JF1527: How To Perform An In-Depth Analysis Of Your Apartment Syndication Market Part 1 of 2 | Syndication School with Theo Hicks

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Time for some more syndication school! This week’s two-parter will be about really diving into a market for the purpose of learning about it for your apartment syndication deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week we air a two-part podcast series focused on a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will be offering a document or a spreadsheet for you to download for free. All of the documents and past and future Syndication School series can be found at SyndicationSchool.com.

In this episode we will be going over part one of  a two-part series entitled “How to perform an in-depth analysis of your target apartment syndication market.” Last week – or if you’re listening to this in the future, episode 1520 and 1521 – we went over how to go from the 19,000 cities in the U.S., narrow it down to seven potential markets, and then narrowing it down to 1-2 target markets… But as I mentioned last week (in 1520 and 1521), the city and the MSA is not as important as the lower-level components, which are the neighborhoods or the submarkets or the street level. Because you can have two separate streets or two separate neighborhoods in a market that are completely different, and I went over an example of that.

In this series we’re going to go over how to learn about your target market all the way down to the street-by-street level. But first, as I mentioned in last week’s series, I want to go over the three immutable laws of real estate investing, because just like the overall city is not as important as the neighborhood within that city, neither of those are as important as the business plan. So you can find the best market, have done all of your analysis, but when the time comes to purchase a deal, if you don’t know how to  execute a business plan or your team doesn’t know how to execute your business plan, it doesn’t matter; you’re not going to do well. Whereas if an investor who is the best on the planet at executing a syndication business plan could invest in any market – the best market or the worst market.

At the top of the list of what’s most important in apartment syndications is executing the business plan, and the three immutable laws of real estate investing are three things that you need to incorporate into your business plan. By following these three laws, you are able to execute the business plan properly. And by not following these three laws, you’re the person who’s investing in the best market that doesn’t know what they’re doing and ends up failing.

If you’re a loyal Best Ever listener, you know what these three laws are, but I am going to provide additional information that we haven’t talked about in the context of these three laws. First, I will just quickly name the three laws, and then I’ll go into details before moving on to the in-depth analysis steps for your target market.

The three laws are 1) buy for cashflow, 2) secure long-term debt and 3) have adequate cash reserves. A good syndicator, when executing a business plan, makes sure they’re buying for cashflow, makes sure they are securing long-term debt, and they make sure they have adequate cash reserves. So what do each of those laws mean?

For law number one, buying for cashflow, the opposite would be buying for appreciation. And what we mean by appreciation is natural appreciation, not forced appreciation. A good analogy would be natural appreciation is like gambling, playing Blackjack and having no idea what you’re doing and just hoping that you’re going to beat the dealer, or get 21… Whereas forced appreciation would be like playing Blackjack but you’re counting cards… So you have a strategy and you know which hands to bet on and which hands not to be on, and the hands you do bet on are the ones that will provide you with the cashflow.

Natural appreciation, following our analogy, is just hoping that the market naturally appreciates, so that the property values naturally appreciate, the rents naturally appreciate, just because of either historical trends, or because it said something in the offering memorandum about the rents increasing a certain percentage each year, and you’re basing your investment off of that.

Forced appreciation is when you go in and add value, which means you increase the revenue or decrease the expenses, which in turn increases the operating income, which in turn increases the property value. So you’re going in there and you’re forcing the value up, as opposed to hoping the value actually increases.

In practice, the three things that you want to do to make sure you’re buying for cashflow is 1) when you’re underwriting a deal, make sure you have conservative revenue increases. Usually, when you’re underwriting a value-add deal, you will have the in-place rents, and then you’ll have your renovation budget, and then you’ll have the new rents that you will be able to demand based off of the new property. That’s where your forced appreciation comes in. But at the same time, you also want to make an assumption of the rents naturally increasing based off of inflation, or just the market becoming stronger… So you always wanna have a factor in there, but you don’t wanna base that factor off of the historical revenue increases.

What will happen when you’re reading offering memorandums or talking to brokers, or talking to brokers, or evaluating a market, you’ll hear things like “For the past five years the rents have increased by 5% annually” or “The rents have increased by 30% in the past decade.” One way to enter the deal is to assume, “Okay, if it has increased by 5% each year for the past five years, let’s go ahead and assume it’s gonna do the same thing for the next five years during my business plan.” So you input that 5%, hoping/gambling that the rents will continue to appreciate at the same rate. If it happens – great. If it doesn’t happen, you’re not gonna be able to meet your return projections, and you’re gonna be in trouble with your investors.

If you instead assume a more conservative number, a more conservative revenue increase, which is 2%-3%, which is very conservative, then if it does better and it hits that 5% – great, you were able to exceed your return projections. If not, you’re still safe and able to hit those projections for your investors. So that’s one, the conservative revenue increase and not using historicals.

Number two has to do with the cap rate. Again, if you are assuming the property is naturally appreciating, you’re assuming that the market is better at sale than it is at purchase, which means that the cap rate is lower at sale that it was at purchase. You don’t wanna do that, either. You wanna assume a cap rate exit that is higher than the in-place cap rate at purchase, which means the market is worse off.

Again, just like that conservative revenue increase, if the market does improve, then you’ve exceeded your projections. If it doesn’t and it actually gets worse, you’ve already assumed that in your underwriting and you’ll still be able to meet those return projections to your investors.

And the third one, which is kind of common sense, but you might not apply this when underwriting – it is making sure you are basing your proforma, your budget based off of how you will operate the property. From day one, the property will operate how it’s currently operating, but then once you take over the property, day two, then the expenses will change based off of how you will operate it, and then over the course of the next 12-24 months the rents will increase based off of your underwriting assumptions. Then you’ve got 3, 4 and 5, or however many years you’re planning holding on to that property, with how you expect the property to operate based off of, again, using these conservative revenue increase assumptions, as well as the conservative expense increase assumption.

Once you have that five or seven or ten-year budget, however long you’re planning on holding on to the property, then you assume a sale, again, using an exit cap rate that’s higher than the purchase cap rate, and from there you’ll have cashflow for 5, 7, 10 years, plus the proceeds at sale and you’re able to determine the return projections to your investors. Based off of those return projections, you can set a purchase price that will meet or exceed what your investors want… So 15% IRR or higher, or 8%, 9% cash-on-cash return.

What you don’t wanna do is base your purchase price on just the in-place NOI, so how the property is currently operating, because yeah, it will have that NOI starting day one, but in 12-18 months that NOI is gonna be a lot higher, which means you could have paid higher for that property. So you’re gonna have a hard time finding a deal that pencils in financially if you are underwriting based on the in-place NOI as opposed to how the property will operate once you’ve taken over. So that’s law number one, buy for cashflow, not appreciation, and I went over three things you can practically do when underwriting to make sure you’re sticking to that law.

Law number two is to secure long-term debt. This one’s pretty straightforward and simple. The length of the loan should be longer than the projected hold period. So if you’re planning on holding on to the property for five years, your loan should be at least five years long, and ideally longer than that, but at least five years. The reason is because you don’t wanna be forced to sell or refinance, because you don’t know what the market conditions will be in a year or two.

Let’s say for example you decide to get a bridge loan, which is an in-between loan between buying  a property that’s not stabilized until it’s stabilized and you can secure agency debt. Let’s say you get a bridge loan for two years, and you don’t get any extensions, and your business plan is five years long. And you say “Well, the market is kicking, so in two years I should be able to refinance into a new loan and return some equity to my investors.” Well, what happens if after one year the market tanks, and you aren’t able to refinance into a new loan, or you’re not able to pull out any equity and return that to your investors? You’re in trouble.

Whereas the same scenario, if you secure a seven-year loan from Fannie or Freddie Mac and the market tanks after two years, as long as you bought for cashflow and have appreciation, then you’ll be fine. You don’t have to sell the property, you don’t have to refinance, because your loan is not gonna be called. So that’s number two. Make sure that when you’re buying an apartment property you are securing debt that is longer in term than the hold period.

Then number three is to have adequate cash reserves. This past weekend I visited some of the properties that my property management company manages, and a few of the properties were in really good shape. Tip-top shape, exactly how I want my properties to look. Then some  of the other properties were in not so good shape, to put it lightly. When I reached out to my management company and asked them why, because at first I was concerned that maybe it was a management issue, but that didn’t really make sense, because if it was a management issue, why were some properties in immaculate condition and why did some properties look like they’ve been hit by a bomb? Well, that’s because the owners at the bombed properties could not afford to keep up with the deferred maintenance.

I live in Florida, in Tampa, and we just got past hurricane season, so there is a lot of damage to the properties from storms, but the owners did not have enough money to fund those repairs. Now, if they would have had adequate cash reserves upfront on an ongoing basis, it could have been a completely different story and the property could have looked much better and have been in much better condition.

That’s why it’s important to make sure you have adequate cash reserves. Without these cash reserves, you’re not able to cover unexpected expenses like damage from a storm, for example, or an unexpected maintenance issue that comes up, like a flood, or HVAC breaks down. The roof was [unintelligible [00:16:40].01] than you thought it was and needs to be replaced. Things that weren’t accounted for upfront, you need to have the reserves in place to be able to cover those costs… Because if you don’t, best-case scenario is you have to do a capital call, which again, is not something you wanna do, but this is best-case scenario, is to do a capital call from your investors to cover that expense… But that will reduce the investor’s overall return.

Or you just may not be able to distribute the projected returns. So rather than distributing 8% to your investors, you have to use that 8% for the next six months to cover the cost to repair the storm damage.

The worst-case scenario is that the unexpected issue is so bad and you can’t repair it and it starts to affect your economic occupancy rate, and that dips to the point where you’re not able to cover your debt service, so you can’t pay your loan. At that point you’re in huge trouble.

So to avoid any of that happening, make sure that you have the adequate cash reserves. That comes in two forms – one, you wanna have an upfront operating account, which is approximately 1% to 5% of the purchase price, depending on the business plan. So if it’s a turnkey property, you’ll have a lower operating account, whereas if it’s a highly distressed property, you wanna make sure you have a little bit more cushion, because a lot more can go wrong the more you plan on doing to the property.

Then you also wanna have an ongoing reserve of approximately $250-$300/unit/year, again, depending on the business plan and the property type.

Now, this operating account fund and these ongoing reserves are on top of the interior and exterior renovations; it’s also on top of the known deferred maintenance issues, because that should be accounted for in your initial budget, and it’s also on top of the ongoing operating expenses, like maintenance and repairs and the turnkey costs. So this is specifically for unexpected issues, not for things that you already know about.

Those are the three laws. Follow those three laws and you will be able to execute the apartment syndication business plan really in any market. Now, moving on to the other topic I wanted to discuss today, which is to provide you with a very detailed approach for how to gain a better understanding of your target market on a submarket, neighborhood and/or street-by-street level.

Last week – again, that’s episodes 1520 and 1521 – we narrowed down the search from the 19,000 cities in the U.S. down to seven markets. You analyzed the seven markets across six factors, ranked those seven markets to select the top one or two, and now in this episode we’re going to talk about how to take those one or two markets and become an expert on those. So we’re gonna go over one approach in this episode, and in the next episode I will go over other strategies to implement in addition to the strategy we’ll discuss in this podcast. Then next episode I’ll also go over how to create a market summary report based on your research following this approach and the other approaches discussed.

So this strategy is called “The 200-property analysis” and being the Syndication School, we’re gonna give you a free document to aid you in this analysis. It’s called “The property comparison tracker spreadsheet.” This analysis is going to have you log data for 17 different factors for at least 200 properties in your one or two target markets. I’m not gonna list out all the 17 factors right now; I will do that as we go through the exercise. The purpose of this exercise is to 1) become an expert on the market, on a submarket and neighborhood level. 2) It gives you a good introduction into finding and reviewing deals, because once you have your team in place and you’re ready to find your first deal, you’re gonna be searching and reviewing a deal, so this is a good first step. Then the third purpose is for you to actually create a list of properties to eventually contact the owners when you are ready to find deals. So if one of your lead generation strategies is direct mail, for example, then you’ve already got a list of at least 200 properties to use as a start.

This process overall is five steps, and it’s pretty labor-intensive, so if you want to actually do a shortcut and you wanna pay for it, because the five-step process I’m gonna go over is technically free (I guess gas money). The shortcut is to either use CoStar or a similar service to log all of this data. You can also partner with a title company or a broker and have them pull this data for you, or you can hire someone on a service like UpWork and record a video of you pulling data for one property and then ask them to do it for 199 or more other properties in that market.

So let’s dive right in. Again, this is a five-step process, and it’s called “The 200-property analysis.” Step one is to search for your target market on Apartments.com. Go to Apartments.com and type in your target market. Type in “Tampa Florida” for example. The reason why you wanna use Apartments.com is because they have essentially all of the information that you need to fill out your property comparison tracker. You can use other services like Craigslist, Zillow, LoopNet, Rent.com, things like that, but Apartments.com is best for this specific exercise. If you wanna do additional research, by all means, use those other sites.

Once you search for your target market on Apartments.com you’ll be presented with a map of the target market, and for all listings that are currently available, those will be denoted as green diamonds, and all other markets’ apartments that aren’t available for rent are noted as little grey dots… Just to give you an idea of what to look for, and make sure you’re on the actual right screen.

Once you type in your target market and you’re presented with this map, in your spreadsheet log the market name. In this case, Tampa, Florida.

Step two is start searching for properties. Now you should be presented with thousands of little green diamonds and grey dots, so click on an apartment building, either on the map, or there’s a list of all the apartments on the right-hand side as well… So click on an apartment and it’ll bring you to a screen with detailed property information. At this point you want to log the property name, property address, the submarket or neighborhood name, the total rent, the total number of units, the rentable square footage, the rent amounts for 1, 2 and 3-bedroom units, depending on the types of units offered at the property, the year built, list who pays the utilities (the owner or the residents), so who pays for electric, water, trash, sewer etc. and also copy the link and put that in the Source section.

You also want to determine if this property has opportunities to add value. So if your investment strategy is the value-add investment strategy, which is what is the focus of Syndication School, then you want to put a Yes or a No under the value-add category. So since you’re just looking at the property on Apartments.com, it’s not actually seeing the property in person, so how do you know if it’s value-add or not? Well, a few tricks is to look at the pictures, and if you see outdated interiors, then you know there’s opportunity to add value. Also, if you see no pictures or only a couple of pictures, that’s also an indication that there’s an opportunity to add value… Because if they had brand new, luxurious units and amenities, they would most likely post those on Apartments.com, so when renters are searching they can see how great their property is. So if there’s no pictures, then they probably don’t have nice units or amenities.

Another thing you need to look at are the other income or the fees that are charged. For some of these properties it will list the types of fees – a pet fee, utility fees, things like that. So if they’re not charging a lot of fees, that’s another way to add value. Maybe you can implement a RUBS program if the owner is paying for all the utilities, or maybe you can charge a pet fee, application fees, things like that. So not a huge value-add — RUBS is pretty big, but the other fees aren’t huge value-add… But these are ways to indicate to you whether there are opportunities to actually add value.

Now, if any of the data is missing – and the data that’s most likely to be missing would be the rents – then the best way to find those are to either 1) search for that apartment on the other sites I mentioned above, so Craigslist, Zillow, LoopNet, Rent.com, see if you can find rents on there, or the last step would be to actually call the property and either say you’re doing a rental survey, or say you’re a resident looking for a potential property to live in, and ask them for the rents that way. So that’s step two.

Step three is to locate the owner information on the auditor or appraisal site. Google the target market name + county website, county auditor, county appraisal. So I’d google “Tampa Florida county website.” The appraisal or auditor site will come up; it’s named differently in different markets… So click on that, locate the property search function, search the property based off of the address that you logged from Apartments.com, and log the owner name, owner address, and you’ll also find the appraised value and the year purchased on there as well. That concludes the 17 factors.

Now, something that you will find very common for apartments is that they’re owned by LLC’s, and the LLC address might be a PO box, or it won’t be the actual owner’s address. So to actually find the owner of that LLC and get their contact information search for the LLC on the Secretary of State website. On some Secretary of State websites all you have to do is type in the name and it’ll show you the owner’s name. On other ones you have to actually download the articles of organization and it’ll list that person’s name and where they live.

Typically, downloading is free, but you might have to pay for it on some Secretary of State websites. But somewhere on the Secretary of State website, free or paid, you’ll be able to find the owner information of the LLC. So that’s step three.

Step four is to repeat steps 1-3 for 199 more properties. Make sure that when you’re looking at your other properties — try to focus on multiple neighborhoods and submarkets. Within Tampa maybe target five neighborhoods or five submarkets… Submarkets would be better, depending on the size of your target market. If it’s a big target market, which it should be, focus on different submarkets within that overall market. So maybe pick five or ten, and then focus on getting 20 properties for each neighborhood.

Now, again, this is going to be pretty labor-intensive if you’re not using one of the shortcut approaches. So if this is something you don’t wanna do or are wanting to avoid, or you’re listening to this and saying “Theo, I’m not going to look up information for 200 properties”, if you’re thinking that, go back and listen to episodes 1513 and 1514, which is where we talked about your short-term goal and your long-term vision, and remind yourself why you’re doing this.

For me, I would focus on what actually disgusts me about not accomplishing my goals, and think “Would I rather have that happen, or would I rather spend a day logging information on 200 properties?” Because at the end of the day, this exercise will save you and your investors from years of headaches from acquiring an asset on the wrong street or the wrong neighborhood, and even better, since we’re eventually going to be reaching out to these owners, one of these properties could be your first deal. So spending that 8 hours going this could results in hundreds of thousands of dollars from actually acquiring one or more of these properties. So that’s step four.

Step five is to actually do an analysis in person. This is gonna be something that differs based off of whether you live in or nearby your target market, or if you don’t live nearby the target market. If you live nearby the target market, what you wanna do is print out your spreadsheet with your 17 factors, and schedule a full day to view these properties in person. Now, you’re probably not gonna be able to view all 200 properties, so it might take multiple days… For example, if you have five submarkets that you’re targeting, or if you have five submarkets that you logged data for, that you could spend five straight Saturdays going to five different neighborhoods.

So print out the spreadsheet and drive to the properties. When you go to the property, the first thing you wanna do is just take  a general picture of the property, so maybe a picture of the monument sign or the clubhouse, or what the property looks like from the street. And the reason you’re doing this is because you’re gonna be viewing a lot of properties over the next five weeks or day, so this will be your visual reminder of what the property was.

Next, you wanna take a picture of something noteworthy, something that’s good about the property – any large green spaces, fresh landscaping, newly-paved driveway, a monument sign that’s interesting… Just be creative here and find something noteworthy about the property. The reason you’re doing that is because eventually when you reach out to the owners to see if they’re interested in selling, you can bring up this noteworthy item during the conversation, which will give you additional credibility, because they will know that you’ve been to the property and you were willing to put forth effort, and that indicates that you’re more likely to close.

On the opposite end, you also wanna take a picture of something that are signs of distress. For example, maybe you see that the pool is uncovered in the winter, or the pool is closed in the summer. You come across very poor landscaping, peeling paint, old roofs with shingles falling off, those super-old air conditioners that I’m sure you’re all aware of, any sort of fence that’s knocked down… Things like that. The reason why is because you did mark whether or not the property was a value-add opportunity during your online research, and this will confirm whether or not that was actually the case, as well as give you something to use as leverage when you eventually reach out to the owners.

Lastly, and this is something that you will most likely do naturally when you’re driving from property to property, but make sure you’re driving around the submarket or the neighborhood and looking at the points of interest. So look for any retail centers, office buildings, restaurants, hospitals, schools, universities… Something that the tenants that live there would want to go to, because the more jobs and entertainment and food surrounding an apartment, the higher the demand is, because people wanna be nearby those types of things.

Doing this, in combination with viewing all of the apartments in that submarket, will give you a great feeling for and understanding of that neighborhood, and you’ll have a level of understanding that would have been impossible to get without actually visiting the place in person.

Now, what if you don’t live near the target market? Number one would be to schedule a trip to the market. If you do that, you have to be very efficient with your time; if you live nearby, you can go there whenever, but if you’re traveling there, make sure you print out a schedule, and ideally a map, so you know exactly what properties you’re going to, in what order, and make sure you have all your spreadsheets printed out, a place to take notes, pictures, things like that. That’s one option.

If you can’t do that, another option would be to find a local partner. This could be a college student, it could be a broker or a property management company, depending on how well you’re tapped into that market, send them your list of properties and have them do the in-person analysis described above.

The last step, which isn’t ideal, and it will not give you the same level of understanding you would get by actually visiting the market and properties in-person, but you could do the same analysis using the Google Street View function. Drop your little pedestrian guy in front of the property and take a look at it, making sure you look at the date of the picture, because if it’s anything older than a couple of years old, it’s likely not gonna be accurate. Then “walk” around the area with your mouse and look for the nearby points of interest.

Again, this isn’t ideal, but it’s better than not doing anything at all after you’ve logged the data in your property comparison tracker.

Once you complete all five of those steps, the goals that you have accomplished would be 1) practice finding properties, and these could be potential deals in the future, and it’ll also help you find rental comps once you start reviewing deals. 2) it helps you practice locating and logging relevant information that you need in order to qualify a deal. 3) it’ll give you a better understanding of what to look for when you’re reviewing properties in person, and finally, the purpose of the entire exercise is to become comfortable with and more knowledgeable of your market on that submarket, neighborhood and street-by-street level.

That concludes this episode. At this point, you’ve learned the three immutable laws of real estate investing, which is buy for cashflow, secure long-term debt and have adequate cash reserves. Then we also went over the detailed five-step 200-property analysis process, and you are also able to download the free spreadsheet that goes along with this, at SyndicationSchoo.com. This concludes part one.

In part two, tomorrow, or if you’re listening to this in the future, go to the next episode – we will discuss seven other strategies to implement in addition to this 200-property analysis exercise, to help you gain an even better understanding of the market. Then we will also be going over how to create market summary reports, so taking all the information we’ve learned so far and distilling it into a synopsis, a summary document of our market.

To listen to other Syndication School series about the how-to’s of apartment syndications and to download your free property comparison tracker document, and all other documents, visit SyndicationSchool.com.

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

JF1520: How To Select An Apartment Syndication Investment Market Part 1 of 2 | Syndication School with Theo hicks

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Welcome back to another episode of Syndication School. This week, Theo is telling us the best ways to select a couple of target markets. For starters, you’ll want to narrow your search to 7 target markets. To hear the next steps, hit play on this episode now! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

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

 

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

Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we offer a document or a spreadsheet or some other resource for you to download for free. All of these documents and all previous and future Syndication School series episodes can be found at SyndicationSchool.com.

This episode is part one of a two-part series entitled “How to select a target apartment syndication investment market.” As the title implies, in the next two episodes  (and next week, as well) we will be having a conversation around target markets, and ultimately the goal is for you to be able to select one or two target markets that you will search for your investment properties, to build your team, and so on.

In this episode, you will learn first what a target market is, so we’re gonna go over some of the basics first, as well as have a discussion around what comes first – the market or the deal. Then we’re gonna have a conversation about how important the market actually is, and you might be surprised at the answer to that question, and then we’re going to outline the entire process, from start to finish, for how to select a target market and eventually achieve the goal of having one or two. Those will be talked about over the next four episodes, most likely.

Then if we have time and I don’t ramble on too much, we will go over the first step, which is how to narrow down the entire United States of America (or maybe even the world) to seven or so markets to evaluate… So let’s get right into it.

Starting off with what is a target market… Simply put, the target market will be the primary geographic location in which you will focus your search for potential investments. Now, for apartments, a target market can be a neighborhood, so it can be the smallest neighborhood or a submarket, or it can be a city, or it can be an entire MSA or metropolitan statistical area. For example, and MSA would be Dallas-Fort Worth. It’s Dallas and Fort Worth and all of its surrounding suburbs. That’s one example of a target market. But if you narrow it down to the city, then the city would be Dallas, or Fort Worth. And if you narrow it down even further to a neighborhood or a submarket or a suburb, an example of that would be Richardson, Texas. So it can be as large as an entire MSA, or as small as a neighborhood.

Now, the level in which you select your target market will be based on the size. If it’s too big, then it’s going to be impossible to understand and to actually screen deals. For example, if your target market was going to be New York City, New York City is huge, and it’s made up of lots of smaller areas that are completely different, and you’d have to gain an understanding of all of those areas if you wanted to paint a  broad stroke and invest in New York… And maybe a deal pops up in an area you don’t understand, so you have to go through the process of evaluating that market first, before you even look at the actual deal.

On the other hand, you also don’t want it to be too small. For example, if you are wanting to invest in Idaho, then picking a specific neighborhood or a smaller random city in Idaho is probably not the best idea, because you’re not going to have enough deals. Yes, it’s going to be  easier to understand a city with a population of 5,000 people but at the same time, there’s probably only gonna be a handful of apartments to choose from, and those likely won’t even be going up for sale. So you wanna find the size that’s just right for you. If you’re in a larger city, then you’re likely gonna want to focus on a neighborhood or a submarket within that city, but if you’re investing in a smaller market, then the entire MSA might be your best approach.

Again, as an example, the MSA would be Dallas-Fort Worth, a city would be Dallas, and a submarket would be Richardson. If you wanted to invest in Dallas-Fort Worth, then it’s probably best for you to pick out a couple of smaller neighborhoods once you’ve actually qualified the city of Dallas… Which we’ll go over how to do here later on in either this episode, or in next week’s episode. So that’s what a target market is.

Before we actually dive into how to select a target market, I wanted to talk about why it’s important to pick a market first, before you start analyzing deals. So what comes first – the deal or the market? The answer will depend on who you talk to, but for us, we believe it’s the market… And here’s why. For Joe, when he was starting off his apartment syndication journey, his first market was Tulsa, Oklahoma, which he chose because it was close to family, and a colleague of his referred him to a broker… So he had an existing team – or at least a team member – in that market.

Unfortunately, he wasn’t able to find a qualified deal. The numbers didn’t make sense, and he wanted to acquire the property with creative financing, which he was unable to do. The next market he selected was Ohio. The broker relationship they formed in Tulsa – that broker sent him a deal in Ohio. He hadn’t analyzed the Ohio market at all at this point; he just found a deal and then had to go back and analyze the market. So what he did was he looked at the Fortune 500 companies in the specific city in Ohio, and assumed that a multi-billion-dollar company would have performed adequate due diligence on a market prior to moving their headquarters there. So some analysis, but not a deep dive. That was the second market, and he actually bought a deal there, because the deal ended up working out.

The third market was Houston, and his now-business partner (wasn’t his business partner at the time) brought him a deal. He met his business partner through a mutual friend, and his partner had the deal, but no money to fund the deal, which Joe was able to do.

Joe had lived in Houston as a child, and he grew up in Dallas-Fort Worth, and went to Texas Tech University, so he was familiar with Houston, since he was in Texas and had visited friends that were there… And he also had the existing relationships. His partner, Frank, actually analyzed the market formally, and Joe did as well after the deal, and they ended up purchasing two apartment communities in Houston.

The fourth market is where Joe followed the approach that we will be discussing in this series – they did a formal analysis of the entire U.S., because they wanted to diversify outside of Houston, and based on this analysis, they landed on Dallas-Fort Worth, and as you all know, he has been able to acquire well over 4,000 units in that submarket.

Now, for all four markets it ended up working out okay for Joe, but it was kind of luck, because for example in Ohio, he could have [unintelligible [00:11:41].29] the deal and not had the wherewithal to actually analyze the market on some level, and he could have just bought the deal… Obviously, the market turned out to be okay, but what if it didn’t? He didn’t check it out first. So that’s why you have to analyze the market first.

It was the same thing for Houston – if he would have just trusted that Frank did the analysis and he didn’t do it himself… Again, Houston turned out to be a good market, but what if it didn’t? Or what if after he was sent that deal in Ohio, and the numbers didn’t pencil in, and he kept underwriting deals in Ohio over and over and over again, maybe underwrite 10, 20, 30 deals, and he finally finds one that makes sense in a certain city, and then he goes to analyze the market and realized that the market isn’t qualified? So he wasted all of that time underwriting all of those deals before analyzing the market. So it’s important to analyze the market first, for many reasons… We’ve gone over some of them, but now with more of  a list fashion.

The first one is you need to have an area to actually focus on. There are over 19,000 cities in the United States (major cities) and it’s impossible to target all 19,000 cities at once. That’s why you need to start with all 19k cities, and then select an MSA, and then based on the MSA, select a city with the MSA, and within that city select some submarkets or neighborhoods to invest in, which is what we will be going over in this series.

Another reason why you need to select a target market before looking at deals is for comprehension. It’s going to be impossible to understand an entire MSA — it’s gonna be impossible to understand even an entire MSA over time, let alone all 19,000 cities in the United States. It’s much easier to understand one city, and it’s even easier to understand a handful of neighborhoods. And when say “understand”, I mean perform a financial analysis and have a feel for the market.  Again, as I mentioned in the example of Joe, if you don’t comprehend the market, you could be spinning your wheels.

Another one is to actually screen deals. So not only would you be looking at 19,000 cities, but you’d be looking at all the deals within those cities, too. That’s hundreds of thousands of deals you have to look at. Even if you’re not in a large MSA, you’re still gonna have trouble analyzing every single deal that comes across your desk, because there’s just too many to handle. So that’s why you select a target market first, and it helps you disqualify the majority of deals right off the bat. Now, the deals might make financial sense, but if they’re not in your target market, you can pass, especially early on in your career. As you become more experienced, it’s easier to diversify and scale, but when you’re first starting out, you wanna focus solely on your target market, and kind of put blinders on and eliminate anything else that is not in your market, so you’re not spending your time underwriting all day long.

Another reason why you wanna select a target market before you actually find deals is to build your team. If you’re investing in 19,000 cities, that’s 19,000 property management companies, over 19,000 brokers, and it’s gonna be impossible to do that. Same if you’re in a large city, with a large MSA – you’re gonna have trouble finding a property management company that specializes in each of these submarkets. And before you start looking at deals, you wanna make sure you have your team in place, which we’ll go over the reasons why in a future episode, but mostly because your team is going to help you find deals, help you analyze deals, help you submit offers on deals, help you do due diligence on deals, and if you don’t have a team in place, you’re going to be doing all that yourself, and since you don’t have the experience with these large syndications starting out, you’re gonna need to rely on your team heavily.

And then lastly, it’s a credibility factor to have a market selected before you start looking for deals and finding your team… Because once you start interviewing property management companies, mortgage brokers, real estate brokers, one of the questions they’re gonna ask you is “What location are you targeting?” and if your response is “I don’t know” or if your response is “I haven’t selected one yet” or “I’m targeting the entire United States”, they’re going to look at you differently than if you tell them “I analyzed the entire Dallas-Fort Worth market and I landed on these three specific submarkets within Dallas-Fort Worth for investing.” That comes with an extra level of credibility, and it’s showing them that you already know what you’re doing and what you’re talking about, and they will take you more seriously.

So those are the reasons why we believe it’s important to select the target market first, before you start looking for deals or building your team or moving on in the syndication process. In fact, if you’ve listened to the first four or five series when we went over the requirements before becoming a syndicator, once you’ve met those requirements and you’re ready to start your business, selecting a target market is going to be one of the first things you do, while at the same time building your brand, which is going to be a focus in the future episodes – how to build a brand.

Now that we’ve discussed why you need to pick the market first – again, before we go into how to actually select it, I wanted to talk about how important is the actual target market. You’re gonna be spending all this time analyzing these markets, and visiting them, talking to people in them, so how important is it to pick the right market? Well, I’m gonna give you an example. Let’s say that you decide to invest in Cincinnati, and you picked the city as a whole as your target market.

Now, within Cincinnati there are smaller neighborhoods – some good, some bad, just like any city. The reason I’m doing Cincinnati is because I know Cincinnati very well, because I lived there for about 6-7 years… Two neighborhoods in Cincinnati – one is Hyde Park, one is East Price Hill. Let’s just quickly go over five different market factors for those two neighborhoods.

For median household income, Hyde Park is $75,000, and East Price Hill is $30,000. For median rent, Hyde Park is just over $750/month, and East Price Hill is just over $500/month in median rent. The average single-family house value in Hyde Park is almost $400,000, whereas for East Price Hill it is under $100,000. The population below the poverty level in Hyde Park is 8,2%, and for East Price Hill it’s 41,8%. And lastly, the number of structures with five or more units in Hyde Park is 12,8%, and it is 30,2% for East Price Hill.

So what’s the point of listing out those statistics? Well, the point is that within the larger city of Cincinnati, there are multiple neighborhoods, and just through these two examples right here, these neighborhoods are completely different, and would be good for completely different investment strategies. When you’re comparing these two neighborhoods, the Hyde Park obviously has a higher median income, which means there’s a higher rent, and the property values are much higher, and there’s less people below the poverty level, but there aren’t as many apartments available in Hyde Park, whereas for Price Hill, most of the economic factors are low (below the Cincinnati average), but there are a lot of apartments available to buy.

The whole point is that you can select really any city in the United States and find a Hyde Park and an East Price Hill and neighborhoods all the way in between. The overall MSA, and even the city, don’t matter as much as the neighborhoods or the submarkets, or even the actual street-by-street level analysis, which is why our market evaluation that we’re gonna go over is conducted on multiple levels.

First, you select an MSA, and you evaluate it at the MSA level. Then you evaluate it at the city level, and then you evaluate it at the actual neighborhood level. Because at the end of the day, you’re going to be able to find a market in which you can implement your value-add business plan, if that’s what you choose to pursue, in any city. All you need to do is do a deep dive into the neighborhoods in order to find the ideal neighborhood that aligns with your investment strategy, which we’ll discuss.

And then lastly – and if you’re a loyal Best Ever listener, you’ve heard this before – the three immutable laws of real estate investing. As long as you follow these three laws, then it doesn’t matter what market you’re in or what the actual market conditions are, you will be able to create and scale and maintain an apartment syndication business.

Those three laws are buy for cashflow, secure long-term debt, and have adequate cash reserves. We’re gonna go into a little bit more detail on those three laws in our series next week… But I just wanted you to be aware, again, of those three laws, and how to apply those to your business, and how those will help you invest in any market.

To quickly summarize, the market, the MSA, the city are not as important as the actual neighborhoods within that city, and you having the knowledge to find those good neighborhoods, and having that boots on the ground, very low-level understanding of — so what’s important is for you to understand the actual neighborhoods within those markets.

Now that we’ve talked about what a target market is, why it’s important, or what parts of the market are important, the next three episodes are gonna focus on how to actually select a target market. So it’s going to be a seven-step process… First, you’re going to narrow it down to seven actual markets – cities or MSA’s – which it’s looking like we’re probably gonna go over that in the next episode, because we’re running out of time here.

Number two is to record the demographic and economic data for those seven markets, which we’ll also discuss in the next episode. Then, based on that analysis, we’re gonna rank those seven markets, from the best to the worst, which we’ll also go over in the next part. And then based on that ranking, we’re going to select the top one or two target markets, which we will be investigating even further, because as I mentioned, you need to have a submarket or a neighborhood or a street-by-street level understanding of your target market in order to find the best areas to invest. That further investigation is gonna happen in next week’s series.

We’re also gonna take a deeper dive into those three immutable laws of real estate investing, and talk about how to create a market summary report for your target markets. We’re going to be discussing one through four in the next episode, and we will be discussing five through seven in next week’s series.

To conclude, in this episode you learned what a target market is, and that is the primary geographic location in which you will focus your search for potential apartment investments. You’ve also learned why you should select and evaluate a target market first, before looking for or analyzing deals, and before finding your team members. Then we also had a discussion about why the target market isn’t necessarily the most important factor, and what we mean by that is the overall MSA’s in the city aren’t as important, because within any city you’ll be able to find at least one specific neighborhood where you can implement your apartment syndication investment strategy.

And then finally, we outlined the overall process for evaluating and selecting your top one or two target markets, which we weren’t able to start in this episode, but we’re going to do a deep dive in the next episode. You’re actually going to get two free documents in the next episode as well.

To listen to the other Syndication School series about the how-to’s of apartment syndications and to download the previous free documents, as well as the free document that you’ll be able to get in tomorrow’s episode if you’re listening to this at a later date, make sure you visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

JF1518: Write Your Real Estate Problems On The Board & He’ll Solve Them with Bryan Chavis

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Bryan is the author of a popular real estate book, Buy it, Rent it, Profit, and he’s here today to share his best knowledge with us! He used to travel the country and host a seminar where he would have investors write their problem on the board (no tenants, low cash flow, etc..) and he would solve them before you left. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Bryan Chavis Real Estate Background:

  • Multifamily investor and property manager
  • Author of Buy it, Rent it, Profit
  • Syndicated almost $5M worth of multifamily properties
  • Based in Tampa, FL
  • Say hi to him at www.bryanchavis.com
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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

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TRANSCRIPTION

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

With us today, Bryan Chavis. How are you doing, Bryan?

Bryan Chavis: I’m blessed, man. How are you?

Joe Fairless: I’m doing well, and I am looking forward to our conversation. A little bit about Bryan – he has syndicated nearly five million dollars worth of multifamily properties. He’s a multifamily investor and property manager. He’s the author of the book “Buy it, rent it, profit”, and he’s based in Tampa, Florida. With that being said, Bryan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Bryan Chavis: Yeah. My background is nothing too decorative. I started in the multifamily industry leasing apartments, worked my way up into acquisition, and then decided one day to venture off on my own. I really didn’t have two nickels to rub together, so I had to come up with an idea, and I came up with an idea to write a book or a manual, and then just kind of traveled around, and wherever anyone would listen to me or allow me to rent a room, and just perform workshops, teaching people how to stabilize their property, which of course was my day job from 9 to 5, in a property management multifamily space.

Basically, I was just teaching people how to stabilize properties, things that I took for granted that were pretty academic coming from the industry. I quickly realized that not a  lot of people who are not institutional investors — they didn’t have the resource to the training and education that I did, so I’d seen an opportunity to educate and train individuals, and that’s kind of really how it started.

Joe Fairless: Well, I would love to learn more about that. What was the process that you took people through when you taught them how to stabilize their property?

Bryan Chavis: That depended upon who was in the room. My thing was it didn’t matter who you were, you just write your problems down on a board when you came in, and I would solve it. That was kind of the whole– that’s how the brand kind of took off, because people were actually getting in there, with no fluff… Back then I didn’t even know what a bootcamp was, I didn’t really understand what — I don’t think funnel [unintelligible [00:05:02].15] were a thing of relevancy back then, but… Really, I had zero marketing. I just was trying to build a name by solving people’s problems. They would come in, and if they were dealing with evictions, or if they were dealing with unoccupied tenants, or whatever it is they were dealing with – cashflow problems, or whatever it was, I would of course give them the system and show them how to actually do it right there, in front of the group, and I would do about 10-15 questions…

And I had a manual, so I wrote a book, which is ironically, the “Buy It, Rent It, Profit!” book, the distant relative of this book… So I wrote this manual, and it basically had everything, all the systems these individuals needed to know. With the systems, they identified the work that needs to be done, and then the systems then also told the users how to go about performing it. So that was my pitch on the operations manual. They had everything they need in this manual.

So I would teach them, and then sell the manual at the end of the class for $100. That was my thing and how I got started, and originally how I thought I was going to make it rich, so I can fund my own multifamily investments. Things started to take off. Eventually, it was published by Simon & Schuster, and the book eventually – don’t despise the humble beginnings, because I was selling out of the trunk of my car; that book now is one of the only books in real estate investing in the U.S. Library of Congress, “Buy it, rent it, profit!”

Joe Fairless: Bravo! That is pretty cool.

Bryan Chavis: For somebody that barely has a high school diploma, I feel like that’s something I can kind of hang my hat on and be extremely proud of. But yeah, so that’s kind of how I got started; I got in with Simon & Schuster, which was a tremendous blessing. As we all know, they’re one of the world’s largest publishers…

Joe Fairless: How did you get in with them?

Bryan Chavis: That’s another funny story… I was working with a boxer named Winky Wright at the time, and Winky Wright was fighting Tito Trinidad, so I was with Gary Sheffield — I’d met Gary Sheffield, that played at that time for the Yankees…

Joe Fairless: The baseball player?

Bryan Chavis: Winky introduced me to Sheffield. Sheffield was trying to get involved with buying multifamily, wanted to deploy some money in that space… A-Rod was doing it, so A-Rod kind of convinced him that “Hey, this is a good thing…” So he came to me; Winky was like “Hey, this is the guy you’ve gotta meet.” So I of course started basically consulting and teaching these guys for free, and I think that’s something else for some of your listeners – there’s some value in that; I wasn’t charging these guys. Most people were like “Why didn’t you charge them? They’ve got so much money…” At the end of the day, you have to remember, I had zero brand, no one knew who I was, so I was trying to build a name, and for me it was giving knowledge away for free at the time, and building a reputation, and so that’s what I was doing.

I was helping him with a lot of his real estate deals. He was writing a book called The Inside Power, and the guy Vigliano, from Vigliano and Associates, his book agent, got on the phone with me because he wanted to ask me a few questions for the writer that was writing the book about Gary getting involved with real estate and how he met me for Gary’s book. So I began to talk, and then the guy was intrigued; he’s like “What do you think about multifamily? What do you think about New York?” He started asking me real estate related questions, so I gave him a 30-minute seminar, and then he was like “Do you have any books yourself?” I was like, “Yeah, I’ve mentioned that. Absolutely. I’ve got a manual here that I’ve been selling out of the trunk of my car.” So he was like “Send it over to me.”

So I immediately FedEx-ed it, and didn’t hear from him. I went to the fight, which was almost a month later, and I hadn’t heard from him. Then I get a call, when I was in Vegas at the fight, and it was him, David Vigliano. He was like, “Hey look, we’ve read your stuff, we love it. We want you to come to New York. We think we can pitch you to a few major publishers here, and I think we can make something happen with this manual thing you’ve got here.” “Great, when do you want me in New York?” “Tonight.”

Joe Fairless: [laughs] I was gonna say “Tomorrow.” Dang!

Bryan Chavis: So I ended up going from Vegas to New York, and the rest was history. And then I remember Simon & Schuster walking in there, and it’s funny, because Joe [unintelligible [00:08:58].15] was in there at the time; I didn’t know who he was, so we were both sitting in the waiting room, and he goes off to his agent, I go off to mine; of course, we have two completely different trajectories. I should have went with him in hindsight; I should have follow him to his meeting, because it worked out much better then… [laughter] So we go in, and Simon & Schuster was like “How many people are bidding?” and I had my book agent who was trying to negotiate…

Basically, Simon & Schuster said “Hey, we don’t care who’s bidding. We want this book.” And that’s kind of how it all got started. We did a rewrite of the book, and then wrote another one, called “The landlord entrepreneur” just last year, that I launched with them… So it’s been a really good relationship to this point with Simon & Schuster, and that’s kind of how that all got started.

Joe Fairless: Oh, man… What a fun story. Thank you for sharing that. With that book, the original one that you were selling out of the trunk of your car and at the meetings, you asked the attendees to write their problems on the board when they walked in the room and then you solved them… What were some common problems that they had that you solved?

Bryan Chavis: Most of those common problems revolved around the lack of systems. They ranged from “I moved tenants in. They’re destroying the unit”, so a lot of their problems were because these individuals did not understand that in real estate investing, like most glorify it, was about the brick and mortar. Real estate investing, when you’re buying multifamily or you’re buying apartment buildings or rental property, it’s a long-term strategy, therefore there has to be some systems in place to be able to operate day-to-day. I think these individuals came in with a very glossy idea of real estate investing and didn’t really quite understand that it was a business… So I had to kind of teach them to develop a franchise mindset, meaning that systems run the whole entire business, and the systems predict the profitability, and not necessarily buying low and selling high, like a lot books talk about – transactions, transactions, brick and mortar. Bricks and mortars never paid me rent. People pay me rent.

So a lot of the questions come from the lack of understand that you’re dealing with your prospect demographic, how to deal with them, the rules, the regulations, the systems that are involved with dealing with the tenant when they’re a prospect, when they become a tenant, and then when you’re moving the tenant out. So really just getting them to understand that this was a business.

Then the idea is “Okay, it’s a business. How do I get it organized?” That’s when the manual came in, and when I would walk them through the manual and solved their problems through showing them the systems that they needed… Because in property management in most states the landlord-tenant laws dictate how we have to react to certain issues that may arise, so you need to have the systems in place to keep you out of trouble.

There was a lot of problem-solving, but it really basically stemmed from a lack of knowledge and understanding getting into this business. In this market, a lot of the questions that I get are “How do you operate at lower cap rates? How do you decide for making a deal happen in this market? How do you evaluate net present values, IRRs? How do all those things come into play? How do you create or generate cashflows from assets that are throwing off these lower cap rates?” So it’s a lot of the same, way back then and even to present day; the market is a little different, the values are a little higher, we know,  depending on the class property that you’re looking at, class A, B, C and so on, but pretty much the gist of it in the problem-solving and in making this thing work is really understanding that it’s a business, and how to run it from an operational standpoint. How to have both an asset manager’s hat, and a property manager’s hat. How to wear those two hats.

Joe Fairless: What’s one specific tactic that we can implement if we want to have a franchise mindset?

Bryan Chavis: One specific technique one can implement — for me it’s kind of tough to say which one. It really depends on what it is you’re trying to do with the project. At the end of the day, if it’s a value-add play, what is one technique one can implement – I think it’s making sure that you step back and you organize and operate from a SEOTA standpoint, which I call a “Strategic Evaluation Over a Target Area.” Understanding who your prospect tenant is I think has always been the thing that’s kept me out of trouble – understanding who that prospect tenant is, understanding the demographics and psychographics.

Nowadays that information is pretty much everywhere. When I first started, you had to dig for it or pay for these expensive reports to get that, but that information is pretty much everywhere on the internet now, so… Really understanding who your prospect tenant is is key before you get started.

Joe Fairless: And what information do we need to know about the prospective tenant?

Bryan Chavis: Okay, good question. I’m trying to paint a picture, a profile; I’m gonna understand 1) the demographic, that’s who they are; psychographics is why they choose one unit versus another… So it’s really the same thing that Walmart, Walgreens, CVS – when you go in, if you remember back in the day they used to have those short receipts; now they have these long receipts that are about as long as the Dead Sea Scrolls… But all that information is basically offering you coupons based on your habits. So the idea of collecting information on my prospect tenant based on their habits, understanding their employment, average household size, the demographics, which means who they are, the psychographics (the why).

Compiling all this information gives me a great perspective and understanding of how I need to stage my rental units, curb appeal, what the focus is… I just took down a project in downtown St. Pete. I facebook every day from the property and show everyone how I’m turning this property. We went from the average $775 rents, I’m already up to $1,000 right now in the rents, and people are scratching their heads trying to figure out how I’m doing it… It’s because I understand my prospect tenant well before I even took the project down. So now I’m catering the whole entire property not based on my personal preference or what I wanna see there, but on my prospect tenant’s personal preference, and that’s everything from the outside of the unit to the inside, the way it looks, the way I have them show the rental unit, the advertisement, the way we speak about the property – everything is catered to that prospect tenant’s demographics and psychographics.

Joe Fairless: The $775 to $1,000 in rent – incredible jump. Did you have to invest–

Bryan Chavis: We’ve just purchased it in October, so I’m not even in a year yet.

Joe Fairless: Oh yeah, not even 12 months… How much have you invested per unit to do that?

Bryan Chavis: That’s a good question… Less than $1,000.

Joe Fairless: That’s even a better jump now in my mind.

Bryan Chavis: Yeah, I’m glad you asked that question.

Joe Fairless: What are some specific things that you’ve done on that property?

Bryan Chavis: Another good question. Some of the things that I like to focus on is I knew who I wanted to compete with. While everyone thought that I was competing with another property, like properties in the area, but I knew that like properties in the area lacked professional management, I knew they lacked the understanding of the demographic. Who I was going after was — if you look at downtown St. Pete, you see all the cranes, you see all the high-rises, all the new class A product coming out online… That’s attracting a lot of individuals there. That was the demographic that I was going after, and everyone thought I was crazy… But I’m trying to go after that demographic, so my pitch was “Why rent at $1,400? Come rent from me at $1,000. Get the same area, get the benefits… You want the free Wi-Fi? There’s a coffee shop attached to my building. You can go there and get the free Wi-Fi. You want the fancy weight room, you go two blocks – there’s the water, there’s the bay… You’ve got all the equipment out there that the city put out there for free…”

So I didn’t really feel like I had to compete with amenities with these companies. Where I had to compete with them, the large institutional guys, was the professional management, and then the way the unit looked and felt to the prospect tenant when they entered in the unit. So I focused on amenities… Ceiling fans – I put in high-end fixtures. We have these cool little faucets, when you put your hands on them in the bathroom, the LED light lights up, and it lights up the water stream so they don’t have to turn on the lights and disturb anybody in the studio. And just thinking about everything about that tenant and really just focusing on their needs, and always having a Wow factor when they come in. That Wow factor could be something as simple as a really cool ceiling fan.

You can go on Facebook and see some of those videos, and I show you when I got this oscillating ceiling fan from Home Depot with two little fans at the end of it, and they blow… It’s just really industrial and urban-looking, and really cool. And based on sensors, when you move, the light turns on, and you’ve got a remote control, you can turn it and rotate the whole entire unit, or just the fans… So just really cool little things like that that really target that demographic, and when they leave Park Plaza, whether or not they rent from me or not, they remember me.

Ultimately, I’m just trying to create that experience, and I let downtown St. Pete do the work with the amenities. I let the city do all the work, and I’m just piggy-backing on the location and focusing on the professional management.

Joe Fairless: That $1,000/unit that you invested in them, how is that budget broken out?

Bryan Chavis: In the due diligence process. When you buy a property, you go through that due diligence period – let me know if I’m explaining this the right way, if this is what you’re asking…

Joe Fairless: What I was asking – you mentioned all those different things you had in those units, like the ceiling fans and fixtures… Within that $1,000 budget, how do you allocate each of those items? Approximately, just to give us an idea of what was the bigger ticket item, versus the smaller ticket items.

Bryan Chavis: Okay, sorry. So I go with the Wow factor, so what I feel that they’re gonna see. Obviously, this is a studio apartment, so their eyes are gonna fix right to the kitchen. They already had the backsplashes from the previous owner, so I didn’t really have to do much there… So then the idea was we spend the money on the fixtures, the faucets, and then the ceiling fans. Those were just abundantly clear that they were outdated. They were actually brand new ceiling fans that the previous owner had in there, but they were those old, wooden fans… But that’s the first thing you see when you walk in, so that was the first thing I got rid of.

So the money was spent on the ceiling fan and on the refrigerators and the stove, the appliances. You want stainless steel, and then you want the brushed nickel, matching ceiling fan, the urban type look and feel… So the focus was really on the appliances packages and faucets and things of that nature. Those are your bigger ticket items.

Joe Fairless: Okay. And how do you spend $1,000 on refrigerators, stoves, ceiling fans, fixtures, lights that turn on when you move…? It seems like that would be more, right?

Bryan Chavis: Well, yeah, but you also have to think these are studios, so these are much smaller items, the refrigerators and things like that… So we’re getting a little smaller units. The ceiling fans are averaging around $300-$400, the faucets – we’re always getting the ones on sale or discounts… So yeah, I just try to buy them in bulk when I see the discounts. I have, of course, the Home Depot savings package or whatever it is that they have… But yeah, at the end of the day it’s not a lot. There’s the bathroom faucet, the kitchen faucet and the ceiling fan. Those are your major amenities that we’ve added in.

Joe Fairless: Okay, so the refrigerator and stove is not included in that $1,000.

Bryan Chavis: Sometimes I have to spend on that, but if I do spend on the refrigerator or a stove, I’m usually trying to get the [unintelligible [00:20:27].21] stainless steel from Home Depot out of the package… And there’s tons of them. You just have to ask where they are. Sometimes you have to go and pick them up, but…

Joe Fairless: How much are they, usually?

Bryan Chavis: I just bought one for $349.

Joe Fairless: Wow. That’s good stuff. With this property, what’s the projected hold period?

Bryan Chavis: Terminal value, probably somewhere right around 14 years.

Joe Fairless: What type of financing do you have on it?

Bryan Chavis: Cash.

Joe Fairless: All cash, no debt?

Bryan Chavis: No debt.

Joe Fairless: What was the purchase price?

Bryan Chavis: 2,6 million.

Joe Fairless: And was that syndicated, or was that your own cash?

Bryan Chavis: Syndicated.

Joe Fairless: What are the projected returns on a property with no debt for 14 years?

Bryan Chavis: Starting out, your entry cap is somewhere right around; you’re coming in at around a 6-cap, and then we’ll probably exit somewhere right around an 8… And for the vast majority of these guys it’s more of the efficiency and not the actual cash-on-cash return… Even though the cash return is extremely important; please understand that’s important; it’s also the IRR, the efficiency from which these guys are getting their money back. When you’re dealing with individuals who are 50-60 million, they’re looking to put their money into real estate, they’re not necessarily cash poor, so they would rather benefit from the tax deferrals… And again, these returns are not factoring the cost segregation, or factoring in any of the other ways we generate returns for our investors, but just straight cash-on-cash, we’re looking at a 6%, and then we’re also looking at an IRR upwards of 13%-14%.

Joe Fairless: And what type of structure do you do with your investors on a deal like this?

Bryan Chavis: There’s many different types of waterfalls, and we can get really far in the weeds with that, but…

Joe Fairless: For this one in particular.

Bryan Chavis: This one in particular is based on performance. Anytime I come to a deal, it’s usually no less than 20%-30% equity stake, and then performance based on waterfalls, IRR’s, various different hurdles that we have at payout. Sometimes there’s a pref, sometimes there isn’t, but…

Joe Fairless: Was there a pref on this one?

Bryan Chavis: No, sir.

Joe Fairless: It’s incredible… When you think about a deal and you’re analyzing it, how do you determine if you should out financing in place or pay all cash?

Bryan Chavis: That’s another good question, and I’m sure someone will always argue this, but after 2008 one of the things that I learned — in 2012 I pretty much lost everything; not necessarily in 2008, but in 2012 I was diagnosed with a brain tumor, did not have insurance, so I pretty much had to sell and liquidate everything and start over from scratch. So when I did and I’ve gone through the losses and gone through some of the things that I’ve gone through, I quickly realized that banks weren’t necessarily partners.

For me, being able to raise money – and many will argue, and I do not disagree with people saying “Use leverage”, and I’m not saying I’m never gonna use leverage again… I will. But for this deal I just didn’t think it made sense. If I’m gonna use leverage, I’ll leverage through the appreciation of this asset because of its location; I’ll use Park Plaza as a bank, and then I can look to use Park Plaza as leverage for the next deal, versus actually bringing in a bank right now. I have a little bit more bargaining chips, I will not be at a disadvantage, and then I can go after the more non-recourse loans, be a little bit more aggressive… Whereas I’m going to them and looking to shop a deal with them, we can already have a decent-sized portfolio and then begin to lend against it, whether it be bridge loans, or deployment of various different products that are out there that exist through Fannie Mae or Freddie Mac, that cater to multifamily. But for me, if I did not have to pull that level right now, it just made more sense to me after what I’ve gone through and some of the things I’ve seen, to have a few assets that we had outright, that we could then use as bargaining chips further down the road.

Joe Fairless: What’s your best real estate investing advice ever?

Bryan Chavis: Best real estate investing advice ever… Man, there’s a lot out there. I would say my best advice that I’ve received is that numbers do lie. People say numbers never lie. Numbers do lie. You can make numbers lie, so understanding how to perform your due diligence, understanding how to go through that SEOTA process, which I call the Strategic Evaluation of a Target Area – really understanding how to perform that to me has been the best advice that I have gotten, really understanding what that means. Numbers do lie, so making sure that you perform your due diligence, especially when you’re dealing with multifamily. You always wanna make sure you’re performing your due diligence.

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

Bryan Chavis: Let’s do it!

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

Break: [[00:25:20].28] to [[00:26:06].27]

Joe Fairless: Alright, Bryan, what’s the best ever book you’ve read?

Bryan Chavis: The Bible.

Joe Fairless: Best ever deal you’ve done?

Bryan Chavis: Park Plaza.

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

Bryan Chavis: Being too eager.

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

Bryan Chavis: Education, training.

Joe Fairless: And how can the Best Ever listeners learn more about you and get in touch with you?

Bryan Chavis: We have a summit coming up October 29th and 30th here in the Tampa Bay area. We’d love for them to come out to the summit at the Holiday Inn Westshore. BryanChavis.com, or BuyItRentItProfit.com. They can find out information about the summit at BuyItRentItProfit.com/brpsummit.

Joe Fairless: Bryan, thank you so much for being on the show and sharing your thought process, the case study with raising rents from $775 to $1,000, how you do it, how you think about it too, with understanding the prospective tenant and knowing who they are and why they choose one unit over another, the really strategic way that you looked at it from the deal we discussed, where you’ve got the amenities built in to the surrounding area – coffee shop, the weight facility on the bay, and you’re less than the class A property a little bit further in… Really interesting.

Thank you so much for being on the show again. I hope you have a best ever day, and we’ll talk to you soon.

Bryan Chavis: Thank you, sir. I appreciate you.

JF1514: Tony Robbins’ Ultimate Syndication Success Formula Part 2 of 2 | Syndication School with Theo Hicks

Listen to the Episode Below (31:41)
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For part two of this mini series, Theo is telling us about our why, or outcome. It’s important to know what you’re working towards, and also have a plan to get there. It’s very important to create an emotional attachment to your goals. Having that attachment will drive you towards your outcome, so how do you create it? Hit play to find out. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

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

 

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

Each week we will air a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will be offering a document or a spreadsheet for you to download for free. All the previous documents and previous Syndication School podcast series can be found at SyndicationSchool.com.

You are listening to part two of a two-part series entitled Tony Robbins Ultimate Syndication Success Formula. If you missed it, make sure you go back and listen to part one, where you will learn the part one of Tony Robbins Ultimate Syndication Success Formula, which is Know Your Outcome. So you’ll first learn the money question, which is how you make money as an apartment syndicator, and then you will set your first 12-month goal and create an affirmation statement. To help you with that, we gave away a free annual income calculator document. To listen to part one, go to SyndicationSchool.com and make sure you download that free income calculator, as well.

In this part, part two, we’re gonna be focusing on part two of Tony Robbins Ultimate Syndication Success Formula, which is Know Your Why. We’ll be focusing on setting a compelling and inspiring vision for your future. So first we will talk about why you need a vision, which should be obvious, but we’ll talk about it anyways, and then two, we’re gonna talk about how to actually create your vision, so we’re gonna go through an exercise to help you do that. Then we’re going to go over a really cool, helpful concept for helping your approach times when you’re not necessarily achieving the quantifiable goal you set out to achieve. This is a very powerful concept that will reframe the way you look at hopefully everything in life. Then lastly, we’re going to give away another free document, which is focused on how to follow through and persist with your goals.

So to begin, why do you need a vision? So you’ve already set your 12-month goal for how much money you wanna make in 12 months, so why not just stop there? Why not just go to “Alright, how do I get to that 12-month goal?” which we’ve already talked about, which is raising a certain amount of money, but breaking it down into the component parts of how to actually raise that amount of money. Well, as Jim Rohn says, the How comes second, the Why comes first. So after you’ve set your actual goal and you know your outcome, the next step in the process is to know your why, which means “Why do you want to achieve that financial goal?” Because at the end of the day, that number is not going to be enough to push your through when the times get tough. You need to know why you’re doing this.

Once you have that Why, it will create a stronger emotional attachment to that outcome, and we’ll go over why that is in a later part of this episode. Once you have that emotional outcome, then once the going gets tough, you can tap into that emotion, rather than tapping into that material dollar number. That will keep you motivated and keep you on track and keep you from giving up.

So how do you actually create this vision and create this emotional attachment to your outcome? Well, the exercise we have all of our consulting clients perform when they first join us is an exercise that we call “Gotta get yo mind right before you get yo money right.” This is a 6-statement exercise where you fill in the blanks, and you use your responses to these statements as your why. So what I want you to do, if you’re able to, after each of these statements pause the podcast for 30-60 seconds and just think about how you would respond to that question. The first thing that comes to mind. Kind of just a stream of consciousness for 30-60 seconds. Then later, once you get home (later in the night or in the morning, whenever you do your writing, or when you have time to write, either one of those), then actually write out answers to these questions, and be as specific as possible. We’ll go over examples of good and bad responses, as well as the reasons why we’re actually reading these statements.

The first one is “What gets me excited about real estate is_____________”

Question two is “Once I achieve my goal, I will benefit by ________________”

Three, “If I don’t achieve my goal, I will be disgusted with myself because I will not get to, or I will unfortunately have to ________________”

Four, “Once I achieve my goal, others will benefit by_________________”

Five, “The negative consequences I’ve already experienced as a result of not achieving my goal have been__________________”

And then lastly, “The benefits I’ve already experienced as a result of achieving my goal in the past have been _________________”

Those are the six statements [unintelligible [00:09:30].12] each of those. Hopefully you paused for 30 seconds and thought about your responses, and then either right now or later tonight or tomorrow morning take the time to actually write out responses to these questions.

Now, why these six questions and why not other questions? Well, the first question, which is “What gets me excited about real estate” – that question will elicit a passion in you. Your responses will tell you what it is about real estate that makes you passionate. This is going to be the core of your Why. It doesn’t necessarily have to be  a specific part of real estate that you really like, like “I really like underwriting deals”, but think of it more as what does real estate allow you to do in other aspects of your life? Because at the end of the day, our Why needs to incorporate our entire life, not just specific to work. So what gets you excited about real estate, you should be thinking about things that you’re able to do because you are a real estate investor, or what you will be able to do as a real estate investor and apartment syndicator. That’s why we ask question number one.

Number two, “Once I achieve my goal, I will benefit by__________” – that is for you to create an ideal scenario or an ideal life to be pulled towards. You’re here in the present, and you are visualizing an ideal future, and once you have that, now that’s something that you are going towards and that is pulling you towards it. So you’re pulling yourself towards the future you want.

The next question is the exact opposite. “If I don’t achieve my goal, I will be disgusted with myself because I will not get to or I will unfortunately have to _____________” In that case, you’re creating a future, but it’s gonna be an unpleasant future. It’s gonna be a future where you do not achieve this goal. Think of the worst case scenario possible that could happen to you if you don’t achieve your goal (that’s gonna be specific to each individual) and write that out. The more disgusting it is, the better. Write that out, and rather than having something to be pulled towards, you will also have something that you are running away from. So you have a future that you are being pulled towards, as well as a past that you’re being pushed away from. The combination of those two things should cover both personality types – people that are motivated by positive, or that are motivated by going away from the negative.

The fourth one is “Once I achieve my goal, others will benefit by___________” For this question, you are thinking of ways that you will be able to help others  by achieving your goal… Because most people are motivated by helping other people, and I know that one of Tony Robbins’ six human needs is contribution. He believes that all humans need to contribute in order to be satisfied and fulfilled in life, so this fourth question will hit on that. So by achieving your goal, how will you help your friends, your family, your significant other, your community, the world, your investors…? Really anyone that’s not you, how will they also benefit by you achieving your goal. It puts other people’s skin in the game, and you won’t wanna let them down.

Number five and six are kind of tied together. Number five is “The negative consequences I’ve already experienced as a result of not achieving my goal have been _______________” A disgusting, negative, bad future to avoid… You now also have a picture of something in your past to avoid, because it’s much easier – at least in my opinion – to visualize your actual past because it happened, so you’re more remembering than creating a vision for the future. So the bad things that have happened to you in the past by not achieving this goal or another goal, and now you’ve got something else to avoid and be disgusted by, which again, will elicit that passion to not have that be your future situation.

And then lastly, “The benefits I have already experienced as a result of achieving a past goal have been__________” Similarly, you are remembering a time you achieved a goal and the benefits that came afterwards. Now you have emotion and a feeling to chase after again, but hopefully this time on a much larger scale, which means much larger benefits.

Again, once you get home tonight, or tomorrow morning, take the time to write out some responses to these questions. To give you an example of good and bad, because you want these to be as specific as possible, because again, we’re trying to create an emotional attachment to our outcome, which means that it needs to be specific to us.

For example, to the question about “Once I achieve my goal, I will benefit by__________”, a bad example would be “Once I achieve my goal, I will benefit by more money, freedom of time and being able to travel.” That’s pretty vague, and it’s not specific enough to help you get through challenges and obstacles that are likely to occur throughout your journey. If you are struggling to raise capital for a specific deal, just telling yourself “Well, if I do this, I’m gonna make more money and have more freedom of time and I’ll be able to travel more”, it’s probably not gonna cut it.

A much better response would be “Once I achieve my goal, I will benefit by more money to buy season tickets to (I’m in Tampa, so we’ll say) the Tampa Bay Devils Rays baseball team for my entire immediate family”, or “I will have freedom of time to work out at 10 AM, three times a week.” Or if you need extra motivation, “to hire a personal trainer to make me work out at 10 AM three times per week.” Or “have more freedom of time to go to all of my daughter’s dance recitals or son’s baseball games.” Or “being able to travel with my wife and kids to Paris and take a picture in front of the Eiffel Tower.”

Again, do you see the difference between the bad example and a good example? These are things that are specific, that involve other people in your life and are things that you actually want to do, and you’re being specific about it. Obviously, you wanna make more money, but what are you gonna do with that money? Obviously, you’re gonna want more time, but what are you gonna do with that time exactly? So those are the types of responses you are looking for, because those are much more powerful and elicit much more passion.

For the statement about being disgusted about not achieving your goal, a bad example would be “If I don’t achieve my goal, I’ll be disgusted with myself because I will not have freedom of time.” It’s kind of the exact opposite of the previous bad example. Instead of saying you are gonna benefit by more freedom of time, now you’re saying that you’re gonna be disgusted because you won’t have that. Again, not specific enough, too vague, and it’s not gonna give you that motivation you need when the going gets tough.

A much better example – and we can all relate to this, and I’m sure everyone would probably have this be their answer – would be “If I don’t achieve my goal, I’ll be disgusted with myself because I will unfortunately have to make the walk of shame back into my W-2 job.” You just visualize yourself, you quit your job in order to become a syndicator, or get into real estate in general – and I personally did this, too… Your boss knows why you left, all of the employees that work there know why you left; maybe they were supportive, maybe they weren’t, but at the end of the day they know that you left in order to chase this real estate dream.

And then you try it out and you fail, and now you have to go back to work and face everyone, face your boss first and ask him for your job back, and then walk back into the office and face all of your employees, and they all know that the reason why you’re back is because you failed. I don’t know about you, but that makes me feel horrible, because not only do I not wanna go back to a W-2 job or a corporate job, but what’s worse is actually having to face everyone at work knowing that I was a failure.

That is the perfect of a good vision to have, and in this case this is the vision you want to avoid – you wanna avoid that feeling of shame from having to walk into your job and tell everyone that you failed.

Once you actually respond to these questions, now the next step is, similarly to your 12-month goal, create an affirmation statement to keep this vision top of mind. It could be a paragraph form, so you could literally write out “What gets me excited about real estate is________. Once I achieve my goal, I’ll benefit by_________.” Or it could just be a running list of bullet points, however you wanna approach it. You write that out as an affirmation statement, and you can write it at the same time you’re writing your 12-month goal in the morning, or you can write it out one time and read it to yourself silently in the morning, and at night, or you could read it aloud to yourself, staring at yourself in the mirror. I found that to be a powerful strategy, and it gives you more confidence, as well.

Another example – and again, this is for the long-term vision, but also your 12-month goal; we’re talking about the same things now – is also create some sort of vision board. For example, you can create a  banner that has your 12-month goal on it, and then maybe you have a long-term goal of how much real estate you wanna control, and then you’re gonna have images representing each of your visions. So you can maybe have a picture of a corporate office, if that’s what you wanna avoid. Or you can put a picture of you and your family on a vacation, or you can even (if you want to) photoshop yourself into a picture at the Eiffel Tower and tell yourself that “In three years, I’m going to actually take this picture and then replace the fake one with the real one.” Examples like that, things that represent your written response to those statements, on a vision board.

You can also create a [unintelligible [00:19:53].27] and just write out your statements, or you can do what Joe did, and you can dedicate an entire wall in your office to a vision board. In that case, you can post anything – you can post brochures from properties you’ve bought… I know Joe has the e-mail he sent when he quit his job posted on there. Pictures of certain events that happened in your life that you want to repeat, as well as things in the future that you want to have happen. So the vision board on your wall [unintelligible [00:20:20].21] anything.

Another example of a way to keep this long-term vision top of mind is to record your voice of you reading your vision, and then listen to that on your headphones on repeat while you’re taking the dog for  a walk, while you’re working out, while you’re on your way to work between podcasts… Those are just a few examples.. Whatever works best for you, but the idea is to have some sort of reminder of this vision on a daily basis in front of you.

Another example is to have post-it notes on your monitor, so every time you are at your computer, the post-it notes are right there in front of you and you can read them every hour, or every once in  a while. So that’s for your vision.

What happens if you don’t hit your goal? What happens if you set a goal to make $100,000/year for the specific reasons you went over and the specific reasons you created in the “Gotta get yo mind right” exercise? What happens if you don’t hit that number? Well, that’s where this very handy and powerful concept of 50/50 goals comes into play. If you’re a long-time listener of the podcast, you should know what this means, but just as a refresher, what 50/50 goals is is a concept where 50% of a goal’s success is based on achieving the actual quantifiable outcome  – in this case, achieving that 12-month goal, or the vision you set out for yourself – and the remaining 50% is on identifying a lesson or skill learned in pursuit of that quantifiable goal, that you can apply to your business to improve your results long-term.

For example, let’s say you set out to make $100,000 in the first 12 months, but you only made $65,000. On the surface, that’s a failure, because you set out to achieve one goal and you only completed 65%. So I guess it’s not a failure, I guess it’s a D, if we’re going by the grade school grading curve. That’s if you look at it through the lens of 100% of the goal’s success is based on actually achieving the quantifiable outcome. But if you apply the 50/50 goals concept, you say to yourself “Okay, so I’ve made $65,000 this year, which is not what I wanted to make. However, what are some lessons that I learned, or skills that I’ve obtained in this past year that’s going to be worth more in the future than that $35,000?” One example would be experience. If you made $65,000, that means you actually did at least one deal, and since it was your first deal, you likely learned a ton of things from just going through that first process of underwriting, submitting an offer, doing due diligence, raising money, and closing. In my opinion, that’s worth way more than $35,000.

At the same time, through that experience, think of all of the different lessons you learned – the ways to improve your underwriting, your due diligence, the way you identify deals, the way you talk to investors, the relations you actually created with new investors that you brought on, the team members that you found throughout that time, or the relationships that you strengthened with your investors and your lender for actually completing a deal, and your broker for closing on the deal… And then all the new skillsets you learned, as well. All those things combined are worth way more than $35,000 in the long run, because they’re gonna make you countless hundreds of thousands, maybe millions of dollars in the long run if you stick to it, but the only way to stick to it is to be able to pull out the benefit and not get discouraged because you failed to meet that $100,000 goal.

Essentially, what this does is it automatically reframes your mind to the glass half full versus glass half empty mentality. And in fact, it’s more of a glass is overfilling mentality, because it forces you to focus on the good, and the positives, and not on that minor negative of not achieving your goal in 12 months, because 12 months is just a small percentage of your life and your business.

At the same time, in tandem with this concept, you need to reframe your mind, especially for apartment syndications, you need to reframe yourself to think in terms of decades, and not months or years. Yes, it’s important to make sure you’re hitting your monthly goals and your yearly goals, but what’s more important is to make sure that you’re acquiring the experience and the skills, and you’re forming new relationships that will help you be successful for decades to come in the future. When you look at it that way, again, it forces you to look at things through this 50/50 goal lens, because in 10 years from now if you’re making 10 million dollars a year and doing hundred million dollar deals, then you missing a goal of 10 years ago by $35,000 isn’t gonna mean anything at that point. So it forces you to think “Okay, well what lessons and skills that I learned that I can apply to my business in the future to help me achieve my future goals?”

So that second 50% of the goals is similar to the compound interest effect. You’re going to earn more money in the long-run by applying these concepts, but also identifying all of those lessons and skills, that you would if you actually hit your goal. So again, all those lessons and skills you learned will make you more money in the long-run than that $35,000 gap. Maybe you  found a big-time investor on one of your deals that you didn’t know; maybe they invested 50k in your first deal in that first year, but then they came back and said “Oh, you did a really good job on that first deal, and now I’m willing to invest 10 million dollars in your next deal.” That’s not accounted for in that $65,000 you made that year.

Maybe you found an amazing five-star property management company who helps you cut certain expenses in the future that make or break a  deal when you’re underwriting it. Or maybe based off of a specific deal that you bought that made you that $65,000, maybe it’s a smaller deal, but you identified a specific value-add opportunity that you hadn’t thought of before, whether it was operational or a physical improvement of the property, that you now are going to apply to a much larger property that helps you win the bid and buy the deal.

Overall, this 50/50 goals concept keeps you motivated in the face of failure. Because if you have two investors who set the same goal and achieve the same less than desirable outcome, and one quits and one improves, what’s the difference between those two? Well, one person quit because they didn’t hit their goal fully, and since that’s what they’re basing their success on, in their minds they’re a failure, and over time that wears on you until they quit… Whereas the person that improves and does better after failing is the person who has this 50/50 goals concept in mind, and instead of focusing on that $35,000 gap, they focus on the lessons and new skills that were learned.

I know I talked about that 50/50 goals concept for a while, but it is a very powerful mindset shift that you can apply to your apartment syndication business, but it’s something you can also apply to your day, or your week, or your month, or you can apply it to your relationships, to working out…You can apply it to anything where you set out to do something and don’t necessarily do exactly what you wanted to do, which usually is the majority of the things we do in our lives, to be honest.

So before I end, I wanna just offer one extra piece of information on goal setting, because this concludes part two of the Ultimate Success Formula podcast series where we focused on goals… This is another Tony Robbins resource, and it’s going to be about how to follow through and persist with your goals. It’s a free document that you can download in the show notes, or at SyndicationSchoo.com. In this document, you will watch a 35-minute video of Tony Robbins, and then you will perform the four-part goal-setting exercise that he lays out at the end of the video. It’s kind of similar to the “Gotta get yo mind right”, but a little bit different, and it’ll have you think about your Why a little bit differently.

First, I recommend completing this for your syndication business, but again, similar to the 50/50 goals concept and the Ultimate Success Formula in general, you can use this for other goals as well – your personal goals, your fitness goals, your relationship goals… Because at the end of the day it’s all connected. If our personal life’s in shambles, we’re really out of shape and we’ve got really bad relationships, then we’re not gonna be able to allocate enough focus to our syndication business. That’s why it’s important to have your personal life, to be in shape, and to make sure you’re constantly working on improving your relationships, because that will ultimately leak over into your syndication business.

That concludes part two of the Tony Robbins Ultimate Syndication Success Formula. In this episode you learned how having a vision creates a strong emotional attachment to your outcome, and you performed an exercise to help you formulate this vision. Then I gave you some examples of how to solidify this vision and your 12-month goal in your mind, and then we had a conversation about the powerful 50/50 goals reframing concept, where 50% of the goal’s success is based off of achieving the actual quantifiable outcome, and the other 50% of the success is based on identifying areas that you learned the lessons, or you learned a new skillset, or something beneficial that came out of that process of striving to achieve that quantifiable goal.

To listen to part one, where we went over setting the outcome and knowing your outcome, and to listen to other Syndication School series about the how-to’s of apartment syndications, and to download this free document, the Tony Robbins goal setting exercise document, as well as all other free documents, visit SyndicationSchool.com.

If you enjoyed this episode, please leave us a review on iTunes, and thank you for listening. I will talk to you next week.

JF1507: How To Break Into The Apartment Syndication Industry Part 2 of 2 | Syndication School with Theo Hicks

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Here is part two of How to Break Into The Apartment Syndication Industry. Today Theo is telling you how to do the things he mentioned yesterday. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, which is a free resource focused on the how-to of apartment syndications. I’m your instructor, Theo Hicks, as always. Each week we will be airing a two-part podcast series about an aspect of the apartment syndication investment strategy, and for the majority of these series we will also be offering a free document or spreadsheet or presentation that you can download for free, that will be based off of the podcast discussion. All of these documents and all of the previous and future Syndication School series can be found at SyndicationSchool.com.

Right now you’re listening to part two of a two-part series entitled “How to break into the apartment syndication industry.” In part one we discussed the catch-22 of becoming an apartment syndicator, which is the fact that in order to become a syndicator, you need to have experience and skillsets in order to execute an apartment syndication business plan… But one of the only ways to gain those skills and expertise and experience is by actually doing an apartment syndication, so how are we supposed to enter the syndication field if we’ve never done a syndication before?

In order to overcome this catch-22, we went over the first four ways to break into the apartment syndication industry without apartment syndication experience, which were 1) have a strong business background; 2) have a strong real estate investing background; 3) become a commercial real estate professional (a commercial broker, a real estate attorney, an analyst for a real estate syndicator etc.) and 4) start your own leadership platform that is interview-based and focused on apartment syndications.

Now, in this episode, in part two, you’re going to learn five more ways to break into the apartment syndication industry. So by the end of the show you’ll have a total of nine different strategies for getting your foot in the door, either with an apartment syndicator or as an apartment syndicator. Then to conclude the episode, we’re going to discuss the consistent themes between these nine strategies.

Again, as I mentioned in the last episode, we will describe the five different strategies. First we’ll describe the strategy and what it actually is and how to do it, then we’re going to discuss the skills you’ll obtain by doing that strategy, that will help you become a syndicator or work for a syndicator, and then finally, we’ll have a conversation about how long it will take you to likely break into the actual syndication industry based off of that specific strategy.

Number five, which is probably the strategy that requires the least effort on your part as regards to getting your foot in the door… Actually, doing a syndication is going to be a hard work regardless of how you actually break into the industry… This one’s probably the easiest from an effort standpoint, and that’s just hiring a mentor, so doing a paid mentorship.

This is when you find a mentor who is an apartment syndicator, but will likely have a mentorship program already. You pay them, and they will show you how to do a deal. Now, how do you actually find a mentor? Well, the best way, and really one of the only ways to find the right mentor is through referrals. You need to find someone who is in the apartment syndication field, maybe a syndicator who has just started out, and ask them for a reference for a mentor.

Another method of finding referrals if you don’t know anyone would be to attend different conferences. Look up any multifamily conferences in your area or across the country and attend those, and you’ll find plenty of people who are investing in apartments as syndicators. Someone should have a reference for you.

You can attend different seminars or meetup groups or REIA meetings in your local area and seek out an apartment syndicator and ask them if they have any references for mentors. Now, some of these people you actually talk to might be mentors themselves, so that’s technically not a referral… But you can use them as a mentor, but make sure you qualify them first, and find other people who used them to see how the program works based off of what you should and shouldn’t expect from a mentor, which I wanna go over here in a second.

Other ways to find referrals would be through Bigger Pockets, so just posting on Bigger Pockets and explaining that you wanna become a syndicator, and if anyone has any references for mentors. Or you just search on Bigger Pockets for other people who did the same thing.

Another unique strategy would be to listen to different real estate podcasts or watch different real estate YouTube videos, or read different real estate blogs that are either conducted by an apartment syndicator or are interviewing syndicators, and reach out to those people and ask them for a mentor referral.

Again, they themselves might also be mentors, and if that’s the case, make sure you apply what I’m going to discuss about what you should and shouldn’t expect in a mentor in a few seconds.

Something else you could do is you could search different social networking sites for apartment syndicators – Facebook, Twitter and LinkedIn – and reach out to them to see if they have any mentor referrals.

Again, how you find a mentor – the only way and the best way to do it is through referrals, because that’s really the only way you can know for certain that it’s a good mentor, and I just gave you a bunch of different ways to actually find this person. I would pick a few, start there, try it for a couple weeks, see if you find anyone, and if not, try another strategy until you find a candidate.

Now, once you find a candidate, since they were referred to you, there is some credibility that comes from that, but you’re still going to want to evaluate their program and they themselves in order to determine if they are the right fit for you. You should do that by first understanding what to expect and what you actually want from a good mentor. There’s four different things.

Number one is you’re gonna want expertise. This person needs to have a successful track record and be active in the apartment syndication field, but also doing exactly what it is you wanna do. So if you wanna be a value-add syndicator, then they should be a value-add syndicator themselves.

You’re also going to want someone who provides a do-it-yourself system. That is a system that tells you how to do what they do, and then you go out and act on that system in order to replicate their success. Third, you want an ally that you can call on. This is someone that you can call and know and not feel guilty about only talking about yourself and not them. If you talk to your friends or your business partner or someone you have a relationship with, you kind of have to talk about them too, whereas with a mentor, since you’re paying them, you don’t have to worry about that; you can talk about whatever you want, whether it’s related to the next step in the syndication process, or something going on in your personal life.

And then lastly – and this is key – is you want connections. The reason why you want someone who has a successful track record, is active and is doing the same strategy that you want to do is because they’re gonna have all the connections you need. They should provide you with a property management company, they should provide you with a broker to reach out to, attorneys. They might even have access to a potential passive investor for your deals. So they should have connections.

Now, the two things that you should not expect from a mentor is going to be a knight in shining armor; you’re not gonna hire a mentor and then magically have a syndication deal done or in your lap tomorrow. If you actually find a deal, you don’t want a mentor that’s going to do everything for you.

In a similar note, you don’t want a done-for-you program. You want that do-it-yourself program. So you don’t want the program where they essentially do everything for you and you just pay them and you get a deal… Because 1) that’s probably too good to be true, but 2) more importantly, you’re going to be reliant on that person forever… Because if you are not using their do-it-yourself system and actually acting on it yourself, or you’re not getting connections from them but actually talking to these people yourself, then you’re not gonna know what you’re doing… And if you don’t know what you’re doing, then you aren’t gonna be able to do it by yourself, and you’re always gonna need that mentor, and you’re gonna be paying them forever.

So that’s what you should expect and want out of a mentor. When you’re talking to a prospective mentor, make sure they meet those qualifications. Now, the benefits of the mentor when it comes to the types of skills you’ll obtain that you can apply to syndications is really everything. With a paid mentorship, they should have resources that teach you how to do all aspects of the syndication process. You should understand the acquisitions phase, you should understand how to raise capital, and you should understand how to asset-manage a deal.

Now, all you need to do is go out there and actually act on that strategy, but you’ve got a huge head start, because you don’t have to eliminate or at least reduce that trial and error period. And then secondly, you’re also going to have an advisor that you can call upon whenever you have any issues or questions. So since they’re active and successful, and have ideally been doing this for a while, they should understand the common mistakes that syndicators make, because they probably made them themselves… So they could 1) provide you with resources that tell you how to avoid those mistakes, but if you do happen to make a mistake or are faced with a challenge, rather than having to face that on your own, you are paying someone to face that challenge with you. And again, they likely know what to do to overcome that obstacle, and they can tell you what you need to do.

Another advantage is that you are going to have an additional level of trust with your passive investors, because when you are talking to them, you can let them know that you have an advisor on your team. For example, let’s say Joe is your advisor – you could say “Well, I’m a part of a program that is managed by Joe Fairless, who has been a syndicator for many years now, and controls over 400 million dollars in apartment syndications, is tapped into a huge network of apartment syndication professionals, and he will be a part of the team as well.”

So you’re essentially leveraging (in this case Joe’s) your mentor’s experience in order to gain additional trust in the eyes of the investors. Because if you’re by yourself, investors might or might not trust you, depending on if they know you or not… But if you tell them that you’ve got an advisor who’s done hundreds of millions of dollars in deals, then they are going to trust that you’re gonna have the ability to preserve their capital and meet their return projections because of your team.

Then lastly, as I mentioned, what you should expect out of the mentor are the connections. When you have a mentor, you don’t have to worry about finding team members. You shouldn’t have to worry about finding team members yourself. They should provide you with connections, actual people, or at least provide you with a system that you can use to find team members in your particular market.

Overall, the advantage of the mentor is that all the different skills that you need to acquire in order to be a successful syndicator are going to be available to you because the mentor should provide you with a system that tells you exactly how to acquire those skillsets and how to identify the skills that you do have. And if you don’t have a certain skillset or aren’t gonna be able to acquire that skillset in the right amount of time, they should also have a proven system for how to find the right connections so you can offset your lack of experience and lack of skills with the right team members.

Now, in regards to timing, technically you could hire a mentor tomorrow if you had one in mind, but it’ll probably take a few months to actually find one, and then depending on how much their program costs, it might take a couple of months up to a couple of years to save up money to actually afford the program. Then once you’re in the program, it really depends on the offering.

Some mentors might say it’ll take you 12 months to do your first deal, others might say it might take you five years to do your first deal. So the timing of when you actually do your first deal depends, but once you find the mentor and have the money, then you can get  your foot in the door right away. So that’s number five, a paid mentorship.

The reason why I focused on the paid mentorship so long is because it is the foundation of the next strategies I’m going to discuss. The rest of the strategies I’m going to discuss involve working with a syndicator. Most mentors – or actually all mentors – should be active syndicators. If you can’t afford the mentorship or you want to go a different route, another approach – which is number six – is to intern for an apartment syndicator for free. So you’re not paying them, they’re not paying you; you’re doing it for free.

In order to find this person, follow the similar approach that you would to finding a mentor: through referrals, attending conferences, seminars and meetup groups, searching on Bigger Pockets, listening to podcasts, watching YouTube videos, reading blogs, searching on different social networking sites like Facebook and Twitter and LinkedIn… There are a lot of different ways to actually find this person.

Now, for the mentorship option you’re actually paying them money, so that’s how you’re adding value to their business, and that’s why they’re choosing you, because you’re paying them. For this strategy, since you’re not paying them, you have to ask yourself — or a question that you’re probably asking yourself is “Why would they hire you, as opposed to the tens or hundreds of other people who are reaching out to intern for them?”, or as opposed to people who are willing to pay them for  a mentorship?

For example, Joe gets multiple e-mails from people who are interested in interning for them… Their messages will be very thoughtful, and very long, and they’ll describe their background, but the gist of the messages are usually them saying that they’ll work for Joe for free, or that they are willing to work for Joe, “Please let me know what I can do to help your business.”

Now, if you find a syndicator who’s just starting out, that would probably work, because who would turn down free labor? But once you gain experience, once you become a syndicator at Joe’s size, then simply offering to work for free isn’t enough of a value add, and it’s not worth taking that risk and extra time investment to train this person, tell them what they should do etc.

Then for the second most common message, which is when people reach out and they ask “Is there anything I can do for your business?”, again, the problem with that is that the syndicator is not gonna know what your abilities are, so they’re gonna have to figure out what you can do, or they’re gonna need to tell you what to do, and again, that’s going to take up time. And for a starting syndicator it could work, but if you wanna find the right syndicator, who has a strong track record, those two strategies aren’t gonna work.

So what can you do instead? Well, rather than offering to work for free, or rather than saying “Hey, what can I do for you?”, instead offer something more than your free labor. The exact strategy of how to do this is to conduct research on that person’s business — again, this entire strategy is as powerful as you are creative. Step one is to conduct research on their business. That doesn’t just mean going to their website and reading what they do, because their About Us section is gonna be very similar to anyone’s About Us section; it’s not gonna be specific enough. So listen to their podcast, or read their blog, visit them at a meetup group, maybe try to take them out to coffee, try to get to know them on a more personal, specific level.

The reason why you wanna do this is because you are trying to identify any need that they might have, even if it’s a need that they don’t know that they have… But identifying some sort of need that they have, so that when you reach out to them, you can offer to fulfill that need.

For example, let’s say you’re listening to a podcast by a syndicator, and they are expanding to a new market. What I would say to myself is “Okay, well, they probably need to evaluate that market. If they don’t live in that market, they might need someone to help them look at deals in that market, or they might need someone to bring them deals from that market.” Those are three things that you can do to help that syndicator fulfill their need.

So what you would do is you’d reach out and say “Hey Joe/Theo/syndicator, my name is Theo. I actually live in the market you’re expanding to, so I would be willing to do the boots on the ground market research; I’ll drive around to the different submarkets you’re interested in investing in, and I’ve already conducted a market evaluation report which I’ve attached to this e-mail. I’m also in conversation with brokers in this market, so if I find any deals, I’ll send them to you.” Boom.

Now, compare that message to “Hey Joe, I’m willing to work for you for free. Let me know if there’s anything I can do.” Huge difference. Something that I added to that example was instead of just offering to do something, I already did it, so I already conducted the market report and attached it to that e-mail. The entire idea behind this is to use your unique skillsets and creativity to proactively add value to the syndicator’s business in order to stand out from the sea of other messages that they’re receiving, and to show them that you’re willing to put forth effort and that you can actually add value to their business.

This strategy is really close to home, because this is exactly how I broke into the syndication business. I went to Joe’s meetup group, and he mentioned a need that he wanted help with the podcast. I told him – even though I had zero experience with podcasts – I’d help him out, and rather than just doing what he told me to do, I put together a business plan for how to expand the podcast’s reach. It included doing a newsletter, I logged every single review that he had, which was hundreds of reviews, and I categorized all of them based off of the type of advice or feedback that was offered, and gave some tips on what we could do to improve the podcast.

So I went above and beyond what Joe was asking, and because of that, three years later I’m sitting here talking to you, hosting an episode on Joe’s podcast.

What’s great about this strategy is that the opportunities are really endless. Once you get your foot in the door, even if you get your foot in the door as an assistant or bringing them a deal, or really anything… Once you get your foot in the door, then the opportunities are going to be limitless, and I could not have expected to be where I was a few years after meeting Joe.

So what’s really nice about this interning for free strategy is that it’s gonna be harder to actually do, but once you do it, the opportunities are really going to be limitless. And in regards to the actual skills that you’ll learn, you could learn one particular thing; maybe you just help them evaluate deals or find deals… Or you could learn the entire syndication process eventually, by working under them. It’s really depending on the role.

Now, in regards to timing, again, this is a very unique strategy, so it kind of depends. Maybe you find a syndicator who is willing to take you on as a free intern in a few months; maybe it takes a few years. This is a strategy that you should be implementing alongside another strategy. You shouldn’t be doing this by itself. Maybe you should be investing yourself, as well as working your way up through your company, and starting your thought leadership platform while reaching out to one syndicator a week, and offering to proactively add value to their business. So that’s number six – intern for an apartment syndicator for free.

These final three (seven, eight, nine), you could do by itself, or it could be something that you do in tandem with another strategy… Or these are three ways that you can proactively add value to that apartment syndicator’s business based off of your background.

Again, how you add value is based off of your creativity and your unique skillsets, but these are three specific examples that really anyone can do in order to add value to that syndicator’s business for free.

Number one is to find off-market deals for that syndicator. Figure out what types of deals they’re looking for, and then find them that deal and present it to them. For example, the types of deals that Joe looks for are properties that are built after the 1980’s, that are in or near a major city, that are over 150 units, and there’s an opportunity to add value. Now that you know that, if you find a deal and send it to Joe, maybe they end up buying that deal, and you can get your foot in the door that way.

In regards to actually how to find off-market deals – it’s not the focus of this podcast. We’ll have plenty of episodes in the future about finding off-market deals. But the benefits and the skills you’ll get – number one is pretty obvious, which is you’ll understand how to find deals, as well as evaluate these deals as they come in. You’ll also be able to make some money; you’ll either make a finder’s fee, or receive an equity stake in that particular deal.

So for the timing for the strategy, it’s probably gonna take you six months to a year to find your first deal, if you’re starting from scratch right now. So that’s number seven, finding an off-market deal and presenting it to a apartment syndicator.

Number eight is to get access to private capital. This is something that you either already have, or that you can work towards gaining, and focus 100% on that. Focus 100% of your energies on raising capital. When you do that, you can offer to raise capital for a syndicator’s deal.

Syndicators are always looking for capital for their deals, so if you can raise a couple hundred thousand dollars for investors deal, you can gain credibility in the eyes of those particular passive investors and future passive investors, because you have experience raising money and returning their capital, even if it’s not necessarily your deal.

You’ll also get your foot in the door with a syndicator, and have the ability to raise capital for future deals… But also, as you successfully raise capital for these deals and create a larger and larger investor database, then the goal would be to eventually partner up with someone who has operational experience and start a syndication business together. You would be the equity raiser and they would do everything else.

This is actually what my business partner and I are doing. He has raised money for some of Joe’s deals in the past, and I have the operational experience, so we’re partnering up. Again, he’s been raising money for a couple of years, but he’s got the credibility with his investors, and the credibility of success raising money, which goes a long way for both the investors and the various team members – the mortgage brokers and the real estate brokers – when you are looking to find deals and secure financing.

Again, for this strategy, the timing really depends on where you’re at right now. If you have access to zero capital, then it’s gonna take you some time to build up that network and then find that syndicator, and then actually raise money for one of their deals, and then build that investor database up before you can partner with someone else and start your own business. But if you have access to a lot of capital right now, then you could likely start your own syndication business. All you need to do is find that partner, which finding a business partner will be the subject of future episodes. Again, for this one, it kind of depends on where you’re at. If you have access to capital now, you should be able to break into the industry pretty quickly.

And then lastly, number nine is to passively invest in apartment syndications. You can break into the industry by passively investing in apartment syndications. Now, when you reach out to that apartment syndicator that you wanna intern for, that’s one way that you can add value to their business. You can mention that you have money to invest in their actual deal. Now, this probably isn’t the best way to become an intern, because it’s actually in the word “passive investor” – you’re gonna be passive, so you’re not gonna be involved in the actual operations of the business, or you’re gonna have trouble becoming an intern, because they have a lot of passive investors. It’s still worth trying, but in general, you can break into the apartment syndication industry by passively investing in a deal.

The benefits of this and the proven skills you’ll get by passively investing is 1) you can leverage that experience and credibility, because you had been a partner in a larger apartment deal. So if  you want to become a syndicator yourself, you can mention that you’ve invested in the past.

Now, that’s kind of indirect, because you’re not necessarily doing anything if you just invest your money and your only other involvement is collecting your checks… But there are ways to become more active, in a sense, in these types of deals.

For example, you’re going to get experience reviewing deals. Whenever the syndicators have a new deal, they’ll typically send out an investment package that highlights that major points of the deal, as well as goes into detail on the financials the property description, the market… So you can read through all those, and that will give you a very basic understanding of the evaluation process, how to underwrite deals, how to evaluate markets, things like that.

But then something else that you can leverage is the syndicator’s experience, only during the due diligence process. Once the deal is under contract, and before they close, when the syndicator is raising money from passive investors, they’ll typically do some sort of new investment offering call, where they’ll present the deal and then have  a Q&A session at the end. Any questions you have about the particular deal or their investment strategy, you can ask, and then you can also e-mail them questions throughout the due diligence period as well.

Now, I’m not saying you can e-mail them 1,000-word blog posts with 50 questions about the deal and then not invest, because it’s not gonna look very good, but asking him a handful of questions that are the most important to you is possible and is encouraged during the due diligence process.

Now, the timing for this strategy could be today. You could invest in a deal right now if you had the money and are on a syndicator’s list, or it could take a few years to become liquid enough to invest in a deal and to find the right syndicator and to find the right deal.

So that’s number nine, passively invest in apartment syndications, and just to summarize the strategies five through nine again – number five is to get a paid mentorship with an apartment syndicator. Number six is to attempt to intern for an apartment syndicator for free. Number seven is to find off-market deals for an apartment syndicator. Number eight is to raise capital for an apartment syndicator, and number nine is to passively invest in an apartment syndication yourself.

Before we end, I wanted to tie all the nine strategies together and just quickly go over three themes of these that are consistent between these three strategies. These are three things that you need to keep in mind when you are interested in breaking into the industry.

Number one is patience. For all of these strategies, I went over how long it would take to actually break into the industry once you’ve decided to actually act on that strategy, and once you’ve broken in, how long it will take to actually do your first deal. The majority of the strategies take at least a couple of years before you do your first deal.

Unlike wholesaling, where you could probably wholesale a deal in a week, or fix and flipping which you could do in a couple of months, apartment syndication is a long-term strategy. Even if you have all the education, all the experience today, it’ll still take you 12-18 months to do your first deal, because you have to find the right team; once you find the right team, you have to find the passive investors. Once you find the passive investors, you have to find the right deal. Once you find the right deal, you have to hopefully get your offer accepted, and once you get your offer accepted, you’ve got a couple of months of due diligence before you actually close. And then your work just gets started, because you have to actually implement the business plan and sell the property in order to conserve your investor’s capital and provide them with returns.

So since this is a long-term strategy, a lot of these strategies take a long time to come to fruition. You have to be patient.

The second theme is I went over nine different ways to break into the industry, and the best strategy for you is going to be based off of your background, your unique skillsets, and your willingness to put effort forth. You need to be honest with yourself, with your skills, with how much work you’re willing to put forth based off of past efforts, past businesses or past jobs, and figure out what’s the best approach for you.

If you’re a hustler and you’ve got a proven track record of being a hustler, then interning for an apartment syndicator might be the best strategy for you. But if you know you’re not necessarily a hustler, then maybe you should just pay a syndicator; that way everything’s not going to be done for you, but all the systems are there for you to use, and all you need to do is act on what someone else tells you to do until you build up the ability to do that yourself.

So be honest with yourself and based off of that assessment, pick the best strategies for you, keeping in mind that maybe the best strategy for you is not to become a syndicator right away. Maybe it’s to work for a syndicator, or work in another commercial real estate branch in order to build up the experience and education first.

Then the third theme between all of these is the idea of partnering up. For all of these strategies I went over the proven skills you’ll learn, and what you’ll realize, except for maybe the mentorship and the interning strategy, is that you do not cover all of the skillsets required to do a syndication. Sometimes you only learn one specific skill, sometimes you learn half the skills, but never all of the skills. So don’t try to do it all yourself. Find a partner(s) to complement your skillsets.

Also, don’t be afraid to give up a percentage of the general partnership to get the deal done. If you, for example, are the equity raiser and you can’t raise equity for 100% of the deal, don’t not do the deal because you’re not gonna get your full equity stake or ownership stake in the general partnership. Instead, network, find others to raise money, and offer them a percentage of the general partnership instead. Because as the saying goes, 50% of something is better than 100% of nothing.

Those are the three themes between all nine of the strategies, which is patience is key; two, be honest with yourself when choosing the ideal strategy, and number three, don’t be afraid to partner up with someone.

In this episode you learned ways five through nine for breaking into the apartment syndication industry, which was number five, paid mentorships, number six, interning for an apartment syndicator, number seven, find off-market deals for an apartment syndicator, number eight, have access to private capital, and number nine, passively invest in apartment syndications.

Then we went over the three main themes that are consistent between these nine strategies, which is patience is key, be honest with yourself when choosing the ideal investment strategy, and don’t be afraid to partner up.

This is the conclusion of part two. Make sure you listen to part one to hear the first four strategies, and you can listen to other Syndication School series as well, about the how-to’s of apartment syndications, and you can download the free documents we have available. All that can be done at SyndicationSchool.com.

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

JF1506: How To Break Into The Apartment Syndication Industry Part 1 of 2 | Syndication School with Theo Hicks

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Theo is back with another two part episode. Today he’s telling us about how we can break into the apartment syndication business. We’ve already heard about the experience we need or our team needs, now we’ll hear the next steps. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, which is a free resource focused on the how-to of apartment syndications. I’m your instructor, Theo Hicks. Each week we will be airing a two-part podcast series about a certain aspect of the apartment syndication investment strategy, and for the majority of the series we will be offering a free document or spreadsheet for you to download that will be accompanying the episode. All the documents and all of the past and future Syndication School series can be found at SyndicationSchool.com.

This episode is going to be part one of a new two-part series entitled “How to break into the apartment syndication industry.” By the end of this particular episode, you will learn the biggest challenges for breaking into the apartment syndication industry, and then we’re going to go over the first four ways to overcome these challenges and break into the apartment syndication industry and start your syndication career.

Now, what’s this challenge…? It’s kind of a catch-22, because on the one hand you need the experience and the skillsets to do an apartment syndication, but one of the only ways to get the experience and the skillset to do apartment syndication is to actually do one. So how can you do one when you need the other first? Well, one of the challenges that we discussed in the previous series was the education and the experience requirements needed before you actually become a syndicator, so make sure you check out episode 1499 and 1500 to learn about the experience and education requirements. But even if you have those covered, you still don’t have actual apartment syndication experience.

For example, we’re gonna break apartment syndications into three categories for the purpose of this episode. You have the acquisitions, you have the securing the capital aspect, and the asset management. Even if you have previous real estate experience, for example, or you were the CEO of a Fortune 500 company, you still don’t have experience finding apartment deals, or evaluating apartment deals, or submitting offers on apartment deals. Once the deal is under contract, you don’t know have the experience performing the due diligence to confirm your underwriting assumptions… And you probably don’t have experience structuring commercial debt with a bank or a mortgage broker.

You probably also don’t have experience finding passive investor and getting the trust from your passive investors so that they’ll invest in your deals. And then lastly, once you actually have a deal under contract should you get to that point, you probably don’t know how to implement an apartment business plan successfully.

So the short answer to how you break into the industry is that you will have to either a) work with an existing syndicator to get your foot in the door, or b) have enough experience and expertise to become a syndicator yourself. So that’s the challenge, that’s the catch-22, and in this part we’re gonna focus on four of the nine different ways to break into the apartment syndication business.

Now, how each of these strategies are going to be broken down is first, I want to provide a description of the strategy, of the way, and then I’m going to discuss these proven skills that you will obtain from this strategy that will also apply to the apartment syndication realm… And then lastly, I will discuss how long it’s going to take for you to execute this strategy before you are actually able to break into the industry.

Number one is to get or have a strong business background. What this means is that you’ve either started your own company – so you’ve started the company, you grew the company, you maintained it, and then maybe you eventually sold it, or you are more passive and wanna move on to apartment syndications. Or you  held a high-level position, probably a director a higher level, at a large corporation. For example, before Joe became a syndicator, he had worked his way up through a New York advertising company, and became the youngest VP.

Now, how does this help you with becoming an apartment syndicator? Well, if you’ve started your own company or if you’ve worked your way through a large corporation, some of the proven skills that you have — and again, the reason why they’re proven is because you’ve actually shown that you can implement these skills in order to either start your own successful company or to grow within an existing company.

So one, it’s project management. You understand how to manage projects from start to finish, which is going to be very helpful on apartment syndications. You also probably have a very good network of high net worth individuals, because if you are at a director level or higher, you yourself probably make a decent amount of money, which means you know other people who are also making a decent amount of money, and those people could be prospective passive investors in your apartment deals.

And then also, you’re probably very resourceful and have the ability to problem-solve, on your feet, and don’t get stressed out when you’re facing something new, which is going to be very helpful as an apartment syndicator. It’ll help you be able to find your team members, it’ll help you find deals, and it’ll help you find passive investors.

Now, what you are lacking if all you have is a strong business background is the actual real estate experience and the apartment experience… So you’re gonna need to offset that with a credible team. You’re likely gonna need to find a partner, ideally someone who has operational experience, which means they have some experience with the apartment transaction acquisition and management process, whether they bought apartments themselves or worked at another company that bought apartments. You’re also gonna need some sort of advisor or a mentor, and we’re gonna go into more detail on the advisor and mentor later in part two.

You’re gonna need a property management to oversee the day-to-day operations, and also a real estate broker to find the deals. But you yourself likely have access to private capital, and because of your network and your resourcefulness, you should have no problem finding these team members and gaining their trust because of your business background.

Now, what about the timing for this strategy? If you’re starting from scratch and you’re listening to this and you have no business background, it’s probably going to take you 5-10 years (or even more) in order to reach a high enough level in a business to have the proven skills that I previously mentioned. But the benefit is that once you actually reach that level, then you can actually become the apartment syndicators. You don’t have to worry about working your way up through another business; you have the skillsets to actually do it yourselves, as long as, again, you’re surrounding yourself with the right team.

So that’s strategy number one, which is go out there and start a business, or work your way up through an existing business, and then leverage those skillsets to start your own syndication business.

Now, on the other side of the coin is strategy number two, which is to get or have real estate investing experience. That means you’ve invested your own money in real estate in the past, and you were successful. By successful I mean that you met or exceeded your return expectations, which means you must have had return expectations upfront, and properly underwritten the deal. If you were able to successfully invest your own money and meet or exceed return projections, then you’ve likely approached the deal the right way and didn’t just buy it on a whim, or if you did evaluate it, evaluated it incorrectly.

Now, not all real estate investing holds equal weight when it comes to breaking into the apartment syndication industry. I would say that going from he least beneficial to the most beneficial would be starting with fix and flips, and then from there would be single-family rentals, and then next would be small multifamily rentals, so if you bought a multifamily building that was less than 50 units… And then the best real estate investing experience would be if you actually bought an apartment. If you’ve actually bought an apartment, then you are setting yourself up for success, but obviously, that would take a little bit longer… Whereas if you have some success in the single-family resident rentals, or fix and flipping, you’ve proven that you’re able to successfully do a real estate transaction, but you haven’t proven that you can replicate that success for a larger deal.

Now, what are the proven skills that you will have obtained from your real estate experience that will apply to syndications? Well, you’ve got your project management skills, of course, because you’ve taken a project from start to finish, or at least you’ve taken it from start to managing it and maintaining it in regards to rentals, but then more importantly, you actually have the real estate transaction and operational experience. You understand what it takes to put a deal under contract, you understand the due diligence process, the closing process, and you also understand how to manage the deal. Again, it might not be the same size as a larger apartment, but you still have a basic understanding of how the ongoing operations of real estate works.

You also have experience finding deals, which is gonna be very helpful when you’re running your syndication business. You’re likely a very resourceful person, and then of course, which is gonna be key for your passive investors, is the fact that you’ve shown proven returns. So you can say “Hey, I’ve found a deal, I underwrote it, and I projected to receive 8% cash-on-cash return each year, I held the property for four years, and I actually received the 10% cash-on-cash return. When someone who’s interested in passively investing hears that, he’s gonna be a lot more interested than someone who has never done a real estate deal before, or did a real estate deal and didn’t meet their return projections.

Now, the one thing that you’re likely going to be lacking if you just have real estate investing experience is the access to the capital and passive investors, because most of your relationships are gonna be with real estate investors, who are likely going to want to be more active… Because that’s what they do; they want more control over the process, whereas you’re looking for people that are mostly passive.

Plus, if you don’t have that business background, you may not have relationships with high net worth individuals. So, similar to what the person with the business background should do, you’re also gonna need to partner up and create a credible team. So you’re still gonna need the property management company, even though you might know how to do it yourself; you’re still gonna need their credibility, and you’re also gonna want their expertise so they can oversee the day-to-day operations.

You’re also gonna need a real estate broker, because they’ll help you find deals- again, even though you know how to do that yourself, and they’ll also help you with the due diligence and closing  and contract process for commercial real estate, which you might not have experience with. And you’re also gonna need that mentor of advisor to help you along the way. But this time, instead of getting a partner that has the operational experience, because that’s going to be you, you’re going to need someone who can raise money. You’re gonna need someone who has access to private money, or they themselves have a large net worth and a lot of liquidity, and they’re willing to invest in your company and receive a return while you do the rest.

Now, the timing for this strategy kind of depends on what the actual real estate investing strategy you pursue, but it’s going to take at least a couple of years; it might take five years, or it might take more than that before you have the proven track record and the skillset to transition to becoming an apartment syndicator.

So that’s strategy number two – to get [unintelligible [00:16:04].17] already have real estate investing experience, and use those skillsets to become an apartment syndicator and partner up with someone who has access to the capital you’ll need to buy the deals.

Strategy number three is similar to number two, but instead of being an actual investor, this time you’re going to get or already have commercial real estate experience. Not necessarily as an investor, but you will be working as a professional in the commercial real estate industry. Now, if you do this approach, you’re going to obtain some skills, really no matter what industry or what part of the commercial real estate industry you decide to work in.

Number one, and probably the most important, is going to be the network you’ve built. If you are working in the commercial real estate field, you’re going to know all the movers and shakers in regards to the various team members you’re gonna need to bring on – property managers, mortgage brokers, commercial real estate brokers… That’ll help you vastly when you’re attempting to put together your team.

Then also you’re going to have at minimum a basic understanding of the apartment transaction process. Unlike the person who has just general real estate investing experience, you’re gonna not only have an understanding of the actual real estate transaction process, but how that applies to commercial real estate as well.

And then thirdly, you’re going to be hyper-specialized and hyper-knowledgeable in a very specific part of the apartment syndication process. From there, you can figure out what team members you need to bring on to complement those skillsets.

Now, in regards to the different types of professions you can pursue, and the skillsets that come from those – number one, you can work for an actual commercial real estate brokerage. When you do that, you’re going to be hyper-specialized in how to find deals, because that’s one of the main jobs of brokers – they’re constantly pursuing different lead generation strategies in order to find deals that they can market to their investor base. So you’re gonna know exactly how to find deals.

You might also have experience actually evaluating the deals. Maybe your responsibility is to find them, but maybe your responsibility is also (or instead) to evaluate the deals first, put together a proforma, figure out what the value-add opportunities are, and you’ll do rental comparable analysis to figure out what the rents are going to be, visit the properties in person when you’re giving tours… You’re gonna have a very good understanding of the evaluation process before a deal goes under contract.

And then finally, you’re gonna have an understanding of the actual due diligence process, because as a broker, you’re gonna be working with whoever you’re representing while they perform your due diligence between the contract and the close.

So as a commercial real estate broker or working for a brokerage, you’re gonna have a very good understanding of the process from finding the deal to closing on the deal. But you’re gonna be lacking in the asset management and the passive investor front, so  you’ll need to find other people to help you with that.

Another profession you can go into is to become or work with a lender or a commercial mortgage broker. If you do that, you’re gonna be hyper-specialized in evaluating deals, you’re gonna know exactly how to underwrite deals, what to look for, and any of the common pitfalls that investors fall into. You’re gonna know exactly how to overcome those, because you’re gonna be underwriting deals constantly.

You’re also gonna understand the due diligence process, because the lender or mortgage broker is heavily involved in the due diligence process, because since they’re the one providing financing, they have to make sure that this property is up to par.

And then you’re also gonna have a good understanding of the debt structuring of the deal. You’re gonna understand based off of the business plan and the type of deal, what’s the best debt for that specific project. But of course, you’re gonna be lacking in the finding the deal department, as well as the ongoing asset management.

Another profession would be to work for, or start your own, or work in a property management company. A property management company that has experience repositioning large apartment deals for example, or whatever the strategy that you are interested in doing, they have experience managing those types of apartments.

Now, by being a property management company, you’re gonna learn what those first two professions didn’t, which is the ongoing asset management. So you’ll understand what needs to be done after the deal is closed, and you’ll likely have some experience – depending on the company you work for, or if you set your own company, the services that you offer – some understanding of the due diligence process, because as a syndicator, you’re going to want your property management company to sign off on your budget before you put the deal under contract. [unintelligible [00:21:30].09] check your assumptions, but then also as due diligence reports come back and your assumptions are updated, you want your property management company to confirm those… And if you’ve got a really good property management company, they’ll actually help you obtain those reports and help you with the inspections, and things like that.

But again, you’re not gonna have all the skills. You’re gonna need to have someone help you find deals, you’re gonna need to have someone help you underwrite and evaluate these deals, as well as source the capital for the deals.

Another profession that you can enter is you can actually work for a commercial real estate investment firm. This would be you working for an actual syndication business. If you do that, your proven skills and the types of things that you can do can be one specific thing; you can just be, for example, an analyst, and evaluate deals… But eventually, you can maybe work your way up to becoming an asset manager, or a director of acquisitions, or a partner, someday, in that company.

That profession kind of just depends on your work effort and the company you join, and things like that. What’s great about that strategy, again, is that you could likely learn all aspects of the syndication process. You might not be an expert on all of them, but you’ll have a better understanding of all of them, which is gonna be very helpful if you wanna launch your own business someday.

Another example – and I kind of already talked about this – is you can become an analyst. You can be an analyst at a brokerage, for a mortgage broker, for a commercial real estate firm… Heck, maybe even for a property management company. And as an analyst, you’re likely gonna be focusing on evaluating deals, so the underwriting, which is also a very important aspect of the syndication process.

For example, I know that Joe and his company, they brought on some analysts that they found at a university in California, and they focus on underwriting deals for them… And if they underwrite a deal that Joe eventually closes, then they get paid  a flat fee or receive an equity stake in that deal. So if you’re in college, becoming an analyst for a company could be a great way to break into the syndication industry and work for an experienced syndicator and work your way up through there.

And then lastly, and this is probably not gonna apply to many people, but you could technically become a real estate attorney; so get your law degree and become an attorney, and maybe you’ll be able to partner up with a syndicator and just be their attorney, but more likely you’ll work with multiple syndicators and help them put together the legal documents during the contract to close period, and then maybe also when they’re just putting their partnership together.

So the timing for working in the commercial real estate industry, again, kind of depends, because those are all very different, and if you wanna become an analyst, if you’re in college right now, you can probably do that the next couple of months; but then if you wanna become a real estate attorney, that’ll probably take you for years at least.

And then once you actually enter this field, you’ll probably either be in the field for another 3-5 years to gain experience and become super-specialized and an expert in that specific part of the syndication process. Then you might be able to partner with syndicators directly, or you might be able to transition into becoming a syndicator yourself.

So for this strategy (number three) getting or having commercial real estate experience, it’s kind of all over the place. You could break into the industry as quickly as tomorrow, or it might be a multi-year strategy, depending on where you’re currently at.

Strategy number four, which is the last one I’m going to discuss in this particular episode, is going to be to break into the syndication industry by creating a thought leadership platform.

A thought leadership platform is what you’re listening to now, for example. It could be a podcast, it could also be a YouTube channel, or a blog, or a meetup group, but the whole point behind it is that it’s an interview-based thought leadership platform that focuses on apartment syndications. Now, you could have absolutely zero experience in real estate or business right now, and start a thought leadership platform. So this is one of the only strategies that you can literally do right now, today, as you’re listening to this.

A lot of future Syndication School episodes will be focused specifically on how to create a thought leadership platform, so we’re not gonna go over that today. But once you do start your thought leadership platform, the skills you’re going to acquire are, number one, you’re going to be able to test out the waters and see if apartment syndications are actually for you, because you’re gonna be interviewing different syndicators and different professionals that work with syndicators, and you’ll get a basic understanding of how the process works, and make sure that it’s the right fit for you. And if it is, you can also figure out which aspect you wanna be involved in. Do you wanna start your own syndication business, or do you wanna start off by becoming a broker, for example, and you’re working your way up from there? Again, it depends on your background.

If you have a strong business background, then you could become a syndicator. But if you’re what I mentioned in the beginning of this step, which is you have no experience in anything, then you’re likely going to want to use one of the other strategies.

You’re also going to get an education, and it’s gonna be a very customized education, because you’re deciding not only who to interview, but what questions to ask during the interview. So if you think about it, if you do one podcast interview a week, for example, you’re gonna be talking to 52 different apartment syndication professionals a year, which is 100 every two years, or 150 every three years. That’s gonna be a lot of information.

On that same note, if you’re talking to that many apartment syndication professionals, you’re also going to have a very strong network. So once you are ready to either launch your own business or join another commercial real estate professional, you’ll have a lot of contacts to reach out to, who already know not only who you are, but they’ve actually spoken to you before in the past.

Also, from a networking perspective, since you are talking to other apartment syndication specialists, and did a podcast with a large audience, and you are hopefully letting people know that you are in the process of launching your syndication business or are interested in doing it, you could also start to be contacted by potential passive investors. These are people who are interested in investing in your syndication, which again, is going to be helpful when you’re launching your own business, because that’s how you fund the deals.

And then lastly – and this is something which is going to address one of the major challenges you’ll face when raising money, which is going to be your passive investors actually trusting you… Because people don’t invest based off of the amount of returns they get. They invest based off of if they trust the individual to provide them with returns.

That is the personal connection that comes from having a thought leadership platform. You’re not necessarily talking to these people one on one – by “these people” I mean potential passive investors, but by them listening to you talk for an hour a week for a year, you’re gonna create an existing personal connection with that person that you wouldn’t have been able to otherwise.

So rather than the first time they’ve heard your voice being on the phone when you do a prospective investor call, instead they’re going to have heard you at least once before.

Me and Joe have talked about this on this podcast before, how Joe will hop on an investor call and they investor will mention that they feel like they already know Joe, and that they’ve been friends for years, because they’ve been a listener of the podcast.

So the thought leadership platform allows you to network with these types of investors, and even team members, and form this personal connection while you’re not actually in front of the person. So you’re able to leverage your time more effectively, because you could be sleeping and networking with someone in Australia, who might invest $100,000 in one of your future deals.

In regards to timing, for the thought leadership platform, again, technically you could start the thought leadership platform right after this episode ends, or at least start the process, but you’re gonna need to have the thought leadership platform live for at least a few years. It could be as low as six months, but most likely you’re gonna have to be recording episodes for a year or two before you build up the network and the education and the personal connection before you can move on to the next step, which would be you can either become a syndicator yourself, but you’ll likely need to do that in tandem with one of the other strategies… For example, while you are doing your thought leadership platform for two years, you could invest in a couple of deals and work your way up through your corporate job.

Or you can keep an ear out when you’re talking to actual apartment syndicators or other apartment syndication professionals, and try to work with them, work in their business, become an intern for them, see if they have any job openings so you can get your foot in the door.

Again, similar to the working in a commercial real estate profession, when it comes to the thought leadership platform, the opportunities are really endless. It just depends on the types of conversations you have and how resourceful you are.

Those are the first four ways to break into the apartment syndication industry. Again, those are to:

1) Get a strong business background

2) Get a strong real estate investing background

3) Get commercial real estate experience, so become a commercial real estate professional

4) Start an interview-based thought leadership platform that focuses on the apartment syndication field.

Those are the four things we learned, and in the beginning of the episode we talked about the catch-22 of becoming a syndicator, which is you need experience to become a syndicator, but the best way to get experience is actually be a syndicator… So the best way to overcome that challenge is to implement one of these four strategies that I’ve mentioned, or one of the next five next strategies that will be discussed in part two, which you can listen to tomorrow.

We will also in that episode discuss the three major themes that are consistent between these nine strategies discussed.

Thank you for listening. To listen to other Syndication School series about the how-to’s of apartment syndications and to download the free documents that we have for the majority of those episodes, be sure to visit SyndicationSchool.com.

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

JF1500: Are You Ready To Become An Apartment Syndicator? Part 2 of 2 | Syndication School with Theo Hicks

Listen to the Episode Below (30:58)
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For part two of Are You Ready To Become An Apartment Syndicator – Theo will be telling us about the education side of doing your own apartment syndication. You’ll need to know the lingo and be able to talk the talk as well as walk the walk when dealing with brokers, lawyers, investors, and everyone else you’ll cross paths with in this business. Theo has 4 ways you can obtain the required education in order to do your own apartment syndications. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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For a free list of all important apartment syndication terms, click here. Or http://bit.ly/apartmentsyndicationterms


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Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free series focus on how to of apartment syndications. I am your instructor, Theo Hicks. Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of this series we will be offering a free resource document or spreadsheet for you to download for free. All  of the documents and all of the episodes can be found at SyndicationSchool.com.

This episode is part two or the two-part series entitled “Are you ready to become an apartment syndicator?” In part one, which was yesterday’s episode, you learned the experience requirements needed before becoming an apartment syndicator as it relates to business and real estate. And to do so, you answered a list of questions and you gave yourself a rating of 1 through 10 based off of your real estate and business background. If you were a five or higher, you are ready to start the syndication journey. If you are four or lower, then you need to spend a couple of years focusing on building a stronger real estate and business background. If you’re a 1 through 10, regardless, this episode will go over the second thing needed before becoming an apartment syndicator, and that’s education.

In the previous episode, when we had a conversation about experience, the reason it was important is because when you’re talking to various team members when you’re in the hiring process, or when you’re talking to potential passive investors, one question they’re gonna ask  you is “What’s your background?” They’re gonna wanna know what your real estate background is and what your business background is, because depending on what you’ve done in the past, they will or won’t have confidence in either investing with you or becoming a part of your team.

Assuming you pass the experience test, another thing that you’re going to need, which is kind of obvious, is an education… Because when you are talking to these team members and passive investors, once you pass that initial smell test, when they’re asking you questions about your investment strategy and what you plan on doing, if you don’t know how to talk the talk, then they’re gonna know that you are not ready to become an apartment syndicator.

For example, when you’re talking to real estate brokers, they’re gonna ask you what your investment criteria is, because that’s how they are going to send you deals. If  you don’t know what investment criteria means, or what the different components of your investment criteria are, then you’re not gonna sound very smart and they’re not gonna be able to send you a deal. And if you just say “I want any deal”, then that also shows a lack of experience.

Also, when you’re talking to attorneys and mortgage brokers, they’re gonna ask you how you plan on structuring your partnership with your limited partners, and they’re gonna ask you what’s the return structure, what’s the preferred return offering, what’s the profit split, things like that… So if you don’t know what those terms mean, you’re not gonna be able to answer that question.

At the same time, your passive investors may ask you any question they can think of, and it’s gonna involve using certain terminology that is specific to apartments and apartment syndications… So overall, in order to effectively communicate with team members, you need to know the lingo.

In this episode, I wanna go over four ways that you can obtain this apartment syndication education. These aren’t the only four ways, but these are the four main ways, and the four best ways to get educated, as well as cover other aspects of the apartment syndication checklist as well.

The first one, which may sound boring to you, but needs to be done, is you need to memorize the important terminology. This is a must. This is something that everyone who wants to become an apartment syndicator has to do. This is the first thing that Joe has his consulting clients do, and in fact, this is the first thing that Joe did himself. When he was interested in becoming an apartment syndicator, he took all the important terms and created flashcards, and carried those flashcards with him wherever he went. When he was taking the L train to work in New York, he had his flashcards. When he was reading different books, he used the flashcards as bookmarks, so that whenever he opened up the book to start reading again, right there was the flashcard in order to learn the apartment syndication lingo.

Now, I’m not gonna go over every single term on this episode, because it would be too long and it would probably bore you to death, but the free resource we’re going to give away with this podcast will be a list of all the important syndication terms. Go to SyndicationSchool.com, and under this specific episode you’ll find a link to download all of the important apartment syndication terms.

Now, I will however on this episode go over a few of the top terms that you must know for apartment syndications, and that are not necessarily related to other non-apartment syndication investment strategies. If you’re a fix and flipper, a wholesaler, a single-family rental investor, or even a smaller multifamily rental investor, these are terms that you might not necessarily know or have heard before, but that you need to know when having conversations with team members and passive investors.

The first one probably the most important one is going to be internal rate of return, or IRR. In most investment strategies, the return factor that’s used would be cash-on-cash return for rentals, or for fix and flippers I guess it’s just a specific “I want to make $15,000 per flip.” For apartment syndications, the important return factor is the internal rate of return.

The internal rate of return is a rate that accounts for the time value of money. When people are investing in apartment syndications, they don’t want to just know what the cash-on-cash return is going to be, because the cash-on-cash return for one year is different than the cash-on-cash return for ten years. So if I make $100,000 in one year, versus $10,000 a year for ten years, the actual value of that money because of time is going to be different, with the one-year $100,000 being worth more than the 10 years of $10,000/year. So that’s what the internal rate of return is.

Usually, a passive investor is going to have a specific IRR target in mind, which means that you as an investor need to know how to calculate the IRR for your deals. It’s a very complex formula typically to calculate the IRR. You just use the Excel formula “IRR”, and what you need is the initial investment and the annual cashflows, plus the profit at sale. That will determine the IRR. And again, if an investor makes $100,000 in two years, that IRR is gonna be much higher than if you make $100,000 in ten years, because of the time value of money. So that’s one important term that you need to know, internal rate of return.

Another important term – or, I guess, terms, are the occupancy rates. For smaller multifamilies or for rentals in general, the occupancy rate that most investors focus on is the physical occupancy rate. That is the rate of units that are occupied. If you’ve got 100 units and 90 are occupied, then your physical occupancy rate is 90%.

Now, the occupancy rate that matters more for apartment syndications is going to be the economic occupancy rate. If you have the same property,  with 90 units occupied out of 100, your physical occupancy rate is 90%, but your economic occupancy rate is not necessarily going to be 90%, because it is the rate of paying tenants, not just the rate of tenants who are there. For example, if those ten units that are occupied are all your highest grossing units, then your economic occupancy rate is gonna be lower than 90%. If 10 of those 90 tenants aren’t paying rent on time, or not paying enough rent, then your economic occupancy rate is gonna be lower than the 90%.

Essentially, you figure out how much rent you should be collecting if the units were 100% occupied, and you need to determine how much rent you’re actually collecting, and you take that number of how much rent you’re actually collecting, divide it by the gross potential rent, and that is going to be your economic occupancy rate. Again, that’s important, because if you have 90 units occupied out of 100, and you say “Oh, well I’ve got 90% occupied”, whereas in reality if those tenants aren’t paying and the units that are vacant are higher in rent, then your economic occupancy rate, which means the amount of money you’re actually making, is not reflective of that 90% number. So those are the two other important terms to understand.

These next three are going to relate to when you’re having conversations with mortgage brokers or with lenders, and when you’re trying to underwrite your deal. This is the third term I’m gonna go over out of the ten, and that’s the debt-service coverage ratio. Now, debt-service coverage ratio is relevant to other investment strategies, but it is going to be something that mortgage brokers take into account when they are determining the amount of money they’re gonna lend to you.

The debt-service coverage ratio is essentially a measure of the cashflow available to pay the debt obligation. If your annual debt service is $100,000 and your cashflow is $125,000, then your debt-service coverage ratio is 1,25. If your debt service is $100,000 and your cashflow is $100,000, then it’s going to be a 1. Obviously, the higher the debt-service coverage ratio, the less risky the deal, because if you have a lower month or a lower year, you’ll still have the ability to at least cover the debt service, or the debt, or the mortgage payments.

Now, when mortgage brokers or lenders are underwriting a deal, there’s typically going to be a minimum debt-service coverage ratio that they’re willing to lend. For permanent agency debt, that number is gonna be 1,25. When they underwrite the deal, the cashflow needs to be 25% higher than the actual debt in order for them to provide you a loan on the deal. That’s an important thing to know, because the property could have returns that meet your projections, but it won’t qualify for financing if the debt-service coverage ratio is too low, starting from day one… And they’re going to base that off of how the property is actually currently operating. If the way the property is currently operating doesn’t have a high enough debt-coverage ratio, then you’re gonna have to pursue a different form of financing.

Number four is gonna be the difference between loan to cost and loan to value. These are two factors that the lender will take into account when determining how much money they’re willing to loan. Loan to cost is going to be a percentage of the total project costs; that’s gonna be the purchase price plus the capital expenditures, which is the renovation budget, whereas the loan to value is going to be a percentage of just the value of the property or the purchase price. For example, a lender will say “I’m willing to lend up to 80% loan to cost”, which means that they’re willing to provide financing on 80% of the total project costs. If the total project costs are a million dollars, then they’re willing to lend $800,000, and you have to come up with the other $200,000.

Loan to value – same thing. A lender will say “I’m willing to loan up to 75% LTV”, which means if the property is valued at a million dollars, they’re willing to loan $750,000, and you have to come up with the rest.

Again, if you don’t know what these terms mean and the lender says that, you’re not gonna know how to respond, or you’re not gonna know what that means.

Number five is the difference between recourse and non-recourse debt. The difference between these two are whether you are personally liable if you are going to foreclosure and the collateral is not enough to pay the existing debt obligation.

For non-recourse debt, the lender can only go after the actual property, unless a carve-out is triggered, which is negligence or fraud. What that means, if you’re going to foreclosure or you default on a non-recourse loan, the lender could only go after the property, as long as the reason for default or foreclosure is not fraud or gross negligence. However, if you have a recourse loan, then that’s not the case. They can come after your personal assets.

The reason why this is important is because when you’re talking to a loan guarantor, which essentially is the person who meets the net worth liquidity requirements and you have them sign on your loan so that you can qualify for the loan, they’re gonna wanna know if their loan is recourse or non-recourse. Because if it’s recourse, they’re gonna demand more compensation to sign on the loan, as opposed to it being non-recourse, because there’s a lot less risk for the non-recourse debt. So that’s number five, the difference between recourse and non-recourse.

Number six is a rent roll and profit and loss statement. These apply to smaller multifamily as well, but the rent roll is going to be a list of all the units and all the information you need to know about those units – who’s living there, what’s the rent, when did the lease start, when does the list end, what’s the security deposit, what are other fees that are being charged to that unit, and how much money does that unit owe.

Then a profit and loss statement is detailed, itemized spreadsheet of all the revenue line items and all the expense line items. These are important, because you are going to use these to initially underwrite the deal, and once you actually own the property, you’re going to need to look at the rent roll and profit and loss statement in order to compare how the property is actually operating to the budget you created, to make sure that you are staying on track. And you’re also gonna send these to your passive investors. So if they come back and ask you questions about something on the rent roll or profit and loss statement and you don’t know what it means, it’s not gonna look very good.

Next is there are a lot more revenue loss items on apartments than there are on smaller multifamily or single-family deals. What I mean by revenue loss is you’ve got your income coming in, and then these are items that aren’t operating expenses, but they are things that you are either losing or having to pay, that are taken away from being fully rented at a 100% economic occupancy rate.

For example, we’ve got vacancy loss, which is pretty standard – how much money are you losing in rent because of vacant units. These other four are not typical to anything but apartments. You’ve got loss to lease – that’s the difference between the market rent, which is the highest amount of rent you can demand based off of the difference between that market rent and the actual rent. So if you are renting a unit for $800 and you could be getting $850, the loss to lease is $50, and that’s technically considered a revenue loss, because you could be getting that $50.

Another one is bad debt. Bad debt is uncollected moneys that are owed by a tenant after they move out. If their security deposit doesn’t cover a certain damage and they still owe you a couple thousand dollars, if you have a 300-unit property, you’re likely not gonna be able to collect every single piece of bad debt, so that’s gonna be a revenue loss that you can write off.

Next is gonna be concessions. That’s moneys offered to residents at move-in, to get them to sign the lease. Maybe you offer them a $300 referral fee, so if they refer someone, they get $300 off the rent. Or it could be a move-in special, where you reduce their first month’s rent or security deposit. Those are all considered losses, because you could be making that money.

And then lastly, there is a unit loss, which means you have a model unit that could be rented, or you’re renting a unit to an employee for a discount.

These are all things you need to know when you’re looking at a profit and loss statement. You need to know what those are, and what is an acceptable amount to have, for example, for loss to lease or for concessions.

Another important term, number eight, is a preferred return. A preferred return is the threshold return that you offer to your passive investors. It’s not a guaranteed return, but the first portion of the cashflow after you pay all operating expenses and debt service goes towards your investors in the form of a preferred return.

For example, if someone invested $100,000 and you offer 8% preferred return, then they should be getting $8,000 annually, before you as a syndicator receive money.

Number nine is a proforma, which is going to be the budget you create prior to buying a property, or submitting an offer. Your mortgage broker is going to want to see your proforma budget in order to underwrite the deal, and your property management company is also gonna want to see your proforma budget so they can confirm whether they can operate the property at those numbers.

The last term I wanna discuss is the income approach, which is the valuation method of apartments. Unlike residential properties, where it’s based off of the sales comparison approach, the value of an apartment is based off of the income. More specifically, it’s based off of the net operating income, which is the total income minus the operating expenses. So the value of the property is going to be the net operating income divided by the market cap rate.

The reason this is important is because the value of the property is based off of how much income you are bringing in, as opposed to the sales price of other apartments in the area.

Those are just ten terms that you might not have heard of before, that are very important to apartment syndications. In order to get the rest of the terms, again, go to SyndicationSchool.com and download the glossary of syndication terms, create flashcards and take them with you wherever you go. Read them once a day until you know these terms inside and out.

That’s the first way to obtain the education, and the one way that everyone has to do, at the very least. These next three are ways to expedite your education, as well as to check off other aspects of the apartment syndication process. Number two is to create a thought leadership platform that is interview-based. As you know, Joe has a podcast where he interviews investors, and one benefit of the podcast is you can decide who you interview. You can create a thought leadership platform and interview one apartment syndicator or one apartment related professional every week. 52 weeks in a year, that’s 52 conversations with active apartment investors, active syndicators, active mortgage brokers, commercial brokers… Imagine how much you can learn from those conversations.

At the same time, you are becoming a thought leader, which would allow you to attract passive investors. You are networking with people who can help you with your business, so that will help you bring on actual team members. So again, you benefit from the education, and you also benefit from the networking abilities of a thought leadership platform. Now, we’re going to in future episodes go into detail on thought leadership platform, so for now I’ll just keep that as a placeholder.

Number three, the third way to obtain an apartment syndication education would be to work under an experienced syndicator. There really is no better way to learn anything than to follow someone who is already successful in that thing. In this case, an apartment syndicator.

Now, I can personally attest to this, because three years ago I had some experience in real estate. I’d purchased a duplex, but I didn’t know anything about apartment syndications whatsoever; I didn’t even know they existed. And I started working for Joe, and in those three years I’ve learned more about apartment syndications than I could have learned really any other way besides actually doing one.

The way that you want to approach working for an experienced syndicator is you can just pay them and they can be your mentor. But a better way is to proactively add value to their business for free, for a certain amount of time, and then ask them if you can become an intern, or shadow them, or take on more responsibilities as it relates to their business. This is essentially what I did.

I attended one of Joe’s meetups, and he needed help with his podcast, and that’s really all he said. He said, “I want help expanding my podcast.” So I told him that I would do that, even though I had no experience with podcasts… And I not only helped him with his podcast, but I also said “Hey, maybe we should start a newsletter, and we can start a blog.” I essentially added more value than what he actually asked for in the first place. Because of that, he trusted me and my responsibilities expanded to helping him out with his actual apartment syndication business, and again, as I mentioned, I’ve learned so much that I’m in the process of starting my own syndication business now.

So what you wanna do is find an experienced syndicator and research and find out their background and what they do, and then offer to add value to their business. Instead of just e-mailing them and saying “Hey, how can I help you?” or “Hey, can you be my mentor?”, say “Hey, I read your blog” or “I listened to your podcast” or “I went to your website and I saw that you are (for example) looking for properties in the Dallas-Fort Worth market, so if you have any deals that you want me to go tour for you, feel free to let me know.” Or you can send them a list of strategies for ways to increase their brand reach.

Really, it comes down to how creative you are and your unique skillsets and background. And again, you’re offering this service for free. Do it for a while, and then eventually ask for more responsibilities, or wait for more responsibilities to come, or ask if you can intern for them, or shadow them, or if they can be your mentor. So that’s the third way.

The fourth way, of course, is to read the Best Ever Apartment Syndication Book. It’s a 400-page tome where we go over the entire apartment syndication process, from beginning to end. To buy that book, go to apartmentsyndicationbook.com. Again, 450 pages of the entire apartment syndication process, from start to finish.

These are the four main ways to obtain an apartment syndication education. First is to create flashcards with the important terminology, and to do so, download the free glossary resource at SyndicationSchool.com. Number two is to create a customized education through a thought leadership platform, which is an interview-based podcast, blog, YouTube channel, where you’re talking to active apartment syndicators or active commercial real estate professionals, and learning from them, and ask them whatever questions that you want.

Number three is to intern or have a paid mentorship with a syndicator. If you wanna go the intern route, proactively add value to their business for free before asking for any sort of help in return. And then fourth, pick up a copy of the Best Ever Apartment Syndication Book at apartmentsyndicationbook.com.

That concludes part two, the education requirements needed before becoming an apartment syndicator. You can listen to part one, which goes over the experience requirements, you can listen to the other Syndication School series, with the how-to’s of apartment syndications, and you can download the free resources – for this episode, again, it’s the glossary – at SyndicationSchool.com.

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

JF1499: Are You Ready To Become An Apartment Syndicator? Part 1 of 2 | Syndication School with Theo Hicks

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Theo is back for his third installment of the new segment, Syndication School. Today he’ll be discussing the experience that you need to have before attempting an apartment syndication. You may be surprised at the level of experience you need when starting out. 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, which is a free resource focused on how-to of apartment syndications. I am your instructor, Theo Hicks. Each week we will be airing a two-part podcast series about a specific aspect of the apartment syndication investment strategy, and for the majority of the series, we will offer a free document or a spreadsheet for you to download as well.

All the documents and the Syndication School series can be found at SyndicationSchoo.com.

This episode is part one of a two-part series entitled “Are you ready to become a syndicator?” In part one we are going to be discussing the experience requirements needed before becoming a syndicator, and in the next episode, part two, we will be discussing the educational requirements.

In this episode, by the end, you will learn the experience requirements needed before becoming an apartment syndicator, and that is going to be business experience and real estate experience. What we’re going to do is we’re going to go through a list of questions that you should answer in order to rate your real estate and business experience, and we’ll go over a few examples of what the different ratings mean. At the end, based off of your rating, you can make the determination if you are ready to move on to the educational phase and start your apartment syndication journey, or if you need to work on addressing your experience requirements first.

As I mentioned, in order to become an apartment syndicator, you’re going to need a successful track record in business or real estate. Ideally, both. The reason is because when you’re talking to team members or passive investors, they’re all gonna ask you what your background is. And one of the biggest challenges you’re going to face starting out is a lack of experience conducting an apartment syndication, because if you’ve never done one before, then they’re going to want to know what your background is and how that will allow you to translate those skills into successfully completing an apartment syndication.

So we’re going to break the experience into two parts. You can have a real estate background or you can have a business background. For real estate, the benefit of a real estate background is pretty straightforward. If you’ve invested in real estate in the past, those skills can easily translate into buying an apartment, because you understand the transactional process, you have some education and some awareness of the different real estate terms, and you likely already have relationships with some people in the industry; maybe those exact relationships won’t help you, but you can get referrals from them for other team members, and you know how to find team members. There’s a whole lot of skills that come from buying just one real estate deal.

But something you’re likely going to lack will be relationships with high net worth individuals, because most passive investors are gonna be passive, first of all, but also high net worth, because they have the liquidity to invest in deals… And if you only know real estate people, they’re likely going to want to be active in the process, and are not ideal passive investor candidates. Also, you’re likely gonna be lacking in the apartment education background because, of course, since you’ve never done an apartment before, there’s a few distinctions between some of the smaller multifamily and single-family investment strategies in apartments… But that will be the focus of part two.

So in order to determine your rating for real estate, there are four questions you need to ask yourself. First, what are your real estate accomplishments? What have you done in the real estate industry? How many deals have you completed, and what is the volume in regards to value of those deals? How long have you been in real estate for? Things like that.

Another question you wanna ask yourself is do you currently or have you previously owned profitable properties? The key word there being ‘profitable.’ If you’ve invested in real estate before but the deals weren’t profitable, then that’s not a good sign, because if you explain that to your investors, they’re likely not going to trust you with your money if you’ve never had a profitable deal before.

Again, it doesn’t have to be an apartment; really, it could be any real estate background – fix and flip, single-family rental, smaller multifamily rental… The key is that it’s profitable, and that you can translate those skills into creating a profitable apartment syndication business.

Another question that you need to ask yourself is do you have a track record of successfully investing your own money and making money? Similar to question number one, have you bought real estate with your own capital and made money, and what was the return on that capital? Again, if you’ve made only a couple of percentage points, that’s gonna be a lot different than if you’ve doubled your money in two years.

And then lastly, do  you have any experience with, or education on commercial real estate? This is where you need to analyze your background as it relates to commercial multifamily real estate. Do you have any experience in that background or education? Even if it’s as simple as reading a book or listening to podcasts. Those are not the best, obviously, but that’s better than having no relevant experience in commercial real estate at all. So that covers the real estate experience aspect of it.

The next aspect of your background you’re going to analyze is your business background. Now, the benefits of having a successful business background is that you have proven your ability to either start your own business, or you performed well enough in another business that you gain promotions or awards, and you’ll be able to translate those skill sets of either starting a business, or being successful within another business – you’ll be able to translate those skills into starting or growing a syndication business. But, of course, since you have no real estate background, all you have is the successful business background, you’re going to need to partner with a business partner and/or very credible and experienced team members, because you have experience growing businesses, but you don’t have experience growing real estate businesses, so you’re gonna be lacking in the real estate relationships and the real estate expertise when you’re first getting started.

So the four questions you should ask yourself to analyze your business background is 1) what are your business accomplishments? Similar to what are you real estate accomplishments, what have you done in the business world that shows others that you are successful?

Next is have you ever started a business, and if so, was it profitable? If you started a business, how did that business perform? How long did it take for that business to become profitable? How much money did you invest versus how much money did you make? How long were you in business for? Anything involving starting your own business and being successful can easily translate into apartment syndications.

Next, if you haven’t started a business and instead you are a W-2 employee, have you received promotions or awards in your job? Have you been promoted, and how many times, and how frequent? Have you won any Salesman of the Year awards, or Rookie of the Year awards? Any sort of positive developments in your W-2 job will be beneficial towards becoming an apartment syndicator.

And then lastly – and this is very important, too – is how would your business colleagues or your employers or boss describe you? Would they describe you as someone who exceeds expectations? Those are the four questions you need to ask yourself to analyze your business background, and the other four questions are for your real estate background.

Now, what you’re gonna do is you’re gonna answer these questions, and then based off of your responses, you’re gonna give yourself a rating of 1 through 10 for your successful track record in real estate and business. What does a successful track record mean and what would a 1 versus a 10 be?

I’ll start with number 1 – that would be the lowest experience level. This is someone who has done zero real estate deals and has had zero involvement in the real estate industry whatsoever. They’re not a broker, they’re not a property manager, they’re not a lender, they never worked for any of those companies – they have no real estate experience whatsoever. Maybe they’ve listened to a couple of podcasts and have a Bigger Pockets account, but that’s the extent of it. And then also, they either haven’t started a business or they have started a business and it was not successful, or they have a W-2 job and they have not received any promotions or awards.

That would be either because you just started, you just graduated school and you just got into that job and you have not had enough time to climb the corporate ladder, or you’ve been working in a W-2 job for a while, but haven’t received any promotions, whether that’s because the company you work for doesn’t have any upward mobility, or maybe because you are comfortable in your position and don’t want to rock the boat, and you kind of just hide out and don’t really do anything. So your job’s safe, because you continue to maintain your current working, but you’re also not exceeding expectations, so no one knows who you are and you’re not being promoted. That would be a 1 – no real estate experience and not a very positive business experience.

Next we’ll say a rating of 4-5 – an example of someone who would give themselves a 4 or 5 would be someone who has invested in real estate before, but it was non-commercial or non-multifamily-related. Maybe they’re a wholesaler of single-family homes, or they have a couple of single-family homes under their belts for rentals, or they’re a fix and flipper… Or maybe they are involved in another aspect of real estate, like they’re an agent or a residential lender, but they have no commercial real estate experience. At the same time, they’ve had a background in business where they’ve received a couple promotions; maybe they’ve been there for a couple of years and were promoted one or two times. Maybe they received an award, maybe not, or they started a company that did okay; it didn’t exceed expectations, but it was profitable and didn’t lose money and didn’t crash and burn. That’d be an example of someone who’s a 4 or 5.

Now, a 7 or an 8, which is where we’re getting to someone with a very strong background – that would be someone who has invested in multifamily before, but instead of large apartments, they were smaller multifamily. Maybe they have a portfolio of a couple of duplexes and fourplexes. Or maybe they are involved in the commercial real estate industry in some other form. They could be an apartment broker, or they could be a property manager, or a commercial lender. The benefits of having the 7 or 8 real estate background is because, yeah, you technically have not done an apartment syndication before, but if you have experience managing a smaller multifamily, then it’s much easier to scale up to a larger multifamily because they’re very similar. There’s a couple of differences, and of course, it’s a lot larger and you’re handling a much larger value property, but you have experience managing a smaller multifamily deal.

Also, if you have the background in some other commercial real estate-related industry, like a broker or a private management company, you know one aspect of the apartment syndication process very well. If you’re an apartment broker, you likely know how to find deals, how to submit offers on deals, how to close on deals, but maybe you’re lacking in the passive investor aspect or how to asset-manage a deal. But you likely have relationships with other people in the apartment syndication industry, as well as a higher level of education than someone who has real estate experience, but not in the commercial realm.

And at the same time, for the business background, this person would have received a ton of promotions; maybe they’ve been working in the business realm for 15 years and received a promotion every two years; they’ve been the Employee of the Year for the past 2-3 years, or they’ve started a profitable company that exceeded expectations, did really well… Maybe they sold it and they have a lot of money to invest in apartments themselves, or they’ve started a successful company in general. That would be someone who would have a rating of a 7 or an 8.

Now, the only way you can be a 10 is if you’ve yourself been a sponsor on an apartment syndication deal and taken it full-cycle. If you haven’t done a syndication deal before, you can’t be a 10.

In order to know what ranking you need to have before becoming a syndicator, let’s use Joe as an example. Before Joe has syndicated his first deal, his real estate background was that he invested in four single-family homes, and held them as rental properties. Because of that, he was familiar with the real estate transaction process, so he knew how to submit offers, how to underwrite the deal, how to manage the due diligence process, how to close, how to asset manage and manage the property management company – so he understood all of that, just on a smaller scale… And he also had experience managing a six-figure portfolio. So he wasn’t managing one small property at the time; he had a portfolio of properties worth upwards of 700k-800k, and was successfully managing those and they were cash-flowing.

He also was teaching others how to replicate his single-family rental success. He taught a class, and because of that, he was perceived as a thought leader in the real estate industry. So yes, he technically was not teaching people how to do apartments, but he was teaching people how to do something, which gives you an extra level of thought leadership than just doing it yourself.

And then from a business background, he was a VP at a New York City advertising firm – the youngest VP at that firm, so that shows that he had the ability to be promoted with a company. Something else that’s important about Joe’s background and having a business background in general, because as I mentioned about your business skills translating to becoming an apartment syndicator, the skills that Joe honed in particular were his written and verbal communication skills, and in particular how to address any questions or concerns in a timely manner.

If you are a loyal Best Ever listener, we’ve talked about this on the show before, but one thing that’s Joe’s investors really appreciate about his business is his communication skills. We will send out monthly recap e-mails to provide the investors with updates on how the properties are performing; if they ask us a question, we’ll respond within 24 hours with an answer, or that we’re at least working towards an answer, and investors really appreciate that.

Based off of Joe’s investors’ feedback, as well as my investigations on Bigger Pockets and reading forums from passive investors, a big thing that’s lacking from some apartment syndicators is communication. Maybe they give updates on a quarterly basis, or no updates at all. If an investor has a question, maybe it takes them a  couple of days or a couple of weeks to get back with an answer.

The reason I’m saying this is because that’s an example of how something that might not seem like it’s related to apartment syndication, it may seem like it’s just related to being a good business person – how that can translate into being a good apartment syndicator. But if you don’t have a solid business background, then that’s likely because you don’t have these effective communication skills, you don’t have good project management skills, and you won’t have the ability to translate those skills into becoming an apartment syndicator.

Based off of that explanation of Joe’s background, he was probably a 4 or a 5. He had a non-commercial real estate background, but he did have experience in investing in properties, but he made up for that with a very strong business background. He became a VP, and he learned a lot of skills that he was able to easily translate into becoming an investor… And at the same time, because of his business background and the relationships he formed at his company, when he found his first deal he had access to passive investors. A lot of his advertising colleagues happened to invest in his first deal and continue to invest to this day.

With that being said, when you analyze your real estate and business background, you’re gonna need a 4 or a 5 before you get started. You’re gonna need to have some real estate experience… Again, it doesn’t have to be in the commercial real estate real or apartments, but it has to be some successful track record in real estate… So when you’re talking to your passive investors, or talking to potential team members and they ask you what your background is, you don’t say “Well, I’ve never done anything in real estate before.”

Joe would say “I’ve invested in 3 or 4 single-family homes, that I’ve managed for the past 4-5 years, and I also taught others how to become a single-family rental investor as well.”

At the same time, you’re gonna need a strong business background, so you need to have promotions or won awards at your company, or start a business…

Or it can be vice-versa – if you have a very strong real estate background, so you were involved in either commercial real estate as a provider, as a vendor – broker, lender or property management company – or you have a background in investing in smaller multifamily homes. If you have that experience, then you don’t necessarily need to have that strong business background. So you need to have one or the other to be very strong, or a combination of both, like Joe.

I would probably say that based off of my background, I’m probably closer to a 6 or a 7, and this is something that I’m gonna go over in the next episode about education… But I haven’t done an apartment syndication myself, but I’ve worked for one for so long that I can leverage that when having conversations with potential team members and with passive investors.

In this episode you learned the experience requirements needed before becoming an apartment syndicator, in regards to both business and real estate, and you also answered, or are going to answer the list of real estate and business background questions in order to give yourself a rating of 1 through 10. 1 is someone who has no business or real estate background, 10 is someone who has taken an apartment syndication deal full-cycle. And based off of that, you’re going to determine if you’re ready to become a syndicator, or if you need to spend a little bit more time building up a track record.

Now, one of the most common questions I see on Bigger Pockets as it relates to apartment syndications is “What’s the fastest way I can get started?” The answer, of course, like everything in real estate, is it depends on your background. If you’re just coming out of college and you have no real estate experience, and you have no business experience, while it’s possible to become a syndicator if you find the right team members, it’s gonna be difficult. You’re gonna face the challenge of raising money, and of finding team members who are going to send you deals and trust you, because you haven’t proven yourself yet.

So unlike house-hacking or wholesaling a deal, which takes a little bit of a background, but is more of a hustle business, apartment syndications are gonna be more relationship-based, and in order to build these relationships, you’re gonna need to have a background… Because all the team members you work with, they get paid when you’re closing a deal. If they can’t trust that you have the ability to close on a deal, then they’re likely gonna send those deals to someone else. With that being said, if you are a rating of 5 and higher, then great; you have the skillset to become an apartment syndicator, and now you just need to get educated, which we will discuss in the next episode. If you don’t, if you’re a 4 or below, then unfortunately, whether you like it or not, you’re going to need to spend a few years either investing in real estate with your own money, or working your way up through a regular W-2 job in order to leverage that experience to become an apartment syndicator.

As I mentioned, in part two we’re gonna discuss the educational requirements before becoming an apartment syndicator. In the meantime, if you want to listen to the other syndication school series about the how-to’s of becoming an apartment syndicator, and to download the free documents that we have available, visit SyndicationSchool.com.

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

JF1493: Why Apartment Syndications? Part 2 of 2: Syndication School With Theo Hicks

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Theo is back today with part two of his mini-series, Why Apartment Syndication. Theo has worked for Joe for a long time and has been a part of the many projects that Joe has done in that time, so he’s more than qualified to teach us about apartment syndications. Tune in and learn why apartment syndications are the preferred investing method for many successful investors. 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. This is your host of the Syndication School, Theo Hicks. This episode is part two of the “Why apartment syndication” series.

In part one we had a discussion about what an apartment syndication is, as well as the overall process, to give you a glimpse of the information we will be going over during the Syndication School series. Then we had a discussion around the pros and cons of raising money to buy apartments, versus using your own money, as well as whether you should be active in apartment syndications, so be the general partner, or if you should be passive and be a passive investor in apartment syndications, based off of how the pros and cons of those two scenarios affect your current situation.

In part two (this episode) we’re going to go into more detail about the various investment strategies and how those compare to apartment syndications. By listening to this episode – I want you to listen to it similarly as you listened to the first part, which I mean that when I go over these pros and cons, they’re not necessarily objective and going to sound the same to everyone.

For some people the pros are going to outweigh the cons for certain scenarios, for certain strategies, whereas for other people the cons are gonna outweigh the pros for other strategies. So the purpose of this pros and cons list are for you to listen and apply them to your life, and ask yourself if the certain pro or certain con is important.

As an example, in the previous episode when we were doing the pros and cons of the limited partner versus general partner, one of the pros of being a general part is the control. You’ve got control over the entire apartment syndication process. Now, for some people that control is great, because they have a lot of time, they want to actually be a full-time apartment syndicator and create their own business, whereas someone else might be listening to this and saying “Well, I like my full-time job. I don’t have time to spare to create a business from scratch, so I’d much rather have the benefits of investing in apartments without all the extra work, and I’m willing to give up control in order to do so” – well, then passive investing and being a limited partner is better for you. That’s how you should approach these pros and cons lists.

In this episode we’re going to be comparing apartment syndications to four strategies in particular. First, we’re gonna compare it to single-family resident rentals. Next, we’re gonna compare it to smaller multifamily – these are buildings with two to fifty units, whereas apartments are gonna be 50+ units, and I’ll get into why I use that classification in that section.

Thirdly, we’re gonna compare it to REITs and other similar types of stock investments. Then finally, we’re going to compare apartment syndications to development.

Just to review, apartment syndication in its most basic sense is you are raising money from other people to buy apartment communities and share in the profits, so how does that strategy compare to single-family rentals?

The first pro is going to be the scalability. Let’s say you have a goal to make $100,000/year, and you determine that you’re going to need 100 doors to accomplish that. I’m just using these as basic numbers. So what’s easier to scale up to – 100 single-family homes, or 100 apartment doors, which could be bought between multiple apartments or just one apartment?

The cashflow for 100 single-families compared to 100 apartments is not going to be the exact same, but you are able to scale up with apartments faster than you are able to scale up with single-family homes in regards to the cashflow, because it will take a lot longer to buy 100 single-family homes than it would be to buy one apartment community.

You’ve also got financing to take into account – how are you going to finance 100 single-family homes when you’re only able to get four to ten loans on your own? So you’re gonna have to get creative there… Whereas for an apartment community, they’re  going to base the financing on the apartment itself, not necessarily you as a borrower. Of course, you need to have certain liquidity and net worth requirements in order to qualify for financing, but that could be partnering up with someone who has those requirements…

And also, how are you going to fund these deals? Funding 100 single-family homes using either your own money – which would take time, and let alone qualifying for financing for… But at the same time, you could technically raise money for 100 single-family homes, but would it be easier to raise money for 100 single-family homes one deal at a time, or raising it for one large apartment community where you can bring in a lot of investors, and they won’t necessarily have to fund the entire purchase price, or the entire equity investment.

At the same time, if you are going to be investing in single-family homes and raising money, you’ll likely need to find multiple deals at once in order to satisfy the return requirements for your investors.

Another pro of apartment syndications to single-family rentals is the ease of finding deals. Now, I’m not saying it’s easier to find an apartment than it is a single single-family home, but using our example, it’s going to be easier to find one 100-unit apartment community than it would be to find 100 single-family homes. Finding 100 single-family homes is going to take some time, generally speaking. I’m sure there’s strategies out there to buy massive packages of single-family homes, but regardless, that’s going to take some more effort, whereas for finding an apartment, you can speak with brokers to find on-market listings, or do some lead generation strategies to find an off-market deal, and all you need to do is find that one 100-unit, and compare that to how long it would take to find 100 single-family homes.

The next pro for apartment syndications compared to single-family rentals is going to be the economies of scale. When you have these 100 single-family homes – that’s 100 roofs, that’s 100 mechanicals (HVACs), 100 driveways, lawns to take care of, and then you’re gonna have a property management company likely to oversee all of those, but they’re not all in one central location, so it’s gonna cost more to have that company to manage those 100 units compared to them managing one 100-unit building in one location.

Also, you’re going to be able to have a better offering for your residents, because in a single-family home they have to have the home to themselves, but at apartments there’s going to be shared amenities; they’re gonna have a pool, clubhouse, fitness center, washer/dryer facilities, storage, lockers, things like that… And at the same time, from your perspective, you could charge extra for that, and that would increase your revenue, whereas for the single-family homes, we’d have trouble charging extra for amenities, and we’d have trouble even having those amenities at such a small scale.

Then also – and this is a big one – there’s a risk factor. When you’re investing in single-family homes, you’ve got pretty low margins for each house. You’re maybe making a couple hundred bucks per door per month, and what happens when you lose that one resident who’s there? You don’t have your revenue spread out across multiple units, you’ve got one unit. So if someone’s living there, you’re making money; if someone’s not living there, you’re losing money. Also, if you have to do an eviction or a turnover, that is going to have a greater impact on your bottom line for a single-family home investor than for a large apartment… Because if you’ve got one turnover, one eviction, it’s gonna cost you some money, but you’ve got your other units that are still occupied and paying rent.

Also, what happens if you have a big-ticket repair? What happens if you replace a roof, or replace HVAC, or replace a parking lot, or replace a siding? It’s going to probably cost more for an apartment, because it’s got a bigger roof, bigger siding etc, but at the same time the margins are a lot higher on apartments; so you’re making more money and you’re able to afford those repairs more than you’re able to afford them for a single-family home.

One big-ticket repair of a couple thousand dollars on an apartment – yeah, it’s unexpected and it’s gonna be frustrating, but on a single-family home, that could wipe out profit for multiple years.

Overall, the pros for apartment syndications compared to single-family rentals are the scalability – you can scale faster with apartments, and you’ll have more cashflow and more flexibility with financing. It’s easier to find a 100-unit apartment deal compared to 100 single-family homes. You also have the benefits of economies of scale; you’re not gonna have multiple roofs, multiple HVAC systems… Property management will be in one central location, you’ll be able to have economies of scale in regards to your expenses, as well as the ability to have shared amenities, which will result in additional revenue. And finally, apartments are actually less risky than single-family rentals, due to the low margins of single-family rentals and profits being wiped out with a turnover, a vacancy, an eviction and a big-ticket repair item.

Now, the cons of apartment syndications compared to single-family rentals – this is gonna be a con that’s mostly across the board for the majority of the strategies we’re gonna be comparing (apartment syndications, too), and that’s gonna be that barrier of entry. That educational barrier of entry – you need to have a solid education and understanding and grasp of the apartment syndication process and the terms before even considering to launch your career.

You’re going to need experience in real estate and/or business, and of course, once you have those in place, you’re gonna need to find a team, you’re gonna need to raise money… Whereas if you’re gonna buy single-family rentals, technically you could just learn about real estate yesterday and try to buy a single-family home the next day as long as you have the money, because it’s not as complicated as an apartment syndication. That’s gonna be something that is, again, consistent across the board, but as I mentioned in part one of this series, the next series that we do is going to be a discussion around the educational and experience requirements, which means what you need from an education and an experience perspective, and then how you actually attain and gain the education and the experience required to become an apartment syndicator.  As I mentioned, all these cons we will give you a solution for.

That wraps up the comparison to single-family rentals. What about other multifamily, so smaller multifamily (2 to 50 units)? The reason why I classify smaller multifamilies as 2 to 50 units, and then apartments as 50 or more units is because generally speaking, once you get above 50 units, you will have an on-site property management company. That’s going to be the first pro of the apartment syndication strategy versus the smaller multifamily – you’re able to have on-site property management, which comes with a better experience for your residents.

Someone’s actually on the site, that they can go and talk to if they have problems; you’ve got someone on-site to address problems as they come up, you’ve got someone on-site to show the units, and for walk-ins… Essentially, you’ve got someone who’s there during the day to address any issue that comes up. And of course, since they’re always there, they’re gonna have a better understanding of the property and be able to stay on top of things more than a property management company who is not at the property and maybe visits it once a week, and isn’t there all the time.

Then also, you’re still going to have the economies of scale of the apartments compared to the smaller multifamily. It’s not gonna be as beneficial as it would be compared to single-family rentals, but you still have a better economy of scale because you’re gonna have a lower management fee the more units that you have, you’re gonna have the ability to have potentially an on-site maintenance team, which could save you some money, whereas having to contract out the maintenance every single time something happens – and just contracts in general… You’re gonna have a landscaping contract, a pool contract to make sure you’re maintaining everything.

Similarly, when compared to single-family rentals, when you’re comparing apartments to the smaller multifamily, you have the opportunity to offer these shared amenities, which will allow you to have extra income.

This transitions into the third pro, which is you’re gonna have overall a better offering for your residents at these larger properties, because since it is larger, you’re able to offer better amenities that wouldn’t really make financial sense at a smaller multifamily property.

Maybe you have a pool at a 50-unit, but would it make sense to have a fitness center or a clubhouse or a dog park, a playground, a grill at the smaller properties? Whereas that’s common at these larger properties. Of course, having these extra amenities are more attractive to the residents and allow you to charge a higher rent.

Another less obvious pro and something that I recently came across is that it’s going to be easier to find rental comps for the larger apartments compared to these 2 to 50-unit buildings… Because what you’re gonna find when you’re looking at rental comps is – of course, when you’re doing rental comp analysis, the properties need to be similar, so if you have something below 50 units, you’re not gonna have these better offerings, these amenities (the pools, the fitness centers, the clubhouses, the dog parks and the sorts), whereas the properties that you’re coming across in your market are gonna be larger and are going to have those… So you can’t use these larger apartments as rental comps for smaller multifamily. You have to use the smaller multifamilies, which aren’t as prevalent as these larger buildings…

So you might have to go a little bit further out to find a rental comp, or you might have to find a rental comp that’s upgraded to a higher quality than yours, which of course you’re able to adjust down or up, depending on how those compare, but it’s much better to have a rental comp that’s very similar to the subject property, and you’re gonna have a much easier time finding that like property in regards to interior quality, operations and amenities offered for the larger apartments than for these smaller multifamily rentals. It’s possible, but you’re gonna have a harder time.

The con of larger apartments to the smaller apartment rentals is going to be that barrier of entry. Now, the barrier of entry is going to be higher for these smaller multifamilies than they would be for single-family homes, but still, it’s not going to be as high as it would be for these larger apartments… But it’s gonna be much closer, because you’re still gonna need to find a property management company, you’re still gonna need the experience and educational requirements, because you are dealing with multifamily even though they are smaller… But you’re gonna need to raise more money for these larger apartments, which is gonna take more time on your part… Whereas you might be able to take down a smaller multifamily unit with the money that you personally have, or by raising money from your current network.

That wraps up the comparison between apartment syndications and smaller multifamily rentals. Now, what about something that’s not necessarily you buying actual properties, but more of a passive investment, which is going to be a REIT (real estate investment trust)?

The textbook definition of a REIT is a company that owns, operates or finances income-producing real estate that generates revenue which is paid out to shareholders in the form of dividends? Essentially, a company buys a ton of real estate – whether it’s apartments, commercial, retail, medical, single-family homes, whatever it happens to be, depending on the company – and together, with these packages of properties, it creates a revenue just like any other property would… And you, buying a REIT, are buying essentially shares of the company that owns all these properties, and you are paid out dividends. It’s very similar to a stock, but it’s like owning a stock in an actual real estate company.

REITs are very similar to passively investing in apartment syndications, but not as beneficial. The pros and cons of apartments versus REITs are gonna be very similar to the pros and cons of being an active syndicator versus being a passive investor in a syndication.

So what are the pros? One of the major pros are going to be the returns of being an apartment syndicator. Based off of the previous five years, the return on a REIT, if you had invested in it five years ago, would have been about 25% overall. So it’s a little bit over 5% each year. If you invested $100,000, at the end of five years you would have $125,000, so a profit of $25,000.

Now, as an apartment syndicator, not only will you make more money than that as you investing that same amount of money in your own deal as a limited partner, assuming you’ve got an 8% preferred return each year, plus the profit split, which would be about a 20% return annualized for the five-year hold, which would be essentially doubling your money… But you will likely make more than that 25% from the REIT – you’d make more than that on your acquisition fee alone.

In a future episode we’re gonna go over all the different ways you can make money as a general partner… One of the ways and the first way you get paid is the acquisition fee at closing, which is gonna be a percentage of the purchase price. Depending on the size of the deal, if you have a million dollar deal and the acquisition fee is 2%, that’s going to be 20k right there. So you’ve got your 20k from the get-go, whereas if you  had invested 100k into a REIT, you’re only making 25k… Whereas you’re getting 20k for not necessarily investing any of your money.

Overall, you will make a lot more money, and your ROI is gonna be a lot higher by being an apartment syndicator, even if you’re not even investing in your own deal.

Another pro is going to be the control. When you’re investing in REITs, you can only control the type of REIT you invest in, and then when you buy and sell your stock, whereas for apartment syndications, as I mentioned in the previous episode, you have control of everything – the investment strategy, where you actually buy the property, the size of the property that you buy, the return structure with your investors, the business plan, the renovations, when you sell… You have control over essentially everything. You don’t have that same level of control with REITs, because REITs are a lot more passive.

Another pro of the apartment syndication strategy versus REITs are going to be the tax benefits. As an apartment syndicator, you’re gonna have the tax benefits that come from real estate – depreciation write-offs, you have the opportunity to do a cost segregation analysis, which we will discuss in a future episode… Essentially, an analyst comes in, breaks down the entire property into its components, and then determines which of those components can have accelerated taxes on, or the depreciation can be accelerated on, so that you can essentially have a much larger write-off when you perform this cost segregation, as opposed to having it spread out over the life of the — I think it’s 17,5 years for commercial properties.

I’m sure there’s some tax benefits for REITs, but not nearly as great as they are for investing in real estate… Which is why people like to invest in real estate.

Now, the cons of apartment syndications compared to REITs, besides the same barrier to entry from an education, experience and a prerequisite standpoint, i.e. building your team and raising money, is going to be the liquidity. For REITs, just like stocks – you can sell whenever you want. Yeah, you’ll be taxed, but you can get your money out quickly and be liquid, and use it for whatever it is you wanna use it for, whether it be buying more real estate, going on a vacation, buying a car, or whatever it happens to be.

For apartment syndications, if you were to invest as a limited partner in your own deal, that capital is gonna be tied up until you sell the property, refinance or get a supplemental loan. If  you aren’t investing in your own deal, you’re still going to build up equity in that property, which won’t be realized until the sale of the property. But you do however get an upfront acquisition fee, and if you charge other fees to your investors, whether it be a fee for signing the loan, or if you’re gonna charge a fee once you refinance the loan… There are ways to get liquid upfront and during the business plan, but you’re not gonna get the majority of your money back, or you’re not gonna get the majority of the money that you’ve made until you actually sell the property. So that’s the comparison of syndications to REITs.

The last comparison we’re going to do is going to be apartment syndications compared to apartment development. We’re not gonna focus on this one too much, because I actually did a debate with a developer whose name is Evan Holladay; if you want to listen to about 45 minutes a back and forth between the pros and cons of apartment syndication versus developments, check out that episode. That is episode number 1423. A debate between me and Evan Holladay.

Just very quickly, the pros of apartment syndications to development are going to be  less risk, of course… Now, apartment syndications come with risk, but compared to development, there’s much less, because as you will learn in the episode with Evan Holladay, you could be analyzing a deal for years, spending money in the process, and never even closing on the deal. So the process of identifying an opportunity to closing is way longer, which means the opportunity of losing the deal goes up, and losing the money that was spent in the meantime.

At the same time, even once you actually have the deal under contract and then you close, and then you start the development process, it’s still gonna be a multi-year process, and whatever capital was invested is gonna be tied up until then, and is not going to be returned. Of course, since you are building something from the ground-up, there are a lot more variables involved in that, and a lot more things could go wrong. If something were to go wrong, you would end up losing all of your money, whereas for apartment syndications – a lot less risky, and yes, your capital is going to be tied up, but you’re going to see an ongoing return, and as long as the syndicator follows the three immutable laws of real estate investing (buy for cashflow and not appreciation, secure long-term debt and have cash reserves), then you are mitigating the risk and are preserving the capital, whereas that’s not necessarily true for development.

At the same time, you’re building something that is completely brand new, which also comes with risks, whereas for apartments it’s already there – you know that at the very least you’re gonna be making the same money that the current owner was making, whereas for development, you can make a ton of money, but at the same time the project could completely flop and you don’t make any money.

Basically, there’s gonna be a lot more variables for development, which brings more risk. Also, apartments – you can close on them faster; the closing period is 60 to 90 days after you put the deal under contract, but it could be about 60 to 90 days, maybe even less, from identifying the opportunity to putting it under contract, depending on whether it’s on market or off market… Whereas as I mentioned before, developments could take years to close, if ever.

You’ll also get faster returns for apartment syndications. You as a syndicator are going to make your money upfront; once the deal is closed, you’ll make money on an ongoing basis and then at sale… Whereas for development you’re really not gonna make any money until the project is completed.

Then there’s also gonna be a lower barrier of entry. The developer is gonna need the same background as someone investing in apartments, because that’s what they’re doing, but on top of that, they’re going to need a stronger construction understanding, they’re gonna have to build up relationships with local government for zoning permits and design approval, so there’s a political aspect to it… They have to work with people in the community to figure it out what it is they actually want out of the building, they have to work with architects to design the building… And those are all things that an apartment syndicator does not necessarily need to do… Or if they do need to do that, not to such a high degree.

Then of course really the only con of apartment syndication compared to development is the overall return. If everything is built according to plan for the development, you’re gonna make a lot more money than you would for the apartment syndication… But you won’t make that money for a longer period of time, and the risk of not making any money at all and losing your investors’ money is a lot higher. That concludes the comparison of apartment syndications to development.

Now, as I mentioned in the beginning of this episode, what you wanna do is you wanna listen to the pros of apartment syndications and the cons, and determine how those relate to you. For example, when you are comparing apartment syndications to single-family rentals, how important is scalability to you? How important is economies of scale? How important is that lower risk?

For those worth the extra time investment required to actually enter the apartment syndication field, in regards to the education, experience, building your team and raising money aspect. For some people, they might say “Well, all that time that it’s gonna take to educate myself and gain experience isn’t worth the extra benefits of apartment syndication, so I’m just gonna continue investing in single-family rentals.” That’s fine, but I do recommend continuing to listen to the Syndication School, because we’re going to give you lots and lots of tips on how to expedite the educational and experience requirements.

That’s how we’re gonna approach this and learn all the different benefits and the cons of becoming an apartment syndicator compared to all the other strategies, to make sure that it is going to be the ideal fit for you. So that concludes this series, “Why apartment syndication?” In part one we discussed what apartment syndications are, and talked about the pros and cons of raising money versus using other people’s money, as well as whether you should be an active syndicator or passively invest first.

Then in part two we discussed the pros and cons of apartment syndications compared to four different strategies – single-family rentals, smaller multifamily (2 to 50 units), REITs and development.

The next series in the Syndication School is going to be a conversation around the requirements needed before becoming an apartment syndicator.

Thank you for listening, and I will see you next week.

self-directed IRA and Scott Maurer

JF1285: What CAN You Do With A Self-Directed IRA? With Scott Maurer

Listen to the Episode Below (21:27)
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Scott is here today to help us understand what is possible and legal with self directed IRA account. You may be surprised by how many investments you can buy with a self directed IRA. You may also be surprised at what you can’t buy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Scott Maurer Background:

Director of Business Development for Advanta IRA, a self-directed IRA administrator.

A licensed attorney and has worked with self-directed IRAs since 2006

-Advanta IRA has close to $1billion in assets under management

-Scott frequently gives seminars and webinars on the subject.

-Say hi to him at  http://www.advantaira.com/

-Based in Tampa, Florida

-Best Ever Book: Grapes of Wrath

 

Join us and our online investor community: BestEverCommunity.com

 


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TRANSCRIPTION

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

With us today, Scott Mauerer. How are you doing, Scott?

Scott Maurer: Great, Joe. How are you doing?

Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Scott – he is a self-directed IRA expert. In fact, he’s the director of business development for Advanta IRA, which is a self-directed IRA administrator. He is a licensed attorney and has worked with self-directed IRA since 2006. He is based in Tampa, Florida. With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Scott Maurer: Sure. I started with a company back in 2006, and when I started at Advanta it was just a few of us here. At that time was really the time when I think self-directed IRA’s really began hitting on a lot more people’s radar, with the last real estate boom. So I was brought in and I started with the company in handling a lot of the initial transactions, people going through the process of buying and selling real estate and other assets through their IRA account. My position really morphed from doing that as I learned more about the business, to focusing more on the education, networking, and ultimately the sales and business development side of things… And teaching classes – teaching webinars, seminars, just networking with individuals and trying to spread the word more about what self-directed IRA’s are, and how they can be used; there’s certain things that you can’t do with them, but that’s certainly what I’ve spent more of my time doing, and that’s really our current focus right now, and really it has always been – to educate as many people as possible that what you can do with IRA accounts that a lot of people simply just don’t realize it’s possible.

Joe Fairless: What are some of those things?

Scott Maurer: As we’ll talk about today, it’s investing in real estate, whether you are an investor who wants to buy single-family properties, you wanna buy properties to rehab, you wanna invest among many other individuals on some type of multifamily project and have your IRA owning a piece of the pie, lending with your IRA account; we have people wanting to buy cryptocurrency in their IRA… There’s so many different things you can buy within your IRA, you just can’t buy life insurance or collectibles – the only two types of investments the IRS prohibits inside your IRA account. So when you have an IRA with a brokerage firm or a bank, they’re limiting you to those items that they sell, those particular investments that they sell and make money from… But the IRS regulations allow for so many more different options than what you typically would have it you don’t look outside that box.

Joe Fairless: Unless I’m mistaken, there’s also some other things you can’t do, like lend money to your family and things like that, right?

Scott Maurer: Correct, yes. Prohibited investments are life insurance and collectibles, and there’s also… When your IRA is for instance buying rental properties or is lending money from your IRA, there’s certain individuals – basically, yourself, your parents, your grandparents, your children and grandchildren – that cannot transact with your IRA or really benefit.

When we talk about buying real estate in an IRA, we do talk about the standpoint as a pure investment vehicle; it’s not something that you can use your IRA to buy a vacation home or buy a primary residence within the account. That’s not allowed. So it’s strictly from that standpoint a pure investment inside the IRA. It’s the alternative to putting your money in stocks or mutual funds or bonds, it’s having this other options of investing in real estate and these other types of assets.

Joe Fairless: What’s a challenge that you’ve come across with this process that recently has made you think “Hm, okay, let me think through that a little bit. It’s not what I typically come across.”

Scott Maurer: Actually, I had a really interesting scenario recently. I had an individual wanting to, in the context of buying a piece of real estate – actually a very nice parcel of real estate, well over a million or two million dollars within an IRA… It was the standpoint of making sure he got all the financing, because he wanted to use his IRA, or a combination of his IRA, his wife’s and his dad’s to buy this property… But the issue he was gonna have was that he wanted to treat it more as a business, as a rental facility, as opposed to more like a rental piece of real estate. So he was transforming that idea of wanting to invest in real estate to really investing into a business using your IRA account. That’s something that is very tricky; it certainly is possible to do, but that’s something that recently I had it as a challenge and trying to talk through with that particular investor.

I spent a lot of time with [unintelligible [00:06:01].27] talking with him and his CPA about exactly how that could be structured if he was gonna go forward. I think that’s one of the more recent examples of something that’s kind of, again, outside the mainstream of what we see, that made it a little bit more challenging.

Joe Fairless: So if I’m understanding it correctly – and we don’t even have to use the specific person, but a person was looking to buy a piece of real estate, but was gonna operate it as a business? Can you just give us a hypothetical example, in case you can share a little bit of the details on this?

Scott Maurer: Yeah, the details — it was a property that I think was listed for around 1.5 million. Actually, it was built as a single-family residence, a huge, huge property… But his idea in buying this property was not to simply buy it and then rent it for rental income, but actually transform that property from a single-family residence into a commercial kind of event planning rental space, where you could host weddings and other types of conferences or things of that nature.

For him the difficulty in figuring this out is that when you’re investing in real estate with your IRA from kind of a residential or rental perspective, that’s more of a passive investment; you’re receiving rental proceeds back to your IRA, which is fantastic. But what he was looking at doing is operating it as a business, in which he was going to work for the company that is operating this event rental facility. So it was challenging for him, because there are specific rules as we’ve mentioned, that you can’t benefit from things going on inside your IRA specifically, so it was trying to find the right vehicle that was gonna make that possible and structure it…

He ended up not going forward with the deal… Not because of that reason, just because of transforming a residential property into a commercial event space apparently was a lot more involved than he had anticipated.

Joe Fairless: Yeah, but it wasn’t because he couldn’t do it, from your perspective, it was because the deal just didn’t pan out.

Scott Maurer: That’s correct. That ended up killing the deal when he realized it wasn’t gonna happen because of the different structural engineering projects that would have to take place to make it a commercial space… But we never got fully to the point of using the IRA as a 401k type situation having the business, although I think his CPA was on board with that. I think that would eventually – if he’d bought the property, that’s how they would have gone.

We were able to work through that issue, it just turned out the property itself didn’t work out for him.

Joe Fairless: Okay, so theoretically if the economics of the deal worked, then there was a way to use this self-directed IRA to do the transaction.

Scott Maurer: There was, and it involved in that scenario using your IRA and setting up this new business venture that he was going to form for this event facility, of establishing a 401k plan for that facility and using his IRA through that 401k to fund a business that he can work with. It’s a very kind of narrow concept within the IRS regulations that allows for that. It does have to be a 401k, but again, that was a challenging topic, because it started from the aspect of someone calling in and getting our name to buy real estate in an IRA account and having that morph from that initial discussion, which is again, something we deal with on an everyday basis, to something a little bit obviously more advanced, and not just simply being a piece of rental property that’s gonna collect rent 12 months a year, but actually transforming it into a commercial space that he wanted to work with… It just added so many more factors into it.

Joe Fairless: What’s the question that you get asked the most often?

Scott Maurer: I think one of the questions I get asked a lot is “Why haven’t people heard about this before?” when they call… Or then, of course, how the process works. I think the question when people find out about this, they say “Hey, I didn’t know this was possible… Why hasn’t someone told me?” The answer is simply your stockbroker, your financial advisor doesn’t always have a vested interest in telling you where else you can place your money. If you have an IRA or a Roth IRA account, or an old 401k, if you’re not looking for it, your typical advisor is not gonna tell you that self-direction is an option. That’s, again, a common question we get, is asking “Why haven’t I heard about this before? Is this something that’s new?” If they’re just hearing about it, they think it must have been something that was allowed in the last year or two, and actually it’s been around and allowed inside IRS regulations since 1975.

Joe Fairless: What’s your role with Advanta?

Scott Maurer: My role as the director of business development is to oversee basically the sales and marketing side of our business in both our Tampa office – our home office is in the Tampa Bay area; we also have an office in Atlanta. So as the director of business development, I’m overseeing the sales staff, the individuals who are talking to individuals who call in or who visit our website to get more information on self-direction, and all of us on the sales team also are just core educators.

It’s the incoming phone call, to talk someone through the process, or it’s again, teaching seminars or online webinars that we have as well, on these different topics… And just explaining the process, explaining the rules and helping people eventually just through education feel more comfortable about self-direction in general. [unintelligible [00:10:53].24] a concept going back to the common question we get of “Why haven’t I heard about this? Is this something new?”, people did wanna feel comfortable and reassure that what they’re doing is allowed, that they’re not reinventing the wheel themselves, so a part of our educational program and process is really to make it seem as easy as possible, because at its core, self-directing is really not that difficult to do, you’ve just gotta make sure you understand what you’re doing.

Joe Fairless: As the director of business development and you’re overseeing sales and marketing, your responsibility is ultimately, I imagine, to make sure you’re bringing in business and converting those leads into customers… What are some of the ways that you’ve found to be most effective for bringing in new business?

Scott Maurer: For us it’s really been networking with I think the right individuals. We focus a lot of our networking and marketing efforts in attracting CPA’s who’s clients obviously go to them for tax advice, and since IRA’s are a tax vehicle or a tax-saving vehicle, CPA’s are gonna get asked questions about self-directed IRA’s as well. So it’s really kind of forming partnerships and relationships with CPA’s, with some financial advisors who are open to the concept and who have clients asking about it.

Another area where we focus on attracting new business is people who are forming multifamily property partnerships or they’re doing large-scale investment real estate where they’re looking to raise several million dollars of capital from a number of individuals, and we can help those companies and show them ways in which they can advertise self-directed IRA’s to their investor base and help attract additional capital. That’s really what we focus on on the business development side – those kinds of strategic partnerships, and then again, just helping CPA’s, financial advisors, real estate investment professionals as well understand what the process is and then making it as easy as possible on the clients and the actual investors who are using their IRA’s to make the investment.

Joe Fairless: CPA’s and then also people putting together deals, syndicators or fund managers… Maybe not fund managers, but definitely syndicators. Any other major groups that would be the ideal networking person, entity or professional?

Scott Maurer: Certainly branching off a little bit, attorneys to some extent, who have clients and have individuals who are asking them about creative ways to buy real estate. [unintelligible [00:13:18].00] CPA’s, the syndicators outside of the real estate space, we also try to work with a lot of private placement companies. Syndicators for real estate are forming an entity to raise capital to invest in real estate, and certainly there are other individuals in the financial world who raise capital inside of partnerships or LLC’s to invest in hedge funds or startup companies… Those are other areas ancillary to real estate that we focus on.

Joe Fairless: And how do you reach those – we’ll talk about the CPA’s and the attorneys – professionals?

Scott Maurer: Well CPA’s, for one, and attorneys a little bit to an extent as well – we teach… Again, this is part of our idea of education being so important… We do continuing education classes. For CPA’s we have a two-hour proved course we offered online. We’ve done some in-person as well for attorneys and CPA’s. We provide them that education of a little bit on IRA’s in general, because not all CPA’s are as versed in the intricacies of IRA’s and contributions and distributions etc., but talking to them about that and also talking to them about what self-direction is. So we do a lot of the educational programs, webinars and seminars, and certainly reaching out to those CPA’s that are in our areas – either in our Tampa or Atlanta market – and meeting face-to-face with them, sitting down and having lunch, going to their office or whatnot and really explaining what we do.

A lot of times we’re getting calls from them [unintelligible [00:14:42].29] the incoming call from a CPA who reached out to a fellow CPA who knew about us, and from that standpoint educating them on what’s possible, so that when they get a client that’s interested or is asking questions about “I heard something about real estate with an IRA account. How does that work?” The CPA at least just knows to forward our name along to them to get the questions answered.

Joe Fairless: I asked those specific questions for two reasons. One, just to understand your approach, and for the Best Ever listeners who are passively investing in deals to understand if they are speaking to a CPA and their CPA is not well-versed on this, then who to talk to… But then also for anyone who’s looking for private investors… So a multifamily syndicator or a fix and flipper – you’re basically targeting the gatekeepers of the people who have access to a lot of individuals who have money, and as a fix and flipper or a multifamily syndicator, also building relationships with CPA’s would be beneficial, because we can then have relationships with someone who has relationships with a lot of people who have money.

Scott Maurer: Yeah, without a doubt. That’s why we try to do a couple things from a marketing standpoint to help syndicators and people who are raising capital. We’ve created a personalized landing page for them that we host, that they can put their logo and their information and use that if they’re looking — again, soliciting for more capital… An easy way to do it, if a syndicating is not using IRA’s already, it’s a good way and an easy way to get more capital invested in your deal without really having to go out and find that new investor… Because you already have your stable of investors that you’re working with, many of whom don’t realize that they could invest more with you or invest in different projects by simply using their IRA accounts.

So we provide this landing page, we can provide some other marketing collateral that’s somewhat personalized for your company and your syndication, to help you reach out to those individuals, and kind of just letting people know that if you are interested in the deal I’ve put together – I’ve put together this syndication; here’s my ideas for an investment and I need capital… Just letting the individuals know “Here’s another resource for you to put that money in the deal, because you might have a lot of investors who would like to invest more, they just don’t think they have it, because they’re looking at their savings account or their own personal accounts, not even thinking that “My IRA or my 401k that’s been sitting there for years could even be used.” So you’re right, we turn to those gatekeepers and let them know “Hey, here’s another way to raise capital.”

Just a quick side-story – we had a company here in the St. Pete area in our Tampa Bay market that was raising private capital for their new startup insurance company. They included just a couple blurbs about self-directed IRA’s in our company in one of their offering pieces and were able to raise several million dollars more in capital just from letting the people they already were working with know that they could buy additional shares or make additional investments using an IRA account. That was obviously very powerful for them, and we’ve seen other syndicators that have used that type of platform be successful as well.

Joe Fairless: What is your best advice ever for real estate investors?

Scott Maurer: I think for when it comes to IRA’s it’s if you’re working with other people. If you’re a real estate investor out there and you are looking for more capital – and it seems a lot of real estate investors typically are; you’re always looking for your next deal – is to keep the IRA in mind when you’re talking to someone else. Not something that’s gonna be the panacea for all capital raising needs; you’re not gonna run into people that always have IRA’s available… But remembering however that there’s option out there, because again, I think a lot of people are unaware that an IRA could even be used in that context to make an alternative investment, number one. And number two, they’re not happy with where their funds are sitting. So not only do they not know it’s possible, they have their money sitting maybe in a CD, or maybe it’s in a stock market that’s great one year, but they know there’s gonna be a correction coming at some point, they don’t wanna be on the wrong side of that correction – it gives them the ability to put that money with you into something else, something alternative that’s not tied to those other markets. I think that’s the best piece of advice for a real estate investor.

Sure, a self-directed IRA can be great for you if you have your own IRA, but don’t forget about the millions of other people that have retirement accounts as well, that could help provide capital for your deals.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Scott Maurer: Sure.

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

Break: [[00:19:06].23] to [[00:19:52].05]

Joe Fairless: Best ever book you’ve read?

Scott Maurer: Grapes of Wrath.

Joe Fairless: What’s a mistake you’ve made in business?

Scott Maurer: Not always seeing the opportunity for growth.

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

Scott Maurer: I love to volunteer my time with youth sports.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

Scott Maurer: They can reach out to me, I have a 0800 number – 0800 425 0653 – and simply ask for Scott. They can visit our website at AdvantaIRA.com. Go to our Meet the Team page, you’ll see my picture and you can click right on there to send me an e-mail.

Joe Fairless: Scott, thank you for being on the show and talking to us about self-directed IRA investing, the things we can’t invest in – life insurance, collectibles are things we can’t do – and things we can invest in. Then the creative solution that you came up with or really had to think through, with the one scenario that we talked about with setting up a business, and then the approach that you take to building out the business and building out new leads and building relationships.

One, you identify who your target audience is, who happen to be gatekeepers, and then you have an education platform and then you build relationships through that education, and it’s a spiral up effect.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Scott Maurer: Thanks, Joe.

Dave Sobelman and Joe Fairless

JF1272: How To Be Proactive & Have A Vision For What Will Happen #SkillSetSunday with Dave Sobelman

Listen to the Episode Below (27:46)
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Dave is a previous guest on the show who specializes in triple net leases. Today he comes back on the show to talk about how he and his team try to predict certain things that will happen and be proactive in solving problems before they even come up. Dave gets a lot of people asking him how he “does so much”. He attributes being on top of everything all the time to his time spent working at The White House. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Dave Sobelman Background:

  • Founder & CEO of Generation Income Properties (a public net lease REIT)
  • Founder of net lease brokerage firm 3 Properties.
  • Managed more than 1,000 single-tenant net lease transactions and has been involved in about $10 billion in transactions
  • Began his tenure in commercial real estate as a Research Analyst and Associate for Grubb & Ellis Company
  • Was responsible for maintaining market data for over 134 million square feet of area properties and accurately forecasting regional trends for client assessments
  • Based in Tampa, Florida
  • Say hi to him at www.gipreit.com

 


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TRANSCRIPTION

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

With us today, Dave Sobelman. How are you doing, Dave?

Dave Sobelman: I’m doing great, so fun to be with you again. Thank you.

Joe Fairless: Yeah, nice to have you back on the show. Best Ever listeners, first and foremost, I hope you’re having a best ever Sunday, and because today is Sunday, we’ve got a special segment for you called Skillset Sunday. You’re gonna walk away from this episode with a particular skill that you can hone if you already have it, or you can acquire if you don’t have it already.

The skill we’re gonna be talking about today is how to be a productive, proactive person who’s got a vision for what’s about to happen. And we’re not talking some mystical stuff, we’re talking about practical things you can do in your life to make that happen.

We’re gonna be talking to a previous Best Ever guest. Dave was on episode 1168, titled “How to Have Your Tenants Pay Taxes, Insurance and…”, what’s the rest of that title?

Dave Sobelman: Maintenance.

Joe Fairless: Maintenance, thank you, sir. A little bit about Dave – he is the founder and CEO of Generation Income Properties, which is a public net lease REIT. He’s managed more than 1,000 single-tenant net lease transactions and has been involved in about ten billion dollars worth of transactions. Based in Florida.

Before we dive into it, Dave, do you wanna give the Best Ever listeners just a refresher of your background?

Dave Sobelman: Absolutely. So I am the founder and CEO of a public real estate investment trust called Generation Income Properties, as you mentioned. We focus on net lease properties throughout the country, typically in the top 20 highest density cities in the United States. I also founded a brokerage firm that helps people buy and sell triple net lease investments throughout the country. That’s where my background started, in this very niche product type.

Lastly, I am one of the founders of an algorithm that focuses on triple net lease valuation, using actual metrics and data, and really trying to quantify subjectivity as it comes to the valuation of net lease properties. That company is called Vero, which is Latin for “truth.” That’s my immediate background and where I spend the majority of my time.

Joe Fairless: So with these things, clearly you’ve accomplished a lot and are continuing to accomplish things and performing at a high level… So walk us through the background for today’s conversation, because with this show I do do returning guests, but I always do a special segment with them, and that is either Skillset Sunday or Situation Saturday. I know when you and I were talking prior to this recording, you talked about the background for the focus of today’s episode and where it was coming from. Can you talk about that?

Dave Sobelman: A lot of people ask me, they say “You do so much, you’re so productive. How do you manage running three companies? How do you manage the staff that comes along with that? How do you manage the people and the tasks at hand, and writing books, and being published, and speaking around the country? How do you get all of this done?” And in my mind, it’s become very simple, but I understand from an outsider’s perspective it seems pretty unique.

The basis of my background or the skillset that I think that I’ve developed over the years comes from my time before real estate, which is when I worked at the White House. At the White it’s a very fast-paced environment. You have to think quickly, you have to think accurately for the most time, and you just have to be on top of everything all the time.

Politics aside – we won’t get into a political discussion, or which president I worked for – but every staffer (which is what I was) who works at the White House either has or has developed the skillset where they can accomplish a lot in a very short amount of time.
I was on the president’s advanced staff, which is a position at the White House that most people don’t know about, and it’s where you travel before the president, anywhere in the world, up to a week or two weeks ahead of where they go, and you establish the political logistics of their trip. In essence, who they’re gonna meet with, where they’re gonna meet, who will be in the room, what it will look like on TV, and sometimes the content of their meeting. And you prepare all of this for the president before he arrives.

So when the president does arrive at any place in the world, you typically meet them at the Airforce One; he walks down the stairs and you start briefing them on exactly what they’ll be doing on that trip and who will be with them. You’ve had all of this preparation for a week or two beforehand to educate yourself, which in turn allows you to very quickly and accurately brief the president on what he’ll be doing on that trip.

So you have to develop the skillset to be ahead of yourself and anyone else, and always think of every contingency that could happen in any scenario, and on top of that being prepared for it.

Joe Fairless: What type of training is involved to have that skillset?

Dave Sobelman: There’s no formal training. It’s not like you study this in school. I didn’t study political science, I didn’t study law… I learned this skillset by being around people who demand this sort of level of service within their lives. So you typically start at a very low position when you’re at the White House, where they don’t put you anywhere near the president, but you’re just working for the people who are near the president. You develop that skillset by watching what they’re doing over a period of time.

So it’s just helpful to completely think of any task at hand as not at what’s immediately in front of you, but what you’re ultimately trying to accomplish and who are the different players involved and what their roles are in each aspect of that plan.

Joe Fairless: When you were watching people over a period of time when you were starting out, what were some of the things that you picked up on?

Dave Sobelman: That’s a great question. A lot of times we’re putting a lot of effort and emphasis into aspects of our lives or aspects of our work that isn’t important to the big scheme of things. An example of that – one of my first assignments as working at the White House was working with the media. A lot of people don’t know that literally wherever the president goes at any point in his day, there is always media involved, because it’s deemed that the president is creating history from any aspect of their life… So from a state dinner, to visiting a foreign country, to doing a speech on a specific policy event, to going to play golf, or going for a run. That’s all considered history, so there’s media with him all the time. Even while the president is sleeping, there’s someone at the White House to report on any events that may occur at the White House that directly affect the president.

So one of the first jobs that I was assigned to was to work with the media and to see how they go about reporting what’s happening, both from a video perspective, and then — they call him pencils, people who are writers, where they don’t have a camera in hand; they’re just writing down what’s happening.

It was my job to coordinate the movements of the press, because everything is very coordinated. So being in a room with some of the well-known media outlets throughout the world and with people who you’d recognize by TV appearances all the time forced me to be in a position to be ahead of them all the time… So what are they trying to accomplish by being in this room with the president right now? What is the story that is coming across with the words that the president is using? What is the angle of the photograph that that photographer is trying to make, and what the background of that photograph and who else is in that picture with the president, and what message are you trying to convey with this particular presidential appearance.

My job was to think about all of those things, so as the media moved with the president, that they were capturing the story in which they were trying to accomplish.

Joe Fairless: When you internalized that and then you apply it, what are some things that you do to influence it one direction or the other?

Dave Sobelman: You know, I still use all of those skills in my real estate practices today. So let’s take a net lease transaction, for instance. I figured out at one point that there could be as many as 23 different people involved in any one transaction, everyone having a different role within that transaction. So whether you’re the buyer, the seller, the attorney, the engineer, the surveyor, the title person – whoever you are within that transaction, that you have a role… And from a brokerage perspective, it’s the broker’s job to coordinate that entire transaction, that entire effort.

So transferring those skills of being ahead, of coordinating people, truly being a leader within that and making sure everyone’s accomplishing their job, with the end goal in mind to complete that transaction. It’s something that I’ve transferred very easily to the real estate market. So over my time, as I developed my skills at the White House, I was promoted to different positions where I ultimately became what they called a lead advance person, meaning that I would not only just be part of the media, but I would control the entire trip, and having conversations directly with the White House beforehand, and reporting back to make sure that our efforts on the day of the president’s arrival are extremely coordinated and well-documented. So not only would I have to work  with the president’s White House political staff, but I’d also have to work with the president’s security, which is the Secret Service, and also with the United States military, which came with different roles, a lot of it being communication with the United States army, with air transportation, with the Airforce or the marines, and as the lead advance person, it’s your job to make sure that everyone is completing their task at hand.

So the organizational effort that goes into any movement that the president has is extremely time-consuming, but at the same time extremely detailed. So it really looks effortless when the president’s doing what he’s doing, but in the background there’s dozens and dozens of people who are involved in every effort he’s doing. As the lead advance person, it’s my job to control each one of those efforts and to make sure that the president is doing exactly what we have planned for him to do at that point.

Joe Fairless: Bringing it back to real estate like you did, and the 23 different people in a transaction, one thing you mentioned is you want to recognize there are lots of people in a transaction (23) in the case that you were looking at, and then understand the role that each person is trying to accomplish… What if there is a person, one of those 23, that you know the role they’re trying to accomplish – you could just look that up on Google, or something (what is this person’s role?), but the way they’re going about it is perceived to you as they are sabotaging the process, or they’re just incompetent… Then you know what they’re looking to accomplish ideally, but they’re just not going in the direction you want it to go.

Dave Sobelman: I found in my career that it’s better – and I would just be very frank about this – to call those people out directly. I choose to handle things privately in the first instance, and  have a very reasonable, professional conversation, pin-pointing that person and letting them know that I understand what they’re doing is not accretive to this process, and I hope that we change things and maybe give them suggestions on how to change them. If that doesn’t work, then essentially we bring it out to the collective good of those 23 people or so, or I should say up to 23 people, and letting them know where the weak link is in this process, just so everyone’s aware that I have identified it, I’m trying to work on it, and that’s it’s not (using your words) “sabotaging” the entire process. Everyone else typically can be a professional about it and realize that there is a weak link, but we’re working around it. I’ve had to do that many times in my career. Not everyone has the best of intentions, although we go into it hoping that they do.

I’ve been in positions where I’ve learned this trait by traveling throughout the world. In every country that I would attend there’s a negotiation point and there’s different styles of negotiation. For instance, when we were negotiating with the Chinese government on the president’s trip to China, the Chinese nationals are extremely shrewd negotiators; they’re excellent and expert negotiators on the different aspects of what we were trying to accomplish within that trip. We have to be able to communicate well, not only with our own team, because now we’re dealing with a whole other set of circumstances, which is an entire national government. So being able to fluidly get through this process and being ahead of what we are perceiving to be issues was always very helpful, so when the president does arrive and/or when a transaction does happen, these issues have already been dealt with.

Joe Fairless: How did you and the team come to a satisfactory conclusion or agreement in that scenario with the Chinese nationals, knowing that (to use your words) they’re excellent negotiators?

Dave Sobelman: Well, understanding who you’re working with beforehand is probably step number one. Assessing your situation, knowing what environment you’re going into is extremely important, because real-estate specifically – and we’ll get back to negotiating with the Chinese government – it’s a very dynamic industry. Properties right next door to each other each have their own dynamics, their own circumstances – different owners, different values, different surveys… There’s differences even in properties right next to each other. So assessing not only the real estate aspects of a specific transaction, but the people involved in those transactions and how they want to accomplish this process (whatever process you’re getting into) is step number one.

Relating that to my work with (in this case) the national government is we knew upfront that they’re shrewd negotiators, and now here we as Americans in a foreign country, and therefore you have typically lower leverage in which to negotiate, because you’re not in your homeland, you don’t have your own people surrounding you… And I’m not saying that from a very polarizing perspective, it’s just there’s a reason that there’s different countries – everyone has their own cultures, and their way that they go about doing business… We weren’t in the United States anymore.

I had the ability to prepare for my time in China by learning their cultures and the way that they do business, and how someone in the Chinese government may respond to a request that we have, and being prepared for that up-front just goes back to the thesis of doing your advance work – being prepared and knowing what you’re getting into before you start.

Joe Fairless: So the key is to learn the culture, learn who you’re gonna be working with and then approach accordingly?

Dave Sobelman: Absolutely. And that’s something that I think has allowed me to run my business currently – knowing the different people and the different scenarios that we’ll be involved with in any stage of our development and growth.

Joe Fairless: Now we’ll bring it back to real estate… When you’re doing research on who you’re gonna be working with or negotiating with, what questions should you be asking yourself and what type of research should you be compiling?

Dave Sobelman: Almost like an attorney… Not quite like an attorney, but almost like an attorney, you wanna be prepared for everything. So if you’re going into a transaction, you wanna know exactly what your end result should be, what you want it to be, before you start that transaction, before you start at negotiating, before you start your first offer on that property… Because usually there’s a negotiation with any real estate transaction, and everyone’s trying to get a good deal; both sides are always trying to get the best deal for themselves, but what is your walk away point? Where can you say “This just doesn’t make sense anymore?” Having that up-front in your brain, in a spreadsheet, however you’re structuring your own underwriting is paramount to the process.

Joe Fairless: To know what your walk away point is, and then be prepared for everything — but “everything” is pretty broad by definition… I’m gonna use some stupid example so you can rein me in a little bit. Do they like Fruity Pebbles or do they eat oatmeal for breakfast? What exactly should we look at, what are the most important things we look at? Because we’ll go insane if we try to be prepared for everything [unintelligible [00:20:46].20]

Dave Sobelman: Yeah, that’s fair… So you’re ultimately ending up at a price, so you should come starting with what’s your walk away price. I’ve made several mistakes early in my career where I was not prepared to understand what the value of a specific property would be, and purchasing that property at the wrong price, so when it came time to exit that property for whatever the reason, you can lose money, or not make money. So price is first.

The people involved – everyone says that real estate is a very people-centered business, or a relationship business, and developing those relationships over a period of time is important to the growth of yourself and your connections, but knowing the people involved… And let’s get specific about that – some people, like I mentioned, are shrewd negotiators and you just know that everything that you’re gonna do with this one particular person may be a negotiation. Other people may see the bigger picture and they’ll say “Listen, I’m willing to leave a few dollars on the table in order to get this transaction done quickly, because in that case I can get my money back and invest in the next project, and I’ll make a few dollars there, and over time, in aggregate, I’ve made a lot of money.” So there’s different types of people – some who are looking for the last penny, and others who are cycling through deals pretty regularly.

In my case, we work with attorneys on every single transaction. There’s always an attorney involved, and having an attorney who’s a deal maker, while also protecting your interest, is also really important. Sometimes the attorneys I work with are not licensed in different states in which I work, so we need to find other counsel in different markets, and that forces us to start that vetting process all over again, and finding that deal-maker who’s also protecting us.

These are just several examples of how to assess the everything that I mentioned, but getting granular about the different aspects of the transaction is something that you just learn over time by having to be prepared for each one of those.

Joe Fairless: Anything else you want to mention as it relates to — you’ve talked about two skillsets; you gave us a bonus one, thank you for that. One is being a productive, proactive person, and two is negotiating tips.

Dave Sobelman: Yeah, just to go back to the original topic we started discussing, which was being ahead of yourself all the time… I really can’t stress this enough of how important it is and how productive you can be by giving yourself the chance and the ability to not just be productive, but being overly productive, to a point where people are not only shocked by how much you’re able to accomplish, but impressed. And that leads people to be attracted to the work that you’re doing and how you’re approaching these different situations.

People use phrases like time management or organizational skills, or all of these catch-phrases that we try to adopt in our lives at different points, but in my opinion the real way to handle multiple tasks at one time is just to think way ahead. Be a slave to your calendar, and think about the different people that are involved in each aspect, communicate what you’re trying to accomplish with each one of these goals that you set, and implementing those goals through that work. So multi-faceted, for sure; not something that’s easily adopted or easily learned, but something that over the years — I won’t say I’ll ever be an expert in this, but I’ll say that I’m able to educate others on how I go about accomplishing a lot, with little time in my life.

Joe Fairless: Great advice, and I will attempt to summarize here in a second, but first, how can the Best Ever listeners get in touch with you?

Dave Sobelman: You can reach me by e-mail, and you can get that through my website, which is gipreit.com (Generation Income Properties REIT). I’m happy to discuss any of these topics with anyone at any point.

Joe Fairless: Outstanding. So gipreit.com, correct?

Dave Sobelman: That’s it, thank you.

Joe Fairless: Perfect. Well, thank you for being on the show and giving us insight into how you’ve gotten some skills that you’ve used to get to where you’re at, and how we can apply those skills in our own lives as real estate entrepreneurs. One, the first skill we talked about is being ahead of yourself, as you call it – and everyone else, quite frankly, most likely… And by how we can apply that in our life moving forward. One is think way ahead. When we think way ahead, we need to have a vision for what we ultimately are trying to accomplish. Then we need to think of the people who are involved in that process, put together a plan and communicate the plan of what we’re trying to accomplish, while being calendar-centric to make sure we’re staying on point.

Dave Sobelman: Well summarized.

Joe Fairless: Well, thank you, sir. With negotiating, the most important thing we’ve got to identify before entering into any negotiation is what is our walk away price… Because without that, we might get caught up in a whirlwind of stuff that might seem relevant at the time, but ultimately it’s not if we’re not getting our walk away price – or, I imagine terms, too; you’d probably throw in price and terms in case they give us crazy good terms and the price might be able to be compensated for that… Is that accurate?

Dave Sobelman: Very fair, yes.

Joe Fairless: Cool. Well, thank you for being on the show. I hope you have a best ever weekend, and we’ll talk to soon.

Dave Sobelman: Thank you very much.

Asset Class domination

JF1230: Finding An Asset Class With Less Competition And Dominating It #SkillSetSunday with Tyler Sheff

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When Tyler is looking for deals, he loves to find 5-50 unit deals. This is an interesting space because it cuts out the smaller investors who are intimidated by multifamily, simultaneously you cut out the bigger investors because the deal is too small for them. The biggest contributor to Tyler’s success he says is not assuming anything anymore, rather always asking questions. We get to hear great tips on how Tyler negotiates hs deals, be ready to take notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Tyler Sheff Real Estate Background:

Founder & CEO of CashFlowGuys.com & CashFlowGuys Podcast

-Commercial Real Estate Broker, Investor and Syndicator

-Over 16 year’s experience in real estate

-Based in Tampa, Florida

-Say hi to him at www.cashflowguys.com

 


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TRANSCRIPTION

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

With us today, Tyler Sheff. How are you doing, Tyler?

Tyler Sheff: Hey, Joe. How are you doing today?

Joe Fairless: I’m doing well, and welcome back to the show. Best Ever listeners, if you recognize Tyler’s name, well then that’s because you’re a loyal Best Ever listener. If you don’t, well then shame on you, you should be a loyal Best Ever listener, but welcome; glad you decided to listen. Tyler was interviewed on episode 783, and the title of that episode is What He Did Immediately After Paying $40,000 for a 26-unit Memphis Property He Bought Remotely. That’s a mouthful, but that certainly is intriguing; if you’re curious about it, then go check out episode 783.

Today we’re gonna be talking about a specific skill that has helped him in his real estate endeavors. Because today is Sunday, and that’s what we do on most Sundays – Skillset Sunday.

Tyler, in addition to the lead-in I just mentioned, he is the founder and CEO of CashflowGuys.com and The Cashflow Guys Podcast. He’s a commercial real estate broker, he’s an investor, and he’s a syndicator. He’s got over 16 years experience in real estate. Based in Tampa, Florida. His focus really is buying non-performing notes and apartment buildings 50 units or less. With that being said, Tyler, how about briefly — just give the Best Ever listeners a refresher on you and your focus, and then we’ll dive into this skillset today.

Tyler Sheff: Well, as you’ve said, my focus is multifamily; I like the smaller stuff – there’s a space I play in, the five to fifty unit space. I don’t have a lot of competition. It’s just a little too big for the single-family guys, they’re usually scared of it because it’s multifamily, and the bigger guys, guys that are playing in the big leagues like you are, it’s a little too small for you, it’s not worth your time. So I kind of exist in this space where there’s only a few of us that are buying in this space, the mom-and-pop type arena, and I like that space, I do.

Joe Fairless: I know we were gonna talk about the skill of asking questions and not assuming the answers, and we’ll get to that, but I wanna follow up on this five to fifty space, because it’s a thing that’s really interesting. Is that okay?

Tyler Sheff: Absolutely.

Joe Fairless: Alright, cool. Management is the first question that I bet you get a lot from people – how do you pay for a manager if the property doesn’t pay for it, and how do you allocate that? What’s your response to that?

Tyler Sheff: As we all know, we make our money when we buy, so it all comes down to building those costs in in advance. When I factor management, I’m always coming in at 15% to 18% as a management cost, therefore it forces me to negotiate a deal to pay for all my management expenses. It’s a little trick that I use to force myself to do what I’m supposed to do.

Joe Fairless: Okay, so you make sure that you have that line item in there, and it’s 15% to 18% of what?

Tyler Sheff: Of the annual income.

Joe Fairless: Of the annual income. Okay, 15% to 18% of the annual income is allocated to management… And where are you netting out after you see those expenses? Is it in that range, or is it a little bit lower?

Tyler Sheff: We’re averaging — as far as ROI, or cash-on-cash return?

Joe Fairless: I’m asking is it truly within the 15% to 18% of the annual income once you start operating the property, or is it a little bit lower?

Tyler Sheff: I find it usually between 10% and 13%, that’s the true number. I like to have a little bit of fluff in there, a little bonus money at the end of the year.

Joe Fairless: Okay. The actual management of let’s say a 50-unit, how do you structure that team?

Tyler Sheff: The properties I have in Memphis now – and I’ve been growing over some time – we’ve added some properties, taken away… We’ve got one management company that manages everything for us. They primarily manage smaller assets, that’s kind of their niche. They don’t get into the big stuff, so initially, part of that 50-unit limit came to what their comfort zone is, the type of clientele that they’re used to dealing with.

I’ve dealt with a lot of bad managers, Joe; I’m sure you have gone through that as well…

Joe Fairless: Yes, absolutely.

Tyler Sheff: When I find a good one, I’m in love. I’m gonna buy what they like to manage, and that’s what I’ve stuck with.

Joe Fairless: I understand that approach. As far as the management goes – that’s one big thing for why people say “I don’t wanna do 50, because the property doesn’t support it; I need to do 100, because then I can hire full-time staff”, but you’re just saying, “Hey, budgeted in on the front-end, so that the property can pay for it.”

Tyler Sheff: Absolutely.

Joe Fairless: Okay, what are some other reasons why people say “I don’t wanna do 50, I’d rather do 100”?

Tyler Sheff: Well, I’m not sure why people wanna go larger. To me, I’m very hyper-focused, I’m very conservative when it comes to my investing, first of all, so I’m gonna make sure, when it comes to due diligence – because as we’ve talked about in the previous episode we did, on episode 783, I’ve made a lot of mistakes, and I’ve lost money doing it, and I came away a better investor, I came away a better syndicator, I came away a better broker by going through that emotion of losing it. So for me, if 50 to 100 doesn’t really matter, but when I’m investing in a certain market and I’ve got a manager that they just like to me in that 50-unit space so they don’t have to put somebody on staff, they like to run a lean operation where they don’t have people all over town on site, that’s their reasoning – it makes sense to me, so I go with it.

Joe Fairless: Okay. You plug into an operation that’s already got the system and the expertise, and you kind of [unintelligible [00:07:48].26] definitely benefit from it already being in place… It makes sense.

Tyler Sheff: Absolutely.

Joe Fairless: Okay. Disadvantages to buying five to fifty, versus smaller or larger?

Tyler Sheff: It does take longer to scale, in my opinion. That’s a big disadvantage. Obviously, it goes a lot faster with 100 units, 200-300 units…

Joe Fairless: And when you say “scale”, what do you mean by that?

Tyler Sheff: Well, to grow my portfolio. If I’m looking at my income levels, I have to work a little harder than people do in a larger asset class; I’ve gotta think outside the box a little differently, and I’m not necessarily dealing with the same type of sophisticated owner (owner direct); I’m dealing with a little different seller than what you would be — you’re dealing with a hedge fund in your space, commercial brokers, big companies, stuff like this, where they talk about hundreds of doors… I’m almost always dealing with mom-and-pop, so the emotion comes back into the transaction, where it wouldn’t necessarily exist in the larger transactions.

Joe Fairless: Okay. And I think that is a good segue into asking questions and not assuming the answers, because when I asked you what type of skills you wanna talk about, that you’ve honed and you think it would be important for other Best Ever listeners to hone, you said “asking questions and not assuming the answers.” Do you use that skill when dealing with the mom-and-pop owners?

Tyler Sheff: I’ve gotta say across the board. It is what has helped me stay successful and profitable, 100%. I find that in every case, we as humans, we assume everything. This is why people don’t like each other on Facebook over three words on a post; somebody misunderstands it. They assume what the other person means, and then they have a freak-out about it. This exact same thing goes on every day in transactions.

I finally woke up one day and I said, “You know what? I’m just not gonna assume anymore, I’m gonna ask the question.” An example of that is let’s say I’ve got a guy by the name of John as my seller, and instead of me thinking “John’s not gonna take this offer. This offer is gonna insult him. He’s gonna get mad at me and he’s gonna hang up the phone and he’s never gonna call me again.” I pick up the phone and I say “John, I really wanna buy your property. As a matter of fact, I woke up this morning deciding that no matter what, somehow today you and I are gonna sit down, we’re gonna figure out how I can buy this property and help you out of the situation. Now, for that to happen, I can assume all kinds of things, but realistically, I’m not that smart and I’m probably gonna be wrong, and you may walk away upset. We both know I can only afford what the asset can afford to pay, and I can’t pay more for this property than what the asset can afford to pay, so let me ask you, John, what can this asset afford to pay?”, and I won’t say a word.

Joe Fairless: I would just say whatever the original price was.

Tyler Sheff: And I’ll restate the question, and when I do this… [laughter] Seriously, when I do this…

Joe Fairless: I’d say, “Well, I heard you the first time.” [laughs]

Tyler Sheff: And I’ll reiterate the fact that, “You know, I would love to, but here’s the thing – when we go into this transaction, we’re gonna have appraiser and bankers, and I’ve got investor partners coming in on this… We wouldn’t buy this just because it’s cool, we’ve gotta be able to make a profit, so… At this price point, John, how do I make a profit?” I put them in the driver’s seat, because I’m not gonna assume what they’re gonna say. And I can tell you, very often they come back around to our way of thinking.

Joe Fairless: The natural question there would be “Well, how much money do you wanna make off this?”

Tyler Sheff: Exactly, and I work on monthly numbers. In other words, I look at a return. I say “John, when you owned this property, was it profitable, did you enjoy it? Why did you buy this property?” I revisit why they originally bought it. Again, I’m constantly putting them in the driver’s seat, because I have no idea what they’re gonna say, but when they feel like they have the ability to be in control of the situation, I think the reality of it is I’m being a good listener, I’m letting them drive the car, and we’re gonna get to where we need to go if I give them the impression that they’re driving the car. If I listen to them, instead of just assuming.

Joe Fairless: So in that scenario, where you say “Hey, I’ve got investors, I need to make money off of this purchase…” and I say “Well, how much money would you need to make off of it?”, you don’t give a direct answer, you then answer that with a question of “Well, how much money did you need to make on it when you bought it?”, or what would your reply be?

Tyler Sheff: Every situation is different, but in that example I would probably say something along the lines of “John, the last couple transactions we’ve made, we’re looking for somewhere between a 16% and 18% return across the board. For us to be able to do that, after we go through the diligence process, we’re gonna have to really get down to brass tax.” Then I’ll go right back to him again – “When you bought this property, you were probably in the 25%-30% return, weren’t you?”, because I know his proud, because most men are proud… And he’ll say “Of course I was, yeah”, because you know, all investors are getting rich.

Joe Fairless: Of course, yeah. Everyone does.

Tyler Sheff: Yeah, yeah. Nobody ever does a mistake, nobody ever loses money. [laughter]

Joe Fairless: Right.

Tyler Sheff: Yeah, I’ve got six million units, that’s great. And why are you driving a Yugo? [laughter] Anyway, so I’ll revisit that, and they’ll always come up with a prideful number, which is beautiful, because now I’m always asking for a number just below what their pride number is. Again, I’m not assuming; I’ll let him drive.

Joe Fairless: Yeah, that’s interesting. I can hear that play out and how that would work. I could also hear the opposite response for — I’m thinking of a seller in my mind, a specific person, so maybe that’s what it is, but they’ve done a very good job investing in a local market, and they are incredibly tight with their finances, and they do self-management etc. and I think they would actually answer the question “When you bought this property, what were you looking for?” – I think they’d say something like “I was just looking to beat inflation, and fortunately we did, and we made a little bit more than that, but I’m looking to get a fair deal”, and then they go back to “I need to retire, and I can’t retire off of the amount that you’re offering.”

Tyler Sheff: Well, you know, I’d absolutely agree with you, Joe… It’s tough to retire in today’s society. “What does retirement look like for you?” I’m gonna get them to verbalize that to me. “What does that mean? Because if I give you a pile of cash, Joe, if I give you three million dollars for this apartment building, we’re gonna put three million dollars down on the table, can I come back 12 months from now and visit it? Will it all be there? Of course not; you’re gonna do something with the money. Retirement is what that is… Tell me about that. What does that look like?” I’m focused on him and his pain, I’m not necessarily focused on the deal.

Obviously, it’s not bulletproof, no plan is, but when I’m focused on the seller’s needs and not on my own, and I get them to verbalize and get comfortable with me… And I’m not a one-hit-wonder, so I’m not one of these people that walks in and just [unintelligible [00:14:30].24] some mobile home wholesaler. This is a process. Sometimes it takes six months, eight months, nine months; meanwhile, they’re turning down everybody else’s offers, and I’ve been successful walking in nine months later, buying the property for significantly better price returns than what anybody else had offered. In other words, I’m getting a better deal than anybody else offered just because of the rapport.

Joe Fairless: Over those (let’s say) eight months, what are you doing over those eight months?

Tyler Sheff: If they’re in my local market, we’ll have a cup of coffee. Recently, I flew up to Memphis and I talked to a guy I’ve been talking to for several months and I said “Hey, I’ve really never got to tour Beale Street. I’m gonna be in town for a couple days. Can you meet me for a beer on Beale Street and kind of walk me around?” He says “Yeah, man. That’d be cool”, so that’s where we’ve been in the afternoon, walking around on Beale Street. He was giving me a tour of the history of Blues in Memphis, Tennessee. We struck up a great, rich rapport; we’ve spent maybe 30 minutes talking about the deal (or the property, so to speak). He’s not quite ready to pull the trigger yet, but we part as friends, you see? We’ve gone to a different place.

Two weeks after that he calls me and says, “Hey man, I just wanna thank you for not coming up here and trying to hump my leg over this deal. I really appreciated hanging out with you.”

Joe Fairless: [laughs] Did he use that expression? Because I like that–

Tyler Sheff: He used those exact words; I’ve been using them ever since. It just stuck in my head, it’s like “Great, I like that…”

Joe Fairless: It’s a good visual. I don’t know about a good visual, but it’s a visual.

Tyler Sheff: No, it’s a bad visual. [laughter] So yeah, it works, and I feel good about negotiations… It takes all the animosity out, because I’m genuine.

Joe Fairless: As far as ways to improve this – so that’s the approach that you take and it works, but now let’s talk about how the listeners and myself get better at this.

Tyler Sheff: Start with the why. You can’t get the answer usually the first time you ask the question; that’s been my experience. They’re gonna give you some other sort of an answer, so… Practice makes perfect. I don’t know about you, Joe – you do a lot of transactions, I’m sure you look at a lot of different deals… Anybody that’s gonna be out there actually doing deals, you’re gonna get practice all by itself, and practice is really what it comes down to. Get out there, fail… You’re gonna ask the question the wrong way, and I can’t tell you which way to ask the question. I could tell you how I do it, but this voice only translates so well… People think that I’m more like a caveman, and I should be [unintelligible [00:16:49].04]  kick your door in and steal your car.

You’re gonna have to try different approaches, but the key is if you go in with the mindset that you genuinely care about solving the seller’s problem, the only thing stopping you from doing that is the answers to those questions; I think most people reasonably will figure out after a couple of times on how to answer those questions that works best for them, I truly believe that.

Joe Fairless: A lot of times brokers get in the way…

Tyler Sheff: Yes, they do.

Joe Fairless: Any thoughts on that?

Tyler Sheff: Well, being one… Full disclosure, I’m a realtor/broker, whatever, but I’m not licensed in Florida as a broker, but I’m a listing agent as well, I list properties, and… I encourage communication, first of all. I will automatically try to befriend the agent. It’s a little easier for me being one; they treat me a little better because I’m one of them, so to speak; at least that’s how they see me. But for a person off the street, I would think — first of all, they live in scarcity, a lot of them do. They’re very afraid of losing out on the opportunity; there may be some insecurities there, whatever… A little bit of a scarcity mentality working. Knowing that, play to that. In other words, assure them that you’re focusing on everybody winning in this transaction.

And what I’ve done in transactions is I’ve actually taken the responsibility early on for paying the broker’s commission from the seller. In other words, instead of “Listen, John (the broker), I understand you have this listing… How about this, I don’t want your commission, or the seller to think that your commission may impact this deal, so let’s even the playing field; I will go ahead and cover your fee if we successfully close on this. Does that make sense?” “Yes, it does.” “Good. So now the commission’s off the table. Now, help me get this thing put together.” I’ve done a couple deals that way and they’ve worked out quite well.

Joe Fairless: That makes a lot of sense on the five to fifty units, because what’s the typical commission on average, on (say) a 50-unit that you’re buying?

Tyler Sheff: You’re looking at 4% on average.

Joe Fairless: Okay, and how much are your purchase prices about?

Tyler Sheff: We’re looking at anywhere from 300k up to maybe 3 million.

Joe Fairless: That’s a big range. On a 3 million dollar purchase, 4% is 120k, so you would be baking that into the costs to acquire the property?

Tyler Sheff: Absolutely.

Joe Fairless: In exchange, you have an ally from the seller side, and that would help you get the transaction closed?

Tyler Sheff: Absolutely, correct. And over and above that, when I’m working with my license, representing the buyer, I always offer to take my fee as a promissory note, recorded against the deed. So in other words, I represent you in the transaction, and I say “Joe, I’ll tell you what – don’t worry about my commission. I will record it as a note. Pay me 6% a year. How long are you gonna keep the property? 10 years? Okay, let’s amortize it over 10 years. That’s 200-something dollars a month, or whatever it works out to be. Let’s do that and let’s let the tenants pay men, and then you don’t have to. It doesn’t become part of the transaction. It’s just [unintelligible [00:19:51].25]”

Joe Fairless: Let’s say that your fee is $100,000. How would you structure that again?

Tyler Sheff: I would basically amortize my fee. So let’s say if your exit strategy is a ten-year hold; I would note in the mortgage maybe 5%-6% interest, and then amortize it over the term of the duration, whatever you’re gonna own the property… Maybe structure a balloon, or something like that to pay off at closing, and that keeps it clean. And then I just become a monthly expense.

Joe Fairless: I haven’t heard of that before. In that case it would be roughly $10,000 + 5%, 6% interest, whatever you do a year, and then at the end of the ten years, you’re fully paid of… Or something like that with a balloon payment after ten years where it’s not 10k, whatever the structure is.

Tyler Sheff: Right. The beauty of it is that we can structure it any way we need to, to make the deal work.

Joe Fairless: And if they don’t pay it, what happens?

Tyler Sheff: I have a second position lien recorded against the property, so I guess we can start looking at foreclosure options and things like that, but I’ve gotta say, I’ve been in the business 17 years, I’ve never had anybody not pay, knock on wood.

Joe Fairless: That is one creative way I hadn’t come across before. Anything else as it relates to asking better questions and not assuming the answers that you wanna mention in our conversation?

Tyler Sheff: I would say – and this is gonna be a tough one for most people, especially in today’s society… But in today’s society, really there’s no excuse to not be face-to-face; we’ve got things like Zoom, we’ve got Skype, we’ve got the ability to get in the car and drive across town… Try to be face-to-face whenever possible – and by that I mean even virtually face-to-face – while you’re talking to people, because I think if they can see the fact that you’re genuine, I think that says a lot to the questions that you’re asking, and I think that’s gonna result in getting better answers. That’s been my experience.

Joe Fairless: Great stuff. I appreciate these insights and the overall approach. One additional resource I recommend on this topic of not assuming the answers is Crucial Conversations. It’s a book that I have read multiple times and I recommend to people. Anyone who assumes things, basically they’re telling themselves a story, and everyone has their own story, and nothing in life means anything until we interpret the meaning that we choose to assign it, and that’s something that this book talks about, and they give some great examples… So Crucial Conversations is a book I recommend.

How can the Best Ever listeners get in touch with you, Tyler?

Tyler Sheff: The best way to reach me is through my website, CashflowGuys.com. Of course, for our podcast, we’re on Stitcher, iTunes, the whole nine yards.

Joe Fairless: From why you buy five to fifty units, and the benefits, and how you handle the management – you just bake it in prior to closing, 15%-18% of annual income; in reality, you’re seeing between 10%-13%. Two, how you’re working with the local owners to purchase those properties and the focus that you have, which is being focused on the seller’s needs, not your own, and caring about solving the seller’s problems, that being the exclusive focus, then everything else falls underneath that. It might take a couple conversations, it might take eight months, or it might never happen, however you’re setting yourself up for success with a higher probability of closing with that approach. I appreciate you taking that approach and giving us some specific stories, with the Beale Street example, and the whole humping your leg thing.

Thanks for being on the show, Tyler. I hope you have a best ever weekend, and we’ll talk to you soon.

Best Real Estate Investing Advice Ever Show Podcast

JF1168: Have Your Tenants Pay Taxes, Insurance, and Maintenance! With Dave Sobelman

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Triple net leases allow investors to be very close to passive. The three nets; taxes, maintenance, and insurance, are all paid by the tenants. You can imagine the headaches that could save the building owner! While this strategy does offer less risk, it also comes with a little less return on your money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Dave Sobelman Background:

  • Founder & CEO of Generation Income Properties (a public net lease REIT)
  • Founder of net lease brokerage firm 3 Properties.
  • Managed more than 1,000 single-tenant net lease transactions and has been involved in about $10 billion in transactions
  • Began his tenure in commercial real estate as a Research Analyst and Associate for Grubb & Ellis Company
  • Was responsible for maintaining market data for over 134 million square feet of area properties and accurately forecasting regional trends for client assessments
  • Based in Tampa, Florida
  • Say hi to him at www.gipreit.com  
  • Best Ever Book: Shoe Dog

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Dave Sobelman. How are you doing, Dave?

Dave Sobelman: I’m doing great.

Joe Fairless: Nice to have you on the show, I’m glad you’re doing great. A little bit about Dave – he is the founder and CEO of Generation Income Properties, which is a public net lease REIT. He is the founder of net lease brokerage firm 3 Properties. He’s managed more than 1,000 single-tenant net lease transactions and has been involved in about ten billion dollars in transactions. Based on Tampa, Florida. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Sobelman: Thank you so much. When you go through my [unintelligible [00:01:54].00] I can’t believe where we’ve come. I started my career at the very bottom. I was a research analyst for a national commercial real estate brokerage firm, where I sat in a cube; no one talked to me, the cube was far away from everyone, and they just wanted me to crunch numbers. It was one day when someone came up to me – about eight months after I started – and asked me my first question in that analyst role, and that’s when I knew that people started to value my work and my opinion.
Since then, I’ve had a sole focus, strictly on triple net lease investments throughout the entire country. Like you said, I’ve done about ten billion dollars in transactions in the last 15 years, and it’s been really interesting to see how having that sole focus has been extremely accretive to not only the companies that I’ve started, but also the industry itself.

I was an anomaly back 15 years ago when I was solely focused on this one property type, because net lease properties truly just were an ancillary investment at that point. A lot of shopping center owners had these outparcel locations, like a McDonald’s or a Burger King or something like that; they didn’t really treat them as an investment – or I should say an industry – in and on itself. So when someone like me came along and said “I’m only gonna focus on these single-tenant triple net lease assets”, we kind of took the market by storm at that point.

Joe Fairless: For anyone not familiar with what you mean when you say single-tenant triple net lease, will you just quickly define that?

Dave Sobelman: The stereotypical example of a single-tenant commercial triple net lease property is your average neighborhood Walgreens drug store. Most people know what that means. There is one parcel of land, there is one building, the building was built specifically for Walgreens in this instance, there’s one lease — a lot of people don’t know that Walgreens in this case doesn’t own a lot of their real estate, they lease it from people who build these buildings for them, and the leases are very long. In their case, they’re 75 years. They have options to terminate after 25 years, but even 25 year is a long time.

Walgreens is a big public company, and they have what’s called an investment-grade credit rating, meaning that they don’t have a lot of debt and they’re a strong and sound, credit-worthy company. Putting these factors together – real estate, good credit tenants, long-term leases, and you get the makings of a good investment.

Now, why are they called triple net leases is – and this may be strange for people to hear, but the three nets are taxes, maintenance and insurance. Those three attributes of the operations of the property are the tenants’ responsibility, not the landlord.

So the landlord in essence is passive from a day-to-day operational perspective. So these triple-net leases are actually very common around the country, and a lot of people don’t know that, but you can be a (somewhat) passive landlord – I put parentheses around ‘somewhat’ because no real estate is passive altogether, but this takes away changing light bulbs and fixing toilets and so on.

Joe Fairless: Ideally, we’re all doing that, not changing light bulbs… Ideally, we all have triple net lease tenants. The perception that I have – and I know you’re gonna educate me otherwise – is that there’s not as much money in buying these types of properties, because they’re… And again, you’re gonna probably punch me in the face when I say this – it’s easier to do triple net lease, to buy them, and you’re not gonna make as much money. So what did I just say that was incorrect?

Dave Sobelman: There’s definitely a stigma on the properties that when you have lower risk, lower amount of responsibilities, that your yield is lower. In some cases it’s very much true, so I wouldn’t disagree with that at all. When you’re getting into higher risk properties, let’s say buying vacant buildings or vacant land that you have to develop, your returns will be higher, but you are taking more risk. So these are probably one of the best risk-adjusted returns that an investor can get, real estate or otherwise.

Let me quantify that for you somewhat. Let’s just continue using our Walgreens example. If you were to purchase a Walgreens drug store as a triple net lease real estate investment, your return today would probably be around six; maybe a little bit lower, maybe up to seven, and that’s a percent return. If you’re getting that 6% return, you have Walgreens as your tenant for 25 years, you get the appreciation of the building, if you have a loan you get to deduct the interest expense on that loan… Now, let’s say you want to buy a bond. A lot of people know that bonds are very conservative; bonds are based on the guarantor of that bond… So let’s say we buy a Walgreens corporate bond. Today, that bond is still guaranteed by the exact same company that’s occupying the Walgreens drug store. The term could be the exact same, 25 years, and obviously the credit of the company is the exact same as the tenant who is occupying that building. But if you were to buy that bond, you are probably getting a 3% or 3,5% return.

So you have multiple hundreds of basis points difference in buying a net lease property versus their corporate bond. Now, if you’re comparing it to higher risk real estate investments, yes, they are on the lower end of things. But from a risk-adjusted basis, they are actually tremendous investments.

Joe Fairless: With your REIT, is your — I hate to say elevator pitch, because I don’t pitch things and I know you don’t either, but your short and sweet value proposition basically that? It’s “Hey, you’re likely gonna get a better return than buying a bond, and you have a collateralized asset?”

Dave Sobelman: No, that’s not my value proposition at all, because having a public REIT – there’s a tremendous amount of disclosure and transparency. That’s one of the things I like about the REIT – just telling the public everything. One thing I like to say is that my REIT Generation Income Properties is not a new concept. I’m not the first triple net lease REIT. In fact, there are 14 other triple net lease REITs that are currently trading all on the New York Stock Exchange.

Now, each one of those REITs has their own strategy within this niche product type. Some people say “We’re strictly gonna buy retail properties” or “We’re strictly gonna buy net lease office properties, or industrial properties.” Some other REITs will say “We don’t wanna buy any credit-worthy tenants whatsoever, so we will never have a Walgreens using that example in our portfolio. We only wanna buy much higher risk credit tenants, because our returns are higher”, and then different variations on everything I just said.

Joe Fairless: Okay.

Dave Sobelman: So the difference between Generation Income Properties and the other 14 net lease REITs is that GIP focuses on the real estate. Now, let me tell you what that means. When someone goes to buy a net lease property, typically they’re looking at the credit of the tenant and how long the lease is, because they want to make sure that their investment can actually pay them income, pay the rent for as long a period as possible, and that’s great. But you are buying that Walgreens that we’re using as an example in midtown Manhattan or in Dubuque, Iowa. With all due respect to Dubuque, Iowa, there’s probably a drastic difference in the valuation of the real estate than midtown Manhattan.

So Generation Income Properties puts the real estate underwriting first, because what we wanna do is increase the value of that real estate during our ownership, and ultimately what that means is not only do we get paid this rent from these investment-grade credit tenants with long-term leases, but there’s a much higher probability of that property appreciation during our ownership, and being a public company, if you do have appreciation of your assets, then the assets or net asset value of the entire company increases, and ultimately what happens is the stock price increases along with it. So I’m treating Generation Income Properties as a growth company, much more so than just a dividend machine, which all the other net lease REITs provide. They wanna tell their shareholders “If you invest with us, we will pay you a 4% return and we’ll pay you every quarter or every month, however it is.” A lot of people like that consistency, but I also provide that same market dividend, but I’m also giving the shareholders a much higher probability of increasing the stock price by buying only in the top 20 highest density cities in the country, like New York, L.A., Atlanta, Washington DC and so on. And they’re all listed on my website, the top 20 cities.

Joe Fairless: How do you increase the value of a triple net lease property?

Dave Sobelman: Just as I stated – by buying good real estate. Because most people derive the value of a net lease property from the credit of the tenant, and the length of the lease. What ultimately happens is the price is derived based on a return, which is called a capitalization rate (cap rate). When I mentioned the 6% return from the Walgreens earlier in the conversation, that’s what people like to see. “I’m gonna get a 6% return on my money, and I’m comfortable with that.” And that’s just based solely on the income, and they’re not really looking at increasing the value of the real estate, and that’s done strictly through higher density, better demographics, tough to invest markets, and just what we call barriers to entry, and that’s what we focus on… Because history has proven that you can quantifiably increase the value of a property by buying in these poor markets.

Joe Fairless: Okay, so you’re not doing anything to the property; you’re identifying the right place to buy the property, and then based on historic data, the property will appreciate because of the area that it’s in.

Dave Sobelman: Very much so. Our very first asset was purchased in Washington DC, just North of the White House. The tenant is 7-Eleven. Not super sexy, not exciting; most people will go get their Slurpee or their hot dog or their drink from there, but they have a AA- Standard & Poor’s credit rating. It’s one of the highest credit ratings there is. The Federal Government, by comparison, is AA+, so they’re not too far off from a credit perspective. This property was a brand new construction, it was the ground floor commercial condominium of a brand new construction, residential condominium building. It’s in the middle of everything, it took them four years to build this property, just because it’s so difficult to build in Washington DC. 7-Eleven has a ten-year lease (triple net), and not many people would have the opportunity to buy this. In fact, this didn’t even go on the market because the seller contacted me directly.

Another value proposition for the REIT is just my reputation in the industry allows me opportunity or access to different properties that most people wouldn’t. So that property is a great example of buying in the middle of everything, and it’s hard to buy in Washington DC. We have properties under contract in Tampa, Florida, about to be Atlanta, Georgia… Just very core markets that typically appreciate in value much faster than secondary and tertiary markets of the country.

Joe Fairless: Other than the 20 highest density cities, what are some specific benchmarks that you look for in demographics for where you buy?

Dave Sobelman: The easy ones to look for are just income, number of people, I look at the trends as well – are the trends going up or down? And then I actually visit each property I go to, to get a feel of it. Let’s take this Atlanta property that I just mentioned – it’s occupied by SunTrust Bank, which if some of your listeners don’t know, it’s a public company, Standard & Poor’s credit rating of A, and they’re headquartered in Atlanta. So this is a prime site for them.

I actually went to the site, I lived just above another commercial condo, triple net leased to SunTrust; I rented an apartment that’s just above this building and I actually embedded myself in the community for a period of time, so I can see…

Joe Fairless: How long?

Dave Sobelman: One night, two full days.

Joe Fairless: [laughs] You made it sound like six months or a year.

Dave Sobelman: No, for sure… I still want my wife to like me.

Joe Fairless: Alright, so you spent the night there, okay.

Dave Sobelman: But seeing the property at different points of the day is really important, because a lot of people go to a property one time, they drive by it, they don’t go inside, they just see “Yes, it does exist”, and they’re comfortable from that point on.

I take a much different approach, where I like to see it during morning hours, during lunchtime traffic where people are out getting their lunches; in the evenings, after they’ve left work, what’s the nightlife looking like? And so on.

There’s lots of different ways to diligent a property from a physical perspective, and that’s something that I take very seriously.

Joe Fairless: Drill in a little bit deeper on specifics  – you said you look at the income, the number of people, trends going up and down… Can you give us some specifics as far as what income do you look at, what number, how many people – 20, 5 million, 300 thousand? And what specific trends?

Dave Sobelman: I don’t have specific numbers, because every market is different. Washington DC actually has higher density than Atlanta, Georgia, and I’m not talking about the suburbs of Atlanta either, I’m talking about Atlanta proper, downtown Atlanta. So the densities are just different. So I don’t have threshold numbers, we take up to 100 different variables into account in any one property.

Joe Fairless: Are all 100 weighted equally?

Dave Sobelman: No.

Joe Fairless: What’s weighted the most?

Dave Sobelman: Just appreciative value. So “What is the potential to appreciate the value of this site?”, that’s the most important variable. But if we’re getting into the minutiae of underwriting, then we can look at “Is the property on a corner, or is it mid-block? What’s the access to the property? Is it good or is it bad? Does the property have parking?” If it doesn’t have parking – like a lot of these dense properties, they don’t have parking at all – then how do people access this property and how do they get to this property? What can we reuse this property for? Even though I’m telling you a great story right now that we’re buying properties occupied by these tremendous companies, I’m always looking at the asset from the worst-case scenario, because what we’ve learned during the last recession is even great companies go out of business.

Kmart used to be a great company, Circuit City used to be a great company, Blockbuster was a great company… And what we learned is even though they were a great credit-worthy company, we had to start learning how to reuse their real estate. In a lot of cases, that’s happening. Blockbuster is probably the best-case scenario on that. Even though they went bankrupt and vacated all of their thousands of locations around the country, a lot of them were in great locations. Those landlords who owned those assets were able to either sell them, or completely reposition them with different tenants, maybe retrofitting them for a different use or allowing the tenant to retrofit them at their own expense for a different use.

So there’s just so many different ways to look at an asset, and you really don’t do that unless you’re spending a decent amount of time there.

Joe Fairless: Based on your experience, for a Best Ever listener who’s listening to this and thinking “Well, I like what you’re saying and I wanna get in on some triple net lease single-tenant properties”, what’s your best advice ever for them as a startup?

Dave Sobelman: Well, first of all, they’re expensive. So if you’re gonna buy a property for yourself or a small partnership, I wouldn’t recommend just throwing a few dollars together. I would recommend waiting and kind of saving those dollars until there’s a substantial amount. That substantial amount could be 2-3 million dollars.

If you wanna get into the net lease business and have some exposure in your account to net lease properties, that’s what REITs are set up for, where you can buy shares of the REIT that’s focused on the net lease properties themselves, and then you can have your exposure that way.

Typically, if someone approached me during a brokerage transaction where they wanted me to represent them to purchase an asset and they said — let’s say I have $500.000, which you and I both know the value of a dollar, we both know that that’s a tremendous amount of money, but in the scheme of a net lease investment it’s a very low dollar amount. So the quality of the asset that they would be purchasing at those low dollar amounts would not be worth the risk that they would be taking.

So I would either encourage them to put a lot of people together at $500,000 each, or to kind of spread their risk and get the diversification of a REIT that’s focused on this.

Joe Fairless: Are  you ready for the Best Ever Lightning Round?

Dave Sobelman: Let’s go!

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [[00:20:54].11] to [[00:21:51].26]

Joe Fairless: Best ever book you’ve read?

Dave Sobelman: Shoe Dog, by Phil Knight. It’s essentially my life story.

Joe Fairless: Best ever deal you’ve done?

Dave Sobelman: Probably a 17-property portfolio occupied by Havertys Furniture, in 10 different states, at a value of about 55 million dollars.

Joe Fairless: And why is that the best ever deal?

Dave Sobelman: Well, number one, the scale of it. Number two, it was very early in my career, so it was very meaningful to me.

Joe Fairless: How do you make money on these deals?

Dave Sobelman: My best advice to people who truly wanna make money on net lease properties is to make sure that you hold them for generations, hence the name of my REIT, Generation Income Properties. You wanna have that sort of outlook. You will get paid during your ownership of this property – that’s what the tenant is there for, that’s what the rent is there for… But you wanna make sure that you’re holding it for a long period of time so you can make a lot of money.

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

Dave Sobelman: Probably early in my career – this is an asset that I still own, because it’s not sellable; I just jumped at an opportunity, what I thought to be a well-priced net lease property, and it turns out that the tenant was very poor, and they vacated the property. We got a second tenant in there, they were very poor, they vacated the property – all of that happened within a  few years of each other, and now the property’s location is what I would call tertiary market… There are so few tenants who truly wanna be in this asset. It’s really a lesson that I learned – to your point, my worst deal ever – that in real estate the actual location does matter.

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

Dave Sobelman: My wife and I have a family foundation called The Wellspring Fund that focuses on children, and exposing them to other children that may be a little bit different than themselves – whether it has to do with nationality, race, religion, ethnicity… We really focus our philanthropy through our family foundation.

Joe Fairless: How can the Best Ever listeners either get in touch with you or learn more about your company or REIT?

Dave Sobelman: GipReit.com, that’s the website for the REIT. All of our contact information is there, there’s a video about me, you can hear me talking about the REIT, and I actually personally respond to every e-mail and every phone call. Actually, one of my great pleasures is educating people about the REIT, introducing them to that… So all of the investors who are in the REIT now, they’ve all had personal interactions with me, which I very much appreciate.

Joe Fairless: Dave, thank you for being on the show and talking about your positioning within the REIT space, how everyone is looking for that angle – some only retail-focused, industrial office, some no credit-worthy tenants because they want a little bit higher risk for better returns… Your focus is on the real estate itself and the appreciation of that real estate based on the location of where it is and how it’s positioned in that particular submarket, and then all the lessons learned along the way.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Dave Sobelman: Thank you.

Best Ever Show Real Estate Advice from experts

JF769: Don’t Use Your Renovation Contractor for a New Development

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General contractors come in all shapes and sizes, and we mean jobs. Your typical general contractor may be skilled at renovations, but wouldn’t have a clue what to do with new construction. In this episode you will learn what to look for, enjoy!

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Jason Gaston Real Estate Background:

– Owner of GT Property Pros LLC, a successful real estate investing firm.
– Owner of the Freedom Flipping Academy; A successful real estate investment education firm and publishing company
– Creator of How to go from Zero to 25K in 14 Days Flipping Houses
– Author of Guerrilla Marketing Mayhem
– Based in Tampa, Florida
– Say hi to him at http://flippingfreedom.com
– Best Ever Book: E-Myth by Michael Gerber

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JF532: A Closer LOOK at Optimizing Your Mortgage and How to Save Through Leverage

We have had a previous guest explain a phenomenon that seemed too good to be true, paying down your mortgage rapidly and saving by leveraging another interest bearing loan. Today’s guest will come to shed more light on the matter and tell us exactly how it works. He claims you can save in interest payments by leveraging another debt, don’t miss this episode!

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Bill Westrom background:

  • For the past 13 years he’s been teaching homeowners an innovative financial strategy called Equity Optimization
  • Co-author of Master Your Debt
  • Based in Portland, Oregon and company is in Tampa, Florida
  • Say hi to him at truthinequity.com

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Listen to all episodes and get a FREE crash course on real estate investing at:http://www.joefairless.com

Are you committed to transforming your life through Real Estate this year? If so, then go to http://www.CoachWithTrevor.Com and claim your FREE Coaching Session.  Trevor is my personal real estate coach and I’ve been working with him for years. Spots are limited, so be sure to do it now before all the spots are gone.

Have you tried REFM’s Valuate software yet? It makes investment analyses a breeze, and makes you look like you spent all week on them. Go to app.getrefm.com to sign up today.

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Best Ever Show Real Estate Advice

JF429: How Technology Elevates REI to a New Level

Our Best Ever guest is revolutionizing the way flippers streamline a property rehab analysis using an app contracted through Home Depot. He has built and liquidated real estate portfolios three times including up to 30 properties at a time. He now specializes in the sale of software that produces real estate investment analysis all in house, hear the details now!

Best Ever Tweet:

Andrew Waite’s real estate background:

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You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

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Best Ever Show Real Estate Advice

JF365: $1,000 Credit Card Charge to Virtual Wholesale Genius!

Ready for a new market? Our Best Ever guest hints how he successfully wholesales properties…virtually! No need to be everywhere at once; he instructs how to close a deal in another city while in the comfort of your home! How to find your “boots on the ground” including additional real estate professionals in places other than your hometown, you have to hear this!

 

 

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Chris Bruce’s real estate background:

 

 

  •  Full time real estate investor who started investing in Detroit, Michigan then went to Tampa, Florida
  • Say hi to him at http://escapethenewbiezone.com/aboutme
  • Popular podcast called Escape the REI Newbie Zone
  • Virtual wholesaling in different markets
  • Based in Tampa, Florida

 

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Made Possible Because of Our Best Ever Sponsor:

 

Patch of Land – Could you do more deals if you had more money? Let the crowdfunding platform, Patch of Land, find investors for you and fund your next deal…and your next deal…and your next deal…and…well, just go find out more at http://www.PatchOfLand.com

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JF101: Build Your Buyer’s List First…Here’s Why

Today’s Best Ever Guest shares why it’s important to build your buyer’s list first and we discuss who that is applied to all areas of real estate investing.

Tweetable quote:

Andrew Massaro’s real estate background:

–        Owner of Rockstar Rehabs based in Tampa, FL

–        Been wholesaling since 2005 and averages about 4 a month since then

–        Focus is on wholesaling and is author of Quick Flips and Fast Cash a former #1 best seller in Amazon store

–        Say hi to him at http://andrewmassaro.com/

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Sponsored by: Twenty Four Sound – visit http://www.twentyfoursound.com and mention “bestever” for an exclusive 20% discount on your purchase.

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