted, what the plan is to get those back on track, or how long it’ll take to get those back on track, and really anything else that’s relevant to your passive investors or your residents that is going to happen after this event has occurred that’s not usual; you’ll wanna let them know in the last summary email.

Overall, when a crisis occurs like the Coronavirus, you wanna follow the SOS approach – the safety of the people and of the money, the O is Ongoing communication to provide your investors and your residents with status updates, and then providing a summary once things return to normal.

As I mentioned, we’re going to be having a lot of conversations about the Coronavirus on our Facebook group, that is the Best Ever Show community on Facebook. Make sure you are following that, so that you can take advantage of not only all of the information that will be provided, but you can provide us with input as well… And then also have the opportunity to be on the podcast – this podcast – as well as on the blog.

Until then, make sure you check out some of the other syndication school series we have, download our free documents, stay safe, have a Best Ever day, and we will talk to you tomorrow.

JF2022: Business Credit Tips With Stephen Wible

Listen to the Episode Below (00:22:47)
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Stephen is a former Marine Corps Veteran and has owned 300+ Rental Units. He is a business credit expert, in fact, he wrote a book called “The business credit; the complete step by step guide.” He gives some great advice on how to build and maintain credit for your business and shares the three most common mistakes people make when it comes to getting approved for a loan. You will also learn what you can do if you already have a bad business credit score.

Stephen Wible Real Estate Background:

  • Marine Corps veteran, sold, invested, and managed real estate, owned 300+ rental units
  • Business credit expert specializes in helping obtain and manage credit for their business
  • Based in Tampa, FL
  • Say hi to him at https://businesscreditspeaker.com/

 

Best Ever Tweet:

“We call that the “secret sauce,” if you know who reports and who will approve you, then you can very simply just follow a step by step process I laid out in my book ” – Stephen Wible


TRANSCRIPTION

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

Steve Wible: I’m great! How are you, Joe?

Joe Fairless: I’m great, and looking forward to our conversation. A little bit about Steve – he’s a former marine. Thank you for everything you do for our country, first and foremost. He has sold, invested and managed real estate. He has owned 300+ rental units, he is a business credit expert… In fact, he wrote a book called “Business Credit: the Complete Step-by-step Guide”, and he specializes in helping obtain and manage credit for your business. Based in Tampa, Florida. With that being said, Steve, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Steve Wible: Absolutely. Right now I’m working for a company called Credit Suite. I’m the head of their business development. And the reason I was attracted to this company is I was around for the ’08 crash, as I’m sure most of your listeners were, and when it all went down, I was able to walk away with almost perfect credit. Now, the question is how did I do that, right?

Joe Fairless: Huh… What did you have going into it in terms of portfolio

Steve Wible: I had at one point 300 single-family units, and I also had a 35-unit apartment complex, and a 187-unit apartment complex.

Joe Fairless: So in 2007 what did you have?

Steve Wible: In 2007 I had 234 left.

Joe Fairless: Cool. Alright, good stuff.

Steve Wible: So when it all crashed, [unintelligible [00:02:24].00] single-family homes and whatnot; that has some effect. However, none of my business debt affected me at all, and I’m talking high-limit credit with Home Depot, with Lowe’s, Visas, Mastercards, five different vehicles in the company name… None of it was against my credit.

Joe Fairless: Just so I’m clear – so you lost those properties, they were given back to the bank, and it didn’t affect your business credit. Am I hearing you correctly?

Steve Wible: It didn’t affect my personal credit.

Joe Fairless: It didn’t affect your personal credit, but you were foreclosed on with those properties.

Steve Wible: Kind of. I actually made a deal because I felt bad for the tenants. I saw what was going on… I didn’t do what a lot of people did, which was just collect the rent and not pay the mortgage. What happened is the Section 8, which was the majority of my tenants, they have what’s called Fair Market Rent, FMR. And as the market crashed, so did my rents. So I went from collecting anywhere between $800 and $1,000 per unit, down to as low as $250 and $300/unit.

Joe Fairless: Okay…

Steve Wible: So I went from making X amount of dollars per month to losing close to $100,000 a month.

Joe Fairless: Okay.

Steve Wible: So I went to the banks and said “Look, what I don’t wanna do is just collect the rent, not pay you, take you a year to foreclose… These are families; I don’t want a sheriff showing up at their door. I’ll make a deal with you.” It was ten different banks. “I’ll deed them back to you, in lieu of foreclosure, if you honor the leases for the next two years. And you can collect the rent; I’ll sign the rents.” And it worked.

I was one of the few I knew that did that. A lot of my friends walked away with a lot of cash, I walked away with my hat in my hand. But all the business debt I had created, in other words the operational debt – everything from the computers in the entire office, all the vehicles, all my credit with Home Depot and Lowe’s, the Visas, Mastercards, American Express… All of it. None of it was tied  to me personally. So I literally walked away clean.

Joe Fairless: So you said your personal credit didn’t get affected, but then you also said your lines of credit with your businesses were not affected either.

Steve Wible: No, no, no.

Joe Fairless: Help me understand this.

Steve Wible: Okay. Accidentally, I figured out how to build my business credit profile. It took me a long time. When I started getting approved for credit in the company – in other words, tied to my EIN, not to my social.

Joe Fairless: Got it.

Steve Wible: When I shut the company down – because obviously the company was bankrupt, there was no more assets; and I didn’t file bankruptcy – the debt was just wiped out. It was not tied to me, nobody came after me personally… I was also one of the top five RE/MAX agents in the States… So when I moved to Florida — because everybody knew me, at this point nobody wanted to let me sell their house… [laughter] So I moved to Florida, I got my real estate license, doing really well, and then I found this company Credit Suite, who was teaching what I had learned through years of business. They were teaching people to do it in 5-6 months. And I said “I have to come work for you.”

Naturally, I called them, I asked for a job… First job ever. 53 years old. I’d never applied for a job other than the marines… And they turned me down. [laughs] Anyhow, they eventually called me back and I ended up working for them… And I didn’t even know how little I knew until I got here. In other words, I was good at it, but I had no idea. So anyways, that sort of attracted me to this company.

Joe Fairless: What were you doing, without prior knowledge of what you now know with Credit Suite – what were you doing that was effective for building the credit in your LLC name?

Steve Wible: That’s a brilliant question. So what I did is I took a shot in the dark — you could imagine how much I was spending with Home Depot, right? I took a shot in the dark and said “I’d like a Home Depot credit  card, but I don’t wanna sign for it. I’m spending 50k to 100k every month with you”, and I got approved.

Well, once I had that approval, I didn’t realize it was reporting on my business credit profile. Then it was easy to get Lowe’s, then all of a sudden Ford was approving me, I was getting Visas, Mastercards, AmEX… All of a sudden, my profile was building organically.

Joe Fairless: Did you say Ford, the car company?

Steve Wible: Yes.

Joe Fairless: Okay.

Steve Wible: There’s actually a couple – Ford and Ally. Both will give you credit in the company name, not tied to you personally.

Joe Fairless: Okay.

Steve Wible: So I looked at that as “This is beautiful.” So when I got to Florida, it was the first thing I started to do. I started a business and started to build my business credit again. And look, it’s not really about if things go bad; obviously, you wanna protect yourself. But it’s more about protecting your personal credit for when those opportunities show up.

As we all know, personal credit is based on a series of things. One, how you pay your bills, two, how much debt you have, three, and most importantly in my mind, your utilization. Well, business credit doesn’t operate that way. So you can run up your credit cards and your debt max; it doesn’t affect your business credit score, and it absolutely doesn’t touch your credit score, because you didn’t apply, you didn’t sign. So I was able to keep my credit score in the 700’s while still generating debt. So then if a great deal came up – let’s say I found an apartment complex today that just fit my needs, my credit score hasn’t been touched, so I have no problem buying it.

Joe Fairless: Got it. So that’s what you were doing before… And then you jumped on board with Credit Suite. Now what are some enhancements to that process?

Steve Wible: Well, I only knew about the things that I knew about. I didn’t realize there were hundreds of people who would give me credit in the business name. And there is a step-by-step process. When you first start your company – and I’m talking like today; if you register your company today, within 30 days I’ll have you some sort of business credit. I didn’t know there were starter vendors out there, I didn’t know about Sprint, I didn’t know they offered business credit, I didn’t know about Apple, Dell… I didn’t know about all of these people.

There’s so many people who will give you business credit, but it has to be done in a very specific order. In other words, there’s starter vendors, you need an X amount of trade lines reporting, and then you can go on and on from there. But more importantly, you can’t get approved for even your first one unless your business is set up credibly. Now, that immediately brings questions to people’s minds, “What do you mean credibly? You mean I’m not credible?” No. But the biggest defense that banks and lenders and creditors have is to protect against fraud. They wanna protect against fraud. So they have certain steps that they follow – and it’s all done through artificial intelligence – to make sure that your company is legit, and it’s not  a fraudulent application.

If you don’t mind, I’ll give you a couple of those things, because I’ll bet you 90% of your audience is gonna fail these 2-3 things I mention.

Joe Fairless: Alright, what have you got?

Steve Wible: Alright, first thing is – if you’re old enough to remember back in the day I used to pick up the phone and dial 411 and get Joe’s pizza up the street… That database still exists today, and it’s actually the first database that the banks check. The National [unintelligible [00:08:44].15] Business database. Unfortunately, if I ask most business owners for their phone number, they’re gonna give me their cell phone. Well, that you can’t list with National [unintelligible [00:08:51].25] database. It has to be a legitimate phone number.

Now, I know not everybody has a phone on their desk or a phone on their wall, but you can get what’s called a virtual phone number. And most of your audience I’m sure is gonna be familiar with Google. Google has their Google phone number. That’s the right path, but you’re on the wrong alley. They own that number, where if you buy it or rent it from a company like RingCentral; that’s your number, because you’re paying for it, and that’s listable with the National [unintelligible [00:09:19].06] database. That’s the first thing, and I see that all the time. I actually had a guy get approved for half a million line of credit when he was denied pretty [unintelligible [00:09:24].02] and the only problem was his phone number.

The second thing I see is the address… And it’s not that using your home is  a problem, because it’s not. You can use your home, you can use an actual business address, or you can use what’s called a virtual address. And there is a big difference between a virtual address and a PO box, and that is the number one reason people fail – they’ll put down a PO box.

Joe Fairless: Okay.

Steve Wible: So a virtual address is actually a very specific industry. They won a lawsuit in the ’70s to be recognized as an actual office. So you can go to places like Regus — I think every city in this country has a Regus. You can run a virtual office from them. What you can’t do is like your buddy owns a grocery store and you have a backroom office in his store. That doesn’t work. So that’s the second thing.

The third thing – and this blows my mind – is the website and email address. I see people who have great websites and then their email will be Iminbusiness@gmail.com. [laughter] Or even worse, Iliketoguff@gmail.com. It’s unbelievable.

Joe Fairless: Right. Needloanasap@gmail.com.

Steve Wible: Exactly. So what we recommend — and look, Gmail has the G Suite, which is great, so you can personalize it. Like ours, info@creditsuite.com. Or purchasing@creditsuite.com, or accounting@creditsuite.com. Whatever it is, it needs to be a legitimate business email address. Now, those three items, 97% of business owners I talk to fail one of them. And if you only get one wrong, you’re denied. Only one. Now, there’s a series of ten.

One of the things lenders look for is they look for congruency. In other words, across the entire internet they wanna see that your business address matches everywhere. Your phone number matches everywhere. That you have a fax machine, believe it or not, in today’s day and age. They’re looking for that. An 800 number is added value.

Joe Fairless: You have to have a fax machine?

Steve Wible: I know, it’s hard to believe. Nobody uses them, except digitally… But guess who does use them? Banks. Banks and lenders use fax machines. And I’ll put it this way – if Walmart wanted to buy your product and they sent in a credit app, and on the credit app they had the purchasing agent’s cell phone, no fax number, and it had purchasingforwalmart@gmail.com, would you think that was legitimate?

Joe Fairless: [laughs] Well, the email I wouldn’t think was legit, but no fax number – I’d be like, “Alright, welcome to 2020”, right.

Steve Wible: I agree with you, because I don’t have a fax. But you can get a virtual fax. When you get a phone number, you can add on the fax for free. And I’m sure you’ve them where you call up and “This is the fax. Press 1, or 2”. It’s the same thing.

Joe Fairless: Okay, got it.

Steve Wible: So there are the minor things, and there’s other items that go along with it as far as making sure everything matches. Like I said, that you have a real business bank account. I’m amazed at how many people don’t have business bank accounts. They run everything through their personal account.

So all these little items add up to a big mess if you don’t have them in order. And we have tons of videos out there. If you go to YouTube and check out our videos, we literally teach everybody the first steps… Because we want all the people to succeed.

And then once you have that set up properly, then getting credit is easy. You just need to know who to go to. Because the big issue is not everybody reports that gives you credit. For example, I had a printing company; we did about 25 million dollars. So you can imagine, because the margins aren’t big in print manufacturing, how much paper I must have been buying. How much ink I was buying, how many plates, and film etc. Well, almost none of them reported, so I wasn’t doing anything for my business credit profile. I had tons of credit, but nothing was reporting on the business.

So you need to know who to go to, and that’s the hard part, that’s the moving target. We call that the secret sauce. If you know who reports and who will approve you, then you can very simply just follow a step by step process and build it up… And I lay that out in my book, and certainly we lay it out in our program.

Joe Fairless: You mentioned a half a million line of credit earlier… Can a real estate investor get a line of credit from somewhere through this process, that allows them to go buy a property for cash?

Steve Wible: Yes and no. It’s gonna depend on their business. We look for the three C’s – cash, credit and collateral. Obviously, collateral – hard money and they could easily do it. My friend and I had a line of credit of two million with a hard money company.

Joe Fairless: At what rate?

Steve Wible: Back then? 12,5%…

Joe Fairless: What year was this?

Steve Wible: It was the ’90s through mid-2000.

Joe Fairless: Okay.

Steve Wible: It was as high as 18%, and as low as 10%. And I made money. Can you imagine?

Joe Fairless: Right… What about now?

Steve Wible: I’ve seen them — and I’m not a financial office; we have them and we definitely do hard money here… But I’ve seen them as low as 6%-8%.

Joe Fairless: Okay.

Steve Wible: That’s just not my department. So I hate to say 7% and have 1,000 of your listeners call up and be like “He lied.”

Joe Fairless: Yeah… [laughs]

Steve Wible: And obviously, rates just dropped tremendously a couple days ago… So it’s a moving target.

Joe Fairless: So from a business standpoint for a real estate investor – you’ve got a hard money department, but in terms of building your business line of credit it can be beneficial for especially people who are managing their own properties, because that’s where you’re gonna be having a large outlay of cash, like fix and flippers, and then you’ll be able to use credit with Home Depot or wherever else…

Steve Wible: Exactly.

Joe Fairless: …and won’t be out of pocket.

Steve Wible: Exactly. And here’s what’s great about it — and I know things have changed a little bit with the hard money world, but back when I started, they would fund the purchase and they would escrow the construction. I’m assuming that still happens today… But what I would do is I would get them to fund the purchase, they’d escrow the repairs… I would do all the repairs via my Visas, Mastercards, American Express, and my Home Depot and/or Lowe’s credit card, depending on what I was buying… Then they would release the escrow, I would keep that cash and pay off the credit cards once they have sold. In other words, I was taking my profits out early. That’s how I was able to leverage; instead of buying one or two or three or five, I was buying blocks of ten.

Joe Fairless: Got it.

Steve Wible: Does that make sense?

Joe Fairless: It does make sense, yes.

Steve Wible: My brother was amazed. We were partners, and he said “How do you have X amount of hundreds of thousands in the bank already?” I’m like, “I’m letting Home Depot finance this. Why not?”

Joe Fairless: And then with this approach, what if someone has a business and the credit is shot right now? What do they do?

Steve Wible: The business credit?

Joe Fairless: Yeah.

Steve Wible: Well, there’s a couple of options. Time and greed is important. In other words, after you hit that two-year mark, you start noticing that the limits go higher and higher and higher… So I’d never tell anybody to shut down a business if it’s not necessary. If their business credit is shot, like unrepairable, then that’s probably your best option. Start a new company, different address, different phone number.

I’ll give you an example. Dun & Bradstreet, their reporting system – they give you a score. Have you heard of the PAYDEX score?

Joe Fairless: Yup.

Steve Wible: Okay. So 80 is perfect. I’ve seen people get approved at 78, 77… That means you’ve paid late a bunch of times. But as you add lines, what happens is that has less and less impact. Because business credit is strictly based on how you pay your bills. So if you’re late five or six times, five or six different vendors, but now you’ve added 20-25 vendors, you’ll be a 79 and you’ll be approved.

Now, the second part of that is if it’s not truly your debt – easily disputed. Easily disputed. I’ve seen that. And the third is, typically after three years it all disappears anyway.

Joe Fairless: What do you mean, “it all disappears”?

Steve Wible: If it’s not active, it just disappears. It just disappears off your report.

Joe Fairless: If your account is not active?

Steve Wible: Correct. Let’s say you’re negative and you didn’t pay your bill. Or you settled it, but you were 180 days late… A couple of years from now it’s gonna be gone. It’s not like personal, where it stays on there for 7-10 years. With the business credit it’s gone fairly quickly.

Joe Fairless: Got it.

Steve Wible: But again, if you have a negative — I’m not talking about a bankruptcy or a UCC judgment; that’s different. But when we’re talking about vendor credit, or regular credit cards, or even a vehicle, or things like that, you can add enough trade lines to certainly outweigh the negatives… Unless you just have so many negatives that I would look at your report and say “You know what – better off start a new company.”

Joe Fairless: When you work with someone who’s looking to do this process, what are some things that surprise them?

Steve Wible: That’s a great question. The first answer that jumped in my mind is how fast it goes. I’ll give you an example. I can show you a  business credit report… And by the way, if you have nothing reporting  – and this is important for your listeners to know – you will get a failing grade. Automatically, a failing grade. But even adding one trade line will bump your score all the way up.

I show an example during my webinars of someone who had a failing grade, it says high risk, because there’s nothing reporting, they added one trade line under $100, their score jumped all the way up, and they were recommended for $2,500 in credit.

Add three trade lines and it suddenly goes to $5,000. Ten trade lines, $25,000. $30,000. $100,000. It’s scalable. So that’s usually what surprised people, how quickly. Unfortunately, the beginning, when you first start, feels like it takes forever. It takes about 60 days, because you’ve gotta make sure you’re set up properly. Find the starter vendors, apply, get approved, buy something from them, then pay the bill and then they report. So you can imagine that takes 60 days.

Joe Fairless: Yup.

Steve Wible: So once they get through that though, it’s like a waterfall. It just keeps coming. And then what’s really cool about it – and this surprises a lot of people – is once you have enough trade lines reporting, the same thing that happens to you as a consumer begins happening to you as a business owner.

As a consumer, if you have 680-700 credit score or higher, you’re getting offers in the mail all the time. Credit card offers, personal loan offers… You’re always getting offers in the mail. Well, they don’t just magically appear. Those lists are being sold. Not your personal information, but “Hey, I wanna buy a list of people between 700 and 800 credit score in this zip code”, and then they mail you. Same thing happens in a business. So suddenly, instead of you chasing the money, the money is chasing you.

Joe Fairless: Based on your experience as not only a real estate investor, but clearly in the credit building business for businesses, what is your best real estate or business advice ever, as it relates to your area of expertise?

Steve Wible: My absolute best would be – I don’t care  if you’ve been in business 20 years or you’ve just started today – make sure you set up properly, because that’s gonna hold you back. One negative, one thing that’s set up wrong will stop you from ever moving forward, and you’ll be frustrated all the time.

Joe Fairless: Can you fix it retroactively?

Steve Wible: Sure, I talked about it. Phone number… If you’re using your cell phone and it’s everywhere, get a virtual phone number; go back, fix your website… Wherever your phone number is listed, change it. Go to the IRS. Go to the Secretary of State. Wherever that phone number is listed. Because they can find that information in a matter of seconds. Not seconds, tenths of a second. It’s all artificial intelligence.

And the  second piece of advice I would give is don’t fall for the shelf corporation scam.

Joe Fairless: What is that? Real quick.

Steve Wible: People buy aged corporations… I started an LLC which I still have, 20 years old. I could sell that. But it’s not like it was in the ’70 and ’80s, where the banks looked at your data of incorporation. Now they have access to everything, through LexisNexis. So they look at the date of your corporation starting as the day you opened your bank account. So if you have a 20-year-old corporation with a bank account that’s one week old, guess how old you are?

Joe Fairless: One week?

Steve Wible: You’ve got it. But if you put down 20 on the application, they’re gonna mark your file as fraud. And they will report it to Dun & Bradstreet as fraud.

Joe Fairless: That’s a problem.

Steve Wible: Once you’re marked on Dun & Bradstreet, there is no removal. Once it says “fraud”, you’re done. That’s it. Shut down the company.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Steve Wible: I’m ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:21:01].28] to [00:21:51].10]

Joe Fairless: Alright, what’s the best ever book you’ve read as it relates to  your business or something relevant to real estate?

Steve Wible: Gary Keller, The Million Dollar Real Estate Investor.

Joe Fairless: Ah, yes. Okay. What’s the best ever way you like to give back to the community?

Steve Wible: The best ever way to give back to the community – back when I was flipping houses, I was giving away homes for homeless people. I’d fix up a property and give it to a homeless person. Obviously, through a charity, through a fund.

Joe Fairless: Sure. And how can the Best Ever listeners learn more about what you’re doing?

Steve Wible: Oh, that’s simple. Go to CreditSuite.com. If they wanna reach out to me, they can certainly reach out via info@creditsuite.com.

Joe Fairless: Steve, thanks for being on the show, giving us some specific tips for setting up our business credibility – virtual phone, address, website with email address and concurrency across all the internet with that stuff, as well as other things… And giving us some examples of what we can do with it as well. Thanks for being on the show, I really appreciate it. I hope you have a best ever day, and we’ll talk to you again soon.

Steve Wible: Alright.

JF2018: Debunking The Most Common Money Raising Myth | Syndication School with Theo Hicks

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In this episode, Theo joins the myth busters crew and helps you understand why the idea of “you must have a history of multi-family deals to raise money for syndication.” He explains why as long as you have experience in either 1 of 2 other options you can still raise money for your apartment syndication. Listen to the full episode to learn what those two other options are. 

 

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

 

Best Ever Tweet:

“The concepts of creating and executing a business plan apply universal, apply to real estate and any other endeavor you go into.” – Theo Hicks


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome 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 Syndication School episodes, on the podcast as well as in video form on our YouTube channel, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer some free documents. These are free PDF how-to guides, PowerPoint presentation templates, Excel calculators that will help you scale and grow your apartment syndication business.

In this episode we’re gonna do some myth busters on this show, and we’re going to debunk a very common money-raising myth that I’m sure you’ve heard countless times; it’s out there on the internet, in podcasts, on forums… People say that you need to have a strong track record in multifamily in order to raise money for apartment syndication.

The idea is that you haven’t done a large apartment deal before, and you want to raise capital from people to do your first apartment deal… But since you haven’t done one before, no one’s gonna give you their money, no one’s gonna trust you; they’re not gonna think you can do it, they’re not gonna think you can conserve and grow their capital, so they’re gonna go ahead and go with someone else who’s gotten done 10, 20, 30 syndication deals… Because it’s less risky.

We’re gonna debunk that in this episode, and then we’re going to talk about the things that you actually do have to do in order to raise money. Just because you debunk one myth doesn’t automatically mean that the opposite is true, that you don’t need a strong track record… Because you actually do need a strong track record, it just doesn’t necessarily need to be in multifamily. Because if that was true, the majority (if not all) of apartment syndicators just flat out would not exist.

There are people who do have experience in multifamily who become apartment syndicators. Maybe they had a lot of money and they were able to buy an apartment community with their own money, and they bought it, they managed it, they sold it, and they used that experience to raise money from people, so that they can scale their business, because they don’t have enough money to do 1,000 units a year, only 100 units a year. Or maybe they worked for a large multifamily institution as an asset manager or as an underwriter, or as a property manager, or had some other involvement in large apartment communities that covers one aspect of the apartment syndication business plan.

Maybe they were a mortgage broker for large apartments, maybe they were a property manager for large apartments, things like that. But many more, if not most – I would say the vast majority of apartment syndicators, including Joe, did not have any involvement whatsoever with large 50+, 100+, 200+ apartment communities before doing their first deal. So that alone basically debunks it.

It would be impossible for anyone to raise money if they needed to have experience raising money. It’s impossible to do something if the only way to do it is having experience doing that thing. It doesn’t make any sense.

So for any syndicator, they were at some point in their careers where if you’re someone who has this belief, if you do believe in this myth, are sitting where you are right now. They wanted to purchase a large apartment community, they wanted to use other people’s money to do that, but they didn’t have the experience. So what did they do? They didn’t let the myth of needing a strong track record in multifamily stop them from just doing it anyways, and doing it successfully.

So if you too want to debunk this myth in your mind, we’re gonna talk about the three things that you need to do, and then we’re gonna talk about something interesting that I heard at the Best Ever conference a few weeks ago, that was around the same topic, and what’s inspired this episode.

So the first thing  you need to do is you need to change your mindset… Yeah, that’s it, change your mindset. Alright, number two — no, I’m just kidding. I’ll go into that a little bit more… So not only is the need to have a strong track record in multifamily a myth, but it’s also a limiting belief, which is a story that you’ve convinced yourself to be true. It’s a powerful story, but it’s still not true, as we’ve already displayed in the opening of this episode.

The analogy that I used is that it’s like watching a horror movie about the Boogieman, let’s say; it’s just a story, it’s just fiction, but it’s such a powerful story that every night for the next 20 years before you go to bed you check your closet, you check under the bed, you check the garage, you check the basement, because you think the Boogieman is down there, because in the movie you watched the Boogieman hides under the bed, hides in the closet, hides in the basement. But as we all know, the Boogieman isn’t real, and neither is this limiting belief about the requirement to have a strong record in multifamily.

The main difference between a syndicator who’s done a billion dollars’ worth of deals and an apartment syndicator who wants to do deals but hasn’t done one before, is this belief in the Boogieman. So just remember that the Boogieman isn’t under your bed, he’s not in the basement, he’s not in the closet, and you don’t need a track record in multifamily to raise money from people.

If you want some more practical advice, if the Boogieman story isn’t enough for how to start working on changing your mindset, some more practical things  you can do – check out our Success Habits category at our blog. So go to thebesteverblog.com, check out the goals and success habits category of blog posts, and there’s lots of blog posts on there that you give you practical things that you can start doing today to change your  mindset, and then just apply the concepts to this belief, and the fact that you can’t raise money because you don’t have any experience in multifamily.

Now, as I mentioned in the beginning, the myth is only partially a myth. The first part, the part that you need to have a strong track record, is actually true… It just doesn’t necessarily need to be in multifamily. There’s two different areas that you need to have experience in. It can be one, the other, or both… But it needs to be at least one of these.

The first one is a strong track record in business, because investing in real estate in general is running a business. You hear this all the time, “Treat your real estate investing like a business.” But apartment syndications are even more like a business. Essentially, what you’re doing as a syndicator – and as an investor, but there’s a lot more moving parts for the apartment syndications – is that you’re creating and then you’re executing a business plan. So you determine what you’re going to do, and then you actually do it.

So step one is determining what to do, making sure it’s the right thing to do, and then the second part is actually executing your plan. If you have a strong track record in business, then you have the skills to create and/or execute a business plan. It might not be obviously specific towards real estate, but the concepts of creating and executing a business plan apply to real estate and really any other endeavor that you go into. If you know how to execute your business plan, then you can do apartment syndications.

Now, what do I mean by having a business track record? It doesn’t mean that you just graduated from college and maybe haven’t even started a job yet at a large corporation like a Fortune 500 company, or that you’ve been there for a few years, in the same role, and gotten some positive feedback from your boss, or you feel really  good about what you’ve done. That’s the experience, but that’s not a strong experience. It also doesn’t mean that when you are a kid you started a lemonade stand or a newspaper delivery business – unless, obviously, it was a massive success. Then [unintelligible [00:09:24].27]

I believe I talked about this on Syndication School – the two tips that you can learn from a lemonade stand. I guess a lemonade stand partially works, because we did do an episode and a blog post about how a lemonade stand can help you in your real estate investing business… So definitely check that out; it’s funny, it’s cute, and it’s packed with some pretty solid advice.

So those don’t count. Again, a lemonade stand kind of counts, depending on how you do it… But what does count is you’ve either started your own business – and it doesn’t really matter how big the business is, how small the business is – and it was successful, which means it was profitable. So you either made money on an ongoing basis, from sales or whatever, or you created the company and then sold it for a profit. So that’s one example of a strong business background, because you created a business, you created a business plan and you successfully executed the business plan, which is reflected by the fact that you made money.

Then the second one would be that you can be the guy that graduated from college, got an offer to work for a Fortune 500 company, but you need to have also been promoted multiple times in that company. So if it’s a large corporation, to like a director level or higher; if it’s a smaller company, there’s not really room for promotions or growth, so there has to be some other measurable metric that shows that you were successful at what you were doing. So if you were in sales, for example – I know there’s not a lot of room for promotion in certain sales roles, because that’s what I used to do… But if you continually grew your customer base or grew your sales revenue, or won awards for Salesman of the Year – these types of things would be relevant to having a strong business background, because all those things show that you can create and  you can execute a business plan. And that’s what you want to have here, because 1) you need to be able to do that to be successful, and 2) you need to be able to portray that to your investors.

If you don’t have any business experience and they ask “Why should I invest with you? What skills are you bringing to the table?” and you say “Well, I just got hired at a really big company”, that might work for some people, but you’re not gonna be able to grow a syndication model off that experience. So that’s the second thing you need to do.

So the first is mindset, the second is business experience… The other experience that you need to have if you don’t have business experience – what you should have and is very helpful to have, even if you do have that strong track record in business experience, is to have real estate experience… And I guess to be more specific, I’ll say non-multifamily-related real estate experience. Here you have  a little bit more flexibility than you do in the business realm, because you really wanna be involved in real estate in any realm, and then use that experience to transition into apartment syndications and raise money.

So you can be an investor, a wholesaler, fix and flipper, single-family rentals, small multifamily rentals, a developer… It can mean that you were a property manager, or worked for a property management company, it can mean that you taught other people how to become an investor – that’s what Joe did – it can mean you were a broker, a realtor, a lender, a mortgage broker… Some sort of involvement in real estate. Because when you’re involved in real estate, you understand how the transactional acquisition process works, as well as the management and disposition of real estate. So you’re specialized in real estate, you already have an insider knowledge of how the process works; now all you need to do is apply that knowledge and those skills that came from that knowledge to the larger apartment communities. So real estate experience that’s not necessarily related to multifamily is a requirement if you don’t have the business background, and a huge plus even if you do have that business background.

In conclusion, thinking that you need to have a strong track record in multifamily before you raise money for apartment syndications is a myth; it is similar to the Boogieman – it might be a scary myth of raising money without having the multifamily experience, but it’s still not true. People do it all the time, people have done it all the time, and people will continue to do it all the time.

Then once you’ve got these three things covered – the mindset, the business and the real estate experience – you’ve got most of your foundation set. The last thing you need to do – which is what you’re doing right now – is to get educated on the apartment syndication process. So you can buy our book about apartment syndications, you can listen to all the Syndication School series podcasts, download the free documents, you can go to our blog categories and read about apartment syndications… You can go anywhere on the internet and read and learn about apartment syndications; go to conferences, seminars, just so you understand the more specifics of the syndication process and how it either differs from whatever real estate you were involved in before, or getting an understanding of real estate in general, as well as apartment syndications, if  you  have that business background.

Now, the last thing I wanted to mention, which I think I mentioned in a previous Syndication School episode about the Best Ever conference and the top ten lessons that I learned, was about something that you can say in order to overcome an objection that an investor has about your experience.

So maybe you tell them about your real estate experience and they still say “Well, that’s all fine and dandy, but I’d much rather invest with Billy Bob Joe over here, because Billy Bob has done 20 apartment syndications, they still own 17 of them, so I feel a lot more confident investing with them. I feel  a lot more confident giving them my money than giving you my money; you have only done one deal.”

The response you’d give to that, which comes from Neal Bawa, is what he said at the conference… It’s something along the lines of – don’t see exactly how I’m gonna say it, but the overall concept applies – “Sure, they’ve done more deals than I have, but since they have so many deals in their portfolio (say 17 deals) and they’re bringing on this 18th deal, most likely you’re only going to get one-eighteenth of their attention… Because they still have to focus on all their portfolio, managing all those employees, all those investors…

So the type of relationship and the type of attention that you’re gonna get from someone who has 18 deals is gonna be way less than the amount of attention you’re gonna get from me. Because this is my only deal that I’m working on right now. In fact, since it’s my only deal, I’m basing my entire reputation, my entire business on this one deal… Because if the deal isn’t successful, then my business is not successful, and then I am not successful, and then as a result you are not successful. There’s a very strong alignment of interest… Whereas if you’re investing with this larger company, if that deal fails, they still have 17 other deals, and 17 other deals’ worth of investors who are happy. And sure, you’re not happy, but they’ve got this large business and they don’t care about you.”

Say that however you want, but the concept is that  if you’re this new investor, you can overcome that objection by explaining it around and saying “Not only is me not having experience not a problem, but it’s actually a positive because of…”

So the three things, again, are mindset, business experience and real estate experience to overcome this money-raising limiting belief that is indeed a myth… And then from there, if you have those bases covered, you need to get educated on the process so that you can speak intelligently about the apartment syndication to your investors, and then obviously increase your chances of being successful in implementing the business plan.

So that’s it for today. Make sure you check out some of the  other Syndication School series and the free documents with those at SyndicationSchool.com. Thank you for listening, and I will talk to you soon.

JF2017: How to Underwrite an Apartment Syndication Deal With No LPs | Syndication School with Theo Hicks

Listen to the Episode Below (0:14:19)
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In this episode, Theo shares how he would go about underwriting an apartment syndication deal when there are no LPs or maybe as a joint venture. He uses a simplified cash flow calculator to help him through this process and walks you through what he is doing along the way. Download the FREE calculator so you can follow along with Theo. 

 

FREE DOCUMENT: Simplified Cash Flow Calculator: https://www.dropbox.com/s/pfwff7g1vmhoi95/Simplified%20Cash%20Flow%20Calculator.xlsx?dl=0 

 

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

 

Best Ever Tweet:

“Syndication School is a free resource to teach others how to do apartment syndication” – Theo Hicks


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome 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 some in video form on YouTube, and they focus on a specific aspect of the apartment syndication investment strategy. For a lot of these series, including the episode today, you’ll get a free document. These are free PDF how-to guides, PowerPoint presentation templates, Excel calculator templates, things that will help you along your apartment syndication journey.

In this episode we’re going to talk about underwriting. We’ve already done an eight-part series covering the entire process for underwriting a value-add apartment syndication deal. So if you wanna check that out, go to SyndicationSchool.com and you will find those episodes there.

This is going to be a continuation (kind of) on that series. We’re gonna talk about how to underwrite apartment deals when there are no LPs, so there’s no one that’s actually passively investing in the deal, and when you are going to be doing a joint venture.

A lot of people aren’t necessarily going to be buying apartments through syndications. Maybe they are just learning about syndications, they wanna asset-manage the property themselves and acquire property themselves… Maybe they plan on just doing  a joint venture with certain people, where you’ve got 4-5 people who are bringing the money and doing all the work… So this  episode is gonna focus on those people.

I’ve got the simplified cashflow calculator up, and that is the free document that we gave away for the first series I mentioned earlier, about how to underwrite a value-add apartment deal… So there’ll be a link to that again to download that in the show notes.

Basically, what you wanna do – because right now the cashflow calculator is set up so that the equity is coming from passive investors; you offer them a preferred return and/or a profit split, and then based on the profit split you (general partners) get paid. Then it will project up to 10 years, but the cashflow would be to the limited partners based on their investment, based on their preferred return, based on the profit split. Then once you sell the property, it’ll calculate which sales proceeds go to them based on, again, their investment, and the profit split, and then the hurdles you have… And then it’ll calculate an IRR based on all the cashflow and all of the sales proceeds distributions.

So the first thing you’re gonna want to do to adjust this cashflow calculator so that you can set it up for either a JV or having no passive investors – which I guess it’s the same thing; when you’re doing a JV there’s no passive investors… But if you are the sole person doing the deal and bringing all the money, or you’ve got multiple people coming, the first thing you’re gonna wanna do is go to the LP/GP returns data table, which starts in row 66 columns B and C, and you’ll wanna set the preferred return to 0%, and  you’ll wanna set the LP split after preferred return to 100%. That way the cashflow calculator thinks that all the profits, all the cashflow go to the limited partners, the people who are bringing the equity. And since there are not LPs, it says LP but actually this is you.

So if you are the person who’s doing this deal by yourself, and you’re bringing all the money, then the cash-on-cash return, the cashflow, the IRRs for the overall project and to the LP on the cashflow calculator should be equal. That’s the first thing you’re gonna wanna do.

The second thing  you’re going to want to do is  you’re gonna go to the IRR calculation tab and you’re gonna want to change the Equity due at sale equal to the original equity amount… Because right now the cashflow calculator is set up so that anything above the preferred return is considered a return of capital, and it reduces the capital balance, it reduces the amount of equity that the LPs have in the deal… So that reduced amount is what is returned first to the LPs at sale, and then the remaining distributions are split. But since there’s no LPs, there really is no capital reduction… Because yeah, sure, it’s actually being reduced, but for the purposes of this, you don’t wanna have it reduced, because you want all the proceeds from sale to go to you, the one investor.

Now, once you’ve done that, the outputs of the cashflow calculator are set, and if you are funding the deal yourself, you  don’t need to do anything else. The cash-on-cash returns, the cashflows, the IRRs, the sales proceeds – those will all be what you are getting for the deal.

Now, this is a little bit different if you’re doing a joint venture, because for joint ventures it doesn’t automatically mean that all five people on the JV are bringing five equal amounts to the deal. So you’re gonna have to approach it a little bit differently and do some extra calculations offline.

The first thing you’re going to want to do is to determine how the ongoing profits are going to be distributed. A very simple breakdown would be you’ve got five LPs, and each of them get 20% of the cashflow. So you’ll go to your cashflow calculator tab, you’ll go down to the Cashflow in row 60, and you’ve got the total cashflow and the cash ROI… For the total cashflow you wanna copy those five years, ten years, however many years it is, into a different Excel calculator, and then multiply each of those by 20%, and that is the amount of cashflow projected to go to each of the JV partners.

Obviously, that’s a simple example. Five partners broken apart in five equal parts. But if you’ve got two people and one person’s got 70% and the other person’s got 30%, whatever the share that that individual gets of the cashflow, you’re gonna want to multiply the total cashflow that’s outputted from the cashflow calculator by whatever that percentage happens to be. It’ll be the year one through five, seven, ten cashflow projected to go to those partners.

Now, for the sales proceeds it’s going to be  a little bit different, because if – continuing with our example of five JV partners – only two of them brought equity, then when you sell the deal and you’ve got your sales proceeds remaining after paying down the remaining loan balance, and paying the closing costs, whatever those sales proceeds are, you’re not going to split those into five equal parts, or whatever the breakdown happens to be… Because the first portion of that needs to go back to those people who invested.

So if you go to the IRR calculation tab, if you remember, in cell H2 we set the Equity due at sale to the actual equity… It’s unlikely that the cashflow given to the people who invested is going to be considered a return of capital… Although if it is a return of capital, then you’re going to reduce that number in H2 by whatever equity was returned, and that’s how much is due at sale.

So if the total investment was eight million dollars, and from the cashflow they received you decided that their equity was paid down by two million dollars, then they’re only gonna get six million dollars at sale.

So assuming that the equity is the same and they’re not receiving return of capital, then the equity due at sale is the original equity investment… So you’re gonna subtract that from the sales proceeds, and then those get distributed to the people who brought money, based on their percentage of the equity, so 50/50 in our example.

Then the remaining balance, so the sales proceeds  minus the equity due at sale, or the original equity investment – that difference will be split between the remaining (in our example) five JV partners. So if there’s five million dollars remaining after all the equity being paid back to the people who invested, that five million dollars will be split one million dollars to each of the partners.

From there, once you know what each partner gets at sale, you can go ahead and create your data table of return projections to each member. Continuing with the example of five people with equal ownership share, year one through five all five JV partners will get the exact same cashflow amount. Hopefully it increases each year, but all five partners will receive the same cashflow number.

Then at the sale at the end of year five, for example, continuing with our example of two partners bringing the money and the other three partners not bringing any money, then those two partners that brought money are gonna get more money at sale because they’re technically getting back the money that they invested, and then from there the remaining profits are split evenly between the five, and then  you’ll have your total amount of money received at year five. From there,  you can calculate the cash-on-cash return for the people who invested, although that cash-on-cash return isn’t gonna be really relevant here, because of the fact that most of the partners didn’t invest any money anyway, so it was gonna be an infinite return on investment.

Maybe you wanna see your infinite return on investment, so you can go ahead and put that in your data table… And then you can calculate an IRR in a similar way, but again, for those who didn’t bring any money it’s gonna be infinite, because IRR is based off of money put in, and then how much money you got back out for the money you put in based off of the time value of money. Since you’ve put no money in the deal, then it’s not gonna make a difference.

But the IRR and the cash-on-cash return – those are relevant for the people who are using the cashflow calculator for their own purposes, for their own deals, or they’re the only person who is bringing the money.

Now, as I mentioned in the episodes where I went over how to do the underwriting on a value-add deal – I’ll mention it again here – it’s called a simplified cashflow  calculator for a reason. So if you go to the Welcome tab, it’ll tell you what assumptions were made for this cashflow calculator. It says that renovation costs are excluded from financing, so they’re not included in the financing… So if you want to do that, you have to change some formulas up. The asset is stabilized after 12 months, so if your renovation timeline is 18 months, 24 months, you’re gonna do some manipulation as well… And  it also assumes a disposition at the end of year five. So those are three things you cannot change with the click of the button.

But as I mentioned in those episodes as well, you wanna use this as a starting point, and then from there you wanna add tabs like rental comps, you wanna add some project summary tabs, maybe make it so you input stuff in a different page; you can make it a little bit fancier, but this is just a great starting point for people, because there’s not a lot of free cashflow calculators out there for apartment syndications that include limited partners.

What you can do, as I mentioned in this episode, is easily use this and convert it to a cashflow calculator where you are the only person investing, or you and three, four etc. amount of people are doing a joint venture.

So make sure you download this simplified cashflow calculator, even if you don’t plan on doing  a JV or investing in the deal yourself. This is a powerful tool for anyone who wants to do apartment syndications, because this is Syndication School, but there are people that might start off by doing deals themselves, they might start off by doing a JV to get their feet wet, so that they can eventually use that experience to raise capital from passive investors.

So thanks for listening… As always, these episodes are available at SyndicationSchool.com, where we talk about the how-to’s of apartment syndications. You can also download this free document, as well as the other free documents we’ve given away in the past, at SyndicationSchool.com.

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

JF2011: The Best Ever Conference 2020 Part Two| Syndication School with Theo Hicks

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This is part 2/2 of a Syndication Series Theo started in Episode JF2010 where he goes over the best tips and advice he gained from the speakers and conversations he had with other investors at the Best Ever Conference 2020 in Key Stone, Colorado. The Best Ever Conference hosts many great speakers who talk on multiple real estate investing topics but the ones Theo will be sharing today are focused on Apartment Syndication. Enjoy this episode as he explains his takeaways from day one of the conference and what he felt was very helpful from different speakers.  

Best Ever Tweet:

“As a GP this is obviously a good thing because if it’s just a straight up profit split you end up making more money, as opposed to having to give away 8%, 10% of the deal before you make a profit split ” – Theo Hicks


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes and series we offer some free PDF how-to guides, PowerPoint presentation templates, Excel calculators, things like that that will help you on your apartment syndication journey. All of those free documents, as well as past Syndication School series can be found at SyndicationSchoo.com.

This is going to be a continuation of yesterday’s episode, or if you’re listening to this in the future, the episode before this one, where we are talking about the top apartment syndication lessons from the Best Ever Conference 2020.

Yesterday (or the episode before) we talked about day one lessons, and today we’re gonna be talking about the day two lessons. The first set of lessons comes from the session called The Life of a Champion, which is the talk given by Buffalo Bills Hall of Fame wide receiver Andre Reed.

He basically talked about what makes someone a champion. The three things that he says makes someone a champion is number one, to value your huddle. Again, he’s a football player, so this is applying to football, but extrapolating this to real estate, valuing your team. Making sure that everyone on your team is on the same page, that everyone knows what the game plan, what the business plan, what the strategy is, and that everyone is executing the business plan… And then making sure that everyone is respecting each other and listening to each other’s input and feedback. That champions lead by influence and not by authority.

Number two is Know your role. Champions know what they are the best at, and they know what everyone on their team is the best at… Well, I guess, taking a step back, they know what they’re the best at, and then they create a team of people who are the best at things that they’re not the best at. They know what their team is the best at, and so they let them focus on those aspects of the business. They know what they’re the best at, so they focus on those aspects of the business, and everyone comes together to use their strengths for the betterment of the team.

Then number three is that you win some and you lose/learn some. Champions know that things are not always going to go according to plan, and that as a result they know how to handle things when everything goes wrong, and they know that once they figure things out, when they make it through this obstacle, they’ll come out the other side even stronger.

Then the fourth lesson from this talk, kind of bringing all three of these characteristics of a champion together  – he says that being a champion is not based off of luck. So valuing your huddle, knowing your role, knowing that you win some and you lose some is not something that you just luck into. It’s not the shake of an 8-Ball, as Andre Reed says. It comes from hard work, and then consciously following the lessons one through three of being a champion.

That was an interesting talk… I actually met Andre. I didn’t realize it was even him until he started passing around his Hall of Fame ring, which — I won’t say literally, but figuratively the size of my head. It was huge. I didn’t realize he was sitting right next to me at the breakfast table. I got to hold his Hall of Fame ring, which he says is one of 170 of those in the entire world.

Anyways, next is John Sebree, who was in the debate from day one… I can’t remember, I think he works for Marcus & Millichap. I can’t remember who he works for, but he’s a big-time broker. The two things that I got from him was, number one — well, I should talk about lesson number two, because yesterday I mentioned that talk about this, but… In the intellectual debate he talked about how demand is outpacing supply for multifamily… So John actually went into the numbers of this and says that housing construction has fallen short of demand.

From 2000 to 2007 there was an oversupply of 2.5 million units. From 2008 to 2020 there’s an undersupply of 1.5 million units, which means that they need to build 1.5 million units to meet the demand. So that’s going back to yesterday’s thing… But similarly tied to that is that there is increasing demand for class C assets, because most of the new construction has been for class A multifamily. So there has been and will continue to be a demand for workforce, affordable housing, which is reflected by the lower vacancy rate and higher rent growth for class C compared to class A.

Basically, they’re not building enough units, and what they are building are all class A, so there’s not enough class C properties. So the vacancy rates are really low, because people are afraid to move out because they’re afraid they’re not gonna find another place to live, which is resulting in an increase in rent… So class C is a good asset class to be investing in right now, according to John.

And then similarly, secondary and tertiary markets are in demand. Most of this new construction for class A and most of these class A deals are being built and done in these primary markets, so people are starting to move into secondary and tertiary markets as well… So you’ll wanna move there before everyone else is, and start doing deals there, because of the high competition in these primary markets. So that’s John Sebree.

Next is The Age of Data, with Michael Cohen of the CoStar Group, and Jeff Adler, which I’m sure you’ve seen… I get emails of him all the time, from Yardi Matrix. They had an interesting lesson about how to find deals. The first tip was about these on-market deals, saying that basically no matter what, you’re gonna overpay for an on-market broker-listed deal. So you need to make sure you’re buying it in a market that allows you to offset overpaying for it. They said that this is done by investing in markets with high net migration; so a lot of people moving in will allow you to offset the extra money that you pay for the deal.

More specifically on finding deals is that you can look at loan maturity data to see what owners have loans coming due soon, and then you can use CoStar or Yardi Matrix data to come up with a valuation of that property, and then reach out to the owner to buy the deal… And they’re saying how you don’t wanna reach out to them and then they ask you how much it’s worth and you say “Oh, well I’ll get back to you.” Instead, you wanna come up with the valuation first, and when they ask you that question, say “Well, based on what I have, I think it’s worth this much… But can you give me some more information, so I can confirm or adjust this number?” That was interesting.

We’ve talked about people’s loans who are coming due being good targets before, but just the extra tip of making sure you have a valuation for the property beforehand is kind of new.

Next is probably from the apartment syndicators’ perspective probably one of the better panels, because it was stories of raising capital. I’ve got three lessons I wanna go over from here. The speakers were Matt Faircloth, who I’m sure you know; he’s got a pretty big presence on YouTube. Then we’ve got Ryan Smith, and we’ve got Neal Bawa.

The first lesson comes from Ryan Smith, who says that he believes we’re transitioning from an LP market to a GP market, which as a general partner, as an apartment syndicator, that’s good news to hear, right?

He says that the margins  on apartment deals are being pinched and put under pressure, so as a result he thinks that 1) GPs are gonna do less deals that they expect this year, which may or may not seem like a good thing or a bad thing to you, but… Because they’re doing less deals, because the returns on the deals are getting lower, there’s gonna be more capital looking for deals than there are deals available.

So he thinks that the 8% to 10% preferred returns that are being offered right now are either gonna be reduced, down to maybe 6% or 4% or 2%, or they’re gonna go away entirely and it’s just gonna be straight-up profit splits. Or there’s gonna be some more  unique passive investor compensation structures in the future.

So as a GP, this is obviously a good thing, because if it’s a straight-up profit split, you’re gonna end up making more money, as opposed to having to give away 8%, 10% of the deal before you make a profit split. So that was Ryan’s prediction, and I thought that was pretty interesting.

Number two – and this is Neal – this is gonna be big for people who haven’t done many deals or haven’t done a deal at all… He says that a track record is not required to raise capital. He says that this is completely a limiting belief, and that it’s pretty easy to debunk, because no one would be on-stage talking about raising capital if they needed a track record to start raising capital… Because everyone raised money for their first deal without a track record, so obviously it’s possible.

He says that people don’t invest in projects, they invest in people, so it’s less about the deal, it’s less about your experience in this particular type of investment strategy, but it’s more about the emotional connection you have with the investor, how candid you are, how well you come across, and how specific you are that matters.

He says a great way to combat a potential passive investor who says “Well, you don’t have a lot of experience, and this guy over here has done 18 deals, so I’m gonna invest in his deal.” And you say “Well, I don’t have a track record, that’s correct, but if you invest with this syndicator who has their 18 deals, then you’re gonna get at a maximum one-eighteenth of their attention and effort… Whereas if you invest with me, you’re going to get 100% of my effort focused on this deal, and I’m actually going to stake my business, my reputation on this one deal.”

So kind of just turning the tables on them and saying “Well, sure, they have a lot of experience, but here’s something that’s negative about that. And sure, I don’t have a lot of experience, but here’s something that’s positive about that.”

Then number four was also Neal Bawa, and he was talking about the fact that you’re not gonna scale by adding more content, you scale by repurposing content. So you’re not going to triple your investor base by increasing the amount of content you put out by tenfold, because it’s just not possible. There’s only so much new content you can create… So instead you wanna repurpose content that’s already been created, which is (if you’ve noticed) something that we do a ton on the Best Ever team.

He says that for example — let’s say he records a one-hour podcast episode; well, he’ll take that podcast episode and break it down into one-minute clips. Maybe he’ll get 10-15 one-minute clips from an hour podcast episode…  So there’s one repurpose. Then he’ll take those 15 clips, take the best ones and then push those out to his investors. Then he’ll take those 15 clips and then another 15 clips from another podcast, and maybe 15 clips from another podcast, and maybe 10 podcasts’ worth of clips and then turn that into an eBook. Then he’ll take the podcast, the eBook, the shorter clips, push that out on Facebook, push it out on social media, on LinkedIn, things like that.

Basically, he said his objective and your objective should be to repurpose every single piece of content at least ten times. Not once, not twice, not five times, but ten times.

We seem to be focusing a lot on Neal Bawa in this episode, because we’re back with Neal again… He gave his advice on some 2020 real estate location trends. And I’m not gonna go too into detail on what he talked about, but basically he has his five metrics that he looks at, so I’m gonna quickly run through these.

Number one is population growth. They only invest in cities with a population growth of at least 21.25% between 2000 and 2017. Number two is median household income – he wants to see the median household income growth of at least 31.5% between that same date range. Number three is median home values. He wants to see a growth of at least 42.5% between that same date range. Number four is crime levels only invest in cities with a crime level index calculated by city data that has been gradually decreasing and is below 500. Then number five is the 12-month job growth – only invest in cities where the 12-month job growth is above 2%. So those are his five metrics.

He talked about how easy it is to look those metrics up, and then based on that, two markets that you’ve probably never heard before that are really strong in all five of those categories – St. George, Utah, and Yuba City, California. I’ve never heard of them before, but apparently, based on Neal’s metrics, these are solid locations. Other top markets were Raleigh NC, Reno NV, Gainesville GA and Asheville NC.

One of the things he said right at the beginning of his speech, kind of  setting up his talk about how important data is, is that the Bible got it wrong by one letter. He says that it isn’t the meek who will inherit the earth, but the geek. So not the meek, but the geek. Then he went into the types of things that geeks should be looking at.

Next we’ve got Frank Roessler, who’s Joe’s business partner. He talked about underwriting and asset management. He went into the asset management duties when managing a single property, as well as managing a portfolio. We’ll talk about the portfolio one.

He said that the two things that change when you’re asset-managing 20 properties as opposed to one property. Number one, managing the scale properly, so doing things like implementing a system of schedules or reminders, creating daily/weekly/monthly to-do lists, having an organized file-sharing platform where each deal has its own folder, and each project in that deal has its own sub-folder.

We’ve got delegating tasks to other team members, because obviously one person can’t wear all the hats. Not becoming too emotionally invested. Celebrating wins only for a small period of time, and then using problems as a learning experience… And then secondly is adding in more sophisticated processes – getting a revenue management software like YieldStar or LRO, doing cost segregation analysis to accelerate your depreciation, hiring a local tax protester to protest your taxes each year, because taxes are gonna be your greatest expense…

Recapitalizing, so having new investors coming and buying shares, as opposed to selling the property, to make sure the taxes remain the same… Because something Frank says is [unintelligible [00:16:00].09] increase the value so much, the taxes will increase at sale, and that’s something that investors really don’t wanna see. They don’t wanna buy a property where the taxes go up a ton… So recapitalizing is a good way to avoid that.

Doing 1031 exchanges to defer taxes, purchasing interest rate caps on floating rate loans… And then once you’ve done a certain amount of deals of debt with agencies like Fannie Mae or Freddie Mac, you can access a security line of credit, and then use that line of credit to buy deals, so that you don’t have to pay any prepayment penalties.

Something else that’s interesting that Frank said is why do you need asset management if you’ve got a great property management company. Number one is the biggest risk point is the execution of the business plan. So you can do everything right, but if you don’t execute the business plan properly, then the project is gonna fail… So there are hundreds of moving parts that need to be taken into account when executing a business plan, so having someone to oversee all the moving parts is important… Because the property management company is just one of the moving parts, but there’s a ton of other things going on that your property management company necessarily isn’t doing or isn’t responsible for, that the asset manager needs to do.

Then secondly, the property management company does not have ownership stake in the deal. And even if they did, it’s not gonna be as much as the ownership stake that you have in the deal, and their reputation isn’t necessarily on the line. If they mess up, they can go somewhere else and continue managing properties. If you mess  up, then your business collapses. So no one’s gonna take care of the property as well as you, the asset manager.

We’ve got two more lessons. Next is Taking the Next Leap – this is a panel Joe did with some of his clients, talking about how they took the leap to do more syndication deals.

One of his clients, [unintelligible [00:17:41].04] had a really funny way to build a relationship with brokers. For his first deal he said that it took three years’ worth of networking to do his first deal. It involved conversations on the phone, actually flying in-person to the market and meeting with brokers in person, wining and dining them, reviewing deals and providing feedback – all the things we’ve talked about before. Basically, everything he could to prove that he was a serious investor, who could close on the deal.

So that’s how he did his first deal, but eventually, he still after this had a hard time getting a deal. He was invited to multiple best and final offer rounds, but wasn’t able to get the deal… And then he said that he called his dad and said “Dad, I’m flying to town. I want you to go to the store and buy ten bottles of Dom Perignon”, and he went and met all ten of his brokers, gave them all bottles of Dom Perignon, and sure enough, within a week, he had a deal. So if you wanna find a deal, buy your brokers some Dom Perignon… Which I think is champagne.

The last lesson comes from Bryan Ellis, who’s the CEO and host of Self-Directed Investor Radio, selfdirected.org. He was talking about the Elite Capital-Raising Webinar Strategies. Basically, talking about how to create the best webinars.

He said that the first thing you need to realize is that people aren’t investing based on rationality, they are actually rationalizing. So he says that when someone sees a webinar, the first thing that happens is they have an automatic response to the deal. Something that [unintelligible [00:19:10].01] they have no control over whatsoever; it automatically just happens, similar to if you put your hand on a hot stove and you pull your hand away automatically. You don’t put your hand on there and say “Huh. This hurts. I think I’m gonna pull my hand away now.” So that’s number one.

Then after that they have this automatic response result and emotional stimulus, which is the gut feeling they have about the deal and what you’re saying to them. So do they like, do they not like it, is it scary, is it interesting? Then after that, they will then think about all the data and facts that you present to them about the deal, and then from the automatic response, it’s resulting in emotional stimulus, and the analysis of the data and facts, they will have their impression of the deal. Now that they have the impression, they will go back over those three points and they’ll pick out all the different pieces that make the most sense to them and support their impression, and they ignore the rest. And then they decide. So basically, they decide on their impression of the deal, which comes from their automatic response and emotional stimulus, and not the facts and the data.

Most webinars focus on the facts and the data and not the emotional stimulus and the automatic response. So a few tips that he gave about how to get more capital commitments from fewer investors, with less resistance and less time, which is obviously focusing on the automatic response and the emotional stimulus, is number one, create questions in the mind of the prospects. Don’t answer every single question; make sure you leave some unanswered questions that can only be answered by reaching out to you and taking the next step that you want them to take.

Number two was to create urgency by design, so let them know why investing now will be better for them, and then number two was to have someone else tell your prospects why they should invest. This is gonna be ideally someone who’s more credible in the eyes of the investors than you, and this could be an example of someone who’s currently investing in your deals. An example that Bryan gave is he had someone else that was actually a speaker come on stage and talk about how great his services were.

He said that “I’ve gotta come up here and say the exact same thing, but you’re persuading more by him coming up and saying how great my services are.” That’s Bryan Ellis, the last lesson.

Those are the syndication lessons from day two. Again, the day one lessons, all of them, and the day two lessons, all of them, are on our blog. So if you go to JoeFairless.com, Resources, Blog, or if you just search “Top lessons from every BEC2020 session”, both of those blogs will come up, and you’ll get all of the different lessons that I got from the Best Ever Conference 2020.

Then make sure you listen to part one of this episode as well, where I went over the main apartment syndication related lessons from the conference

That concludes this episode, as well as this series, “The top apartment syndication lessons from the Best Ever Conference 2020.” Until next time, check out some of the other Syndication School episodes, as well as take a look at those free documents that we have on there. All of those are available at SyndicationSchool.com.

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

JF2010: The Best Ever Conference 2020 Part One| Syndication School with Theo Hicks

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In this episode of Syndication School, Theo shares the best tips and advice he learned from The Best Ever Conference 2020. The Best Ever Conference hosts many great speakers on different real estate investing topics but the ones Theo will be sharing today are focused on Apartment Syndication. Enjoy this episode as he explains his takeaways from day one of the conference and what he felt was very helpful from different speakers.  

 

Best Ever Tweet:

“Don’t make offers in your personal name so basically create a separate LLC, that you use to make offers and then have something in the contract that allows you to assign the contract to yourself, and the reason why you want to do this is because if you walk away from the deal the seller can sue you personally for damages.” – Theo Hicks


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we give away some free stuff – free PDF how-to guides, PowerPoint presentation templates, Excel calculators… Things like that, that will help you on your syndication journey. All of those free documents from past episodes, as well as the past episodes, can be found at SyndicationSchool.com.

This episode is gonna be part one of a two-part series about the Best Ever conference. I just got back from the Best Ever conference two days ago. This will probably be airing about a week after the conference has ended, and this year the conference is focused on apartment syndication, active investing, and then passive investing, with a focus on multifamily. Obviously, there were other talks as well, but for this, being Syndication School, I wanted to go over some of the top apartment syndication takeaways that I got from the conference, that I thought would be helpful for those who either couldn’t see every single panel or talk, or those who were not able to attend.

Now, if you want a full breakdown of all of the talks from the Best Ever conference, we’ve got two blog posts. They’re both called “Top lessons from every BEC 2020 session.” There’s one for day one and one for day two, and it goes over the main takeaways for each of the sessions. I’m only gonna focus on the ones that were related to apartment syndications, and the ones that I thought had lessons that were interesting, things that I hadn’t necessarily  thought of before and I wanted to share with you. So this is gonna be part one, where I’m gonna focus on day one. Then depending on how many lessons we get through today, we’ll finish up day one tomorrow and then move into day two. So let’s jump right into it.

The first lesson comes from Glenn Mueller, who is or was (I’m not exactly sure) a professor at the Denver University, and I’m pretty sure he has a Ph.D. in real estate. One of the things that was interesting is he talked about the current economic expansion, and why it’s been one of the longest – I think this is THE longest; I don’t think he said this, but someone else mentioned that this is the longest economic expansion in recent history, starting back from the 1950s… He talked about why, and he called it a “lower for longer” environment.

Basically, what he said is that the three main drivers of real estate demand are gonna be population growth, GDP growth, and employment growth. As you know, we talk about population growth and employment growth a lot when talking about which markets to invest in… So compared to previous periods of expansion, being from the end of a recession to the beginning of a recession – that’s the period of economic expansion – these three factors (the population growth, the GDP growth and the employment growth) have been lower compared to the previous expansions.

The current expansion that we’re in, the growth of those three factors has been lower compared to the growth of the same three factors in all previous economic recessions. He also said that these income drivers are essentially identical to the cost of real estate. The GDP growth, for example, and the employment growth, and the population growth have been very similar to the interest rates. He said because of this we’re in an equilibrium state where one’s not higher than the other, and that’s why this current expansionary period has been more stable, has been the longest, and why he thinks it’s going to continue to be stabilized, be equalized, and not enter a recession. That’s Glenn Mueller, from Denver University, saying that we’re in a “lower for longer” environment. I thought that was interesting.

The next one was Jilliene Helman, who is the CEO of RealtyMogul. Her talk was “Lessons learned from crowdfunding two billion dollars in commercial real estate.” There’s actually two pieces of advice that she gave that I thought were interesting. One of them is funny, the other one is — and I guess it is practical, but it’s a little out there. I thought it was funny, and everyone laughed when she went over this lesson.

Basically, she said that when she first started, she was a little afraid of raising capital from her family and friends. Didn’t think she could get the return that they wanted, was afraid that she’d lose their money… So in order to overcome the fear of taking a risk and potentially facing bad consequences, what she did is she decided to start illegally parking all over Los Angeles… And ultimately, she said she ended up paying $1,000 in parking fines, but by doing this she was able to change her mindset around fear and taking risks.

Basically, what she did is she took a risk that she knew there would be negative consequences for eventually, and then once she went through those negative consequences of paying the fine, she realized that it wasn’t that big of a deal, and that the fear that she had for illegally parking was blown out of proportion compared to the consequences… And she could just figure it out by, in this case, paying it, but for raising money she then realized that it’s something she could do, it was just kind of an irrational fear that she had. I thought that was funny.

A way to get over fear is to put yourself into situations where you know you’re gonna get rejected or you’re going to fail. That way you get used to the emotion/feeling of failing, so that if you were to do it in real estate, it wouldn’t completely take you over and make you not be able to figure out a solution. I thought that was kind of funny.

Then her other lesson that was a lot more relevant to apartment syndications is that the proforma is always wrong. In this case, I don’t think she’s just talking about the proforma that you’ll get in an offering memorandum from a broker who’s listing an apartment deal, but the actual proforma that you create. The income and expense projections that you create for your deal, based on your assumptions.

Since it’s always going to be wrong, she gave advice on four things you can do in order to minimize the wrongness. You’re gonna be wrong, so if you are wrong, you need other things in place to offset that wrongness.

The first thing was to have a minimum 10% contingency budget for your capital expenditures, and I think she’s also applying this to the expenses as well, so maybe having a reserve fund of 10%. So that was number one.

Number two was to use a cap rate at exit that is at least 1% greater than the cap rate at purchase. We’ve talked about that before on Syndication School.

This one was interesting… She suggested to reduce the number of units that you plan to renovate each month, and that you plan to re-lease each month. She actually uses 4-6 units per month, and sometimes up to 8 units per month, as opposed to 10, 15, 20 units per month. That’s huge, because obviously, if you are cutting the number of units you’re renovating in half, that extends your renovation timeline by two times, and you are going to achieve your stabilized rent twice as later… Which means that, for example, if you cut the renovation timeline from 12 month to 24 months, being stabilized at year one, and then having it 30% greater at year two is a lot different than being halfway to your stabilized rents at year one, and then fully to your stabilized rents at year two. Huge difference in cashflow, huge difference in the value of the property.

So again, these are all conservative things, and if you are able to exceed these and do better, that’s just more money in your pocket… But in order to make sure that you’re not being aggressive, you want to – according to Jilliene, follow these steps.

And then the last one is to increase the vacancy and the bad debt during the renovations period. We’ve talked about increasing vacancy before, but she also increases the bad debt, because whenever you’re doing the renovations at your property, there’s gonna be chaos, there’s gonna be noise, there’s gonna be dust, there’s gonna be people everywhere… And tenants are more likely to want to move out because of that skip-out on their lease, which results in bad debt… But also, for the vacancy part of it – and we’ve talked about this before, but just as a refresher, if you’re raising rents by a couple hundred bucks, the demographic that’s currently there is not gonna be the demographic that pays two hundred bucks more. So you’re actually gonna want to turn over the residents, and then the ones that you aren’t turning over, expect some of them to skip and leave because of the increases in rent, because they can’t afford it. So that was Jilliene Helman.

The next one was a panel with a  bunch of securities attorneys called “The unknown unknowns of SEC law”, and there were two lessons from here that I wanted to highlight. Number one was that if you have an investor who is not happy, buy them out. What they were saying is that the SEC isn’t out there searching for apartment syndicators who raise a million dollars incorrectly or out of compliance. That’s not what they do. They’re only gonna come after you — I guess not only, because they possibly could come after you without someone coming to them, but most of the time they go after syndicators who have done something wrong to their investors. The investor reaches out to the SEC, and then the SEC pursues the syndicator. So it’s more of a reactive, as opposed to proactive on the part of the SEC.

The investors can potentially reach out to the SEC without you doing anything that you think is actually wrong. So if you do have a disruption like this, they said that the best approach is to just buy out that investor, especially if they’re  a small investor. If they’re 1% of the total capital raise and they’re out there reaching over to the SEC because they’re confused of what preferred return meant, they thought that 8% preferred return meant 8% each month, not each year, if they’re going to SEC thinking that you’ve lied, even though they’re wrong, that’s still gonna be a major headache for you. So in order to avoid these types of disruptions or potential lawsuits, you can just buy the investor out. It saves you both time and money. I thought that was interesting.

The other lesson was about the differences between a JV and a syndication. What they said is that for a JV, the people who are involved all need to be active in the business. But what you might not have known is that you can have someone who invests, say, 90% of the capital, and their active involvement is deciding the compensation structure for the sponsor. So they pick what the acquisition fee is, they pick what the asset management fee is, and according to these lawyers, that can be deemed a JV, even if they’re not asset-managing the deal. They’re the ones that upfront picked and decided what the fees were, so that’s an active role, therefore it could be a JV. I thought that was pretty interesting. I didn’t necessarily know that someone could just pick the fees and be considered a JV. Maybe I misunderstood what they said, so don’t just take my word for it when you’re structuring any type of syndication or JV. Make sure you’re talking with an attorney… But that’s what they said, and that’s what I’m telling you today.

The next lesson is from Joe. This one was funny – basically, he was talking about how to accomplish more. This was similar to the Jilliene Helman illegally parking lesson, but a little grosser… Basically, he said “How to accomplish more is to have a thorn.” A thorn is a negative experience that you can draw upon to propel yourself forward.

For example for Joe, his thorn was he had a bad deal, where he ended up losing money on his first deal, among other things that went wrong with that deal… And he never wants to experience that again, so he uses that negative experience to propel him to always make money on his deals, because he does not wanna go through all the chaos that happened when he ended up losing money on the deal.

So he said that everyone needs to have an experience like this, that is something that they are kind of avoiding and using to propel themselves towards something else. If you don’t have the thorn, another strategy is to make a thorn up. Basically, say “If I don’t accomplish X, Y, Z, then I am going to have to do something really bad, that I don’t wanna do”, and that’s gonna be your thorn. An example that he gave was holding dog poop in your hand and licking it.

So let’s say you have a goal of syndicating one deal in 2020. Your thorn, the thing that you don’t want to have happen again could be that if you don’t syndicate a deal in 2020, then the next time, the 1st January 2021 you have to pick up the first dog poop that you see, smell it, rub it in your hand and then rub it on your face, or something… I probably wouldn’t lick it, because I think you’d get sick from that, but… Just something really gross like that, that will mentally make you not wanna put the dog poop on your face and get the deal done.

I thought that was really funny, really unique, and I’m sure that it works. If there’s something else that you really don’t wanna do, like “I don’t wanna go skydiving”, or something that you’re afraid of, something that’s gross, something that scares you, then you can use that as a punishment, in a sense, for if you don’t accomplish whatever goal you want to accomplish. So that’s Joe Fairless, lesson number one – if you  wanna accomplish more, lick a dog poop.

The next one is going to be Alex Racey, who is a Special Ops guy. I think he was in the Army; I’m not sure he was Army Rangers, or Green Berets, or something, but he was in the special forces in the Army… And he was talking about peak performance. Basically, what he was saying is that there’s the human performance, physical performance, and then mental executive performance. And your human performance is based off of eating, sleeping and moving/exercising, and if you don’t have peak human performance, you can’t have peak executive performance. So those two are tied together.

Basically, if you’re not in good shape, then you are limiting your ability to run a business, to accomplish goals, to scale a business, things like that. He talked about three performance categories that I thought were interesting. He says that most people fall into one of these three categories when it comes to human performance.

The first one was kicking the can. I probably fall into this category right now a little bit… So someone who was a star athlete in high school, or college, or maybe when they first graduated college they got in a really good shape, or at some point early on in their lives they were in really, really good, peak athletic shape, and they obsessed with it, they focused a lot of their time and energy on the physical side, and then once they got a job, they shifted 100% of that energy to their job, and they stopped working out, stopped eating well, stopped sleeping well… Maybe made a lot of money in their job, maybe were really successful in their job, but their physical and their mental/emotional health was lacking. This is the guy who works all day and then maybe drinks all night, or something.

Then – this is called kick the can, this is the person who says “Eventually I’ll get back into working out. Eventually, I’ll focus on my sleeping or eating, but for now I’m just gonna focus on my job.” That’s kicking the can.

The second category is the head in the sand. This is basically someone who’s overwhelmed with the total number of different fitness routines, and sleeping advice, and diets out there, hundreds of thousands of these things, and they don’t know how to pick between the two, so they say “Screw it! I’m just gonna put my head in the sand and just ignore all of it and just forget about it… Because how do I know which one’s right, how do I know which one to pick? Just forget about it.”

And then the third one is the all good. He had pictures, cartoons to represent each of these, and the cartoon for the all good is the one where the dog is in the house, sipping the coffee, and the house is on fire, and he’s saying “Everything’s all good.” Basically, this is someone who is working out, is eating well, is sleeping well, but they  maybe are overdoing it, maybe they are not doing it totally 100% properly, and so they have issues. Maybe they’ve got joint pain, or back pain, or acid reflux, or insomnia, or some issue… So again, on the outside everything looks like it’s fine, but on the inside is where they’re having the problems, and this is the category Alex said he falls into.

So you don’t wanna be in either one of these three categories. You wanna be in peak performance. So he said that in order in peak performance, optimize your human performance for each of those three categories, you want to look up and research the following three factors. For eating, you wanna look up metabolic flexibility; for sleeping, you wanna look up sleep hygiene, and for moving you wanna look up minimum effective dosing. So if you follow those three things, you’ll have peak human performance, which will also as a result positively impact your executive performance. So that’s a lesson from peak performance, Special Ops veteran Alex Racey.

Next we’ve got a lesson from Clint Coons, who is (I believe) an attorney, and it was about asset protection and planning for real estate investments. Pretty quick lesson, but basically what he was saying is that don’t make offers in your personal name. Create a separate LLC that you use to make offers, and then have something in the contract that allows you to assign that contract to yourself. The reason why you wanna do that is because if you end up walking away from the deal, the seller can sue you personally for damages.

So let’s say you put a property under contract and then 30 days later you cancel the contract, but during that 30 days if the value of the property drops by a million dollars, they could technically come sue you for that million dollars. But if you put the property in an LLC name that doesn’t own any property, then they can’t sue you personally, they can only sue the LLC, which doesn’t own anything.

The last section I wanted to talk about was the intellectual debate that was basically between two people on one side and two people on the other side, and the topic was “Will you have greater success over the next years if you sell more than you buy in 2020?”

We had Neal Bawa and John Sebree, who said “yes, you’ll have greater success over the next years if you sell”, and then you had Jilliene Helman and Jamie Smith saying “No, you should buy more.”

I’m just gonna go over the arguments on both sides. For the ones that said you should buy more, they set the stage by saying that you’re only buying things that are long-term value-add deals, in quality markets, with quality underwriting and management. One of their best arguments was saying that when you sell a property, you lose the future wealth potential of that property, because you no longer own it, you’re no longer benefitting from forced natural appreciation. But also, you’re going to be taxed on the money that you actually make. So not only are you losing out on the future wealth, but you’re also losing a portion of the income that you’re getting because of the capital gains taxes at sale. I thought that was pretty interesting. That was Jamie Smith.

Then Jilliene had three reasons why you should be buying more. One was that interest rates are extremely low, there’s a huge demand for multifamily but not enough supply, which we’ll talk about a little bit more in tomorrow’s lessons, and you will lose 2% each year due to inflation if you are liquid, so “Where else can I put my money? If I put my money in my bank account, it’s just gonna lose money, whereas if I keep it invested, even if the rents go down, rents are low, my returns get lower – I’m still making a return, as opposed to actually losing money.”

And then lastly, they said that if you are buying, besides long-term value-add deals in quality markets, with quality underwriting and quality management, you should be playing defense and  investing in asset classes such as mobile homes and affordable housing, which they say continue to perform during recessions.

On the other hand, we had Neal Bawa and John Sebree, who said that “No, you should sell more in 2020”, because 1) people are no longer underwriting deals based on fundamentals of a property, but on aggressive proformas. They’re also more leveraged and securing loans with longer interest-only periods, and sponsors are trying to maximize fees. They talked about government is continuing to spend our tax dollars to create inflation, which they said is quantitative easing, and that this is unsustainable.

They talked about how rent growth is slowing and expenses are increasing, which means NOI growth is slowing. They said that an economic slowdown is inevitable, and you want to have cash to take advantage of opportunities. That people are buying overpriced properties from veteran investors who are waiting for a recession… So basically saying everyone buying right now is a bunch of dummies, and everyone that’s selling are all the geniuses who know what’s happening and taking advantage of these dummies.

They talked about the trillion-dollar debt deficit, they talked about people from get-rich-fast courses are flooding the market, and that the Fed continues to cut interest rates, even though the economy is supposed to be strong, so what do they know that we don’t know?

What’s funny is they had this heated debated back and forth, and then the ones who thought that you should buy more were the ones that ended up winning the debate, and then at the end they were like “By the way, we just kind of drew straws to see what side of the debate we would be on”, and that it’s not actually what they even believe… [laughs] They were just doing it because that’s what they picked, and they needed to come up with reasons why on their side… So just because they said all these things doesn’t necessarily mean they believe their side of the equation, which I thought was kind of a funny way to end the debate, and a funny way to end the episode.

So to close this one out, these are the top apartment syndication lessons from day one of the Best Ever conference from 2020, in February.

In the meantime, until we come back tomorrow, check out some of the other syndication school series about the how-to’s of apartment syndication, check out all of our free documents. All those are at SyndicationSchool.com, and make sure you pick up your ticket for the 2021 conference at BEC2021.com. It’s the cheapest it’s ever gonna be, so if you want to attend it next year and see these talks first-hand, you’ll want to go to BEC2021.com.

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

Syndication School with Theo Hicks

JF1976: 8 Tips To Nail a Podcast Interview Part 2 | Syndication School with Theo Hicks

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In Part 2 of this series, veteran podcast host, Theo Hicks, explains some best ever practices for all things podcasting. Catering to the audience’s needs is a no-brainer and finding out why people listen is something you should determine in advance. Listen to this episode to hear the rest of Theo’s best ever advice for how to interview on podcasts.

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“Ideally, the best ever practice would be to have a call-to-action where you’re giving the audience something for free.” – 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 that are generally part of a larger podcast series that focus on a specific aspect of the apartment syndication investment strategy. For a lot of these series and episodes, we offer a free document for you to download. These are free PDF how-to guides, PowerPoint presentation templates, Excel calculator templates, something for you to download for free that accompanies the content discussed in that series or episode. All those free documents as well as the previous Syndication School series episodes and series can be found at syndicationschool.com.

This episode is going to be part two of a two-part series entitled, “Eight Tips to Nail Your Podcast Interview.” So the last Syndication School episode, or yesterday, if you’re listening to this currently, we went over tips one through four. Today we’re going to finish up the eight with tips five through eight.

So really quickly, and I definitely recommend listening to part one, but just as a refresher, the four tips were – number one, we talked about the best ever practices for the equipment that you’re going to want to use when you’re being interviewed on other people’s podcasts. Obviously, the same equipment applies to your own podcast as well. Number two is to make sure you have a web presence prior to being interviewed on the other person’s podcasts, so that when people listen to it, they have somewhere to go to find more information about you, and ideally for you to capture their contact information once they’ve arrived at your web location. Number three is going to be best ever practices for how to prepare for the interview. Then number four is going to be the best ever practices for what to do after the interview is over. So I went in a lot more details on those four in the previous part, part one. So definitely check that out. Again, today, we’re going to go over four more tips to nail your podcast interview.

So overall, tip number five, is to make sure you determine before going on the podcast, why people actually listen to this podcast. So always ask the host why people listen to their podcast. What does their audience want? What is their audience trying to get out of listening to this person’s podcast? At the very latest, this needs to be done in the minutes before going live. But ideally, you’re doing this a few days beforehand, so that you have time to prepare. Because when you know why people are actually listening to the podcast, you know what you should and shouldn’t talk about, as well as how to [unintelligible [00:05:01].23] the conversation.

For example, people listen to Joe’s podcast, to this podcast, because they want to hear the best ever advice that the guests have about their successful real estate career. But they want it in a short, no fluff format. So typically, our shows are under 30 minutes, probably on average 20 to 25 minutes. So really short, concise, to the point, no fluff advice, and then specifically the best advice that they actually have for how they’ve been successful and how you can also be successful. So if I’m being interviewed on that type of podcast, then I’m going to make sure that I keep all my advice really concise, and to the point. I’m going to make sure that I’ve got an answer to the question, “What is your best real estate investing advice ever?” Be able to answer follow-up questions on that, and keep in mind the entire time that these are people who want to be as successful as me, supposing I’m a multi-million-dollar real estate investor, so what’s the best advice ever that applies to those types of people?

On the other hand, you’ve got a podcast like BiggerPockets, which was a little bit different. So the BiggerPockets podcasts, people that listen to that are going to hear a casual, much longer, and more conversational type chat about the failures, successes, motivations and the lessons learned. So if you go to the BiggerPockets podcast, that’s essentially a summation of their description – a casual, longer form, more conversational chat about the failures, successes, motivations, and lessons learned from the guests.

They also do the lightning round, but they don’t have the money question like Joe has. Theirs are also much longer, like an hour, an hour and a half in length. So if I was being interviewed in that podcast, I would prepare entirely differently. I’d make sure that I had multiple stories to tell, multiple pieces of advice to tell, have stories about failures, have stories about successes, but detailed stories on those, because I have to talk for an hour. Talk about things that motivated me, a long story about why I got started, maybe five or six lessons that I’ve learned so far. So I need a lot more information for those podcasts, because listeners are there to hear a ton, as opposed to Joe’s are concise, to the point, here’s everything you need to know and nothing else.

Some people also listen to a podcast for a specific niche. So they might be looking for niche-specific advice. So for example, you’ve got Jake and Dinos’ Wheelbarrow Profits Apartment Investing podcast. Obviously, by the title of it, the listeners really only care about apartment investing. Similarly, you’ve got someone like Kevin Bupp who has a mobile home park investing podcast. So the listeners want to hear about mobile home park investing. So if I’m going on Jake and Dinos’ podcast, I’m not going to talk about mobile homes, or single family homes; I’m talking about apartments. If I’m going to go on a mobile home podcast, I’m not gonna talk about apartments or single family homes or office centers or shopping malls or whatever. I’m going to talk about mobile homes.

It seems pretty obvious, but you need to make sure that you know why the audience is listening. Then make sure that everything you say is directed specifically toward that audience’s needs, and then avoiding any topics that they’re probably not going to be interested in. So, again, how do you figure this out is you ask the host, “Why do people listen to your podcast?” You can also get a pretty good idea of why people listen to the podcast by looking at the topics of some of the previous podcasts, as well as reading the description they have on their iTunes podcast page, because when they create the podcast, they’ll have a description they use to attract people and say, “Hey, this is what we’re talking about.” So people that read the description, and then listen to some of the podcasts, realize that, “Hey, this is for me.” So obviously, the description and then what they talked about in previous podcasts are going to give you a great idea of all the reasons why people are actually listening. So that’s number five.

Number six is to make sure you have a call-to-action, which I briefly mentioned it yesterday, but I did say I would elaborate on it in a more detail in this episode. So at the conclusion of most podcasts that are interview format, the host is going to ask you, in this case, the interviewee, to tell the listeners to tell their listeners where they can learn more about you, and your business, or  something along those lines, ask you for a concluding statement. They might just say, “Oh, to wrap things up, you got anything else to say to us?” or whatever. So you’re gonna be allowed of some concluding statement on the majority of podcasts you’re interviewed on.

At this point, whether it’s them asking you about where they can find more about you, or just to give a concluding statement, you want to make sure that you have a prepared reply. You don’t need to script it out, but just have an idea of what you’re going to say. This needs to include some call-to-action. Ideally, the best ever practice would be to have a call-to-action where you’re giving the viewers something for free. The action could be something as simple as just, “Hey, email me” or “Hey, go check out my website”, but going back to the last episode, one of the benefits is you want to increase your followers because the more followers you have, the more potential investors you have, the more potential team members you can find, the more potential partners you can find. So in order to maximize the conversion rate from the podcast, you’re going to want to offer something for free for them to download.

So you can ask them to send you an email to get this free thing, you can create a landing page where they sign up, and they sign up for your newsletter and they get this free thing… But whatever it is, you should send them something for free, and then capture their email address. Those are the two main important keys to your call-to-action. So, “Hey, I’m giving you something free and I want your email address for it.” Don’t say it like that, but that’s your goal. So whatever form your call-to-action is, however you’re capturing their email address, whether it’s them emailing you — a landing page is much better, because they might look at other parts of the website as well. The free item then can be an eBook that you’ve written, it could be a blog post that goes into more depth on whatever topic you discussed, it could just be a free subscription to your newsletter… That’s probably the most simple approach. But an eBook or some document that goes into more detail on the episode is great, because then you can have a document created, you can hit some of the highlights of the document and then say, “This is the taste. If you want more information on what I talked about– I gave you tips one through five. If you want tips six through ten, go to my website, sign up for my newsletter, and I’ll send you the free ten tips to nail your podcast interview.”

Another benefit besides just capturing their email addresses and again, increasing your followers, your newsletter list, is that you can actually determine the success or the failure of the interview, because you’re not gonna have analytics to the interview. So technically, I guess you would ask the interviewer, “Hey, it’s been a week, how many views did my podcast get?” But that really doesn’t really matter alone. You also need to know how many views the other podcasts and interviews they’ve done and have gotten, and thus actually see if it was a hit or not. And you’ve got to know what their average viewers is. You could technically ask the interviewer for that, but they’re probably busy and don’t want to give you all the information. So instead, you can use the email capturing process to determine how successful the interview was.

I got interviewed on the BiggerPockets podcast and I had ten email signups. I got interviewed on Joe’s podcast and I got a 100 email signups… So obviously, my content resonated a lot more with Joe’s audience than the BiggerPockets audience. Now you know what type of podcast to go on in the future, so that you’re maximizing that conversion rate. So that’s number six, call-to-action.

Number seven is going to be have prepared stories. So no matter what the format of the podcast is, you are going to resonate with the listeners the most if you’re telling stories, as opposed to just going through a list of things, giving them stats. You can do that, but you also want to back them up with an interesting story to tell.

So depending on the podcast – if I was going to be in Joe’s podcast then maybe I’d make sure I had three or four stories to tell. If I was going on the BiggerPockets podcast, I’d probably have a list of ten stories to tell. Then depending on which way the conversation goes, I can naturally bring up one of my prepared stories. You don’t wanna force the story in there. For example, maybe you’re in apartment syndication, you’re talking about how you found your first deal and I go, “Well, really funny story. One time after I bought a deal…”, or maybe a story about you meeting a property management company or something completely random; it’s an interesting story, for sure, but it has nothing to do with your first deal. So that’s why you wanna have multiple stories prepared so that you can naturally bring that story up, because it’s related to a question that was asked.

So for example, as I said, if you’re asked about your first deal, don’t talk about how you met your property management company or talk about your job that you had before getting the real estate or talk about the deals which you sold, which is obvious… But if you’ve only got one story prepared, and that’s the one, well, you’re going to bring it up eventually. But you’re also gonna want to make sure, as I said before, that you don’t say something like, “Oh, well I bought it for $100,000. I put $50,000 into it, and then the value was $200,000. It was a solid deal.” That’s interesting, a little bit, but you can definitely make it more interesting, more entertaining, because that’s boring. So instead, you can tell an interesting story about your first deal; something funny that happened, or unexpected that happened, or an interesting lesson that you learned.

So my go-to story, my bit is that when I bought my first deal, I was super excited about getting into real estate. I was 23 years old, I think; just out of my work training. Out of all my friends, I was the only person that bought real estate, so I thought I was so cool. I went to the house, I’d taken a bunch of selfies to post on Instagram about buying my first house. I just thought I was the coolest guy in the world.

My plan going into it was to start to do the renovations the day that I closed. I closed on a Thursday. My goal was to go over there, take the pictures, and then start pulling up carpets that night, and then working through the weekend. so that the next week, the contractors could come in there and start doing their work. But of course, since I’m this cool guy, I was like, “I not gonna do that now. I’m going to go out and celebrate how cool I am.” So the weekend goes by. This is in February in Ohio, so it’s freezing. Then I show up to the house on Monday, ready to go with all my carpet removing tools. I open the front door and I hear a very faint sound, like a wishing sound. It sounded like static. I was like, “Oh, that’s weird.” So I walk in the living room and I start ripping up carpet and I’m like, “What is that sound? That doesn’t sound right.” So I’m looking around for the source of it, I’m walking around, playing like “You’re getting hotter, you’re getting hotter, you’re getting colder, you’re getting colder.” So it started getting hotter as I approached the basement door, and I open the basement door up and now it’s a really loud whooshing sound, but I still can’t identify what it actually is. So I walk down the stairs and I turn, because you go down the stairs, and then behind the stairs is a bathroom. So [unintelligible [00:15:46].11] second I look and literally there this Niagara Falls just pouring down out of the ceiling into the basement. I’m freaking out at this point; I don’t even know how to turn the water off. So I googled “How to turn water off in your house,” I identified the master valves, I’ve turned that, and then all the water in the house turns off. One thing led to another, it all got figured out, but what happened was that my real estate agent – again, this is my first time buying a house – she told me to make sure I transferred the utilities into my name. So the word “transfer” to me meant that I need to transfer from their name to my name, so that I’m paying. Because if I don’t do that, then they’re gonna keep paying the utilities and that’s not fair, and they’ll have to come to me and ask for money, so I need to make sure I’m transferring beforehand… And I didn’t. That means, as I know now, that the utilities actually get turned off, because the owners will say, “Hey, we don’t own this property anymore. You need to stop utilities on this day.” So they stopped; the heat turned off. It was freezing cold outside, so the pipes froze, and then it warmed up a little bit. The pipes thawed, the pipes burst while it was frozen, and the water had been pouring in the basement for– I don’t know how long it was doing it, but my water bill was some insane number, because it was all just pouring straight into the sewers.

So that is a more interesting story to tell than just saying, “Well, I bought my first deal when I was 22. I bought it for $170,000. I put 20k into it and I rented it out for three years and I sold it.” I can say that, but adding in that interesting story, I think it’s interesting, now. It was kind of depressing at the time, but now I think it’s funny. So, think of stories like that. Little funny things that are entertaining things you can add into your prepared story. So that’s number seven – have prepared stories, as opposed to just running through facts about your deals.

Lastly, number eight is going to be lists. So give your advice in list form. In addition to having your stories, you’re going to want to also format your advice in the form of a list. People listen to podcasts and read blogs. We’ve got BuzzFeed, for example, 17 different ways to make a cupcake. People love lists. So whenever a host asks you a question, or whenever you’re giving advice on a specific topic, make sure it’s in list form. So eight tips to nail your podcast interview, or as I said before, 17 different ways to make a cupcake… As opposed to just randomly talking about things and transitioning from one to the other without actually mentioning you’re transitioning; it’s better to say  number one is this, number two is this, number three is this, number four is this. Number one, here is a funny story; number two, here’s a funny story; number three, here’s a funny story; number four, here’s a funny story.

So for example, let’s say they ask you about mistakes that you’ve made. You can say, “Well, it’s a good question. Here’s five mistakes that I made on that deal. So mistake number one was I forgot to put the utilities into my name. Here’s a funny story about that. Number two is I didn’t get a 203k loan. Instead I invested all the money myself for renovations. Here’s a funny story about that.” So not only is it really more entertaining and more engaging, but it also is going to help the listeners more easily understand what you’re saying, as opposed to your advice being all over the place.

So those are the eight tips to nail your podcast interview. Being the Best Ever podcast, I’m going to give you a bonus tip. Actually, it’s because I missed this in the outline in part one, and that is your bio. So whenever you are being introduced on a podcast, they’re going to read off some biographical information about you so the people that are listening know who they’re listening to. The host is going to likely ask for you to send them something before the interview, that includes what you want them to read during this section.

So some best ever practices for your bio that you send to them is to keep it to two paragraphs at most. You don’t want it to be this super long in-depth bio, because number one, it’s going to be wasting time that you could be using to discuss advice on the podcast. Plus, you can just discuss things that you’d left out later on in the podcast. Anyways. The bio should include facts about your business, and it should focus on how your specific background and your expertise and your business is going to be relevant and add value to the listeners. You know what they want to hear, so what in your background can you leverage to display that you are someone that they should listen to, and you’re someone that they should want to listen to.

Then you’re going to want to provide the host the link to your website, ideally that landing page, so that they can learn more about you and your company. They probably will ask you for a headshot as well, because they’re going to want to make a nice little fancy design of them and you, and then the caption would be the title of the podcast. So make sure you’ve got a nice professional picture to send them and it’s not a selfie of you at the bar or something… Which might work on certain podcasts, but most likely not.

Lastly, you’re going to want to provide them with your email address, your phone number, and then your username, so they knew who to send the Zoom invite to or they knew who to call on the Skype call… And then anything else that they asked for.

So a pretty short bonus tip, but just again, all these things are very similar, just making sure that you’re curating everything that you do to the specific audience. So for the bio, you want to make sure that your bio that’s going to be read at the beginning of the podcast is going to be included in the show notes of the podcast is information that’s relevant to the listeners. You know what they want to hear, so you know what you can put in your bio.

So those are the eight plus the bonus tip for how to nail your podcast interview. As I mentioned, on the last episode, we’ve got a full series about building a brand. A portion of that focuses on starting your own podcast, and some best practices on that but also a blog, a website, all the things that you need in order to successfully maximize your success on someone else’s podcast. So make sure you check that out as well and then download those free documents. Then of course, check out the other syndication school episodes as well. All of those are available at syndicationschool.com. Thank you for listening. Have a best ever day and we’ll talk to you soon.

JF1969: The Pros And Cons Of The Two Most Common Investment Tiers | Syndication School with Theo Hicks

Listen to the Episode Below (00:18:25)
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We’ve talked a lot on how to structure deals with passive investors. This episode will cover a much higher level conversation on deal structure with passive investors. Theo will explain an approach that Joe and Ashcroft have used, having multiple compensation structures in the same deal, allowing investors to choose the best investment for them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“They have decided to offer a two tier investment structure, rather than just one”

 


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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, and welcome to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host Theo Hicks.

Each week we air two syndication school episodes, generally a part of a larger series, but we’re going through a lot of standalone episodes at the moment. And these always focus on a specific aspect of the apartment syndication investment strategy. For a lot of these series and episodes, we offer some document for you to download for free – PowerPoint presentation templates, Excel templates, PDF, how-to guides, things that accompany the topic that we discussed in the episode. And all of these free documents as well as free syndication school series can be found at syndicationschool.com.

In this episode, we are going to be talking about the pros and cons of the two most common investment tiers. So we’ve done a lot of episodes in the past about how to structure the deals with your passive investors. If you want to go into a lot of detail on that, check out those syndication school episodes about how to structure deals with your passive investors. This is going to be a little bit more high-level and talk about something that Joe has done on his deals that’s slightly different than what he was doing when we wrote the book and when I recorded those episodes.

So the reason why this change has [unintelligible [00:03:49].08] typically what happens is, apartment syndicators will offer one type of offering of compensation structure to their passive investors, and most commonly– again, this is not always the case, but the most common structure you’re going to see for value-add syndications is going to be a preferred return, and then possibly some profit split. So 8% preferred return and then 50/50 profit split thereafter, or 8% preferred return, and then 70/30 profit split up to a certain IRR threshold, and then above that IRR threshold, it’s 50/50.

But one issue with just offering one single compensation structure on your deals is that it’s a one-size-fits-all approach; you’re assuming that this structure is going to work for everyone. Whereas in reality, typically in accredited investors, even sophisticated investors will have goals that will fall into two categories. And the one-size-fits-all approach might help one of those types of categories of accredited investors achieve their financial goals, but maybe not necessarily the other.

So one category would be people who are just investing for ongoing cash flow. They don’t care about getting a massive upside at sale, they just want a place to park their money and to beat the market in regards to cash on cash return, and then get their money back at the end of the business plan, say five years later. Whereas other people don’t care as much about ongoing cash flow. They want a place to put their money. They’re not worried about making a return on it on an ongoing basis, but they do want to make a large lump sum, maybe double their money in five years, for example.

So in order to offer investment opportunities, compensation structures that allow Joe to match the investment goals of both of those categories, they have decided to offer a two-tiered investment structure as opposed to just one. So rather than just offering Class A, now they have Class A and Class B.

So in this episode, we’re going to talk about what Class A is, what Class B is, and then compare the two and discuss which one of those classes applies to those two categories of accredited investors.

Class A investors will sit behind the debt in the capital stack. So you’ve got debt, and the next is going to be Class A. So you pay the debt first and then you pay the Class A investors second. The Class A investors are going to be offered a preferred return that is going to be higher than the preferred return offered to Class B investors. So if Class A investors are offered a return of 10% per year, let’s say, then Class B investors will be offered something below 10%. The Class A investors will also have virtually no upside upon selling the deal or any capital event like every financer’s helping them alone, and they also do not participate in the profit splits. So anything above that 10%, they are not getting a 50/50 split of that. But because of tax purposes, so that the Class A investors are taxed the same as the Class B investors, they are provided some upsides – it’s just very little; just enough so that they are classified in the same tax situation as Class B investors.  And then for Joe’s deals, the bucket of Class A investors are limited to 15% to 25% of the total equity investment.

Another characteristic is a higher minimum investment. So typically, the minimal investment is 50k for the Class A investors, to $100,000. Now, of course, this is just what Joe does, but any of these numbers can be different; the preferred return to turn can be different, a small upside given the percentage of the total equity could be different, the minimum investment could be different, but typically the minimum investment is going to be higher than Class B. The allocation is going to be less than Class B, and the preferred return is going to be higher than Class B, but the upside is going to be less than Class B. So going to class B — I guess I said what class B is, but more specifically, Class B investors sit behind the Class A, and in front of the general partners in the capital stack.  So you’ve got the debt, and then behind that is the Class A. So class A gets paid first after the debt, and then Class B gets paid after Class A, and then behind that would be Joe and the general partners, who I guess are Class C, and they are paid last.

Class B investors are also going to be offered a preferred return, but that preferred return is going to be much lower than the preferred return offered to Class A investors. So the Class A investors are going to be offered a 10% preferred return, the class B investors are going to be offered a 7% preferred term. Both of those are paid out monthly, so it’s gonna be 10% divided by 12, multiplied by your investment for Class A, or 7% divided by 12, multiplied by your investment for Class B. And again, since these Class B investors are sitting behind the Class A investors in the capital stack, the 7% is paid out monthly after the Class A has received their 10%, which is one of the reasons why the Class A investors are limited to 15% and 25%, since that preferred term is going to be higher, and the deal itself most likely is not going to have a 10% return, day one. It’s going to be somewhere in between 7% and 10%.

So you’re gonna want your Class B or Class A to be above and below whatever that return on the deal is, and then we can mess around with the amount that’s allocated to each (15%, 25% whatever) to make sure that you’re able to pay out both, ideally.

Now, if this full 7% can’t be paid out for some reason, then it will accrue over the life of the deal. So if the Class B investor only gets a 5% return year one, then that 2% is going to accrue and it will be paid out at some later date, whether it’s the next year, at a capital event or at the end of the business plan, when the property is sold. So at some point, they’ll make that preferred return, but they’re not necessarily going to get that preferred return on an ongoing basis. So, the probability of the Class A investors receiving their 10% preferred return is much higher than the probability of the Class B investors receiving their full 7% preferred return based off of the capital stack.

Now, in return for this less likely chance of getting on an ongoing basis – they’re going to get it eventually – is that the Class B investors do participate in the upside upon the sale and upon any sort of capital event. So on Joe’s deals, the Class B investors will receive a profit split of 70%. So any of the profits above their preferred returns are split between the Class B investors and the general partners. Class B gets 70% of the profits, general partners get 30% of those profits, Class A does not get any percent of those profits. or very, very minimal, again, for tax purposes.

Once the return to the class B investors has equaled 13% IRR, then the profit split goes to 50/50. Again, keeping in mind that the IRR is not going to be above zero until they receive all their money back, which most likely is not going to happen until sale… So the profits will be split 70/30 up until sale, and then a portion of the sales proceeds will most likely be split 70/30. Then once that threshold is hit, 13% IRR, whatever IRR threshold you decide to use, then it can change to 50/50 or 60/40 or again, or whatever you decide.

The minimum investment for class B is $50,000 for first-time investors and $25,000 for returning investors, so much lower than the investment for the Class A investors. And again, like I explained for Class A, the other syndicators might have a different preferred returns, different profit splits, different thresholds, different minimum investments, again, depending on what they’ve decided to do with their investors. This is just what Joe does as an example, but the general concepts still apply.

So let’s compare the two rules. So Class A investors are in front of Class B investors in the capital stack, so they’re paid first. Additionally, the Class A investors are offered a higher preferred return, so if you’re an investor and you are interested in a stronger ongoing cash flow, then Class A tier is ideal for you, because of the fact that you get paid first and the payment that you receive is the highest of the two classes.

Class B investors are behind the Class A in the capital stack, so they are paid with what is left over after the Class A investors have received their preferred return. If that leftover money is not enough to meet that preferred return member, then that is going to accrue and will most likely be paid out upon disposition or a capital event.

Class B investors are offered the lower preferred term, 10% versus 7%, but they do participate in the upside upon disposition or capital events like a supplemental loan or a refinance. So since they participate in the upside, but also have the drawbacks of not necessarily getting money on an ongoing basis, then the overall return over the life of the deal is actually going to be higher for Class B investors because the fact that they are participating in the upside.

So for Class A it is going to be 10% because they’re always making 10%, whereas for Class B, it could be as low as 7%, but most likely is going to be higher because they are getting some of the profits as well. So what does that mean? That means that class B tier is going to be ideal for accredited investors who want to maximize their returns over the life of the investment, as opposed to getting a strong ongoing return.

So in the beginning we said that the two categories are 1) they invest for ongoing cash flow, so Class A, and 2) they invest for upside, Class B. Well, what happens if I want both? What happens I want to have an ongoing cash flow, but I also want to participate in the upside? Well, for Joe’s deals, in particular – again, this might vary from syndicator to syndicator – but the passive investors can do both. So they can invest $75,000 as a Class A investor and then $25,000 as a Class B investor and participate in both of the upside and the ongoing profit.

From the apartment syndicators perspective, this is gonna be beneficial because you’re able to fulfill the needs of more investors. So if you’re just offering a Class A, or say, a nice preferred return, but no profit split – well, your accredited investors who fall into the category of wanting a strong, ongoing cash flow, but no upside, are going to be interested in your deal. But the ones that aren’t necessarily worried about ongoing cash flow and want to participate in the upside aren’t going to look at your deals, and obviously vice versa as well.

If you’re only offering upside to a lower preferred return, but a nice juicy profit split, then the people who are the accredited investors who want to receive more upside in the deal are going to be interested, but the ones who want a stronger ongoing cash flow are going to go somewhere else.

So you’re able to appease, in a sense, both categories of accredited investors by offering these two different types of investment tiers – a Class A and a Class B. Then even better, is if you allow a single investor to participate in Class A and Class B. And in this case, if you remember, the minimum investment for Class A was $100,000, but in the example that I said, they’re only investing $75,000 because the total investment needs to be $100,000. So if you are participating in Class A, your total investment needs to be a 100k. So you can invest 100k grand into the Class A, or you can invest 75k in the class A, and 25k into class B.

In conclusion, offering these two different tiers – or heck, more than two tiers; three tiers, four tiers, whatever – in your apartment syndications will allow passive investors to select the investment option that meets their financial goals, as opposed to either you fit them or you don’t fit them.

I went through, for Joe’s deals, how they offer the Class A and the Class B. The Class A are for a higher preferred return that is paid out first, but Class A investors do not participate in the upside. Class B investors, on the other hand, are offered a lower preferred a term that is paid out after Class A makes their preferred return, but they do participate in the upside. Therefore, Class A is going to be ideal for accredited investors who are more interested in the ongoing cash flow. And Class B is going to be more for the accredited investors who are more interested in the up side, as well as wanting a higher return over the life of the deal.

So that concludes this episode. To listen to some of the other syndication school series, as well as to download all of the free documents we have available, those are at syndicationschool.com. I’ll be back tomorrow. Until then, have a better day I’ll talk to you soon.

JF1968: What Is A Fair Commission For An Apartment Broker? Syndication School with Theo Hicks

Listen to the Episode Below (00:15:39)
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When you buy an apartment community, you’ll be paying your broker a hefty commission too. So what is a fair commission? Theo will cover how you can find that out, as well as some other ideas for getting the broker on your side. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Those are 4 ways to get the broker on your side”

 

Referenced episode with apartment broker Thomas Furlow:

https://joefairless.com/podcast/jf1353-win-over-apartment-broker-from-an-apartment-broker-with-thomas-t-furlow/

 


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

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

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


TRANSCRIPTION

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

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

 

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

Welcome to 2020. This is the first syndication school of the new year. So we will be continuing to do these syndication schools into 2020 for the foreseeable future. And we will continue to air the two syndication episodes every week that will focus on a specific aspect of the apartment syndication investment strategy. And we will also continue to offer the free documents that we’ve been offering for the majority of these episodes and series. All of the previous episodes, series and documents can be found at syndicationschool.com.

This episode is entitled, “What Is A Fair Commission To Pay An Apartment Broker?” I interviewed someone on 1813, Episode 1813. And we talked about different ways that an apartment syndicator can win over an experienced broker.

I’m pretty sure I did a syndication school episode on that, but I recommend listening to the conversation on that episode 1813 with Thomas T. Furlow, because we go into a lot more detail, plus it’s a lot better to hear from him, since he’s the one that’s actually telling you, “I’m an experienced broker and here’s what I look for when someone wants to work with me.” And this particularly is applied to syndicators who don’t necessarily have a high level of experience, or do not have a team with a high level of experience… Because as we all know, brokers care the most about closing, because that’s how they make their money, and therefore their main goal is to close on the deal. So if they’re listing a deal, whether it’s on market or they haven’t a pocket listing, they’re going to send that to people they know are going to close.

In that conversation, we talked about different ways that someone who has a little bit less experience, maybe even hasn’t done a single syndication yet, what they can do to position themselves as a person who is credible, and can position themselves as someone who’s able to close in the eyes of the broker.

And the four ways that we discussed was one, a consulting fee, so pay them a consulting fee for their time. When you’re asking all the questions and stuff, rather than just ask for that information for free, offer to pay them a few hundred bucks an hour for their time.

Number two was to visit their recent sales. So ask them for a list of their ten, five, whatever, most recent sales, and then go and visit those properties. Then tell the broker how those properties compare to the type the properties that you’re looking for, and then ask any follow up questions that you might have, just to give them an idea of what you’re looking for, but also show that you are putting forth the initiative. And again, all these things are to display your credibility to close.

Number three is to explain to them exactly how you plan on funding your deals. So how much money you have verbally committed, what types of financing are you pre-qualified for, things like that. And then number four is general, constant follow up. So whenever you perform any sort of task that brings you one step closer to putting a deal, let this experienced broker know, “Hey, I met with XYZ lender, and I told him about my business plan, and they told me that I can qualify for $10 million in financing,” for example.

So those were four ways– again, I kind of brushed over those quickly because we’ve talked about these before on Syndication School, and you can go listen to the 1813 episode where I talked to Mr. Furlow about those.

Now, the reason why I talked about those is because we have a fifth thing to add to this list now, and it has to do with the commission. So if you’ve read the Apartment Syndication Book that we released – I think it might be in 2018, so technically two years ago; it was less than that, more like a year ago, but since we’re in 2020, and it was 2018… Anyways, one of the sections talks about why it can be advantageous to buy and deal off market and not going through a broker in this, because of the cost to pay the broker. And you are able to avoid that cost by purchasing a deal that is off market, directly from the owner.

We had a few conversation with brokers just to get an idea of how much money can be saved by buying a deal off market, and we were told that one common structure would be a percentage of the purchase price up to a certain threshold, and above that threshold it’s a flat fee. Obviously, if you’re dealing with an $8 million property as opposed to a $100 million property, it’s really not that much more work on the broker’s side, but it’s over 10 times the commission. So in the book, we said that a common structure would be 3% to 4% of the purchase price up to $8 million, and then once you hit that $8 million mark and above it’s going to be a flat fee of say $150,000.

Now, one thing that structure is missing is alignment of interest, and we talk about alignment of interest all the time on this show, on the Joe Fairless content in general. So the fifth way to win over a broker is to offer a commission structure that is promoting alignment of interests, and is going to be beneficial to both you selling the property — this is actually on the sales end. So you benefit from the structure and they also have a way to make more money by getting you a better price.

This actually came from one of our consulting clients who has a property for sale for $42 million, and the broker is asking for a commission of 0.8%. So we’re above his $8 million threshold, and it’s actually not a flat fee, it is going to be a much smaller percentage of the fee compared to that 3% to 4% range. And so the client wanted to know, number one, is this fair to me and to the broker; two, “Should we cap that commission at a certain number?” thinking along the lines of our book; and then three, “Should there be any additional bonus structure?”

So right off the bat, you hear 0.8% and it may sound amazing, because you’re used to paying 3%, 4% for your traditional SFRs, your traditional duplexes, quadplexes, and even $8 million and below paying 3% to 4%. So 0.8% sounds great, but again, when we’re dealing with tens of millions of dollars, the approach is different. In one case it could just be a flat fee, but the way to create alignment of interest is to do it a different way.

One way to incentivize brokers to push for a higher price, but to also create realistic expectation is to negotiate a commission percentage that is less than the market commission rate. So in this case, something slightly below 0.8%, like 0.65%. And then base that off of whatever they believe the purchase price is going to be. So if the purchase price is going to be $42 million, that’s what the broker is telling you and that’s what the market is telling you, then you can set this lower commission for the $42 million number and then say anything above that you’ll get a commission that is significantly higher, say 5%. This way, if the broker is able to hit expectations, they’re still getting a fair commission, but they are incentivized to actually go above and beyond that purchase price and grind for the extra $100,000, $200,000, a million dollars because they get a larger chunk of that as a commission.

So in other words, you offer them something that would be slightly below market up to the purchase price, and then anything above that strike price would be offered an additional larger commission structure.

Using this $42 million deal as an example, if the deal were to sell for $44 million, and it was negotiated as, “Okay, the market commission rate is between 0.75% and 0.8%, so I’m going to give you 0.65% up to $42 million. Then anything above $42 million, you’ll take a cut of 5% of that.” So if the deal were to sell for $44 million, then their commission would be the $273,000 from the first $42 million, which is 0.8% of the $42 million, plus an additional $100,000, because of the $2 million above the strike price. And that $100,000 is coming from 5% of $2 million. So in this case, the total commission would be $373,000.

Now, if you were to just do the basic market commission of, say 0.75%, and you were to sell a deal for $44 million, then the broker would actually make $330,000, so about $40,000 less than what they would have made with this competitive structure, even though the initial commission percentage was lower than what they would have gotten if they wouldn’t have that bonus.

So to answer the question about “Is it fair? Should you offer something additional? Should you cap it?”, the compensation structure that is most advantageous isn’t one that’s just a commission up to a certain number and then a flat fee after that, because if that’s the case, what’s the point of selling the deal for, in this case, $44 million? Because it doesn’t matter to them. I mean, yeah, they’ll make slightly more money, because it is percentage based… It is actually probably the worst if it’s a flat fee, because then it doesn’t matter at all. Whereas if they are able to sell for $2 million more, they’re only going to get 0.0065% of that. Whereas if they are given a compensation structure that incentivizes them to get a larger percentage of the moneys above the strike price, the purchase price, the market rate, whatever, they’re more likely to push for that higher number.

So the best way to win over a broker is to offer them some competitive compensation structure. So rather than just offering them a basic compensation structure of a percentage or a flat fee over a certain threshold, offer them a slightly lower percentage up to a certain number, and then offer them a significantly higher percentage commission above that strike price.

So again, now we’ve got five ways to win over an experienced broker. And obviously, you benefit from this by selling your deal for a higher price, which – in turn, your investors benefit by making more money on the back-end, your brokers benefit because they’re also making more money, and it’s just a win-win all around and that’s what alignment of interests are. I win, you win, everyone wins, as opposed to one party winning and the other one not necessarily winning. Because if that’s the case, then sure, they might be a good person who’s going to put forth that effort, but they’re not incentivized to put forth that extra effort.

In summary, the fifth way to win over an experienced commercial real estate broker is to offer them fair compensation.  What’s fair compensation? A structure that incentivizes them, that promotes alignment of interests and allows them to take a larger cut of the purchase price above a certain threshold, in this case, the strike price, whatever the list price is going to be.

Again, I recommend listening to the episode 1813 with Mr. Furlow, where we talk about the four ways, and then now you’ve got the fifth way. And we’ve also got a blog post if you’re a reader – Four Ways To Win Over An Experienced Apartment Broker, that is also available on the website. So just google “win broker” actually and then it’ll be one of the first things that come up, and you’ll find the blog post as well as the conversation I had with Mr. Furlow.

That concludes this episode. Until next time, make sure you check out some of our other Syndication School series about the How-to’s of apartment syndication. Make sure you download the free documents we have available. Those are, of course, available at syndicationschool.com.

Thanks for listening and I’ll talk to you tomorrow.

JF1934: Everything You Need To Know About The LLCs In Apartment Syndications | Syndication School with Theo Hicks

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Forming an LLC happens with each new deal in apartment syndications. Theo will be going over some of the details of how when to set them up, and how to do it, and what the LLC’s usually consist of. We’ve included a document for you to use to follow along with Theo, but this does not take the place of legal counsel! You will NEED to consult with an SEC attorney when pursuing an apartment syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“There’s going to be a subscription agreement for this LLC that outlines the price of the units”

 

Free Document To Follow Along:

http://bit.ly/syndicationllc

 


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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 Syndication School episodes; those are released on the best real estate investing advice ever show on iTunes, and then we also post them a little bit later in the week in video form on our YouTube channel, so you can check those out in either form. Those focus on a specific aspect of the apartment syndication investment strategy. For a lot of these series we offer a free resource. These are free PowerPoint presentation templates, free Excel calculator templates, free how-to guides, something for you to download for free that accompanies the episode and the series. All of those free documents, as well as past Syndication School series and episodes can be found at SyndicationSchool.com.

In this episode we’re going to dive into the limited liability companies in apartment syndications. This is gonna contain everything you need to know about the LLCs in apartment syndication. This is gonna be a pretty detailed episode, so we’re going to offer the document that I’m using as a guide for free; that way you can read through all of this and have an understanding of all the various LLCs you’re going to want to create when you’re doing an apartment syndication deal.

This is particularly what  Joe does for his deals. This is not the end all be all, it’s just gonna be an example of how Joe does his deals, and most likely what most syndicators do… But before we get into that, disclaimer – as you know, I’m not a securities attorney, I’m not a real estate attorney, so this is gonna be a general overview of the types of LLCs that Joe uses for his deals when he’s doing his apartment syndications, based on his experience.

We always recommend speaking with your real estate attorney, your securities attorney prior to forming any sort of LLC, prior to making any sort of legal decision. This is just a guide to push you in the right direction.

So if you’re able to, I recommend having this document open; if not, no problem. Download it later and read through it. It’s pretty self-explanatory.

There are actually gonna be four different LLCs that are created for the purposes of an apartment syndication. The first one is just gonna be your company’s LLC, so Theo Hicks LLC, Joe Fairless LLC, Ashcroft Capital LLC. This is gonna be the limited liability company that has an operating agreement that defines the roles, responsibilities and ownership percentages for the apartment syndicators. So this is gonna be the main LLC that you will create for your company. If it’s you and one other business partner, you create this LLC and the operating agreement is between you and your business partner, outlining who does what and who owns what percentage of the company.

Then a little bit later on, when we talk about the third LLC — so your company LLC is actually going to be a member of a later LLC. I’ll explain that once I get down to that point. These are all connected like a web, which is why it’s important to have this document, so you can follow along easier. And then this LLC also has the contractual rights to purchase properties, and then it has a right to assign the contract to the property’s specific LLC, which we’ll get into next.

So when do you create this LLC? Well, the specific time to create your company’s LLC – people have different opinions on when to create it. Our recommendation is to actually wait until you have your first deal under contract. It doesn’t take a long time to create an LLC; it’ll be like a week… And it’s better to do it once you have the deal under contract, just because if for some reason you and your business partner don’t end up doing a deal, you’ve kind of wasted that money required to form the LLC… And at the very least, don’t form it until you are familiar with the apartment syndication process and are serious about doing a deal.

So don’t just listen to Syndication School one time and be like “Oh, that sounds great. I wanna become an apartment syndicator” and before listening to all Syndication School episodes, before finding a business partner, before creating a team, before educating yourself on the process, you just go out there and form an LLC. That’s not what you wanna do.

At the very least, wait until you’re actually educated on the process and are committed to doing a deal. So  that’s number one, it’s gonna be your company LLC. Number two is gonna be the general partnership LLC for the specific property. This is what’s actually going to be the property that you assign the contract to. When you actually put a deal under contract, you either have your company LLC created or you don’t; that’s gonna be the company that actually signs on the contract, and then you’re actually going to assign that contract to the general partnership LLC for that particular property that you’ve created.

So your company LLC is gonna be used for all deals; these next ones are gonna be specific to a deal. So the property, general partnership LLC is the property that owns and operates the apartment. And then the sole member of the LLC is gonna be an LLC that we’ll talk about in a second, and the managers of this LLC are the individuals who sign on the loan.

Being the general partnership LLC, this is the LLC that has unlimited liability in the deal, whereas your passive investors, the LP, has limited liability in the deal. As I mentioned, this LLC is gonna be newly created for each new deal, and you create this LLC once you have the deal under contract, because you don’t know how to name the thing until you actually have the deal under contract. The format of this is gonna be Property Name GP LLC.

Number three is gonna be Your Company Name, Property Name LLC. And this LLC is the sole member of the general partner, which is the LLC I just talked about… And this is actually considered a class B limited partner, or a class C limited partner, if you’re offering class A and class B shares to your limited partners. In other words, this LLC has an ownership stake in the specific property LLC, and this ownership stake is the percentage of the deal that is taken by the GP.

If you are doing a 70/30 split, then this LLC – Your Company Name, Property Name LLC – has a 30% share in the deal. So this LLC is what allows you as a syndicator to take your portion of the profits. Now, the members of this LLC are going to be your Main Company Name LLC (the last LLC, that we’ll talk about in a second), as well as if the loan guarantor is a third-party, and then the managers of this LLC are going to be you and your business partners. And like the previous LLC, as I mentioned, these are going to be newly-created for each deal, and it won’t be created until the deal is under contract.

The last LLC is going to be the Property Name LLC. This is the LLC that your investors – and also the previous LLC we’ve talked about, Your Company Name + Property Name LLC – owns units of. So if it’s 70/30, then Your Company Name, Property Name LLC owns 30%, and then your individual investors own 70% combined. Maybe one owns 1%, 10%, 12%, whatever; depending on how much they invested.

And then there’s gonna be a subscription agreement for this Property Name LLC that outlines the price of the units which the investors agree to pay, and the general partners agree to give them the specified ownership stake in that LLC.

So class A and then class B, when applicable, if you’re doing class A and class B [unintelligible [00:09:25].11] are owned by your investors, and then class B or class C – again, if you’re doing class A and class B  for your investors – are owned by you and your company. And this is a newly-created LLC for each deal, and it is going to be created after you put the deal under contract.

To summarize, you’ve got your Main Company LLC, which is going to be a member of that LLC that I talked about, the third LLC, which owns a 30% stake in the deal… And it also has the right to assign the contract to the general partnership LLC. The general partnership LLC is going to be the sole member of the LLC that has a 30% stake in the deal, and then the Your Company Name + Property Name LLC is the one that has the 30% stake in the deal. And then the deal itself, that is 100%, is the Property Name LLC, where 30% goes to the GP, and then 70% goes to your pool of investors.

So again, I highly recommend downloading this free document, just so you can clearly see what LLC is a member of what, who is a manager of what, how the money flows from the deal to the GP and the LPs and things like that. We’re gonna have that document available for free to download in the show notes of this episode, as well as in the description of the YouTube channel. And of course, you’re gonna also find it at SyndicationSchool.com.

A little bit of a shorter of an episode. Again, I recommend downloading the document, but as well consulting with your attorney before you start creating these LLCs, which you’re gonna have to do anyways when you’re creating the PPM, so you might as well have them help you create the LLCs.

Until Syndication School next week and until Follow Along Friday tomorrow, I recommend listening to some of our other Syndication School series about the how-to’s of apartment syndication, and make sure you also, again, download this free document to have a better understanding of what we discussed today.

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

JF1933: When To & When To NOT Work With Private Equity Institutions | Syndication School with Theo Hicks

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After you’ve done a deal or two, you may have the opportunity to work with private equity institutions. Joe and Ashcroft Capital choose to not work with them ever, but that doesn’t mean you shouldn’t. Theo will cover why we do not work with them, and when it might make sense to work with them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you’re unable to raise money from the fund, you’ll lose your earnest deposit, unless it’s refundable, and your reputation will take a hit”

 

Relevant Blog Post:

http://bit.ly/institutionalmoney

 


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

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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 episodes of the Syndication School series on the best real estate investing advice ever show on iTunes, as well as in video form on YouTube, and we focus on a specific aspect of the apartment syndication investment strategy.

For the majority of the series, especially our earlier series, we offer free documents. These are PowerPoint presentation templates, Excel calculator templates, PDF how-to guides, some sort of resource for you to download for free, that accompanies the episode or the series. All of these past series and these free documents can be found at SyndicationSchool.com.

In this episode we’re gonna talk about when to work with and when not to work with private equity institutions. First I’m gonna define what these are, and then we’re gonna go over what to think about when you are considering raising money from private equity institutions.

Private equity is an asset class composed of pooled private and public investments in the property markets. That’s the textbook definition. What that means is that private accredited institutions such as pension funds and non-profit funds and other third-party asset managers who invest on the behalf of institutions will invest in these private equity real estate funds that are then used to buy real estate. One way that it could be used to buy real estate is to invest with an apartment syndicator of some sort, whether it’s a developer, a value-add syndicator, distressed syndicator, turnkey syndicator, or whatever.

A caveat would be that this is really only gonna be relevant to people who have done deals before, so you’re not going to be able to get a line of credit or funding from a private equity institution if it’s your first deal or your second deal. You’re gonna wanna have a track record, because they’re going to base their funding on the deal, but then also on you. But if you’ve done some deals, then you can consider working with institutions. We’re not gonna talk about exactly how to work with institutions here, but we’re gonna talk about when it makes sense to work with them and when it makes sense not to work with them.

Joe does not work with private equity institutions because of the way that his deals are structured. It really depends on how your deals are structured to determine if it makes sense to work with them.

We’re gonna go over the reasons why Joe doesn’t work with then, and then we’re also gonna talk about reasons why if his deals were different in this way, then this is how he would be able to work with them.

The first thing is that the private equity institutions are only going to review a deal that’s under contract. Once you’ve got your PSA signed with the seller and you already have your relationship with this institution, it’s only at that point that they’re going to actually perform their due diligence on the deal to determine if they’re going to provide funding. So they’re not going to do due diligence and let you know that they’re gonna fund the deal before you put it under contract. So you’re doing all of your upfront due diligence, underwriting, and then once you determine that the deal makes sense, only then will they actually look at the deal to see if it makes sense to them, to determine if they’re going to provide you funding.

This could pose a pretty big problem, especially if you’re working in a pretty competitive market that requires a non-refundable earnest deposit… Because generally, if you’re raising money from just regular passive investors and not a fund, you don’t have hard commitment, but you have an idea of how much money you’re capable of raising beforehand; it’s what we recommend, at least – you wanna have the money before the deal. So you wanna have verbal commitments, you wanna have a list of investors, and then know how much money that they are capable of investing, and then based on the summation of that list, you can determine what size deals you can look at. If you’re capable of raising a million dollars, then you can assume that you’ll probably have to put down between 30% to 35%, so you can look at deals that are three million dollars and lower.

When you’re working with an institution – sure, you might have an idea of the line of credit that they’ll give you, how much money they’re willing to fund in total, but since you don’t know if they’re actually going to fund the deal or not beforehand, and you put down a non-refundable earnest deposit, if they don’t fund it, then you’re gonna lose that earnest deposit.

Obviously, it’s possible  to lose the non-refundable earnest deposit by raising capital from a group of individual accredited investors, but the probability is going to be lower, because as I mentioned before, you already have an idea of how much money you’re capable of raising, plus ideally you’re not going to push that ceiling. Obviously, it’s good to push yourself, but if you’re capable of raising a million dollars and you only need to raise 500k, well you’ve got a lot of options to raise money from people. Only half of the investors need to actually invest the amount they said they would invest in order to hit that threshold… Whereas if you’re doing it with a fund, it’s just one entity that’s investing… And if they say yes, then you’ve got the money; if they say no, you’ve got no money. And then obviously, if you are able to close, then you’re gonna lose that non-refundable earnest deposit. So that’s one thing.

If you need to go non-refundable, it might not make sense to use private equity. If you do go refundable, then the next thing to think about is this next point, which is that private equity institutions typically will not approve their funding until a minimum of 30 days after contract. So you put the deal under contract, they do the due diligence – they’re not gonna instantaneously come back to you in one day and say “Oh yeah, we’ll fund this deal” or “Nah, we’re gonna pass on this deal.” It takes a while to do due diligence, so expect for it to take at least 30 days for them to approve or deny funding after the deal is placed under contract. And of course, this is an issue if you don’t have  a long contract-to-close time period. Typically, it’ll take anywhere from 60 to 90 days to close on a deal; so PSA-to-close, 60-90 days.

Well, for Joe’s deals, the formal funding period usually will begin a few weeks after placing the deal under contract, so say day 14. And then the goal is to secure all the money that’s required to close by at least 30 days prior to closing. So if it’s  a 60-day close, then day 14 to 30 hopefully they get all the money at that point, or at least the majority of the money.

Now, what happens if you raise money from institutions and you have a 60-day contract-to-close? Well, you do all your due diligence, you’re preparing to close, and then they don’t get back to you until day 30, and they say “Oh, we’re not gonna close on this deal.” Now you only have 30 days to fund your deal from your individual passive investors, whereas on the other hand, if you raise money from individual people, you would have 45 days to raise money. So that 15 days is gonna be pretty important. If they decide to obviously fund the deal, then no problem, but… There’s also the possibility that they won’t fund the deal.

If that’s the case, well then you have a condensed timeline to raise money from your list of private investors. And hopefully you can get it done, but again, the probability is lower of getting it done in that compressed timeframe. If you’re unable to raise money, you can’t close on the deal. If the earnest deposit is refundable – great, you get it back. If it’s non-refundable, well then you’re going to go ahead and lose that non-refundable earnest deposit.

Now what happens if “I have a refundable earnest deposit, so I’m not really worried about any of this, because even if they say no and I can’t raise the money, I’ll just get my money back.” Well, that’s not necessarily the case, because there’s more than just the earnest deposit that’s on the line. There’s other money on the line, but your reputation is also on the line. So when you are 30 days or more into the due diligence process – again, it takes 30 days for them to approve or deny it; or at least 30 days, maybe even longer. It could take two months. You might not get an approval until you’re supposed to close. But let’s just say on the fastest end 30 days. Well, at that point you’ve done inspections, you’ve done appraisals, different surveys, and these things aren’t free. These things cost money. And if you close, you’re gonna reimburse yourself if it comes out of your pocket, but you’re probably gonna be 5k, 10k, 20k out-of-pocket depending on how big the deal is.

You’ve also got legal costs as well, putting together PPMs in other contracts, creating the LLCs… Those aren’t free. And if you fail to close on the deal, even if you have a refundable earnest deposit – sure, you’ll get that back, but you’ll also lose all of that upfront due diligence costs and legal costs if you’re unable to close. There’s really nothing you can do about that at that point. That can happen in general if you don’t close, you’re unable  to raise money… But as I mentioned before, the probability of raising money from your pool of investors is higher than raising money from one specific fund, because only one entity is making the decision on whether or not they’re gonna fund the cost of the deal.

But again, it’s not all just money that’s on the line as well. Your reputation is gonna be also at stake. If you were to pull out of a deal because you couldn’t raise enough money – either the private equity people back out and then you can’t fund the deal from your passive investors – well, your reputation is gonna take a hit, first of all, with the seller, so the person that you’re buying the deal from. And if that seller owns multiple apartments in that area – well, if they go to sell another deal in the future, you’ve reduced the likelihood of being awarded that contract, because the last time you weren’t able to close.

Also, if the seller is pretty involved in the local real estate market, knows a lot of real estate professionals, other investors, brokers, things like that – well, your reputation might also take a hit in the eyes of those other professionals of the greater real estate community in that area, because you’re gonna be known as a person who can’t close on deals. Even if it happens just one time, the word gets around.

Additionally, your reputation is going to take a hit from the listing broker as well, for very similar reasons. This could potentially be even worse, because the seller might own maybe five deals, so you’ve kind of lost on those five deals, but the broker might be listing hundreds of deals in their lifetime… And if you’re unable to close on one of those deals, you’ve reduced the likelihood of being awarded another deal that is listed by that  broker, because similarly, you didn’t close, and they think of you as someone who wasted their time and was unable to close on the deal.

And then similarly to the seller, the broker also has a relationship with other brokers in the area, other investors in the area, and it’s kind of like a domino effect where you also might have issues getting deals from other brokers as well. Not all brokers, obviously… But again, the entire point of this is that if you do not close on a deal that you put under contract, at the very least you’re likely not going to get awarded another deal by that broker or that seller, if the reason why was because yo could not follow up on your commitment. If you had to  back out because there’s a problem with the deal, that’s different. But if you could not qualify for financing and you couldn’t raise enough money, that’s different than backing out because of some environmental issue or something like that.

So if you’re unable to raise money, which is more probable if you’re raising money from a fund, then it’s a double-whammy. You’re gonna lose your earnest deposit, unless it’s refundable.  But even if it’s refundable, you’re gonna lose all the upfront due diligence costs, and your reputation is also going to take a hit.

So when should you work with a private equity institution? The main factor would be if you have a long contract to close timeframe. You’ve got a lot of time before you close, so you don’t have to worry about waiting a month or two for the institution to get back to you and let you know if they could fund it. And if they say no, you have plenty of time to raise money from your list of private investors; ideally you have that, and you’re not just relying solely on private equity. But again, since you’re likely experienced, you’ve raised money from people before so you do have a network of passive investors that you can tap into, if you’re unable to quality.

So the main thing would be if you have more than 90 days, so like 120 days plus maybe a few 30-day or 15-day contract extensions, that would be good time to use the private equity institution. If you don’t need to go non-refundable on your earnest deposit, similarly, because if you’re unable to secure the funding from the private equity institution because they denied funding, and you’re unable to get money from the passive investors, then you could at the very least get your earnest deposit back… But again, you still have the issues with the upfront due diligence costs, as well as the reputation. So ideally, you have a long timeframe, so that if you’re denied funding, you can raise money from your passive investors.

Overall, the three reasons why Joe personally does not work with institutions is 1) they don’t review deals unless they’re under contract; 2) they deny funding until at least 30 days after the deal is under contract, and 3) if you’re unable to close, you lose money and reputation. So that is when to work with and when not to work with private equity institutions.

Until tomorrow, check out some of our other Syndication School episodes on the how-to’s of apartment syndications, make sure you download the free documents we have available as well. Both are available at SyndicationSchool.com.

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

JF1927: Everything You Need To Know About Sales Assumptions When Underwriting An Apartment Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:21:38)
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When underwriting a potential deal, you’ll need to have set assumptions that will help you determine how much cash you will receive at sale. After investors are paid back, you’ll be splitting the profits with them according to how you structure the investment. Theo will break down how Joe and Frank underwrite their sales assumptions for Ashcroft Capital. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to determine what  the closing costs are going to be as well how much debt you will owe. Subtract those two factors from the sale price, and that gives you your profits at sale”

 

Free Resource:

http://bit.ly/salesassumptionoutline

 


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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two podcast episodes; they are available on the best real estate investing advice ever show in podcast audio form, as well as available on our YouTube channel in video form.

These episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer some sort of free resource. These are PowerPoint presentation templates, these are Excel calculators, these are PDF how-to guides, these are resources that will help you in your apartment syndication journey, that accompany the specific episode or series that we are discussing. Of course, these are free, just like the Syndication School episodes are free. Both of those are available to SyndicationSchool.com.

In this episode we are going to talk about sales assumptions. This episode is entitled “Everything you need to know about sales assumptions when underwriting an apartment deal.” If you harken back to our discussion about underwriting value-add apartment deals or just underwriting really apartment deals in general, one of the many assumptions are going to be your sales assumptions. That is the assumptions the assumptions made about when you actually sell the deal on the back-end.

The purpose of this episode – it’s going to outline how to think about in more detail these assumptions that you’re setting when you are initially underwriting the apartment deal. So all of these assumptions are a part of the disposition summary that is outputted for you at the end of your underwriting process, which basically tells you how much cash you’re going to get at closing. That’s gonna be very important for you when you’re raising capital, because you’re obviously offering your investors some sort of ongoing return, whether it’s a preferred return, a profit split, or a combination of the two, class A, class B… But a large portion of the return – and maybe even a majority of the return – actually comes at sale. So you add value to the property, you force equity up and up and up, you sell the property for a large profit, and then after you have returned equity to your investors, the remaining profits are split between you the general partner, and the limited partner. The return goes from maybe 8% to 10% annualized, up to 20% plus annualized, once you take into account those profits at sale.

As we’ll dive deeper, the actual profit at sale calculation is very sensitive. So you could change the assumption just a little bit and it could increase your sales price, which would in return increase your profits. So it’s very important to be specific, to be conservative when you are making these underwriting assumptions on the back-end. Once I get to that part of this episode, I’ll explain what I’m talking about.

This disposition summary flows like this – so you decide to sell the property, you have a  net operating income at that date… So I guess going in you have in your mind a projected hold period of, say, five years, so in five years you plan on selling the property. In your model you have a year five ending net operating income, as well as the exit cap rate assumption that you think the cap rate will be at year five, and then you divide the net operating income by the cap rate to get the projected sales price of the property, the value of the property, which you assume is gonna be the sales price of the property.

Then you take the closing costs expense, as well as any debt that you still owe to your lender if you’ve got a mortgage on the property, and you subtract that from this projected sales price… Because those are gonna be expenses paid out at closing. And then you determine based off of that what the sales proceeds are going to be.

So the six assumptions here that we’re making is 1) the net operating income, 2) the exit cap rate, 3) the sales price, 4) the closing costs, 5) the remaining debt, and then 6) the sales proceeds. So we’re gonna go ahead and go through all six of those, and discuss (again) how to think about setting these assumptions.

First is the net operating income. As you know if you’ve been listening to the Syndication School – and I mentioned this a few seconds ago – the value of the apartment is based on the net operating income. That is one of the two factors that goes into the value of the apartment calculation.

The value of the apartment equals the net operating income, divided by the second factor, which is the cap rate. So to calculate the projected sales price, the first thing you need to do is determine what the net operating income is at the sale. So you’ve got your deal fully underwritten — this is assuming you’ve already underwritten the entire deal, and the last thing you need to do is set these last assumptions. In our underwriting process, this is actually one of the last things you do, because a lot of the formulas that are used in this disposition summary are tied to the five-year business plan, and things like that.

The first assumption that goes into your net operating income is obviously the hold period. So when you’re initially underwriting the deal, you need to know how long you plan on holding on to the property. Again, the profits at sale are going to be a large chunk of your investors’ profits, and if you don’t have an end in sight, you’re not gonna have that profit in sight, so you can’t just hold on to the deal for an indeterminate amount of time, unless of course that’s what your investors want… But most likely you’re gonna want to sell the property at some point, so you can return their equity, as well as give them that profit. So five years, six years, seven years, eight years, nine years, ten years – whatever you wanna do, but you need to set that assumption in your underwriting model.

Now, in the simplified cashflow calculator that is hardwired in, you can’t change it. It’s set at five years. But obviously, as I explained in those episodes, you wanna use this as a guide, and then from there using your Excel skills (if you have those) and making it more detailed.

So that’s one, the hold period. And then obviously, once you know the hold period, then you can pull that net operating income number and use that for your calculation. And of course, the net operating income calculation is based off of the income and the expenses, but usually, since it’s gonna be year five, it’s actually based off of the stabilized income and expenses that you underwrote, plus whatever annual income and annual expense growth that you assumed; your rental growth is gonna be based off of how quickly you do renovations… So obviously, there’s a lot that goes into the net operating income calculation. I’m not gonna go into extreme detail on that right now, because we’ve already talked about that a ton in our episodes on how to underwrite the deal.

The one thing that I did wanna stress is the hold period; the NOI at the end of year five is gonna be different than the NOI at the end of year three, which is gonna be different than the NOI at the end of year ten… And since those are all gonna be different numbers, the value of the apartment at year three, year five and year ten are also gonna be different. Hopefully, the NOI is higher at year three than it was in year five and year ten. So once you set that hold period assumption, then you can pull that NOI number from your five, ten-year projections. So that’s the first assumption.

The second one is the exit cap rate. That’s the other part of the value calculation to get that sales price. So in the simplified cashflow model, the assumption is that the exit cap rate is 50 basis points higher than the in-place cap rate at acquisition. So whatever you paid for the property and whatever the net operating income at the time was, is used to calculate the in-place cap rate. So it would be the NOI divided by the purchase price.

So the assumption is that the exit cap rate is going to be 50 basis points, which is 0.5% higher than that in-place cap rate… Which is assuming that the market is worse at sale than at purchase, which is a conservative assumption. Because if the market is the same or is better, then that’s just extra value that’s created. But if it’s worse, then you’ve already accounted for that. If it’s way worse, well then you’ve already accounted for at least some of that.

Now, this 50 basis points assumption that we use is based on a five-year exit. So if you want to have a lower one, if you’re gonna make the exit cap rate the exact same as it was in place, if you wanna make it less than, greater than, it’s really up to you. This is just what we do. But if you make that change, then you wanna make that change reflected in your cashflow calculator. So however you’re calculating your exit cap rate in your cashflow calculator… If it’s gonna be 50 basis points greater than the in-place cap rate, then the formula would be in-place cap rate plus 0.0005. If it’s something else, then you wanna change that plus number… And if you’re just inputting a different number entirely that’s not based on the in-place cap rate at all, then you’ll wanna just input that.

Now, there are a few scenarios where you can’t just base the exit cap rate on the in-place cap rate. There’s really two that come to mind. The first is if you bought the property below market value, and the second is if you are updating the property to such a degree – and this kind of ties into yesterday’s episode, or if you’re listening to this in the future, the Syndication School episode before this one, about underwriting a highly-distressed apartment deal… So if you’re adding  a ton of value to an apartment, that actually brings it from class B to class A, or class C to class B, or class D to class C, so it’s going up in class ranking – then you’re also gonna want to not base the cap rate on the in-place cap rate.

So in the first scenario, if you’re acquiring the property below market value, then the in-place cap rate is going to be a lot higher than what the actual market cap rate is… Because the value is lower, the NOI is the same, so therefore the cap rate is higher, since it’s in the denominator of that formula… So you need to figure out what the actual market cap rate is, because your transaction is not actually at market cap rate.

So this is speaking with your property management company, or your broker, and reading the various market cap rate reports by institutions such as CBRE, to help you determine based off of the stabilized product what is the market cap rate. And then you can base your exit assumption on that number, as opposed to the in-place cap rate.

The other time, again, is if you’re taking the apartment to a higher asset class. Generally, the cap rate of class A are less than the cap rates of class B, which are less than the cap rates of class C, which are less than the cap rates of class D. So if you are buying a class C at a higher cap rate, and you convert it to a class B, at that lower cap rate, well then you’re not gonna wanna base your exit cap rate on that class C cap rate; you’ll wanna base it on that class B cap rate. So again, where do you find that? Same place you find any market cap rate, which is your property management company, brokers, and the various commercial real estate reports. Once you find that number for the new asset class, then you can base your exit cap rate assumption on that number. So that’s assumption number two, exit cap rate.

Assumption number three is the sales price, which technically isn’t really an assumption. I mean, it is, but it is based off of two other assumptions. So it’s based off of your NOI at exit assumption and your exit cap rate assumption – again, NOI divided by cap rate gives you the value. In your cashflow calculator that’ll most likely be automatically calculated. It is in our simplified cashflow calculator that you can get at SyndicationSchool.com for free.

Number four is the closing costs. These are the expenses that are associated with selling the apartment, and in the simplified cashflow model we just have it set to 1% of the sales price. It’s not necessarily a placeholder, but it’s just assuming that all it is is these lending closing costs; the closing costs paid to the lender, which may be lower or higher than 1%.

So there are other expenses that might be incurred at sale, depending on your business plan, depending on the loan that you’ve got… So here’s a breakdown of some of those other potential expenses. If these are something that you believe might be incurred at sale, well, make sure you’re accounting for these in your disposition analysis.

First is the commission. If the deal on the back-end is listed for sale by a broker, they’re gonna take a percentage of that purchase price. That’s gonna be based on the sales price, so you need to account for that in your disposition analysis. So ask the broker you expect to use what they would charge to list the property on the back-end. Usually, it’s gonna be a percentage, but it might also be a flat fee, depending on if you’ve exceeded a certain dollar threshold… So it kind of varies, depending on the sales price of the deal. But you can get that information from the broker, whether it’s a flat fee or a percentage. That’s gonna be something else that’s subtracted from the sales price when making the sales proceeds calculation.

Two is a disposition fee, which is kind of like a back-end acquisition fee charged by you, the syndicator, for the process, the work involved in actually selling the deal. 1% of the purchase price is standard, but again, you may or may not charge this fee.

The pre-payment penalty and yield maintenance and defeasance are all kind of wrapped into one. If there is a yield maintenance, a defeasance, a pre-penalty clause in your mortgage, and you sell your property before that clause expires, well there’s gonna be some extra fees that are gonna be paid to the lender for exiting the deal. I’m just gonna leave that there, because we’ve talked about pre-payment penalty, yield maintenance and defeasance in the Syndication School episode “Everything you need to know about pre-payment penalties.” So for more information on that and what those numbers/costs might be, make sure you check out that episode.

Next are closing costs. And now I’m saying “Well, how is closing costs a category of closing costs?” Well, these are the costs that are associate with ending the mortgage that your lender charges. Whenever you sell a deal, there’s always closing costs; these are what’s associated with that. To get those numbers, talk with your mortgage broker or lender, to get an estimation of what those will be; is it a percentage of the purchase price, a flat fee? Things like that.

And then lastly, legal costs. Since you’re putting a syndication together, there is steps that need to be taken to end that syndication partnership, which requires the work of a real estate attorney or a securities attorney… So that’s also an extra cost you might have to pay, depending on your contract with them. So you’ll wanna also talk to them, your securities attorney and your real estate attorney, to determine what’s the process for ending the partnership and any costs associated with that.

All those combined add up to the closing costs expense, which is subtracted from the sales price. The last thing that’s subtracted from the sales price, or I guess the second thing that’s subtracted from the sales price is the remaining debt. So you secured a mortgage, and you paid a principal towards that mortgage, so the remaining debt is the initial loan balance minus all the principal payments. Maybe you had three years of interest-only and no principal was paid down, so maybe it’s like two years of principle; maybe it’s five years, maybe it’s ten years, maybe you paid extra, for some reason… Whatever that happens to be, there’s going to be an amount that you still owe to the lender to pay off that loan… And that also comes out of the sales price.

That is something that, again, is tied back to the holding period assumption. So if you plan on holding on to the property for 4-5 years, then based off of whatever the amortization schedule is, you will know how much of the loan you should have paid off, unless something crazy happened and you can’t pay the loan off. This is something that’s gonna be a maximally certain assumption, shall we say, that you should be able to know how much debt is gonna be remaining based on when I sell.

If I have three years of interest-only and I sell at year three, then I owe all of the debt back. If I sell at year ten and I have five years of interest-only, then those five years of principal paydown, which are gonna be on kind of a sliding scale, since you pay more interest upfront, and gradually pay off more principal over time, you can look at your amortization schedule and it’ll tell you “You’ve paid this much principal in year two, this much in year three, year four, year five”, therefore all those together have paid down the mortgage, so whatever is left over is what you owe. That is the remaining debt.

The last assumption, which again, is kind of like the sales price assumption, is actually based off of the previous two assumptions, or the previous three assumptions, or I guess all five assumptions, is the sales proceeds. So the sales proceeds is going to be the sales price minus the closing costs, minus the remaining debt. And again, in your cashflow calculator, this is most likely gonna be automatically calculated for you, if you set it up properly. And then whatever that number is, a portion of that is going to go to your investors…

So however much equity you owe them — it depends on how you structure it, but typically it’s either all of their equity, if you offered a preferred return,  or if you did a refinance, or if you had the partnership structured such that any profits above the preferred return are considered a return of capital, then those profits above the preferred return in addition to the refinance proceeds are typically considered a return of capital… So that’ll be subtracted from whatever equity is owed, and then the remaining balance will be owed, and the  rest of those sales proceeds that are remaining, the profits that are remaining are split amongst the GP and the LP based off of what was agreed to.

So overall, you need to know what the exit operating income and the exit cap rate is at your projected sales date, so those are two assumptions you set. Based on that,  you can determine what the projected sales price is gonna be. Then you also want to determine what the closing costs are going to be, as well as how much debt you’re going to owe based on that sales date… Subtract those two factors from the sales price and that gives you your profits at sale, which a portion goes back to paying your investors, and the rest is split as profit, and that will go into your IRR and cash-on-cash return calculations.

So that’s it for this episode… That is everything that you need to know about setting the sales assumptions when you’re underwriting an apartment deal. Until next week, check out some of the other Syndication School series episodes that we have about the how-to’s of apartment syndication. As I mentioned in the beginning, lots and lots of free documents as well. All of that is available at SyndicationSchool.com.

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

JF1926: How To Underwrite A Highly Distressed Apartment Deal | Syndication School with Theo Hicks

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We’ve covered underwriting for more “normal” value add apartment syndication deals. Now we’re going to hear the differences between underwriting those deals, and underwriting highly distressed apartment communities. Theo will cover how you should underwrite highly distressed deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two Syndication School episodes on the best real estate investing advice ever show podcast. You can also watch them in video form on our YouTube channel. These episodes focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these series we offer some sort of resource. These are PowerPoint presentation templates, Excel calculators, PDF how-to guides, things that accompany the episode or the series. And of course, these are free for to you to download. All of these free documents can be found at SyndicationSchool.com, as well as all of the past Syndication School episodes.

This episode we are going to talk about how to underwrite a highly distressed apartment deal, today’s episode, and then the next Syndication School episode is gonna be focused on underwriting.

When you are underwriting your normal value-add or turnkey apartment syndication deal – we’ve covered that already in Syndication School. In fact, we did I believe a six-part series, or maybe even an eight-part series on underwriting… So if you want to learn how to underwrite those types of deals, go to SyndicationSchool.com, or just go to JoeFairless.com, type in “underwriting”, and then you’ll see all of those Syndication School episodes where we went over in great detail how to underwrite deals, we gave away a free simplified cashflow calculator, as well as some other documents to help guide you through the underwriting process.

This process is a little bit different. This isn’t an actual calculator. You can technically use the cashflow calculator that we provided, but you need to make some manipulations, just because when you are doing a highly-distressed deal, the upfront assumptions of underwriting are gonna be slightly different.

So we’re gonna find a highly-distressed deal that is something that has a low occupancy rate, so something that’s not stabilized,  so below 85%, but it could as low as 50%, or it could be completely unoccupied. It’s also something that has a lot of deferred maintenance; this isn’t a deal where it’s already got the deferred maintenance cured, and your plan is to either go in there and just continue to operate how it currently is, or if your plan is to go from that foundation and implementing some value-add business plans like renovating the units, adding some exterior amenities to increase the rent. This is different; this is when those things need to be done, obviously, but there’s also the added thing of a lot of deferred maintenance. Another example would be thing that have very big tax liens on them.

Basically, this is a deal that requires a lot of upfront capital to even get it to the point where you can start collecting money. So when you are underwriting a distressed property that fits that criteria, rather than just starting right away with “Okay, all my cap-ex are gonna be to add value”, you need to take a different approach… And we have a formula for calculating the max purchase price; the formula is going to be the stabilized value, minus the deferred maintenance expense, minus the stabilized expense loss, minus contingency, minus an equity fee, minus other expenses. I’m gonna go ahead and define all those, obviously, and then we’re gonna give away this document that I’m using as a guide for this for free, just so you can have that without having to have an audio form… So you can just be like “Alright, I’ve got a highly-distressed deal. What do I do? Oh, I’ve got this document in handy, that walks me through that entire process.”

So let’s go ahead and define the inputs and the outputs of this formula. Obviously, the output is the max purchase price. That is what you are calculating, and that is going to be the maximum amount of money that you’re willing to pay for the property. So what is the highest purchase price you’re willing to offer for this highly-distressed property? That’s number one.

The next thing – this is really the only positive input, which is the stable value of the property. This is gonna be the value of the property when it is fully operational. So you’ve addressed all the deferred maintenance, all the other issues… It is stable, so you’ve got an occupancy rate that’s at least 85%, and to calculate this number you want to divide the stabilized net operating income by the market cap rate.

To get the market cap rate you wanna talk to your broker, property management company… There’s lots of reports out there that talk about what the cap rates are for particular markets, but it’s gonna be pretty specific to what you expect the stabilized product to be; is it a class A, class B or class C market? All those things go into what that market cap rate is going to be, so it’s gonna take some research on your point, because I can’t just give you a general number and say “Hey, it’s gonna be a 5% cap rate”, because I don’t know where you’re investing, I don’t know what class the property will be once you’re done curing deferred maintenance and doing renovations… So make sure you have a conversation with your experienced property management company, the broker… They should give you an idea of what the market cap rate is for — not what the market cap rate is for the property in its current condition, but what’s the market cap rate for once this property is actually stabilized.

Then for the net operating income – this is why I mentioned that you can use the simplified cashflow calculator that we gave you, but there’s upfront work before you’re gonna input data into that. So once everything is stabilized, once all the deferred maintenance is cured, you can underwrite the deal like any other deal… And when you do that, you’ll have your one-year, two-year, three-year, four-year, five-year etc. income projections, expense projections, and then your net operating incomes.

And even when you’re underwriting a regular value add deal, you start how it currently is operating, and then you say “This is what I plan on doing, and based on what I plan on doing, this is the new income based on the rents and other incomes being collected. Here’s the new expenses based on how it’s currently operating and how I expect to operate it, and here’s my net operating income.”

So you wanna follow that same process to calculate what is going to be your projected net operating income once you’ve taken this property from highly distressed to stabilized. This is not a five-year NOI, this is — alright, let’s say for example the property is at 50% occupancy, and that’s really the only issue. Well, what’s the next operating income once you get it up to whatever your occupancy projection is?

If you project an 8% vacancy rate, then what is going to be the net operating income at 92% occupancy with everything at market rents, and the expenses being whatever you decide the expenses to be based on, again, how the property is currently operating and the conversation with your property management company and how they can operate it.

I go into a lot more detail on that in the episodes about underwriting a standard deal. You can use the advice I gave there plus what I’ve just said to figure out how to calculate that stabilized value. But overall, it is gonna be based on the market cap rate once that property is stabilized, and the NOI once that property is stabilized. That’s the positive input. Now, everything else is gonna be subtracted from that stabilized number.

First you wanna just subtract deferred maintenance. What are the costs to cure all the deferred maintenance issues, both interior and exterior? These are not going to be things that are value-add, these are things that are gonna be things that need to be done to get the property actually functional.

Maybe there’s a bunch of units that are completely down, that can’t even be rented. That’d be an example of deferred maintenance. Maybe half the roofs are really old and leaking. That’s deferred maintenance. Those are things that are required to be addressed in order to make the property livable. So tally up all those costs. Obviously, that requires going to that property, doing your due diligence… So you’re not gonna have an exact number upfront, but we’ve talked about, again, in previous Syndication School episodes on how to determine these things before you actually put the deal under contract.

That involves going to the property, talking with experts, getting some high-level quotes from experts as [unintelligible [00:10:10].11] having conversations with the property management company to figure out what these items are, and then what the cost of these items are. And then you can also ask the owner, but again, you can’t totally accept what they say to be true for deferred maintenance, because they might not necessarily be giving you all of these correct information, or all of the deferred maintenance issues.

So subtract deferred maintenance from the stable value… You’ll also wanna subtract what we’re calling the stabilized expense loss. Let’s say that it takes you one year after buying the property to get it stabilized, to actually start collecting rent. Well, there’s a lot of money that’s going to be lost during that time, so you can’t just start your proforma at end of year one; there’s a whole entire year of you paying insurance, of you paying utilities, of you actually using rental income that’s coming in. Not only are you not making any money, but you’re actually paying money. So you wanna account for all of those things  as well – all the rents that are being lost, all the income that’s being lost and all the expenses that are being paid need to be included in this formula. So you wanna also subtract that number from whatever that stable value is.

Next is contingency. You’ve got your deferred maintenance budget, you’ll also want to have a contingency budget, again, just in case you weren’t able to identify all of the deferred maintenance issues, because that’s going to be impossible until you actually get in there. Sometimes you need to actually break into walls and you realize “Oh my god, there’s so many more issues.” You hear stories about that all the time.

For this particular formula, we recommend having at least 10% of that deferred maintenance budget as contingency. Sometimes people do 50%, sometimes people do 20%, 25%… It’s really what you’re comfortable with, but the point here is to 1) actually have a contingency budget, and 2) have it be at least 10% of the deferred maintenance cost. So if deferred maintenance is $100,000, then you wanna have an extra $10,000 as contingency for a total of $110,000 between the deferred maintenance and the contingency expense.

You’ll also want to account for equity fee. So you’re putting in all this effort into turning around this property, and in return for the effort you should want to get paid for that. Obviously, you’re not going to be getting paid from rents, so the way that you recapture that risk you put into the deal is through an equity fee. This is going to be a percentage of the stabilized value. How much equity do you want to have built up in return for your efforts? …and you subtract that from your purchase price. So rather than paying a million dollars, if you want to have $100,000 in equity, you pay $900,000 for your efforts. So you’re getting in at a discount because of all this effort and risk that you’re putting into the deal.

And then lastly is other expenses, so really anything else. As I mentioned in the introduction, talking about what types of deals can be considered highly distressed, it could be things that have tax liens on them. So if there are delinquent taxes, then you’re gonna wanna go ahead and make sure that you’re accounting for  that in your purchase price. So if you have to pay $100,000 or $50,000 in tax liens, you’re gonna  wanna reduce your purchase price by that $50,000 number, so that you’re not actually paying for the mishaps of the current owner.

These could be also things like financing fees, if you’re getting a loan on the property and not paying cash, acquisition fees… The acquisition fee would be something that you would charge if you’re raising money for this deal, or it’s just kind of your typical closing costs; things you need to pay for during due diligence, any of those upfront costs that you need to pay to actually close on the deal. Those are pretty standard across really any apartment deal. The specifics here would be any sort of delinquent taxes or some other type of lien on the property that needs to be paid off before it can even be sold.

So again, the formula is max purchase price, which is the maximum amount of money that you can pay for the deal, equals the stabilized value, which is based off of the cap rate and the NOI, minus all deferred maintenance, minus stabilized expense loss, so all the things you’re paying for while you’re actually stabilizing the property, minus contingency, which is a percentage of the deferred maintenance budget, minus an equity fee, which is the amount of equity you want to make based off of your efforts and taking the risk, minus all other expenses, whether they’re liens or the standard closing costs.

Before we close, let’s just go over an example. This is not a real-life example, this is something to show you how to calculate what the max purchase price would be on a highly-distressed property.

Let’s say you’re looking at a 100-unit apartment community that is currently 50% occupied. And again, we’re gonna give this to you for free, so I’m not gonna bring out my calculator and show you all the math. I’m just gonna say “This plus this equals this.” So you’ve got a 100-unit apartment community, half the units are vacant. So 50% of the units have already been remodeled for $5,000 each, and they’re all rented for $100,000 per month. So half the units are all fully renovated, remodeled, renting for $1,000/month, and it costs $5,000 to renovate those units.

Of the 50 vacant units, half of the units are flooded, and you’ve determined the cost of deferred maintenance is $1,000/unit, plus the additional $5,000 in renovations required after the water damage to bring it up to that remodel level to achieve that $1,000/month in rent… So a total of $6,000 needs to be invested in those 25 units.

Then the other 25 units need just to be remodeled to get that $1,000 market rent, so $5,000 is required for those. So really only 25% of the units are actually messed up, 25% are just not renovated, so it’s more of like a value-add play… And then 50% are actually done, ready to go, being rented. Also, let’s say you calculate the exterior deferred maintenance. Let’s say maybe the roofs in these 25 units are all leaking, so you need to spend 30k to fix those roofs.

Then you spoke to your contractor, they said “You know, it’s gonna cost  you 30k, you’ve got the 5k costs for the renovations, it also costs 1k to fix those water damages, and  it’s gonna take us six months to complete.”

Let’s also say that the owner has 50k in delinquent taxes. Those are kind of all the inputs you need to know. Then you talk to your property management company, you talk to your broker, and based on current listings of a similar product once it’s stabilized, you have the market cap rate of 10%… Which is obviously pretty, but that just makes the math a lot easier on our end.

You calculate that the stabilized annual expense per unit is gonna be $6,840. So the expense per unit for this deal is $6,840, and times a hundred, overall that’d be about $684,000. So how do we calculate the max purchase price? Again, I know I went through all that really quickly. We’re gonna give this away for free so you’ll have all the information in front of you, so you can have an idea of how to calculate these numbers.

Obviously, I just said exterior deferred maintenance is 30k; there’s a lot more that goes into that than just pulling the number out of a hat. You have to go to the property, you have to talk to contractors, things like that. But we already talked about that earlier.

So the stabilized value is going to be the annual income, so you need to figure out what the annual income is first, then figure out what the annual expenses is first, and that’ll help you determine the NOI. So the annual income is based off of 90% occupied, times 100 units, times $1,000/month, times 12 months, is about one million dollars. So this is $1,080,000. That’s the total income once this thing is 90% occupied, and then you’ve got the units being rented for $1,000. The annual expense, as we’ve mentioned, is $6,840/unit, times 100 units, is $684,000; that’s gonna be your expense… So your net operating income is the subtraction of those two, so you’ve got $396,000. The stabilized value based on a 10% cap rate is 3.96 million, which is $396,000 divided by 10%.

So you’ve got your stabilized value of, again, 3.96 million dollars. That’s one input. Deferred maintenance – so you’ve got interior deferred maintenance on the 25 units that just had the water damage, which times $1,000 is $25,000. You need to rehab the interiors of those 25 water damaged units, as well as the 25 units that have not been renovated, so $5,000 times 50 is $250,000. You’ve got your exterior deferred maintenance of — I say 50k here, but it should be 30k… And then you’ve got the deferred maintenance, which is a total of all of those; again, part of that is value-add, but that’s $25,000 plus $250,000, plus $50,000 now for the exterior deferred maintenance (I misspoke earlier). So a total of $325,000 for deferred maintenance.

For the stabilized expense loss we’ve got the 50 units that are vacant, times the six months that they’re vacant, times $1,000, which is $300,000… So that’s accounting for the income that’s lost; we’ve already accounted for the expenses… We’ve got the contingency, so we’re gonna do 10% for this case. 10% of the $325,000 deferred maintenance is an additional $32,500.

Let’s say that I want 10% equity for all these  efforts, so take 10% times the stabilized value of 3.96 million dollars, so the equity that I want is $396,000. And then other expenses – you’ve got your delinquent taxes of $50,000, closing costs of (let’s assume) $50,000, and let’s say you’re raising money for this and you want an acquisition fee of $50,000… For a total of $150,000.

So the max purchase price calculation is that stabilized value minus all these numbers. So 3.96 million minus the 325k in deferred maintenance, minus the 300k in the stabilized expense loss, minus the 32,5k in contingency, minus the 396k in equity, minus the 150k in other expenses… Brings you to the max purchase price being 2.7565 million.

Now, just to maybe reiterate, or just to say that this is obviously a very, very high-level… So a lot of these numbers — again, I kind of just said “Hey, here’s an example”, but again, underlying those numbers is a lot of extra effort to get the numbers. And then obviously, once you’ve done all this, you’ll also want to fully underwrite the deal. “Alright, so it takes me six months in this case to get it stabilized.

Once I’m there – alright, how does this deal perform based off of this purchase price?” Then you could actually adjust that purchase price even lower from there. Again, this is a max purchase price… But at the end of the day the deal might not make sense at this purchase price if you start to underwrite it out fully, look at a five-year proforma, and have a specific return goal in mind for your investors, in that case. This isn’t really taking into account the ongoing ROI; that’s something that you wanna do after you’ve come to this conclusion for the max purchase price.  But this is a great place to start… Of course, all of these deals need to be underwritten on a case-by-case basis.

As I mentioned in the beginning, this document that I’ve used as an outline for this episode will be available for you to download for free, in the show notes or at SyndicationSchool.com, so definitely take advantage of that. We’ll be back tomorrow, or if you’re listening to this in the future, the next Syndication School episode is going to be talking about the sales assumptions when you’re underwriting a deal. So what to assume about your exit when you’re actually initially underwriting the deal.

Until then, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndication. Make sure you download this free “How to underwrite a highly distressed deal” document. All that is available, again, at SyndicationSchool.com.

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

JF1920: The 51 Responsibilities Of The General Partnership Part 2 of 2 | Syndication School with Theo Hicks

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Yesterday Theo began discussing these 51 responsibilities. Today he will finish the rest of the responsibilities that he didn’t get to yesterday. You won’t hear a detailed breakdown of each responsibility, we’ve already done that throughout syndication school. The focus of these episodes is to help you figure out how to divide up these responsibilities among your team and business partners. 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, and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week we air two podcast episodes that are focusing on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes – or series; right now we’re doing a two-part series – we offer a free document. These are PowerPoint presentation templates, Excel templates, PDF how-to guides, things that accompany the series or the episode, that help you grow, scale, start an apartment syndication business. All these free documents, as well as past Syndication School episodes/series can be found at SyndicationSchool.com.

This is part two of a two-part series entitled “The 51 responsibilities of the general partnerships.” In part one we first discussed the context of why we’re even talking about this, which I’ll get into in a second, and then we went into the first 28 roles and responsibilities of the general partnership, which make up the pre-contract phase, the “Hey, I wanna do apartment syndications” to “Oh my god, I have my first deal under contract.” All the various steps involved to get from that starting point to that first ending point, in a sense.

In this part we’re gonna talk about the remaining steps, roles and responsibilities 29 through 51. Again, taking a step back, to give context for why we’re talking about this, when you’re doing apartment syndications you are most likely not doing them by yourself. If you’re doing them by yourself, then this is not 100% relevant to you. But if you have a business partner, or multiple business partners, then you need to figure out who is going to do what. Who is responsible for what aspect of the business plan, and making sure that these are defined, so that everyone knows what their roles and responsibilities are, and everyone knows what everyone else in the partnership is supposed to be doing, rather than keeping it vague. The best way to do this is to know, from beginning to end, what all of these roles and responsibilities are.

You can go through all of these roles and responsibilities, learn more about these roles and responsibilities and what they entail… Which is not the focus of this series, because it would take 20 episodes to discuss this… Which is true, because we’ve actually done 20+ episodes on each of these specific tasks. So we’re gonna have  a blog post in the show notes with the links to blog posts and Syndication School episodes where we go into more detail on each of these steps, so that we don’t have to focus on that in this series.

But again, the entire point of this two-part series is to list out in two episodes all of the main roles and responsibilities of the general partnership, so that you can take this information which is in this free document that you can download in the show notes or at SyndicationSchool.com, to assign each of these responsibilities to you or your business partner(s), so that you know exactly who’s responsible for what. Then at that point you can set up an accountability system, do weekly calls to make sure everyone’s doing what they’re supposed to be doing, things like that. But that’s, again, not the focus of this episode. The focus of this episode is to talk about the things that need to be assigned to people.

So in part one we went over the pre-contract phase, which is one through 28, so  I’m gonna quickly just read those. I went into a little bit of detail on each of those, and kind of how to think about assigning these… But again, in the blog post there are links – probably 90% of these have links to some other blog post or Syndication School episode where you can learn more about how to actually execute this responsibility.

Really quickly, the pre-contract phase 1 through 28 is:

  1. Select Potential Target Investment Markets
  2. Evaluate Potential Target Investment Markets
  3. Select 1 to 2 Potential Target Markets
  4. Create Website
  5. Create Company Presentation
  6. Define Target Audience for Thought Leadership Platform
  7. Create and Grow Thought Leadership Platform
  8. Create an In-Person Meetup Group
  9. Create a Facebook Group And/Or Page
  10. Find, Interview, and Select Property Management Company
  11. Find, Interview, and Select Commercial Brokers
  12. Find, Interview, and Select Mortgage Brokers
  13. Find Business Partner
  14. Find a Syndication Accountant
  15. Find a Real Estate Attorney
  16. Find a Securities Attorney
  17. Find a Loan Guarantor
  18. Define Responsibilities for Each Business Partner
  19. Set Investment Criteria for Deals
  20. Set GP compensation structure
  21. Set LP compensation structure
  22. Create Investor Email List on MailChimp
  23. Find Passive Investors
  24. Build Relationships with Commercial Brokers
  25. Subscribe to Commercial Broker’s On-Market Email Lists
  26. Implement Marketing Strategies to Generate Off-Market Deals
  27. Underwrite Deals
  28. Submit and Negotiate the PSAs.

Again, for each of those in the last episode we kind of briefly hit on what each of those are and why you need to assign these to people… And the ultimately, the purpose on your end is to assign each of these 28 responsibilities to a member of the general partnership based on their background, their experience, what they’re good at and what they actually like to do.

Similarly, you’re gonna wanna follow the same process for the remaining roles and responsibilities, number 29 through 51. So we are going to go over 29 through 51 in the same fashion we went over 1 through 28 in the previous Syndication School episode. And again, for all the ones we’re going over today, only one doesn’t have a link to another blog post or Syndication School episode, just because it’s more of a checkmark thing… And I’ll mention what that is when we get to it.

So 29, who performs due diligence on the deal? Which is a pretty large role. This is the person who is responsible for once the deal is under contract, making sure all the inspections are done, all the reports are created, reviewing these reports, using these reports to update the underwriting or to confirm the underwriting assumptions, deciding if there’s some aspect of the due diligence that disqualifies the deal or requires going back to the owner/seller and renegotiating terms or the sales price. Again, I’m not gonna go into all the detail on the due diligence; that’s just kind of a general overview. There’s a link for more… I think we have like an eight-part series on doing due diligence in Syndication School. So who’s responsible for managing this due diligence process?

Number 30 is to create the investment summary. This is gonna be a long, 20, 30, 40+ page document. Usually it’s gonna be in PowerPoint format; we do have the investment summary template at SyndicationSchool.com for you to download… But this is gonna give you a general overview of the deal, of the property, the market, and your business plan for the deal. And then whatever else you wanna include; maybe a section on case studies of successful deals you’ve done in the past. This is a thing that you send to passive investors when you are announcing the deal. So who’s responsible for creating this investment summary? Most likely, someone who has had a hand in or is responsible for underwriting, because a lot of the information that is included in the investment summary – the majority of it in fact – comes from the underwriting. It’s all the assumptions made, the market research done, rental comps, financial analysis, things like that. Who’s making that document?

Number 31 is to announce the new deal to the investor list. When you have a deal under contract, you’ve got your investment summary done, you’re performing your due diligence… At the same time, you want to announce your deal to your investors, so you can start the process of securing commitments from your investors. This starts with an email that includes information about the deal… So who is writing this email? Who decides what goes in this email and what doesn’t go in this email? So overall, who’s responsible for creating this email. Most likely it’s gonna be the person who’s responsible for managing the entirety of the email list, so sending out all the emails to the investors…

Unless you want, again, to have multiple people, there’s gonna be one person who sends out the investment [unintelligible [00:10:29].24] 31, which is the announcing the new deal to investors, and maybe someone else is responsible for sending out ongoing email updates to the investors. Again, whatever you wanna do, but again, this is a specific duty, announcing the new deal to your investor list; you wanna know who’s gonna do that before you get to that point, and you’re not arguing over who’s making this email.

I guess a more general point to make is another reason why you want to  define all the roles or responsibilities upfront is because you don’t wanna have to stop and have a back-and-forth negotiation or argument with the members of the GP each time you get to a new step in the process. Like “Alright, the deal is under contract. Now starting to do due diligence. Well, who’s responsible for managing this? Well, I don’t wanna do that. I underwrote the deal, so why would I have to do due diligence? You should do this.” You wanna have all this stuff defined upfront, so you don’t have to argue over every single step in the process as it comes up. You know from the beginning “Alright, Theo, you underwrote the deal. Now is my turn to take over and do due diligence.” Or “Theo, you underwrote the deal, so you’re also gonna do due diligence as well.” Again, all this is defined upfront. So that’s 31, announce a new deal to the investor list.

Number 32 is perform the new investment offering conference call or webinar. When you are doing the call or webinar, presenting the deal to your investors – who’s on that call? Who’s responsible for setting up the call in number or the webinar? Who’s responsible for creating the structure for a new investment offering call? Who’s actually gonna execute the call? Who’s gonna talk on the call? Who’s responsible for gather the Q&A from your investors? That’s what I talked about in the last episode – it’s not just perform a new investment offering conference call or webinar; there’s a lot of subcategories or subduties underneath that, that need to be assigned to people. For each of these, in reality it’s not for every single one, because some of them are pretty straightforward, like “Announce new deal to investors. Who’s creating that email?” But for something like 32, performing the new investment offering conference call, there’s a lot of other steps that go into executing that conference call. Maybe one person isn’t gonna be responsible for all of it.

So when you get to this point in the document, you’ll be like “Alright, what all needs to be done to actually execute the new investment offering call?” And then based on all those steps, who is gonna do what? Is it gonna be one person, or is this person responsible for the logistic aspect of it, but then this person is gonna present part one of it, and then another person will present part two, and this person right here is kind of just responsible for the Q&A; if a question is asked about the business plan, then this person answers. If it’s asked about the market – well, this person knows a lot more about the market… Things like that. So that overall concept can be applied to the majority of these roles or responsibilities.

Number 33 is sending the conference call or webinar recordings to investors. Pretty straightforward, but you’re gonna wanna send an email to your list of investors, because not every single person is gonna attend the webinar or conference call. So again, who’s responsible for sending out that information to the list of investors?

Number 32, create legal documents and send them to investors. To formalize their investment, they’re gonna need to sign a PPM, the operating agreements… So who’s responsible for making sure those are created? Who’s responsible for working with the securities and the real estate attorneys to make sure that these are set up on time, and then who’s responsible for making sure that these get to the investors, who’s responsible for making sure that these get to the investors? Who’s responsible for making sure that the investors are actually signing them? Things like that.

Number 35 is create the LLCs. We actually haven’t done a full Syndication School episode on this; I don’t think we have. We will in the future, but basically – there’s various LLCs that are involved in the apartment syndication process. There’s the general partnership LLC, there’s an LLC that owns the deal that the limited partners invest in, and maybe the limited partners have their own LLCs that they’re using to invest in the deal… But overall on the GP side there’s a few LLCs that you’re gonna wanna create; at the very least, one for the GP and one for the deal. So who’s responsible for making sure those LLCs get set up?

Number 36 – this is the only one we don’t have a link  of to a blog post or to a Syndication School episode about, because it’s “Ensure passive investors’ money is transferred.” I won’t say it’s simple, but it doesn’t really warrant a long, drawn out, 30-minute episode or 1,000-word blog post. Basically, it’s just “Did the investors send their money or didn’t they send their money?” Or did they say they sent the money and the money got there, or did it not get there? So it’s kind of just  a check box thing, but somebody needs to be responsible for making sure that passive investors are sending in their money… Because you don’t wanna sit at the closing table and no one’s looked at this, and you don’t have enough money to close on the deal.

Number 37, set up the operating bank accounts. Before you close, you’re gonna wanna have all your bank accounts set up. So again, who’s responsible for going to the bank and setting these up? There’s three main accounts. Again, we’ve got a link to that, so I’m not gonna go into what those operating accounts are. If you wanna learn more about those, make sure you click on that link in the blog post in the show notes; or if you’re watching this on YouTube, it’s also in the description.

Number 38, secure financing. Again, a very general, broad, large step. But who’s responsible for securing the financing from the lender, based on whatever assumptions you set while you were underwriting the deal?

So all the work that’s required to go into securing financing, which again, you can learn more about by clicking on the link in the blog post in the show notes – who’s responsible for each of those steps in that process?

And then 39, closing on the deals. Who’s responsible for the few days leading up to the actual closing date, plus the closing date? Who’s responsible for managing that entire process? Who’s the person that the broker is going to be contacting, the title company is gonna be contacting, who’s wiring the funds, who’s signing the documents? Things like that.

So 29 through 39 – those are the contract to close phase. The last phase, 40 through 51, is going to be the post-closing phase. These are essentially the asset management duties. So who’s gonna be the asset manager will most likely be doing most of these responsibilities, but then the person who’s the investor relations will also be doing another portion of these responsibilities as well. So number 40 is create the investor guide. This goes in tandem with 41, which is notify investors of closing.

In order to notify investors of closing, you’re gonna send out an email to your list of investors. Obviously, who’s responsible for sending out that email list? Who’s responsible for deciding what goes into that closing email?

One of the things that you’re gonna want to include is an investor guide, which is a separate document that they can download, that kind of answers FAQs about investing in the deal; when they get paid, tax timing, things like that. So who’s making this document? Who decides what goes into this document and who’s making sure this document goes to the investors and is sent to the investors? So that covers 40 and 41 – creating the investor guide and notifying investors of closing.

Number 42 is sending monthly recap emails to investors. Who’s responsible for gathering information from the property management company, that is used to create these monthly recap emails? Who’s decides what goes into these monthly recap emails? Who drafts these monthly recap emails? Who reviews these monthly recap emails, and who ultimately sends these monthly recap emails

Number 43, sending quarterly financials to investors. Who’s gonna get the financials from the property management company? Who decides what financials to send, and who ultimately sends these to the investors?

Number 44 – sending the K1 tax documents to investors. Again, who is responsible for gathering these K1s, or who’s responsible for making sure that the accountant is sending these K1s to the investors? Who’s responsible for letting the investors know when they’re coming, how the K1 process works? Things like that.

Number 45 – this is kind of general, but answering incoming questions from investors. In all of your emails or in all of your communications with investors, when you say “If you have any questions, you can contact this person”, who is this person? Who do you want your passive investors to direct their questions to, and then who’s responsible for making sure that these questions get answered?

Number 46, oversee the property management company. Again, this is basically the asset manager. So who is the asset manager? Weekly performance call with the property management company – again, the asset manager most likely. Frequently analyze competition to set rents, 48. Number 49 – frequently analyze the market to determine when to sell. So for 48 – who is responsible for doing rent comp analysis on an ongoing basis? If it’s a property management company, who’s responsible for reviewing that and deciding if it makes sense to increase rents, to reduce rents, to do specials…

Similarly with frequently analyzing the market, when to determine to sell, number 49… Who’s doing that? Your property management company might be doing that, but if they’re not, or if you also wanna do that, who’s reaching out to brokers and getting a broker’s opinion of value, and then ultimately, who decides when to sell the property? Is it gonna be at the end of the hold period? Is it gonna be if you can hit a certain return threshold to your investors? What’s that return threshold and who decides what that return threshold is? This is a very important step, because you may wait until exactly five years to sell, but maybe you wait more than five years to sell; maybe you sell after 2-3 years. Ultimately, you need to have a process for how you’re gonna determine when to sell and if one person has the ultimate decision-making power to determine when to actually sell? So this is a very important thing that you wanna define upfront, because it’s probably something that if you wait until after you’ve closed, you’re probably not gonna be able to come to an agreement on when’s the right time to sell.

Number 50 is to ensure the correct distributions are sent on time. So who’s sending distributions to investors? Most likely your property management company. Who’s responsible for overseeing the property management company to ensure that they’re sending out the correct distributions on time? Who’s the person that’s gonna notify investors when these distributions are coming? And things like that.

And then lastly, who is overseeing the sale of the asset? Basically, the entire process that you did on the front-end, interacting with the listing broker and the seller – who’s gonna be that version for your deals? So who’s gonna work with the broker to essentially go through the entire process of selling the deal? So from listing the deal to actually doing all the due diligence on the deal, to closing on the deal?

Number 29 to 51 – for all of those, except for number 36, ensure passive investor money is transferred, there are links to blog posts, to other Syndication School episodes. You don’t have to find all these yourself if you don’t want to. We wanna make it easy, because we went over a lot of information, and I was not able to go into detail on all of these, because again, it would be a 20 or 30-part podcast series, which I don’t have a problem doing, but I don’t want you to have to sit through all that again, because we’ve gone over all of this before in blog posts and in Syndication School episodes.

So the next step for you is to download the free document that has all of these listed out, download that blog post that you can click on the links to go into more detail on some of the responsibilities you’re unclear about, and then ultimately the goal is to assign each of these roles and responsibilities to a specific member of the general partnership, and then from there you can set up some sort of accountability system, meeting frequency, to make sure that the members of the GP are actually executing these roles and responsibilities.

That concludes this two-part series, the 51 responsibilities of the general partnership. To listen to other Syndication School episodes about the how-to’s of apartment syndications and to download the free documents and the free blog posts in this case, visit SyndicationSchool.com.

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

JF1919: The 51 Responsibilities Of The General Partnership Part 1 of 2 | Syndication School with Theo Hicks

Listen to the Episode Below (00:22:31)
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Theo has already covered most, if not all of these responsibilities in detail on previous episodes of Syndication School. The purpose for this and tomorrow’s episode is to explain how to divide these responsibilities among your team members and business partners. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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

Twice a week we release the Syndication School episodes on the best real estate investing advice ever show, podcast, as well as in video form on YouTube, so you can watch those either place. Each of these episodes will focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, including this one, we offer some sort of resource for free. These are PowerPoint presentation templates, Excel templates, PDF how-to guides, free resources that accompany what we’ve talked about in the Syndication School podcast and video episode, and of course, as I mentioned, these are free for you to download. You can download these free documents, as well as listen and/or watch the previous Syndication School episodes at SyndicationSchool.com.

This is going to be part one of a two-part series, and we’re gonna call this The 51 Responsibilities of the General Partnership. Before we dive into those responsibilities, we’re gonna talk about probably less than half in this episode, and then in the next episode, part two, we’re gonna talk about the remaining tasks. We’ve talked about all of these tasks before in detail in our previous Syndication School episodes, and we actually have a blog post as well written on this… So if you go to that blog post – which we’ll have in the show notes – you can click on the links. That will direct you to the Syndication School episode or a blog post that goes into more detail on those steps.

So the purpose of this episode is not to go into detail on all 51 steps, because it would be probably a 20 or 30-part series… But we’ve done that already; there are probably 20 to 30+ episodes where we talked about these in the past. Again, SyndicationSchool.com, just search whatever role I’m talking about and you should be able to find the episode on that.

The purpose of this episode is to talk about how to break apart these roles and responsibilities within the general partnership. More than likely, if you are going to pursue the apartment syndication investment strategy, you’re not gonna do everything yourself. You’re going to have one or multiple business partners… And the reason why you’re gonna want multiple business partners is because not every single person, including you, is going to be excellent at all 51 of these various roles and responsibilities… Which is why typically when you have a syndication, you’re gonna have multiple members – probably two being the most common  – on the general partnership, and one person does, say, 25 of these roles and responsibilities, and the other person does 26 of these roles and responsibilities.

So the purpose of this episode is to outline all 51 of those roles and responsibilities, give a very brief description of each of those, and then once you know these 51 main responsibilities, you can use the free document, which is the “GP Roles and Responsibilities” document and you can input the names of all the members of the general partnership, and then for each of these different responsibilities you can assign who’s responsible for that. So when we go into these roles and responsibilities, I’ve broken them down into three phases. The pre-contract phase – these are things that are from “Okay, I wanna do apartment syndication” to “I have a deal under contract.” Everything in between that, which is a pretty lengthy process.

The next category are going to be the contract to close. So “I’ve signed the PSA. What are the next steps until I actually sign the closing papers and I actually take over the deal?” And then the third category is going to be the post-closing phase. That is after closing on the deal, to when you actually sell the deal.

So what’s nice about the document we’re providing you with is that it has these 51 main responsibilities, but each of these responsibilities could technically be broken up into maybe two different duties, or maybe 20 different duties. So they’re kind of just general; for example “Select a potential target investment market.” Within that, you can say “Okay, what exactly are we going to do to find these target markets?” And we’ve talked about this in episodes before… But if you want to, you can break apart each of the 51 roles and responsibilities into multiple roles or responsibilities, if in this case for selecting a potential target investment market maybe you’re both gonna be involved in that; maybe one person’s actually going to find the market, the other person is gonna maybe go there, because they live in that area… Maybe one person is gonna look at these four markets, another person is gonna look at these four markets…

Obviously, this is not an all-encompassing, locked-in document. It’s something that is going to be a starting place for you to take and expand, based on specifically what you’re doing for apartment syndications.

So overall, the entire point of this series is going to be to explain to you the main responsibilities of the general partnership, so that you can determine which roles you are capable of fulfilling, and then once you’ve got those roles filled out, the remaining roles will need to be fulfilled by someone else (or someone else) and at that point you can go out and find that right business partner. So this is something that you’re gonna do upfront, before you even begin to look for deals, put your team together… You need to figure out who’s gonna do what before you do any of that. So that is the time in the process where this document is going to come into play.

With all that being said, let’s jump into the 51 main responsibilities of the general partnership. We’re gonna go over as many as we can in this episode, and then in the next episode we’re going to finish it off, and then we’ll  kind of close out this series. And again, this document is available to download for free at SyndicationSchool.com or in the show notes of this episode… But you don’t necessarily need to have this document open during this episode for it to make sense, because it’s really just a list of all the roles and responsibilities, and then a column that allows you to put in the person responsible for it. And I think there’s also a dropdown menu, so you put in “Okay, this is Jim and Bob, and Theo and Joe are the GP membership”, so each of those 51 roles, there’s a dropdown menu where you can put Jim, Bob, and Joe and Theo.

So first is the pre-contract phase. Again, this is from “Okay, I wanna do an apartment syndication” to “We’ve got a deal under contract.” These are all the steps that are required to actually set up an apartment syndication business, and then find and put that first deal under contract. So the first three roles and responsibilities are kind of wrapped into one. They are technically distinct, but they’re all focused on finding the market to invest in. This is a starting point, so at this point you’re educated on apartment syndications, you’ve met the requirements to become an apartment syndicator, so you’ve got a real estate background, experience background, and you’re actually starting to launch your business. The first thing you’re gonna wanna do is find out where you’re gonna invest.

Number one is to select potential target investment markets. So you’re gonna wanna find five, ten, twenty, however many markets you want to have in your initial analysis, places that you’re interested in investing, and places that you know really well, places you’ve lived before, places you’ve visited, and that’s gonna be your initial list of places to invest in. So someone needs to come up with this list. Who’s responsible for coming up with the markets we’re gonna evaluate?

And then number two, evaluate these potential target investment markets. Once they’re selected, who’s responsible for doing the evaluation process? Who’s responsible for doing the online, detailed research on each of these markets, pulling the relevant demographic economic data on those target markets, visiting those markets in person, driving around and learning the specific neighborhoods in these markets… And then once you’ve gotten that research process done, number three is selecting one or two of these to be the markets you actually start looking at deals and building your team in.

So who’s responsible for picking where to invest? Is it the person who did all the evaluation? Is it an agreement between all the general partners, or is one person going to be the decider in that situation?

Number four is creating a website. This is going to be the foundation of your brand. Every other aspect of your brand is going to direct to your company website… So who is responsible for creating the website? Who’s responsible for hiring the person to create the website? Who’s responsible for deciding what goes on the website? And again, for all of these we have Syndication School episodes on in the past, so we’re not gonna go into detail on the answer to those questions. What you should have on your website, how to create the website… We’ve already talked about that. Again, the point here is who’s actually going to do that stuff?

Number five is create a company presentation. The company presentation is going to talk about who you are, who the people in your company are, and what type of apartment syndication are you doing. why should I invest in an apartment syndication? This is gonna be an introduction to your company and your business plan. So again, who is responsible for creating this company presentation, who’s responsible for using this company presentation to present to various team members, passive investors in the future?

Number six is define a target audience for a thought leadership platform. Again, we’ve talked about on this show before, and the fact that you’re listening to this show – this show IS a thought leadership platform – who is responsible for deciding who you’re going to target? What is the demographic of the person that you’re trying to target? Obviously, it’s going to be passive investors, but more specifically, what is the economic situation of the passive investor? How are you determining who you target, and then again, who is that target audience actually going to be?

Number seven is to create and grow a thought leadership platform. So who’s responsible for creating the podcast, or the YouTube channel, or the blog that you’re going to use to position yourself as an expert in the apartment syndication industry? And then who’s responsible for growing that thought leadership platform? Who’s responsible for making sure that you are consistently putting out content? Who’s gonna be booking interviews if you’re doing interviews? Who’s responsible for posting these? Who’s responsible for tracking the analytics on these? Who’s going to be basically the branding person in your company? And then whoever that branding person is is obviously responsible for creating and growing the thought leadership platform.

The next two things are also related to the brand and the thought leadership platform. Number eight is creating an in-person meetup group. So who’s responsible for creating the in-person meetup group? Who’s responsible for deciding what the format of the meetup group is going to be? Who’s responsible for actually going to the meetup group and hosting it? Who’s responsible for finding out the venue? How often are gonna do that meetup group? Who’s scheduling the meetup group?

I think at this point it’s good to pause, because you’re asking “Why do I need a meetup group to be an apartment syndicator?” Of course, you don’t need to have a thought leadership platform either; you don’t need to have a business partner. But these are all things that are going to help you be more successful as an apartment syndicator. You don’t have to do these things. Every single thing I list is not gonna be done by every single apartment syndicator. The point is that if you wanna be successful, these are the types of things you should be doing.

Similarly, number nine is to create a Facebook page or group. Again, who’s gonna create the page and who’s responsible for managing the page? This could be something that’s tied into your meetup group, so it could be a Facebook group specific for the meetup group, and you could also create another Facebook page for apartment syndicators; it can be a place for passive investors to come and ask questions… So who decides what this Facebook page is going to be, and then who’s responsible for making sure that people are engaging in the Facebook group? Things like that.

So those five – create a website, create a presentation, selecting a target audience, creating a thought leadership platform, in-person meetup group and the Facebook page (I guess that’s six), that’s all in the category of branding. So most likely one person is gonna be responsible for branding. That’s the most efficient way to do it. That individual is gonna be assigned these roles and responsibilities. But maybe the person that is branding isn’t gonna create a website, or isn’t gonna create a company presentation. Or maybe all members of the general partnership are gonna decide who the target audience is, or be involved in the creation of the thought leadership platform. So again, it all depends on what you wanna  do, and it all depends on the skillsets and experiences of the various members of the general partnership.

Now, these next responsibilities are about creating your team. So number ten, find, interview and select a property management company. Who’s responsible for finding the property management company? Same with commercial real estate brokers, number 11 – who’s responsible for finding the brokers, for setting up the interviews, for meeting with them or calling them, for qualifying them? Ultimately, deciding which ones you’re gonna move forward with and which ones you aren’t gonna move forward with – who is responsible for this?

Same with commercial mortgage brokers or lenders. Are you gonna use a lender or a commercial broker, and who decides which one you’re going to use? If you go with the commercial mortgage broker, which commercial mortgage broker are you gonna move forward with? Who’s responsible for finding the mortgage brokers, for interviewing them, for qualifying them? Who’s responsible for deciding what type of loans you wanna get on your deals?

Most likely, someone has more experience in this realm, and  they’re gonna have to come to the ultimate decision of who to move forward with based off of their background on financing deals.

Number 13 is finding a business partner. This is not necessarily a role that’s given to someone, because everyone is responsible for finding a business partner if that’s the route you decide to go… So if I’m creating this list, I’m responsible for finding a business partner.

Number 14, find an accountant who specializes in apartment syndications. Again, similarly, Who’s responsible for qualifying the accountant?

Number 15 and 16 are find a real estate attorney and find a securities attorney. Same thing, I’m not gonna keep repeating myself. And then 17 is a loan guarantor.

So if the members of the general partnership don’t have the liquidity or the net worth requirement to qualify for financing on the particular type of deals they’re pursuing, then they’re gonna need to find someone who is going to sign on the loan. So who is gonna find that person?

Number 18, define the roles and responsibility of each member of the GP. This is kind of referencing the entire purpose of this entire thing, which is who decides who does what?

Number 19 is set investment criteria for deals. This is huge. What types of apartment deals are you going to syndicated? Are you gonna do value-add, are you gonna do distressed, are you gonna do turnkey? A combination of one of those? Who decides this?

Next is setting the GP compensation structure. Number 20 and 21, setting the limited partner compensation structure. So this is about how the people involved in the deal get paid. So how are you going to come to the decision of how the various members of the general partnership are gonna make money? What are the ownership percentages going to be? This is most likely gonna be based on the final filled out version of this document, that allows you to assign the roles and responsibilities to everyone. And again, we’ve got a Syndication School series about how to structure the GP compensation structure based on who does what. But ultimately, someone’s got to decide if that structure is what you’re gonna move forward with. Again, it’s most likely going to be a combination of everyone involved, because everyone’s gonna have to agree on the compensation structure… But that is a duty that needs to be fulfilled before you can move forward with doing deals.

Similarly, with the LP compensation structure – who decides and how are you gonna decide how the passive investors get paid?

Number 22 is create a list of investor emails in MailChimp or whatever mass email sending service you plan on using. Basically, setting up an account where you can collect all of  your passive investors’ emails and send them the new deals, send them recap emails, things like that, without having to send out individual emails.

So who’s responsible for creating the account? Who’s responsible for inputting new investor emails? Who’s responsible for creating these emails? Things like that.

Number 23, finding passive investors. Who is going to be the investor relations person?

Number 24, build relationships with commercial real estate brokers. So you don’t just want to find a broker and then that’s it. You wanna build a relationship with them, with the purpose of getting them to send you off market opportunities. Who’s responsible for networking and relationship-building with these commercial real estate brokers?

Number 25, subscribe to commercial real estate brokers on market email lists. Brokers will typically allow you to subscribe to some sort of automated mailing list, that whenever they list a new deal, it automatically gets sent to your email inbox. So who are these deals going to be sent to? And as you can begin to see, a lot of these responsibilities are tied to other responsibilities. For example, the person that is subscribed to the commercial real estate broker’s on-market email list is probably gonna be the person who’s underwriting the deals. It doesn’t make sense for, for example me, to get all these deals from brokers, to network with brokers, but then once a deal comes, they are transitioned to meeting with Joe to underwrite the deals, to tour the deals, and things like that.

So most likely, the person who’s responsible for maintaining relationships with brokers is also gonna be the person who’s getting the deals from the brokers and who’s also underwriting the deals that the brokers send it. Or at least responsible for managing underwriters.

So there’s a few more to finish up the first phase, the pre-contract phase, and then we’re gonna close out this particular episode and finish up the remaining responsibilities tomorrow… Or if you’re listening to this in the future, the next episode.

The next one is to implement marketing strategies to generate off market deals. Who’s responsible for the direct mailing campaigns, or whatever off market lead generation strategy you want to implement to find off market deals – who’s responsible for that?

And then 27 – underwrite the deals. So who’s underwriting, who’s managing the entire underwriting process? Who’s touring the deals? Who’s asking the brokers questions? Who’s talking with lenders to get preliminary financing terms? Who’s doing the rental comp analysis?

And then lastly, 28, who is submitting the letter of intents and negotiating the PSA? So who’s responsible for submitting these LOIs to brokers, being involved in the back-and-forth process? Who is going to be responsible for the best and final seller calls? Who’s responsible for negotiating the PSA and ultimately executing the PSA?

Those are the 28 pre-contract phase responsibilities of the general partnership. Again, at this point you would have your document and you would say “Okay, number one – select potential target investment markets. Theo is responsible for that. Theo is also responsible for evaluating these potential target investment markets, and for selecting 1-2 potential target markets… But also, we’re all gonna look at Theo’s research and determine which ones we’re gonna use…”, so that’d be everyone.

Then Bill is gonna create the website, and then John is gonna create the company presentation, Rob is gonna define a target audience for the thought leadership platform… So you do that for every single item on this list, so that everyone knows what they’re supposed to do.

So tomorrow, or again in the next episode, we’re gonna talk about 29 through 51, the contract to close phase, and then the post-closing phase, and then wrap up these series. Until then, make sure you check out some of the other Syndication School series we have. Download our previous free documents, download this free document… All that is available at SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.

JF1913: Everything You Need To Know About Filing An Insurance Claim | Syndication School with Theo Hicks

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Whether it’s damages from a tenant, fire, water, winds, etc, if you own enough properties, at some point you will likely have to file an insurance claim at some point. The process can be super meticulous and involved. Theo will explain what to do and how to do it when it comes to filing your insurance claim. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“Take as many pictures as you can and write a detailed description of what you are seeing”

 

Related Blog Post:

https://joefairless.com/s-o-s-approach-managing-investment-crisis-like-hurricane-harvey/

 


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

Each week we air two podcast episodes that are focusing on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes – or if they’re a part of a larger series – we offer a document  to you for free. These could be PowerPoint presentations, these are Excel template calculators, they’re PDF how-to guides… Some sort of document that accompanies the episodes or the series, that you can use to help you further your apartment syndication business.

All these documents, which again, are free, as well as the past free Syndication School series, can be found at SyndicationSchool.com. And in this episode we are going to talk about insurance. This is everything that you need to know about filing an insurance claim.

A few Syndication School episodes ago – maybe about a month ago, or if you’re listening to this in the future, it’s probably 20-30 episodes ago – we talked about the SOS approach to a major issue that occurs at your property, and it was talked about in the context of Hurricane Harvey; what do you do if a massive hurricane comes and smashes into your apartment community? And we talked about the SOS approach, which is Safety — I can’t remember what the other two were, but basically we talked about the high-level process that you as the investor want to do. I think it was Safety, Ongoing community, and then Solution.

So first you figure out “Is everyone safe?” Then you figure out the condition of the property, and then you communicate that to your investors, and then you have some sort of solution in place… And most likely, that solution, if there is a big issue, is gonna be filing an insurance claim. So this episode will be very helpful in explaining, going into more detail on that third S in the SOS approach. Or for anyone that owns a property and needs to file some sort of insurance claim, they need to know if they should file an insurance claim, what is covered by the insurance claim, and things to not do to avoid delaying your insurance claim. So those are the three things we’re gonna talk about – the claims process first, then what a typical commercial property insurance policy covers, and then we’re gonna talk about tips for avoiding a delay.

The process, typically, the commercial property insurance claim entails restoring the property to the pre-lost condition, within the limits defined by whatever insurance policy you purchased. Then it should also help you maintain the business during the time it takes to rebuild or repair that property. That’s the overall purpose of the insurance claim. So it should 1) bring the property back to its pre-loss condition, and 2) while it’s being brought back to its pre-loss condition, it shouldn’t impact the business, which is really the money coming in.

Here’s a general overview of the process. Again, it depends on  what actually happened, your insurance policy, but in general, this will what will happen. First, some sort of catastrophe happens; a hurricane, a flood, a fire, a storm… Something like that. Once that happens, step two is called mitigation of damages. So you are required to protect the property from additional damages, to mitigate the extent of physical and economic losses. What this means is that you may need to make temporary emergency repairs out of pocket. For example, if there’s a crazy hurricane and a bunch of windows shattered, trees fell through your roof, maybe doors blew off the hinges, you are gonna be required to go in there and cover with a board any windows, any doors, any roofs, any sort of opening, because if it rains, the animals can get in there, people can get in there, which would result in further damage done to the property. So you need to mitigate ongoing damage that occurred from some sort of catastrophe.

Number three is gonna be evaluation of coverages. Once a catastrophe occurred and you’ve mitigated the damages, covered up all the holes, then you want to review your insurance policy to understand the terms and conditions, including the coverage limitations, how they value certain things, the time limitations, and then your duties and responsibilities for filing the claim. Basically said, three is read your policy.

Four is the evaluation of damages, claim preparation and documentation. So before anyone touches anything, you’re gonna wanna document the extent of the damage. If there’s a hurricane, you’re gonna wanna take pictures of all the shattered windows, of all the doors blown off the hinges, of all the holes in the wall, of all the water damage, of all the trees that have fallen on the roofs, things like that. Take a lot of pictures, from as many angles as possible, for each of the damaged areas or items.

You wanna write detailed descriptions of the damages for each of those pictures, and then you wanna include when this actually happened, and then include any questions or concerns you have about any potential hidden damage. So overall, there’s no such thing as too much documentation. The pictures, questions, written explanations, predictions on what else might be wrong…

Additionally, you’re gonna want to reach out to licensed contractors and obtain estimates and bids to repair these issues. Because you’re gonna be required to submit an itemized, detailed claim, with expert reports and estimates to your insurance broker, or who your insurance provider is. This should include information about the property damage, as well as any sort of business interruption, loss of income, rents, as well as any extra expenses needed to continue operations. Include that in your claim to your insurance broker.

If your ten units are down because of this hurricane, and those people need to move out, how much rent are you using? And then are you putting these people in a hotel? How much money is that costing you, to put them in a hotel? So the loss of rent would be an example of the loss of income, and then the example of extra expense would be putting these people in a hotel until everything is fixed.

And then we’re going to give away a free document, because this is Syndication School, and it’s going to be a sample claims report. It’s gonna be something you can take a look at that is an example of what you need to prepare and send to an insurance broker. This is commonly referred to as a proof of loss statement. So that’s number four.

Number five is negotiations and settlement. Once you submit your claim, your insurer will audit your claim and detail and make any adjustments based on whatever policy that you have… Because every single thing may not be covered by your insurance policy. And then also based off of the expert opinions.

Number six is going to be restorations of the property and the operations, which is the last step. Do not proceed with any permanent work until you’ve reached an actual agreement with your insurer. Once the negotiation and the settlement is reached, then you can begin to restore the asset to its pre-loss condition. That’s kind of the overall six-step process of how it’ll work.

If something bad happens, you make sure nothing extra bad happens, you evaluate the damage that occurred from that bad thing happening, you figure out how much it’s gonna cost to fix the damages from that thing happening, you have a negotiation back and forth with your insurer to come to agreement on the costs and what will be covered, and then you actually fix the property.

So what types of things are typically covered by your insurance policy? Again, you’re gonna wanna read your insurance policy, you’re gonna wanna have a conversation with your insurer before you even accept their insurance. You wanna figure out specifically what is covered by your insurance policy. Sometimes they’ll have a nice little simple one-page cheat sheet they can send you, that says “Hey, if you’ve got this insurance policy, here’s every single thing that’s covered.” But obviously, in your very long policy, your book-length policy, it goes into a lot more detail on what that actually means. But here are some of the most common things covered – and I’m gonna go through this pretty quickly, because most of the things are pretty self-explanatory.

Number one is property damage. This includes the buildings, fixtures, machines, the furnishing, raw materials and inventory.

Business interruption – which is intended to place an insured business in the position it would have attained had the loss that caused the interruption not occurred. So it should provide funds necessary to sustain the ensured business whilst operations are suspended as a result of damage caused by a covered peril. It typically pays a business’ profit and continuing operating expenses, including payroll for a specific period of time.

Something else is extra expense, which covers expenses incurred in mitigating the business loss, which I gave an example of earlier. Or increased costs in continuing a business in the wake of a catastrophe. It can reimburse a policy holder for money spent, moving a covered business to a different location while the covered property is restored, is intended to offset expenses associated with returning to normal operations.

Equipment breakdown coverage is often available with this coverage and should be purchased if a customer’s business is dependent on certain equipment. That’s not necessarily important for apartments unless you’ve got like a maintenance [unintelligible [00:11:15].01] that gets destroyed, with a bunch of maintenance equipments in there.

Something else is contingent business interruption, which is usually an extension of the business interruption coverage. Contingent business interruption provides the insured with benefits to cover lost profits and extra expenses resulting from damage to a third-party’s property, typically in four situations. One, when the insured business relies on a third-party to deliver materials or product. Basically, this is business interruption based off of a third-party you’re using. Let’s say you’re using a property management company who’s also affected by the hurricane. I’m not gonna go into more detail on examples of that. It’s basically just third-parties as well.

Something else is ordinary payroll coverage. Pretty self-explanatory. It provides for salaries as a continued expense. Loss of rents – self-explanatory. Extended period of indemnity – it provides business interruption and extra expense benefits beyond the period of restoration defined in the standard business interruption policy.

Something else that might be covered is extended period of indemnity, which provides business interruption and extra expense benefits beyond the period of restoration defined in the standard business interruption policy.

So you’ve got business interruption, which is during the time it takes to get the property restored; there’s contingent business interruption, which is something that covers third-parties while it’s being restored, and there’s also the extended period of indemnity, which extends this business interruption beyond the time it takes to restore the property, if you’re still negatively impacted.

Civil authority coverage provides business income benefits when a civil authority prohibits access to the insured property due to direct physical loss or damage at the property. It’s most commonly triggered during mandatory evacuations.

You’ve got utility services, which extends business income and extra expense insurance to protect against losses caused by interruption of services from a specific utility; that provides a business with water, power, communications.

Then lastly, loss of ingress or egress, which provides benefits when as a direct result of a covered peril. Ingress to or egress from real and personal property is prevented.

So those are all examples of things that are covered. Obviously, there’s more than just that, and then obviously not every single policy is gonna cover all of that… So again, make sure you’re reviewing your policy, so that you know what is and isn’t covered.

The last thing we’re gonna talk about is just some tips to avoid having your insurance claim delayed… Because if you have a major issue, you’re gonna wanna get  it fixed as quickly as possible, so you can get back to your normal operations. So here are things you can do to make sure you get the claim done as quickly as possible.

Your policy does state that your insurer is legally bound to process your claim and pay you what is owed from your damages in a timely manner, but timely manner is pretty subjective. It’s not saying “Within 10 days or within 30 days”, it’s more subjective… So it can be delayed for lots of different reasons, and again, here are some things to do to avoid some of the most common reasons why a claim will be delayed.

Number one is to know your policy, which is pretty self-explanatory. Your property insurance policy is going to be packed with enough legal jargon to make anyone’s head spin. Even seasoned claim professionals routinely argue over business insurance policy interpretation… So it’s very important for you to read and understand what your policy covers, what it includes, what it obligates you to do, and the process you must follow to settle your commercial property insurance claim successfully.

If you have gaps in your understanding of your policy, then seek help from a business insurance claims professional, which is probably what you’re gonna wanna do anyways, to help you create your claim. These are called licensed public insurance adjusters, and they can review your claim and advise you on how to achieve the maximum settlement under the terms of your specific property insurance policy.

Number two is to take immediate steps to mitigate additional damage, which you’re required to do; to make temporary emergency repairs to prevent additional losses resulting from the original damage. So this is a no-excuses step you must take, as your policy provides coverage for the cost. Make sure you’re mitigating the damages… Because if you don’t, then this is gonna delay your claim.

Three, collect abundant documentation of all the damage. We’ve kind of mentioned this – before anyone moves almost anything from your damaged property, make sure you take pictures, as many as you can, from all different angles, of each damaged area and item; write detailed descriptions of the damage you observe, that correspond with those pictures. Include when the loss occurred, and then have any extra questions you might have, or reasons you have, to suspect that there may be hidden damage somewhere else.

This additional documentation is gonna be very valuable when you develop your proof of loss statement that you submit to your insurer.

Number four is to get multiple bids from repair contractors. Some insurance carriers may encourage you to  believe that you have to select a specific contractor from their list of preferred contractors. Others may suggest that you’ll save a lot of money by using their chosen providers… But just because they say that doesn’t mean it’s true, and you have the right to pick your own provider as long as they’re licensed. So just like you did when you did your interior and exterior renovation budgets, get multiple bids and make sure that you are not necessarily going with the contractor that’s the cheapest, but the ones that are able to return your property to the pre-loss condition the best, and the fastest.

Number five is submit a proper proof of loss statement. Developing this proof of loss statement, the thing that you submit to your insurer, is one of the most important steps that you can do to make sure you get your claims process resolved quickly. Your company will send you a proof of loss form, which you will then need to fill out accurately and thoroughly. This is a time in the process where people knowingly or unknowingly short-change themselves — well, I guess they wouldn’t knowingly do that… But they unknowingly short-change themselves on their claim settlement amount, because they provide insufficient information, they didn’t document properly, they don’t have enough evidence for their losses.

So when you’ve taken all of your pictures, you’ve got all of your written descriptions, your questions and reasons for things that might be hidden, you wanna organize all of these photographs and written explanations of your damages to show what happened, when it happened, where it happened, the resulting damage to the property, to your inventory, equipment, personal property etc. You wanna provide copies of the estimates you obtained and the value for the full extent of your losses. And this – as I mentioned earlier – is where  a licensed public adjuster can be very helpful; to fill it out properly, to make sure you’re maximizing the money you get back to cover all the issues that have been found.

Number six is to keep a journal. Filing a claim takes a lot of time, a lot of effort, a lot of knowledge, determination and communication, so throughout the process it’s wise to keep a claims journal, so when you need to go back to any step in the process, you have detailed notes on what happened, when it happened, who said what and who did what. And then whenever possible when you communicate, try to communicate as much as possible through email. If you are contacted by someone or speak with someone on the phone, make sure you note in your claims journal the date and time of the call, the person’s name and title, what you have talked about, the conclusions that were reached, any additional steps needed, who is responsible for taking those steps, and any deadlines set.

Get that person’s personal email address, and follow up with the call by emailing them a summary of that call, and then ask them to review it and then kind of reply back and say “Yes, this is what happened” or “No, this is not right. Here’s what’s right”, so you have documentation and evidence of everything.

If you’re talking to someone and they say “Well, we’re gonna cover this” and then you didn’t really have any documentation of that, then when the time comes and it’s not covered – well, if you didn’t document it, if you didn’t get them to agree that that’s what they said in writing, then you’re kind of out of luck.

And then lastly – and this is just a general advice, which can really be applied to anything – be respectful, but firm. Achieving a fair settlement for damages to your business is not gonna be a very easy process. The insurance company is not just gonna give you whatever you want… So remind yourself that if you are having issues, if they aren’t giving you what you want, take a deep breath and remind yourself that you have the right and the obligation to stand up for yourself and your business. The more organized, direct, respectful and firm you are throughout your entire process, the better chances there are of avoiding delays and achieving fair compensation for your loss.

So just because they tell you something, don’t just take it at face value. Just because they say “Well, this is not what this actually means. Business interruption doesn’t mean you get this, this and this.” If you believe that that is the case, then be firm about it; just say something, don’t just accept it. So that’s the last thing that I wanted to talk about.

Again, make sure you check out the episode about the S.O.S. approach – Safety, Ongoing communication and Summary – because that will give you an idea of how to approach a major issue to your investors… But this episode is focused more on “Okay, something bad happens [unintelligible [00:20:29].27] now what happens?” Well, this is what happens – you file an insurance claim. This is everything you need to know about filing an insurance claim on your apartment community. And then again, you’ve got that free sample proof of loss statement that you can download for free in the show notes, or at SyndicationSchool.com.

Until tomorrow, make sure you check out some of the other Syndication School episodes about the how-to’s of apartment syndications and download that free proof of loss statement document. All that is available at SyndicationSchool.com.

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

JF1912: How to Track Your Exterior Renovations | Syndication School with Theo Hicks

Listen to the Episode Below (00:20:25)
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We’ve already covered how to track your interior renovations, today Theo will start talking about how to track your exterior renovations. We also have a free spreadsheet for you to open and follow along with while listening to this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Some items aren’t as high of a priority”

 

Free Spreadsheet: 

http://bit.ly/exteriorrenovationtracker

 


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

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

Each week we air two podcast episodes that are focusing on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes – or sometimes they’re combined into series – we offer a free resource, which we will today. This is an Excel template, PowerPoint template, PDF how-to guide, some sort of resource for you to download for free, that will help you on your apartment syndication journey.

All of these documents and all of the previous syndication school series can be found at SyndicationSchool.com. In this episode we are going to talk about tracking your exterior renovations. Last week – or if you’re listening to this in the future, I guess it would be six or seven episodes ago – we went over how to track interior renovations, and we gave away a free interior renovation tracker document that allows you to input all of your interior renovation assumptions, and then on an ongoing basis you’ll input the actual costs and timeline of these interior renovations… And it allows you to compare and contrast and make sure you’re on track, on time and on budget.

Similarly, we’re going to do the same thing for the exterior renovations. It’s going to be a little bit different than the interior, obviously, because interior renovations are focused on renovating a number of units, whereas this is going to be all exterior items. But the purpose of tracking it is the same. So the purpose on the overall scale is to input the renovation assumptions, include what you plan on doing, the costs, when you plan on starting, and when you plan on finishing, and that will all be done both while underwriting the deal, and then confirmed or updated during the due diligence process, and then once you actually close on the deal, then you’re going to fill out this  tracker on a daily/weekly/monthly basis, whatever you decide to do… And the goal is to look at the difference between your projected budget and what it actually costs, as well as your projected start date, when you actually started, and then the total number of days to complete the project versus how long you expected it to take.

The free document this week is called the exterior renovation tracker. Ideally, you’ll have this open while we’re talking, so go to SyndicationSchool.com or download in the show notes; I believe even if you’re looking at it on your iPhone, you should be able to click on it and see a version of it. You might not be able to edit it, but you’ll be able to see what we’re talking about… Because I’m gonna go over how to fill it out, what everything means; it’ll make a lot more sense if you have it in front of you. I will go under the assumption that you don’t have it in front of you, so I will explain it in as much detail as possible.

Like all of our Excel documents, we’ve got a note at the top that says “All the input data goes into the cells that are in red.” So you only wanna edit the cells that are in red. The cells that are black are things that have formulas in there that are going to calculate the different variances and whatnot, which we’ll go over towards the end of this episode.

So at the top there’s four data tables that you wanna fill out just to get things started. The property name – not as important, but we wanna input the property name in there, so that it labels the data table with your actual property name. And then the next two data tables – one is the category of rehab, and two is the purpose of the rehab.

For the category of rehab there’s really two main categories. One is rehabs that begin at closing, and then two are rehabs that are on an ongoing or as-needed basis. When you’re buying an apartment deal, there’s certain renovations that you’re gonna start right away, but then there’s other projects that aren’t as high of a priority. These are things that either don’t need to be done for the property to be operational, or used. They don’t need to be done because they are based on something needing to be done first. A perfect example of that would be if you’re doing a rebrand, then you’re not gonna want to do the landscaping around the current monument sign just to know down the monument sign, and step all over the nice landscaping, put a new monument sign in there and then do landscaping again. That’s one example.

Maybe you are going to add in a dog park, a  soccer field, things like that. Well, you’re probably not gonna want to do landscaping in those areas before you add all that new stuff, because it’s just gonna get trampled on and knocked over anyways.

Maybe the roofs don’t need to be replaced for 2-3 years, so obviously you’re not gonna replace them from day one, but you know going into day one that you’re gonna have to replace the roofs eventually. So there’s two categories. There’s the things that you’re gonna do right away at closing, and then there’s things that you’re gonna do on an as-needed or ongoing basis.

Another example for ongoing – I keep saying landscaping, but landscaping is not something you just do once and then completely ignore. So you’ve got landscaping, and then you’ll have your ongoing operating expense to maintain the landscaping, and maybe every 2-3 years you do a new landscaping overhaul, so that everything looks nice at your property… So you’ll want to make sure you’re accounting for that upfront as well, or accounting for that, some sort of ongoing cap ex budget that’s pulled from your cashflow.

But the reason why you wanna have [unintelligible [00:07:50].29] is because – we’ll get to this in a later section, but you wanna have a projected start date and then a  projected number of days to complete, so you can figure out “Hey, this is when I expect this to be done.” But for things that are ongoing or as needed, like these roof replacements, landscaping, plumbing, electrical, boilers, things that you don’t necessarily need to do right away, but you know you’ll have to do at some point – well, you can’t really predict when you’re gonna start doing that. You don’t know how long it’s gonna take to fix, because you don’t know how many boilers you’re gonna have to replace, how much landscaping, how many roofs you’ll replace… So for those types of things the budget is more important than the actual time to finish, whereas for the things that you’re gonna start right away, both are gonna be pretty important.

So the next table is the purposes. The three purposes that we have on this sample spreadsheet – because we’re not sending you a blank spreadsheet; it’s filled out with a sample deal… The purposes of the rehab – number one, it’s gonna be a lender requirement. So when you’re doing due diligence, you’ll get a property condition assessment done by ideally your contractor, as well as the lender. We’ve done a Syndication School episode on this, about the due diligence report. Something along the lines of “Everything you need to know about doing due diligence.” I believe it’s like an 8-part series, so check that out at SyndicationSchool.com.

One of those reports is the PCA, the Property Condition Assessment. What the lender will do is they’ll have a contractor of some sort come out, look at all the exteriors and then categorize everything into three categories. One of those categories are things that need to be immediately replaced. These are things that the lender says “You need to replace these right away, at closing”, and that’s something that’s in the loan terms.

So they say “Hey, the siding needs to be replaced and repainted in order for us to give you this loan, so you need to do that from day one.” Typically, it’ll be “Do it within this many days”, things like that. Some of the repairs you’re gonna be doing are gonna be things that are required of you by the lender in order to accept that loan.

The other category you have in there is deferred maintenance. these are things that aren’t’ necessarily going to be required by the lender, but are things that you’ll want to do, that aren’t necessarily going to directly add value to the property. An example would be dumpster enclosures. You’ve got the garbage dumpster sitting out in the open; you’ll wanna enclose those dumpsters and make  it look better, but it’s not like you’re going to market your dumpster enclosures on your rental listing.

Other examples would be replacing roofs, fixing boilers, or retaining walls, or plumbing and electrical… These aren’t things you’re going to sell to potential residents. They don’t care about that stuff. What they care about are the third category, which is value-add. These are things like security camera systems, private patios, patio fences, clubhouse conversions, carports, soccer fields, playgrounds. So things that actually add value to the resident.

So those are the three categories that we have. When it comes to the category of rehabs and the purposes, these are the main ones. I’m sure you can come up with more… But for the most deals, for the category of rehabs, they’re either gonna start at closing, or not start at closing, and be done on an ongoing or as-needed basis. I guess there’s really no other category of rehab. For these purposes you’re gonna see lender requirements, value-add, and deferred maintenance.

Again, the reason why you want to categorize them based on these three things is because the next thing you wanna input – we’ll talk about why in a second. So those are the top three data tables. The last one – you just insert in the closing date. Again, [unintelligible [00:11:27].20] you know when you’re closing, and you can reference that in the bottom data table, which is the meat of the calculator, which is the exterior capital expenditure budget tracker.

The first thing you wanna input in this tracker are your actual exterior rehab projects. List out every single thing that you plan on doing to the property. You’ll see in this tracker 21 different items that are included in this data table, that are going to be done to the property. You’ve got siding replacement, asphalt repairs, security camera system, dumpster enclosures, convert office into rentable unit etc.

The next two columns – the category and the purpose – these are both gonna be dropdowns that reference the category of rehabs and the purposes that you inputted in the data tables above. So for each of the exterior rehab projects you wanna set the category – do they begin at closing, or are they done on an ongoing or as-needed basis? And then are they things that are required by the lender? Are these things that are deferred maintenance, or are these value-add projects?

The next column is your projected budget. This is where you wanna input how much money you expect to spend on each of these. Usually, when you’re underwriting a deal, right away at the beginning you set a generic exterior renovations number. You’re gonna visit the property and you get a better idea what needs to be done. At that point  you can fill out this tracker with the actual exterior rehab project. And between your experience, conversations with contractors, conversations with the property management company, you should be getting a projected cost for these things. That’s when you can input the actual costs into the projected budget.

So the category and the purpose – these are things that you’ll most likely do during the due diligence, but the exterior rehab project and the projected budgets, those are things you can fill out from the get-go, when you’re underwriting the deal. So you’ll see in here for all of the different exterior rehab projects we’ve got a cost.

Next is going to be the projected start date. Obviously, this is something else that you’re not going to do until due diligence, because you don’t know when you’re gonna close if you don’t have the deal under contract.

Once you’ve got the deal under contract, you’re near the closing date, you’re basically gonna say “Hey, we’re gonna start all of these day one.” Then as you go through the due diligence process, you get your due diligence reports, and you realize “Okay, these things right here are gonna be a lender requirement, so these are definitely gonna be done day one. These right here are deferred maintenance; not necessarily necessary, so let’s push these back and start these maybe once everything else is done. Okay, these are gonna be value-add projects, so we definitely wanna get these done first, or we wanna get these done immediately after getting done for the lender requirements. Okay, this value-add I think is gonna be more important than this value-add, so we’ll start that one first, and we’ll start that one second. Okay, this contractor says they can’t start until this day, so we’ll start this one on that day.” So it’ll be evolving, but you wanna have some sort of specific time when you expect to start each of these projects. Again, it’s gonna change throughout the due diligence process, but you wanna input when you expect to actually start these projects. I’m not saying when you plan on the first nail hitting the first piece of wood, but when you first plan on bidding it out, getting it designed, and then getting it done.

In the next column comes that, which is projected days to complete. So based off of the project, how long do you expect it to take to complete? So how long will it take for siding replacement and property repaint? How long will it take to identify the siding that you need? For all the siding to come in, for you to get all the bids for the labor, for them to actually install the siding, for them to then pick the paint colors, and then get the paint, and then have the people actually paint the property – how long is that entire process gonna take?

Same thing for asphalt repairs – how long does it take for them to come out and identify if it needs to be fixed? Then give you bids; you accept the bids, and they come out to actually do it – how long is that gonna take? Again, this comes from conversations with your contractors, your property management company. This is something that you can have an idea of during underwriting and due diligence, but you’re not gonna know for certain until you actually start having these conversations with contractors. So the projected start date and the projected days to completion – these are things that you can still update, and budget as well. They’re gonna be continuously updated until the actual work starts.

So once you have a bid in hand that says “The siding replacement and property repaint is gonna be $300,000. We’re gonna start on the 1st of January 2020, and it’s gonna take us 45 days to complete.” Once you have that verbal commitment, that’s when you lock that into your data table… Which brings us to the last part of the data table, which is the actual data.

Once you have that agreement set for the siding and repaint – again, 300k, we’re starting on this date, it’s gonna take us 45 days to complete – then you want to say “Okay, great.” Let’s say this thing is gonna start in two weeks. So you’ve got that filled out, and then when two weeks come, let’s say for some reason they say “We have to push it back a week.” So if they start three weeks after they said they would, or start a week after they said they would, then you’ll put the actual start date as a week later. And then whenever they actually complete it, you wanna input that into the data table as well, and based off of when they started and when they stopped, it will give you the actual time it took for them to finish the project.

The next column would be comparing the actual time it took to complete the project, to how long they said it would take to complete the project. Because this is important, especially for the value-add type of exterior capital expenditures. The whole purpose of you doing that is because you know you’re gonna be able to get more revenue because of that value-add. So if it’s not done when you thought it was going to be done, then you’re gonna get that added revenue later than you expected, which means you’re gonna be behind on your NOI projections… Which is why you wanna get these things done on time.

And then obviously you input the actual cost. Once everything is said and done, you tally up all the costs that it took, for example for placing siding and painting siding. Then it’ll give you a variance there as well.

Depending on the type of loan that you got, you’re either paying for renovations out of pocket, i.e. from your passive investors capital, or your lender is covering those costs. Either way, you wanna track how much you’re actually spending compared to what you actually projected, because no matter which way you’re funding these, you have a set amount of money that you can use to do these renovations.

So if you start off and you’re over-budget by 100k on your first project, well, you’re gonna have to figure out what you’re gonna do to make up that 100k. Is this something you can do? Are you gonna need to do a capital call? Are you going to pull money from somewhere else? What are you gonna do? Whereas if you don’t track any of that, then you’re not gonna know until it’s too late, and then you’re not gonna have money to do something that you thought you were gonna be able to do, and you’re gonna end up in a bad situation.

So as I’ve mentioned, overall, for the projected budget, the projected start date and the projected days to completion, these are things that are set in stone once the agreement has been come to between you and your contractor. So once they tell you “Hey, this is how much it’s gonna cost, here’s how long it’ll take, here’s when we’re gonna start”, those numbers are locked in. After that you’ll wanna update the actual stuff. So if they change their mind the next day, then you still wanna say “Okay, well, they told me it would be this much, now it’s this much. That’s kind of screwing us over.”

So that is really all you need to know about this tracker. If you wanna add in more rows to the exterior capital expenditure budget tracker data table, it shouldn’t be an issue. I believe all you need to do is insert columns and you should be good to go. That’s really the only spot you might need to insert columns and adjust this template. But if you’re doing more than 20 things to the property… But overall, this is a very powerful document that will help you stay on track, both time-wise and budget-wise. And if you do go off-track, you’ll know exactly where that happened, as opposed to just having an overall variance between “Okay, well I projected a million dollars and we spent a million five. Okay, we need to figure out where that 500k came from.” If you look at your tracker and say “Okay, we paid 200k more for this, and 100k more for this, and then 100k more for this, and 100k more for this, which is why our budget is off.” Or “Hey, we expected to be done by this date, but now we’re behind, which throws everything else off…” So it’ll help you see what’s being done on time compared to your projections.

Again, that is gonna be available for you to download for free at SyndicationSchool.com or in the show notes of this episode. Until tomorrow, make sure you check out some of our other Syndication School series about the how-to’s of apartment syndications. Again, download this free exterior renovation tracker – all that is available at SyndicationSchool.com.

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

 

JF1906: How To Track Your Interior Renovations | Syndication School with Theo Hicks

Listen to the Episode Below (00:17:35)
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When you’re doing a value add business plan, you’ll likely be renovating some if not all of your apartment units. If you have a 100+ unit community, that is a lot to keep track of! Lucky for you, we have a free spreadsheet for you to use, and Theo will cover how to use it in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“Once you close, all the projected numbers should be set in stone, you don’t want to update those again”

 

Free Interior Renovation Spreadsheet:

http://bit.ly/interiorrenovationtracker

 


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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, every Wednesday and Thursday, we air the two Syndication School podcast episodes on the best real estate investing advice ever show on iTunes. And for the majority of these series we offer some sort of resource  – PowerPoint presentation templates, Excel calculators and templates, how-to PDF guides – some sort of resource for you to download for free. We’re returning to the free documents today, so make sure you check out this free document that we’re gonna talk about today. All the other previous free documents we’ve given away, as well as all of the previous Syndication School series episodes we’ve recorded can be found at SyndicationSchool.com.

As I mentioned, we will be giving away a free document today. You can get that in the show notes of this episode, or at SyndicationSchool.com. That is going to be the Interior Renovation Tracker, hence why the episode is entitled “How to track your interior renovations.”

This is going to be an Excel template which I recommend if you have the opportunity to have it opened and follow along as I’m talking about it, because I’ll be going over how to use this document and what it actually is telling you and showing you. It’ll be a lot easier and it’ll make more sense to you if you have the document open. If not, no problem; just download it when you have a chance. It’s very simple and user-friendly, and it still should make sense if you’ve been following along with Syndication School and know what the interior renovations entail, and why you’re doing them, and the key metrics that you wanna be tracking. So let’s just jump right into the documents.

One more thing before we jump in… So this is gonna be what you use after you’ve closed on a deal to track your interior renovations, number one, and number two, to compare how your renovations are actually going to what you’ve projected. So the second part is the key. You wanna make sure that you are on time and on budget with interior renovations, so that is what this document is gonna help you out with. So you should be able to fill out the majority of this document once you have set your business plan.

There are five different data tables. We’ll go through each of those and discuss what they mean and how to fill it out.

The first one is the interior renovation timeline. The two things you wanna input into here – number one is units to renovate. The four things you wanna input here is 1) what are the total number of units at the apartment? Pretty self-explanatory. And then the next section deals with the total number of units to renovate. So it’s not as simple as saying “I need to renovate 326 units. I plan on renovating every single unit, so I need to renovate 326 units.” Yes, that’s technically true, but this document allows you to be more specific.

So what you’ll find if you are a value-add investor is that you’ll come across a few different types of deals. Number one, it’ll be deals where not a single unit has been renovated yet, so all the units are in the original form. If that’s the case, then the total number of units will equal the units not renovated by the seller. So there is a cell that you input the number of units that were not renovated by the seller at all… So if you’re dealing with that first type of deal, where the seller didn’t do any renovations yet on the units, then yes, it’s as simple as saying “There’s this many units, and every single unit has not been renovated yet.”

In other cases you’ll come across deals where the owners have fully renovated a percentage of units. Ideally, it’s less than 50%, so there’s enough skin on the bone for you to make money after you’ve completed the upgrades, or gone above their upgrades. So if if it’s the case where the seller has renovated 10% of the units, then 90% have not been touched, and 10% have been touched, which means you’re only renovating 90% of the units.

The third category would be if the owner has renovated let’s say 10% of the units fully, but your plan is to go above and beyond those fully renovated units. If that’s the case, then those fully-renovated units are technically partially-renovated units. Because a fully-renovated unit from your perspective would be a partially renovated unit plus whatever else you plan on doing. If that’s the case, then 90% of those units have not been touched, and 10% have been partially renovated.

Then there’s other times where you’ll find a deal where a percentage of the units haven’t been touched, and another percentage have been partially renovated, and another percentage have been fully renovated… And your plan is to take the non-renovated and the partially-renovated to the fully-renovated. And the fully-renovated that you’re gonna do is the same as the fully-renovated that the current owner has done. If that’s the case, then you’ll have to input data in all three of the cells available on the Interior Renovation Tracker.

Overall, in this Units to Renovate data table  you want to input four numbers. Number one, the total number of units at the property. Number two, the total number of units that have not been renovated at all. Three, the total number of units that have been partially renovated by the seller, and then four, the total number of units that have been fully renovated by the seller.

And again, even if the owner states that a unit is fully-renovated, if your plan is to go above and beyond that in your business plan, then you wanna classify that as a partially-renovated unit.

Right now there’s only three different types of renovation statuses. If for some reason you have a deal where there’s a fourth or a fifth category – let’s say a percentage are non-renovated, another percentage are partially-renovated, another percentage are partially-renovated but to a higher degree, and then the fourth category is fully-renovated, and then maybe you plan on going above and beyond that, so there’s five categories, just add those cells into the model manually. If you do that, there’s a couple other things you’ll have to change, which I will get into in the later sections.

So the second data table is the interior renovation timeline. So you need to  input two data points here. Number one is when do you plan on starting the renovations? This could be the exact same as your closing date, but most likely it won’t be, because you probably aren’t going to start renovating day one. It’s ideal that you renovate as close to day one as possible, but it’s highly unlikely the day you close you’re gonna start renovating units and have contractors mobilized.

So you want to project before you close when you plan on starting those renovations, and then obviously if it starts at a later date, then make sure you update that number in your tracker.

And then another thing you projected during the underwriting process was the number of months to complete the interior renovations. Generally, it’ll be between 12 and 24 months. To get an idea of what that number would be, make sure you have a conversation with your management company if you haven’t done a deal before, because they are the ones that will likely be managing the renovation process, managing the contractors, and they have experience doing this, so they can tell you based off of what you plan on doing to the units and the total number of units how long it should take. 12 months, 18 months, 24 months is most likely gonna be the numbers you would put in there.

Then from there it’ll automatically calculate based on your renovation timeline and the total of units the projected number of units that should be renovated each month.

Now, the next data table is going to be the projected interior renovation budget. This is where if you decide to expand the first data table and have more than just the renovated, partially renovated and non-renovated units, you wanna make an adjustment in this data table and add those extra unit classifications to this data table, because right now all we have is non-renovated and partially-renovated. So these are the costs to renovate those units.

So what is your projected budget for each non-renovated unit and what is your projected budget for each partially-renovated unit. And again, if you have a second or third partially-renovated category, you’ll wanna add that to this right here. This data table the projected interior renovation budget.

The next data table is the interior renovation projects and costs. Here you wanna input all of the interior rehab projects that you’re doing, which units these renovations will be performed on… So right now your options are renovated and non-renovated. Again, if there are going to be additional categories that you’ve added to the projected interior renovation budget data table, then you’re gonna want to go ahead and add that name to the dropdown menu, because what you’re doing is you’re saying “Okay, here are all my interior rehab projects. Half of these will  be done to the non-renovated units, and the other half will be done to the partially-renovated units. Here’s the cost of each of these per-unit”, and it’s pulling that data to tell you what your projected interior renovation budget is going to be.

So if you are adding a second partially-renovated category, then you need to make sure you are defining that in this data table, so that the formulas line up.

So all you need to do is you need to highlight all of the cells under which units, you wanna go to data, and you wanna go to the What If analysis data table, you wanna go to Data Validation, and you wanna go ahead and update that list to include your added partially-renovation unit status. Then from there, as long as the way you tied it into that cell matches the way you tied it into the label in the projected interior renovation budget data table, it should automatically pull that cost for you. So you don’t need to put anything into the projected interior renovation budget data table unless you are actually adding in another unit of classification. All you need to do is add in the list of interior rehab projects, which units they’re being done to, and the cost per unit in the interior renovation project and cost data table, and then it’ll automatically calculate the non-renovated unit cost per unit, the partially-renovated cost per unit, and then the blended average.

Now, the last data table is where you want to actually track on an ongoing basis. The projected has a number of renovations to complete, the month that those renovations are supposed to be completed, and the projected total costs. So you don’t need to fill out anything there, because it’ll automatically pull that data from the previous data tables. Right now there are 24 months, so if your timeline is greater than 24 months, you’ll have to add in additional months to that data table… But it most likely won’t be, unless you’re doing pretty heavy lifting. Everything else after this point should be inserted in before you close. At this point the only things that should be added after closing is tracking the total number of renovations completed and the total cost spent. So each month – maybe you can add this to the first month’s performance review call with your private management company, or if you can add this to the performance review template you send your management company… You wanna know, number one, how many units renovated this month, number two, what was the total cost spent on those renovated units.

It’ll automatically calculate the variance for both of those. So if you projected to renovate 18 units and you only renovated 10, then there’s a variance of 8. And obviously, the total cost will also be a variance as well if you’re not renovating as much. But if you are projected to renovate 18 and you’ve renovated 18, but it cost $1,000 more, that’s your variance. So you can look at the variance column to determine if you’re on-time and if you’re on-budget. And if you’re not, you can work with your management company to determine what’s going on there and what can be done to get you back on track and on budget.

So at first you can fill this out with your underwriting assumptions. More specifically, those would be the cost-per-units for each of those individual rehab projects, and then as you do due diligence and as you renovate each of the units, you can update those numbers; maybe update what you’re going to do. Maybe you thought you needed to do appliances, but the appliances are fine, so you can remove that… But then once you close, all of those projected numbers are set in stone, you don’t wanna update those again. And then from there, the only thing you’re adding in are the total number of units renovated each month and the total cost to renovate those units each month, and then looking at those variances to see if you’re on-time and on-budget. And again, if you’re not, that’s where you have that conversation with your management company to figure out what is going on.

So make sure, again, you download this interior renovation tracker. If you weren’t able to do that before listening to this episode, no problem… But I recommend downloading it and then relistening to the episode, because it might not make 100% sense, especially if you’re not very familiar with Excel and how the formulas work in Excel… So I think it’ll be very helpful and beneficial to you if you watched the episode with this actual template open.

Now, right now every single thing that you need to change is in red, so once you’ve downloaded it, you’ve understood it based on the sample data that’s in there, you can go ahead and delete everything that’s in red, and then input in your own numbers.

So that concludes this episode of how to track your interior renovations with the free Interior Renovation Tracker Excel document, so make sure, again, you download that, in the show notes or at SyndicationSchool.com.

Until tomorrow, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications and download this free document, as well as all of our other free documents. Again, SyndicationSchool.com.

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

JF1905: Everything You Need to Know About Prepayment Penalties | Syndication School with Theo Hicks

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As if the apartment syndication process wasn’t complicated enough, now you have to worry about prepayment penalties on the financing. Theo will cover how they work, what to look out for, and when it may make sense to bite the bullet and pay the penalties. 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 apartment syndication school series on the best real estate investing advice ever  show podcast. Each of these episodes focus on a specific aspect of the apartment syndication investment strategy.

For the majority of our previously aired series and episodes we offered a resource, a Power Point presentation template, an Excel calculator template, how-to PDF guides… Some sort of free resource for you to download, that accompanies those episodes and series. All these free documents and free Syndication School episodes can be found at SyndicationSchool.com.

This episode we are going to talk about pre-payment penalties, so everything you need to know about pre-payment penalties. We’re gonna talk about what pre-payment penalties are, and then the three main types of pre-payment penalties, and then how to think about which pre-payment penalty you want to actually get for your loans.

A pre-payment penalty is going to be a clause specified in your mortgage contract, stating that a financial penalty will be assessed against you, the borrower, if  you either significantly pay down the principal on your loan, or if you pay off the entire loan for a specific period of time. What we’re saying, basically, is that yes, the lender may actually charge you a fee when you give them their money back, which may seem counter-intuitive, but from the perspective of a lender, when they’re underwriting a loan, when they are trying to determine how much money to loan to you, one of the factors that they take into account is the interest payments, so the interest they’re gonna make on your loan, so a 5% interest rate, 10% interest rate, 12% interest rate. That interest rate is based on the principal amount. The lower the principal, the interest rate will stay the same, but the amount of interest they make is reduced.

So if you pay off a large portion of that principle, or if you pay off all the principal and close out the loan, then the lender is no longer going to receive those interest payments. So the prepayment penalty is something that the lenders have that protects them against the financial loss of interest income that they would have otherwise been paid over time. So if a lender provides you with a ten-year loan, they are assuming they’re gonna make interests for ten years. If you pay the loan off after five years, then they’re only making interest for five years, which is why interest rates are different on five-year loans versus ten-year loans.

On a ten-year loan you are typically going to see a lower interest rate, because they’re making money over a longer period of time, whereas for the shorter loans you’re gonna see a much higher interest rate.

Typically, the pre-payment penalty is incurred if the borrower pays down the loan either entirely, or significantly, via a refinance or a sell, within 1-3 years, and sometimes up to five years… Again, depending on how long the loan actually is.

There’s actually three types of pre-payment penalties, there’s not just one type. So the lenders are able to get that interest money by charging these three different types of pre-payment penalties. The first category are soft and hard pre-payment penalties. The second is yield of maintenance, and the third is defeasances.

The first category, the hard and soft pre-payment penalties. A soft pre-payment penalty allows a borrower to sell their property at any time, without paying a fee. But a fee is incurred if the borrower decides to actually refinance. So that’s a soft. No fee if you sell, yes fee if you refinance.

A hard pre-payment penalty does not allow the borrower to sell or refinance without paying  a fee. So the difference here is when they charge the pre-payment penalty. For the soft pre-payment penalty, if that’s a clause, then if you sell, you’re off the hook. If you refinance, you are not off the hook. For the hard, no matter what, if you sell or refinance, you are on the hook for paying a fee. Both soft and hard pre-payment penalties are either a percentage of the remaining loan balance or of the principal amount, so anywhere between 1% to 3% of the remaining principal balance that was paid off at sale, or refinance. It could be a fixed amount, that is stated from the get-go in your contract, or it could be a certain number of months’ worth of interest.

For example, it could be 80% of six months’ worth of interest if you were to refinance or sell early. Again, these are going to be stated in your contract, so you’re gonna wanna know what the soft or hard prepayment penalty clause is and what the terms are when you are actually in your due diligence phase… Because if you plan to sell or refinance before that clause expires, then you wanna make sure you’re taking that added cost into account when calculating your sales proceeds.

The second category is yield maintenance. Yield maintenance is a pre-payment penalty that allows the lender to attain the same yield as if the borrower made all scheduled interest payments up until the maturity of the loan date. If you remember, I said earlier, when a lender underwrites a loan for you, they do so with the expectation of receiving interest on that loan for whatever term they set. So they plan on received 5% interest for ten years. If you pre-pay that loan amount earlier than (in that example) ten years, a yield maintenance premium can be charged, which allows the lender to earn their originally-projected yield. The purpose of the yield maintenance pre-payment penalty is to protect the lender against falling interest rates. So the yield maintenance premium is going to be the difference between the amount of money the lender would have made from interest payments on the loan, and how much money they would make if they were to reinvest the remaining loan balance.

So it’s not like if you get a ten-year loan at a 5% interest, you sell after five years – you’re not gonna owe them five years’ worth of 5%, you’re gonna owe them five years’ worth of 5% minus whatever they could have gotten by reinvesting that principal into something else. Typically, that something else is going to be a U.S. Treasury bond. For example, if the borrower — if you repay the entire loan balance five years early, the yield maintenance would be the difference between five years’ worth of interest payments and the interest earned from a five-year U.S. Treasury bond.

So in order to determine what that would be, this is something you can estimate on your own. Obviously, five years from now the five-year U.S. Treasury bond might be a little bit different, but you can look at trends — you can just google “U.S. Treasury bonds” and see what the five-year rate is (interest rate) and find that difference to determine what your yield maintenance fee would actually be.

And then the third category is called defeasance. So rather than getting charged a pre-payment fee, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan. Typically, defeasance only applies to commercial real estate loans, while the yield maintenance and the soft and hard pre-payment penalty could apply to any mortgage loan that you get.

This new collateral – it’s going to normally be a Treasury security – is usually much less risky than the original commercial real estate investment… So the lender is far better off because they received the same cashflow they would have received from the interest payments on the loan, and in return receive a much better risk-adjusted investment.

Basically, when you’re using a defeasance, you are exchanging for another cash-flowing asset, so you’re exchanging the original collateral on the loan for another cash-flowing asset, which allows the lender to continue to make money.

So which pre-payment penalty is best? When you’re in apartments, generally speaking there’s gonna be some sort of pre-payment penalty on your loan, unless you’re getting a bridge loan of some sorts. If you’re getting long-term debt, there’s going to be a pre-payment penalty.

Each pre-payment penalty has pros and cons to both you as a borrower, as well as to the lender. The best option is gonna depend on whatever your business plan is, and then the investor’s expectations on future interest rates. That second one comes with that defeasance.

So the benefit of having a pre-payment penalty clause to you as a borrower is that you can receive a lower interest rate, and get lower closing costs on a loan with a pre-payment penalty compared to a loan without a pre-payment penalty.

So as long as your project business plan, your projected hold period is longer than the pre-payment period, so one to five years – again this will be stated in the loan documents, so you’ll know upfront exactly when that pre-payment period ends, then you benefit from the lower upfront costs and ongoing costs, than having to worry about paying that fee on the back-end.

Of course, it gets a little bit trickier for you as a borrower if you’re getting a loan with a five-year pre-payment penalty clause and your business plan is to refinance after three years. More specifically, going into the three different categories, the hard and soft pre-payment penalty is gonna be based on the timing of a refinance or the sell, so it’s easier to calculate upfront.

If you secure a five-year loan with a  pre-payment penalty during years one to three, then you should be able to calculate the pre-payment penalty if your plan is to sell during year two… So the fee would be, for example, 1%, or whatever percent that is stated in your loan documents, of the remaining loan balance… Or 80%, 70%, 90%, or whatever is specified in your loan documents, of 6 months, 10 months, 12 months – again, whatever is specified in your loan documents – worth of interest. So soft and hard are pretty easy.

The other two pre-payment categories are gonna be dependent on the interest rates at the time of sell or refinance, which is gonna require some level of speculation, some level of assumption on your part.

Generally, the yield maintenance premium and the defeasance fees are gonna be based on the U.S. Treasury rate, and the U.S. Treasury rate is based on the market interest rate. So as market interest rates go up, the cost to invest in U.S. Treasury bonds goes down, and vice-versa. There’s an inverse relationship there.

So if you have a yield maintenance pre-payment clause and the current interest rate is higher, once that pre-payment clause is triggered, if the current interest rate is higher than the loan interest rate, then the yield maintenance premium usually decreases to zero. But when the interest rates are rising, then U.S. Treasury bonds are cheaper, so the difference between the remaining interest rates and the cashflow from buying U.S. Treasury bonds or providing another mortgage loan is zero or a net gain to the lender.

So lenders will typically add a clause that if the yield maintenance is zero, then it’ll trigger a soft or hard pre-payment penalty. For example, the pre-payment penalty may be the greater of the yield maintenance or 1% of the remaining loan balance. So it’s either this, or that. “Yeah, sure, if we make money on the yield maintenance – great. But if we don’t, we’re still gonna charge you a 1% to 3% pre-payment fee.”

So if you feel as if the interest rates are going to rise, then selecting yield maintenance can be the cheaper option compared to the soft or hard pre-payment fees or defeasance payments.

Now, the defeasance fee is gonna be also based on the U.S. Treasury rate, but unlike yield maintenance, the borrower – you can technically make money with defeasance. So again, the relationship between the interest rates and the U.S. Treasury bonds still holds true here. So if interest rates on loans will rise to a rate greater than the loan’s interest rate – so 5% at closing, but then 7% at refinance or sale, then the U.S. Treasury bonds lose value and become cheaper, which means you (the borrower) are able to buy the required bonds based on the defeasance option for less than what it is required to pre-pay the loan, which means you make some cashflow.

On the other hand, if interest rates are falling, U.S. Treasury bonds gain in value, then the borrower has to pay an amount greater than the loan amount at pre-payment. So defeasance is a good option if you think interest rates are going up, or if you plan on selling your multifamily property early, and are worried about the potential increase in mortgage payments with some sort of floating rate loan. So you’re paying it off because you don’t want your interest rate to go higher and higher and be paying more and more money each month.

But the defeasance option is obviously very complicated, because you’re taking your principal and investing it in something else, and trying to figure out “Okay, well what difference could it be? Will I make money? Will I lose money? Is it gonna be cheaper? More expensive?” So whatever defeasance is used, you’re typically gonna wanna hire some sort of defeasance consultant, which obviously also increases the costs.

The last thing I wanna do is go over some common examples of pre-payment penalty structures. These are just gonna be ones for the common Fannie Mae and Freddie Mac loans, because again, you’re gonna see pre-payment penalties on these agency debts on these longer-term loans. You’re not really gonna see a pre-payment penalty on a bridge loan, because the lenders that are underwriting these bridge loans understand that you’re gonna be paying it off after a few years, which is why the interest rate and the closing costs are gonna be a little bit higher.

Let’s start with Fannie Mae. Fannie Mae states that for all of their loans, flexible pre-payment options are available, including yield maintenance and declining pre-payment premium. So declining pre-payment premium – also called graduated pre-payment premium for fixed rate loans, structured ARM loans and hybrid loans – means that the pre-payment percentage is higher year one, and then gradually reduces each year. For example, if you get a five-year fixed Fannie Mae loan, then the pre-payment penalty year one is 5%, 4% in year two, 3% in year three, 2% in year four, and 1% in year five. After that, there’s no pre-payment penalty.

For Freddie Mac things are a little bit different. For their fixed-rate conventional loan – regular fixed-rate loan – there’s yield maintenance until securitized, which means… Securitize is the financial practice of pulling various types of contractual debt and selling the related cashflows to third-party investors as securities. Basically, you’re gonna pay yield maintenance if you sell or refinance before the lender is able to securitize their loan, package it together and sell it off to a third-party. Then after that it’s followed by a two-year lock-out, and then there is defeasance after that. There is no pre-payment penalty premium for the final 90 days. If the loan is not securitized within the first year, then the yield maintenance applies until the final 90 days.

The yield maintenance without defeasance is available for these loans that are securitized at an additional cost.

For floating rate they have four pre-payment options. For option one, you’re locked out year one, and then a 1% pre-payment penalty thereafter. Locked out means they won’t allow you to sell or to refinance. Then after that there’s a one-year pre-payment penalty thereafter.

Another option is 3% pre-payment penalty year one, 2% year two, and 1% thereafter. Another option (3) is 5% year one, 4% year two, 3% year three, 2% year four, and 1% thereafter. Then option four, which is only available for their ten-year capped loan – capped interest rate – 7% year one, reduced by 1% each year. 1% in year seven and thereafter.

For each of those options you’re gonna get different loan terms. The more expensive the pre-payment penalty, the better initial terms you’re going to get.

And then also, for their moderate rehab loan, which is a float-to-float loan, there’s a 2% pre-payment premium during the interim phase. For their float-to-fixed loan there’s yield maintenance during the interim phase, and then the standard Freddie Mac pre-pay structures that we discussed before apply thereafter.

Overall, those are the three types of pre-payment penalties. Unless you’re getting a bridge loan, as I mentioned, you’re most likely going to have a pre-payment penalty for your loan, so make sure you know which pre-payment penalty you have. If you have an option to select between different options and what the benefits are of those and the costs of those are, and if there is a chance that you’re going to trigger a pre-payment penalty, make sure you’re taking that into account when you’re initially underwriting your deal… And you’re gonna take that into account in the closing costs at sale.

So if you are assuming a $100,000 closing cost at sale without a pre-payment penalty, then you’re gonna get returns of X, but if there is a pre-payment penalty, you’re gonna have a little bit lower returns. So when you’re evaluating whether to sell early or not, make sure you’re remembering to take into account these pre-payment penalties, because it might tell you that you need to wait to sell… Because once those pre-payment penalties go away in a year, then you’re gonna be able to return a significantly larger amount of money to your investors.

That concludes this episode. That should be everything that you need to know about pre-payment penalties. Until tomorrow, make sure you check out the other Syndication School series about the how-to’s of apartment syndications, and check out some of those free documents as well. Those are all available at SyndicationSchool.com.

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

JF1899: 3 Secrets To Attract And Keep Your Passive Apartment Investors | Syndication School with Theo Hicks

Listen to the Episode Below (00:19:21)
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Finding investors to invest in your apartment syndication deals can often be easier than keeping those investors for future deals. In our experience, private investors are not most concerned with their ROI, it is a concern obviously, but not as high as three other concerns. They want to know that their money is in good hands, frequent updates, and is the process hassle free? Theo will cover those three things in more depth today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“When you buy for appreciation, it’s kind of like gambling because you’re betting on the market going up and that’s out of your control” – Theo Hicks

 


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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome  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 Tuesday and Wednesday, we air two Syndication School episodes on the best real estate investing  advice ever show podcast on iTunes. These episodes focus on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes – sometimes the episodes are a part of a larger series – we offer some sort of free resource. These are PowerPoint presentation templates, Excel calculators and how-to guides that accompany these series or episodes. Those are free, as well as the Syndication School episodes are free… Which can be found at SyndicationSchool.com.

If this is your first time listening, I highly recommend going back and starting at series number one, and working your way up through the final series that talks about selling your deal. That way you can go through the entire process, start to finish. Then you can listen to some of the more recent episodes where we go into specifics on some more of these steps.

Today’s episode is going to be one of those episodes where we go into more specifics, and today we’re gonna talk about how to attract and keep passive apartment investors. In order to attract and keep passive apartment investors, a first question that you should be asking yourself is “Why would they invest with you in the first place?” What is their primary motivation for investing in apartment syndication deals? You’d be surprised, but returns, the amount of money you can give them is not their primary motivation. It is not one of their primary concerns.

Obviously, they care about how much money they’re gonna make, and if you offer them 1% and someone offers them 10%, it’s going to go into their decision, but most likely a passive apartment investor is going to be able to get a similar return by investing with any apartment investor. So it can’t be that they want a solid return. Also not the business plan, it’s not the market… It is actually going to be these three things that we’re gonna talk about in today’s episode; these are basically the three reasons why someone would invest in an apartment syndication deal. And if you know these three things, then you can formulate your company around these three things in order to attract more passive investors, and in order to retain more passive investors.

The three things – I’m gonna go over them right now really quickly, and then I’m gonna go over them each in more details. Number one is they want their money to be in good hands. Number two, they want to be updated on relevant information on the deal, and number three, they want a hassle-free process.

Those are really the three main reasons why people will invest in apartment deals, which is why these are the three secrets to attract and keep your passive apartment investors. Is their money in good hands, will they be updated on relevant information on the deal, and is the process hassle-free?

Let’s go over need number one, which is “Is their money in good hands?” Basically, what this means first and foremost is “Are you not going to lose my  money?” Warren Buffet is famously known for saying that the two rules for investing are 1) never lose money, and 2) never forget rule number one. As an apartment syndicator, one of your main focuses should be on making sure you’re not losing your investors’ money. The investors’ money is used towards the down payment for the loan, it’s used towards maybe funding renovations, and then of course, the fees paid to you for closing on the deal.

Like any investment, there’s not gonna be any guarantees; you can’t guarantee them you’re not gonna lose their money, because that’s not possible. You can’t really guarantee anything. The market could completely collapse, or there could be a nuclear apocalypse tomorrow, and of course, if that happens, you’re not gonna be able to give your investors their money back. But in that case, they probably have other concerns that are more important. Anyways…

But there are a few things that you can do proactively to mitigate the major risks of the deal. We call these the three immutable laws of real estate investing. If you follow these three laws, then you should be confident that you will not only be able to preserve the capital of your investors, but maximize their returns as well.

Basically, if you do the opposite of these three things, are what get people into trouble, are what get people foreclosed on, losing their deal, not being able to sell at a higher price, and not being able to keep their investors’ money.

The first one is to not buy for appreciation. Making sure you’re buying for cashflow. Because when you buy for appreciation, it’s kind of like gambling. You’re betting on the fact that the market is gonna keep  going up, and the market going  up is really not in your control. The only thing in your control is buying the deal at that point.

When you buy for cashflow, then you know “Well, it doesn’t really matter what the value of the property is, as long as you aren’t selling” – and we’ll address that not selling part in a second. But when you buy for cashflow, then you know upfront “Well, I’m gonna make this much money each year, really no matter what… Unless something crazy happens. If the market goes up in value – great. That’s the cherry on top, and I’ll have even more money. But if it doesn’t, I’ll still hit my cashflow numbers.”

Now, I wanna differentiate between natural appreciation and forced appreciation. I’m saying don’t buy for natural appreciation. Don’t buy for “The market is gonna go up 10% each year” or “Rents are gonna go up 10% each year.” You can buy for forced appreciation though. Forced appreciation is when you’re actually doing something to force up the value of the property, so you’re doing some sort of value-add. You’re doing some sort of physical improvements to the property, or you’re improving the operations in order to increase the income and/or decrease the revenue, which in turn increases the NOI, which in turn increases the value of the property.

Buying for forced appreciation is fine, and actually encouraged in apartments, and that’s the best way to get the best of both worlds in terms of cashflow and a large profit at sale… Because with forced appreciation, your rents are going up, so you’re able to provide a higher cashflow as time goes on in the project, and then since rents are going up, your NOI is going up, and the value of the property is going up, so when you sell, you’ll have a large lump sum of profit to distribute to investors at sale. So that’s number one, don’t buy for natural appreciation, buy for cashflow and forced appreciation.

Number two is gonna be about debt. Secure long-term debt. I mentioned, of course, you can buy for cashflow, and you can buy for forced appreciation, but if there’s a time where you’re forced to sell the property for some reason, then that can be something that makes you lose  money. So in order to avoid having to sell early, you wanna secure long-term debt.

To define long-term debt – it’s debt that is equal to or longer in term than the hold period. So if your plan is to hold on to the property for ten years, you probably don’t wanna get a three-year loan, because at the end of year three you’re gonna have to refinance or sell the property. And if your business plan didn’t go according to plan, if the market took a turn, you might have to refinance and do a capital call to actually have enough equity in the deal to get a new loan. Or you might be forced to sell at a price that’s so low that maybe you can return your investors’ capital, but you’re not able to give them the return you promised.

In the example of a ten-year loan, you wanna get a loan that’s at least ten year long. If you’re doing a ten-year hold, then a loan that’s at least ten years long. If you’re doing a five-year hold, you want a loan that’s at least five years long. Now, it’s tricky when you’re doing the bridge loan, the renovation loan, because those are typically going to be shorter-term, because part of the business plan is to refinance once you’ve done the value-add business plan… And if things go according to plan and you refinance – great; you should be able to return a large amount of capital to your investors.

But if things don’t go according to plan, you still want to follow this principle of having long-term debt. So if the plan is to hold on to the deal for five years and you wanna do a bridge loan, then make sure you have the option to extend that bridge loan up to five years, so that worst-case scenario, if you can’t refinance, then you can extend the loan one year and then reevaluate. If you still can’t refinance or don’t wanna refinance, it doesn’t make sense to refinance, then you can extend it again, and then year five you can decide whether you wanna refinance, or hold to your hold period and sell.

And then along with that comes making sure you’re not being overleveraged. But unless you’re not going the conventional Fannie/Freddie route, or a bridge loan, then you’re really not gonna have that opportunity to overleverage. It’s when you’re looking at lease options or seller financing, where you might actually have the opportunity to get the deal with 5% down, 10% down. Again, not a good idea, because if you have to sell or you have to refinance, you’re gonna have to bring money to the table for the refinance, or you’re gonna have to actually lose capital if you sell the deal, and the value dropped by 5% or 10%.

So the last principle is don’t get forced to sell. Basically, follow the first two, and then you’re going to automatically follow the third principle and not get forced to sell the property. Because again, when you’re forced to sell, it’s likely because there’s a problem, and if there’s a problem, you’re likely not gonna be able to return all of your investors’ capital.

So all those three rules and your investors are going to know that their money is in good hands, because you’re mitigating the chances of you actually losing the money. And then there’s a few other things you can do as well to portray to your investors that you’re in good hands.

Something that’s pretty self-explanatory is making sure that you have a solid educational foundation and a track record in real estate or business before you start raising capital… Because you’re not going to attract anyone if you don’t know what you’re talking about, and if you’ve got no experience with business or real estate. Now, there’s a way to get around this.  If you are lacking in any of these areas – probably not education, but maybe the background, then you can make up for this with a trustworthy, credible team.

So you can bring a mentor on, a property management company, a broker, who have a strong background in the apartment industry, and have a strong, successful background in apartment syndications. That will help you get started, but you’re going to attract more investors if you have the experience, you’re the point person. So if you have the experience, if you have the education, then they’re going to know their money is in good hands more than if you don’t, and you’re just bringing on an experienced team.

So the experienced team can definitely help, but you wanna make sure that you are still working on your education, and making sure you still have some sort of relevant background to leverage when discussing yourself with potential investors. We’ve gone over what that means – what specifically is a solid real estate background, what specifically is a solid business background –  on previous Syndication School episodes.

This is also pretty self-explanatory, but if they trust you as a person, then they’re gonna know that their money is in good hands. They’re gonna have to have a good feeling about who you are as a person and truly believe that you have their best interests in mind. This trust can be established by the length of time you’ve known this person, by the quality of your relationships with this person, by having a strong online presence, by displaying your expertise of you and your team through a thought leadership platform, and by having alignment of interests, which we’ve actually talked about alignment of interests in yesterday’s episode (the episode just before this one). Make sure you check that out, to learn about the four tiers of alignment of interests.

Once they trust you, then they’re gonna be confident that you have common sense, that you can make good decisions, that you’re going to conservatively underwrite the deals, that you’re gonna perform all of the required due diligence before buying the apartment, and you’re going to at least meet the projected returns that you outlined in your investment summary.

Then lastly, someone will know that their money is in good hands if they know you are a responsive communicator. We also talked about this in the episode yesterday, so I’m not gonna go into too much detail on this… But basically, if something goes wrong, do you let them know and do you already have a solution in mind (or already implemented), and when they reach out to you, how quickly are you responding?

Overall, a passive investor is gonna wanna know their money is in good hands, and you as a syndicator can convey this to the passive investor by proactively mitigating risks, by following the three immutable laws of real estate investing, having the relevant background, educational and business or real estate background, building a trusting relationship and being a responsive communicator.

Again, one of the needs of a passive investor is to know if their money is in good hands, and if it is, that’s how you attract them to your deals and keep them on. Will they be provided with status updates on the deal? They’re gonna want to know what’s going on with the deals they’re investing in, if they are going to invest with you and if they’re gonna keep investing with you. So on a consistent basis, you want to provide them with a  director-level – this is in between an entry-level employee level, super-detail, lots of numbers and calculations, and the CEO level, which is quick bullet points of what’s going on. Somewhere in between status updates on the deal.

Again, we talked about this plenty of times on Syndication School, how to do this… But basically, first you wanna send them a monthly update that includes things like occupancy rates, rental rates, renovations, cap ex, issues, community engagement events… You also wanna provide them with quarterly financials, and then any information about when they’re gonna get paid, or anything else like taxes and things like that.

Some syndicators don’t provide any updates, or updates are very minimal, so you wanna make sure that you are letting your investors know that they’re going to be kept up to date on what’s going on. Once you fulfill that need, you’re more likely to attract and keep them on as investors.

Then the last need is a hassle-free process. It’s in the name, “passive investor”, but they wanna be passive. They want a place to park their money and not have to worry about doing anything else. They don’t wanna have to worry about being responsible for any day-to-day operations. They’re busy doing whatever they’re doing to make money, whether it’s real estate, whether it’s a business, whether they’re working a W2 job, they’re busy with family life, personal life… So they want to minimize the amount of time spent on their investment.

So their ideal setup would be they send you the money and you send them money back, with frequent updates on what’s going on, so they know that they can expect to receive their money.

So besides doing due diligence on the syndicator initially, and then doing due diligence on the deals as they come in, a passive investor wants the investment to be as boring as possible, with little to no surprises. All they wanna do is read a monthly email and receive their distributions. So one thing you should probably do, that we recommend doing and that we encourage you to do, is to set up some sort of direct deposit with your investors, or at least offer direct deposit… Because some of them do like the old-school checks, but… With direct deposits, that takes away the added step of cashing a check. So all they need to do is log into their bank account, see “Okay, Theo sent me my monthly distribution. I’m good to go.”

And then also, part of the hassle-free process is if I do have a question, if I do need something from you, I want the problem to be resolved quickly, and I want minimal back-and-forth.

So if I reach out with an issue, I’d much rather have you reply one time saying “I’ve got your email. Here’s what we’re doing to solve this problem” or “Here’s what we’ve already done. The problem is solved” or “Hey, here’s an answer to your question.” Rather than send them one email saying “Hey, I got your email”, a reply on this day, then again on this day saying “Oh, well I still don’t know the answer, so give me some more time.” Just one time, address whatever they need right away, and then that’s it.

Those are the three primary reasons why someone would invest in the deal, the three things that you need to address in order to get them to invest in your deals… And that is “Is their money in good hands? Will they be updated on the relevant information on the deal? Is the process hassle-free?” If you do these three things, you’re gonna attract more passive investors and you’re going to retain more of your current passive investors.

That concludes this episode. Until tomorrow, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications, and check out those free documents we have. Both of those can be found at SyndicationSchool.com.

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

JF1898: 3 Ways To Separate Yourself From Other Apartment Syndicators | Syndication School with Theo Hicks

Listen to the Episode Below (00:18:57)
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10 years ago, we wouldn’t have had a conversation or podcast episode about this. Apartment syndication has exploded in popularity in the last decade as people started to learn it’s a fantastic way to build wealth and do bigger deals with investors than they could do on their own. So how can you stand out from the crowd? Theo covers three ways to do that in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome 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 Tuesday and Wednesday, on the best real estate investing advice ever show podcast. These two episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the first batch of series we did, up to about 25-30, we offer a free resource. These are PowerPoint presentation templates, Excel calculator templates, how-to guides… Some sort of resource that will accompany the series or the episode. Of course, those are free. You can download those free documents, as well as listen to the previous free Syndication School series podcast episodes at syndicationschool.com.

This episode is going to focus on how to separate yourself from other apartment syndicators. As you probably know, there are a lot of apartment syndicators out there. Lots of sponsors, lots of people who are raising money for apartment deals and sharing in the profits. Most are also qualified, as well. Most of the offer some sort of competitive return structure… So you need  to be asking yourself, how can you stand out from all the other apartment syndicators? Why would your passive investor that you’re talking to invest with you, and not someone else?

Like all things, there’s a secret formula or a secret answer that if you do this one thing, you’re going to attract millions/billions of dollars in private capital, everyone’s gonna want to invest with you and no one else… But there are a few tactics that when you implement those over a long period of time, you can slowly begin to separate yourself from other apartment syndicators out there, and  obviously build stronger relationships with your current high net worth individual investors, as well as build relationships with new high net worth individuals, who can ultimately become your passive investor… And these tactics will also help you build a sustainable and successful apartment syndication business model, because again, you’re separating yourself from the pack and building these stronger relationships.

We’re gonna go over three different tactics that you can implement. I’m gonna go over the three first and I’m gonna give some specific examples of what you can actually do. The three ways to separate yourself from other apartment syndicators – number one is going to be alignment of interests. And keep in mind, you should be doing all these things regardless, but these are just things that other syndicators might not necessarily be doing, or might not necessarily be strong at. So if you can be strong at these three things, then you can separate yourself from the other syndicators.

So the first way is to have alignment of interests with your passive investors. What this means is you are doing things – these are things that are evident to your passive investors – that they’re interests, their financial interests, their goals, their interests in general are at least just as important as yours. Ideally, they are more important than yours. So these are things you’re doing that your investors will say “Hey, Theo really has my interests at heart, and it seems as if he’s putting my own interests above even his own interests, even his own financial interests, even his own personal interests.”

So there are lots of different ways to do this, and we’ve talked about different ways to create an alignment of interests with your passive investors on Syndication School. I’m not gonna go into extreme detail on these, but I’ll just kind of go over them really quickly.

Number one is to put your asset management fee in a position behind the investors’ preferred return. Basically, what this means is that if you have a preferred return of 8%, an asset management fee of 2%, if the asset management fee was in first position, then if the deal cash-flowed 8%, then you would get the first 2% as your asset management fee, and then the remaining 6% would go to your passive investors.

Now, if that’s the case, and you had offered an 8% preferred return to your investors, then they aren’t hitting that 8% preferred return. They can still accumulate, they’re still gonna get it at the end of the deal, the portion of that will come out of the sales proceeds, but still, you’re getting paid before they’re getting paid, and as a result, they may not get their full preferred return.

Now, if the deal is cash-flowing 10% plus, then it’s really not that big of a deal, but especially when you’re first starting out, you might be projecting an 8% cash-on-cash return for year one, or a 9% cash-on-cash return for year one, because you’re slowly implementing your value-add business plan, and you don’t expect to get above 10% until, say, mid-year two.

If that’s the case, then putting the preferred return in second position is definitely promoting alignment of interest with your investors, because if the deal cash-flows only 8%, then you’re saying “Hey, I’m not gonna get paid until you get all of your preferred return. For year one we’re projecting 8%, so we’re not gonna get paid year one.” That sounds a lot different than “Hey, we’re only projecting 8% cash-on-cash return the first year”, they see that, but they see that they’re not hitting the preferred return, and they realize “Oh, it’s because they’re paying themselves first.” Those two stories are gonna go across completely different to a passive investor.

So that’s just one way… And there’s definitely not a common practice, where it’s explicitly stated in the operating agreement that you are going to be putting your preferred return in second position. So that’s one way…

The other way to create alignment of interests – this is kind of like a ladder, or a tiered form… Basically, the lowest tier would be – this is separate from what I just talked about, and you really wanna do this regardless, put your preferred return in second position… But I guess the lowest alignment of interests comes from having an experienced team member on the deal. This would be an experienced property management company, an experienced broker, or an experienced local owner… And going from least to highest alignment of interest based off of who you bring on, the property management company would be the highest, because they are responsible for covering the day-to-day operations. Second would be a local owner, just because they’re got experience with apartments, they own apartments in that market… And then the lowest would be bringing on an experienced broker, because really all they’re doing is helping you find the deal, maybe helping you underwrite the deal… But at the end of the day, the broker wants to get paid, so they want you to buy the deal at the highest price. So that’s tier number one, where you bring in an experienced team member on the team.

Tier number two would be bringing on an experienced team member and also giving them an equity stake in the deal. So just straight up “Hey, you’re on my team. Here’s a percentage of the general partnership for joining.” This is a little bit more of alignment of interests than just having them on the team, because they don’t have skin in the game, but they have a financial stake in the deal. So if the deal performs well, they get paid, but if the doesn’t perform well, then they just don’t get that extra money, but they’re still getting whatever fees they are charging you – the property management company is gonna be a few percentage points of the income; a local owner – I guess they’re really not making any money, unless you give them equity… And the broker – they’re gonna make their commission.

So what would be even better – this is tier three – would be bringing on an experienced team member and giving them equity in the deal because they invested their own money in the deal. So the broker invests their commission in the deal. A property management company invests some sort of capital from their company in the deal. A local owner invests in the deal.

Now, this is the case – if the deal performs well, they get paid, but if the deal performs poorly, then they could technically lose their money. So now at tier three they have skin in the game, a lot more alignment of interests with your investors, because they know that not only is the financial success of the GP dependent on the success of the deal, but the financial success of the management company, of a broker, of a local owner is also dependent on the success of the deal.

And then the highest would be if those individuals not only invested their own money in the deal, but brought on their own investors… Because now you’re adding even more people whose financial success is tied to the success of the deal.

And then one more way to create alignment of interests would be to have one of those parties – most likely a local owner, or some other apartment syndicator – actually sign on the loan… Because again, not only are you signing on the loan, so your credit and your money is at stake, but you’ve got someone else on board as well, who’s guaranteeing that loan.

Overall, the main way and the first way to separate yourself from other apartment syndicators is to create an alignment of interests, and we went over multiple ways for you to do that.

The second way to separate yourself from other investors is to be very transparent, to have a very high level of transparency. Now, this doesn’t mean that you want to send your investors emails every day with updates, or send them a KPI snapshot every single day. It doesn’t mean that you want to give them an update on every single thing that happens, every time you get a point of contact from your property management company; you don’t wanna forward that on to your investors. “Hey, one person just stopped by to take a look at a unit at my 500-unit apartment community.” That’s overkill. But you do want to make sure that at the very least/baseline you’re providing them with ongoing updates on a monthly basis, or on a quarterly basis, about the operations, the KPIs at the property… And we’ve talked about what you wanna include in there – things like occupancy rates, renovation updates, what rental premiums you’re demanding on those renovated units, how that compares to the rental premiums you projected to demand, any capital improvement updates, any issues that you have with the proposed solutions, and any other relevant updates like market updates, resident appreciation parties, things like that.

Then also, you’re gonna wanna be transparent with the financials, so proactively send out rent rolls and profit and loss statements, so that your investors can look at the granular details of the operations.

Now, typically, things aren’t going to go wrong — ideally, I guess I should say, things aren’t going to go wrong. I did mention that if something were to go wrong, you want to talk about that issue in your monthly update as having a proposed solution. So that’s key. So not only do you wanna be transparent and say “Hey, we had this issue at the property”, but you also wanna take it to the next level and say “But here’s what we are already doing to fix that problem.” Or even better, “Here’s what we’ve done. The problem is already fixed”, depending on what the problem is. If it’s a fire, or some sort of natural disaster, you’re not gonna be able to fix everything within a few weeks, so at the very least saying “Okay, we’ve got a fire. I’m not gonna reach out to my investors until we know exactly what we’re going to do.” Which means you need to know exactly what you’re going to do pretty quickly. You don’t want to wait and have your investors find out before you reach out to them.

So obviously, sending them updates on the key performance indicators, sending them financials is one thing, but also, when issues arise, telling them and having a proposed solution, or a solution in place already… And then even above that – this isn’t related to transparency, but making sure that you are extremely quick in your responses to investors’ questions and concerns. So when you do your monthly emails, expect to receive responses from your investors. When you present a new deal to investors, expect to have questions from your investors.

And the last thing you wanna have happen is if a passive investor reaches out with a question, a comment or a concern, and they don’t receive a response for a few days, or a week, or two weeks, or they never get a response whatsoever.

So you should set expectations with your investors upfront for how quickly you’re going to respond to their inquiries. Ideally, you do it that same day. So schedule a chunk of time either at the end of the day, or as they come in, respond to those emails.

If it’s something that you don’t know the answer to, or you can’t respond to in a timely manner, then rather than just waiting until you can, let them know “Hey, I’m looking into this and I’ll let you know by this date.” And then put a reminder on your calendar to make sure you send them an email on that date.

This may seem like a minor point, but a huge complaint that you’ll hear from passive investors is a lack of communication. A lack of transparency. They don’t get updates, if something goes wrong they don’t learn about it until it affects their distribution, or “I reach out to this investor with questions and they never reply, or they reply a week later.”

So by not falling into that trap and making sure you’re sending out updates, making sure you’re sending out financials, making sure you are addressing issues, addressing questions in a timely manner, you’re gonna be able to separate yourself from other apartment syndicators out there.

And then lastly, number three is going to be trust. This is the third one, the last one, but it’s probably the most important, because the main reason someone is gonna invest with you is if they trust you, they trust the person in charge. The main way to build trust is to just be yourself. When you’re being yourself, you’re being honest, and honest and trustworthy are basically synonymous.

There’s no reason to put on a show, there’s no reason to be someone you’re not, there’s no reason to act how you think they want you to act. Just be yourself, and that will help you build stronger relationships with your investors, that are deeper. Because again, the can get returns from anyone. So if they trust you, then they’re going to invest with you more often, at a higher number than if they didn’t trust you.

And then another way to build trust besides being authentic, being yourself, is to have a strong online presence. So if an investor googles you, they should be able to find you pretty quickly. You should be one of the top results. If you have no online presence and they can’t find you, then that’s definitely an indication of a lack of trust.

I was interviewing someone on the podcast – I’m pretty sure they’re a passive investor – and one of the things they said when qualifying a syndicator is to google them and see if they show up, see if they have an online presence, see if they have a strong brand… Because if in addition to their syndication business they have a strong brand, then if they mess up on the syndication business, that brand is gonna take a hit… So they have more skin in the game. This is kind of like number one, alignment of interests – if they have a strong brand, then they’re probably gonna take care of it a little bit more. Because if they have no online presence at all and they mess up, then me as an investor – I’m not gonna be able to go and write a review of their brand online, because it doesn’t exist. Whereas if I have a massive brand – if I have a podcast, a YouTube channel – and I mess up, well, I should expect to see a lot of negative comments on those thought leadership platforms about my mistakes, my misdeeds.

So making sure you have an online presence, making sure you’re able to be googled easily, having a LinkedIn profile, having a podcast, a YouTube channel, a blog, whatever. And then the added benefit of this is that if you do that, you can use this to generate interest from passive investors, and when you’re having conversations with them, they’re going to feel as if they already know you, because they’ve listened to you, they’ve seen you talk for hours and hours and hours before you’ve even met them in person… And that’s a great way to establish rapport even before having your first conversation.

So those are the three ways to separate yourself from other syndicators. Number one is having alignment of interests, number two is transparency, and number three is trust.

Until tomorrow, make sure you listen to the other Syndication School series about the how-to’s of apartment syndications, and take a look at some of those free documents as well. Both of those are available at SyndicationSchool.com.

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

JF1885: 5 Steps To Raise Over $40,000,000 For Apartment Syndications | Syndication School with Theo Hicks

Listen to the Episode Below (00:17:37)
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Joe was once starting from no money raised just like every other investor gets into raising money. After a lot of deals, he was at a point where he had raised $40 Million (over two years ago) and wrote about it for others to learn from. Today, Theo is sharing those lessons with us via the podcast. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Once you’ve received a new investor, you want to focus on retaining them by continuing to syndicate successful deals”

 

Related Blog Post:

https://joefairless.com/5-steps-raise-30000000-apartment-syndications/

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we release two podcast episodes for the Syndication School series on the best real estate investing advice ever show, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the ones earlier on, where we went through the entire apartment syndication process, we offer free resources. These are PowerPoint presentation templates, these are Excel calculators, they’re PDF how-to guides that accompany the episodes in the series… And again, those are free. In order to download all of the free documents, as well as listen to the past Syndication School series, visit SyndicationSchool.com.

If you’re new around here, I highly recommend starting from series number one and working your way through the twenty, because for the first chunk of episodes we went through the entire apartment syndication process, from start to end; from not knowing anything about apartment syndications to selling your first deal. Along the way, we’ve provided a ton of free documents that you can use to guide you on your journey… So make sure you check all that out. Again, that is SyndicationSchool.com.

In this episode we are going to talk about raising money. Joe interviewed someone on the podcast who has closed on over 2,800 apartment units since 2010. He interviewed this person back in 2017, so it’s probably a lot more now. And for these deals he raised 40 million dollars, four-zero million dollars. But of course, at one point in his career he was just like you, if you haven’t done a deal before. He didn’t have any connections, he didn’t know how to invest in apartments, so he told his story of how he got from where you most likely are right now, to where he is today. Based on the conversation, we broke his journey into five steps. So these are the five steps to raise over 40 million dollars for apartment syndications.

Step number one is going to be to build your reputation. How I’m gonna go about this is I’m going to explain first what he talked about, and then we’re gonna talk about content and advice that we’ve given on this podcast, on our blog, in our book, that echoes his advice.

So number one is to build your reputation. Before he even entertained the idea of raising money for apartment deals, he was already investing in apartments, in multifamily on his own, using his own money. He also ran a successful sales and marketing company. Due to the success of both of these jobs – buying real estate on his own, as well as running and starting his own company, he was known by many other entrepreneurs in his local area to be a savvy entrepreneur who could effectively manage, run, scale a business.

Of course, this gave him a solid reputation amongst his entrepreneurial peers. It makes sense that this is step number one, because due to this reputation from his previous business success, he was able to eventually (as we’ll talk about in future steps) leverage that to raise capital.

So in his particular case, his background was investing in real estate on his own, particularly multifamily, which is even better, because if you’re gonna raise money for multifamily deals, it’s good to be able to leverage a background in successfully doing that on your own. But also, he had experience running a company. And when you’re doing apartment syndications, you are starting a company. So it’s different than just buying one-off deals on your own. You’re actually running a full-fledged company, with team members, with stakeholders who are your investors… So having a background in starting your own business and in running your own business is also very important.

So the two main things that you need before becoming a syndicator is going to be real estate experience and/or business experience. Real estate experience – buying your own deals, even if it’s buying single-family homes like Joe, and also business experience, whether it’s starting your own company or working your way up through an existing company to a high/director level.

No one’s gonna trust you with their money if they’re not confident that you can navigate the syndication niche. Obviously, if you haven’t done a syndication before, you’re not gonna know how to do a syndication. You can get educated, but you don’t really know how to do something until you actually do it… So the next best thing is to show your ability to successfully navigate other similar niches, so successfully navigate buying your own properties, successfully navigate managing your own company, things like that. So that’s step number one – build a reputation; how you do that is by having previous real estate and/or business success.

Step two is to tell your story. After building a solid business reputation, the next step is to locate the high net individuals that are in your current network, so the people that you already know, and then tell them your story. You’re not gonna have a reputation unless it’s known. So you could have done all the deals in the world, managed a successful business, but if no one knows about it, then it’s not really powerful. That’s where telling your story comes into play.

Now, if you’re thinking to yourself “Well, I don’t have a network of high net worth individuals”, that means you most likely need to continue working on your reputation. Because when you’re performing at a high level – in real estate, in business – you’re going to cross paths with people who can be potential private money/passive investors.  On a more personal note, a perfect example is my wife works for a big Fortune 500 company, and she has a lot of people that she works with who might not necessarily be accredited, but would be interested in passively investing. She’s worked her way up through this company and she’s met a lot of people who have the capital to invest in these types of deals. This is one example.

If you’re investing in multifamily, then you likely know a lot of other multifamily operators who may have connections to other passive investors.

Another example would be Joe. He was a VP at his New York City advertising firm, so when he was ready to raise money for his deals, there were people within the industry that he had already created relationships with, who were his first investors and invest with him to this day. Because they saw his success in business, in the advertising industry, they also saw his success in real estate, purchasing multiple single-family homes and teaching people how to buy properties, but more importantly they knew that he actually did that, they knew that he worked his way through the company, they knew that he was involved in real estate.

The individual who Joe interviewed similarly also had the same steps [unintelligible [00:09:10].10] obviously, he told his story, so what he said is “What really helped me was I was able to show them (his passive investors) what I was doing. I started in this business investing in multifamily, on my own, for myself, I had a tax problem, I needed some tax shelter. We got creative on that side, so I was able to approach some of the people that I knew, that had the same investable income, and just told them my story.”

Overall, after you’ve  built your reputation in business and/or real estate, you want to use that as — I don’t want to call it a selling point, but you want to leverage that when you’re having conversations with the high net worth individuals you met whilst creating that story. So that’s step two, tell your story.

Now, this something that he didn’t mention, but one great way to tell your story to come across as a credible person is to start a thought leadership platform. We’re not gonna talk about that in detail today, because we’ve got plenty of content on that on the blog and in past Syndication School series. If you go to JoeFairless.com and you search “thought leadership platform” in the search function, you’ll find countless content on how to do that, and why you should do that.

So step one – build a reputation. Step two – tell your story. Step three is to get investor commitments. Now that you’ve got your reputation and you begin telling your story to high net worth individuals, the next step is to get them to commit to investing in your deal. And the individual that Joe interviewed had a great story about how he did this. He said “I was invited to sit on the board of a local startup bank. I was listening to a conversation that went something like this… These guys were talking back and forth, and I knew most of these guys around the table, about a dozen guys. They were talking about investing in this bank, and wanting to know if that was a good idea, a wise investment. I heard conversations like “Well, you might not see a return for 5-7 years, but it’s better than putting our money in a CD.” I was just blown away. I was amazed at the conversation.

I got to looking at what I was doing in the multifamily space, and got thinking “Man, how can I add value to these guys?” It was about the time I had bought a  couple hundred units on my own, I was sort of coming to the point where I was running out of cash, I had to slow down… Then I talked to another friend of mine who was on the board as well. I ran the idea by him about syndicating and teaming up with these guys. He thought it was a great idea. For the next deal they came along.”

So because of his business reputation, he was invited onto this board. Due to his previous real estate investing experience and successes, he had a compelling story to tell. So in a combination with both of these things, he was able to raise money for his first deal. In this particular case, it was from people that were on this bank.

So how can this apply to you? Well, this is why it’s good to have both. If you have a strong business reputation – you start a company or you’ve worked you way through a company – you’re likely gonna get more opportunities to be in front of these potential investors. Once you’re in front of these potential investors, you need to have another story to tell them about why they should be investing with your real estate deals, and a great way to do that is to tell them about your successful real estate investing background. Those things go hand in hand. You can do one without the other, but it’s much easier to have both in your background.

And again, you don’t need to have started a massive company on your own. You can, as Joe did, work your way through a company and meet people through that, and find opportunities through that. So step four is to increase your investor network through referrals.

Once you’ve actually done your first deal, or two, as long as those deals were successful and you took care of your investors, and you did what you said you were going to do, then your current investors will likely refer you to their other high net worth friends. Then from there it’s a snowball effect.

So referrals are the best way to get more investors, because of the concept of social proof, which we’ve talked about plenty of times on the podcast. You’re more likely to buy something at the recommendation of a friend than at the recommendation of that company.

I was reading an article last night about social media influencers, and how companies are going away from paying the multi-million follower accounts for their advertising, and again, they’re paying smaller accounts, just random people, a few hundred bucks to post pictures of them wearing their clothing or using their product… Because I’m more likely to buy a product if I see my friend using it than if I see some super-fancy person that I don’t necessarily know promoting that product. That’s just an example of referrals, but this also applies to real estate.

If I’m investing in a deal and it goes really well, and I tell a friend “Hey, I’m investing in this deal. It’s going really well, you should take a look”, they’re more likely to do it than if they’ve found it on their own, or if the syndicator reached out to them and they didn’t know I was investing into that deal.

The individual that Joe interviewed at this point said “If I would pinpoint and go back to each one of those investors, a  lot of the guys were from referrals. People that invested with me, and then said “Hey, I’ve got a friend…” They’d give me a third-party endorsement and we ended up doing a deal together. One thing led to the next, and the next thing you know, they’re a really faithful investor.”

Now, the last step – it goes hand in hand with step four… So step four was, again, increase your investor network through referrals. Step five is to retain current and referral investors. Once you’ve received a new investor, whether it’s one of your first-time investors from your current network, or a referral, or somebody you’ve found from somewhere else, you want to focus on retaining them by continuing to syndicate successful deals.

I interviewed someone from Joe’s podcast last week who was talking about the fact that a lot of people focus on finding new investors and don’t focus enough on retaining current investors… Because they don’t realize the power of the referrals.

Technically speaking, once you brought on your first batch of investors from your current network, it’s not a requirement to have to go out there and always find new investors, because your current investors might do that on your behalf, as long as you’re taking care of them. And again, we’ve done plenty of podcasts in Syndication School; I believe there’s one that’s titled “How to retain passive investors”, so make sure you check that out as well. Again, that’s at SyndicationSchool.com, or you can search “retain passive investors” on Joe’s website in the search function.

So as long as you consistently provide your investors with a solid return, you are transparent with the communication, not only will you receive more referrals from them, but they’ll also come back and continue to invest, and ideally invest more and more.

On this point, the person that Joe interviewed said “We recently closed on a 300+ unit building. We raised over three million dollars, and about 85% of those investors had invested with me on other deals.” So they were current investors, and just coming back for another round.

Again, referrals are powerful, but also retaining your current investors is probably as important as getting referrals.

To summarize, the five-step process to raise over 40 million dollars – maybe even more than 40 million dollars; 100 million dollars, a billion dollars – is step one, build your reputation, step two, tell your story, step three, get investor commitments, step four, increase your investor network through referrals, and step five, retain those current investors and retain those referral investors.

That concludes this episode. If you want to actually listen to the podcast interview that I was referencing for this, it’s episode 1093. The person Joe interviewed was Dave Zook.

Until tomorrow, make sure you check out and listen to some of the other Syndication School episodes and series about the how-to’s of apartment syndications. Make sure you check out all of the free documents that we have as well. Those are both available at SyndicationSchool.com.

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

JF1884: When To NOT Work With A Passive Investor On An Apartment Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:17:16)
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Obviously we talk and write a lot about finding private investors, but we don’t talk so much about when you shouldn’t work with them. Priority number one is having an alignment of interests with your investors, and ideally they treat you as a partner rather than a vendor. Theo will explain that and more in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we release two podcast episodes on the Best Real Estate Investing Ever Show, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, especially the earlier series, we will offer some sort of resource for you to download, whether it’s a PowerPoint Template, Excel calculator, PDF how-to guide, some sort of resource for you to download for free, that accompanies the episode or series. All of these free resources, as well as the free past Syndication School series, can be found at SyndicationSchool.com.

In this episode we are going to talk about when to not work with a passive investor on an apartment deal. A lot of content is geared towards how to find passive investors, how to retain passive investors, but there’s not much content on when to actually not work with a particular individual.

Now, when you are first raising money for deals to purchase apartment communities, most people as long as this person is interested in investing and meets the accredited investor qualifications – if that is one of the criteria you have for your investors – then typically their capital is accepted into the deal, really without any other hesitation. “Are you qualified and do you wanna invest? Alright, come on and invest in this deal.” But maybe something you wanna do starting out, or most likely this will occur when you’ve gotten a few deals under your belt, and you’ve got a large list of investors, maybe you have a waiting list at a few of your deals, or it fills up really quickly, you might wanna consider potentially not working with certain passive investors if there are some red flags from the get go.

It’s important to be aware of these red flags right away, when you’re first starting out, but obviously – and again, this is up to you, but if you really need this person to invest and there are red flags, that decision is up to you… But eventually, you’ll want to only work with passive investors who do not have these red flags.

Before I go into these red flags, this is gonna be important for you to first define what the ideal relationship will be between you and your passive investors. Typically, your syndication deals are gonna be anywhere from five years to ten years. Maybe you sell early, maybe you hold on later, but generally speaking, the business plan is going to be five years. So you buy it and then you sell it within 5 or 10 years. In that case, you’re gonna have a relationship with your passive investors for at least the period of the business plan. Obviously, ideally it will be longer, because they’re coming back for multiple deals, but the very least, the relationship is going to be five years, or whatever the length of your business plan is going to be.

So if you’re gonna be in a relationship with someone for that long, then it’s best if you have a passive investor who trusts you as a person, personally, but as well as a businessperson, and also treats you as a partner in the deal.

Now, the opposite of that would be if they were looking at you as more of a vendor. So think of how you would treat a partner, compared to someone for example that you’re buying some commodity from one time; like you’re buying internet, or something.

So based off of Joe’s experience, having conversations with hundreds of accredited investors, thousands of accredited investors, having hundreds of accredited investors invest in his deals, completed upward of 20 apartment syndication deals, there are two major re flags or factors that indicate to him that the relationship between him and that passive investor is not gonna meet these requirements. It’s not gonna meet the requirements of the passive investor trusting him, and the passive investor treating him as a partner rather than as a vendor.

The first red flag is contempt. There was a famous study that was published in the 1990 by a marriage researcher named John Gottman, and he videotaped newlywed couples discussing a controversial topic for 15 minutes. The purpose of this study was to measure how these newlyweds fought over this controversial topic. Then, 3-6 years later Gottman and his team checked back in on these couples to see what their marital status was. Were they together, or were they divorced?

As a result of this study, they determined that they could predict with an accuracy of 83% if newlywed couples that they interviewed would be divorced. And based off of their analysis, they’ve found four major emotional reactions that are destructive to marriages, and of the four, contempt is the strongest. So if there is contempt in a marriage, which they measured by “Was there contempt during this back-and-forth argument over a controversial subject?”, then that marriage is most likely not going to last.

Now, you may be saying to yourself, “Theo, what does marriage have anything to do with apartment syndications?” Well, marriage is a partnership, and since the ideal relationship between you and your passive investor is also a partnership, then marriages and business partnerships obviously are not the exact same, but the same concepts that apply to whether a long-term marriage is gonna last can also be used to apply to business partnerships.

According to Dictionary.com, contempt is the feeling that a person or a thing is beneath consideration, worthless, or deserving of scorn. So how do you identify if there is contempt between you and a passive investor? The best way to do that is going to be having to trust your gut. So do you get the feeling that this person sees you as an equal and as a partner, or do you get the sense that they look down on you and see you as more of a vendor, that you’re there to simply serve them and that you are not at the same level as them?

For example, Joe received an email correspondence from a potential investor who had led off the conversation by saying “My standards are high. My patience for slick marketing is low.” So Joe responded by providing him with some information about the company, which included past case studies of the returns he was able to provide to some of his investors, to which this individual replied “So, what I need to hear is why do some deals with you, as opposed to doing deals with the company that I currently invest with?”

Now, based off of this interaction, Joe got the sense — based on the interactions and these replies, Joe got the sense that there were traces of contempt coming from this person. He started off by saying that he has very high standards, he doesn’t wanna see slick marketing, “Why should I invest with you over someone else?” Joe got the sense there that this person thought that he was beneath consideration. Maybe not necessarily completely worthless, but definitely below the worth of him himself. So Joe politely explained to this individual that they would not be a good fit for his money.

Now, if Joe was earlier on in his career, he said that he would have likely brought this individual on as a partner, because he didn’t have a lot of access to money, so really any dollar coming in was worth any sort of contempt that he received. But now that he has already created strong relationships with his current investors, he didn’t find the potential issues that could come from this individual worth pursuing the relationship any further.

Of course, maybe this person was having a bad day, maybe the emotions couldn’t get communicated properly through email, but Joe sensed that there might potentially be a chance that this relationship would not work, and the potential issues that could have arised from this relationship just weren’t worth it for him.

So if you are having a conversation with an investor and your gut is telling you that this person might potentially hold you in contempt, then our recommendation is to pass on this relationship. Instead, you wanna make sure you’re setting up relationships for success from the get go by only working with investors who treat you as an equal and who want to have a mutually beneficial partnership, as opposed to only talking about what’s in it for them. And again, this is going to be something that you’re not going to be able to quantitatively measure. It’s going to be a subjective gut reaction.

Sometimes you might be wrong, but again, if there’s a chance that this person holds you in contempt, there’s a chance that there’s going to be potential issues with this individual in the future, you have to ask yourself “Is it worth bringing on that capital, as opposed to working with investors who are looking for a long-term partnership?” So that’s red flag number one, “Does this individual hold you in contempt?”

Red flag number two is going to be the individual asking you a lot of accusatory questions that don’t convey that they trust you. Again, we’ve already covered the partnership aspect of the ideal passive investor. The other characteristic is trust. So do they trust you? One way to determine if they might not have a high-level of trust in you is if they ask you a laundry list of questions in an accusatory tone.

For example, Joe has an investor who literally sent him a list of over 50 questions that are written in an accusatory fashion for every single new deal that he sends out. So every time he sends out  a new deal email, this person sends him a massive list of questions that aren’t asked in good faith. After Joe is taking the time to answer all these questions for multiple deals, this person has yet to invest in any of these deals… Because since they are asking these questions in an accusatory manner, no matter how Joe responds, they are always still suspicious of Joe, Joe’s company and his deals.

Now, an important distinction to make here  is that you – and Joe, obviously – does not have an issue with investors sending him a list of questions. Joe doesn’t have an issue with investors sending him a list of 50 questions, of 100 questions, of 1,000 questions. It doesn’t matter how long. In fact, he encourages that investors ask him  questions, because the more information that he can provide to them about the deal, the more confidence they’re gonna have in the investment overall. At the end of the day, that’s important, because these people are trusting Joe with his hard-earned money, and he wants them to be confident that they will be taken care of.

So the red flag here isn’t a long list of questions, but it is the tone in which the questions are asked, so the questions being asked in an accusatory manner… Because that conveys that they don’t have trust in Joe and his team. Plus, since they don’t have trust – that’s the main reason people invest, is if they trust you – then they’re not going to invest in the deal.

At the end of the day, the key to a successful relationship, as I mentioned, is going to be that trust factor. So if your instincts are telling you that there is a lack of trust, which one example is conveyed through a list of accusatory questions, but there’s other ways that people can convey that they don’t trust you, then Joe no longer decides to pursue that relationship.

Again, this one is also going to be something you’re not able to quantify with numbers, but it’s more of a gut feeling. So if you’re reading through questions and they aren’t asking them in good faith, they’re not asking them to get information to determine if they wanna invest or not, but they’re asking them to trip you up, then that is an indication that they do not have trust in you. And if they don’t trust you, they’re not gonna invest in the deal. And if they do, there’s going to be issues that arise.

In conclusion, you do not wanna work with every single passive investor who is interested in investing and who has the qualifications to invest. The two main red flags that if you see them you should consider not partnering with this individual, is going to be 1) contempt, and 2) asking a lot of accusatory questions. Again, the contempt is an indication that they are not looking for a partnership, and the long list of accusatory questions indicates that they do not trust you.

And then again, I know I said this multiple times, but just to finish off the episode I wanna say it again – both of these factors are very, very subjective. Each syndicator and each investor has a different personality, and each syndicator and each investor will get along with the different types of people. So just because you get the feeling that someone holds you in contempt, or get the feeling that someone sent you a list of questions in an accusatory tone, does not mean that they are a bad person, but it does indicate that you will have an issue connecting with this individual in such a way that builds a strong relationship that is capable of surviving the course of a syndication deal.

So overall, if you see either of these red flags, and you feel (subjectively) that these red flags are present, make sure you’re polite in your way of declining to work with this individual, but we strongly consider not working with that particular passive investor.

That concludes the episode of when to not work with a passive investor on an apartment deal. Until next time, make sure you check out some of the other Syndication School series or Syndication School episodes about the how-to’s of apartment syndications, and make sure you also download all of our free documents. All those are available at SyndicationSchool.com.

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

 

JF1879: Best Ever Lessons Learned Last Week #FollowAlongFriday with Theo and Danny

Listen to the Episode Below (00:25:51)
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Today Theo will be doing Follow Along Friday with Danny Randazzo, who is also an apartment syndicator controlling over $225 million in apartment communities. Theo will be mentioning three lessons he learned last week while performing the interviews for the podcast and Danny will provide additional insights and thoughts. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks. Today is Friday, which means it is Follow Along Friday, where typically Joe and I will go over the lessons that we learned from the previous week’s interviews. A sneak peek into what you’re going to learn in the coming months.

We are going to do that today, but instead of me and Joe doing it, Joe is in Aruba right now, so I hope he enjoys his downtime and vacation there… So we are joined by Danny Randazzo again, as the co-host. Danny, how are you doing today?

Danny Randazzo: I am doing great, Theo. Glad to be back. Just excited to be here with you for this Follow Along Friday.

Theo Hicks: Awesome. As I mentioned, we’re going to go over three lessons that I learned from interviews last week… But before we do that, I wanted Danny to just briefly give us another introduction of himself. You should know who he is already, but if you don’t know who he is, Danny, do you mind just giving a rundown of your background and what you’re focused on now?

Danny Randazzo: Yeah. My name is Danny Randazzo, I am a real estate investor and entrepreneur. I’ve been a three-time guest on the Best Ever show, so you can go back and listen to those episodes to see my evolution and journey over the years. I really got started one deal at a time. Today my company controls over 225 million in multifamily deals. We syndicate large apartment deals. Today we look for deals that are 150 units or more, and greater than 30 million dollars in purchase price. So that’s what we’re focused on today.

I’m also the host of my own podcast, the Danny Randazzo Show, where I love to talk about money, mindset and investing. So that’s what I’ve been working on, and… Any questions, Theo, from you? Otherwise let’s get into the show.

Theo Hicks: Yeah, let’s just jump right in. The three lessons that I learned — well, it’s more than three lessons, obviously, as we always say, but these are just three interviews that we wanted to highlight.

The first one is from Alan Schnerr. He is a syndicator. He has bought more than 2,000 units and he’s managed more than 7,000 units, but he doesn’t syndicate your typical multifamily deal. He does triple-net leases. I had obviously heard the term triple-net leases before, but I didn’t actually know what it meant… So he gave a really good rundown of what they are, and then the benefits of the triple-net lease. In my opinion, it sounds too good to be true.

The one thing that he said was for multifamily, for every dollar that would come in as income, he would be spending 60 to 80 cents going out as an expense – operating expenses, debt service, things like that, which… 60 cents – fair enough. For triple-net leases he says that he’s able to keep 90-95 cents on the dollar. So when he told me that, I’m just like “Well, why isn’t every single person on the planet doing triple-net leases?” And maybe it has to do with them not knowing about it, but basically what he told me is the main difference between a triple-net lease and a regular lease is the reimbursables. So insurance, taxes, the majority of the expenses are all reimbursable to you, the owner. In multifamily the owner pays for all  that stuff. In triple-net leases the retail tenant, office tenant, the warehouse tenant pays for all that. It comes out of their pocket.

He went into more details on the budget, and how that’s sent to them, but… I thought that was interesting. I didn’t know what triple-net leases were. The other thing that you can do is you can put annual rent increases in the lease, because typically these aren’t your one-year lease, like it would be for a regular tenant. If you have a national tenant – and he talked about how to find national tenants – if that particular branch that’s in your building goes bankrupt, whatever, you’re still gonna get paid, because the national Starbucks is gonna pay you money even if that particular Starbucks isn’t doing well, or something goes wrong where they can’t be open. You can also get a percentage of sales, the tenants will have to pay for a property management company as well… So overall, he was saying how this is a more dependable income stream as a syndicator.

The main reason why I thought it was interesting is because he has done basically every single type of real estate investing you could think of. He’s bought medical, office, warehouse, shopping centers, custom homes, apartments, and he has been in the business for 20+ years. He’s really excited about triple-net leases and he says that his best advice was he wished he had done this earlier. Danny, do you know about triple-net leases? What are your thoughts on it? Is this too good to be true, or is this truly something that can allow you to maximize the amount of money you make per dollar invested?

Danny Randazzo: I do know some things about triple net leases. Actually, the first deal that I ever purchased was a one-million-dollar office building.

Theo Hicks: Yeah, I remember that.

Danny Randazzo: That was my first real estate investment, and I think back to the first best ever show that I was on, I covered that deal in detail… But he is on the right track. I don’t know if 90 to 95 cents is accurate in terms of net profit, because again, you would have to pay your debt service, so I think that’s a little bit off… But you definitely keep more money from a cashflow perspective with triple-net leases, because yes, the tenant is paying for the insurance, the taxes, any sort of community maintenance fee, they’re paying their water, utilities, all of that. And typically, if there’s something that breaks down inside the unit, like the toilet stops running, the tenant is gonna pay for a plumber to come out and fix it. So truly, gross income collected is almost identical to your net income. Then once you have your net income, you then pay your debt service.

So I think from a cashflow perspective, triple-net leases are great. However, once you have a fully-occupied building, there’s not much value-add opportunity. So if we compare it to an apartment deal where even if you buy a 95% occupied apartment community, and let’s say it’s a nice B class asset that hasn’t been renovated in 15 years – well, you can go in and you can add value to it, and instead of increasing the rent by 3% annually, which is typically a triple-net lease annual increase, you can increase rent by maybe 20%, 30%, 40% if you’re taking an apartment rent from $1,000/month and you renovate it, and now you’re renting it for $1,200. Well, that’s  a 20% rent increase, and that’s a huge equity forced appreciation that you can have.

So I definitely like a triple-net lease from a cashflow play. It’s a good place, like you said, to put your money in and have a national tenant backing it and paying the bills. If I can put $100,000 to work and know that Starbucks is gonna pay me for the next ten years, I feel pretty good about that. If I put $100,000 to work in a small office building where you might have an insurance broker and an attorney renting from you, that to me isn’t as secure… So I just think you have to weigh the pros and cons of what type of triple net lease you have, what the tenant quality is, and who’s really backing that, to understand what type of return you’re going to get, what are you comfortable with.

I always tie an investment back to what is the real goal here. Buying a triple-net lease to generate monthly income – that is a fantastic goal. Buying a triple-net lease to force appreciation – not a good goal. You would wanna buy an apartment community where you can force appreciation and create equity. So – absolutely, triple-net lease you can retain a lot of gross income as net income and cashflow every single month, and that’s really the primary purpose of having those investments.

Theo Hicks: Yeah, I think first of all the point about the value-add is definitely huge. I’m remembering now why he said 90%-95% on the dollar, and why we’re gonna bring him back on the podcast… Because once we got off — because again, we can only do these for 30 minutes. Once we got off, he was going on and on and on about all these different things that he did, that were very unique, that allowed him to bring in an extra 20k, 30k, 40k per month in rent, which would obviously increase the value.

One of the examples was he did something with a parking lot, built some structure on there, and someone rented it out for 40k/month, or something like that… And he said he has a bunch of other examples of that. So we’re definitely gonna bring him back on the podcast, because he started getting into the value-add stuff at the end and we just didn’t have enough time to talk about it. But in general, as you said, for triple-net leases, most of the time it’s just income coming in, which as you mentioned, you’re not able to force appreciation unless you’re doing something really unique, like Alan.

Danny Randazzo: Yeah. And I think some of those unique opportunities, like — if you own a building, sometimes you can put a weather antenna up, or you can put a cell tower up if you have the right zoning, you could put a billboard up… From a parking lot perspective, I’ve seen people put in ATM machines, the little standalone structure – those can rent for some serious money, and that definitely improves the bottom line, it definitely forces appreciation, and improves cashflow.

I’ve also seen ice machines, or sometimes in some cities they have these new Starbucks that are built out of old shipping containers… So you’re able to put that into three parking spaces, and that can bring in some serious rents.

Theo Hicks: Oh, I bet.

Danny Randazzo: So you can definitely be creative if you have enough land, the right zoning, and of course, the demand from a tenant who needs an ATM machine, or a cell tower, or whatever that is.

Theo Hicks: [unintelligible [00:11:38].11] learn more about triple-net leases from you, Danny. I appreciate that. Alright, so the second interview that I did was with John Bogdasarian. Basically, what he does is he has a firm that helps passive investors find deals to invest in. He works for a real estate firm that works with 300 passive investors… So he talked about really all things passive investor. We talked about investing from the perspective of the passive investor. There’s a few things that he said that I had not heard before, and I thought they were interesting and unique. Again, this is coming from the perspective of a passive investor.

The first one I’ve obviously heard before was as a passive investor, when you are looking at deals — I asked him how should a passive investor analyze a deal. He said the most intelligent investors, when they’re asking questions, will not ask questions about the actual specific deal. They won’t focus on that. Instead, they’ll focus on asking questions about the actual sponsor, the actual people responsible for the deal. What does that mean to people who are syndicators? Well, you need to make sure that obviously you’re giving ample information about the deal that you’re trying to raise money for, but also make sure that you can answer questions about why they should be investing with you, what’s your background expertise, experience, who’s on your team, that makes you the right person to invest with to grow and preserve their capital.

That wasn’t something new, obviously, but I did ask him some questions on how to find sponsors, and he had some very unique responses. One of them was when you’re in a hot market, he said “Look for cranes in the air.” For context, he helps people invest in development deals, too… So find cranes in the air, drive to those cranes; typically, when there’s a development going on, there will be some sort of banner with the person’s name on it… So reach out to that name, the developer, and see if you can get involved in either this particular deal, or some other deal they’re doing in the future, or at least figure out who is the party responsible for it.

Another one was — he said if you go to doctor’s office, if you’re talking with your lawyer, or someone who’s a high net worth individual who has the potential of investing in these types of opportunities – just ask them after they’ve done your check-up what they’re investing in, and see if they’re investing in apartments or some other passive investment source.

And some other ones he said – Google searches, obviously, read news article or local real estate publications… Typically, there’s gonna be some sort of Business Inquirer type publication for your particular market, and you can see who’s doing new development, who bought a new large multifamily building, things like that. Find out who they are, look them up on their website, reach out to them… And then with word of mouth — he said back in the day there was no internet, so there were country club deals. Kind of the same thing – go to places where there are high net worth individuals and then ask them what they’re investing in. Obviously, don’t go to some athletic club and walk up to every single person and say “Hey, what are you investing in?” Be smart about it…

Danny Randazzo: “How are you putting your money to work for you?”

Theo Hicks: [laughs] Seriously… Talk to them first, get to know them first, and then transition into that.

Danny Randazzo: Yeah. My excitement is through the roof right now, because I have the best ever approach to finding a sponsor… And I hope you’re ready for this, Theo. As a sponsor myself, I had this happen to me the other day; someone called me and they said “Hey, I have been looking at all of the SEC filings for private placement memorandums, specifically real estate syndication deals in this specific market, and I saw you just recently closed a deal, and I wanted to connect with you to see what you’re about and build a relationship to possibly invest in future deals.”

Doing that, number one, you always wanna make sure that the sponsor is following the law, abiding by SEC regulations… So when they close a deal, they have to file their offering with the SEC. And again, that’s public information, so Best Ever listeners, this is an excellent approach to see who is syndicating deals in the markets that you want. All of those filings can be found; you just need to hunt for them.

This guy was actively seeking out syndicators and then calling people to build that relationship. I think that’s another phenomenal approach if you are truly interested in buying in a specific market, or anywhere around the country; you can see those offerings, you can read through the details of it, and then of course, go to the folks’ website, look them up, build that relationship, know/like/trust them, which I would highlight as the [unintelligible [00:16:23].02] as a passive investor myself personally, I invest in Ashcroft deals with Joe as a passive investor, and it takes time to build that relationship, to know/like/trust someone. So once you do that and you qualify them, I think investing in the next deal, and the next deal, and the next deal makes it that much easier. Again, do your research, use your personal network, use your extended network, do the Google searches… I guess if you wanna look for development opportunities look for the cranes, call the company that’s sponsored on the fence out front, and use the SEC website to find the filings and then reach out to those syndicators.

Theo Hicks: Thanks for providing that. I had heard that SEC filing one before. It might have been you, actually. I can’t remember who it was. I think it was a syndicator saying that “Make sure you’re registering on the SEC site, so people can find your deals.” But on the know/like/trust, something else than John said about looking for sponsors is that he always recommends to his passive investors to avoid the investor portals, because he said that it’s very difficult to gauge if you can trust them by simply finding them and then logging into their portal and just sending them money. He talked about that a lot. I have seen the portals before, but I don’t know of any investors who just strictly — 506(c),  have people come to their portal, never talk to them, things like that… But obviously, if that does exist, then yeah, it’d be very difficult to know them, to like them and to trust them if you’re never talking to them. So that’s something else that he ended with.

Danny Randazzo: Yeah. I would just put that disclaimer out there that if you are going to invest your own money, you are responsible for it. You need to talk to the main sponsor, or you need to meet them in person, period, before you ever send your money. And if you can’t do one of those two things, then I would just say don’t invest, because that doesn’t make sense, to me personally. My gut wouldn’t allow me to do that without speaking to them or meeting them in person. Again, it’s a huge investment; you’re putting your money to work and you need to know, like and trust. And if any one of those three is off or feels weird, don’t do it.

Theo Hicks: Exactly. Alright, so the last lesson – this will be a quick one. Eachan Fletcher – he’s the CEO of a company called NestEgg. That sounded so familiar when I interviewed him, but it’s a property management and maintenance online platform. He actually used to be the CTO and VP of product at Expedia, which is interesting… So he has a lot of experience of growing companies, startups, venture capital, things like that. We’ll definitely get him on the podcast again, because I wanted to talk to him more about NestEgg, just because it’s kind of a startup company, it’s only in a few locations, and I wanted to know what’s the approach of scaling that nationally… Because that can be very helpful to syndicators, or also investors who are investing in one location and what to eventually grow a business that can help them invest all over the country.

He gave a three-step process for how he started the company from a strategic standpoint, that I thought would be interesting to anyone who obviously wants to do some sort of startup that provides a service to real estate investors… But also, you could apply this to your real estate business as well.

The first step when he started the company was to gain insights on this space, and the customers. So he did a lot of market research to basically figure out what’s missing, and what’s hard about property management. If you want to learn about what he determined, you can check out that interview, which we’ll probably be releasing in a little bit… Basically, he asked himself “What are people who are starting out 2-3 years into being a landlord, with less than ten properties – what do they need help with?”

The second one was to find competitors who are also providing solutions and services to those customers to figure out why people aren’t happy with their solutions. And then the third one is based on all that research on why people aren’t happy – you wanna determine what features your company is going to have in order to make sure people are happy, to fill that need.

And I guess I’ll say what he did – basically, the things that he did for his company was 1) the maintenance. So rather than having the owners have to do the maintenance themselves, or rather than the property management company kind of just taking care of it and sending them a bill at the end, he has an online portal that they could submit their maintenance requests to, and then they’ll take care of everything. There’s a lot of pictures, and back-and-forth, and you can monitor the repairs to make sure that they’re actually fixed… Then they’ll actually monitor the repairs on an ongoing basis. They partner with a lot of contractors, so you don’t have to do that yourself.

The second one was the cashflow issue – people that are starting out need their money, and I know an initiative I had was getting cashflow a month later from the previous month, or two months later, whereas they’ll pay you the rent they collect on October 1st – you get paid October 1st, even if they don’t have that money right away. So you get paid a month earlier than you usually do.

And then the other one was about the maintenance issues – rather than paying last month’s maintenance calls all coming out of the rent for the next month, they’ll spread it out over a 12-month period instead. There’s a couple other things that they have as well, but the main point was his process for creating the company, which was gaining insights, find the competitors, and then determine what features you’re going to create with your company. I thought that was interesting.

Danny Randazzo: Yeah, I think that is very interesting. It always comes back to the Why and the Need. You just need to solve for those things. It sounds like a very interesting approach, and I’ll be curious to listen to that next episode of how the implementation is going so far, and what their value-add approach is to help owners, operators, management companies improve that maintenance issue. Because as we know, in the apartment ownership world your largest expense typically is payroll, which includes your on-site maintenance staff salary. So if there’s a way that NestEgg is able to change the approach to maintenance costs, it could be extremely beneficial to owners, operators and managers to impact and improve their NOI if there’s a new way to handle maintenance requests and decreasing expenses.

Theo Hicks: Exactly. So those are the three interviews. Again, those will probably airing in the January to February timeframe, so you got a sneak peek of what will be talked about in those episodes. Just to wrap things up, trivia questions – we do a trivia question each week; the first person to get the trivia question correct gets a free copy of our book. We’re doing a loyalty trivia question this month – all the trivia questions are things that we’ve talked about on the blog, on Follow Along Friday, the podcast, the book…

Last week’s question was “Of the two main occupancy metrics, which one is more relevant to you when you’re investing in apartments?” The two main occupancy metrics are physical and economic occupancy. Physical is just the rate of people who are in your apartments. So if you have 100 units and 90 are occupied, the physical occupancy is 90%. But let’s say that of those 90 people only 80 are paying rent, and 10 aren’t, for some reason – then your economic occupancy is actually 80%. So the answer is economic occupancy, because if I’m buying an apartment and they tell me “Oh, Theo, the occupancy is 100%”, it’s like “Oh, well is that physical or economic?” “Well, it’s physically occupied 100%.” “And what’s the economic occupancy?” “Well, some people aren’t paying rent, and there’s bad debt, and there’s this and that… So essentially 80%.” That’s a huge difference in income, that’s a huge difference in NOI, so that’s a huge difference in the value of the property.

Joe has talked about this on his first deal as well. If you go to JoeFairless.com and you search “economic occupancy”, you’ll find some blog posts going into more detail on that.

This week’s question is “What is the main difference between the cash-on-cash return metric and the internal rate of return metric?” I guess it could be a one-word answer or a three-word answer, depending on how you answer… But “What is the main difference between the cash-on-cash return metric and the internal rate of return metric for apartments?” Technically, you could use that for really anything.

So you can submit that to info@joefairless.com, or you can comment on the YouTube video. Again, the first person that gets that correctly will get a free copy of our book.

Danny, thanks for coming, I really appreciate it. I really enjoy doing Follow Along Friday with you, because you always have a lot of value to add, a lot of things to say that I haven’t thought of before or that I don’t know about, so… I really appreciate you coming on. Where can the Best Ever listeners get in touch with you?

Danny Randazzo: Theo, thank you for having me, happy to be here. If any of the Best Ever listeners need to get in touch with me, just go to DannyRandazzo.com.

Theo Hicks: Perfect. Again, Danny, I appreciate it. Best Ever listeners, thanks for tuning in. Have a best ever day, and we’ll talk to you tomorrow.

JF1878: How To Communicate With Investors When Something Goes Majorly Wrong | Syndication School with Theo Hicks

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Floods, fires, crime, wind damage, etc… They all happen, how you communicate with you investors about their investment is crucial. Communication on current deals will likely sway your investors on whether they will invest with you again or not. Ideally, when things go wrong, you respond quickly with relevant information for them. Theo will cover what we have done when a property was hit by hurricane Harvey. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Related Blog Post:

https://joefairless.com/s-o-s-approach-managing-investment-crisis-like-hurricane-harvey/

 


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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