JF1927: Everything You Need To Know About Sales Assumptions When Underwriting An Apartment Deal | Syndication School with Theo Hicks

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When underwriting a potential deal, you’ll need to have set assumptions that will help you determine how much cash you will receive at sale. After investors are paid back, you’ll be splitting the profits with them according to how you structure the investment. Theo will break down how Joe and Frank underwrite their sales assumptions for Ashcroft Capital. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to determine what  the closing costs are going to be as well how much debt you will owe. Subtract those two factors from the sale price, and that gives you your profits at sale”

 

Free Resource:

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JF1926: How To Underwrite A Highly Distressed Apartment Deal | Syndication School with Theo Hicks

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We’ve covered underwriting for more “normal” value add apartment syndication deals. Now we’re going to hear the differences between underwriting those deals, and underwriting highly distressed apartment communities. Theo will cover how you should underwrite highly distressed deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The point is to have a contingency budget and have it be at least 10% of the deferred maintenance cost”

 

Definitions & Example Deal:

http://bit.ly/highlydistressed

 


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


 

JF1920: The 51 Responsibilities Of The General Partnership Part 2 of 2 | Syndication School with Theo Hicks

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Yesterday Theo began discussing these 51 responsibilities. Today he will finish the rest of the responsibilities that he didn’t get to yesterday. You won’t hear a detailed breakdown of each responsibility, we’ve already done that throughout syndication school. The focus of these episodes is to help you figure out how to divide up these responsibilities among your team and business partners. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You’ll know exactly who is responsible for what”

 

Related Blog Post:

http://bit.ly/51roles

 

Free Resource:

http://bit.ly/GProles

 


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


 

JF1919: The 51 Responsibilities Of The General Partnership Part 1 of 2 | Syndication School with Theo Hicks

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Theo has already covered most, if not all of these responsibilities in detail on previous episodes of Syndication School. The purpose for this and tomorrow’s episode is to explain how to divide these responsibilities among your team members and business partners. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“This document has all 51 of the main responsibilities”

 

Related Blog Post:

http://bit.ly/51roles

 

Free Resource:

http://bit.ly/GProles

 


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

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

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


 

JF1913: Everything You Need To Know About Filing An Insurance Claim | Syndication School with Theo Hicks

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Whether it’s damages from a tenant, fire, water, winds, etc, if you own enough properties, at some point you will likely have to file an insurance claim at some point. The process can be super meticulous and involved. Theo will explain what to do and how to do it when it comes to filing your insurance claim. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Take as many pictures as you can and write a detailed description of what you are seeing”

 

Related Blog Post:

https://joefairless.com/s-o-s-approach-managing-investment-crisis-like-hurricane-harvey/

 


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


 

JF1912: How to Track Your Exterior Renovations | Syndication School with Theo Hicks

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We’ve already covered how to track your interior renovations, today Theo will start talking about how to track your exterior renovations. We also have a free spreadsheet for you to open and follow along with while listening to this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Some items aren’t as high of a priority”

 

Free Spreadsheet: 

http://bit.ly/exteriorrenovationtracker

 


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

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


 

JF1906: How To Track Your Interior Renovations | Syndication School with Theo Hicks

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When you’re doing a value add business plan, you’ll likely be renovating some if not all of your apartment units. If you have a 100+ unit community, that is a lot to keep track of! Lucky for you, we have a free spreadsheet for you to use, and Theo will cover how to use it in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Once you close, all the projected numbers should be set in stone, you don’t want to update those again”

 

Free Interior Renovation Spreadsheet:

http://bit.ly/interiorrenovationtracker

 


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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, every Wednesday and Thursday, we air the two Syndication School podcast episodes on the best real estate investing advice ever show on iTunes. And for the majority of these series we offer some sort of resource  – PowerPoint presentation templates, Excel calculators and templates, how-to PDF guides – some sort of resource for you to download for free. We’re returning to the free documents today, so make sure you check out this free document that we’re gonna talk about today. All the other previous free documents we’ve given away, as well as all of the previous Syndication School series episodes we’ve recorded can be found at SyndicationSchool.com.

As I mentioned, we will be giving away a free document today. You can get that in the show notes of this episode, or at SyndicationSchool.com. That is going to be the Interior Renovation Tracker, hence why the episode is entitled “How to track your interior renovations.”

This is going to be an Excel template which I recommend if you have the opportunity to have it opened and follow along as I’m talking about it, because I’ll be going over how to use this document and what it actually is telling you and showing you. It’ll be a lot easier and it’ll make more sense to you if you have the document open. If not, no problem; just download it when you have a chance. It’s very simple and user-friendly, and it still should make sense if you’ve been following along with Syndication School and know what the interior renovations entail, and why you’re doing them, and the key metrics that you wanna be tracking. So let’s just jump right into the documents.

One more thing before we jump in… So this is gonna be what you use after you’ve closed on a deal to track your interior renovations, number one, and number two, to compare how your renovations are actually going to what you’ve projected. So the second part is the key. You wanna make sure that you are on time and on budget with interior renovations, so that is what this document is gonna help you out with. So you should be able to fill out the majority of this document once you have set your business plan.

There are five different data tables. We’ll go through each of those and discuss what they mean and how to fill it out.

The first one is the interior renovation timeline. The two things you wanna input into here – number one is units to renovate. The four things you wanna input here is 1) what are the total number of units at the apartment? Pretty self-explanatory. And then the next section deals with the total number of units to renovate. So it’s not as simple as saying “I need to renovate 326 units. I plan on renovating every single unit, so I need to renovate 326 units.” Yes, that’s technically true, but this document allows you to be more specific.

So what you’ll find if you are a value-add investor is that you’ll come across a few different types of deals. Number one, it’ll be deals where not a single unit has been renovated yet, so all the units are in the original form. If that’s the case, then the total number of units will equal the units not renovated by the seller. So there is a cell that you input the number of units that were not renovated by the seller at all… So if you’re dealing with that first type of deal, where the seller didn’t do any renovations yet on the units, then yes, it’s as simple as saying “There’s this many units, and every single unit has not been renovated yet.”

In other cases you’ll come across deals where the owners have fully renovated a percentage of units. Ideally, it’s less than 50%, so there’s enough skin on the bone for you to make money after you’ve completed the upgrades, or gone above their upgrades. So if if it’s the case where the seller has renovated 10% of the units, then 90% have not been touched, and 10% have been touched, which means you’re only renovating 90% of the units.

The third category would be if the owner has renovated let’s say 10% of the units fully, but your plan is to go above and beyond those fully renovated units. If that’s the case, then those fully-renovated units are technically partially-renovated units. Because a fully-renovated unit from your perspective would be a partially renovated unit plus whatever else you plan on doing. If that’s the case, then 90% of those units have not been touched, and 10% have been partially renovated.

Then there’s other times where you’ll find a deal where a percentage of the units haven’t been touched, and another percentage have been partially renovated, and another percentage have been fully renovated… And your plan is to take the non-renovated and the partially-renovated to the fully-renovated. And the fully-renovated that you’re gonna do is the same as the fully-renovated that the current owner has done. If that’s the case, then you’ll have to input data in all three of the cells available on the Interior Renovation Tracker.

Overall, in this Units to Renovate data table  you want to input four numbers. Number one, the total number of units at the property. Number two, the total number of units that have not been renovated at all. Three, the total number of units that have been partially renovated by the seller, and then four, the total number of units that have been fully renovated by the seller.

And again, even if the owner states that a unit is fully-renovated, if your plan is to go above and beyond that in your business plan, then you wanna classify that as a partially-renovated unit.

Right now there’s only three different types of renovation statuses. If for some reason you have a deal where there’s a fourth or a fifth category – let’s say a percentage are non-renovated, another percentage are partially-renovated, another percentage are partially-renovated but to a higher degree, and then the fourth category is fully-renovated, and then maybe you plan on going above and beyond that, so there’s five categories, just add those cells into the model manually. If you do that, there’s a couple other things you’ll have to change, which I will get into in the later sections.

So the second data table is the interior renovation timeline. So you need to  input two data points here. Number one is when do you plan on starting the renovations? This could be the exact same as your closing date, but most likely it won’t be, because you probably aren’t going to start renovating day one. It’s ideal that you renovate as close to day one as possible, but it’s highly unlikely the day you close you’re gonna start renovating units and have contractors mobilized.

So you want to project before you close when you plan on starting those renovations, and then obviously if it starts at a later date, then make sure you update that number in your tracker.

And then another thing you projected during the underwriting process was the number of months to complete the interior renovations. Generally, it’ll be between 12 and 24 months. To get an idea of what that number would be, make sure you have a conversation with your management company if you haven’t done a deal before, because they are the ones that will likely be managing the renovation process, managing the contractors, and they have experience doing this, so they can tell you based off of what you plan on doing to the units and the total number of units how long it should take. 12 months, 18 months, 24 months is most likely gonna be the numbers you would put in there.

Then from there it’ll automatically calculate based on your renovation timeline and the total of units the projected number of units that should be renovated each month.

Now, the next data table is going to be the projected interior renovation budget. This is where if you decide to expand the first data table and have more than just the renovated, partially renovated and non-renovated units, you wanna make an adjustment in this data table and add those extra unit classifications to this data table, because right now all we have is non-renovated and partially-renovated. So these are the costs to renovate those units.

So what is your projected budget for each non-renovated unit and what is your projected budget for each partially-renovated unit. And again, if you have a second or third partially-renovated category, you’ll wanna add that to this right here. This data table the projected interior renovation budget.

The next data table is the interior renovation projects and costs. Here you wanna input all of the interior rehab projects that you’re doing, which units these renovations will be performed on… So right now your options are renovated and non-renovated. Again, if there are going to be additional categories that you’ve added to the projected interior renovation budget data table, then you’re gonna want to go ahead and add that name to the dropdown menu, because what you’re doing is you’re saying “Okay, here are all my interior rehab projects. Half of these will  be done to the non-renovated units, and the other half will be done to the partially-renovated units. Here’s the cost of each of these per-unit”, and it’s pulling that data to tell you what your projected interior renovation budget is going to be.

So if you are adding a second partially-renovated category, then you need to make sure you are defining that in this data table, so that the formulas line up.

So all you need to do is you need to highlight all of the cells under which units, you wanna go to data, and you wanna go to the What If analysis data table, you wanna go to Data Validation, and you wanna go ahead and update that list to include your added partially-renovation unit status. Then from there, as long as the way you tied it into that cell matches the way you tied it into the label in the projected interior renovation budget data table, it should automatically pull that cost for you. So you don’t need to put anything into the projected interior renovation budget data table unless you are actually adding in another unit of classification. All you need to do is add in the list of interior rehab projects, which units they’re being done to, and the cost per unit in the interior renovation project and cost data table, and then it’ll automatically calculate the non-renovated unit cost per unit, the partially-renovated cost per unit, and then the blended average.

Now, the last data table is where you want to actually track on an ongoing basis. The projected has a number of renovations to complete, the month that those renovations are supposed to be completed, and the projected total costs. So you don’t need to fill out anything there, because it’ll automatically pull that data from the previous data tables. Right now there are 24 months, so if your timeline is greater than 24 months, you’ll have to add in additional months to that data table… But it most likely won’t be, unless you’re doing pretty heavy lifting. Everything else after this point should be inserted in before you close. At this point the only things that should be added after closing is tracking the total number of renovations completed and the total cost spent. So each month – maybe you can add this to the first month’s performance review call with your private management company, or if you can add this to the performance review template you send your management company… You wanna know, number one, how many units renovated this month, number two, what was the total cost spent on those renovated units.

It’ll automatically calculate the variance for both of those. So if you projected to renovate 18 units and you only renovated 10, then there’s a variance of 8. And obviously, the total cost will also be a variance as well if you’re not renovating as much. But if you are projected to renovate 18 and you’ve renovated 18, but it cost $1,000 more, that’s your variance. So you can look at the variance column to determine if you’re on-time and if you’re on-budget. And if you’re not, you can work with your management company to determine what’s going on there and what can be done to get you back on track and on budget.

So at first you can fill this out with your underwriting assumptions. More specifically, those would be the cost-per-units for each of those individual rehab projects, and then as you do due diligence and as you renovate each of the units, you can update those numbers; maybe update what you’re going to do. Maybe you thought you needed to do appliances, but the appliances are fine, so you can remove that… But then once you close, all of those projected numbers are set in stone, you don’t wanna update those again. And then from there, the only thing you’re adding in are the total number of units renovated each month and the total cost to renovate those units each month, and then looking at those variances to see if you’re on-time and on-budget. And again, if you’re not, that’s where you have that conversation with your management company to figure out what is going on.

So make sure, again, you download this interior renovation tracker. If you weren’t able to do that before listening to this episode, no problem… But I recommend downloading it and then relistening to the episode, because it might not make 100% sense, especially if you’re not very familiar with Excel and how the formulas work in Excel… So I think it’ll be very helpful and beneficial to you if you watched the episode with this actual template open.

Now, right now every single thing that you need to change is in red, so once you’ve downloaded it, you’ve understood it based on the sample data that’s in there, you can go ahead and delete everything that’s in red, and then input in your own numbers.

So that concludes this episode of how to track your interior renovations with the free Interior Renovation Tracker Excel document, so make sure, again, you download that, in the show notes or at SyndicationSchool.com.

Until tomorrow, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications and download this free document, as well as all of our other free documents. Again, SyndicationSchool.com.

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

JF1905: Everything You Need to Know About Prepayment Penalties | Syndication School with Theo Hicks

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As if the apartment syndication process wasn’t complicated enough, now you have to worry about prepayment penalties on the financing. Theo will cover how they work, what to look out for, and when it may make sense to bite the bullet and pay the penalties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Remember to take into account these prepayment penalties”

 


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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week we air two apartment syndication school series on the best real estate investing advice ever  show podcast. Each of these episodes focus on a specific aspect of the apartment syndication investment strategy.

For the majority of our previously aired series and episodes we offered a resource, a Power Point presentation template, an Excel calculator template, how-to PDF guides… Some sort of free resource for you to download, that accompanies those episodes and series. All these free documents and free Syndication School episodes can be found at SyndicationSchool.com.

This episode we are going to talk about pre-payment penalties, so everything you need to know about pre-payment penalties. We’re gonna talk about what pre-payment penalties are, and then the three main types of pre-payment penalties, and then how to think about which pre-payment penalty you want to actually get for your loans.

A pre-payment penalty is going to be a clause specified in your mortgage contract, stating that a financial penalty will be assessed against you, the borrower, if  you either significantly pay down the principal on your loan, or if you pay off the entire loan for a specific period of time. What we’re saying, basically, is that yes, the lender may actually charge you a fee when you give them their money back, which may seem counter-intuitive, but from the perspective of a lender, when they’re underwriting a loan, when they are trying to determine how much money to loan to you, one of the factors that they take into account is the interest payments, so the interest they’re gonna make on your loan, so a 5% interest rate, 10% interest rate, 12% interest rate. That interest rate is based on the principal amount. The lower the principal, the interest rate will stay the same, but the amount of interest they make is reduced.

So if you pay off a large portion of that principle, or if you pay off all the principal and close out the loan, then the lender is no longer going to receive those interest payments. So the prepayment penalty is something that the lenders have that protects them against the financial loss of interest income that they would have otherwise been paid over time. So if a lender provides you with a ten-year loan, they are assuming they’re gonna make interests for ten years. If you pay the loan off after five years, then they’re only making interest for five years, which is why interest rates are different on five-year loans versus ten-year loans.

On a ten-year loan you are typically going to see a lower interest rate, because they’re making money over a longer period of time, whereas for the shorter loans you’re gonna see a much higher interest rate.

Typically, the pre-payment penalty is incurred if the borrower pays down the loan either entirely, or significantly, via a refinance or a sell, within 1-3 years, and sometimes up to five years… Again, depending on how long the loan actually is.

There’s actually three types of pre-payment penalties, there’s not just one type. So the lenders are able to get that interest money by charging these three different types of pre-payment penalties. The first category are soft and hard pre-payment penalties. The second is yield of maintenance, and the third is defeasances.

The first category, the hard and soft pre-payment penalties. A soft pre-payment penalty allows a borrower to sell their property at any time, without paying a fee. But a fee is incurred if the borrower decides to actually refinance. So that’s a soft. No fee if you sell, yes fee if you refinance.

A hard pre-payment penalty does not allow the borrower to sell or refinance without paying  a fee. So the difference here is when they charge the pre-payment penalty. For the soft pre-payment penalty, if that’s a clause, then if you sell, you’re off the hook. If you refinance, you are not off the hook. For the hard, no matter what, if you sell or refinance, you are on the hook for paying a fee. Both soft and hard pre-payment penalties are either a percentage of the remaining loan balance or of the principal amount, so anywhere between 1% to 3% of the remaining principal balance that was paid off at sale, or refinance. It could be a fixed amount, that is stated from the get-go in your contract, or it could be a certain number of months’ worth of interest.

For example, it could be 80% of six months’ worth of interest if you were to refinance or sell early. Again, these are going to be stated in your contract, so you’re gonna wanna know what the soft or hard prepayment penalty clause is and what the terms are when you are actually in your due diligence phase… Because if you plan to sell or refinance before that clause expires, then you wanna make sure you’re taking that added cost into account when calculating your sales proceeds.

The second category is yield maintenance. Yield maintenance is a pre-payment penalty that allows the lender to attain the same yield as if the borrower made all scheduled interest payments up until the maturity of the loan date. If you remember, I said earlier, when a lender underwrites a loan for you, they do so with the expectation of receiving interest on that loan for whatever term they set. So they plan on received 5% interest for ten years. If you pre-pay that loan amount earlier than (in that example) ten years, a yield maintenance premium can be charged, which allows the lender to earn their originally-projected yield. The purpose of the yield maintenance pre-payment penalty is to protect the lender against falling interest rates. So the yield maintenance premium is going to be the difference between the amount of money the lender would have made from interest payments on the loan, and how much money they would make if they were to reinvest the remaining loan balance.

So it’s not like if you get a ten-year loan at a 5% interest, you sell after five years – you’re not gonna owe them five years’ worth of 5%, you’re gonna owe them five years’ worth of 5% minus whatever they could have gotten by reinvesting that principal into something else. Typically, that something else is going to be a U.S. Treasury bond. For example, if the borrower — if you repay the entire loan balance five years early, the yield maintenance would be the difference between five years’ worth of interest payments and the interest earned from a five-year U.S. Treasury bond.

So in order to determine what that would be, this is something you can estimate on your own. Obviously, five years from now the five-year U.S. Treasury bond might be a little bit different, but you can look at trends — you can just google “U.S. Treasury bonds” and see what the five-year rate is (interest rate) and find that difference to determine what your yield maintenance fee would actually be.

And then the third category is called defeasance. So rather than getting charged a pre-payment fee, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan. Typically, defeasance only applies to commercial real estate loans, while the yield maintenance and the soft and hard pre-payment penalty could apply to any mortgage loan that you get.

This new collateral – it’s going to normally be a Treasury security – is usually much less risky than the original commercial real estate investment… So the lender is far better off because they received the same cashflow they would have received from the interest payments on the loan, and in return receive a much better risk-adjusted investment.

Basically, when you’re using a defeasance, you are exchanging for another cash-flowing asset, so you’re exchanging the original collateral on the loan for another cash-flowing asset, which allows the lender to continue to make money.

So which pre-payment penalty is best? When you’re in apartments, generally speaking there’s gonna be some sort of pre-payment penalty on your loan, unless you’re getting a bridge loan of some sorts. If you’re getting long-term debt, there’s going to be a pre-payment penalty.

Each pre-payment penalty has pros and cons to both you as a borrower, as well as to the lender. The best option is gonna depend on whatever your business plan is, and then the investor’s expectations on future interest rates. That second one comes with that defeasance.

So the benefit of having a pre-payment penalty clause to you as a borrower is that you can receive a lower interest rate, and get lower closing costs on a loan with a pre-payment penalty compared to a loan without a pre-payment penalty.

So as long as your project business plan, your projected hold period is longer than the pre-payment period, so one to five years – again this will be stated in the loan documents, so you’ll know upfront exactly when that pre-payment period ends, then you benefit from the lower upfront costs and ongoing costs, than having to worry about paying that fee on the back-end.

Of course, it gets a little bit trickier for you as a borrower if you’re getting a loan with a five-year pre-payment penalty clause and your business plan is to refinance after three years. More specifically, going into the three different categories, the hard and soft pre-payment penalty is gonna be based on the timing of a refinance or the sell, so it’s easier to calculate upfront.

If you secure a five-year loan with a  pre-payment penalty during years one to three, then you should be able to calculate the pre-payment penalty if your plan is to sell during year two… So the fee would be, for example, 1%, or whatever percent that is stated in your loan documents, of the remaining loan balance… Or 80%, 70%, 90%, or whatever is specified in your loan documents, of 6 months, 10 months, 12 months – again, whatever is specified in your loan documents – worth of interest. So soft and hard are pretty easy.

The other two pre-payment categories are gonna be dependent on the interest rates at the time of sell or refinance, which is gonna require some level of speculation, some level of assumption on your part.

Generally, the yield maintenance premium and the defeasance fees are gonna be based on the U.S. Treasury rate, and the U.S. Treasury rate is based on the market interest rate. So as market interest rates go up, the cost to invest in U.S. Treasury bonds goes down, and vice-versa. There’s an inverse relationship there.

So if you have a yield maintenance pre-payment clause and the current interest rate is higher, once that pre-payment clause is triggered, if the current interest rate is higher than the loan interest rate, then the yield maintenance premium usually decreases to zero. But when the interest rates are rising, then U.S. Treasury bonds are cheaper, so the difference between the remaining interest rates and the cashflow from buying U.S. Treasury bonds or providing another mortgage loan is zero or a net gain to the lender.

So lenders will typically add a clause that if the yield maintenance is zero, then it’ll trigger a soft or hard pre-payment penalty. For example, the pre-payment penalty may be the greater of the yield maintenance or 1% of the remaining loan balance. So it’s either this, or that. “Yeah, sure, if we make money on the yield maintenance – great. But if we don’t, we’re still gonna charge you a 1% to 3% pre-payment fee.”

So if you feel as if the interest rates are going to rise, then selecting yield maintenance can be the cheaper option compared to the soft or hard pre-payment fees or defeasance payments.

Now, the defeasance fee is gonna be also based on the U.S. Treasury rate, but unlike yield maintenance, the borrower – you can technically make money with defeasance. So again, the relationship between the interest rates and the U.S. Treasury bonds still holds true here. So if interest rates on loans will rise to a rate greater than the loan’s interest rate – so 5% at closing, but then 7% at refinance or sale, then the U.S. Treasury bonds lose value and become cheaper, which means you (the borrower) are able to buy the required bonds based on the defeasance option for less than what it is required to pre-pay the loan, which means you make some cashflow.

On the other hand, if interest rates are falling, U.S. Treasury bonds gain in value, then the borrower has to pay an amount greater than the loan amount at pre-payment. So defeasance is a good option if you think interest rates are going up, or if you plan on selling your multifamily property early, and are worried about the potential increase in mortgage payments with some sort of floating rate loan. So you’re paying it off because you don’t want your interest rate to go higher and higher and be paying more and more money each month.

But the defeasance option is obviously very complicated, because you’re taking your principal and investing it in something else, and trying to figure out “Okay, well what difference could it be? Will I make money? Will I lose money? Is it gonna be cheaper? More expensive?” So whatever defeasance is used, you’re typically gonna wanna hire some sort of defeasance consultant, which obviously also increases the costs.

The last thing I wanna do is go over some common examples of pre-payment penalty structures. These are just gonna be ones for the common Fannie Mae and Freddie Mac loans, because again, you’re gonna see pre-payment penalties on these agency debts on these longer-term loans. You’re not really gonna see a pre-payment penalty on a bridge loan, because the lenders that are underwriting these bridge loans understand that you’re gonna be paying it off after a few years, which is why the interest rate and the closing costs are gonna be a little bit higher.

Let’s start with Fannie Mae. Fannie Mae states that for all of their loans, flexible pre-payment options are available, including yield maintenance and declining pre-payment premium. So declining pre-payment premium – also called graduated pre-payment premium for fixed rate loans, structured ARM loans and hybrid loans – means that the pre-payment percentage is higher year one, and then gradually reduces each year. For example, if you get a five-year fixed Fannie Mae loan, then the pre-payment penalty year one is 5%, 4% in year two, 3% in year three, 2% in year four, and 1% in year five. After that, there’s no pre-payment penalty.

For Freddie Mac things are a little bit different. For their fixed-rate conventional loan – regular fixed-rate loan – there’s yield maintenance until securitized, which means… Securitize is the financial practice of pulling various types of contractual debt and selling the related cashflows to third-party investors as securities. Basically, you’re gonna pay yield maintenance if you sell or refinance before the lender is able to securitize their loan, package it together and sell it off to a third-party. Then after that it’s followed by a two-year lock-out, and then there is defeasance after that. There is no pre-payment penalty premium for the final 90 days. If the loan is not securitized within the first year, then the yield maintenance applies until the final 90 days.

The yield maintenance without defeasance is available for these loans that are securitized at an additional cost.

For floating rate they have four pre-payment options. For option one, you’re locked out year one, and then a 1% pre-payment penalty thereafter. Locked out means they won’t allow you to sell or to refinance. Then after that there’s a one-year pre-payment penalty thereafter.

Another option is 3% pre-payment penalty year one, 2% year two, and 1% thereafter. Another option (3) is 5% year one, 4% year two, 3% year three, 2% year four, and 1% thereafter. Then option four, which is only available for their ten-year capped loan – capped interest rate – 7% year one, reduced by 1% each year. 1% in year seven and thereafter.

For each of those options you’re gonna get different loan terms. The more expensive the pre-payment penalty, the better initial terms you’re going to get.

And then also, for their moderate rehab loan, which is a float-to-float loan, there’s a 2% pre-payment premium during the interim phase. For their float-to-fixed loan there’s yield maintenance during the interim phase, and then the standard Freddie Mac pre-pay structures that we discussed before apply thereafter.

Overall, those are the three types of pre-payment penalties. Unless you’re getting a bridge loan, as I mentioned, you’re most likely going to have a pre-payment penalty for your loan, so make sure you know which pre-payment penalty you have. If you have an option to select between different options and what the benefits are of those and the costs of those are, and if there is a chance that you’re going to trigger a pre-payment penalty, make sure you’re taking that into account when you’re initially underwriting your deal… And you’re gonna take that into account in the closing costs at sale.

So if you are assuming a $100,000 closing cost at sale without a pre-payment penalty, then you’re gonna get returns of X, but if there is a pre-payment penalty, you’re gonna have a little bit lower returns. So when you’re evaluating whether to sell early or not, make sure you’re remembering to take into account these pre-payment penalties, because it might tell you that you need to wait to sell… Because once those pre-payment penalties go away in a year, then you’re gonna be able to return a significantly larger amount of money to your investors.

That concludes this episode. That should be everything that you need to know about pre-payment penalties. Until tomorrow, make sure you check out the other Syndication School series about the how-to’s of apartment syndications, and check out some of those free documents as well. Those are all available at SyndicationSchool.com.

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

JF1899: 3 Secrets To Attract And Keep Your Passive Apartment Investors | Syndication School with Theo Hicks

Listen to the Episode Below (00:19:21)
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Finding investors to invest in your apartment syndication deals can often be easier than keeping those investors for future deals. In our experience, private investors are not most concerned with their ROI, it is a concern obviously, but not as high as three other concerns. They want to know that their money is in good hands, frequent updates, and is the process hassle free? Theo will cover those three things in more depth today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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TRANSCRIPTION

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

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

 

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

Each week, every Tuesday and Wednesday, we air two Syndication School episodes on the best real estate investing  advice ever show podcast on iTunes. These episodes focus on a specific aspect of the apartment syndication investment strategy. For a lot of these episodes – sometimes the episodes are a part of a larger series – we offer some sort of free resource. These are PowerPoint presentation templates, Excel calculators and how-to guides that accompany these series or episodes. Those are free, as well as the Syndication School episodes are free… Which can be found at SyndicationSchool.com.

If this is your first time listening, I highly recommend going back and starting at series number one, and working your way up through the final series that talks about selling your deal. That way you can go through the entire process, start to finish. Then you can listen to some of the more recent episodes where we go into specifics on some more of these steps.

Today’s episode is going to be one of those episodes where we go into more specifics, and today we’re gonna talk about how to attract and keep passive apartment investors. In order to attract and keep passive apartment investors, a first question that you should be asking yourself is “Why would they invest with you in the first place?” What is their primary motivation for investing in apartment syndication deals? You’d be surprised, but returns, the amount of money you can give them is not their primary motivation. It is not one of their primary concerns.

Obviously, they care about how much money they’re gonna make, and if you offer them 1% and someone offers them 10%, it’s going to go into their decision, but most likely a passive apartment investor is going to be able to get a similar return by investing with any apartment investor. So it can’t be that they want a solid return. Also not the business plan, it’s not the market… It is actually going to be these three things that we’re gonna talk about in today’s episode; these are basically the three reasons why someone would invest in an apartment syndication deal. And if you know these three things, then you can formulate your company around these three things in order to attract more passive investors, and in order to retain more passive investors.

The three things – I’m gonna go over them right now really quickly, and then I’m gonna go over them each in more details. Number one is they want their money to be in good hands. Number two, they want to be updated on relevant information on the deal, and number three, they want a hassle-free process.

Those are really the three main reasons why people will invest in apartment deals, which is why these are the three secrets to attract and keep your passive apartment investors. Is their money in good hands, will they be updated on relevant information on the deal, and is the process hassle-free?

Let’s go over need number one, which is “Is their money in good hands?” Basically, what this means first and foremost is “Are you not going to lose my  money?” Warren Buffet is famously known for saying that the two rules for investing are 1) never lose money, and 2) never forget rule number one. As an apartment syndicator, one of your main focuses should be on making sure you’re not losing your investors’ money. The investors’ money is used towards the down payment for the loan, it’s used towards maybe funding renovations, and then of course, the fees paid to you for closing on the deal.

Like any investment, there’s not gonna be any guarantees; you can’t guarantee them you’re not gonna lose their money, because that’s not possible. You can’t really guarantee anything. The market could completely collapse, or there could be a nuclear apocalypse tomorrow, and of course, if that happens, you’re not gonna be able to give your investors their money back. But in that case, they probably have other concerns that are more important. Anyways…

But there are a few things that you can do proactively to mitigate the major risks of the deal. We call these the three immutable laws of real estate investing. If you follow these three laws, then you should be confident that you will not only be able to preserve the capital of your investors, but maximize their returns as well.

Basically, if you do the opposite of these three things, are what get people into trouble, are what get people foreclosed on, losing their deal, not being able to sell at a higher price, and not being able to keep their investors’ money.

The first one is to not buy for appreciation. Making sure you’re buying for cashflow. Because when you buy for appreciation, it’s kind of like gambling. You’re betting on the fact that the market is gonna keep  going up, and the market going  up is really not in your control. The only thing in your control is buying the deal at that point.

When you buy for cashflow, then you know “Well, it doesn’t really matter what the value of the property is, as long as you aren’t selling” – and we’ll address that not selling part in a second. But when you buy for cashflow, then you know upfront “Well, I’m gonna make this much money each year, really no matter what… Unless something crazy happens. If the market goes up in value – great. That’s the cherry on top, and I’ll have even more money. But if it doesn’t, I’ll still hit my cashflow numbers.”

Now, I wanna differentiate between natural appreciation and forced appreciation. I’m saying don’t buy for natural appreciation. Don’t buy for “The market is gonna go up 10% each year” or “Rents are gonna go up 10% each year.” You can buy for forced appreciation though. Forced appreciation is when you’re actually doing something to force up the value of the property, so you’re doing some sort of value-add. You’re doing some sort of physical improvements to the property, or you’re improving the operations in order to increase the income and/or decrease the revenue, which in turn increases the NOI, which in turn increases the value of the property.

Buying for forced appreciation is fine, and actually encouraged in apartments, and that’s the best way to get the best of both worlds in terms of cashflow and a large profit at sale… Because with forced appreciation, your rents are going up, so you’re able to provide a higher cashflow as time goes on in the project, and then since rents are going up, your NOI is going up, and the value of the property is going up, so when you sell, you’ll have a large lump sum of profit to distribute to investors at sale. So that’s number one, don’t buy for natural appreciation, buy for cashflow and forced appreciation.

Number two is gonna be about debt. Secure long-term debt. I mentioned, of course, you can buy for cashflow, and you can buy for forced appreciation, but if there’s a time where you’re forced to sell the property for some reason, then that can be something that makes you lose  money. So in order to avoid having to sell early, you wanna secure long-term debt.

To define long-term debt – it’s debt that is equal to or longer in term than the hold period. So if your plan is to hold on to the property for ten years, you probably don’t wanna get a three-year loan, because at the end of year three you’re gonna have to refinance or sell the property. And if your business plan didn’t go according to plan, if the market took a turn, you might have to refinance and do a capital call to actually have enough equity in the deal to get a new loan. Or you might be forced to sell at a price that’s so low that maybe you can return your investors’ capital, but you’re not able to give them the return you promised.

In the example of a ten-year loan, you wanna get a loan that’s at least ten year long. If you’re doing a ten-year hold, then a loan that’s at least ten years long. If you’re doing a five-year hold, you want a loan that’s at least five years long. Now, it’s tricky when you’re doing the bridge loan, the renovation loan, because those are typically going to be shorter-term, because part of the business plan is to refinance once you’ve done the value-add business plan… And if things go according to plan and you refinance – great; you should be able to return a large amount of capital to your investors.

But if things don’t go according to plan, you still want to follow this principle of having long-term debt. So if the plan is to hold on to the deal for five years and you wanna do a bridge loan, then make sure you have the option to extend that bridge loan up to five years, so that worst-case scenario, if you can’t refinance, then you can extend the loan one year and then reevaluate. If you still can’t refinance or don’t wanna refinance, it doesn’t make sense to refinance, then you can extend it again, and then year five you can decide whether you wanna refinance, or hold to your hold period and sell.

And then along with that comes making sure you’re not being overleveraged. But unless you’re not going the conventional Fannie/Freddie route, or a bridge loan, then you’re really not gonna have that opportunity to overleverage. It’s when you’re looking at lease options or seller financing, where you might actually have the opportunity to get the deal with 5% down, 10% down. Again, not a good idea, because if you have to sell or you have to refinance, you’re gonna have to bring money to the table for the refinance, or you’re gonna have to actually lose capital if you sell the deal, and the value dropped by 5% or 10%.

So the last principle is don’t get forced to sell. Basically, follow the first two, and then you’re going to automatically follow the third principle and not get forced to sell the property. Because again, when you’re forced to sell, it’s likely because there’s a problem, and if there’s a problem, you’re likely not gonna be able to return all of your investors’ capital.

So all those three rules and your investors are going to know that their money is in good hands, because you’re mitigating the chances of you actually losing the money. And then there’s a few other things you can do as well to portray to your investors that you’re in good hands.

Something that’s pretty self-explanatory is making sure that you have a solid educational foundation and a track record in real estate or business before you start raising capital… Because you’re not going to attract anyone if you don’t know what you’re talking about, and if you’ve got no experience with business or real estate. Now, there’s a way to get around this.  If you are lacking in any of these areas – probably not education, but maybe the background, then you can make up for this with a trustworthy, credible team.

So you can bring a mentor on, a property management company, a broker, who have a strong background in the apartment industry, and have a strong, successful background in apartment syndications. That will help you get started, but you’re going to attract more investors if you have the experience, you’re the point person. So if you have the experience, if you have the education, then they’re going to know their money is in good hands more than if you don’t, and you’re just bringing on an experienced team.

So the experienced team can definitely help, but you wanna make sure that you are still working on your education, and making sure you still have some sort of relevant background to leverage when discussing yourself with potential investors. We’ve gone over what that means – what specifically is a solid real estate background, what specifically is a solid business background –  on previous Syndication School episodes.

This is also pretty self-explanatory, but if they trust you as a person, then they’re gonna know that their money is in good hands. They’re gonna have to have a good feeling about who you are as a person and truly believe that you have their best interests in mind. This trust can be established by the length of time you’ve known this person, by the quality of your relationships with this person, by having a strong online presence, by displaying your expertise of you and your team through a thought leadership platform, and by having alignment of interests, which we’ve actually talked about alignment of interests in yesterday’s episode (the episode just before this one). Make sure you check that out, to learn about the four tiers of alignment of interests.

Once they trust you, then they’re gonna be confident that you have common sense, that you can make good decisions, that you’re going to conservatively underwrite the deals, that you’re gonna perform all of the required due diligence before buying the apartment, and you’re going to at least meet the projected returns that you outlined in your investment summary.

Then lastly, someone will know that their money is in good hands if they know you are a responsive communicator. We also talked about this in the episode yesterday, so I’m not gonna go into too much detail on this… But basically, if something goes wrong, do you let them know and do you already have a solution in mind (or already implemented), and when they reach out to you, how quickly are you responding?

Overall, a passive investor is gonna wanna know their money is in good hands, and you as a syndicator can convey this to the passive investor by proactively mitigating risks, by following the three immutable laws of real estate investing, having the relevant background, educational and business or real estate background, building a trusting relationship and being a responsive communicator.

Again, one of the needs of a passive investor is to know if their money is in good hands, and if it is, that’s how you attract them to your deals and keep them on. Will they be provided with status updates on the deal? They’re gonna want to know what’s going on with the deals they’re investing in, if they are going to invest with you and if they’re gonna keep investing with you. So on a consistent basis, you want to provide them with a  director-level – this is in between an entry-level employee level, super-detail, lots of numbers and calculations, and the CEO level, which is quick bullet points of what’s going on. Somewhere in between status updates on the deal.

Again, we talked about this plenty of times on Syndication School, how to do this… But basically, first you wanna send them a monthly update that includes things like occupancy rates, rental rates, renovations, cap ex, issues, community engagement events… You also wanna provide them with quarterly financials, and then any information about when they’re gonna get paid, or anything else like taxes and things like that.

Some syndicators don’t provide any updates, or updates are very minimal, so you wanna make sure that you are letting your investors know that they’re going to be kept up to date on what’s going on. Once you fulfill that need, you’re more likely to attract and keep them on as investors.

Then the last need is a hassle-free process. It’s in the name, “passive investor”, but they wanna be passive. They want a place to park their money and not have to worry about doing anything else. They don’t wanna have to worry about being responsible for any day-to-day operations. They’re busy doing whatever they’re doing to make money, whether it’s real estate, whether it’s a business, whether they’re working a W2 job, they’re busy with family life, personal life… So they want to minimize the amount of time spent on their investment.

So their ideal setup would be they send you the money and you send them money back, with frequent updates on what’s going on, so they know that they can expect to receive their money.

So besides doing due diligence on the syndicator initially, and then doing due diligence on the deals as they come in, a passive investor wants the investment to be as boring as possible, with little to no surprises. All they wanna do is read a monthly email and receive their distributions. So one thing you should probably do, that we recommend doing and that we encourage you to do, is to set up some sort of direct deposit with your investors, or at least offer direct deposit… Because some of them do like the old-school checks, but… With direct deposits, that takes away the added step of cashing a check. So all they need to do is log into their bank account, see “Okay, Theo sent me my monthly distribution. I’m good to go.”

And then also, part of the hassle-free process is if I do have a question, if I do need something from you, I want the problem to be resolved quickly, and I want minimal back-and-forth.

So if I reach out with an issue, I’d much rather have you reply one time saying “I’ve got your email. Here’s what we’re doing to solve this problem” or “Here’s what we’ve already done. The problem is solved” or “Hey, here’s an answer to your question.” Rather than send them one email saying “Hey, I got your email”, a reply on this day, then again on this day saying “Oh, well I still don’t know the answer, so give me some more time.” Just one time, address whatever they need right away, and then that’s it.

Those are the three primary reasons why someone would invest in the deal, the three things that you need to address in order to get them to invest in your deals… And that is “Is their money in good hands? Will they be updated on the relevant information on the deal? Is the process hassle-free?” If you do these three things, you’re gonna attract more passive investors and you’re going to retain more of your current passive investors.

That concludes this episode. Until tomorrow, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndications, and check out those free documents we have. Both of those can be found at SyndicationSchool.com.

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

JF1898: 3 Ways To Separate Yourself From Other Apartment Syndicators | Syndication School with Theo Hicks

Listen to the Episode Below (00:18:57)
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10 years ago, we wouldn’t have had a conversation or podcast episode about this. Apartment syndication has exploded in popularity in the last decade as people started to learn it’s a fantastic way to build wealth and do bigger deals with investors than they could do on their own. So how can you stand out from the crowd? Theo covers three ways to do that in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes, every Tuesday and Wednesday, on the best real estate investing advice ever show podcast. These two episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the first batch of series we did, up to about 25-30, we offer a free resource. These are PowerPoint presentation templates, Excel calculator templates, how-to guides… Some sort of resource that will accompany the series or the episode. Of course, those are free. You can download those free documents, as well as listen to the previous free Syndication School series podcast episodes at syndicationschool.com.

This episode is going to focus on how to separate yourself from other apartment syndicators. As you probably know, there are a lot of apartment syndicators out there. Lots of sponsors, lots of people who are raising money for apartment deals and sharing in the profits. Most are also qualified, as well. Most of the offer some sort of competitive return structure… So you need  to be asking yourself, how can you stand out from all the other apartment syndicators? Why would your passive investor that you’re talking to invest with you, and not someone else?

Like all things, there’s a secret formula or a secret answer that if you do this one thing, you’re going to attract millions/billions of dollars in private capital, everyone’s gonna want to invest with you and no one else… But there are a few tactics that when you implement those over a long period of time, you can slowly begin to separate yourself from other apartment syndicators out there, and  obviously build stronger relationships with your current high net worth individual investors, as well as build relationships with new high net worth individuals, who can ultimately become your passive investor… And these tactics will also help you build a sustainable and successful apartment syndication business model, because again, you’re separating yourself from the pack and building these stronger relationships.

We’re gonna go over three different tactics that you can implement. I’m gonna go over the three first and I’m gonna give some specific examples of what you can actually do. The three ways to separate yourself from other apartment syndicators – number one is going to be alignment of interests. And keep in mind, you should be doing all these things regardless, but these are just things that other syndicators might not necessarily be doing, or might not necessarily be strong at. So if you can be strong at these three things, then you can separate yourself from the other syndicators.

So the first way is to have alignment of interests with your passive investors. What this means is you are doing things – these are things that are evident to your passive investors – that they’re interests, their financial interests, their goals, their interests in general are at least just as important as yours. Ideally, they are more important than yours. So these are things you’re doing that your investors will say “Hey, Theo really has my interests at heart, and it seems as if he’s putting my own interests above even his own interests, even his own financial interests, even his own personal interests.”

So there are lots of different ways to do this, and we’ve talked about different ways to create an alignment of interests with your passive investors on Syndication School. I’m not gonna go into extreme detail on these, but I’ll just kind of go over them really quickly.

Number one is to put your asset management fee in a position behind the investors’ preferred return. Basically, what this means is that if you have a preferred return of 8%, an asset management fee of 2%, if the asset management fee was in first position, then if the deal cash-flowed 8%, then you would get the first 2% as your asset management fee, and then the remaining 6% would go to your passive investors.

Now, if that’s the case, and you had offered an 8% preferred return to your investors, then they aren’t hitting that 8% preferred return. They can still accumulate, they’re still gonna get it at the end of the deal, the portion of that will come out of the sales proceeds, but still, you’re getting paid before they’re getting paid, and as a result, they may not get their full preferred return.

Now, if the deal is cash-flowing 10% plus, then it’s really not that big of a deal, but especially when you’re first starting out, you might be projecting an 8% cash-on-cash return for year one, or a 9% cash-on-cash return for year one, because you’re slowly implementing your value-add business plan, and you don’t expect to get above 10% until, say, mid-year two.

If that’s the case, then putting the preferred return in second position is definitely promoting alignment of interest with your investors, because if the deal cash-flows only 8%, then you’re saying “Hey, I’m not gonna get paid until you get all of your preferred return. For year one we’re projecting 8%, so we’re not gonna get paid year one.” That sounds a lot different than “Hey, we’re only projecting 8% cash-on-cash return the first year”, they see that, but they see that they’re not hitting the preferred return, and they realize “Oh, it’s because they’re paying themselves first.” Those two stories are gonna go across completely different to a passive investor.

So that’s just one way… And there’s definitely not a common practice, where it’s explicitly stated in the operating agreement that you are going to be putting your preferred return in second position. So that’s one way…

The other way to create alignment of interests – this is kind of like a ladder, or a tiered form… Basically, the lowest tier would be – this is separate from what I just talked about, and you really wanna do this regardless, put your preferred return in second position… But I guess the lowest alignment of interests comes from having an experienced team member on the deal. This would be an experienced property management company, an experienced broker, or an experienced local owner… And going from least to highest alignment of interest based off of who you bring on, the property management company would be the highest, because they are responsible for covering the day-to-day operations. Second would be a local owner, just because they’re got experience with apartments, they own apartments in that market… And then the lowest would be bringing on an experienced broker, because really all they’re doing is helping you find the deal, maybe helping you underwrite the deal… But at the end of the day, the broker wants to get paid, so they want you to buy the deal at the highest price. So that’s tier number one, where you bring in an experienced team member on the team.

Tier number two would be bringing on an experienced team member and also giving them an equity stake in the deal. So just straight up “Hey, you’re on my team. Here’s a percentage of the general partnership for joining.” This is a little bit more of alignment of interests than just having them on the team, because they don’t have skin in the game, but they have a financial stake in the deal. So if the deal performs well, they get paid, but if the doesn’t perform well, then they just don’t get that extra money, but they’re still getting whatever fees they are charging you – the property management company is gonna be a few percentage points of the income; a local owner – I guess they’re really not making any money, unless you give them equity… And the broker – they’re gonna make their commission.

So what would be even better – this is tier three – would be bringing on an experienced team member and giving them equity in the deal because they invested their own money in the deal. So the broker invests their commission in the deal. A property management company invests some sort of capital from their company in the deal. A local owner invests in the deal.

Now, this is the case – if the deal performs well, they get paid, but if the deal performs poorly, then they could technically lose their money. So now at tier three they have skin in the game, a lot more alignment of interests with your investors, because they know that not only is the financial success of the GP dependent on the success of the deal, but the financial success of the management company, of a broker, of a local owner is also dependent on the success of the deal.

And then the highest would be if those individuals not only invested their own money in the deal, but brought on their own investors… Because now you’re adding even more people whose financial success is tied to the success of the deal.

And then one more way to create alignment of interests would be to have one of those parties – most likely a local owner, or some other apartment syndicator – actually sign on the loan… Because again, not only are you signing on the loan, so your credit and your money is at stake, but you’ve got someone else on board as well, who’s guaranteeing that loan.

Overall, the main way and the first way to separate yourself from other apartment syndicators is to create an alignment of interests, and we went over multiple ways for you to do that.

The second way to separate yourself from other investors is to be very transparent, to have a very high level of transparency. Now, this doesn’t mean that you want to send your investors emails every day with updates, or send them a KPI snapshot every single day. It doesn’t mean that you want to give them an update on every single thing that happens, every time you get a point of contact from your property management company; you don’t wanna forward that on to your investors. “Hey, one person just stopped by to take a look at a unit at my 500-unit apartment community.” That’s overkill. But you do want to make sure that at the very least/baseline you’re providing them with ongoing updates on a monthly basis, or on a quarterly basis, about the operations, the KPIs at the property… And we’ve talked about what you wanna include in there – things like occupancy rates, renovation updates, what rental premiums you’re demanding on those renovated units, how that compares to the rental premiums you projected to demand, any capital improvement updates, any issues that you have with the proposed solutions, and any other relevant updates like market updates, resident appreciation parties, things like that.

Then also, you’re gonna wanna be transparent with the financials, so proactively send out rent rolls and profit and loss statements, so that your investors can look at the granular details of the operations.

Now, typically, things aren’t going to go wrong — ideally, I guess I should say, things aren’t going to go wrong. I did mention that if something were to go wrong, you want to talk about that issue in your monthly update as having a proposed solution. So that’s key. So not only do you wanna be transparent and say “Hey, we had this issue at the property”, but you also wanna take it to the next level and say “But here’s what we are already doing to fix that problem.” Or even better, “Here’s what we’ve done. The problem is already fixed”, depending on what the problem is. If it’s a fire, or some sort of natural disaster, you’re not gonna be able to fix everything within a few weeks, so at the very least saying “Okay, we’ve got a fire. I’m not gonna reach out to my investors until we know exactly what we’re going to do.” Which means you need to know exactly what you’re going to do pretty quickly. You don’t want to wait and have your investors find out before you reach out to them.

So obviously, sending them updates on the key performance indicators, sending them financials is one thing, but also, when issues arise, telling them and having a proposed solution, or a solution in place already… And then even above that – this isn’t related to transparency, but making sure that you are extremely quick in your responses to investors’ questions and concerns. So when you do your monthly emails, expect to receive responses from your investors. When you present a new deal to investors, expect to have questions from your investors.

And the last thing you wanna have happen is if a passive investor reaches out with a question, a comment or a concern, and they don’t receive a response for a few days, or a week, or two weeks, or they never get a response whatsoever.

So you should set expectations with your investors upfront for how quickly you’re going to respond to their inquiries. Ideally, you do it that same day. So schedule a chunk of time either at the end of the day, or as they come in, respond to those emails.

If it’s something that you don’t know the answer to, or you can’t respond to in a timely manner, then rather than just waiting until you can, let them know “Hey, I’m looking into this and I’ll let you know by this date.” And then put a reminder on your calendar to make sure you send them an email on that date.

This may seem like a minor point, but a huge complaint that you’ll hear from passive investors is a lack of communication. A lack of transparency. They don’t get updates, if something goes wrong they don’t learn about it until it affects their distribution, or “I reach out to this investor with questions and they never reply, or they reply a week later.”

So by not falling into that trap and making sure you’re sending out updates, making sure you’re sending out financials, making sure you are addressing issues, addressing questions in a timely manner, you’re gonna be able to separate yourself from other apartment syndicators out there.

And then lastly, number three is going to be trust. This is the third one, the last one, but it’s probably the most important, because the main reason someone is gonna invest with you is if they trust you, they trust the person in charge. The main way to build trust is to just be yourself. When you’re being yourself, you’re being honest, and honest and trustworthy are basically synonymous.

There’s no reason to put on a show, there’s no reason to be someone you’re not, there’s no reason to act how you think they want you to act. Just be yourself, and that will help you build stronger relationships with your investors, that are deeper. Because again, the can get returns from anyone. So if they trust you, then they’re going to invest with you more often, at a higher number than if they didn’t trust you.

And then another way to build trust besides being authentic, being yourself, is to have a strong online presence. So if an investor googles you, they should be able to find you pretty quickly. You should be one of the top results. If you have no online presence and they can’t find you, then that’s definitely an indication of a lack of trust.

I was interviewing someone on the podcast – I’m pretty sure they’re a passive investor – and one of the things they said when qualifying a syndicator is to google them and see if they show up, see if they have an online presence, see if they have a strong brand… Because if in addition to their syndication business they have a strong brand, then if they mess up on the syndication business, that brand is gonna take a hit… So they have more skin in the game. This is kind of like number one, alignment of interests – if they have a strong brand, then they’re probably gonna take care of it a little bit more. Because if they have no online presence at all and they mess up, then me as an investor – I’m not gonna be able to go and write a review of their brand online, because it doesn’t exist. Whereas if I have a massive brand – if I have a podcast, a YouTube channel – and I mess up, well, I should expect to see a lot of negative comments on those thought leadership platforms about my mistakes, my misdeeds.

So making sure you have an online presence, making sure you’re able to be googled easily, having a LinkedIn profile, having a podcast, a YouTube channel, a blog, whatever. And then the added benefit of this is that if you do that, you can use this to generate interest from passive investors, and when you’re having conversations with them, they’re going to feel as if they already know you, because they’ve listened to you, they’ve seen you talk for hours and hours and hours before you’ve even met them in person… And that’s a great way to establish rapport even before having your first conversation.

So those are the three ways to separate yourself from other syndicators. Number one is having alignment of interests, number two is transparency, and number three is trust.

Until tomorrow, make sure you listen to the other Syndication School series about the how-to’s of apartment syndications, and take a look at some of those free documents as well. Both of those are available at SyndicationSchool.com.

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

JF1885: 5 Steps To Raise Over $40,000,000 For Apartment Syndications | Syndication School with Theo Hicks

Listen to the Episode Below (00:17:37)
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Joe was once starting from no money raised just like every other investor gets into raising money. After a lot of deals, he was at a point where he had raised $40 Million (over two years ago) and wrote about it for others to learn from. Today, Theo is sharing those lessons with us via the podcast. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we release two podcast episodes for the Syndication School series on the best real estate investing advice ever show, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the ones earlier on, where we went through the entire apartment syndication process, we offer free resources. These are PowerPoint presentation templates, these are Excel calculators, they’re PDF how-to guides that accompany the episodes in the series… And again, those are free. In order to download all of the free documents, as well as listen to the past Syndication School series, visit SyndicationSchool.com.

If you’re new around here, I highly recommend starting from series number one and working your way through the twenty, because for the first chunk of episodes we went through the entire apartment syndication process, from start to end; from not knowing anything about apartment syndications to selling your first deal. Along the way, we’ve provided a ton of free documents that you can use to guide you on your journey… So make sure you check all that out. Again, that is SyndicationSchool.com.

In this episode we are going to talk about raising money. Joe interviewed someone on the podcast who has closed on over 2,800 apartment units since 2010. He interviewed this person back in 2017, so it’s probably a lot more now. And for these deals he raised 40 million dollars, four-zero million dollars. But of course, at one point in his career he was just like you, if you haven’t done a deal before. He didn’t have any connections, he didn’t know how to invest in apartments, so he told his story of how he got from where you most likely are right now, to where he is today. Based on the conversation, we broke his journey into five steps. So these are the five steps to raise over 40 million dollars for apartment syndications.

Step number one is going to be to build your reputation. How I’m gonna go about this is I’m going to explain first what he talked about, and then we’re gonna talk about content and advice that we’ve given on this podcast, on our blog, in our book, that echoes his advice.

So number one is to build your reputation. Before he even entertained the idea of raising money for apartment deals, he was already investing in apartments, in multifamily on his own, using his own money. He also ran a successful sales and marketing company. Due to the success of both of these jobs – buying real estate on his own, as well as running and starting his own company, he was known by many other entrepreneurs in his local area to be a savvy entrepreneur who could effectively manage, run, scale a business.

Of course, this gave him a solid reputation amongst his entrepreneurial peers. It makes sense that this is step number one, because due to this reputation from his previous business success, he was able to eventually (as we’ll talk about in future steps) leverage that to raise capital.

So in his particular case, his background was investing in real estate on his own, particularly multifamily, which is even better, because if you’re gonna raise money for multifamily deals, it’s good to be able to leverage a background in successfully doing that on your own. But also, he had experience running a company. And when you’re doing apartment syndications, you are starting a company. So it’s different than just buying one-off deals on your own. You’re actually running a full-fledged company, with team members, with stakeholders who are your investors… So having a background in starting your own business and in running your own business is also very important.

So the two main things that you need before becoming a syndicator is going to be real estate experience and/or business experience. Real estate experience – buying your own deals, even if it’s buying single-family homes like Joe, and also business experience, whether it’s starting your own company or working your way up through an existing company to a high/director level.

No one’s gonna trust you with their money if they’re not confident that you can navigate the syndication niche. Obviously, if you haven’t done a syndication before, you’re not gonna know how to do a syndication. You can get educated, but you don’t really know how to do something until you actually do it… So the next best thing is to show your ability to successfully navigate other similar niches, so successfully navigate buying your own properties, successfully navigate managing your own company, things like that. So that’s step number one – build a reputation; how you do that is by having previous real estate and/or business success.

Step two is to tell your story. After building a solid business reputation, the next step is to locate the high net individuals that are in your current network, so the people that you already know, and then tell them your story. You’re not gonna have a reputation unless it’s known. So you could have done all the deals in the world, managed a successful business, but if no one knows about it, then it’s not really powerful. That’s where telling your story comes into play.

Now, if you’re thinking to yourself “Well, I don’t have a network of high net worth individuals”, that means you most likely need to continue working on your reputation. Because when you’re performing at a high level – in real estate, in business – you’re going to cross paths with people who can be potential private money/passive investors.  On a more personal note, a perfect example is my wife works for a big Fortune 500 company, and she has a lot of people that she works with who might not necessarily be accredited, but would be interested in passively investing. She’s worked her way up through this company and she’s met a lot of people who have the capital to invest in these types of deals. This is one example.

If you’re investing in multifamily, then you likely know a lot of other multifamily operators who may have connections to other passive investors.

Another example would be Joe. He was a VP at his New York City advertising firm, so when he was ready to raise money for his deals, there were people within the industry that he had already created relationships with, who were his first investors and invest with him to this day. Because they saw his success in business, in the advertising industry, they also saw his success in real estate, purchasing multiple single-family homes and teaching people how to buy properties, but more importantly they knew that he actually did that, they knew that he worked his way through the company, they knew that he was involved in real estate.

The individual who Joe interviewed similarly also had the same steps [unintelligible [00:09:10].10] obviously, he told his story, so what he said is “What really helped me was I was able to show them (his passive investors) what I was doing. I started in this business investing in multifamily, on my own, for myself, I had a tax problem, I needed some tax shelter. We got creative on that side, so I was able to approach some of the people that I knew, that had the same investable income, and just told them my story.”

Overall, after you’ve  built your reputation in business and/or real estate, you want to use that as — I don’t want to call it a selling point, but you want to leverage that when you’re having conversations with the high net worth individuals you met whilst creating that story. So that’s step two, tell your story.

Now, this something that he didn’t mention, but one great way to tell your story to come across as a credible person is to start a thought leadership platform. We’re not gonna talk about that in detail today, because we’ve got plenty of content on that on the blog and in past Syndication School series. If you go to JoeFairless.com and you search “thought leadership platform” in the search function, you’ll find countless content on how to do that, and why you should do that.

So step one – build a reputation. Step two – tell your story. Step three is to get investor commitments. Now that you’ve got your reputation and you begin telling your story to high net worth individuals, the next step is to get them to commit to investing in your deal. And the individual that Joe interviewed had a great story about how he did this. He said “I was invited to sit on the board of a local startup bank. I was listening to a conversation that went something like this… These guys were talking back and forth, and I knew most of these guys around the table, about a dozen guys. They were talking about investing in this bank, and wanting to know if that was a good idea, a wise investment. I heard conversations like “Well, you might not see a return for 5-7 years, but it’s better than putting our money in a CD.” I was just blown away. I was amazed at the conversation.

I got to looking at what I was doing in the multifamily space, and got thinking “Man, how can I add value to these guys?” It was about the time I had bought a  couple hundred units on my own, I was sort of coming to the point where I was running out of cash, I had to slow down… Then I talked to another friend of mine who was on the board as well. I ran the idea by him about syndicating and teaming up with these guys. He thought it was a great idea. For the next deal they came along.”

So because of his business reputation, he was invited onto this board. Due to his previous real estate investing experience and successes, he had a compelling story to tell. So in a combination with both of these things, he was able to raise money for his first deal. In this particular case, it was from people that were on this bank.

So how can this apply to you? Well, this is why it’s good to have both. If you have a strong business reputation – you start a company or you’ve worked you way through a company – you’re likely gonna get more opportunities to be in front of these potential investors. Once you’re in front of these potential investors, you need to have another story to tell them about why they should be investing with your real estate deals, and a great way to do that is to tell them about your successful real estate investing background. Those things go hand in hand. You can do one without the other, but it’s much easier to have both in your background.

And again, you don’t need to have started a massive company on your own. You can, as Joe did, work your way through a company and meet people through that, and find opportunities through that. So step four is to increase your investor network through referrals.

Once you’ve actually done your first deal, or two, as long as those deals were successful and you took care of your investors, and you did what you said you were going to do, then your current investors will likely refer you to their other high net worth friends. Then from there it’s a snowball effect.

So referrals are the best way to get more investors, because of the concept of social proof, which we’ve talked about plenty of times on the podcast. You’re more likely to buy something at the recommendation of a friend than at the recommendation of that company.

I was reading an article last night about social media influencers, and how companies are going away from paying the multi-million follower accounts for their advertising, and again, they’re paying smaller accounts, just random people, a few hundred bucks to post pictures of them wearing their clothing or using their product… Because I’m more likely to buy a product if I see my friend using it than if I see some super-fancy person that I don’t necessarily know promoting that product. That’s just an example of referrals, but this also applies to real estate.

If I’m investing in a deal and it goes really well, and I tell a friend “Hey, I’m investing in this deal. It’s going really well, you should take a look”, they’re more likely to do it than if they’ve found it on their own, or if the syndicator reached out to them and they didn’t know I was investing into that deal.

The individual that Joe interviewed at this point said “If I would pinpoint and go back to each one of those investors, a  lot of the guys were from referrals. People that invested with me, and then said “Hey, I’ve got a friend…” They’d give me a third-party endorsement and we ended up doing a deal together. One thing led to the next, and the next thing you know, they’re a really faithful investor.”

Now, the last step – it goes hand in hand with step four… So step four was, again, increase your investor network through referrals. Step five is to retain current and referral investors. Once you’ve received a new investor, whether it’s one of your first-time investors from your current network, or a referral, or somebody you’ve found from somewhere else, you want to focus on retaining them by continuing to syndicate successful deals.

I interviewed someone from Joe’s podcast last week who was talking about the fact that a lot of people focus on finding new investors and don’t focus enough on retaining current investors… Because they don’t realize the power of the referrals.

Technically speaking, once you brought on your first batch of investors from your current network, it’s not a requirement to have to go out there and always find new investors, because your current investors might do that on your behalf, as long as you’re taking care of them. And again, we’ve done plenty of podcasts in Syndication School; I believe there’s one that’s titled “How to retain passive investors”, so make sure you check that out as well. Again, that’s at SyndicationSchool.com, or you can search “retain passive investors” on Joe’s website in the search function.

So as long as you consistently provide your investors with a solid return, you are transparent with the communication, not only will you receive more referrals from them, but they’ll also come back and continue to invest, and ideally invest more and more.

On this point, the person that Joe interviewed said “We recently closed on a 300+ unit building. We raised over three million dollars, and about 85% of those investors had invested with me on other deals.” So they were current investors, and just coming back for another round.

Again, referrals are powerful, but also retaining your current investors is probably as important as getting referrals.

To summarize, the five-step process to raise over 40 million dollars – maybe even more than 40 million dollars; 100 million dollars, a billion dollars – is step one, build your reputation, step two, tell your story, step three, get investor commitments, step four, increase your investor network through referrals, and step five, retain those current investors and retain those referral investors.

That concludes this episode. If you want to actually listen to the podcast interview that I was referencing for this, it’s episode 1093. The person Joe interviewed was Dave Zook.

Until tomorrow, make sure you check out and listen to some of the other Syndication School episodes and series about the how-to’s of apartment syndications. Make sure you check out all of the free documents that we have as well. Those are both available at SyndicationSchool.com.

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

JF1884: When To NOT Work With A Passive Investor On An Apartment Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:17:16)
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Obviously we talk and write a lot about finding private investors, but we don’t talk so much about when you shouldn’t work with them. Priority number one is having an alignment of interests with your investors, and ideally they treat you as a partner rather than a vendor. Theo will explain that and more in this episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“He encourages investors to ask questions because the more information he can provide to them, the more confidence they will have”

 


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

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TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we release two podcast episodes on the Best Real Estate Investing Ever Show, that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, especially the earlier series, we will offer some sort of resource for you to download, whether it’s a PowerPoint Template, Excel calculator, PDF how-to guide, some sort of resource for you to download for free, that accompanies the episode or series. All of these free resources, as well as the free past Syndication School series, can be found at SyndicationSchool.com.

In this episode we are going to talk about when to not work with a passive investor on an apartment deal. A lot of content is geared towards how to find passive investors, how to retain passive investors, but there’s not much content on when to actually not work with a particular individual.

Now, when you are first raising money for deals to purchase apartment communities, most people as long as this person is interested in investing and meets the accredited investor qualifications – if that is one of the criteria you have for your investors – then typically their capital is accepted into the deal, really without any other hesitation. “Are you qualified and do you wanna invest? Alright, come on and invest in this deal.” But maybe something you wanna do starting out, or most likely this will occur when you’ve gotten a few deals under your belt, and you’ve got a large list of investors, maybe you have a waiting list at a few of your deals, or it fills up really quickly, you might wanna consider potentially not working with certain passive investors if there are some red flags from the get go.

It’s important to be aware of these red flags right away, when you’re first starting out, but obviously – and again, this is up to you, but if you really need this person to invest and there are red flags, that decision is up to you… But eventually, you’ll want to only work with passive investors who do not have these red flags.

Before I go into these red flags, this is gonna be important for you to first define what the ideal relationship will be between you and your passive investors. Typically, your syndication deals are gonna be anywhere from five years to ten years. Maybe you sell early, maybe you hold on later, but generally speaking, the business plan is going to be five years. So you buy it and then you sell it within 5 or 10 years. In that case, you’re gonna have a relationship with your passive investors for at least the period of the business plan. Obviously, ideally it will be longer, because they’re coming back for multiple deals, but the very least, the relationship is going to be five years, or whatever the length of your business plan is going to be.

So if you’re gonna be in a relationship with someone for that long, then it’s best if you have a passive investor who trusts you as a person, personally, but as well as a businessperson, and also treats you as a partner in the deal.

Now, the opposite of that would be if they were looking at you as more of a vendor. So think of how you would treat a partner, compared to someone for example that you’re buying some commodity from one time; like you’re buying internet, or something.

So based off of Joe’s experience, having conversations with hundreds of accredited investors, thousands of accredited investors, having hundreds of accredited investors invest in his deals, completed upward of 20 apartment syndication deals, there are two major re flags or factors that indicate to him that the relationship between him and that passive investor is not gonna meet these requirements. It’s not gonna meet the requirements of the passive investor trusting him, and the passive investor treating him as a partner rather than as a vendor.

The first red flag is contempt. There was a famous study that was published in the 1990 by a marriage researcher named John Gottman, and he videotaped newlywed couples discussing a controversial topic for 15 minutes. The purpose of this study was to measure how these newlyweds fought over this controversial topic. Then, 3-6 years later Gottman and his team checked back in on these couples to see what their marital status was. Were they together, or were they divorced?

As a result of this study, they determined that they could predict with an accuracy of 83% if newlywed couples that they interviewed would be divorced. And based off of their analysis, they’ve found four major emotional reactions that are destructive to marriages, and of the four, contempt is the strongest. So if there is contempt in a marriage, which they measured by “Was there contempt during this back-and-forth argument over a controversial subject?”, then that marriage is most likely not going to last.

Now, you may be saying to yourself, “Theo, what does marriage have anything to do with apartment syndications?” Well, marriage is a partnership, and since the ideal relationship between you and your passive investor is also a partnership, then marriages and business partnerships obviously are not the exact same, but the same concepts that apply to whether a long-term marriage is gonna last can also be used to apply to business partnerships.

According to Dictionary.com, contempt is the feeling that a person or a thing is beneath consideration, worthless, or deserving of scorn. So how do you identify if there is contempt between you and a passive investor? The best way to do that is going to be having to trust your gut. So do you get the feeling that this person sees you as an equal and as a partner, or do you get the sense that they look down on you and see you as more of a vendor, that you’re there to simply serve them and that you are not at the same level as them?

For example, Joe received an email correspondence from a potential investor who had led off the conversation by saying “My standards are high. My patience for slick marketing is low.” So Joe responded by providing him with some information about the company, which included past case studies of the returns he was able to provide to some of his investors, to which this individual replied “So, what I need to hear is why do some deals with you, as opposed to doing deals with the company that I currently invest with?”

Now, based off of this interaction, Joe got the sense — based on the interactions and these replies, Joe got the sense that there were traces of contempt coming from this person. He started off by saying that he has very high standards, he doesn’t wanna see slick marketing, “Why should I invest with you over someone else?” Joe got the sense there that this person thought that he was beneath consideration. Maybe not necessarily completely worthless, but definitely below the worth of him himself. So Joe politely explained to this individual that they would not be a good fit for his money.

Now, if Joe was earlier on in his career, he said that he would have likely brought this individual on as a partner, because he didn’t have a lot of access to money, so really any dollar coming in was worth any sort of contempt that he received. But now that he has already created strong relationships with his current investors, he didn’t find the potential issues that could come from this individual worth pursuing the relationship any further.

Of course, maybe this person was having a bad day, maybe the emotions couldn’t get communicated properly through email, but Joe sensed that there might potentially be a chance that this relationship would not work, and the potential issues that could have arised from this relationship just weren’t worth it for him.

So if you are having a conversation with an investor and your gut is telling you that this person might potentially hold you in contempt, then our recommendation is to pass on this relationship. Instead, you wanna make sure you’re setting up relationships for success from the get go by only working with investors who treat you as an equal and who want to have a mutually beneficial partnership, as opposed to only talking about what’s in it for them. And again, this is going to be something that you’re not going to be able to quantitatively measure. It’s going to be a subjective gut reaction.

Sometimes you might be wrong, but again, if there’s a chance that this person holds you in contempt, there’s a chance that there’s going to be potential issues with this individual in the future, you have to ask yourself “Is it worth bringing on that capital, as opposed to working with investors who are looking for a long-term partnership?” So that’s red flag number one, “Does this individual hold you in contempt?”

Red flag number two is going to be the individual asking you a lot of accusatory questions that don’t convey that they trust you. Again, we’ve already covered the partnership aspect of the ideal passive investor. The other characteristic is trust. So do they trust you? One way to determine if they might not have a high-level of trust in you is if they ask you a laundry list of questions in an accusatory tone.

For example, Joe has an investor who literally sent him a list of over 50 questions that are written in an accusatory fashion for every single new deal that he sends out. So every time he sends out  a new deal email, this person sends him a massive list of questions that aren’t asked in good faith. After Joe is taking the time to answer all these questions for multiple deals, this person has yet to invest in any of these deals… Because since they are asking these questions in an accusatory manner, no matter how Joe responds, they are always still suspicious of Joe, Joe’s company and his deals.

Now, an important distinction to make here  is that you – and Joe, obviously – does not have an issue with investors sending him a list of questions. Joe doesn’t have an issue with investors sending him a list of 50 questions, of 100 questions, of 1,000 questions. It doesn’t matter how long. In fact, he encourages that investors ask him  questions, because the more information that he can provide to them about the deal, the more confidence they’re gonna have in the investment overall. At the end of the day, that’s important, because these people are trusting Joe with his hard-earned money, and he wants them to be confident that they will be taken care of.

So the red flag here isn’t a long list of questions, but it is the tone in which the questions are asked, so the questions being asked in an accusatory manner… Because that conveys that they don’t have trust in Joe and his team. Plus, since they don’t have trust – that’s the main reason people invest, is if they trust you – then they’re not going to invest in the deal.

At the end of the day, the key to a successful relationship, as I mentioned, is going to be that trust factor. So if your instincts are telling you that there is a lack of trust, which one example is conveyed through a list of accusatory questions, but there’s other ways that people can convey that they don’t trust you, then Joe no longer decides to pursue that relationship.

Again, this one is also going to be something you’re not able to quantify with numbers, but it’s more of a gut feeling. So if you’re reading through questions and they aren’t asking them in good faith, they’re not asking them to get information to determine if they wanna invest or not, but they’re asking them to trip you up, then that is an indication that they do not have trust in you. And if they don’t trust you, they’re not gonna invest in the deal. And if they do, there’s going to be issues that arise.

In conclusion, you do not wanna work with every single passive investor who is interested in investing and who has the qualifications to invest. The two main red flags that if you see them you should consider not partnering with this individual, is going to be 1) contempt, and 2) asking a lot of accusatory questions. Again, the contempt is an indication that they are not looking for a partnership, and the long list of accusatory questions indicates that they do not trust you.

And then again, I know I said this multiple times, but just to finish off the episode I wanna say it again – both of these factors are very, very subjective. Each syndicator and each investor has a different personality, and each syndicator and each investor will get along with the different types of people. So just because you get the feeling that someone holds you in contempt, or get the feeling that someone sent you a list of questions in an accusatory tone, does not mean that they are a bad person, but it does indicate that you will have an issue connecting with this individual in such a way that builds a strong relationship that is capable of surviving the course of a syndication deal.

So overall, if you see either of these red flags, and you feel (subjectively) that these red flags are present, make sure you’re polite in your way of declining to work with this individual, but we strongly consider not working with that particular passive investor.

That concludes the episode of when to not work with a passive investor on an apartment deal. Until next time, make sure you check out some of the other Syndication School series or Syndication School episodes about the how-to’s of apartment syndications, and make sure you also download all of our free documents. All those are available at SyndicationSchool.com.

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

 

JF1879: Best Ever Lessons Learned Last Week #FollowAlongFriday with Theo and Danny

Listen to the Episode Below (00:25:51)
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Today Theo will be doing Follow Along Friday with Danny Randazzo, who is also an apartment syndicator controlling over $225 million in apartment communities. Theo will be mentioning three lessons he learned last week while performing the interviews for the podcast and Danny will provide additional insights and thoughts. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“You can put annual rent increases in the lease”

 


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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks. Today is Friday, which means it is Follow Along Friday, where typically Joe and I will go over the lessons that we learned from the previous week’s interviews. A sneak peek into what you’re going to learn in the coming months.

We are going to do that today, but instead of me and Joe doing it, Joe is in Aruba right now, so I hope he enjoys his downtime and vacation there… So we are joined by Danny Randazzo again, as the co-host. Danny, how are you doing today?

Danny Randazzo: I am doing great, Theo. Glad to be back. Just excited to be here with you for this Follow Along Friday.

Theo Hicks: Awesome. As I mentioned, we’re going to go over three lessons that I learned from interviews last week… But before we do that, I wanted Danny to just briefly give us another introduction of himself. You should know who he is already, but if you don’t know who he is, Danny, do you mind just giving a rundown of your background and what you’re focused on now?

Danny Randazzo: Yeah. My name is Danny Randazzo, I am a real estate investor and entrepreneur. I’ve been a three-time guest on the Best Ever show, so you can go back and listen to those episodes to see my evolution and journey over the years. I really got started one deal at a time. Today my company controls over 225 million in multifamily deals. We syndicate large apartment deals. Today we look for deals that are 150 units or more, and greater than 30 million dollars in purchase price. So that’s what we’re focused on today.

I’m also the host of my own podcast, the Danny Randazzo Show, where I love to talk about money, mindset and investing. So that’s what I’ve been working on, and… Any questions, Theo, from you? Otherwise let’s get into the show.

Theo Hicks: Yeah, let’s just jump right in. The three lessons that I learned — well, it’s more than three lessons, obviously, as we always say, but these are just three interviews that we wanted to highlight.

The first one is from Alan Schnerr. He is a syndicator. He has bought more than 2,000 units and he’s managed more than 7,000 units, but he doesn’t syndicate your typical multifamily deal. He does triple-net leases. I had obviously heard the term triple-net leases before, but I didn’t actually know what it meant… So he gave a really good rundown of what they are, and then the benefits of the triple-net lease. In my opinion, it sounds too good to be true.

The one thing that he said was for multifamily, for every dollar that would come in as income, he would be spending 60 to 80 cents going out as an expense – operating expenses, debt service, things like that, which… 60 cents – fair enough. For triple-net leases he says that he’s able to keep 90-95 cents on the dollar. So when he told me that, I’m just like “Well, why isn’t every single person on the planet doing triple-net leases?” And maybe it has to do with them not knowing about it, but basically what he told me is the main difference between a triple-net lease and a regular lease is the reimbursables. So insurance, taxes, the majority of the expenses are all reimbursable to you, the owner. In multifamily the owner pays for all  that stuff. In triple-net leases the retail tenant, office tenant, the warehouse tenant pays for all that. It comes out of their pocket.

He went into more details on the budget, and how that’s sent to them, but… I thought that was interesting. I didn’t know what triple-net leases were. The other thing that you can do is you can put annual rent increases in the lease, because typically these aren’t your one-year lease, like it would be for a regular tenant. If you have a national tenant – and he talked about how to find national tenants – if that particular branch that’s in your building goes bankrupt, whatever, you’re still gonna get paid, because the national Starbucks is gonna pay you money even if that particular Starbucks isn’t doing well, or something goes wrong where they can’t be open. You can also get a percentage of sales, the tenants will have to pay for a property management company as well… So overall, he was saying how this is a more dependable income stream as a syndicator.

The main reason why I thought it was interesting is because he has done basically every single type of real estate investing you could think of. He’s bought medical, office, warehouse, shopping centers, custom homes, apartments, and he has been in the business for 20+ years. He’s really excited about triple-net leases and he says that his best advice was he wished he had done this earlier. Danny, do you know about triple-net leases? What are your thoughts on it? Is this too good to be true, or is this truly something that can allow you to maximize the amount of money you make per dollar invested?

Danny Randazzo: I do know some things about triple net leases. Actually, the first deal that I ever purchased was a one-million-dollar office building.

Theo Hicks: Yeah, I remember that.

Danny Randazzo: That was my first real estate investment, and I think back to the first best ever show that I was on, I covered that deal in detail… But he is on the right track. I don’t know if 90 to 95 cents is accurate in terms of net profit, because again, you would have to pay your debt service, so I think that’s a little bit off… But you definitely keep more money from a cashflow perspective with triple-net leases, because yes, the tenant is paying for the insurance, the taxes, any sort of community maintenance fee, they’re paying their water, utilities, all of that. And typically, if there’s something that breaks down inside the unit, like the toilet stops running, the tenant is gonna pay for a plumber to come out and fix it. So truly, gross income collected is almost identical to your net income. Then once you have your net income, you then pay your debt service.

So I think from a cashflow perspective, triple-net leases are great. However, once you have a fully-occupied building, there’s not much value-add opportunity. So if we compare it to an apartment deal where even if you buy a 95% occupied apartment community, and let’s say it’s a nice B class asset that hasn’t been renovated in 15 years – well, you can go in and you can add value to it, and instead of increasing the rent by 3% annually, which is typically a triple-net lease annual increase, you can increase rent by maybe 20%, 30%, 40% if you’re taking an apartment rent from $1,000/month and you renovate it, and now you’re renting it for $1,200. Well, that’s  a 20% rent increase, and that’s a huge equity forced appreciation that you can have.

So I definitely like a triple-net lease from a cashflow play. It’s a good place, like you said, to put your money in and have a national tenant backing it and paying the bills. If I can put $100,000 to work and know that Starbucks is gonna pay me for the next ten years, I feel pretty good about that. If I put $100,000 to work in a small office building where you might have an insurance broker and an attorney renting from you, that to me isn’t as secure… So I just think you have to weigh the pros and cons of what type of triple net lease you have, what the tenant quality is, and who’s really backing that, to understand what type of return you’re going to get, what are you comfortable with.

I always tie an investment back to what is the real goal here. Buying a triple-net lease to generate monthly income – that is a fantastic goal. Buying a triple-net lease to force appreciation – not a good goal. You would wanna buy an apartment community where you can force appreciation and create equity. So – absolutely, triple-net lease you can retain a lot of gross income as net income and cashflow every single month, and that’s really the primary purpose of having those investments.

Theo Hicks: Yeah, I think first of all the point about the value-add is definitely huge. I’m remembering now why he said 90%-95% on the dollar, and why we’re gonna bring him back on the podcast… Because once we got off — because again, we can only do these for 30 minutes. Once we got off, he was going on and on and on about all these different things that he did, that were very unique, that allowed him to bring in an extra 20k, 30k, 40k per month in rent, which would obviously increase the value.

One of the examples was he did something with a parking lot, built some structure on there, and someone rented it out for 40k/month, or something like that… And he said he has a bunch of other examples of that. So we’re definitely gonna bring him back on the podcast, because he started getting into the value-add stuff at the end and we just didn’t have enough time to talk about it. But in general, as you said, for triple-net leases, most of the time it’s just income coming in, which as you mentioned, you’re not able to force appreciation unless you’re doing something really unique, like Alan.

Danny Randazzo: Yeah. And I think some of those unique opportunities, like — if you own a building, sometimes you can put a weather antenna up, or you can put a cell tower up if you have the right zoning, you could put a billboard up… From a parking lot perspective, I’ve seen people put in ATM machines, the little standalone structure – those can rent for some serious money, and that definitely improves the bottom line, it definitely forces appreciation, and improves cashflow.

I’ve also seen ice machines, or sometimes in some cities they have these new Starbucks that are built out of old shipping containers… So you’re able to put that into three parking spaces, and that can bring in some serious rents.

Theo Hicks: Oh, I bet.

Danny Randazzo: So you can definitely be creative if you have enough land, the right zoning, and of course, the demand from a tenant who needs an ATM machine, or a cell tower, or whatever that is.

Theo Hicks: [unintelligible [00:11:38].11] learn more about triple-net leases from you, Danny. I appreciate that. Alright, so the second interview that I did was with John Bogdasarian. Basically, what he does is he has a firm that helps passive investors find deals to invest in. He works for a real estate firm that works with 300 passive investors… So he talked about really all things passive investor. We talked about investing from the perspective of the passive investor. There’s a few things that he said that I had not heard before, and I thought they were interesting and unique. Again, this is coming from the perspective of a passive investor.

The first one I’ve obviously heard before was as a passive investor, when you are looking at deals — I asked him how should a passive investor analyze a deal. He said the most intelligent investors, when they’re asking questions, will not ask questions about the actual specific deal. They won’t focus on that. Instead, they’ll focus on asking questions about the actual sponsor, the actual people responsible for the deal. What does that mean to people who are syndicators? Well, you need to make sure that obviously you’re giving ample information about the deal that you’re trying to raise money for, but also make sure that you can answer questions about why they should be investing with you, what’s your background expertise, experience, who’s on your team, that makes you the right person to invest with to grow and preserve their capital.

That wasn’t something new, obviously, but I did ask him some questions on how to find sponsors, and he had some very unique responses. One of them was when you’re in a hot market, he said “Look for cranes in the air.” For context, he helps people invest in development deals, too… So find cranes in the air, drive to those cranes; typically, when there’s a development going on, there will be some sort of banner with the person’s name on it… So reach out to that name, the developer, and see if you can get involved in either this particular deal, or some other deal they’re doing in the future, or at least figure out who is the party responsible for it.

Another one was — he said if you go to doctor’s office, if you’re talking with your lawyer, or someone who’s a high net worth individual who has the potential of investing in these types of opportunities – just ask them after they’ve done your check-up what they’re investing in, and see if they’re investing in apartments or some other passive investment source.

And some other ones he said – Google searches, obviously, read news article or local real estate publications… Typically, there’s gonna be some sort of Business Inquirer type publication for your particular market, and you can see who’s doing new development, who bought a new large multifamily building, things like that. Find out who they are, look them up on their website, reach out to them… And then with word of mouth — he said back in the day there was no internet, so there were country club deals. Kind of the same thing – go to places where there are high net worth individuals and then ask them what they’re investing in. Obviously, don’t go to some athletic club and walk up to every single person and say “Hey, what are you investing in?” Be smart about it…

Danny Randazzo: “How are you putting your money to work for you?”

Theo Hicks: [laughs] Seriously… Talk to them first, get to know them first, and then transition into that.

Danny Randazzo: Yeah. My excitement is through the roof right now, because I have the best ever approach to finding a sponsor… And I hope you’re ready for this, Theo. As a sponsor myself, I had this happen to me the other day; someone called me and they said “Hey, I have been looking at all of the SEC filings for private placement memorandums, specifically real estate syndication deals in this specific market, and I saw you just recently closed a deal, and I wanted to connect with you to see what you’re about and build a relationship to possibly invest in future deals.”

Doing that, number one, you always wanna make sure that the sponsor is following the law, abiding by SEC regulations… So when they close a deal, they have to file their offering with the SEC. And again, that’s public information, so Best Ever listeners, this is an excellent approach to see who is syndicating deals in the markets that you want. All of those filings can be found; you just need to hunt for them.

This guy was actively seeking out syndicators and then calling people to build that relationship. I think that’s another phenomenal approach if you are truly interested in buying in a specific market, or anywhere around the country; you can see those offerings, you can read through the details of it, and then of course, go to the folks’ website, look them up, build that relationship, know/like/trust them, which I would highlight as the [unintelligible [00:16:23].02] as a passive investor myself personally, I invest in Ashcroft deals with Joe as a passive investor, and it takes time to build that relationship, to know/like/trust someone. So once you do that and you qualify them, I think investing in the next deal, and the next deal, and the next deal makes it that much easier. Again, do your research, use your personal network, use your extended network, do the Google searches… I guess if you wanna look for development opportunities look for the cranes, call the company that’s sponsored on the fence out front, and use the SEC website to find the filings and then reach out to those syndicators.

Theo Hicks: Thanks for providing that. I had heard that SEC filing one before. It might have been you, actually. I can’t remember who it was. I think it was a syndicator saying that “Make sure you’re registering on the SEC site, so people can find your deals.” But on the know/like/trust, something else than John said about looking for sponsors is that he always recommends to his passive investors to avoid the investor portals, because he said that it’s very difficult to gauge if you can trust them by simply finding them and then logging into their portal and just sending them money. He talked about that a lot. I have seen the portals before, but I don’t know of any investors who just strictly — 506(c),  have people come to their portal, never talk to them, things like that… But obviously, if that does exist, then yeah, it’d be very difficult to know them, to like them and to trust them if you’re never talking to them. So that’s something else that he ended with.

Danny Randazzo: Yeah. I would just put that disclaimer out there that if you are going to invest your own money, you are responsible for it. You need to talk to the main sponsor, or you need to meet them in person, period, before you ever send your money. And if you can’t do one of those two things, then I would just say don’t invest, because that doesn’t make sense, to me personally. My gut wouldn’t allow me to do that without speaking to them or meeting them in person. Again, it’s a huge investment; you’re putting your money to work and you need to know, like and trust. And if any one of those three is off or feels weird, don’t do it.

Theo Hicks: Exactly. Alright, so the last lesson – this will be a quick one. Eachan Fletcher – he’s the CEO of a company called NestEgg. That sounded so familiar when I interviewed him, but it’s a property management and maintenance online platform. He actually used to be the CTO and VP of product at Expedia, which is interesting… So he has a lot of experience of growing companies, startups, venture capital, things like that. We’ll definitely get him on the podcast again, because I wanted to talk to him more about NestEgg, just because it’s kind of a startup company, it’s only in a few locations, and I wanted to know what’s the approach of scaling that nationally… Because that can be very helpful to syndicators, or also investors who are investing in one location and what to eventually grow a business that can help them invest all over the country.

He gave a three-step process for how he started the company from a strategic standpoint, that I thought would be interesting to anyone who obviously wants to do some sort of startup that provides a service to real estate investors… But also, you could apply this to your real estate business as well.

The first step when he started the company was to gain insights on this space, and the customers. So he did a lot of market research to basically figure out what’s missing, and what’s hard about property management. If you want to learn about what he determined, you can check out that interview, which we’ll probably be releasing in a little bit… Basically, he asked himself “What are people who are starting out 2-3 years into being a landlord, with less than ten properties – what do they need help with?”

The second one was to find competitors who are also providing solutions and services to those customers to figure out why people aren’t happy with their solutions. And then the third one is based on all that research on why people aren’t happy – you wanna determine what features your company is going to have in order to make sure people are happy, to fill that need.

And I guess I’ll say what he did – basically, the things that he did for his company was 1) the maintenance. So rather than having the owners have to do the maintenance themselves, or rather than the property management company kind of just taking care of it and sending them a bill at the end, he has an online portal that they could submit their maintenance requests to, and then they’ll take care of everything. There’s a lot of pictures, and back-and-forth, and you can monitor the repairs to make sure that they’re actually fixed… Then they’ll actually monitor the repairs on an ongoing basis. They partner with a lot of contractors, so you don’t have to do that yourself.

The second one was the cashflow issue – people that are starting out need their money, and I know an initiative I had was getting cashflow a month later from the previous month, or two months later, whereas they’ll pay you the rent they collect on October 1st – you get paid October 1st, even if they don’t have that money right away. So you get paid a month earlier than you usually do.

And then the other one was about the maintenance issues – rather than paying last month’s maintenance calls all coming out of the rent for the next month, they’ll spread it out over a 12-month period instead. There’s a couple other things that they have as well, but the main point was his process for creating the company, which was gaining insights, find the competitors, and then determine what features you’re going to create with your company. I thought that was interesting.

Danny Randazzo: Yeah, I think that is very interesting. It always comes back to the Why and the Need. You just need to solve for those things. It sounds like a very interesting approach, and I’ll be curious to listen to that next episode of how the implementation is going so far, and what their value-add approach is to help owners, operators, management companies improve that maintenance issue. Because as we know, in the apartment ownership world your largest expense typically is payroll, which includes your on-site maintenance staff salary. So if there’s a way that NestEgg is able to change the approach to maintenance costs, it could be extremely beneficial to owners, operators and managers to impact and improve their NOI if there’s a new way to handle maintenance requests and decreasing expenses.

Theo Hicks: Exactly. So those are the three interviews. Again, those will probably airing in the January to February timeframe, so you got a sneak peek of what will be talked about in those episodes. Just to wrap things up, trivia questions – we do a trivia question each week; the first person to get the trivia question correct gets a free copy of our book. We’re doing a loyalty trivia question this month – all the trivia questions are things that we’ve talked about on the blog, on Follow Along Friday, the podcast, the book…

Last week’s question was “Of the two main occupancy metrics, which one is more relevant to you when you’re investing in apartments?” The two main occupancy metrics are physical and economic occupancy. Physical is just the rate of people who are in your apartments. So if you have 100 units and 90 are occupied, the physical occupancy is 90%. But let’s say that of those 90 people only 80 are paying rent, and 10 aren’t, for some reason – then your economic occupancy is actually 80%. So the answer is economic occupancy, because if I’m buying an apartment and they tell me “Oh, Theo, the occupancy is 100%”, it’s like “Oh, well is that physical or economic?” “Well, it’s physically occupied 100%.” “And what’s the economic occupancy?” “Well, some people aren’t paying rent, and there’s bad debt, and there’s this and that… So essentially 80%.” That’s a huge difference in income, that’s a huge difference in NOI, so that’s a huge difference in the value of the property.

Joe has talked about this on his first deal as well. If you go to JoeFairless.com and you search “economic occupancy”, you’ll find some blog posts going into more detail on that.

This week’s question is “What is the main difference between the cash-on-cash return metric and the internal rate of return metric?” I guess it could be a one-word answer or a three-word answer, depending on how you answer… But “What is the main difference between the cash-on-cash return metric and the internal rate of return metric for apartments?” Technically, you could use that for really anything.

So you can submit that to info@joefairless.com, or you can comment on the YouTube video. Again, the first person that gets that correctly will get a free copy of our book.

Danny, thanks for coming, I really appreciate it. I really enjoy doing Follow Along Friday with you, because you always have a lot of value to add, a lot of things to say that I haven’t thought of before or that I don’t know about, so… I really appreciate you coming on. Where can the Best Ever listeners get in touch with you?

Danny Randazzo: Theo, thank you for having me, happy to be here. If any of the Best Ever listeners need to get in touch with me, just go to DannyRandazzo.com.

Theo Hicks: Perfect. Again, Danny, I appreciate it. Best Ever listeners, thanks for tuning in. Have a best ever day, and we’ll talk to you tomorrow.

JF1878: How To Communicate With Investors When Something Goes Majorly Wrong | Syndication School with Theo Hicks

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Floods, fires, crime, wind damage, etc… They all happen, how you communicate with you investors about their investment is crucial. Communication on current deals will likely sway your investors on whether they will invest with you again or not. Ideally, when things go wrong, you respond quickly with relevant information for them. Theo will cover what we have done when a property was hit by hurricane Harvey. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You don’t want to send an email with no information at all”

 

Related Blog Post:

https://joefairless.com/s-o-s-approach-managing-investment-crisis-like-hurricane-harvey/

 


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TRANSCRIPTION

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

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

 

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

Each week, we air two podcast episodes, every Wednesday and Thursday, on the Best Real Estate Investing Advice Ever Show, that is the Syndication School series. These episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the first 20 or so series, we offered free resources. These are PowerPoint templates, these are Excel calculators, how-to PDF guides, things that accompany the series that we talked about, that will help you in your syndication business. And those are, of course, for free. All of these free documents and free Syndication School series can be found at SyndicationSchool.com.

In this episode, as I mentioned yesterday – or in the previous Syndication School series – is how to communicate with your investors when something goes majorly wrong. This is a process that we came up with after going through the process of communicating a major issue with investors.

This particular issue was not the fault of anyone at our company, at Ashcroft. It was actually a hurricane. The majority of Joe’s portfolio is in Texas, and this was two years ago; it was Hurricane Harvey. If you remember, Hurricane Harvey was a huge hurricane that hit Texas… And we obviously had to communicate that to our investors and let them know what our plan was if something were to happen to our properties from the hurricane.

Obviously, this could be a hurricane, it could be a fire, it could be an earthquake, it could  be a flooding, it could be any sort of large issue that happens, that affects the entire property – how do you communicate that to your investors.

You can also apply this approach to smaller issues as well, but today we’re gonna talk about this in the context of a huge national disaster type issue that affects the entire property. Obviously, this is going to have an impact on your investors if something were to happen at the property, and they might not necessarily know what the insurance process is like, or things like that… And they might be afraid that they’re not gonna be able to get their capital back, make their money back if the property was entirely destroyed by a hurricane.

So here is the three-step approach that you’re gonna wanna use once a natural disaster type even has occurred, from your perspective, in order to communicate this effectively to your investors. This approach – we’re calling it the S.O.S. approach. The S.O.S. approach stands for Safety, Ongoing communication, and Summary.

The first S is Safety, and the first step when any sort of major crisis occurs is going to always and most importantly be safety. That, of course, can be safety for the people at the property, as well as the safety of the money that was invested by your passive investors. So from the people perspective, one of the first things you’re gonna wanna do is ensure that your residents and your team members on the ground are safe.

For this Hurricane Harvey example, it actually hit Houston, and at the time Joe had two apartment buildings in Houston. One of the buildings was unaffected, while the other one was in a flood zone and received some minor damage. So fortunately, for these properties, all the residents and all the team members on the ground were safe and secure.

Now, obviously, if this wasn’t the case, then you’re gonna have to take some extra steps to make sure that your team members are safe. So if the hurricane/fire/whatever impacted the property majorly, then you’re gonna wanna take steps to make sure that everyone is okay at the property, make sure everyone is safe and sound, and if they’re not, take the appropriate steps there.

From a money perspective, one of the properties – the one that was in the flood zone, in this example – took in small amounts of water, but fortunately they had flood insurance. So after they did a final assessment, they went ahead and decided whether or no they were gonna make an insurance claim or not.

So from a money perspective, whenever a crisis like this occurs, what you’re gonna wanna do is you’re gonna wanna review your insurance policy. So if it’s flood, do you have flood insurance? Do you have hurricane insurance? Do you have fire insurance? Earthquake insurance? We don’t have a Syndication School episode on this, but we did do a blog post about how to underwrite deals that are in flood zones.

Basically, what you wanna do is whatever that additional flood insurance is going to be, add that to your operating expenses. So if your property is in the flood zone and you decide to go ahead and get flood insurance, when underwriting your deal make sure you’re including that expense in your operating expenses.

Ideally, if something goes majorly wrong, you have insurance to cover that. If not, then hopefully – and this is why we recommend having an operating account fund upfront, to cover things like this. So raise extra money to cover potential issues that happen like this. Because if you don’t have insurance and you have no money, you’re either going to have to pull money from your operating accounts to cover the costs, and/or do a capital call. Or you might even have to sell the property because you can’t cover these expenses.

So for safety, 1) ensure the safety of your residents and your team members, 2) ensure the safety of  your money, which means going over your insurance policy to see if you can actually file a claim to cover this, or if you actually have to pull money from your accounts, raise money from your investors, or (God forbid) sell the deal because you don’t have that money to fix the issue to bring the property back to stabilization. So that’s S.

Number two is O, Ongoing communication. So once you’ve ensured the safety of the people and you have an understanding of the initial damage done to your property, that’s when you want to bring your investors into the loop. You don’t wanna just instantaneously reach out to your investors right away. You wanna first make sure everyone’s okay, and then figure out what exactly happened to your property, what the effects were from this disaster at the property.

Now, for the Hurricane Harvey example – for hurricanes you get some forewarning. For Hurricane Harvey I believe they were talking about it probably a week before it actually came. So once Hurricane Harvey actually made landfall, we were able to send an initial email to our investors to let them know if the property was impacted. So everyone was ready for it to come. Once it hit, they made the assessment quickly and were able to reach out to their investors right away and tell them that “This property is okay, and this property took some minor flood damage.”

And for that property that took minor flood damage, that’s what was included in that email. For the one that didn’t, that’s what was included in that email. So for the property that did take in the water, we communicated that information and then stated that we would provide another update with more details once the hurricane actually weakened.

So for hurricanes there’s gonna be forewarnings, so you can send  an initial email right away to say “Hey, there is damage. We don’t know the extent, so once the hurricane weakens we’re going to go ahead and go in there and do a full review, and we’ll provide you with an update at that point.”

If it’s a fire or some sort of other flooding, or an earthquake, or something like that, then you can send out an initial email as well. If you know there’s damage at the property, you can say “Hey, there’s damage. We’re assessing. We’ll let you know.” But basically, you don’t want to send an email with no information at all.

A few days later, after the hurricane did weaken (for this example), we sent the investors a second email with another status update that included what happened to the property – we had some minor flooding – and also “Here’s how we plan on managing the situation moving forward.”

What’s important in that second email, and what’s important if there’s a fire/earthquake in that first email, is 1) let them know what happened to the property, what the damage was, and 2) let them know what your plan is to fix the problem. Did you file an insurance claim, where is the money coming from, how long is it gonna take to fix, and how is that gonna impact the KPIs at the property – occupancy, renovation schedule, things like that.

Overall, when you’re doing your ongoing communication, it’s better to provide a few updates that are spread apart, that have a lot of information, as opposed to sending hour-by-hour updates… Because you’re not gonna have information coming in to you to provide enough information to your investors to make hour-by-hour updates really relevant to them. So that’s number two, ongoing communication.

The last one is S, so that’s Summary. S.O.S. – Safety, Ongoing communication, and Summary. For this particular example, about a week or two later we had a much better understanding of the situation, and at that point we provided our investors with a summary of where we netted out from an insurance claim standpoint, or if we didn’t do an insurance claim standpoint, how we’re going to fund the repairs, and really any other developments that happened since then.

Overall, the process is 1) Safety – make sure first that everyone at the property is safe. Then once everyone at the property is safe, you wanna assess the damage at the property to see how that’s gonna affect the money, so making sure the money is safe. Once you know the damage at the property, the next step is ongoing communication. This could be one email, two emails, three emails, depending on the type of crisis. But whenever you’re communicating, you always wanna make sure that you have new information. So don’t just send the same email three times every hour. Instead, send the first email that maybe says “Hey, the hurricane did hit our property. There is some damage. The next steps are to assess the damage and figure out exactly what we’re gonna do.”

Email number two – “Hey, we assessed the damage”, so addressing the next steps from the first email in, the second email first. “Hey, we assessed the damage. This property has some minor flood damage. We’re gonna file an insurance claim to cover the costs.” Again, address the next steps from the first email in the second email, and then provide more next steps on what you’re gonna do next.

Then, for this particular case, a few weeks later – “Hey, we did the insurance claim. Here’s how much money it cost, here’s how much our insurance is gonna go up. It’s not gonna impact your returns.” Any other developments that happened; maybe the hurricane came back and it hit again, so you need to go through the process again. Again, it really depends on the crisis, but overall, for the ongoing communication, the point is don’t do hour-by-hour updates. Provide updates that 1) have new information, and 2) has what your next steps are going to be.

And then lastly, Summary – at the end, when everything is said and done, you wanna summarize essentially everything that’s happened so far. “Hey, the hurricane hit. Here’s the damage, we assessed it. Filed an insurance claim. Here’s how much it cost. Boom, we’re done. Everything’s back to normal now.”

So the last email should be ending with — you don’t wanna say “Everything’s back to normal”, but it should be at the point when everything is back to normal.

So when a crisis occurs, follow the three-step procedure, S.O.S. Safety of the people and the money, Ongoing communication to provide your investors with status updates, and then providing a summary a few weeks later.

Of course, hopefully you never have to go through this, but it’s always important to have a process in place for these worst-case scenarios. Because if you don’t know what you’re going to do in these situations, then you’re not gonna be able to communicate it properly to your investors, which they’re not gonna like, which could reverberate into them not investing in future deals, which could be a complete mess for your business.

So use this S.O.S. approach whenever a natural disaster, any major crisis happens at your property, to make sure that you’re keeping your investors in the loop and that you yourself are on top of it. Because if you know you have to send your investors an update, well you’re gonna work a lot faster than maybe if you plan on just not telling them anything at all. If there’s a fire, for example, you don’t necessarily have to tell your investors, because they’re not gonna read about it in the news, or anything; or it’s not gonna be on the major news networks. But a big thing that we’ve learned that passive investors don’t like is a lack of communication when things go wrong. So they’re not gonna be mad if something goes wrong, they’re only gonna be mad if they don’t know that thing went wrong until it actually affects them monetarily… Because maybe there’s something you could have done beforehand to alleviate that from even happening in the first place.

Again, S.O.S. – Safety of people and money, Ongoing communication, Summary.

That concludes this episode. To listen to the other Syndication School series about the how-to’s of apartment syndication, and make sure you also check out all of our free documents – those can be found at SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

JF1877: The Four Prong Test To Legally Raise Capital | Syndication School with Theo Hicks

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As a syndicator, you raise capital, we know that. Raising money from private investors is a heavily regulated industry by the SEC. You may be surprised to know that a lot of investors are not following the guidelines properly and are at risk of being fined or sued by the SEC. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Avoid the biggest mistake of not understanding the difference between a syndication and a joint venture”

 

Related Blog Post:

https://joefairless.com/4-pronged-test-raise-money-legally-avoid-fines-lawsuits-jail-time/

 


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TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we release two Syndication School episodes on the Best Real Estate Investing Advice Ever Show on iTunes, and for the majority of these series – they focus on a specific aspect of the apartment syndication investment strategy – we offer a free resource. These are PowerPoint presentations, these are Excel template calculators, these are how to guides. You can download these free documents, as well as listen to past Syndication School series at SyndicationSchool.com.

In this episode we are going to focus on how to raise money legally. So we’re going to talk about what happens if you don’t raise money legally, and then for some context we’re gonna talk about how to actually make sure you are raising money legally.

When you are raising capital, you are going to be regulated by the SEC, and you must adhere to their guidelines. If you fail to adhere to their guidelines, you are susceptible to fines, lawsuits, and potentially even jail time. Sure enough, the SECs main source of revenue comes from pursuing syndicators who break the rules. They have a financial incentive to find syndicators who are not adhering to their guidelines.

A few years ago we had a conversation with a securities attorney on the podcast who broke down exactly what happens when you don’t raise money legally, and then a test that you can perform in order to determine if you are adhering to the SEC guidelines.

In addition to the SEC fines and potential jail time, the lawsuits are things that will come from your investors. So if you’re not doing right by your investors and you break the SEC guidelines and you get sued, well your investors are going to be exhibit A in court. So if you make a mistake and you do not follow SEC guidelines, and your investor wants their money back, there’s some sort of falling out and you don’t wanna give them their money back, well – they’re gonna use you breaking the guidelines in court when they sue you as evidence in order to get their money back.

So in order to avoid the wrath of both your investors and the SEC, the thing you need to do is avoid making the biggest legal mistake that this securities attorney comes across, which is not understanding the difference between a security and a joint venture (JV).

This securities attorney said “I often hear people say to me ‘Well, if I just use a joint venture agreement or call it a joint venture, then that’s not securities and I’m in the clear.” And she said how she’s been to seminars where people say there’s really no difference between JV and selling a security, and you can kind of just do whatever you want. Obviously, that’s not true, and that’s not the type of advice that you want to hear.

So when you’re raising money for a deal and you think that securities law does not apply to you, because you think it’s a JV, that is what’s gonna land you in legal trouble the most. That’s the most common way people break the law, in a sense, and don’t follow SEC guidelines. And if you’re thinking about just making a JV, even though you know that it’s not, it’s not worth it. It is worth paying the extra money to register as a security, work with  a securities attorney, create a PPM, and things like that.

So that’s the context, but here’s how to make sure you’re raising money legally, and there’s actually a four-pronged test. It’s commonly referred to as the Howey Test, so you can look that up. There’s four prongs, and if these prongs apply to your situation, if these prongs apply to your business plan, what you plan on doing with the capital that you raise, with your deal, then you must adhere to the SEC securities laws, which means you should find a securities attorney for your deal.

So here is the four-pronged Howey Test that you should use to help you differentiate between a security and a joint venture. The first prong is investment of money. This will be a given, since you are raising money from investors, you’re taking that money and using it to buy the deal. So if you’re raising money from investors, you’re getting an investment of money from someone else. That’s prong number one, which  you’re checking off the list right off the bat.

Number two is expectation of profit. So are the people who are investing this money expecting a profit in return? And for apartment syndications, that profit is gonna be the preferred return, some sort of profit split… So again, another check. Your investors expect to make money, which is why they’re investing with you in the first place, so this will also apply to your syndication if you’re raising money for apartment deals.

Number two, “Is there more than one investor?” This is called a common enterprise. So this doesn’t mean “Do you have one investor?” If you have only one investor, period, you and that investor form the common enterprise. So do you have more than one investor in the deal? Are you raising capital from more than just one person?

And then the fourth prong is through the efforts of a promoter. So this is the prong that mainly differentiates a security from a joint venture. So if you are doing all the work, and your investors aren’t doing any of the work, then it qualifies as a security. So is the expectation of profits coming through the efforts of a promoter, or is the person investing in the deal also having another active role in the deal? That’s the thing that differentiates between a security and a joint venture.

So if you are taking an investment of money from someone who has an expectation of profit, you’re raising money from multiple people, and these multiple people do not have an active involvement in the deal, it qualifies as a security. And if it qualifies as a security, then it is an investment contract and you are required to follow SEC guidelines. And according to the SEC, the definition of an investment contract is “An investment of money…” – again, this is basically the Howey Test written out in sentence form… An investment of money (prong number one) in a common enterprise (prong number three), with an expectation of profit (prong number two), based solely on the efforts of a promoter (number four).

For more information on the differences between the security and a joint venture, I included a link in the show notes that you can click on. It’s entitled “Joint ventures or security? What’s the difference?” And then of course, we always have to say this as a disclaimer, I’m not attorney, Joe is not an attorney, no one that’s part of our team is an attorney, so whenever you are in this area of “Is it a security? Is it a joint venture?”, any decision that could potentially result in legal action against you, make sure that you’re consulting with a securities attorney.

We actually did a Syndication School series on how to find your team, and one of the best ways to find a securities attorney is gonna be through a referral from someone else, who’s using that securities attorney, or when [unintelligible [00:09:49].28] your property management company, your real estate broker, things like that – you can ask them for a referral… Because you’re most likely going to be using, and it’s ideal to use a property management company who has experience with syndicators, or at least with apartment investors. You’re not gonna wanna use a single-family property management company at a 100-unit apartment deal… So they’re more than likely going to know at least a handful of securities attorneys. Just make sure you interview them, make sure that they are experienced with apartment syndications and not some other type of security when you are hiring them, and obviously, make sure you’ve got a good connection with them when you speak with them on the phone as well.

Just to summarize, when you are raising money for deals, you wanna make sure that you are avoiding fines from the SEC, you are not setting yourself up to lose potential lawsuits against your investors, and of course, you’re not going to end up having to go to jail for making a mistake, whether it was your fault or not. In order to do that, you need to understand whether you are regulated by the SEC or not.

In order to determine if you’re regulated by the SEC, you want to walk through the four-pronged Howey Test, which is “Is there an investment of money? Is there an expectation of profit? Is there more than one investor? Is everything done through the efforts of a promoter?” If the answer is yes to all four of these questions, you are regulated by the SEC and must adhere to their guidelines and their rules. And of course, if you are regulated by the SEC, make sure that you’re working  with a securities attorney to cover all of your bases.

That concludes this episode. To listen to the other Syndication School series about the how-to’s of apartment syndications and to download all of those free resources that we have, visit SyndicationSchool.com.

Thank you for listening, and tomorrow on Syndication School we are going to talk about how to communicate with your investors when something goes majorly wrong at your properly. So how do you communicate that to your investors properly – we’re gonna talk about that tomorrow.

Until then, Best Ever listeners, thanks for tuning in. Have a best ever day, and we will talk to your tomorrow.

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

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

 

Best Ever Tweet:

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

 

Related Blog Post:

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

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we air two podcast episodes on the Best Real Estate Investing Advice Ever Show, that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes, which are typically a part of a larger series, we’ll offer a free document for you to download for free. These could be an Excel template calculator, a PowerPoint presentation, a PDF how-to guide, things like that that accompany the series, that you can download for free. All of those free documents, as well as the past Syndication School series, can be found at SyndicationSchool.com.

This episode is going to be about how to find the owner of an LLC. So it’s entitled “How to send your direct mailing campaign to the owner of an LLC.”

A great way to find deals that are off market, especially if you’re in a hot market, a very competitive market, where you’ve got a lot of different investors and operators who are looking at the on market deals, the bidding price goes up and up, because there’s a lot of offers, and you ultimately have problems and issues and challenges finding deals that make financial sense, that allow you to hit your return goals that you and your investors want. So one way to get around this is to think about some off market lead generation strategies.

One powerful strategy is to reach out to owners of the property. The most popular way to do this would be the direct mailing campaign, but you would also  technically cold-call them; depending on what market you live in, you could door-knock, if they happen to live in the multifamily property. I interviewed a guy that invests in Boston, and that is very common, where you’ll find an 8-unit, a 12-unit, and it’s a family-owned multifamily home, and the owners live in one of the units, so you could technically just door-knock and talk to them. But either way, this is gonna be more for cold-calling and for direct-mailing.

So for direct-mailing, for cold-calling, you’ll basically build a list based on your investment criteria, you create a marketing piece, and then you mail this marketing piece directly to the owner, or you’ve got a script that you use when you’re calling the owners.

Now, in order for this to be a successful marketing strategy – and it’s also part of the name, “direct mail” – you need to make sure that you are getting in contact directly with the owner. So if you’re calling someone, you wanna talk to the owner. If you’re sending a mailer, you want to send your mailer to the actual owner’s home, where they live.

Something that you’ll come across – or you’ve already come across if you’ve created a list, and especially if you’re dealing with larger apartments, but you’ll still find this for fourplexes and eightplexes, things like that, is that the owner of record is an LLC. So ABC LLC, or the address of the property LLC. And then typically, below that you’ll see an address that’s going to be a PO box. If that’s the case, then there’s gonna be an extra step required for those parcels, so that you’re sending the mailer directly to the owner of the LLC. Because if you were to send your direct mailing campaign to the address listed for the LLC, you are 100% reducing your response rate… Because most likely, the address is gonna be a PO box that the owner may or may not check every day, every week, every month. It may be something they check on a monthly basis or a quarterly basis, or they may just set it up just so they could create the LLC, and they don’t wanna list their home address, and they never check it for mail.

So you need to find the home address of the LLC’s owner, and we’re gonna talk about the eight-step process to do that today on the episode.

Step one is you need to determine which state the LLC is located in. I’d probably say the majority of the time – I’m not gonna give a specific number, but the majority of the time – the state that the property is in is a state that the LLC is located in. However, that’s not always the case. For example, I think Joe’s LLC might be in Wyoming, or some North-Western state. I can’t remember exactly which one it was. I think it’s Wyoming. So if you were to wanna send a direct mailer to Joe, and you were looking for the address, and you wanted to buy a property that he had in Dallas, you need to make sure that his LLC is not actually in Texas, but is in Wyoming. And you’ll understand why in this next step. So step one, figure out what state the LLC is located in.

Step two is once you’ve determined which state the LLC is located in, go to that state’s Secretary of State website, or they might call that Department of State website – if you just google “secretary of state” and then the state name, it should come up. It might be named differently… And then step three is once you’ve located that website, you want to locate the business search page. It might be called “The Entity Search Page”, “The LLC Search Page”, “The Corporations Search Page”, but there should be some page that allows you to search all of the different limited liability corporations in that state. Once you’ve found that, step four is to use the search function to search for the LLC name. So again, this is why it’s important to know what state you’re in. Because if you’re looking up Joe’s LLC and his property is in Texas, then you’re looking through the Texas Secretary of State website, Joe’s LLC is not gonna come up, because it’s in a different state.

So step four, again, use a search function to search for the LLC. Type in just the exact LLC name into the search function, and hit enter.

Now, if the LLC is indeed located in that state, then the name will appear in the search results. If the LLC is not located in that state, then the name will not appear in the search results, in which case you will need to go back and locate that correct state.

The easiest way to locate what state the LLC is located in is to just search the LLC name in Google. Typically, if you search any LLC name in Google, it will actually most likely bring you to its page on that respective state’s Secretary of State website.

Step six is going to be to click on the LLC name in the search results. Step seven – at this point, depending on the website, the contact information of the LLC owners, so the owner’s name and their address will be presented. If it’s not presented, then you’ll need to locate the articles of organization.

When someone is setting up an LLC, one of the forms they need to fill out is the articles of organization, and they have to put their name and their contact information in that form. So if you look at that form, you’ll find their name and their contact information.

Step eight is to download the articles of organization to determine what their name and address is. Now, generally this is gonna be free for you to do. Sometimes it’ll be presented right away, other times you have to download the articles of organization, which  is free… However, there are some states where there’s a fee to view the articles of organization.

So regardless of which way you are able to download and get access to the articles of organization, you’re going to have access to the owner’s name and the owner’s address.

Now, unfortunately, if you have a list of 1,000 different apartments that you wanna mail to, and the majority of those are LLCs, then you’re gonna have to do this process 500, 600, 700 times. Each time it’s probably gonna take you 10 minutes, so we’re looking at 5,000+ minutes of work, which is about 83 hours of work… Which is something you probably don’t wanna do. So kind of a shortcut – and you might have used this service to create your list in the first place – is to use a service like Upwork.

If you go to Upwork, there are plenty of people out there who are web scrapers, or who are specialized in pulling these types of lists… And they probably have a way that allows them to find the names of the owner of the LLC and their account information a lot faster than the 80+ hours it would take you to do it.

So I recommend that if you have more than 50 different LLCs that you need to determine the owner’s name and their address, I would go ahead and post a job to Upwork and pay someone to do that for  you.

Sometimes there might be some sort of service on the appraisal or auditor site that allows you to do that, but at the end of the day, the outcome of this is to get the name and get the mailing address of the individual who owns the LLC. If you do that, you are guaranteed to maximize your response rate, and then as long as you have the right marketing piece, maximize your conversion rate.

Now, we’ve done a Syndication School episode on direct mailing campaigns before, so make sure you check that out at SyndicationSchool.com. That’s not the focus of this episode. The focus of this episode was to teach you how to send your direct mailing campaign directly to the owner of the LLC.

That concludes this episode. It was a short one, I know, but this is important information that you need to know, because at the end of the way, if you’re in a hot market – and the market is very hot right now – you’re gonna need to do more than just look at deals that are coming into your inbox, that are listed on the market… And one of those things is doing a direct mailing campaign. And if you want a successful direct mailing campaign, you cannot send your mailer to the PO box of an LLC. You need to find the owner. It’s gonna take some time, it might cost a little bit extra, but again, you’re talking about deals. If one deal results from your direct marketing efforts, then it’s going to more than pay for any expense that you paid in order to create this campaign.

In the meantime, to listen to other Syndication School series about the how-to’s of apartment syndications and to download all of the free documents we have available, make sure you visit SyndicationSchool.com.

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

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

Listen to the Episode Below (00:16:30)
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Today’s syndication school is a little bit different than normal. Theo is discussing Joe’s response to a Facebook post about a lemonade stand and how the same advice can benefit apartment syndication investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

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

 

Related Blog Post:

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

 


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TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are typically part of a larger podcast series. We release those on the Best Real Estate Investing Advice Ever Podcast on iTunes every Wednesday and Thursday, as well as in video form on YouTube a little bit later in the week.

Each of these series or standalone episodes focus on a  specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, whether it be Excel spreadsheet calculator, a PowerPoint presentation template or a how-to PDF guide for you to download for free, that accompanies that episode or series. All of these free documents, as well as the past Syndication School series can be found at SyndicationSchool.com

This episode is going to be  a little bit unique, because it is entitled, as you can see, “How creating a lemonade stand can help you become a better apartment syndicator.” So this is based off of a Follow Along Friday I did with Joe a while back. Basically, we came across a Facebook post – and I’m gonna read the Facebook post really quickly, to give you some context.

“Our five-year-old wants to do a lemonade and popcorn stand during our community yard sale this weekend. As her business consultants, we need to provide her with some market research to help maximize profits, so we need your help. One, how much would you pay for a glass of fresh lemonade? Two, what size cup of lemonade would you like for that price? Three, would you prefer fresh lemonade from actual lemon juice, or the fake Country Time kind? Any and all advice is also welcome.”

So Joe read the replies, and most of the replies were directly answering the questions. “Hey, this is how much money I would pay for a glass of fresh lemonade. This is the size cup I would prefer based on that price, and I would like lemon juice/Country Time/some other type of lemonade brand.”

Obviously, all those are relevant, and they answered this individual’s questions directly… But from Joe’s perspective, he realized that there were at least two keys that were missing in order to create a very profitable stand. And when Joe went over this, we kind of talked about it and related it to investing, so that’s what I wanted to talk about today. So we’re gonna go over the keys that Joe mentioned in his post, and then we’re going to talk about high-level, as well as some specifics as to how these keys can be applied to your syndication business to make you a better apartment syndicator.

The first key was if you are a commodity business, then get out as quick as you can. According to the Merriam-Webster Dictionary, the definition of a commodity is a mass-produced, unspecialized product. Mass-produced, unspecialized – basically, something that’s pretty generic. Most lemonade stands are gonna be pretty generic. One, people already know how much money they wanna pay for a glass of lemonade. They can go to the store, they can see how much lemons cost, they can see how much the Country Time and some other powders cost, they can know how much cups cost, maybe they add in some labor cost as well on the part of the kid, and they can pretty much say  “Okay, if you’re just selling me lemonade, here’s how much I could spend.” Or “Hey, I could just go buy lemonade at the store, so why would I buy lemonade from you?”

So that is what a commodity is. But to make it not a commodity, Joe recommended that the person add some sort of bonus gift to each paying customer. Once she adds that bonus gift, she’s no longer selling just a commodity, and as a result, she’ll be able to charge more for her lemonade. The specific suggestion that Joe gave in his Facebook comment was that the bonus gift could be a drawing by this five-year-old.

So before she starts her lemonade stand, she can spend maybe the night before, or the morning of, creating 20, 30, 40 different drawings (each drawing will be different), and then whenever she is selling it, she could basically market and say “Lemonade plus free custom drawing.” If me or Joe were to be selling lemonade and do a drawing, people probably wouldn’t buy it, but since the kid has that cuteness factor going on for them, people are more likely to buy a lemonade from this child if on top of it she’s giving away their custom drawings. Even if they’re not gonna keep that custom drawing, it’s still making it not a commodity, and it gives her really limited upside for the price. So if the drawing is very good, she could sell a cup of lemonade for $10. Or it could be something like “Pay what you want for this lemonade.”

So the whole point is don’t just do something that really everyone else is doing. When you are an apartment syndicator, you have to figure out how you’re going to stand out and not just be another commodity. When we did the episode talking about why people invest with you – they’re not gonna invest with you because of the returns you’re offering; they can go anywhere and get returns. So what makes you different than other syndicators?

Whenever you’re starting your business, whenever you’re starting even your educational process, you wanna think about how are you going to be different than the other syndicators out there who are offering just a return on the investment? Obviously important, but again, if I’m a passive investor, why am I investing with you and getting your 8% preferred return, as opposed to this guy over here, and getting his 8% preferred return? What’s the difference?

A few examples – and again, these are a few specific examples that Joe does. Number one, they send out monthly Best Ever reports. They’ll interview one of the investors, and they will feature them in their report, as well as having a few other items in their report as well, and then they will send that hard copy, nicely-designed report out to their investors.

Whenever we wrote the Best Ever Apartment Syndication Book, which in itself is something that’s unique – it’s a book that is teaching people how to become apartment syndicators, plus we’re also in the process of writing another book, that is The Best Ever Passive Investor Handbook – we give those out to our investors for free; one for them, and then one for them to give to someone that they think would be interested in learning about the material in the book. Joe hosted in-person happy hours across the country this year.

So those are just three specific things that Joe does, that’s on top of just offering a return. A few other things that aren’t very specific, but also kind of unique, is his communication style, responding to investor’s questions very quickly, hosting conference calls instead of generating interest on an individual basis… Hosting the conference, having a podcast, a blog… All those things are taking Joe’s business from being just a return standpoint, to having unique added value to the investor. So that’s point number one – basically, figure out how you can stand apart from just offering returns to your investors.

Now, going back to the lemonade stand, the key too to the success of a lemonade stand is going to be location. Location matters. You can do the right thing, at the right time… So you can sell the best lemonade, at the hours where people are the most thirsty – maybe after lunch, or something – but if you’re in the wrong spot, then it’s not going to work.

Another example – this is a little bit different from the five-year-old… Joe was going on a jog, and he came across a lemonade stand. The kids that were hosting the lemonade stand had strategically placed their stand at the beginning of a dead-end road. So it’s right next to a “No Outlet” sign. Also, in the intersection was a well-traveled road, and the road had a Stop sign. So not only was it at a dead-end road for safety purposes, but it was on a well-traveled road, so lots of traffic, and it was at a Stop sign. So the fact that it was at a Stop sign basically forced the people at the Stop sign to make a contact with the kids, who also had a massive sign promoting their lemonade.

And then on top of all that, they were also providing a drive-through type service. So if you didn’t wanna get out of your car, the kids would come up to you, offer you the lemonade, you’d hand them the money, they’d hand you the lemonade.

So the advice that Joe took from this, that he gave to this five-year-old from the Facebook post is that they should find an intersection where there are Stop signs, and that there’s a safe way for people to pull to the side to buy a cup of lemonade. Obviously, safety is being the priority, because if hospital visits are part of the business plan, it’s not gonna be the best, most successful lemonade stand, because all of your profits are gonna go towards paying for hospital bills… But aside from that, clearly you wanna be on a street that has low speed limits, and a sidewalk for the safety concern, but also you want to ask  yourself “Where do people usually stop?” You don’t wanna do it on a 55 mph road, where people are driving by and have to pull to the side; there’s obviously the safety concern, but also people are less likely to pull aside if you’re hosting your lemonade stand on the highway. So you wanna host it on a well-traveled road, ideally by a stop sign, where it’s safe – sidewalks, and people having the ability to pull over.

Obviously, applying this to apartment syndication – where you buy your deal matters. That’s the first point. We’ve done Syndication School episodes on maybe a two or four-party, or maybe even a six-part series on guiding you how to specifically go from narrowing down 19,000 cities in the country down to a handful of cities, how to evaluate those cities to determine which ones to select, and then once you select those cities, how to learn which submarkets within those cities, which neighborhoods, which streets are the best plays to invest in deals.

But secondarily – or I guess in addition to where you’re investing, you also wanna keep in mind what you are doing to find investors. So where are you going to find investors? Are you going to the places that have a high concentration of high net worth individuals?

Here’s an example – I was interviewing someone on Joe’s podcast the other day. The episode is not gonna come out until February… The guest was Ryan Gibson, who works for a company that raises capital to buy and develop self-storage facilities… And the example that he gave is that he joined an athletic club that is known to have a lot of high net worth individuals go there. And through this club not only is he meeting these high net worth individuals while he’s working out, or at different community events, but he’s also been able to find other community events through this athletic club. So we’ve got high net worth individuals that are there, and the example that he gave was he found an organization to volunteer with that also has high net worth individuals.

So are you going to a regular, smaller gym, that has non-high net worth individuals, or are you combining your fitness regime with going to an athletic center that has high net worth customers that work out there, that go there for different community events? That’s just one example.

Basically, ask yourself “Are you going to the right places in order to maximize your chances for meeting high net worth individuals, creating relationships with them, cultivating that relationship and ultimately transitioning into talking about investing in real estate?”

Again, those are two keys – number one is “Don’t be a commodity, be unique.” Number two is that location matters.

We actually have a blog post that we wrote on this. I went into a lot more in this episode than I did in the blog post. The blog post is “The two secrets to a successful lemonade stand”, which you can find on Joe’s website, in the search function. And if you wanna go there to take a look at some of the images we uploaded, we’ve got a picture of the lemonade stand that Joe came across on his walk, as well as the lemonade stand from one of Joe’s — so one of Joe’s investors heard Joe talk about it on the podcast, and actually had his son follow Joe’s advice, did a lemonade stand and handed out custom drawings… So there’s pictures of that, as well as the email that Joe’s investor sent him, that explains the success of the lemonade stand.

Again, first make sure you’re offering services that are not commodities, and I gave plenty of specific examples of how to do that for apartment syndication… But again, be creative, be unique, and base it off of your own personal strengths, personal skills and personal experience. And then secondarily, make sure that you’re investing in the best locations, and that you are putting yourself in situations, you’re going to the places that will maximize your chances of finding high net worth individuals to invest in your deals. You can apply this to finding team members as well, finding business partners, education (are you going to the right conferences?), things like that.

That concludes this episode of “How creating a lemonade stand can help you become a better apartment syndicator.” To listen to other Syndication School series about the how-to’s of apartment syndications and to download all the free documents we have available, visit SyndicationSchool.com.

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

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

Listen to the Episode Below (00:18:02)
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Theo is telling us two great lessons he learned last week while doing the interviews for the podcast last week. He is joined by Chris Salerno (https://qccapitalgroup.com/) today. The lessons they will be discussing are coming from Adam Weiner (https://www.sayrhino.com/) and Christopher Stafford (https://theagentunleashed.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

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

 


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TRANSCRIPTION

Theo Hicks: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today is Friday, so we’ll be doing Follow Along Friday. As you can tell, I’m not Joe; I will be the main host today. The co-host today is going to be Chris Salerno. Chris, how are you doing today?

Chris Salerno: I’m doing amazing, Theo. Thank you for having me. How are you?

Theo Hicks: I’m doing great, I’m glad to have you on here. Before we dive into the lessons that we learned, because as you guys and girls know, each Follow Along Friday me and Joe will go over some of the lessons we learned from the interviews that we did, to give you a little sneak peek, just because these interviews probably aren’t gonna be coming out until early 2020… But before we get to those lessons,  Chris, do you wanna just quickly introduce yourself, give a little bit about your background and maybe what you’re focused on right now?

Chris Salerno: Yeah, I’d love to. Thank you again, Theo. My name is Chris Salerno, I live here in Charlotte, North Carolina. I’ve been here a little over 13 years. I am the founder and president of QC Capital, and we specialize in acquiring large multifamily assets, primarily B type of assets, over 100 units, with passive investors. We focus extremely heavily on the Carolina market… So that’s a little sum of what we do.

Theo Hicks: Perfect. Chris has been a guest on the podcast at least once before… So if you just go to JoeFairless.com and type in Chris Salerno in the search function, you should get his interviews. Actually, I interviewed you one time, so I think Joe probably interviewed you the other time.

Chris Salerno: Yeah… So I’m excited to be on again in the future.

Theo Hicks: Absolutely. Alright, so we’re gonna go over some lessons I learned from the interviews last week. Again, these are not the only lessons I learned, and these are not the only interviews that I learned lessons from; they’re just two lessons I wanted to talk about, and both of these are gonna be relevant to Chris, so… Even better.

The first interview was with Adam Weiner, who is the managing director a company called Rhino. This was interesting – I had never heard of this before. I was talking to Chris about it beforehand, and he actually just recently heard about this… Basically, what Rhino does is they replace the typical security deposit, the typical maybe half the first month’s rent, or the full first month rent, or some flat fee that a renter pays upfront, in addition to the first month’s rent, in order to secure a unit, to cover potential issues once they move out… So they replace this one-time lump sum fee with an insurance policy.

The way that he explained it to me is that – say I’m renting from Chris; rather than me paying Chris $500 for a security deposit, plus maybe paying $500 for first month’s rent, and then $500 for last month’s rent, depending on how Chris’ lease is set up, I’ll pay my $500/month and then I’ll pay something like $5 extra per month, and that covers my security deposit. And it works just like any other insurance policy. At the end of my lease, Chris will go in there and take pictures to see if there’s any damages, and then he can upload these pictures, upload the leases to this Rhino platform, and then they will handle the entire insurance process. So if you need to get money to cover any of these things, rather than come to me or the tenants, Chris will go to this company, and based on the insurance policy, that will cover those issues.

I’m not exactly sure what happens if the costs are extremely high, because I made mistakes, why wouldn’t the  tenant pay more than $5/month, but I thought that was interesting… So if you want to learn more about that, visit SayRhino.com. [unintelligible [00:05:35].08] to mention that, but this is a newer company, so he mentioned that when they started, they had less than seven people working there, and they had this insurance policy on less than 100,000 units… Which is still a ton of units…

Chris Salerno: Oh, yeah.

Theo Hicks: …but now they’ve got 40 people, so almost six times more people than what they had in the beginning, and they’ve got over 300,000 units.

Chris Salerno: Wow.

Theo Hicks: So I asked him — not necessarily what does he attribute to scaling, but if I want to scale a business with employees, what should I do? If I’m a real estate investor or syndicator, for example, and I want to hire employees and scale my business to go from maybe one deal to 20 deals, what are some things that I need to do? And it was actually very simple advice, nothing too crazy… But it was about hiring people. He said basically what you wanna do is you wanna figure out what your mission statement is if you’re a company, what the overall goal is for the company, and then make sure that right from the beginning — so you figure this out right from the beginning, before you hire anyone.

And then your first person you hire needs to be someone who is smart, intelligent, driven, hungry and they are on board with this mission. And then once you hire that first person, when you are interviewing additional people, they’ll see you and they’ll see the person that’s working for you already, and how they are smart, intelligent, driven and hungry, and there’ll kind of be a snowball effect; they’ll attract good people as well, and then they’ll attract even more good people… So basically what he said is that first hire is so important, because if you hire the wrong person, you’re gonna attract more wrong people. If you hire the right person, you’re gonna attract more right people.

And one last thing before you chime in, Chris, I wanted to mention… He said that when you’re actually hiring these people to determine if they’re smart, intelligent, driven, hungry, you don’t want to go in there with a list of generic interview questions like “What was your last job? How long did you work there?” You wanna have a conversation with them, you wanna try to have a real conversation with them to see if you can find a connection with that person, and you can’t do that with generic questions. That’s all I had to say about that, Chris. What are your thoughts?

Chris Salerno: He couldn’t say that any better. I think he is spot on when it comes to hiring your first 1-5 employees, because that is the face of your company when you’re growing your company, is those first couple of employees. If you really mold them into your mission statement for your company and your future that you see where your company is going to head, and if they align with that and with you, they will attract a lot of  people that are just like them to grow your company… So I think that was amazing. That was great.

Theo Hicks: I’ve never hired anyone before, but I’d imagine that you’re in your real estate business, things are going smoothly, and then maybe over time you decide “Okay, I’m gonna hire someone”, or maybe you’re kind of forced to hire someone and you just quickly do it, or maybe you go to a conference and you meet someone, and they’ve convinced you to hire them… Or maybe you’re looking for an opening and you find the first person that you can find, because you wanna fill it quickly, and that’s not the best approach. The best approach is to be patient with hiring that first person, because again, it’s a snowball effect.

Chris Salerno: Yeah, very much so. Hiring that first person – be extremely patient, and just let it happen. Don’t try to force it. It’s like a relationship. If you try to force it, it may not work out. So just let it happen and gradually come together for that partnership.

Theo Hicks: Another tip that wasn’t necessarily talked about in this interview, but it’s something that I’ve come to realize from working with Joe, from doing a ton of interviews, is that you don’t really even need to rush into hiring someone full-time. You can either have them work for you part-time at first, up to six months, maybe even a year, to see how they do, or depending on what business you’re in – if you’re a syndicator, there’s so many hungry people that want to be in syndication, that you could very easily find someone that will work for you maybe five hours a week for free, and you can use that to test the waters to see if they’re worth bringing on full-time. If they’re not, well then you can end the relationship there, or find a different fit for them. If they are, then obviously you’ll realize that they are, if they work for you for a test period. So if it’s possible to hire people on a test basis first, and then kind of increase that to a full-time or increase that to a part-time position.

Chris Salerno: Yeah, I definitely agree with that. I think like you said earlier, you should not rush into things; make it nice and slow, and… You touched on the point – there is a lot of people out there who love underwriting, who love to do acquisitions, and they’ll work to just gain that knowledge upfront.

Theo Hicks: So that was the interview that I did with Adam Weiner. That will be coming out in January/February timeframe. The second interview I wanted to talk about was with Christopher Stafford. He’s a listing agent for the past 25 years in San Francisco/Bay Area, and he’s also a coach for agents. He was actually on the podcast before, 1435, where he talked about how to pick markets to remotely invest in. Since he’s a returning guest, we did a Situation Saturday about overcoming the fear of investing in real estate nationally and internationally.

Christopher lives in San Francisco, and as an agent he was selling deals no problem, but then he wanted to invest in single-family deals… And he realized that – well, if you wanna buy a single-family deal as a rental in San Francisco, you’re gonna have to pay a lot of money for that. So he was desperate to find properties… And rather than give up and just keep selling – we’ll explain how, but he decided to invest in what he calls “second-tier cities.” These are cities that are not sexy, but are still really good markets. He said they have strong employment numbers, company headquarters, amazing local economies, and then you’ll get greater returns buying less expensive properties with long-term appreciation. An example he gave was Oklahoma City for being a second-tier market.

For him, he uses kind of like a turnkey company called ICG, who finds the cities to invest in, finds the best type of property to invest in in that second-tier city, and then actually assembles a team in that city to help you find the deal, help you manage the deal. So if you wanna go that route, you can, but you don’t have to, because in this episode he talked about how to build your entire team if you’re investing out of state.

The first thing you wanna do is find a property management company. You can find them through referrals. Unless you’re completely new to the business, you should know someone in real estate that can give you a referral. If you don’t, bigger pockets, podcasts like this – you’ll be able to find a property management company and interview them. We didn’t go into interview questions, but we do have a blog post and also a guide to selecting a property management company on our website… So go to JoeFairless.com, search  “interviewing a property management company” and that will come up.

So you find a property management company. They’re the ones who are gonna give you a ton of information on the market. Information on the types of properties to invest in, and the neighborhoods within that larger market to invest in. Once you find the property management company, you want to find a real estate agent to help you find these deals. If you’re investing in commercial properties, then a broker. You wanna get this person from your property management company.

So you’re already qualified your property management company, and then since you already qualified them and you trust them, if they give you a referral, that has a little bit more weight than you just finding them out of the blue yourself… So get that referral from the property management company for a realtor or for the commercial broker, and they’re the one that’s gonna have their finger on the pulse of what’s going on on a day-to-day, week-to-week basis in the market, and they’re the ones that are gonna help you find deals.

The property management company helps you know the market, know what to invest in, and actually manage the deals. The commercial broker is gonna find you the properties… And that’s really what you need to start your business when investing out of state – you need a property management company and a realtor to be your boots on the ground. From there, the contractors, the lenders – you can find them through the realtor or the property management company.

So when you’re interviewing that property management company initially, a few things that Chris said you should look out for is how long they’ve been in the business, what type of information are they providing you with, so when you’re talking to them, how much do they know about the market, how much do they know about the properties based off of how they’re communicating that to you? Good communication skills, and then ultimately, your gut feeling for them.

Meet them in person, so maybe fly out to this actual market, drive out to the market, meet them in person and ask yourself what is your initial feeling with this person, and then once you’ve left, how do you feel about these individuals? Did you get a good sense of them as a person, are they trustworthy, and is this someone that you can see yourself working with? Because since you’re investing out of state, you’re not gonna see them all the time, you’re not gonna see the properties all the time, if ever again… So you have to put a lot of trust in your team if you’re investing out of state.

So again, just to quickly summarize – find the property management first; through them find  a realtor, and then through both of them find the rest of your team.

Chris Salerno: Yeah, definitely. I think you couldn’t have said it any better. I think it’s extremely important to build those relationships with the property management company and with the broker… Because the broker is gonna feed you deals, no matter if they’re on market or off market. The property management company is going to be that day-to-day aspect of  your whole business model of that property, so I think it’s very important to build those relationships, just like you said, with them, when you are thinking investing out of state.

You will eventually have to fly out there and meet them face-to-face, even better feeling for them and also get a better feeling for the property and the surrounding areas for your investor… But yeah, you couldn’t have said it any better.

Theo Hicks: Perfect. Alright, so those are the two lessons. Again, those episodes will be coming out in early 2020, but we wanted to give you kind of a sneak peek of the biggest lessons from those episodes, so you can start applying those to your business now, and not having to wait until 2020.

Alright, to wrap things up, the trivia questions. This month we’re doing kind of like a loyalty theme, so these are questions that you really only know the answers to if you’ve read the blogs, if you’re a loyal Best Ever listener, if you’ve read our books. Maybe this week’s question you might be able to figure out the answer if you’re just an amazing apartment syndicator who’s done a bunch of deals… But again, the question is something we’ve talked about before on the podcast and the blog.

First, let’s quickly go over last week’s question. Last week’s question was “What are Joe’s three immutable laws of real estate investing?” In order to win, you had to get all three of those correct. Number one was buy for cashflow, not appreciation; number two was secure long-term debt, and number three was to have adequate cash reserves.

For more details on those three laws, you can google “three immutable laws of real estate investing” and it’s one of the first results on Google. Again, the first person that got that correct will receive a free copy of our first book. This week’s question is “If you need to raise one million dollars for your apartment syndication deal, what is the maximum amount of money a single investor can invest without having to go through the extra due diligence by the lender?”

Typically, this is expressed as a percentage, but we just gave an example, so you take that percentage, multiply it by one million dollars, and that would be the maximum amount of money a single investor can invest without having to go through the extra due diligence by the lender. Again, the first person that gets that correct will get a free copy of our first book, and we’ll give you the answer to that one next week.

Chris, I appreciate you stopping by. If the Best Ever listeners want to get in touch with you and learn more about what you’ve got going on, where can they reach you?

Chris Salerno: Yeah, very much so. You can reach me at Chris@QCCapitalGroup.com, or follow me on social media, just Chris Salerno. Extremely heavily on Instagram, @chris_salerno_, and we do have a networking page at Mindful Multifamily Network. That’s where you can find me.

Theo Hicks: Perfect. And you also mentioned beforehand that you’re going to Jake and Gino’s event next week, so…

Chris Salerno: I will be, yeah. I will be at Jake and Gino’s event down in Orlando. I know I have a ton of lunches and coffees that are already being lined up, so reach out to me, definitely. I’d love to connect in person. I’m a big networker when it comes to these conferences, so I definitely would love to have you on my schedule.

Theo Hicks: Perfect. Well, thanks again, Chris. Best Ever listeners, thanks for stopping by. Have a Best Ever day, and we’ll talk to you tomorrow.

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

Listen to the Episode Below (00:19:30)
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Not only does Joe put together his own deals and help others do the same, he invests in other peoples’ deals as well. He has three main reasons for doing this, which can benefit everyone who wants to be an apartment syndicator. Tune in as Theo reviews the benefits that active investors can receive by being a passive investor too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It allows you to test drive other markets”

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we air our Syndication School episodes on the best real estate investing advice ever show, podcast on iTunes, they will also be available to watch in video form on our YouTube channel a little bit later in the week. Either way, consuming them in audio or video form, we’re gonna be talking about specific aspects of the apartment syndication investment strategy, and we’re gonna give away some free resources to accompany those episodes and series as well. All of those can be found at SyndicationSchool.com.

This episode we are going to take a step back a little bit. This is not gonna be on a specific step in the syndication process, rather it’s going to be a general conversation on why you should consider investing in other syndicators’ deals as a limited partner.

Now, before I dive into these lessons, I wanted to let you know that whether you’ve done one deal, ten deals, a hundred deals, zero deals, these lessons are going to apply to you. So whether you’ve done no deals, or all of the deals, the reasons I’m going to go over today for investing in other people’s deals are going to apply to you, and you’re gonna learn why here in a little bit.

This is based off of a post that Joe wrote about the reasons why he specifically invests in other people’s deals. And when I read it, I realized that this would be good content to share with Syndication School, because obviously everyone listening to this is an aspiring syndicator, and just because you can’t do a deal right now, whether you’re lacking education, you’re lacking in experience, you’re lacking in credibility, whatever it is, you can still move your business forward, you can still work on getting closer to doing your first deal by investing in other people’s deals.

So there’s actually three reasons why Joe invests in other people’s deals and why you should as well, and the first reason is that it makes you a better general partner on your own deals. When you’re investing in other people’s deals, you’re not the general partner, you are the limited partner. And since you want to be a syndicator, you’re gonna have your own limited partners. So what better way to get inside the mind of the limited partner than to be a limited partner yourself? And when you’re a limited partner in other people’s deals more specifically, you’re going to see first-hand how other general partners or competition are organizing their deals and executing their deals.

So a few things that you’ll be exposed to – again, this is not an exhaustive list, but these are some of the most important things that are gonna be relevant to you as a GP, these are things that you’ll be exposed to as an LP on other people’s deals. Number one is the initial email announcing the deal. As a limited partner, whenever the syndicator has a new deal, they’re gonna send it out to their database that you should be on. And when they send out this email, a few things you wanna look at are how do they write the email, how is it designed, what does it say in this email and what doesn’t it say, and then at the end, what is their call to action?

So you’re gonna analyze their email using those questions, and essentially see what they’re doing good and what they’re not doing so good, and then extracting the good and making sure you do that when you announce your deal, to your investors. You’re also gonna learn about their sign-up process for investing. Do they have some sort of investor portal that they want their limited partners to go through? If not, what do they use? How are they getting people to send in their commitments? Do they have some sort of Adobe Sign, or DocuSign, or something else? So if you want to invest in their deal, what process do they put you through? And then when you go through that process, was it smooth, was it kind of frustrating, was it confusing, was it simple, was it easy? And then thinking how can you take the good from what they’re doing and applying it to yours?

That’s the theme for all of these, so I’m not gonna keep saying that. Basically, you wanna look at these things and see what they’re doing good and what they’re doing wrong, ask the questions I’m gonna mention, and then apply that to yours.

Number three is gonna be the deal structure. What is their profit split? What fees do they charge? What type of financing do they secure? What information in regards to this deal structure do they include in their investment package? What are their underwriting assumptions? Things like that. How are they structuring the deal with their investors, and then where are these numbers coming from? What are these numbers based on?

Next is the deal presentation to investors. This would be conference call or the webinar, where all the LPs are on the call, or in the webinar, on mute, and the general partners are presenting the opportunity to their investors. When you’re on that conference call you’re gonna learn how they’re presenting their deals.

We have an episode in Syndication School where we talk about the new investment offering, so make sure you check that out to see what questions from your perspective the LPs are going to ask, and then how to actually structure that call, and then see how they’re doing it, and then see if there’s anything extra that they’re doing that is not included on there, or are they doing anything extra that you hadn’t thought of before.

Next is the ongoing communication. Do they send monthly updates, quarterly updates, or are the updates sporadic? Joe gave an example that he was investing with one operator whose communication was sporadic, and the deal did not perform as well as his other investments that did not have sporadic, that had more consistent communication. Joe said he will not be investing in that deal again, because according to this specific example, ongoing communication was sporadic, the deal didn’t do good, so why invest with that person again if the deal is not doing so well? And then it’s a red flag for the future that if you find that a GP has sporadic communication, the deal is likely not going to do as well.

Now, if they are sending out monthly updates, quarterly updates, what’s included in these updates, and then what types of financials are they proactively sending out?

Next are the distributions. Are they sending out monthly distributions, quarterly distributions, or some other distribution schedule? And depending on what they send out, do you like it or don’t like it? Are they sending out their distributions just via check, or are they sending them out via direct deposit?

Joe hates getting checks. He prefers the direct deposits because it’s easy to track, and you don’t have to go to the bank and deposit your check, or use one of those apps, take a picture of the back and the front of the check and you can never get the right zoom in level and it takes forever, and half the time they don’t work anyways, so… That’s just me ranting about my experience with those apps… But direct deposit is obviously gonna be better, because it’s really no time commitment on an ongoing basis to Joe, to the LP.

And then more importantly, do you get paid when they say they’re gonna pay you? For example, sometimes you’ll see these GPs doing quarterly distributions, so the LP expects to get their check at the end of that quarter, whereas in reality they might not get that check for another month or two due to processing.

And then lastly – this is more overall – what happens when things don’t go according to plan? If something happens to the property, does the GP just go dark and you don’t hear from them, or do they clearly communicate the problem and then the steps that they’re already implementing towards finding the solution? Of course, investors want to be told succinctly and straightforward what’s going on with the property, whether it’s good or bad, and they want these updates on a consistent basis.

If the communication is slow when challenges arise, that’s a red flag, that Joe has experienced on some of his other passive investments. So again, all of these things – essentially, what you’re doing is analyzing from start to finish what the GP is doing, and then from your perspective as an LP do you like it or do you not like it? If you do like it, then maybe your LPs are gonna like the same thing, and things that bother you, red flags that come up, are things that your limited partners probably don’t want, and then you know not to do that for your own business.

Overall, that’s a long way of saying that one of the main benefits of investing in other people’s deals is that it makes you a better GP because you see the things that people do right, that you might not necessarily have thought of, plus things that people do wrong, that you know you should avoid on your own deals.

Number two is that it allows you to test-drive other markets. The second reason that Joe in particular passively invests in other people’s deals is because it allows him to test-drive markets that he’s not currently invested in. At the moment, they’re invested in Texas and Florida, and since they’re laser-focused on those markets, they don’t really have time or the mindshare to focus on opportunities that are in other markets for their own business. But let’s say they want to expand to Ohio, for example, or they wanna expand to Atlanta. Well, rather than buying a deal and seeing how it goes, or rather than initially diving into an insane market study research, they can go to those markets and see how those markets are doing for other operators, for other general partners.

And it’s a  great opportunity to actually invest passively in deals without having to do one yourself, to test out that market as well. Plus, the operator should do a ton of market research on that area before they even started looking for deals, so you kind of have a jumpstart on your own market research because you can pull what they’ve done already and look through that, rather than having to do all of it on your own.

And then lastly, benefit number three is to strengthen your relationships with influencers. Joe said that by investing with other GPs, he’s able to strengthen his relationships with other people who are influential in the business, who are also putting together deals. He says by investing with other general partners, that allows him to help them grow their business, while staying in touch with them in a relevant way.

It’s important to make sure that we’re always in contact with people who are out there, the movers and shakers. And obviously, you can get lunch, you can make trips, you can do all these different things, but another great point of contact is to actually invest in their deal, because you have a natural way to always stay in contact with that person.

So those are the three main reasons why Joe invests in other people’s deals and why you should as well. As a refresher – number one, you will become a better GP on your own deals. Number two, it allows you to test-drive other markets without having to jump all-in yourself, and number three, it allows you to stay connected and strengthen your relationships with other influencers.

Now, Joe also went over some other takeaways that he got from investing in other people’s deals. Not necessarily reasons why he does it, but just lessons that he learned from investing in other people’s deals. Maybe mistakes that were made, or things that people did good, that he then applied to his own business. Let’s quickly go over those before we wrap up.

Number one, one operator sent him a deal, and Joe said he would invest, and then after a month or so they sent a follow-up email to Joe saying that they were pulling out of the deal. In this follow-up email they had a thorough explanation of why they were pulling out of the deal, and it made a lot of sense to Joe. As a result, the experience gave him more confidence in them as a GP.

So they told Joe they were gonna do something, that they were gonna buy a deal, and a few months later they said they’re not buying the deal anymore… So okay, you’re not doing what you say you’re going to do, which is no problem, as long as you’re able to explain specifically why you’re not doing it.

In this case, they probably weren’t doing it because it wouldn’t have been able to get them the returns they wanted, which obviously saved Joe a lot of money. So by them telling him “Hey, we’re pulling out of the deal. Sorry about that” probably would not have given Joe more confidence in them as a GP… But they said “We’re pulling out of the deal because of a, b, c, d, e, f, g. We’ll definitely let you know when we find another deal that meets our requirements and meets your requirements.”

So in one scenario, two different responses – one results in Joe strengthening his confidence in them, the other one probably results in him not investing in one of their deals in the future.

Another observation is that some of Joe’s investors have said they prefer a higher preferred return, and don’t really care as much about upside in the deal, whereas Joe’s typical structure was the preferred return plus upside. So he had some investors who wanted the opposite – they wanted a higher preferred return, they didn’t really care about the upside. Around the same time, Joe came across an offering from a GP that offered a higher preferred return for class A investors, and then a lower preferred return for class B investors. The class A investors, with higher preferred return, had firstly no upside in the deal, so they made their preferred return and that was really it, whereas the class B – sure, they got a lower ongoing preferred return, but they participated in the upside, they got a split of the profits above and beyond the preferred return and then at sale.

Seeing that and talking to other GPs about that, Joe tested this out on one of his deals. So if he hadn’t been on this person’s list — I’m not sure if he actually invested in this person’s deal or not, but the fact that he was on their list and saw their new investment offering email and saw this unique structure, Joe was able to test-drive that on his own deals, and the investors actually really liked it.

Another observation – one group that Joe invests with does interviews with experts like self-directed IRA custodians, property managers, and then share these recordings exclusively with their LPs. Obviously, we do a ton of interviews – we’ve got Syndication School, the podcast etc. but we don’t have anything specific for the limited partners… So this is something that we are likely going to implement moving forward. Again, if Joe was not a part of this group’s email list, he might have never known about this and we would have never implemented it in the future.

Another operator – and here’s a negative – hardcopy-mailed Joe all the legal documents (the PPM) rather than allowing him to fill it out virtually. Obviously, that’s a no-go, because you have to sign everything hardcopywise, whereas it’s much easier/simpler to do all of it via the internet.

And then lastly, an operator mailed Joe a gift with their logo on it. Obviously, that’s a kind gesture, but for Joe this was amiss, because whatever this gift was, he could buy it himself. Investors don’t really need another mug or another thermos or another pen. Joe would much rather like to see GPs send out gifts that are much more thoughtful and much more personalized.

Based on this lesson, Joe is working with us to create a program for the investors in his deals that provides them with more thoughtful gifts on special occasions. Once we implement that, I’ll definitely do a Syndication School episode on that, and a blog post as well.

So again, overall, the main reasons why you wanna invest in other people’s deals is 1) you’re able to learn how to become a better GP, 2) test-driving other markets, and 3) strengthen your relationships with other movers and shakers, with other syndicators… And then we went over some other observations that Joe had from either investing in other people’s deals, or at least being on their email list.

That concludes this episode. Until next time, check out some of the other Syndication School episodes, download the free documents. All of those are available at SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

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

Listen to the Episode Below (00:16:46)
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When you’re putting together large deals with multiple people involved both passively and as general partners, you’ll need to focus a lot of organizing everything. Theo will be covering what kind of accounts you need and how to keep it all organized. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

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

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes, every Wednesday and Thursday, and the Best Real Estate Investing Advice Ever Show on iTunes. We also turn these into YouTube videos as well, posted a little bit later in the week. Each of these episodes is focused on a specific aspect of the apartment syndication investment strategy, and for the majority of these series we offer a free resource, whether it’s a PDF how-to guide, an Excel template calculator or  a PowerPoint presentation template… Regardless of the type of resource, we’re always giving away free stuff on SyndicationSchool.com, in addition to the actual free episodes. All of the previous free resources and free Syndication School podcast episodes can be found at SyndicationSchool.com.

This episode is gonna be a quick one, but it’s still important information to give out. We’re gonna talk about the different accounts you will have when you are asset-managing a deal. These are the different types of bank accounts you’re going to have, and we’re going to talk about what they are and what they are used for.

There are really two main accounts, and the second one is kind of a part one, part two, or a and b; it kind of depends on the type of loan that you get. But the first account – the main account – is going to be your operating account.

The operating account is the account that all of the revenues you collect go into. All of the rents you collect, all the security deposits you collect, all of the other fees you charge, whether it be moneys from renting out a carport, or other types of parking, valet trash, pet fees, application fees, things like that. Basically, any money that you are collecting from tenants are going to go into this operating account. And since money is coming in, money is also going to be going out, so whenever you are paying your expenses, those will come out of this operating account. Ongoing expenses such as maintenance and repairs, paying your property management company, paying your taxes, paying insurance, any types of reserves that you plan on saving – those will come out of this operating account. This is the main account you’re gonna use for the everyday incomes and everyday expenses.

Additionally, since this is the account that has all the money in it, this is the account you’ll also want to use to pay out your investors. We’ve talked about this before, but typically you pay your investors distributions on a monthly basis, quarterly basis, or you can do bi-annually or annually. We do monthly. The most common one is quarterly; sometimes you’ll see twice a year or annually. So whenever it’s time to pay your investors, this is where that money comes from.

Now, since it’s gonna be a bank account, you can either pay them in the form of check, so you send checks in the mail, so you’ve gotta get checks for this account, or have your property management company set up direct deposit… Just making sure you have all that set up before closing, so that your investors can get their first distribution smoothly.

Now, one of the common questions we get from our clients, as well as those other people who are interested in doing apartment syndications – a very specific question when it comes to underwriting, and that is “What is this operating account fund cost assumption?” So whenever you’re underwriting a deal, obviously you’ve got to raise money for your down payment, for closing costs, for fees you’re charging as a GP, whether it’s acquisition fees, guarantee fees, things like that… And then depending on the type of loan you get, you might have to raise additional money for your cap ex costs… And then there’s this other item, which is the operating account fund.

So now that we’re explaining what the operating account is and how it’s used, the upfront operating account fund should make a little bit more sense. This operating account fund is essentially to pay for any unexpected issues that arise, or shortfalls that arise, before you’re able to accumulate enough money in that operating account.

So after 12 months of owning the deal you should have collected enough rent, enough other incomes to have a large enough purse to pay for any sort of unexpected maintenance issue. A large boiler goes down and you need to spend $20,000 to repair it.

After 12 months, you should be able to cover that no problem. But what happens if you buy the property and then the first month something happens to the boiler, and you go to your operating account and you have to decide whether you’re gonna distribute money to your investors for the month, or if you’re going to pay and fix this boiler. Obviously, to pay and fix the boiler, which means you have to delay your distributions to your investors, which might be an issue for them. That’s why the operating account fund upfront is so important.

So you’re going to want to raise additional capital upfront, and put it into  your operating account, so that, following this example, if that boiler were to break down and you need to replace it, you already have money allocated towards issues like that… Whereas if you didn’t raise this money, you would have to make some hard decisions.

So the upfront operating account fund amount depends on the business plan, depends on the type of deal. A good rule of thumb – and this is kind of a large range – would be anywhere between 1% to 5% of the purchase price, raise additional capital for that. So that would be raising a few extra acquisition fees, because the acquisition fees are usually 2% of the purchase price, so… Again, it varies. Some people do a flat rate of, say, 100k. It kind of depends on the deal itself. So make sure that when you are underwriting your deal, like all things in your underwriting, you run it by your property management company first, and you ask them “What would be a good amount of money to put in this operating account fund?” Ideally, you’re working with an experienced property management company who knows what that is and has a good idea of what might potentially come up.

Now, this is different than contingency. When you’re underwriting your deal and you’re creating your interior and exterior cap ex assumptions, you’re gonna go in there and renovate the units, and maybe you’re gonna upgrade the clubhouse, and install some carports, and do some other touch-ups to the property, you’re gonna wanna have a contingency fund that’s equal to 10% to 15% of the overall interior and exterior cap ex budget for unexpected issues that arise while you’re doing the renovations. So let’s say you projected $5,000 per unit, but it ends up being $6,000 per unit, or $5,500, because the bid was a lot higher than you expected – that’s what the contingency covers.

The operating account fund is different. That’s gonna cover things that come up that have nothing to do with your initial cap ex. These are like deferred maintenance items that you missed. Or maybe to pay insurance or taxes upfront, or sooner than possible. Things like that. They’re kind of similar, but they’re actually two distinct things.

Contingency is to cover things that you either miscalculated or that come up while you’re doing the  exterior and interior renovations, and then the operating account fund is to cover unexpected issues that come up that are unrelated to your actual cap ex.

So hopefully that clears up what that operating account fund is when you’re underwriting your deal and making sure you’re raising the right amount of money to cover that upfront, as well as also having the separate contingency budget for your exterior and interior renovations. So that’s the first account, that’s the main account. You’re gonna have that account really no matter what type of loan you get.

The second and third account, I guess we’re gonna call them 2A and 2B. Those are going to depend on the type of loan that you get. So 2A we’re gonna call the capital account. The capital account is if you are securing an agency loan, so a Freddie Mac or a Fannie Mae loan, and you are not including any renovations in your loan. There are agency loans that do allow you to have moneys allocated towards renovations, but for the capital account, this is when you’re getting a loan – whether it’s an agency loan or some other type of loan – and you know the cap ex interior or exterior are going to be included in that loan, and instead you need to raise money from your investors to cover that. That’s where the capital account comes in.

So whenever you perform a renovation, your contractor finishes up and they’re ready to get paid, this is the account they get paid out of. They’re not paid out of the operating account, they’re paid out of the capital account, because this is where you put your investors’ money. So when you raise the money from your investors, obviously a portion of it goes to the down payment, another goes to the closing costs, fees to you, some of it goes to the operating account fund – the rest of it, the chunk that goes to your cap ex, is gonna go into a separate account; it’s gonna go into the capital account, and that is how you pay your contractors.

A contractor finishes up a unit, or finishes up half the units, whatever your agreement is, and they come to get paid – you pay them out of your capital account, not your operating account.

And then as I mentioned, since this is going to be how your contractors get paid, this is where you’re gonna wanna put your investor’s money. So when they are wiring their funds to you, you’re gonna put it in this capital account and then pay for the loan, pay yourself, pay the closing costs, transfer money into your operating account for that operating account upfront fund, and then the rest will stay in that capital account and be paid out to the contractors. So that’s 2A.

2B would be if you got a loan program like a bridge loan or some other loan program that does include renovations, then your lender may require you to create what’s called a DACA account. What this is is that the lender may require you to rather than depositing any of the rents straight into your operating account, the lender may require you to deposit the rent into this DACA account first, and then funnel that money into your operating account fund, maybe even that exact same day.

The purpose of this DACA account is to technically stop income coming to you, the borrower, if you fall into what’s called cash management from not passing the debt service coverage ratio test. Typically, when you are getting money from a lender for renovations, they’re gonna have some debt service coverage ratio requirements, maybe some occupancy requirements, maybe some timeline requirements where you need to have the renovations completed within a certain amount of time, and then they’re gonna come to the property and do some inspections to make sure that everything is going according to plan.

If things aren’t going according to plan, if you’re not hitting their debt service coverage ratio requirements, then you go into what’s called cash management, and they will in a sense take money from this account to pay themselves for whatever issue that arose. So this is something that’s different from the capital account. If you’re not paying for renovations you’re self, you’re not gonna have a capital account, because they’re coming from the lender, through the draws, but you might have to have a separate DACA account, so that if for some reason you’re not following the lender’s requirements, you fall into cash management, they can stop the money from coming to you. So they’re not gonna take the money, they just put a halt on it and you can’t collect that money until you hit those requirements.

So those are the three different types of accounts you’re gonna come across when you are asset-managing your deals. It’s important to know, because you wanna make sure that you’re not paying your investors out of the capital account, that you actually have an operating account, that you have enough money in your operating account to pay your investors, to pay your property management company, making sure you have enough money in your capital account to pay your contractors, and making sure you have that DACA account if required, so that you’re meeting the lender’s requirements.

And again, the capital account will be if you are paying for renovations yourself, or your investors are paying for the renovations. DACA account is something that you might have to do if the lender is the one who’s covering the renovations, and you pay for those in your down payment.

That concludes this episode. As I said, it’s gonna be a quick one, but this information is important to know, especially since typically a lot of the focus in the real estate apartment syndications are on the front-end activities, like how to find deals, how to build your team, how to raise money, how to underwrite deals, and not focused as much on the asset management side. So we’re definitely gonna be talking a lot more about asset management in some future Syndication School episodes, even though we focused probably an eight-part series on it earlier on, so you’ll definitely wanna check that out on SyndicationSchool.com.

Until tomorrow, make sure you check out some of our other Syndication School series, make sure you check out and download all of the free documents we have available to you. Both of those can be found at SyndicationSchool.com.

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

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

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

 

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

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

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


 

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

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

 

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“People tend to like investing locally”

 


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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Best Ever Tweet:

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

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, the Syndication School series air on the podcast Best Real Estate Investing Advice Ever Show. We also post these a little bit later in the week on YouTube in video form, so you can listen or watch, either on the podcast or on YouTube.

Each of these episodes or overall series focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer a resource for you to download for free, whether it be a PDF how-to guide, an Excel template calculator, a PowerPoint presentation template – some sort of resource for you to download for free. All of these free resources and past Syndication School series can be found at SyndicationSchool.com.

This episode is going to be a standalone episode entitled “Four tips to raise more money from passive investors.” This is actually a response to a very common question that we receive. In fact, it was the most common question that we received at our Best Ever Conference, which actually you can buy tickets right now at BEC20.com (the third annual conference). This time I think we’re doing a ski resort actually, so that’s gonna be pretty cool; I’m looking forward to that. But one of the obstacles that a lot of investors had was how to raise money and how to find more off market deals.

We’ve put together a list of ways to raise more money, to find off market deals, and these are actually kind of matched together into four tips that’ll help you today start raising more capital from investors… And then one of these strategies will actually help you find more deals, as well as more investors.

Let’s jump right into it – the first tactic is to focus on building your sphere of influence. When Joe interviewed THE Robert Kiyosaki, Rich Dad Poor Dad, which is probably the number one response we get when we ask guests what’s their best ever book… This is episode 262. Joe got him on the podcast within his first year of podcasting, which is pretty impressive… But one of the things that Robert Kiyosaki said is that the richest people in the world build networks, everyone else looks for work. What this means is that the most important thing that you can do, short-term, long-term, in general, is to play the long game when it comes to real estate investing. And to play the long game, make sure that you’re staying relevant. To make sure that you are continuously building and growing your business, and not just doing a few deals and falling off, is to focus on building your network.

What we’ve found is that the best, most effective way to build your network, and what Joe attributes his success to a lot, is to create a thought leadership platform. Best Ever listeners, we are not going to go into how to build a thought leadership platform in this episode, because we’ve talked about this a ton on Follow Along Friday, and we’ve also got — it’s probably a six or an eight-part Syndication School series on how to build a thought leadership platform, why to build it, how to grow it… But just to quickly summarize what we’ve talked about in 2-3 hours of content on Syndication School, and probably another 20 hours of content on Follow Along Friday, is a thought leadership platform is going to be an interview-based online platform, like a podcast, which you’re listening to right now, a YouTube channel, which you might be watching right now, a blog, or an in-person event.

The keys to having a successful thought leadership platform, that has the purpose of, again, building your network and playing the long game, is number one, consistency – so whatever thought leadership platform you do select, make sure you’re doing it on a consistent basis… Whether that’s every day, multiple times a day, a few times a week, once a week – whatever it is, pick  a time frequency that you’re going to create this content, and then stick to that for at least a year before expecting to see any crazy results.  This is gonna be, again, a longer-term strategy. That’s why we have the world’s longest daily running real estate podcast… I believe we’re in the 1800’s now, so we’ve had an episode air for 1800 straight days.

Next is to identify what your unique angle is going to be. Don’t just have a generic, vague podcast or YouTube channel or thought leadership platform. Make it unique to you. Make it unique to your skills, make it unique to your experience, make it unique to your background. One example is that Joe has two clients that have a military background, and one was in the army and the other was in the airforce, so they created a YouTube channel called Joint Ops. It focuses on teaching people how to do lease options. Once they launched that, they were able to raise over six figures in money from passive investors by launching this brand.

So if you’re an engineer by trade, then have your thought leadership platform focused on some aspect of engineering when it comes to real estate. If you’re in sales, talk about sales techniques. If you’re in marketing, talk about marketing techniques. But you can be even more specific than that. If you’re in a certain type of sales, just talk about that sales technique, or just be creative in thinking about what your unique angle is going to be, using this Joint Ops, people with military backgrounds as an example.

Next is to start within your sphere of influence. When you’re starting out your thought leadership platform, as I’ve mentioned before, you’re not gonna see crazy results right away. You’re not gonna launch your podcast and then have a million downloads in the first month. I’m sure it’s possible and I’m sure it’s been done before, but if you’re starting from scratch, you’re gonna start at zero and will have to slowly work your way up… So focus on sharing your content with people within your sphere of influence.

It takes a lot of time to gain the trust and gain the viewership of strangers… But you can get instantaneous results by sharing it with your current sphere of influence. So send it to all of your family members, send it to all of your friends; you can even send it to your work colleagues, depending on if there’s some sort of conflict of interest and you don’t want them knowing that you’re spending all this time on real estate… Then don’t do that. But focus on your sphere of influence that you already have.

For example, for Joe’s first deal, he raised a million dollars from a combination of his work colleagues, people he knew from volunteering, people he played football with, played softball with… But actually none of it came from his family members. It came from friends of family members, but none of it actually came from family members. So focus on not only trying to grow your thought leadership platform within your current sphere of influence, but heck, try to raise capital from them as well.

And then lastly, to tie it into a larger distribution channel. This is pretty simple, and it’s kind of something that you’re naturally gonna do anyways, but… Whatever content you’re creating, make sure that it is on a platform that already has a large built-in audience. For example, if you’re gonna do videos, YouTube. If you’re gonna do blogs, post them on Bigger Pockets, post them on LinkedIn, post them on Facebook. If you’re gonna do a podcast, do it on iTunes. Leverage the existing channel of these large networks to grow your thought leadership platform.

So that’s the long way of saying that one tip for raising more capital is to build your network, and the best way to build your network is through a thought leadership platform, because you can network with people all across the world while you’re asleep. That’s probably one of my favorite things to say.

Number two is to ask better questions. What does that mean? Joe was talking to a client, and he asked them to tell them what’s the best thing that’s happened to them since the last time they spoke. And the client in particular said “Oh, since the last time we spoke things haven’t been too bad.” And while that may seem kind of innocuous and not really telling, if you kind of dive into it, what they’re actually saying is that things aren’t going good, at all… Or at least they’re not going good, because they’re saying “It’s not that bad.” So the point of that is to focus on the language and the words that we’re using.

Even though this person said that things aren’t that bad, they’re still using the word “bad”, which is a negative word… And Joe is a big believer in that using these negative words, using “bad”, “poor”, “don’t”, “can’t” put us in the wrong mindset. So the same thing applies to you. So you’re asking yourself “Why can’t I raise more money?” or “Why can’t I find a deal?” or “What happens if I raise money and I don’t find a deal?” or “What happens if the deal doesn’t work out?” or “What happens if I can’t raise any money at all?”

So instead of asking yourself those questions, or rather than having these negative questions, these “What if I can’t do something?”, “What if this doesn’t happen?”, “What if something bad happens?”, instead focus on asking better questions. These are questions that don’t have the built-in assumption that something is going to go wrong.

To reframe some of these questions, you would say “How do people who are great at raising investment capital and finding deals do it?” That generates more creative, generates better answers, more positive answers, because you can say “Oh, well Joe makes a thought leadership platform, so maybe I should make a thought leadership platform.” Whereas if you ask yourself “Well, what happens if I raise money and I don’t find a deal? What happens if I can’t raise money?”, you’re thinking about “Well, then I’m not gonna meet my financial goals, and I’m not gonna be able to afford my house, I’m not gonna be able to eat, and I’m gonna starve, or be homeless, or something.”

So you’re kind of spiraling downwards into a negative rabbit hole, as opposed to spiraling upwards into a positive rabbit hole by asking yourself “Okay, well what can I do to raise money? What are the people who are successful at raising money doing?” That’s gonna generate much more positive thoughts, which is going to put you in a better mindset, which is going to increase the likelihood of you actually raising the capital… Whereas saying “Well, what happens if I can’t raise capital?”, you’re more likely to not raise capital at all.

So that’s something you can quickly do by shifting your mindset into asking these better, more positive questions, as opposed to these negative-sounding questions.

Number three is to create opportunities. This is something that can apply to both raising money, as well as to find deals. So what can you do to create the most amount of opportunities, that will allow you to raise more money. So what are things you should be doing that will give you the opportunity to raise more money? Not necessarily 100% definitely walk away with a million dollars in commitments, but something that has the chance of getting you more private money investors – volunteering, going to meetup groups, doing a conference, starting a thought leadership platform, going to Bigger Pockets forums, starting a blog. All these different things are you putting yourself out there, putting content out there; it’s not necessarily directly going to get you private money right away, because you’re not walking up to someone and saying “Hey, do you wanna invest?”, but you are creating the opportunity to eventually get leads and raise capital.

Now, when it comes to finding deals, the same thing can happen. Rather than sitting back and passively waiting for deals to be sent to your inbox, you can go out there and create opportunities. You can go out there and proactively find deals, through off market marketing strategies, like direct mail, cold-calling, things like that — but think more unique than that. Here’s an example to kind of get the juices flowing… So one way that Joe was able to find a deal in a hot market was they were looking at an on-market apartment opportunity; I forget the deal’s details specifically, but it was something along the lines of the on-market deal was made up of two and three-bedroom units. Since it was on market, the price kept getting bid higher and higher. But the market was great, the value-add opportunity was there, and they really wanted this deal.

Now, there was also another opportunity across the street, that was made up of mostly one-bedroom units, and they thought that it would be a great natural referral source if someone comes to the two to three-bedroom units and says “Well, the two-bedrooms are a little bit outside my price range, and I don’t really need that much room.” Well, if you own the property across the street, you could say “No problem, we’ve got a property across the street, same area, same management team, same amenities. The only difference is [unintelligible [00:15:45].09] over there.”

Plus, because of the economies of scale and the ability to get the off market deal at a reduced price, they wanted to pursue that opportunity for those benefits… So their broker reached out to the owner, and ultimately they ended up buying the deal across the street, as well as the on-market deal. So they bought the on-market deal, and the off market deal… And because of the benefits, the advantages of the off market deal, they were able to pay a little bit of a higher price for that on-market deal.

Now, if they didn’t create the opportunity by reaching out to the owner across the street, they probably wouldn’t have bought either deal. But by being creative, thinking strategically, reaching out to the owner across the street, they were able to turn zero deals into two really amazing deals, which I believe they still own to this day.

So this is a more general piece of advice about creating opportunities. I gave a couple of specific examples, but the way you create opportunities is gonna be unique to you… So again, ask yourself better questions, and ask yourself “How can I create more opportunities to find more investors? How can I create more opportunities to find off market deals?”, and then see what answers you come up with… Rather than saying “Well, what happens if I can’t find any deals? What happens if I can’t raise any money?” Because they’re all kind of connected to each other.

The fourth tip to raise more money from passive investors is to partner up. So rather than trying to go at things alone, find a business partner. When Joe was a solo investor and he was working on his business all by himself, he was able to purchase four single-family homes and one large apartment building, and then he says that his business was a little stagnant for a few years. But once he partnered up with someone – and when it comes to partnerships, we’ve got some Syndication School episodes, as well as blog posts about partnerships… So if you just go to JoeFairless.com, type in “partners” in the search box, all of those blog posts and Syndication School episodes will come up… But you wanna find a partner who complements your strengths and helps you with your weaknesses. So what you aren’t good at, they are good at. What you are really good at, they’re not necessarily the best at.

Well, when Joe partnered up with this individual – as you guys know, Frank – his business skyrocketed. Now they have over — I believe they have 700 million in apartments under management. So he went from four single-family homes and one apartment, to 700 million dollars in apartments under control, by in a sense partnering up with someone else.

One more piece of advice on partnering is that if you wanna find  the perfect partner – as I mentioned, it needs to be someone  who complements your strengths, as well as helps you out with your weaknesses – well, you need to know yourself. You need to know what you’re good at and what you’re bad at, you need to objectively analyze yourself… Because obviously, everyone has weaknesses. So if you’re saying “Well, I don’t have weaknesses at all”, well you probably don’t know yourself and you’re not gonna be able to find the best partner… So figure out what you’re not good at, or what you don’t like doing; that way you can find someone who does like doing that, and is good at it.

It’s gonna take some time to know yourself in the context of real estate investing, if you haven’t done a deal before or haven’t done many deals… But as you do deals and you experience the ups and downs of buying the deal, underwriting it, due diligence, closing, managing, selling, you’ll start to realize what you like and what you don’t like, what you’re good at and what you’re not good at… And then look in the mirror and ask yourself “What am I good at and what am I really bad at?” Then build your team around those answers, and once you do that, your business is going to begin to skyrocket.

For example, for Joe, after his first syndication deal, he realized that he was really good at raising money and really good at marketing, but he was not so good at underwriting and asset management. Well, he found a partner who has an institutional background, so he’s phenomenal at underwriting and phenomenal at asset management. As a result, they complement each other perfectly, which is why they were able to scale so quickly. Whereas if Joe thought he was really good at underwriting, thought he was really good at asset management, and brought someone on to do capital and marketing – well, they might not have scaled, he might not have done any more deals just because he’d be pulling his hair out from underwriting, because I know how much Joe does not like underwriting deals.

So those are the four ways for you to raise more money from passive investors. Some of them are longer-term strategies, but some of them are instantaneous things you can do right away. Number one is to build your network by creating a thought leadership platform, which is one of those longer-term strategies. Number two is ask better questions, so shift your mindset from asking negative questions like “What happens if this bad thing happens?” to “Well, how can I make this good thing happen?” or “What are successful people doing that result in this good thing happening? …raising money, find deals.” Number three is to create opportunities. So instead of sitting back and waiting for money to come to you, waiting for deals to come to you – well, go out there and create opportunities, the example being Joe going out and reaching out to the owner across the street and buying the package of deals, as opposed to just the on market deal.

And then fourth is to partner up with someone who complements your strengths, as well as helps you out with your weaknesses, which requires you knowing what you’re good at and what you are bad at.

That concludes this episode. Until next time, make sure you check out some of our other Syndication School series episodes about the how-to’s of apartment syndication. Download our free documents. All those can be found at SyndicationSchool.com.

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

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

Listen to the Episode Below (00:16:30)
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A strategy for buying apartment communities that we haven’t really covered is to purchase the LLC that owns the community. There are advantages and disadvantages to this of course, and Theo will break those down in detail on today’s episode of Syndication School. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

 

Free Document:

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

 


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


TRANSCRIPTION

Theo Hicks: Hi, Best Ever listeners. Welcome to the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week we air two Syndication School series episodes, every Wednesday and Thursday. They can be found in audio-only form on the podcast, as well as video on YouTube. We focus on a specific aspect of the apartment syndication investment strategy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome to the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, every Wednesday and Thursday, we release the Syndication School series, on the podcast as well as on YouTube, and we will focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer some sort of resource for you to download for free, whether it be a Word document, PowerPoint presentation, Excel template etc. The free documents, as well as all of the past Syndication School series episodes can be found at SyndicationSchool.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Best Ever Tweet:

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

 


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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

 

Best Ever Tweet:

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

 

Free Money Raising Tracker:

http://bit.ly/moneyraisingtracker 

 


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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

 


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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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“All of the added legal costs and increase in down payment will likely push the deal below your return expectations”

 


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

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


TRANSCRIPTION

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

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

 

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

Each week we air two episodes; you can find those on our podcast, as well as on our YouTube channel. Typically, these episodes are part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we also include a link to download a free resource, whether it’s a Word template, PDF, PowerPoint presentation template, Excel template, something for you to download that accompanies that series. All of these free documents,  as well as past Syndication School episodes can be found at SyndicationSchool.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Best Ever Tweet:

“It’s better to have someone who has a lot of experience working in their areas, rather than someone who is kind of good at it”

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast and video episodes – every Wednesday and Thursday – that are typically a  part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of document, PowerPoint presentation template, Excel template, some sort of resource for you to download for free. All of these documents and Syndication School series can be found at SyndicationSchool.com. Of course, all of it is free to listen to and to download.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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Original Blog Post:

https://joefairless.com/3-ways-raise-1mm-1st-apartment-syndication/ 

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are typically part of a larger podcast series – we also release these on YouTube as well – that’s focused on a specific aspect of the apartment syndication investment strategy, and for the majority of these series we offer some sort of free resource, document, spreadsheet, presentation template, something for you to download for free, that accompanies the series or episode. All of these free documents, as well as the free Syndication School series can be found at SyndicationSchool.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Listen to the Episode Below (00:20:22)
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Now that we’ve completed the business cycle with our apartment syndication deal, is it time to sell? Theo will cover what you need to look into with each deal before making that decision. It may make sense sometimes to sell early, other times it won’t. How do you know when is the best time? Hit play to find out. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You never want to get forced to sell”

 

Free Document:

http://bit.ly/letterofdisposition

 


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

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

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


TRANSCRIPTION

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

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

 

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

Each week we air two podcast and now video episodes that are typically a part of a larger podcast video series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer some sort of Microsoft Word document, Excel template, PowerPoint presentation, something for you to download for free, that accompanies that series. All of these free documents, as well as past Syndication School series can be found at SyndicationSchool.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Listen to the Episode Below (00:18:19)
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Securing a supplemental loan. That is how we will be wrapping up this series of the syndication school episodes.. Without further ado, hit play and learn the next step of the apartment syndication process.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A supplemental loan is not the same as a refinance”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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TRANSCRIPTION

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

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

 

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

As you know, each week we air two episodes (a podcast and a video series) that are part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we give away some sort of document, PowerPoint presentation, Excel template, some sort of resource for you to download for free. All these episodes, as well as the free documents can be found at SyndicationSchool.com.

This episode is a continuation of a series entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part six, and – well, if you haven’t done so already, I recommend listening to parts one through five, where first we discussed the ten asset management duties in parts one through three, then in part four you learned more details on one of those duties, which is maintaining economic occupancy. We went over 19 ways to list and market your rental listings in order to make sure you’re maximizing not only the physical occupancy rate, but the actual economic occupancy rate (the rate of paying tenants). Then yesterday or an episode before this one – part five – we went over how to manage your property management company.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Listen to the Episode Below (00:23:00)
Join + receive...
Best Real Estate Investing Crash Course Ever!

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

 

Best Ever Tweet:

“Everything that happens at the property good or bad, is your responsibility”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week we air two podcast episodes – and now also video episodes – that are part of a larger podcast series or video series that’s focused on a specific aspect of the apartment syndication investment strategy.

For the majority of these series we offer a document, spreadsheet, PowerPoint presentation template, some sort of resource for you to download for free. All these free documents and all of these free Syndication School series can be found at SyndicationSchool.com.

This episode is a continuation of a series entitled “How to asset-manage a newly-acquired apartment syndication deal.” This is part four, so if you haven’t done so already, make sure you check out parts one through three of this series. In parts 1-3 we went over the top ten asset management duties; these are the ten things that you as the asset manager are responsible for doing once you’ve taken over an apartment deal, and up until you see that deal. So this is most likely going to be the longest time range of the deal, which is from the contract to the selling. That could be five years, ten years, or even longer than that.

As a refresher, I’m just gonna go over these quickly, but if you want more details on each of these duties, again, make sure you check out parts 1-3. In part one we went over duties one through five, which were 1) implement the business plan, 2) do weekly performance reviews with your property management company, 3) send out investor distributions, 4) manage the renovations at the property, and 5) maintain economic occupancy. And we also gave away a free document with that part, which is the weekly performance review tracker. This is a template that has all of the KPIs that you wanna track at your property. So  you’ll send this to your property management company, they’ll fill it out, and then on that call you’ll review the results each week.

Then in part two we focused exclusively on duty number six, which is the investor communications. Then yesterday – or the episode before this one – which is part three, we went over duties seven through ten, which were 7) plan trips to the property, 8) frequently analyze the competition, 9) frequently analyze the market, and 10) expect the unexpected.

Now, before moving on to other aspects of what’ll be most likely the longest timeframe of your business plan, which is from closing to closing – for example next week we’re gonna talk about how to manage your property management company and how to approach firing a property management company –  I wanted to go into more detail on how to actually maintain that economic occupancy rate. That’s duty number five.

Again, I’ve mentioned this in all of these parts so far, at the end of the day it is your responsibility, the property is your responsibility. Everything at the property, whether it’s going wrong or right, is solely reliant on you. Yes, your property management company is gonna be heavily involved in a lot of these duties, but at the end of the day it’s your responsibility to 1) select the right property management company, and 2) manage them properly. So we’re gonna talk about how to select them, we’re gonna talk about how to manage them next week, and then we’re also gonna talk about when it might be time to part ways and fire them… But let’s say for some reason you find yourself with either a bad property management company in general, and you maybe are trying to figure out whether or not to fire them — and we’ll talk about this, again, next week, but you don’t wanna just fire them instantaneously; you kind of want to wait a set amount of time just to see if they turn things around, and then fire them.

So during that period of time you don’t want your property to go down the crapper, so you might need to become more involved in the marketing process… Or on a more ideal  side, these might be the things that your property management company might not have thought about, or maybe they’re implementing maybe half the things on this list, and you’re experiencing a down couple of months or down quarter… So you can go to your property management company and say “Hey, here are some things I think we can do in order to increase the occupancy at our property.”

At one end of the spectrum it could be you’ve got a really bad property management company, you’ve kind of in your mind put them on notice and said “Hey, I’m gonna give them six months and then I’m going to fire them if things don’t turn around… But during those six months I don’t want to just do nothing and let them continue to run the property to the ground.” That’s one end of the spectrum.

The other end of the spectrum is a really solid property management company, but maybe you’re just experiencing a few down months two years into the business plan, for something that’s outside of their control, and you wanna present them with some ideas on how to actually increase that occupancy at your property.

Whatever situation you’re in, here are 19 proven ways to market your rental listings in order to attract high-quality tenants… With high-quality being tenants who pay on time and stay at your property and take care of the property as if it was their own.

Again, some of these are pretty straightforward, some of them might take a little bit more effort; some of them are free, some of them cost money… Essentially, anything that we could think of that we’ve seen people implement in order to market the rental listings.

Number one is to set up a landing page online and direct people to it. This should be something as simple as having a specific page on the property’s website, because more than likely if you’re dealing with these larger properties you’re gonna have your overall company website, but then you’re also gonna have websites specifically for that property, that’ll have prospective tenants, current tenants, [unintelligible [00:08:38].29] So you wanna have a landing page so that prospective tenants can go there and type in the information, and you’ll get that lead. And obviously, you’ll wanna take that landing page and market it on social media, do all the best SEO practices, maybe buy an ad in some real estate investor’s newsletter… But overall, the idea is to set up a landing page online and then making sure that people can find that landing page, and when they find that landing page, they can submit information so you can qualify them to see if they’re qualified for moving into your building.

Number two is to essentially do a direct mailing campaign to a property that is similar to yours. Let’s say you’ve got your 100-unit building in Tampa; then you could find other buildings that are between 50 and 500 units and then send direct mailing campaigns to those residents, trying to tempt them to move into your property. Now, obviously this strategy is going to anger local owners if they find out that you’re trying to steal their residents… So if you do decide to do this, don’t expect to be popular.

Also, once people catch on to this strategy, they might also do it to your residents as well. This is not something that we do, this is not something that Joe does, but it is a tactic that is out there that could possibly help you get new residents.

Number three, contact the HR department at all of the surrounding employers in that area and let them know about your wonderful apartments… Someone in the HR department at the company responsible for relocating employees.

Let’s say — obviously, Cincinnati is an example. You’ve got Procter & Gamble, you’ve got GE, you’ve got Kroger, you’ve got these really large companies that obviously are also services by other large companies… So if someone from L.A. is moving to Cincinnati to work for Kroger, then sure if they’re working for a smaller company they might have to find their own place to live or to rent on their own… But if they’re working for one of these larger companies, they likely have some resource available to them at the company that helps them out with this process. So it might be someone who’s responsible for just finding them a place to live for [unintelligible [00:10:50].09] rotation, or whatever. So your goal will be to find this person at that company and let them know about your apartment and see if you can be added to their list of preferred landlords, or whatever that particular list is called.

It’s pretty easy to find contact information to these people. One, you could just call the general phone number of the company and ask to be directed to HR, or you could go to somewhere like LinkedIn and find out who’s actually in HR at that company.

Number four – this one’s pretty simple – is to create a tenant referral program. You can post letters at your residents’ doors or send them emails saying that “Hey, if you refer a tenant to us and they end up moving in, then once they sign the lease we’ll give you $300.” $300 is pretty standard, unless the lease is like $500; then you might wanna reduce that to like $100.

Number five is to set up an open house and invite members of the local community to attend. This works best if you’re unveiling something new. Let’s say you’ve just renovated the clubhouse, so you host some sort of open house at the clubhouse and invite people who live at your property to invite other friends and family to come to this open house, and serve beverages and food. Or you can have an open house for a model unit, and have all the signs out front saying “Hey, we’ve got this new model unit. Come check it out.”

Obviously, you’ll wanna market it online as well, but overall, just set up some sort of open house at your property, whether it’s a model unit, whether it’s an unveiling of a new clubhouse, maybe it’s an unveiling of a new rebrand, you just got a new monument sign… And then invite people that live in the local community to attend.

Number six is to offer a special discount on rent for military, police and first-responders. You can say something along the lines of “If you were in the military or if you are in the military, or if you were or are a police officer, or if you were or are a first-responder, you’ll get 50% off of  your first month’s rent.”

Number seven is to design For Lease banners and put them up at the entryway to your property. You see this a lot when you drive by an apartment and you can’t even tell there’s an apartment; you don’t know what the apartment name is, you don’t know if there’s any units available for rent… You have no idea. Whereas other ones, you’ll see the red, white and blue strings with little flags attached to it, they’ll have big arrows pointing at their property, they’ll have big signs and big red letters that say “One and two-bedroom units available.” Maybe it’ll talk about some special that they’re doing… So which property do you think is gonna get more foot traffic? The one that’s invisible, or the one that has all these bells and whistles that are pointing people to that property.

Number eight is to create a corporate outreach program. If your apartments would make a good corporate housing for executives or workers that are new to the area, then you will want to reach out to the corporations and see if you can get on their preferred landlord list. This is a little bit different than HR, because this is more of like a one-off basis… But if there’s — not necessarily an actual Kroger or GE or P&G, but an actual company that focuses on reaching out to corporations and placing high executives or workers that are moving into the area into places to rent… You’ll want to build a relationship with that company, so that instead of having to talk to individual human resources officers, you can just talk to this one company and they’re kind of like your nexus for all the major companies in the area.

Number nine is to design and place fliers at local establishments where you know there’s a lot of foot traffic. So make one-page fliers that talk about your property, and how it’s available for rent, and drop those off at Laundromats, hair salons, nail salons, restaurants… Anywhere that has those little tables that a lot of people drop off business cards.

Number ten is to purchase ads and place them in local newspapers. Again, this is kind of demographic-specific; if you’re obviously trying to attract millennials, then newspapers might not be the best way to go, but instead you can place ads somewhere else, and we’ll get into that a little bit later.

Number eleven is to post a listing to Craigslist, Zillow, Realtor.com, Apartments.com, Rentals.com and all of those other online rental listing services. In addition to everything else, make sure that you’re posting your listings to all these free resources online. You just create one listing, the same description for all the listings, same pictures, and just copy-paste that to all these different online portals.

Twelve is to partner with a real estate agent, or if you have a license, then I guess you’re that agent… And the purpose is to post your deal on the MLS. So it is possible to have an agent sell or buy a property, but it’s also possible to have him help you rent a property. I think they maybe take half the first month’s rent… But there’s a section on the MLS actually for rentals, and that’s one way to advertise your units.

Thirteen is to create a Facebook advertisement. Again, I guess this is gonna be demographic-specific, but Facebook advertising allows you to hyper-target a user based on a very specific criteria. You can say age, location, job, income, interests… And you can figure out “Okay, so what are those criteria for my ideal tenant?”, create a Facebook ad with pictures of your property, maybe some sort of highlights or a recent development at the property, and then mention it’s for rent. Make that ad and hopefully it gets in front of as many of your preferred tenants as possible.

Fourteen is to create  a Facebook page for your rental business. This is sort of a longer-term strategy, and this could be for your rental business or for the actual property, but ideally both. So create a Facebook page for your actual business, and then create a Facebook page for each of your individual properties. Then brainstorm ways to post content there on a weekly basis. If you’re hosting weekly resident appreciation parties, take a bunch of pictures and post those online. Once your new monument sign is installed – take a picture, and post it on Facebook. Once you’ve painted the property, once you’ve installed the dog park, once you’ve completed the model unit, once the playground [unintelligible [00:16:29].01] come in. Essentially, anything that happens, take pictures, post it on Facebook, and over time you’ll generate a following from tenants who already live at the property, and then their friends will see that they are a part of this group, they’ll join, and ideally, over time you’re able to just post rental listings there, and then your tenants and the friends of the tenants will either see that and rent it themselves, or share it on their own page to attract more tenants to the property.

Fifteen is to pay close attention to what is nearby and cater to that audience. Again, this is kind of vague, but your marketing strategies are gonna be different for colleges nearby, because then you might wanna put fliers on those little bulletin boards throughout the campus; if there’s a military base, there might be a specific person that you can talk to. Large corporations – same things. But the type of advertisement is gonna be different for someone who’s in college versus someone who’s at a military base, because someone who’s in college is gonna want something a little bit different out of their living experience than someone who’s in the military or someone who’s a VP at a company.

Sixteen is pretty simple and obvious, but still pretty important, which is to provide good old-fashioned customer service. For the people that already live there, be responsive and timely with any requests that they have or any questions that they have. You don’t necessarily have to be a marketing wizard and get hundreds of responses from your marketing pieces in order to get someone to live there. And even if you do, and they do move in there and you’re not picking up your phone when they call — and again, this is you, your team, someone on your team is not picking up the phone, someone’s not responding to the emails… Then they’re not gonna stay, and they’re not gonna recommend your property if they move in there; or if they have all these questions before moving in and you’re not answering them, they’re obviously not gonna move in in the first place.

So providing good, old-fashioned customer service is also a great way to increase your occupancy.

Number seventeen – this is an interesting one. Call all the residents who have already told you that they plan on moving out at the end of their lease and figure out why they’re leaving. So let’s say Billy Bob Joe reaches out and says “Hey, I’m moving out at the end of my lease (which is in 60 days, or whatever)”, and you reach back out and figure out exactly why they want to leave, what’s the issue with the unit, and see what you can do to convince them to stay.

Maybe it’s something like they want to move to a different unit because they want to either upgrade or downgrade. Maybe there’s something in the unit that they don’t like, or they want upgraded, like there’s white appliances and they want stainless steel appliances, or like an X on the wall, or something.” And then something else you can do too is explain to them the costs associated with moving. Obviously, give them something, but also say “Hey, if you move out, you do know that you’re gonna have to pay a new security deposit, you’re most likely gonna have to hire a moving company to move all of your stuff from here to there, there’s gonna be cleaning costs for cleaning this unit, you might have to buy new furniture if you’re upgrading or downgrading units, so it’s gonna be pretty expensive to move.”

This overall conversation – make sure this happens 60 to 90 days before the end of the lease, because this most likely isn’t gonna work if they’re moving out next week. So give them some time, and again, figure out why they’re leaving and see if there’s something you can do to attract them and keep them at the actual property.

Number eighteen is to send marketing packages and gift baskets to preferred employers surrounding your property. Preferred employers would be companies who employ your ideal tenant demographic. You’d be surprised at how effective these gift baskets can be. Essentially, you just wanna create a gift basket with wine in it, or cookies, or chips, or whatever. And then either give that to the person at this place – the HR person or the corporate outreach person – and thank them for helping you get residents at the property with the gift basket approach.

The marketing package approach would be to do something similar where you’ve got a box full of fliers, and you’re gonna attach those fliers to like a [unintelligible [00:20:13].25] or something. Something that people will pick up, take the [unintelligible [00:20:18].01] read about your property and potentially move in there. But the gift basket approach is great, because that person’s more likely to send a resident your way than someone who didn’t give them some gift basket or some goodie.

And then number nineteen is to reach out to old leads that you receive. Obviously, you’ve got leads coming in, qualified or unqualified, and then a percentage of those leads move in, a percentage of those leads kind of just die out and you never hear from them again, so every 90 days reach back out to those leads that die out to see if you can attract some of those people to move into your property.

Those are the 19 proven ways to maintain and increase economic occupancy at your apartment community. Again, that’s not an exhaustive list; there’s plenty of creative ways to market your rental listings. We’ll probably go into a few more of those throughout this series. This is gonna be a long series, there’s lots to go over, because again, this is gonna be the longest timeframe of the business plan – 5 to 10+ years.

That’s the end of this episode. As I mentioned, in parts five and six we’re going to talk about – in part five, how to manage the property management company, and in part six how to approach firing a property management company; determining if it’s time to part ways, and if so, how to actually do it.

Until next time, I recommend listening to parts one, two and three, for those ten different asset management duties. I recommend listening to the previous Syndication School series that we’ve done. I think this is series 20, so you’ve got 19 other Syndication School series to listen to… As well as around 19 free documents to download for each of those Syndication School series. All that is at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.